One of the most important learning tools we have available as investors is looking back at our mistakes. With that in mind, today I’m re-examining my bearish outlook on shopping centre REIT Capital & Regional (LSE: CAL).
When I last wrote about the company back in August, I dismissed it as too highly leveraged for a company that was facing down falling footfall at high street stores, stagnant consumer confidence and Brexit-related falls in property valuations.
However, the company’s full-year results released this morning offer an opportune moment to reassess my initially negative outlook. Against a tough backdrop for many peers, Capital & Regional performed very well during the latest period.
Like-for-like net rental income bumped up 1.9%, occupancy rates increased substantially from 95.4% to 97.3% year-on-year, and rising profits led to a 7.4% increase in total dividends per share to 3.64p.
And the group has continued to perform well after its December year-end with footfall at its centres up 3.1% in January and February, which was exceptional considering the national index saw footfall contract 2.9% during these months.
This is one area where I was definitely too quick to judge, as going back over the group’s entire portfolio reveals it may hold up better during a recession and against the threat of e-commerce than I expected. Much of this is due to management filling its centres with relatively low-price stores such as McDonald’s and Lidl that cater to daily necessities and should prove fairly resilient during any downturn.
On top of this possible resiliency, the stock also offers a 6.6% dividend yield and a bargain share price that today represents a whopping 18.5% discount to net asset value (NAV). While these facts certainly merit further research on my part, I must say the group’s 46% net debt-to-property value ratio is still far too high for my taste and broader trends negatively affecting the sector lead me to continue avoiding Capital & Regional.
A larger, more diversified option
One other REIT that’s on my watch list for offering a high yield, relatively attractive valuation and a management team that’s proving adept at reorienting its portfolio to adapt to changing consumer habits is British Land (LSE: BLND).
The company has a much larger and varied portfolio than Capital & Regional with a collection of very pricey commercial real estate developments existing alongside more high-end shopping centres. This mixed estate leaves the company more vulnerable to any economic downturn, but with its loan to value ratio down to 26.9% as of September, it has the balance sheet to withstand the next recession.
Furthermore, the group’s management team is already planning for this eventuality by disposing of non-core sites at lofty prices and returning the cash to shareholders rather than buying over-priced property. This leads to a 4.7% dividend yield for shareholders alongside a share buyback programme of £300m for the fiscal year to March.
And in the meantime the company is still reaping the rewards of a stable economy as its NAV rose 2.6% in H1 to 939p, thanks to a 1.4% valuation uplift and stable underlying profits despite large disposals. And for contrarian investors, British Land could be a bargain buy at its current share price of 635p, well below its NAV.
