Investors Chronicle recommends taking a closer look at Highcroft Investments (HCFT:775p), a well-managed real estate investment trust (Reit) that owns a diversified portfolio of properties across various sectors such as warehouse, retail warehouse, leisure, office, and retail. Highcroft has recently delivered a solid first-half performance and has made strategic moves to replace lost income from the disposal of an industrial property in South Wales.
Strong Portfolio Focus
Approximately 75% of their portfolio is concentrated in the industrial and retail warehouse sector. This particular segment of the market has been experiencing rental growth due to strong dynamics. The company is actively maintaining its high exposure to this sector and has reinvested a portion of the proceeds from the sale of the Llantrisant property into a well-located logistics asset in Ipswich. This property is leased to Thompson & Morgan, the UK’s largest mail-order garden products retailer. The purchase price of £5.5mn reflects a net initial yield (NIY) of 6.3%. This acquisition helps to rebuild the rental income lost from the Llantrisant disposal.
New Acquisitions
In addition to the Ipswich logistics asset, Highcroft Investments has also acquired an industrial property in Aberdare, South Wales. The property is leased to a subsidiary of Berry Global Group, a packaging and engineering group listed on the New York Stock Exchange. The purchase price of £3.75mn reflects a NIY of 8%. With this acquisition, they have successfully replaced £0.7mn of the £0.8mn rental income it had been earning from the Llantrisant property. Both the Ipswich and Aberdare investments offer potential for capturing rental growth in the future, unlike the Llantrisant property which was nearing the end of its lease.
Promising Lease Agreement
Highcroft Investments has signed a 15-year lease with logistics group DHL for a brand-new warehouse in St Austell, Cornwall. The development of this 28,000 square feet warehouse is projected to be completed in April 2024. The asset is carried in the accounts at cost, so as the development progresses, there is potential for strong valuation uplifts. They are utilizing £4.75mn of its cash on the balance sheet to fund this development.
Balance Sheet Strength
Highcroft maintains a sound balance sheet, with a weighted average cost of debt of only 3.06% on £27.2mn of bank loans. Importantly, no borrowings mature before 2026, eliminating any immediate funding concerns. Debt levels are comfortable at 33% of the £80.5mn portfolio valuation. The company’s annualized net rental income of £5.2mn covers interest costs more than six times, ensuring ample surplus cash flow. This surplus cash will be used to fund the payout of 56p per share, supporting the impressive 7.2% dividend yield.
Share Price and Discount
While Highcroft Investments’ share price has experienced some decline in a weak market, it is worth noting that the valuations in the sector have been stabilizing after last year’s government bond yield spike led to significant declines. Despite the recent weak market conditions, the share price currently represents a 28% discount to net asset value (NAV). This discount may present an attractive opportunity for potential investors.
In summary, Highcroft Investments has demonstrated a solid performance in the first half of the year. The company has strategically replaced lost income through acquisitions and is actively focused on the resilient industrial and retail warehouse sector. With a strong balance sheet, promising lease agreements, and an attractive share price discount, this REIT may be worth considering for investors looking to enter the property market.