£1 Of Value For Less Than 60p

Published in Investing on 18 November 2011

This unloved property company is seriously undervalued.

Several of the UK's leading commercial property REITs (Real Estate Investment Trusts) have released their half-year results in the past 10 days.

For the six months to 30 September, Land Securities (LSE: LAND), British Land (LSE: BLND), and Great Portland Estates (LSE: GPOR) all reported 4-5% increases in net asset value (NAV) per share, underpinned by modest rises in property valuations. Their shares are currently trading at discounts to NAV of between 4% and 24%.

Meanwhile, shares in McKay Securities (LSE: MCKS), a smaller REIT, stand at a 42% discount -- 115p against NAV per share of 197p. The NAV dates from McKay's last year end (31 March); so the discount will be wider still if the company reports an uplift in line with its sector peers when it announces its own half-year results next Wednesday.

Simple and effective

McKay may be dwarfed by the UK's REIT giants, but there's not a lot wrong with it that I can see.

The company was established in 1946. It operates in the (relatively) healthy South East and Central London region and its business model is to "Buy -- manage -- develop/refurbish -- manage -- sell/recycle."

McKay is conservatively run; it didn't, at any rate, have to tap shareholders for emergency cash as a result of the credit crunch. At the company's AGM in July, the board said it had £60m of headroom on its £155m long-term loan facilities, £12m of which was earmarked for expenditure on existing properties and acquisitions.

The catalyst for me having a closer look at McKay -- which my Foolish colleague David Holding reviewed in depth in June -- was the announcement, on Thursday, that the company had acquired a new property to add to its £208m portfolio.

This £2.7m acquisition seems to encapsulate what McKay is all about. Doncastle House is a 33,600 sq ft modern office property in Bracknell with good access to the M3 and M4, and very generous car parking space.

The initial yield is 12.5%, which would rise to a whopping 17.5% if the building was fully let at current rents, and there is also planning consent for a 30% increase in the net lettable area.

McKay sees significant scope to improve both the rental income and capital value through "simple, effective asset management."

Too generous

The Doncastle House acquisition looks a very good deal to me, and amply illustrates the kind of value McKay has the potential to unlock.

The market's valuation of the company at a discount to NAV in excess of 40%, and affording it a dividend yield of over 7%, just seems too generous.

A good set of results from McKay next week could see the market revise its opinion.

More from G A Chester:

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MrBearBull888 18 Nov 2011 , 5:55pm

This has to be a buy - so I bought!

vinchainsaw 18 Nov 2011 , 6:50pm

Obviously there is a discount.
Just not convinced its 60p/£1... suppose it depends if you think property is still over-valued or not.

Is on my watchlist though.

Hannibalis 19 Nov 2011 , 9:17am

Interesting, although I am a bit cautious on property. Some property plays also have good yields.


fedupwithbanks 21 Nov 2011 , 5:43pm

Obviously a good buy? Which is why the directors own only a tiny fraction of the company? And they should know, shouldn't they?

Rooky102 25 Nov 2011 , 5:07pm

'Doncastle House is a 33,600 sq ft modern office property in Bracknell with good access to the M3 and M4'
If you think Bracknell property is a good purchase, then you haven't been here recently - the town is stuffed full of offices to let - including "name your own price" offers. A couple of quite recent buildings are currently being bulldozed to save on council tax. It pays to do research on the ground!

MTIOC 27 Nov 2011 , 8:22pm

After the June write-up I looked at Mackay. Despite a lot of effort I could not understand the potential hedging and pension liabilities. They could be immaterial, but I could not understand them, so did not invest.

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