A property firm with an 8%+ yield and a big discount to asset value.
Companies specialising in public service properties fell completely out of favour when the credit crunch really began to crunch share prices in pretty much anything related to property. All of a sudden, the one way ride wasn't quite what it seemed and the reverse gear was swiftly engaged.
As usual with such situations, the prices swung too much in either direction and the seismic waves certainly haven't settled yet. This presents opportunities for canny investors. And Public Service Properties Investments (LSE: PSPI) just might still be an opportunity.
Does what it says on the tin
The company does largely what it says on the tin, providing 39 care homes mainly in the UK, with an increasing presence in Germany where it owns 14, with another in Switzerland, and 140 post offices in the USA.
It takes the rents but doesn't operate the care homes, so whilst there is no direct trading risk, it is important that the operators are reputable and able to continue paying rents. The UK homes are operated by privately-owned European Care Group.
The company first floated on AIM around the height of the bubble in March 2007 at 150p, raising £30m with a market capitalisation of £100m.
As you might expect, the shares plummeted following flotation, reaching their nadir at 35.5p in March this year -- when their inherent value was pointed out by Steve Scott with perfect timing. The rally that followed saw the shares go over 80p in October. Today, they stand at 72p, valuing the group at just over £48m.
What you get for your cash
In return for a purchase today, investors are buying into a company with adjusted net asset per share of 193p at the last count and a relatively whopping yield of over 8.3%. These factors combined are the share's main appeal, though life isn't that simple unfortunately. Gearing, of course, is crucial to the investment case and the company's ability to maintain the 6p per annum dividend.
The ins and outs of the company were discussed recently in some depth on the Fool's discussion boards. At the interim stage, the Loan to Value ratio was 54%. This doesn't look overly demanding if we've seen the bottom of the commercial property market.
Meanwhile, the number of people needing nursing home care in the UK over the next couple of decades will rise significantly both in the UK and Germany, unless someone comes up with an elixir of eternal youth pretty quickly.
Sustainable business?
All of the group's UK leases are linked to the retail price index, subject to a minimum annual increase of 1.5%, with a cap at 5%.
Most leases are for 35 years, and there is a good spread across the country with a mix of nursing, residential and specialist care homes.
Meanwhile, the rents for the German portfolio increase every three or four years by a proportion of the increase in the German consumer price index.
The Swiss investment property increases annually in line with the Swiss consumer price index whilst the US investment portfolio maintains the same rental level throughout the term of the lease.
This suggests to me that the business model is sustainable as is, therefore, the yield. And that's where the main interest lies for potential investors today looking for a reasonably safe high yield -- unless the discount to NAV is going to narrow.
The house broker agrees with earnings per share of 9.7p in for 2009, rising to 10.2p for 2010, so either things aren't half as solid as they seem -- or the shares are a high-yielding bargain.
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