The UK’s second largest commercial REIT reported a 2.6% rise in its EPRA net asset value per share to 939p, following healthy revaluation gains which demonstrated the resilience of its prime property assets.

It’s not all rosy though. Net rental income, a key measure of underlying profits, fell by £15m to £297m in the first half of the year. The decrease in net rental income during the period was mainly down to recent divestitures and lease expiries, although like-for-like rental growth also slowed considerably to 1.8%, from 3.4% in the same period last year.

In addition, amid a continuing overhang of uncertainty, chief executive Chris Grigg warned that he expects “rental growth across the market to be flat-to-down over the next 12 months.”

Big discount to NAV

Still, buying into a prime property portfolio at roughly 65p to the pound sounds to me like a great opportunity. The shares’ 35% discount to NAV also gives its dividends a nice boost. Following a 3% increase in its quarterly dividend to 7.52p per share, the shares offer an enticing prospective yield of 4.9%.

And while I don’t expect the valuation gap to close anytime soon, I have high hopes that medium-term upside could come from its development pipeline. Committed developments are forecast to generate an extra £55m in annual rents over the next five years. At first glance, this may seem speculative to some investors, but it’s important to realise the company is defensively positioned with 57% of committed pipeline already pre-let or under offer.

Together with contracted rent rises and upcoming open market rent reviews, British Land expects to earn an extra £109m in annual cash flow by 2022/23. This equates to nearly a fifth of its current passing rent, which could lead to some serious dividend growth and additional share buybacks.

Discounted REITs are not always better

However, it’s not a simple case of buying those with the biggest discounts. A well-run REIT with attractive fundamentals may be worth backing even if the shares trade at a premium to its NAV.

I reckon that Hansteen Holdings (LSE: HSTN), which trades at a 3% premium to its NAV, is perhaps one such REIT.

The industrial property investment company has recently undergone a major transformation after selling its entire property portfolio in Germany and the Netherlands and doubling down on the UK. It’s a strategy which crystallises value for shareholders with the euro at a high point, and allows it to take advantage of opportunistic pricing of UK assets.

Market fundamentals have also fared more resiliently in the industrial sector, with rents rising modestly and vacancies historically low and stable. And although industrial units have not made the same valuation gains experienced for prime central London property, investment yields have been far greater. This is especially true for newly built stock as Hansteen earns an 8% yield on passing rent.

At current prices, it has a prospective dividend yield of 4.4%.

The post British Land Company plc: an unloved 4.9% yielder trading at a 35% discount to NAV appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended British Land Co and Hansteen Holdings. 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.

We aren’t exactly sure how things will shake out just yet, but many office and retail focused REITs have been heavily sold off and now trade at steep discounts to their net asset values (NAV). It’s clear that markets don’t like uncertainty — but uncertainty can also create opportunities.

Rental rates going strong

Right now, British Land (LSE: BLND) trades at a discount to NAV of 34.6%, its widest level since July 2016. This seems understandable as investors remain mindful of the potential headwinds going forward, but rental rates have so far been going very well for British Land.

Despite slowing retail sales growth in the UK in recent months, British Land’s high quality assets seem to have held up better than most, with recent retail figures showing its properties have been outperforming industry benchmarks. In the three months to the end of December, the company secured 314,000 sq ft of retail lettings and renewals at 8.7% ahead of its estimated rental value (ERV).

However, there are also signs of weakness. Its third quarter occupancy rates dipped 1 percentage point to 97%, amid softening demand for London office space. And although retail rental rates were ahead of expectations, office lettings and renewals were only in-line with their ERV.

Still, British Land is in much better shape than it was leading up to the recent recession. With less leverage and a stronger focus on higher value property assets, its earnings should be less volatile and its dividends more stable.

British Land’s current loan-to-value ratio of 30.5% compares favourably to its 2008 figure of 47%. In addition, the REIT’s speculative development commitments stands at just 5% of its portfolio value right now, a far cry from the 23% figure in 2008.

With this in mind, I’m confident that the company has the ability to withstand the current uncertain economic climate.

More highly levered

intu Properties (LSE: INTU) trades at a slightly smaller discount to NAV of 33.6%. The shopping centre REIT, like British Land, could see rental yields fall if the economy weakens and consumers spend less on retail.

With a net debt-to-assets ratio of 44%, intu is more highly levered than many of its peers. But it isn’t excessive relative to its rental income, given that interest cover is just below 2.0x. What’s more, it shouldn’t prevent the firm to pursue further acquisition and development opportunities, and that should enable the company to deliver continued earnings growth going forward.

intu’s dividend is likely to remain unchanged at 13.7 pence per share this year, but that still leaves intu with a higher yield than British Land. For 2017, intu’s prospective dividend yield is 5.1%, which just about beats British Land’s prospective yield of 5.0%.

The post 2 deeply discounted REITs to consider today appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Focusing on non-prime London locations where prices are more reasonable, and thus more sustainable in the long term, has been a solid play for Telford. Through organic growth and acquisitions the company has built up a £1.5bn development pipeline with forward sales of £700m. Charging up to 20% of the price of a home in deposits and other fees means that the company has freed up significant cash flow years before developments are even completed.

A laser focus on costs has also brought gross margins up to 27.6%, above internal long-term goals and ahead of larger competitors. However, there are some clouds on the horizon. Net debt at the last reporting period was £50.4m, representing a gearing ratio of 37.3%. This is significantly more debt than larger homebuilders have piled on, having learned the lesson during the lean years that high leverage and low demand is a bad combination.

If London housing prices go south, gearing of 37% would be a scary sight for management and shareholders alike. I may be overly cautious, but high debt levels and relying on housing prices continuing to defy gravity makes me wary of Telford’s ability to continue performing as well as it has. While the company has built up a strong portfolio and relatively lean operations, housing prices will come down eventually and Telford is far too tied to them to make me consider investing in the homebuilder at this point in the cycle.

Multiple challenges

Foxtons (LSE: FOXT), the London-only estate agency, has struggled since going public in 2013 with share prices down 40% from their IPO level. While the company has continued to increase the top line, it’s increasingly beginning to feel the bite of a slowdown in its traditional high-end market.

Pre-tax margins fell from 32.1% to 30.7% over the past year as expensive home sales in central London fell, forcing the company to expand into outer London. Foxtons plans to continue with this and foresees expanding its number of locations from the current 62 offices to over 100 in the near future. Although this will help to keep the top line growing, I have concerns for what this will do to profits. Pre-tax profits already fell 2.6% year-on-year as the company discovered that lower home prices in non-core postcodes led to lower margins.

The largest worry I have for Foxtons is the long-term threat it faces from online-only and hybrid estate agents such as Purplebricks. These disruptive, low-overhead entrants to the industry offer sellers fees that are on average a quarter of what Foxtons and other high street agents charge. As increasing numbers of homeowners balk at paying 2.5% to 3% of their windfall to an agent who does little more than list the property on Rightmove and Zoopla, the traditional estate agency model could be facing an existential threat. With short and long-term problems looming, I don’t believe Foxtons shares will be reversing its decline anytime soon, even if the London property market continues to chug along.

The post Will London’s Sky-High Real Estate Prices Send Telford Homes Plc & Foxtons Group Plc Soaring? appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.