De­spite a weak share price, this prop­erty com­pany is in­creas­ing its div­i­dends

The Daily Telegraph - Business - - Business -

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.

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