Circle Property – showing growth in both income and value

Shares in Circle Property are trading way below what I feel would be an appropriate valuation for such an enterprising and tightly controlled property company, writes Mark Watson-Mitchell.

In just over three weeks Circle Property (LON:CRC) will be announcing its interim results for the six months to end-September. The company should show that it is continuing to deliver impressive net asset value strength, which is a basic requirement for any property company.

Although it was formed way back in 2002, it grew in the years up to the financial crash, then managed to meet all of its commitments when markets got rough.

By February 2016 it was progressing again, and its growth was solid. The Jersey-based company then had a £42.2m market capitalisation, as Peel Hunt, its brokers, handled a placing of just 89,744 vendor shares together with a subscription for 704,697 shares at 149p each.

Circle Property classes itself as a specialist property investment company. It acquires provincial office properties where it believes that it can add value by actively undertaking lease renewals, rent reviews, lettings and refurbishments.

Its acquisition strategy is to seek out ‘special situation’ deals, especially redevelopments, and keeping focused upon such opportunities in the UK’s regional cities. The company has a portfolio of 15 UK regional commercial property investment and development assets.

Its funding strategy has been the maintenance of a core secured borrowing facility, by which it is able to fund its acquisitions of both freehold and leasehold properties.

The nub of the company’s focus is on acquiring assets in regional cities, several of which have significant office supply constraints. Rather than just maximising initial rental yields, Circle also takes on office assets with active management potential, such as refurbishment opportunities, under-rented or vacant properties or short leases.

And it certainly appears to be working well with just three full-time property professionals and a very well-connected management team, which owns 34% of the company.

In the decade from 2006 to going public in 2016 the company provided an average return of over 7.5%. Since its float in February that year and up to September last year, the company’s net asset value had increased by 84%.

Issued early last week, the company’s trading update stated that for the first six months of the current year to end-March 2020, the identification and active management of its assets in a niche market had been supported by strong fundamentals. It also noted that demand for regional office space had remained positive, helped by the regulations in relation to permitted development rights.

The company’s portfolio, which is 99% focused upon the office sector, had risen in value over the first half year. At the end of September, it had been independently valued at £135.6m, which was up £11m from the end-March figure.

Net assets per share were 278p, which was a mere 1p up on the end-March figure. However, the real increase in value will be evident in the second half-year. Work on various refurbishments now underway will boost both values and rental income.

In the six months there was a 7.2% increase in gross rent flow to £8.2m. In that period the company has been highly active in putting together a pipeline of well-located income generating assets, which will add to the anticipated value and rent income boost.

What appeals to me is the fact that as well as delivering substantial increases in NAV, the portfolio also has a very significant reversionary potential with current total estimated rental values of some £10.9m annually.

There are 28,551,796 shares in issue, of which the management own some 9.7m shares. Other larger holders include Palace Capital (5.04%), Downing LLP (4.42%), and Delta Securities Holdings (2.81%).

For the current year, estimates suggest that the net (not gross) rental income will rise from £6.5m to £7.1m, with the adjusted net profit remaining about the same at £1.9m. Earnings could improve by just 0.1p to 6.7p per share. The dividend of 6.5p per share should rise just 0.2p over the end March 2019 figure. The net asset value should rise to 281p a share (275p).

However, for next year, estimated net rent of £7.7m should pump its net profits which are expected to rise to £2.6m. Adjusted earnings per share could see a healthy improvement to 9.1p, comfortably covering the generous dividend of 7p per share.

On the face of it, those figures from Circle may not be too inspirational; however, I do feel that with its shares currently at around 206p, they are trading way below what I feel would be an appropriate valuation for such an enterprising and tightly controlled property company.

I see the shares, which peaked at 230p in July 2018, gradually rising back up to that level and above. Taking an end-2020 view I am putting out a target price of 235p. This is a very solid situation play and valued at just £58.8m it really is looking cheap.