Landlords seeking investments in commercial property shares

Landlords who are confident that the property market has turned a corner and are looking at investing in income generating shares should have a look at a recent post of mine on Property Investment Trusts (PITS).

These offshore property companies have been hammered by the fall in commercial property values which have dropped by over 40% from their peak in 2007.

Some of these PITs were trading at a 50% discount to their underlying asset values at one stage. Stability appears to now be returning to commercial property values after the steep declines.

PITS are high yielding investments with a high proportion of any residual income being distributed to their shareholders in dividend payments.

To find out more about Property Investment Trusts along with the best ones to buy have a look at my post.


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Residential fund to target distressed buy-to-lets in North & Midlands

A residential property fund will aim to target the unprecedented opportunities in the buy-to-let market.

Three Leicester based residential agents are aiming to buy 'distressed and mispriced' buy-to-let properties in the Midlands and North.

The Residential Property Recovery Fund aims to raise £10m of equity by a private placing. The five year closed ended fund is targeting a return of 16% a year and to double investors equity. It is also eligible for investment in a SIPP.


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Landbank looks to capitalise on distressed market

Landlords looking to invest in a housing recovery without buying more property may want to look out for a new company coming to the market which is looking at buying residential land from distressed sellers.

Landbank hopes to float on AIM in July with between £150m-£250m, will look to acquire land at the bottom of the cycle, increase its value through the planning process, then sell back into a recovering residential market.

For more details see the FT.


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Property income stocks to buy!?!

The price of property shares continues to drop through the floor on Friday as the markets appear to have gone into melt down.

In times like these it is hard for income orientated property investors to keep their head there is no doubt about that. However, could this panic, the rush for the door be throwing up once in a lifetime opportunity for income seeking property investors prepared to ride out the market turbulence and the ensuing depression? I still believe so.

When the dust clears from this financial Armageddon, people will still need places to work, live, shop and eat. They may be not doing so much of this and paying so much for it, but by and large we will still need buildings.

Having said all this, which stocks am I still buying?

Heres a safe stock after my recent more speculative punt.

Isis Property 2 (IRP)

Price 58.25p
High 121p
Annual div 7.2p
Proj yield 12.4%
Net gearing 31%
Net assets 121p
Net annual income 11.9p

This company has one very important characteristic in the current cash strapped markets, low levels of borrowing. Just over 30% according to its year end results produced for the year to 30.06. It proposes to keep its quarterly dividend payment at 1.8p into 2009.

More importantly dividend cover is 1.65 times. This means that unless voids increase dramatically or rent fall (unlikely given most leases are upwards only guaranteeing rent rises for the landlord) then this should be secure.

RISK vs REWARDS

There are risks with holding property shares still with commercial property values continuing to fall and capital values will remain under attack whilst banks scramble to deleverage their balance sheets. The likely depression will also no doubt increase the voids experienced by many property investment companies. However, if there is such as things as a safe pair of property hands in the current climate then Isis Property Trust 2 is probably it.

Property share to buy

The turmoil in the credit markets are having a devastating impact on property shares as investors run for the hills worrying that property investment companies are not going to be able to refinance their debt. On top of this there is a general realisation that a credit squeeze will turn into a depression. Depression means companies going bust and therefore not paying rent to landlords, such as the property investment companies.

Having said this, we know that things are rosy in the property investing garden, but have markets gone too far, pricing in the risk and then some. I think they may have.

Take for instance one company, which I have been watching for some time.

Dawnay Day Trevaria (DTR). This company invests in German retail property. The German economy is generally better placed than UK Plc because Germans who prefer renting their houses (owner occupation I believe is less than 50%) are not so leveraged with property debt.

This company was originally set up by the ill feted DAWNAY DAY outfit which has since gone into administration.

Their recent interim results to 30th June highlighted the following:

*

Property assets of €2,221 million, after revaluation, as at 30 June 2008 (31 December 2007: €2,333 million) reflecting a decline in valuation of 6%

*

€79.2 million of property disposals notarised since 30 June 2008 at a 10% premium to the 31 December 2007 valuation

*

Gross rental income for the period rose 34% to €79.8 million (2007: €59.3 million)

*

Adjusted profits after tax* of €17.4 million (2007: €20.3 million)

*

Adjusted EPS* for the period of 2.85c (2007: 2.86c)

*

Adjusted NAV* per share of 91.2c, a decrease of 19.2% from 112.9c as at 31 December 2007

*

Total cash position of €152 million as at 30 June 2008

*

Strategic review now focused on strengthening the Company's balance sheet and new management arrangements progressing

*

Proposed name change.

The shares have fallen from a year high of 90cents to 8cents and are now trading at around 10cents being up strongly today.

The market clearly prices them to go under having breached some of it's banking covenants. However, with net assets of over 90c per share cash of over €150 million and more importantly a positive income of about €44million a year, I think it has a chance of surviving.

Ian Henderson, Chairman of Dawnay, Day Treveria PLC, said: "We retain a substantial and diversified portfolio of retail assets in Europe's leading economy. With a cautious approach to the use of our cash, stabilisation of the capital base, a co-operative relationship with our lenders and a targeted sales programme, we are positioning the Company in a way which should enable it to weather the current economic storms and to benefit as market conditions improve."

He is not the only one who thinks that Dawnay Day may live to tell the tale of the 2008 credit crunch and eventually pay a decent income. Activist funds have been secretly buying. Montpelier Investment Manager LLP have accrued a stake of over 10% as have Taube Hodson Stonex Partners LLP being upping theirs to just under 10%.

Only for the brave this one, but when the credit bubble dust clears and if the company has survived, it could prove a very shrewd investment.

Next time I will pick a more conservative property investment stock

Property Shares to buy

It been a while since my last post, I appologise. It is a full time job keeping up with such a fast moving turbulent market. Having said that this presents some great property share investing opportunities.

One share that I have been keeping my eye on and topping up my holdings in is ING REAL ESTATE INCOME TRUST (IRET).

It is capitalised at its current share price of 45.75p at just over £150m. In its recent results to the end of June it reported net asset of 97p putting it on a current discount of over 50%. The great thing for Income Monkeys is that its current dividend which is 88% covered by income receipts mainly in the form of rent is 6.25p. With my ropey maths that equates to over 13.5% yield.

That to me is worth taking the risk that commercial property values fall further especially given that it already trades at such a discount to underlying asset values.

The share price has currently hit a trading range up from its year low of 41.75p in the mid to low 40p share mark. Any drops below 45p I will definitely be picking up more.

More ideas coming along soon...

Property investment capitulation draws near

Its exciting time for investors in commercial property shares. Why? Because we are reaching the capitulation point. This is the mythical stage where investors are so sickened by their financial losses that they give up, walk away and vow never to invest in commercial property or shares again. CAPITULATION!

At that point so the theory goes the last of the force sellers exit the market and from that point on the share price and company values start to rebuild.

We are getting close to that point, but no quite yet. Confidence in bank shares is starting to stabilise, housebuilding stocks have probably hit the bottom. The next sector to stage a recouvery is likely to be commercial property shares and this is why.

1. commercial property shares have been obviously hit by a huge slump in commercial property values. However, shares have fallen faster and further than values of their underlying assets leading to massive discounts of share price to underlying asset values. Whilst this can be explained by the fact that investors are pricing in further falls, some time soon probably towards the end of the year real values will start to stabalise and these discounts will be revealed as ludicrously large
2. sentiment - the share market is all about sentiment at the moment. Fear has taken hold and many investors battered by massive and often inexplicable falls have bolted for the door. Once this sentiment changes as a result of capitulation investors will awake to the fundamentals.
3. fundamentals - share prices for commercial property stocks are pricing in an apocolyptic scenario. Things are bad and going to get worse. Fundamentally though alot of occupiers will continue to need property and accommodation. The market is full of property shares yielding over 10% and I have checked out there consolidated income statement to show that these yields are sustainable unless the property companies suddenly start having massive voids. A year ago no body would have believed that these kind of figures would have been achievable. How quickly a market changes from greed to fear!

What stocks should I be buying?

As I said landlords and investors should be looking out for tell tail signs of capitulation, but here is a property investment share to buy, more tips in subsequent posts

Mapeley

Share price £10
NAV £17.32
dividend £1.27

Mapeley is a classic case of the City not understanding a company. Mapeley is a hybrid which has confused the City. It is partly property investment company but mainly an outsourcing company deriving much of its income from managing other companies property requirements. The result is that it generates much greater levels of income than traditional property investment companies.

In its unaudited quarterly results for the three months ended 31 March 2008 it announced that it owns and manages a commercial property portfolio of over £2.0 billion covering some 2.4 million square metres throughout the UK.

Highlights

• FFO* the key measure of operating performance up 226% to £45.0 million,
equating to 153 pence per share** (31 March 2007: £13.8 million, equating
to 47 pence per share)
• Excluding the effect of above average asset management receipts in the
quarter, FFO remains stable at 48 pence per share (31 March 2007: 47 pence
per share)
• EBITDA*** increased by 8.9% to £35.6 million (31 March 2007: £32.7
million)
• Revenue down 4.3% to £99.6 million (31 March 2007: £104.1 million)
• Loss before tax of £27.4 million (31 March 2007: profit before tax of
£11.4 million) due to non-cash revaluation losses in the quarter of £39.2
million in line with market trends
• Total asset value of £2,253.9 million (31 December 2007: £2,317.6
million)
• NAV per share decreased to £17.32 per share (31 December 2007: £18.62)
• Dividends to be paid at the half year and full year rather than
quarterly
• Over 90% of our income is derived from government and investment grade corporates, with low vacancy rates and a 10 year average lease length across the
portfolio.

The current price is at a discount to asset value of 43%. However as Citi property analyst Harry Stokes observes Mapeley should not be valued as an investment company

"We use enterprise value/EBITDA because we consider property outsourcing an earning play, not a property play" he said.

This all means that you have a company with a cast iron and rising income stream, most of its properties are let to government or the Santander Bank (formerly Abbey). The company is paying a whopping and rising dividend and trading at a discount to underlying asset values into the bargain.