A confident trading update from Town Centre Securities (TCS) points to a stable financial performance, supported by robust operational metrics, across its increasingly diversified regional commercial property portfolio. Against the backdrop of a challenging retail sector, and the economic and political uncertainty of recent months, we view this positively, justifying the recent share price strength. We make no changes to our forecasts and will review these with the interim results due 26 February.
In H120, a good level of occupancy further increased, while like-for-like passing rent increased 0.4% year-on-year on an underlying basis excluding the impact of significant development projects. With redevelopment of The Cube underway, passing rent is temporarily reduced by £1.2m, partly offset by the £0.6m uplift from fully re-letting Milngavie. Including these development impacts, like-for-like passing rent was 2.8% lower. Reflecting the increasingly diversified regional portfolio and the defensive nature of the remaining retail exposure (less than 50% by value with a lack of big high street names and a focus on discount formats), rent collection remains strong and there was only one additional retail administration (and no new CVAs) in the period. CitiPark continued to grow revenues and earnings. The update appears consistent with our recurring income forecasts and supportive of our capital value assumptions. We expect a robust but lower income performance in FY20 and a rebound in FY21 as developments complete and are re-let.
TCS is a family-run business with a strong focus on dividends, increasing or maintaining DPS in each of the last 59 years while recycling capital and actively managing assets for long-term growth. An extensive pipeline of potential development projects with an estimated gross value – once funded and developed – of more than £600m, represents both a significant long-term growth opportunity not captured by stated NAV and a differentiating factor for the group. Borrowing headroom (£26m at end-FY19) and proceeds from further retail divestment is likely to be targeted at development investment and/or acquisitions. Management signals that it is also open to potential accretive share repurchases.
TCS has a strong dividend commitment while continuing to invest for growth and, despite the recent rise in the share price, the yield remains attractively above 5% while the share price discount to NAV per share is more than 30%.