Property investment and development company Helical (LSE: HLCL) has spent the last year restructuring its portfolio towards higher quality assets, and it looks as if this is starting to pay off for the firm.
Since April the company has sold £315m of investment assets at prices in the aggregate of 2.5% above book value. These disposals have funded reinvestment activities as well as debt reduction.
Net borrowings have fallen by £236m, substantially reducing the firm’s loan ratio from 55%, at 31 March 2016, to today’s pro-forma ratio of 43%. This debt reduction will be good news to shareholders as Helical’s high level of debt has historically been a major criticism of the group and its investment case.
Now management is focusing on generating the most income from the firm’s portfolio. Within Helical’s results for the six months to 30 September published today, CEO Gerald Kaye said: “With our portfolio of high-quality London and Manchester offices and higher-yielding logistics properties, we now look forward to increasing our income stream from the current contracted rents of £45m towards the portfolio’s ERV of £65m as completed office space is made available to potential tenants in the next 12 months.”
Set to push higher
This realisation of the company’s full potential could, in my opinion, drive a re-rating of the shares.
At the end of September, its net asset value per share was 465p, 51% above the current price. Over the past 12 months, the share price has gained 20% as the restructuring has unfolded and investors have bought into the growth story.
Shares in the real estate business are changing hands for less than £5 at £3.08 today. This low share price is not an indicator of value, but the vast discount to net asset value is. As well as this enormous discount, the shares support a dividend yield of 3%.
Helical is not the only UK property company trading at a discount to net asset value. U and I Group (LSE: UAI) is another deeply discounted income stock.
Double-digit returns
U and I is a property regeneration company. Profits are lumpy, and the business is dependent on debt to get projects off the ground. However, these factors should not detract from the investment proposition.
Management is targeting a 12% post-tax total annual return from property development profits and dividend income. So far this year, the company has generated development and trading gains of £6.7m taking the level of gains delivered since the start of the financial year to £16.1m, against a full-year target of £65m to £70m as legacy projects are divested.
For the six months ended 31 August, U and I’s net asset value per share was reported at 269p, 42% above the current price of 190p.
As well as this deep discount, City analysts are expecting the firm to distribute all excess earnings to investors for the fiscal year ending 28 February 2018. A dividend payout of 17.9p per share is projected, giving a potential dividend yield of 9.3%. The payout is expected to fall back slightly next year, but the yield is expected to remain at an attractive 6.2%.