Mountview Estates:  FY 2020 Statement Signals Modest 8% Gearing, ’Happy’ Auction-Room Activity And Potential To Pick Up Possible Pandemic Property Bargains

13 August 2020
By Maynard Paton

Results summary for Mountview Estates (MTVW):

• Standstill 2020 figures that showed 8% more properties sold at prices 9% lower than last year.

• A maintained dividend, a lack for furloughed staff and the directors currently being “happy in the auction room” underline some pandemic-resilient qualities. 

• Net debt representing a very modest 8% of the group’s property estate suggests significant scope to pick up any property bargains.

• This week’s AGM witnessed a further bout of protest votes against the independent non-executives, the board’s pay and the auditors.

• MTVW’s book value increased by 3% to a record £97 per share, although my calculations suggest the balance sheet could be worth £200-plus per share. I continue to hold.

Contents

• Event links, share data and disclosure
• Why I own MTVW
• Results summary
• Covid-19 and online auctions
• Revenue, profit, dividend and net asset value
• Gross margin
• Allsop valuation
• Financials
• Corporate governance and protest votes
• Valuation
• Grainger comparison

Event links, share data and disclosure

Event: Preliminary results and annual report for the twelve months to 31 March 2020 published 18 June 2020

Price: £109
Shares in issue: 3,899,014
Market capitalisation: £425m

Disclosure: Maynard owns shares in Mountview Estates. This blog post contains SharePad affiliate links.

Why I own MTVW

• Buys, holds and sells regulated-tenancy properties and boasts an illustrious, 40-year-plus history of net asset value and dividend advances.

• Board led by veteran family management that continues to boast an aggregate 50%/£212m shareholding.  

• Simple accounts carry properties at cost, which if sold at their potential ‘reversionary’ values may be worth significantly in excess of the recent market cap.

Further reading: My MTVW Buy report | All my MTVW posts | MTVW website  

Results summary

Covid-19 and online auctions

• MTVW thankfully appears to have escaped the worst of the pandemic.

• MTVW buys and sells residential properties, and I had wondered whether the lockdown — and resultant mothballed housing market — would hamper trading and valuations. 

• These results were not affected by Covid-19:

“[T]he trading results for the year ended 31 March 2020 were not influenced by the Covid-19 pandemic and that any influence or effects should be considered as post balance sheet events.”

• As it turns out, trading following the March year-end seems not to have been affected either:

“This keen eye on purchasing has continued into the new financial year, despite Covid-19, and we have been active in auctions, both buying and selling properties at prices that we would have been pleased with at any time in recent years.”

• Similar to many activities at present, property auctions have migrated entirely online:

“Auctions are now all conducted remotely and the auctioneers are becoming more successful at replicating the ballroom atmosphere. So far this financial year we have been happy in the auction room both in terms of sale prices achieved and the prices at which we have been able to make purchases.”

• Housing activity in general has revived quickly, in part due to stamp-duty reductions and lifestyle changes.

• Fellow portfolio holding M Winkworth said the other week:

“This has now been our busiest July in at least the past five years. The changes in stamp duty have turbo-charged the market. Our network is reporting a significant uplift in activity at all price levels, with a focus not only on London and the commuter belt, but also on towns and cities with a longer commute, reflecting the move to a more flexible working landscape.”

• A full complement of employees underlined MTVW’s resilience to the pandemic:

“We have not had to furlough any staff or reduce staff numbers in any other way and I remain confident that our years of financial prudence will enable us to continue to conduct the business successfully and to maintain our dividend payments.”

• MTVW also implied tenants would continue to pay their rent:

“Over 80% of our rents are paid directly into the bank and regulated rents are set at a modest level. Provided tenants pay their rent they have absolute security of tenure and a significant number have help from social services.”

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Revenue, profit, dividend and net asset value

• November’s dull interim results had already suggested these 2020 figures would not be spectacular.

• Brexit “uncertainties” were then cited for the standstill H1 revenue and profit performance.

• This full-year statement cheered the election result:

“Happily on 12 December 2019 Boris Johnson was elected with a big majority that enabled us to leave the European Union on 31 January 2020 but the details of the withdrawal will not be certain until 31 December 2020.” 

• Revenue fell 1% and operating profit gained 1% after MTVW sold 8% more properties at prices 9% lower than last year: 

Year to 31 March	2016	2017	2018	2019	2020
Net asset value (£k)	311,752	336,279	354,462	366,874	379,574
Net asset value per share (p)	7,996	8,625	9,091	9,409	9,735
Revenue (£k)	79,765	78,232	70,272	65,428	64,873
Gross profit (£k)	53,014	52,056	43,357	40,801	41,354
Operating profit (£k)	47,866	46,825	37,850	35,359	35,724
Net valuation gain (£k)	1,504	(1,020)	(376)	287	(969)
Finance income (£k)	(1,179)	(819)	(714)	(1,079)	(988)
Other items (£k)	197	-	145	-	1,174
Pre-tax profit (£k)	48,388	44,986	36,905	34,576	34,941
Earnings per share (p)	993	929	766	718	726
Dividend per share (p)	300	300	400	400	400

Year to 31 March	2016	2017	2018	2019	2020
Gross sales of properties (£k)	61,442	60,154	51,840	46,430	45,651
Properties sold	209	182	170	154	167
Average price (£k)	294	331	305	301	273

• Remember that MTVW sells its regulated-tenancy properties only when the tenancy ends — which typically occurs when the tenant has died. 

• The number of properties becoming available for sale — and the total proceeds MTVW earns from one set of results to the next — can therefore be unpredictable.

• The 167 properties sold during 2020 compares to an average of 172 per annum during the last ten years, with a low of 137 sold in 2012 and a high of 209 sold in 2016.

• The £273k average sale price reflected a lower number of properties sold for £500k or more: 

Year to 31 March	2016	2017	2018	2019	2020
Sales price range
Below £500k	181	152	145	132	151
Between £500k and £1m	26	28	22	19	15
Above £1m	2	2	3	3	1
Total	203	182	170	154	167

• Rental income increased 1% to £19m — equivalent to 30% of total revenue and the highest proportion since 2012. 

• The dividend was held at 400p per share for the second successive year.

• Documents at Companies House show the dividend has never been cut since at least 1979 — after which the payout has risen 267-fold:

• Net asset value (NAV) improved by £13m to £380m — equivalent to £97.35 per share and a fresh NAV record:

• The 3% NAV advance was the lowest annual percentage gain since NAV dipped slightly during 2009. 

• NAV per share growth has slowed over time. 

• NAV per share has compounded at a 6% average during the last five years, 7% during the last ten years, 9% during the last 20 years and 10% during the last 30 years.

Gross margin

• MTVW’s balance sheet is dominated by 1,955 regulated-tenancy (and similar) properties that boast an aggregate £315m book value.

• Assured/life tenancy properties plus freehold/leasehold ground rent properties represent a further £77m. 

• The group’s properties are held on the balance sheet at their cost price. 

• The percentage gain on each property sold is correlated loosely to how long the property has been owned by MTVW — and that gain can vary somewhat in any particular year.

• Management comments at last year’s AGM indicated MTVW liked to purchase regulated-tenancy properties at a 25% discount to the property’s ‘unregulated’ state.

• The table below shows the gross margin achieved from selling properties during the last five years:

Year to 31 March	2016	2017	2018	2019	2020
Group gross margin (%)	66.5	66.5	61.7	62.4	63.7
Property sales gross margin (%)	65.8	66.3	57.9	59.1	61.3

• The 61.3% gross margin for 2020 is equivalent to MTVW selling a property for a 158% gain. MTVW’s five-year average gain is 166% and the ten-year average is 164%.

• Lower house prices can affect the gross margin MTVW enjoys.

• Just before the Brexit vote, MTVW’s gross margin was approximately 65% from property sales (equivalent to 185% gains) — with a record 71% gross margin (245% gain) achieved during the six months to September 2016.

• These 2020 results encouragingly showed the second-half gross margin from property sales at 61.7% (161% gain) — the highest six-monthly figure for three years: 

	H1 2018	H2 2018		H1 2019	H2 2019		H1 2020	H2 2020
Property sales revenue (£k)	23,953	27,887		20,656	25,774		20,199	25,452
Property sales gross profit (£k)	14,297	15,721		11,706	15,571		12,271	15,694
Property sales gross margin (%)	59.7	56.4		56.7	61.1		60.8	61.7

• I am hopeful this gross-margin improvement can be sustained, and that gross margins can gradually return to their 65% pre-Brexit level.

Allsop valuation

• MTVW commissioned property agent Allsop to value the group’s estate during September 2014.

• Allsop returned a £666m valuation — some 2.1x the £318m book value of the properties carried at the time.

• The Allsop calculation was based on MTVW’s properties remaining in their regulated-tenancy state. 

• The Allsop valuation was not formally applied to the accounts. MTVW’s properties remain on the balance sheet at their cost price.

• Following the Allsop valuation, MTVW reveals the proceeds from sold properties versus their stated Allsop value:

	FY 2016	FY 2017	FY 2018	FY 2019		H1 2020	H2 2020
Property sales revenue (£k)	61,442	57,174	45,156	41,273		17,361	24,458
Allsop valuation (£k)	42,600	38,505	30,594	28,727		12,166	17,055
Sold-premium-to-Allsop (x)	1.44	1.48	1.48	1.44		1.43	1.43

• These 2020 results showed the ‘sold-premium-to-Allsop’ multiple at 1.43x — in keeping with the previous year and the level witnessed during 2016. 

• The ‘sold-premium-to-Allsop’ multiple not moving higher during the last few years suggests house prices have not moved higher either.

• The Allsop valuation is now six years old and may have become rather stale.

• Management claimed at last year’s AGM that it was “premature to conduct another valuation in the current uncertain times”.

• The “uncertain times” related to Brexit.

• This year’s AGM Q&A statement did not herald a fresh Allsop valuation:

Mountview as a property trading company is not legally obliged to value its trading stock nor does any Financial Standard require it to carry out such a valuation. The modus operandi of the company is to acquire residential properties subject to regulated tenancies and sell them when they become vacant.

Because a regulated rent is such a modest return on the investment the properties are acquired at a significant discount to vacant possession value. Because the margin between acquisition cost and sale proceeds is so substantial there is never any reason to dispose of a property while it remains subject to a tenancy.

The cost of carrying out a valuation is such that your Board are reluctant to inflict such an expense on the shareholders when the information so acquired is not a useful management tool. The uncertainties created by Brexit and Covid are such that any current valuation is unlikely to have any long term reliability. Nevertheless your Board always review any representations made by shareholders in respect of a potential valuation.

• Another reason why a new Allsop valuation has yet to be conducted could be the verdict will not show much improvement on the 2014 conclusion.

• Contrasting the 2014 valuation to any 2020 valuation could outline how clever (or not) MTVW’s post-2014 purchases have been.

• A 2020 valuation would also provide greater clarity to the inherent value of MTVW’s property estate.

• The board really ought to commit to fresh Allsop valuations every (say) five years and simply say a valuation is taking place and nothing can be done about any “uncertainties”. Shareholders can then adjust the valuation for any uncertainties themselves.

• The aforementioned management remarks about being “happy in the auction room both in terms of sale prices achieved and the prices at which we have been able to make purchases ” implies MTVW’s executives — despite Covid-19 and Brexit — can still judge the fair value of a property.

• If MTVW’s executives can still judge the fair value of a property, I am sure Allsop can do likewise and therefore undertake another valuation.

Financials

• MTVW’s accounts remain very straightforward. 

• Some £15m was spent during the year acquiring 57 additional properties (average cost: £271k), the lowest number of purchases since 2010:

Year to 31 March	2016	2017	2018	2019	2020
Number of properties purchased	90	118	119	105	57
Cost of properties purchased (£k)	28,330	29,800	47,130	30,731	15,420
Average cost (£k)	315	253	396	293	271

• The disposal of four investment properties during the first half raised a useful £4.2m.

• The investment properties had a combined £3.0m book value, which might suggest the remaining investment properties (book value: £24m) are undervalued.

• Mind you, MTVW incurred a £1m write-off on the investment properties due to Covid-19 influences. The annual-report small-print (point 15) admitted:

“The properties are all held for investment and Market Values are on the basis that the properties would be sold subject to any existing leases and tenancies. The valuer’s opinion of Market Value was derived using comparable recent market transactions on arm’s length terms.

The outbreak of the Novel Coronavirus (Covid-19), declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. 

Market activity is being impacted in many sectors. As at the valuation date, the Valuers felt that they could attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to Covid-19 means that the Valuers were faced with an unprecedented set of circumstances on which to base a judgement. 

The valuation is therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book. Consequently less certainty and a higher degree of caution should be attached to the valuation than would normally be the case.” 

• Earnings of £28m plus the investment-property disposals funded a £17m debt repayment and a £16m dividend.

• Net debt dropped by £17m during the year to £30m — equivalent to 8% of the group’s £392m property estate:

Year to 31 March	2016	2017	2018	2019	2020
Trading properties (£k)	334,108	347,380	376,879	392,384	392,069
Net debt (£k)	(41,619)	(31,217)	(44,995)	(46,519)	(29,607)

• Net debt has at times represented 30% or more of MTVW’s property stock.

• The annual report small-print (point 12) reveals MTVW’s banking facilities allow the group to borrow up to £90m — equivalent to 23% of the property estate.

• The current low level of gearing suggests the group is ideally placed to pick up any property bargains. 

• Interest costs of £1.0m remain reasonable at 2.4% of average annual debt of £41m.

• MTVW’s books are free of pension obligations.

Corporate governance and protest votes

• Despite MTVW’s illustrious, 40-year-plus history of NAV and dividend advances, not every shareholder is happy.

• The last four AGMs — including the one held this week — have seen significant c30% protest votes against re-electing the independent non-executives, the approval of the board’s remuneration and the re-appointment of the auditors. 

• MTVW shareholders can be dividend into three groups:

1. The Sinclair family concert party, which is led by chief executive Duncan Sinclair and represents just over 50% of the share count;
2. The Murphy family and connected parties, who claim to own 24% of the share count and whose largest shareholder is the chief executive’s sister, and;
3. Everybody else, who are left with 25% of the share count.

• The protest votes come from group 2.

• My review of November’s interim figures recapped the grievances of the Murphy family and how the dissident shareholders have prevented the re-election of certain non-execs at the 2017, 2018 and 2019 AGMs. 

• When announcing last year’s AGM voting result, MTVW said:

“The Directors will engage with shareholders to obtain feedback on their concerns and will publish an update on that engagement within six months of the date of the Annual General Meeting. “

• A statement during February then revealed:

“Following the 2019 AGM in August and prior to the general meeting held on 18 November 2019, the Company identified as far as possible those shareholders who did not support the various resolutions and attempted to engage with them to seek their views. They declined to meet or engage. The Company remains committed to shareholder engagement and we will continue to offer to meet with shareholders to take into account their concerns and considerations in the future.”

• I don’t know why the Murphy family declined to meet the board. 

• From my 2019 AGM notes, I recall Craig Murphy and the chairman both referring to a previous meeting between the parties, but a difference of opinion was given by each as to what was actually said.

• I can only assume relations between MTVW and the Murphys have now broken down completely.

• How the Murphys now intend to shake up the board therefore remains unclear.

• The 2020 AGM was held this week behind closed doors due to the pandemic. 

• Once again the Murphys led a protest vote against the re-election of the non-executives.

• The re-elections were prevented because the resolutions were deemed to be ‘independent’ and the Sinclair family concert party could therefore not vote:

	2017	2018	2019	2020
AGM
Votes FOR	126k (13%)	223k (19%)	180k (16%)	236k (20%)
Votes AGAINST	827k (87%)	927k (81%)	938k (84%)	971k (80%)
Subsequent GM
Votes FOR	2,361k (74%)	1,504k (62%)	2,095k (69%)	-
Votes AGAINST	826k (26%)	941k (38%)	939k (31%)	-

• However, the FCA’s listing rules allow MTVW to hold a subsequent general meeting, whereby the non-exec re-elections can be proposed again — but this time with the Sinclair family concert party allowed to vote.

• The rejected non-execs have always been re-appointed at these subsequent general meetings.

• After this week’s AGM, MTVW repeated its message from last year:

“The Directors intend to engage with shareholders to obtain feedback on their concerns and will publish an update on that engagement within six months of the date of the Annual General Meeting.”

• A follow-up statement should therefore be published on or before 12 February 2021.

• Whether the Murphys will engage with the board this time remains to be seen.

• The 2020 AGM results also revealed a 31% protest vote against a new remuneration policy for the directors.

• The annual report small-print (point 10) claimed the policy was “developed in consultation with major shareholders”.

• A 31% protest vote suggests not every major shareholder was consulted.

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Valuation

• MTVW could be worth more than £200 per share — assuming all of the group’s regulated tenancies were to end immediately and the properties were then all sold at a fair market value.

• The following table outlines my latest sums:

Property stock Sept 2014 (£k)	317,651
Less property stock sold since Sept 2014 (£k)	(99,098)
	218,553
Allsop-premium-to-book	2.10x
Sold-premium-to-Allsop	1.43x
	655,133
Stock purchased since Sept 2014	173,516
Sold-premium-to-Allsop	1.43x
	248,128
Possible property stock value (£k)	903,261

• I have taken the original September 2014 portfolio value of £318m and subtracted the £99m book value of properties sold since that date. 

• I have then multiplied the £219m remainder by my 2.1x ‘Allsop-premium-to-book’ multiple and then by the 1.43x ‘sold-premium-to-Allsop’ multiple witnessed during 2020.

• I arrived at a £655m estimated value for all of MTVW’s properties that were owned at September 2014 but have yet to be sold.

• Since September 2014, MTVW has acquired additional properties with a net £174m book value. 

• I have assumed all of these additional properties can be sold one day for £248m based on my 1.43x ‘sold-premium-to-Allsop’ multiple.

• Adding the £655m and the £248m together gives £903m.

• This next table adjusts that £903m for 19% taxation, other investments, net debt and other liabilities to give a possible book value of £787m or £202 per share:

Possible property stock value (£k)	903,261
Less tax at 19% (£k)	(97,126)
Plus other investments (£k)	24,122
Less net debt (£k)	(29,607)
Less other liabilities (£k)	(13,430)
Possible NAV (£k)	787,220
Possible NAV per share (£)	201.90

• These sums are not perfect, and the major question remains how long MTVW will take to sell all of its properties to realise my potential £202 per share NAV guess.

• Bear in mind my NAV per share estimates were £204 for 2019, £213 for 2018, £206 for 2017 and £200 for 2016.

• My estimated value of MTVW’s property estate has not really improved during the last few years, which might explain why the share price has gone nowhere during the same time.

Grainger comparison

• A comparison between MTVW and Grainger (GRI), the UK’s largest listed residential landlord with a £2b market cap, is instructive.

• GRI owns a regulated-tenancy portfolio consisting of 2,822 homes with a £1b market value and a £1.2b ‘reversionary’ value (i.e. the possible value of the properties were the regulated tenancy to finish):

• GRI’s annual reports and presentations provide plenty of useful sector snippets:

• Unlike GRI, MTVW does not disclose rental growth or the average age of its regulated-tenancy occupiers. (Remarks at last year’s AGM suggested MTVW’s board did not even know the average age of its regulated-tenancy occupiers).  

• I estimate MTVW’s vacancy rate (i.e. the number of regulated tenancies sold as a proportion of the estate at the start of the year) has averaged 7% during the last ten years.

• Applying GRI’s 2% typical net yield and 1.2x ‘reversionary-premium-to-market’ multiple to MTVW’s net rental income of £13m suggests MTVW’s estate could one day be sold for £774m.

• Factoring in 19% taxation, other investments, net debt and other liabilities then gives a possible book value of £698m or £179 per share.

• Note that MTVW’s portfolio includes life-tenancy properties that management has claimed the rentals for which “can be as low as £10 a year”.

• Life-tenancy properties sported a notable £33m book value within these results, and the net yield on that sub-portfolio could be close to zero.

• As such, constructing a valuation using GRI’s 2% typical net yield could mean the overall £179 per share NAV estimate is too conservative.

• Whether MTVW’s inherent balance-sheet value is £179 or £202 per share or somewhere in between, one thing remains a constant…

• …patience is required for the underlying value of MTVW’s property portfolio to be realised.

• Mind you, the longer the disposals take, the higher house prices should rise and the greater proceeds MTVW ought to eventually achieve from future sales.

• In the meantime, two valuation measures are not subject to significant guesswork: 

1. MTVW’s £97 per share book value — calculated with the properties accounted for at cost — covers 89% of the £109 share price. 
2. The 400p per share annual dividend supplies a 3.7% income.

Maynard Paton

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