Questor share tip: Town Centre Securities a long term buy

Town Centre Securities
305.5p+9.1p
Questor says BUY

Town Centre Securities' [LON:TCSC] are trading at a discount to the value of the commercial property it owns. The company offers exposure to a recovery in regional property values, while also paying a 3.5pc prospective dividend yield.

Northern lights

The group is a small, family-owned real estate investment trust with a market capitalisation of £162m. Mainly focused on the north of England, its property portfolio is split: 56pc in Leeds, 24pc in Glasgow and Edinburgh, and 14pc in Manchester, with the 6pc balance in London.

Town Centre Securities’ most recent set of results revealed that the property portfolio increased in value by 7.1pc to £355m in the year to June 30. The company had net debt of £175m to fund that portfolio, which leaves a net asset value of about £180m, or 344p per share. The shares, at 305p, currently trade at an 11pc discount.

Super Leeds

The fortunes of the company are closely linked to the north of England, and Leeds in particular. Its largest asset is the Merrion Centre, which makes up more than a third of the value of the group’s entire property portfolio.

The rental income at the Merrion Centre is based on two key customers: Leeds City Council and Wm Morrison.

Morrisons signed a new lease in June last year that runs until 2040. The store recently expanded and its rent increased.

Leeds City Council entered into a joint venture with Town Centre Securities in May for a complete refurbishment of its offices.

Town Centre Securities’ underlying pre-tax profits dipped to £6.5m in the period, from £7.6m a year earlier. The drop in income came after the company sold properties in Scotland and Leeds, with the funds being reinvested in Edinburgh and London.

The reported figures, which include the revaluation of properties and any profits made on disposals, were down 12pc to £24m.

Mind the debt

The biggest risk to equity investors in property funds is debt levels. Town Centre Securities’ borrowing levels look manageable because £106m of the total £175m debt is funded via a fixed interest debenture with an interest rate of 5.4pc.

The remaining debt was recently renegotiated at a lower interest charge. The loan to value – a key measure of risk in property investment – remains 49pc, which means the debts are half the value of the property.

The provincial property market is far less buoyant than in London, but its core asset – the Merrion Centre – should benefit from the office redevelopment plans now in place.

Town Centre Securities’ shares are likely to be volatile due to the company’s small size and reduced liquidity in the stock. The Ziff family retains a controlling 53pc interest, with Edward Ziff as chairman and chief executive.

The dividend of 10.4p has been held for the past five years, and offers a forecast yield of 3.5pc. The final 7.3p goes ex-dividend on December 2 and pays out on January 5.

The local property market is a volatile place and the shares are still well below a peak of 713p reached in the heady days of 2006.

We said buy (232.5p, December 2013) and that long-term advice remains.