Town Centre Securities (TCS) provides mainly regional commercial property exposure, with a focus on the fast growing cities of Leeds and Manchester, where management has a deep knowledge of the markets. TCS is a family-run business with a strong income focus and a 57-year record of increased or maintained DPS. It employs intensive asset management and capital recycling to drive income growth and capital returns. Management has provided details of a substantial pipeline of continuing development opportunities, with the potential to add materially to our forecast earnings and NAV over time.
H118 (the six months ended 31 December 2017) was a period of significant change within the portfolio, including strategic disposals and continuing business development, but the underlying trends continued to be positive. With occupancy remaining high (99%) and like-for-like rents advancing (by 2.2%), TCS was able to limit the negative impact of disposals on near-term property income and earnings, before the benefits of development completions are fully felt. The car park operation, CitiPark (c 25% of recurring operating profit) grew further. H118 NAV per share grew 4.5% on end-FY17 to 375p, supported by valuation gains on completed and development assets. Including DPS paid, the H118 NAV total return was 6.6%, with an unchanged DPS of 3.25p declared for H118.
Recognising that property values and income can reach levels where the potential for future returns becomes muted, TCS has been very active in the past five years in recycling capital from mature/non-core assets to self-fund over £85m of investment. Opportunities with a developed value of up to £600m remain, providing significant potential to lift earnings and NAV well beyond our forecasts over time. Management is exploring how it may fund this investment in growth. Capital recycling and joint ventures are likely to contribute, but with an LTV of 47% material new debt funding is unlikely. Additional equity is an option but may require family shareholders to re-assess their position.
NAV total return was a compound 8.8% pa in the five years to end-FY17, and we forecast 7.3% in the three years to end-FY21. Despite continuing investment to support long-term total return, the dividend yield is a fully covered 4.0%, yet the shares trade at a significant 26% discount to FY18e EPRA NAV.