There could be more to come from this specialised real estate investment trust.
Despite the property sector's woes, the two joint chief executives of Local Shopping REIT (LSE: LSR) seem to think now is a good time to invest. Both Nicholas Gregory and Michael Riley added 25,000 shares each last week, taking their holdings to 600,000 shares each.
This property company's share price stands at 61.5p and it's capitalised at £51m. The shares hit a low of 28p early last year but were priced at 174p when the company floated in May 2007. Let's hope Messrs Riley and Gregory got their timing right!
A tale of empty shops
The findings of a survey on numbers of empty shops were announced at the British Property Federation (BPF) Retail Summit last week. The report by the Local Data Company surveyed over 700 locations and gives a position at the end of 2009.
Overall, one in eight shops in Britain stands empty, and in the worst-affected areas of Kent, the Midlands and the North East, the figure is one in five. Overall vacancy rates have nearly doubled in England since the end of 2008.
More than a quarter of Margate's shops (27.2%) are empty. Wolverhampton's vacancy rate is 23.9% and Bradford, Middlesborough and Sheffield follow close behind. Central London, however, is holding up well.
The recession clearly is one major trigger, and the continued switch to online shopping would probably be close behind.
The case for
At the end of January, Local Shopping had a portfolio of 625 properties comprising nearly 2,000 letting units. Income for the year ending 30 September 2009 was £15.5m, slightly down on the previous year's £16.1m. This is partly explained by it owning fewer properties in 2009 than 2008. Ignoring valuation adjustments, Local Shopping made what it calls a recurring profit of £2.9m (3.5p per share).
Its investment policy is to acquire local shops in urban and suburban areas, investing in neighbourhood and convenience properties throughout the UK. It says it looks for an attractive and growing level of income, and it actively manages its assets for capital growth with rental reviews, securing change of use of premises, developing adjacent land and residential accommodation above shops.
Debt stands at £117m with an average interest rate of 5.7%. No refinancing is due until 2016 there is an additional, committed and undrawn long-term loan facility from of £60m until available 2013.
It reckons its focus on smaller local shops (a median property value of £165,000 and an average annual rent of just over £12,000) provided some protection during the recession, especially compared to other real estate investment trusts (REITs) that concentrate on larger high street shops.
A recent interim trading statement was quite upbeat, highlighting an increase in annual rental income overall plus good sales of lower performing properties. Seven new properties have been bought for £1.6m, at an average yield of 9.3%, and the commercial void rate was down to 8%.
Discounts and dividends
According to Investors Chronicle, Local Shopping is sitting at a 30% discount to its broker's forecast net asset value of 87p. Most larger REITs are now trading at a small premium, so I reckon there's a good chance this discount could narrow. Further, evidence from auction prices is showing that smaller shop values are holding up well, as private investors continue to seek better-yielding investment alternatives. Local Shopping has sold ten properties since September at 1% over their latest official valuation.
Whilst its recovery from 28p has been exceptional (more than doubling), I'm holding for combination of decent income plus potential capital growth. REITs are obliged to pay at least 90% of their profits as dividends. Local Shopping's payout in 2009 was 3.5p -- a yield of 5.7% on the current price. The same dividend is forecast for this year, with 3.75p for the year after.
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Phil owns shares in Local Shopping REIT.
