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Circle Property PLC: DEEP DIVE

Circle Property in right spot as regional office demand keeps rising

“We believe that our NAV forecasts are conservative and the shares are significantly under-valued given the company’s track record and growth prospects.”
OVERVIEW: CRC The Big Picture
Circle has a number of properties in or close to Birmingham
  • Focused on undervalued regional office properties where there is scope for refurbishment upside

  • Net asset value gain of 95% over past three years

  • Market value of £58mln compares to underlying NAV of £78.4mln

  • Forecast dividend yield of 3.1% at 204p share price


What it does

Circle Property's strategy is to identify under-utilised office buildings and rejuvenate them to boost the underlying value and rental income.

The sweet spot is properties worth between £5mln and £15mln or that are too small for institutional funds and too large for most private investors.

About 94% of the portfolio are regional offices, a property sub-sector that was the UK’ second best performer in 2018 with capital returns of more than 5%.

There is a minimum total return target of 12% on acquisitions and 20% on development projects. 

Circle is not a REIT, so it is not obliged to return rental profits to shareholders, something that gives it financial flexibility to acquire and renovate.

What the boss says

“I know all of the towns, all of the [UK's] streets and probably most of the buildings as do my colleagues Edward Olins (COO) and Ian Henderson (chairman),“ says John Arnold, chief executive.

The current portfolio contains 21 regional office buildings with reversionary potential and, says Arnold, around half the portfolio offers the opportunity for value to be added from active management.

But he says Circle is “not interested in buying and owning for long-term income – to us that’s boring – we like to sell that income once we’ve created it”.

What it owns

Circle owns 21 properties, of which three most valuable are Kent Hills Business Park, Milton Keynes; Somerset House, Birmingham; and 36 Great Charles Street, Birmingham.

Eight other properties are spread about Bristol, Birmingham, Northampton, Staines and Moorgate, the only property in London, which is right next to what will be a new Crossrail station.

The provincial office portfolio totals 375,741 sq ft and has an average passing rent of £14.80 per sq ft and capital value of £192 per sq ft.

Occupancy at end September was 90% excluding refurbishments.

What the broker says

Circle offers "investors with the opportunity to invest in a small, nimble and well regarded property investment and development company which specialises in opportunistically buying and actively managing provincial offices in undersupplied towns and cities".

Analysts say that being a relatively small, but a highly nimble company has "undoubtedly helped as generating income and capital growth from a small number of properties can significantly boost total returns" and Circle has added substantial value to a number of its previously under-utilised regional office buildings.

Since IPO, and without raising any additional equity capital, the EPRA NAV has increased from £43.2mln to £78.4mln or 277p per share, up 20.43% over the year to 31 March.

'Buy' is the Cenkos investment view.

Blue sky potential

“The investment case is predicated on the continued recovery in selective provincial office markets and the prospect of generating high returns from under-utilised secondary properties through the cycle," says Cenkos, which is also house broker.

"The company has a good pipeline of investment opportunities which would be significantly accretive to EPS and NAV while boosting share liquidity.

"The existing portfolio has performed strongly but continues to offer considerable latent income and capital growth potential.

“We believe that our NAV forecasts are conservative and the shares are significantly under-valued given the company’s track record and growth prospects.”

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Circle Property PLC Timeline

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June 20 2019
“We believe that our NAV forecasts are conservative and the shares are significantly under-valued given the company’s track record and growth prospects.”

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