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.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.