(MENAFN- ProactiveInvestors) is a £900m UK listed real estate investor that is majority controlled by the Freshwater family. The group invests in the UK and the US and has 52% of its asset base in residential property. A policy of low gearing has allowed Daejan to withstand downturns and outperform the UK real estate sector.
In the Industry Classification Benchmarks (ICB) the real estate sector is listed as part of the financial services industry. Banks and real estate groups have a lot in common with both being cyclical sectors that deploy high levels of debt.
In a downturn this can be a deadly combination with many banks failing in the financial crisis. Real estate firms also saw weakness with the UK’s two largest groups – and – undertaking rights issues in 2009.
A recession reduces the valuation of real estate and sees lenders become more conservative on credit terms. This can bankrupt some of the weaker real estate groups and makes it a difficult to invest in real estate groups.
Most of the large real estate groups firms are focused on mature income producing assets. The higher risk real estate groups undertake non-income producing development projects which may deliver large payoffs.
We note that and don’t have particularly impressive long-term share price performances. This partly reflects the high dividend payout ratios but also suggests they have had too much leverage going into downturns.
Against this backdrop the real estate investor is notable for having a policy of low financial gearing. In March 2014 Daejan had a gearing ratio – borrowings over total assets – of only 17.6%.
Low financial gearing is likely to remain in place as the family majority ownership means that capital preservation is paramount. This prudent balance sheet has allowed Daejan to be more resilient than rivals during the financial crisis.
It is also notable that Daejan’s annual dividend hasn’t been cut in any year from 1993 to 2014 and increased from 27p to 82p over the period. By contrast slashed its annual payment by half during the financial crisis.
rides the booms and busts
Source: Daejan 2014 annual report Daejan’s real estate Daejan is also unusual for having 52% of its valuation in residential property as other real estate firms generally focus on commercial property. Residential property is more resilient as people still need somewhere to live in a recession. On a geographic basis the group has 22% of its asset valuation in the United States with this mainly in residential assets. The remaining 78% of assets are in the UK and are split between commercial and residential property. Daejan asset profile March 2014 Looking at the geographic breakdown in more detail and nearly half of the US assets are in New York. In the UK over three quarters of the assets are in London and the South East. This means that the group is exposed to supply constrained and high demand markets. London and the South East have been particularly buoyant on the strength of the financial services and London’s appeal as a global city. Risk profile While Daejan’s business model may be resilient the share price is still affected by investor sentiment. The shares fell back from around £60 in late 2006 to as low as £18 in early 2009 which is a drop of 70%. This was despite the asset value per share only falling in one year with a 16% drop from £55.4 in March 2008 to £46.6 in March 2009. The asset value per share increased every year since then with the March 2014 NAV at £68.15. Daejan’s momentum quickly returned after the downturn Summary and valuation is a company with a low profile but which has outperformed the UK real estate sector. The resilience in the recent downturn is due to low gearing and the exposure to residential property. The company doesn’t undertake risky development activity and has a focus on supply constrained markets. These include New York in the US and London and the South East in the UK. The increase in value of the US dollar against sterling will have helped bolster the value of the US assets. The recent UK election has also taken the threat away of government intervention in the UK residential rental market. Daejan’s UK portfolio of commercial and residential property now looks set to benefit from Britain’s new business friendly government. Commercial property is particularly sensitive to economic growth and business confidence. In terms of the dividend yield and the financial year to March 2014 delivered an annual payment of 82p. This provides a modest historical yield of 1.5% but the track record of consistent dividend growth is impressive. Daejan’s net asset value (NAV) per share was £75 at 30th September 2014 which puts the shares at a 25% discount to the NAV. The group will report the March 2015 net asset value in early July and looks set to make further progress. The relatively large share price discount to NAV reflects the illiquidity of the stock and a discount for the family control. However the long-term track record and current market backdrop both suggest that Daejan offers value. This report was produced by Fat prophets Research Analyst Andrew Latto
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