It takes a bold management team to refuse to invest spare cash because property prices are too high. But that’s what industrial property investment trust Hansteen Holdings (LSE: HSTN) has done today.
For the second time in six months, the company has decided to return cash received from property sales to investors, claiming that the “high level of demand for industrial property” means that opportunities to reinvest the cash “are likely to be limited”.
In November, £580m was returned to shareholders through a tender offer. Today the company has announced plans for a further £145m return. This will see shareholders receive 35p per share in cash.
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The news was announced alongside the group’s 2017 results. These are interesting because the firm sold its German and Dutch portfolio last year, reducing the size of its holdings substantially. Today’s accounts give us a chance to see what’s left, and to judge whether the stock remains attractive.
I’m impressed
Hansteen’s portfolio is now made up of 15.9m square feet of industrial property in the UJK, and 900,000 in Belgium and France. The overall portfolio has an attractive passing rental yield of 7.5%.
I’m impressed by management’s restraint in an increasingly expensive market. Rather than accepting lower rental yield, the top team has returned cash to shareholders and reduced the group’s loan-to-value ratio from 40.9% to 27.6% since December 2016.
The portfolio’s shrinking size meant that normalised income fell to £51.9m last year, down from £64.5m one year earlier. However, this still supported a dividend of 6.1p, up from 5.9p in 2016.
Looking ahead, the business has a net asset value (NAV) of 130.6p per share. The current share price of 139p represents a slight premium to NAV, but given the stock’s 4.4% yield I think that’s acceptable. On balance, I’d rate Hansteen as an income buy at current levels.
A more difficult choice
Not all types of commercial property are booming in value. Tough market conditions for large retailers and restaurant chains means that the market is finding it more difficult to value shopping centres and other large retail properties.
As a result, FTSE 100 property group British Land Company (LSE: BLND) is trading at a 30% discount to its net asset value of 939p per share. British Land owns £6.6bn of retail property around the UK, including Ealing Broadway and Sheffield’s Meadowhall. Retail accounts for about half of the trust’s total portfolio by value.
As yet, there’s no sign of trouble. The portfolio was 98% occupied at the end of September and net asset value rose by 2.6% to 939p during the half-year period.
Alongside this, British Land’s loan-to-value ratio has been reduced to 26.9%. The group’s debt carries a weighted average interest rate of just 3%.
What’s the risk?
I believe that some of British Land’s major tenants may reach a point where they will close shops and restaurants if they can’t secure lower rents. At this point it could find itself forced to accept lower rates in order to keep hold of key anchor tenants.
I’m still undecided about this stock, so I’m staying on the sidelines. But with a forecast yield of 4.7% and an attractive discount to NAV, British Land could be a great long-term income buy at current levels.
