Despite a weak share price, this property company is increasing its dividends
PROPERTY plays a crucial role within Questor’s Income Portfolio. Our exposure is varied, comprising shares in Crest Nicholson, the housebuilder, and Lloyds Banking Group, the country’s largest mortgage lender, along with stakes in two listed property investment companies, the F&C Commercial Property Trust and Regional Reit. Commercial property has been one of the most watched sectors since the Brexit vote in June last year. We have hedged our bets to some extent, putting 5pc of the portfolio (£25,000) into the London-focused F&C trust and 3pc (£15,000) into Regional Reit, whose holdings are entirely outside the M25. Both purchase, manage and sell-on office and industrial properties. Regional’s half-year results, published yesterday, are encouraging, suggesting that regional property is holding up well despite the continued uncertainty. Most importantly for our portfolio, which aims to produce 5pc income a year, dividends are growing.
Regional’s policy is to pay three equal, quarterly dividends and a larger final dividend. In 2016 there were three payments of 1.75p and a final of 2.4p. This year investors can expect 3pc dividend growth, equating to 1.8p and 2.47p. The growth in income is particularly impressive given that Regional is very much in an expansion phase: it listed only in 2015 and is still making acquisitions at a rapid pace.
Across the group, mortgage borrowing relative to assets is falling, from around 49pc to 47pc over the six months to July, although this is still some way off the long-term goal of 35pc. Management has also told Questor that the company plans to refinance its long-term debt at today’s low rates over the next 18 months.
Less pleasing is the recent erosion of the share price. We bought at 103p in October 2016, but at the close yesterday it was 100.5p. The company’s properties have increased in value, expressed as net asset value or NAV per share, from 106.9p at the end of 2016 to 107.3p now.
In other words, assets have grown while the share price has fallen. At the moment at least, the market seems to undervalue the company slightly.
As detailed at the start of this month, sentiment over F&C Commercial Property has gone the other way. On the same basis, it is “overvalued” by about 7pc. Better news emerged from Next yesterday as the group increased sales and profit forecasts.
Admittedly, its high street arm reported profits 33pc lower than last year, but the improvement in forecasts, driven by favourable weather, was enough to push the shares up 13pc to £49.94. That puts the share price up by as much as 37pc in just two months. Next has been criticised for failing to keep pace The manufacturer of Cathedral City has disappointed since our October 2016 purchase at 605p, with the shares about 1pc lower at 601p. The business is exposed to milk prices and the hard-nosed supermarkets that control its distribution. Yet, as with Royal Mail, another holding, management’s commitment to reducing the burden from the legacy final-salary pension schemes is welcome.
In line with other sponsors of these schemes, the trustees have agreed to move to a more affordable inflation link. All final-salary pensions must increase payments each year in line with the rising cost of living. However, millions can be shaved off pension liabilities simply by a switch from the retail prices index measure of inflation to the usually lower consumer prices index. Dairy Crest will save around £12m over the next two years.
All three stocks retain their place in our portfolio.