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."
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.
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