Town Centre portfolio transformation

Town Centre Securities (LON: TOWN) has been reducing its dependence on retail property and that proved a good thing this year. COVID-19 has hit rents and property valuations, but the downside has been limited and the discount to NAV appears overdone.

Retail and leisure property used to account for four-fifths of the portfolio and that has been reduced to 42%. Offices account for around one-quarter of the portfolio.

The strategy to reduce dependence on retail is being accelerated and since June, there have been further disposals of two Waitrose supermarkets and other retail properties. These disposals show that the book values of the properties are reasonable.

Town Centre Securities focuses on northern England, London and Scotland. In the three years to June 2020, there has been £84m raised from disposals.

Rental collections

Since March, £10.9m of the £13.3m of rent due has been collected with a further 4% deferred by agreement. There has been £800,000 waived. That leaves £1.1m outstanding.

Rental collections from residential property have been the best. In May there was 96% of rent collected.

NAV

There was a like-for-like reduction of 6.9% in the value of the property portfolio. Most of that decline is due to retail and leisure sites.

This led to a 17% fall in underlying NAV to 292p a share at the end of June 2020. It could fall further this year, although actively managing the properties could reduce the level of decline.

Results

Management reckons that COVID-19 knocked £3.6m off profit in the year to June 2020. This was mainly due to lower car park income, where some sites were closed, and bad debts.

A final dividend of 1.75p a share was declared. That takes the total for the year to 5p a share, which was not quite covered by earnings per share.

This year earnings and dividend will be lower. The dividend could fall to 2p a share, although it is difficult to assess at this point in time.

Net debt was £186.9m, excluding leases, and loan to value is 53.2%. There have been subsequent sales worth £35m and loan to value has fallen to 47.8%. Those disposals and future sales will improve the balance sheet.

Development

There is a £600m development pipeline. This includes some sites where detailed planning permission has been obtained.

Management is less keen to go ahead with the potential office developments. Residential is likely to be more attractive, particularly as rent collection levels have been much higher than other property sectors. There is also strong demand for rental housing.

Valuation

The share price recovered 4p to 90p. That is still less than one-third of NAV. That more than discounts further decline in valuations. Even on the lowest dividend estimates, the forecast yield is 2.2%.

There is more pain to come. Also, rental income will decline in the short-term as properties are sold and it takes time to reinvest in other properties.

There is £18.2m of headroom on existing debt available. This will continue to increase, and the cash can be used to make acquisitions when opportunities arise.

Investors need to take a long-term view of Town Centre Securities. The outlook is going to be uncertain for quite a while, although the company is in a good position to survive and consolidate.

Once there is an upturn the NAV discount should narrow and the yield should increase.