02 September 2022
By Maynard Paton
Results summary for Mountview Estates (MTVW):
- A steady FY 2022 performance, buoyed by an H2 that saw property sales achieve a record £379k average and realise a 66% premium to their 2014 Allsop valuation.
- The final dividend was lifted 11% while expenditure on new properties fell to a 13-year low after management expressed a desire to “not chase purchases at any price“.
- Net debt remains very modest at just 5% of the property estate and reflects management’s concerns of forthcoming “difficult economic circumstances“.
- Friction between major shareholders continues, with revised director-pay arrangements perhaps encouraging significant protest votes at the latest AGM.
- Net asset value remains at £101 per share, although the balance sheet could be worth £210 per share assuming all owned properties enjoy immediate ‘reversionary’ gains and are then sold at fair-market value. I continue to hold.
- News link, share data and disclosure
- Why I own MTVW
- Results summary
- Revenue, profit, dividend and net asset value
- Trading properties: gross margin and rental income
- Allsop valuation
- Protest votes and executive pay
News link, share data and disclosure
News: Annual results for the twelve months to 31 March 2022 published 16 June 2022
Share price: £130
Share count: 3,899,014
Market capitalisation: £507m
Disclosure: Maynard owns shares in Mountview Estates. This blog post contains SharePad affiliate links.
Why I own MTVW
- Buys, holds and sells regulated-tenancy (and similar) 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%/£254m shareholding.
- Properties are carried at cost, and when eventually sold at their ‘reversionary’ values may generate total proceeds significantly in excess of the recent market cap.
Revenue, profit, dividend and net asset value
- An acceptable H1 2022 performance that expressed caution about the “difficult times that may lie ahead“…
“The Company has generated strong cash flow and we are thus in a good position to shield ourselves from the difficult times that may lie ahead.”
- …and bemoaned a lack of property buying opportunities…
“Good purchases are vital to the future prosperity of the Company and our financial strength will enable us to compete when good opportunities occur.”
- …was never likely to herald an astonishing FY 2022 statement.
- For the full year, revenue was unchanged at £66m while operating profit dropped 7% to £35m:
- The annual performance was also similar to that reported for FYs 2019 and 2020, but was 15-25% below the record revenue/profit levels witnessed during FYs 2016 and 2017.
- H2 revenue fell 18% and H2 operating profit fell 20% versus the remarkable H2 2021, which enjoyed a sales “backlog” following earlier pandemic-related disruption.
- Revenue was split 71%/29% between property sales and rental income, and broadly matched MTVW’s preceding ten-year average:
- Note that MTVW sells its regulated-tenancy (and similar) properties only when the tenancy ends — which typically occurs when the tenant dies.
- The mix of properties becoming available for sale — and the total proceeds MTVW earns — can therefore vary from one set of results to the next.
- The 135 properties sold during FY 2022 was the lowest number for at least 20 years:
- But the average price achieved from the properties sold reached a new high of £347k.
- H2 in fact witnessed average selling prices climb to £379k:
- The £379k average price perhaps reflects the “different type of purchaser” MTVW said had been attending recent auctions:
“On the purchase side, the tail end of Covid-19, and in particular the stamp duty holiday, attracted a different type of purchaser into the auction rooms who was willing to buy regulated tenancies at smaller discounts than we believed was reasonable.“
- Buoyant sales prices do mean MTVW has struggled to find auction bargains:
“We believe that our decision… to stick to our principles of risk management and not chase purchases at any price is proving a sound one that will protect shareholder value going forward.”
- Most of MTVW’s properties are located within London and south-east England and are relatively low value.
- Of the 786 properties MTVW sold between FYs 2018 and 2022, 688 achieved less than £500k, a further 89 achieved less than £1m and only nine achieved £1m or more.
- The payment of the 275p per share special dividend announced within the preceding H1 statement caused net asset value (NAV) to decline for the first time since FY 2009:
- NAV ended the year at £393m, or £100.92 per share, versus £395m, or £101.27 per share, twelve months earlier.
- The 275p per share special dividend cost almost £11m, and would have lifted NAV to £404m or £103.67 per share were it not paid.
- MTVW’s NAV per share growth has slowed over time.
- NAV per share has compounded at:
- 3% during the five years to FY 2022;
- 6% during the ten years to FY 2022;
- 6% during the 15 years to FY 2022, and;
- 7% during the 20 years to FY 2022.
- The full-year dividend was raised almost 12% to 475p per share after the final dividend was lifted 11% to 250p per share.
- The preceding H1 statement suggested ordinary dividends for FY 2023 may not witness similar advances:
“It is not anticipated that this interim dividend will limit the final dividend payable in August 2022 in any way, but it would be prudent to presume that the interim dividend payable in March 2023 will be maintained at the new increased level of 225p per share.“
- Management talk of “difficult economic circumstances” within these FY 2022 results may also keep a lid on near-term ordinary dividends:
“Economists’ views on where inflation and interest rates are going and how long lasting their effects will be vary across the board though we do anticipate that the era of rock bottom interest rates is behind us.”
“We are now confronted by the prospect of double-digit inflation which will not be gone in the blink of an eye and may be with us for years rather than months.”
“As we now enter a period of what are expected to be difficult economic circumstances we may find opportunities of which we can take advantage…”
- At least Companies House shows the dividend has never been cut since at least 1979 — after which the payout has risen 317-fold:
Trading properties: gross margin and rental income
- The preceding H1 statement revealed a 54% gross margin generated through property sales — the lowest since H1 2014 (49%).
- I wrote at the time:
“I trust the 54% property-sales gross margin for this H1 was caused by an unusual collection of properties becoming available for disposal during the six months…
…and that MTVW’s longer-term gross margin will continue to average approximately 61%.“
- Sure enough, properties sold during H2 boasted a 65% gross margin to give a full-year gross margin of 62%:
- A 62% gross margin is equivalent to buying a property for £100k and selling it for £263k.
- Fluctuations to gross margins occur because of the unpredictable mix of properties becoming available for sale during any particular period.
- The percentage gain on each property sold is correlated to the duration of MTVW’s ownership, which can range from a few years to a few decades.
- The mix of properties sold tends to even out over time. MTVW’s average gross margin over five-year periods has been remarkably consistent:
- FYs 2018 to 2022: 60%
- FYs 2013 to 2017: 62%
- FYs 2008 to 2012: 60%
- FYs 2003 to 2007: 63%
- The 65% property gross margin achieved during H2 is not unheard of but not common either.
- MTVW has recorded property sale gross margins of 65% or more during eight years since FY 2000 — most recently during FYs 2015, 2016 and 2017.
- A super 71% property gross margin was in fact reported for FY 2008.
- MTVW’s rental-income gross margin at 69% has reverted to normal levels after certain work was deferred during the pandemic:
- Rental income as a proportion of the carrying value of all properties was 4.6% during FY 2022 and within the range seen since FY 2008:
- An encouraging development during this FY concerned the proceeds from sold properties compared to a past valuation.
- To recap, MTVW commissioned property agent Allsop during September 2014 to assess the group’s estate.
- Allsop returned a £666m valuation — some 2.1x the £318m book value of the properties owned at the time.
- The Allsop assessment was based on MTVW’s properties remaining in their regulated-tenancy state and therefore excluded any ‘reversionary’ gain (i.e. the value uplift that occurs when a regulated tenancy finishes, the rent reverts to a proper market level and the property can then be sold at a fair market value).
- The Allsop assessment was not applied to the audited accounts. MTVW’s properties instead remain on the balance sheet at their cost price.
- Following the Allsop assessment, MTVW reveals the proceeds from sold properties versus their Allsop valuation:
- Prior to the pandemic, sale proceeds realised premiums of between 43% and 53% on the Allsop valuation:
- But the preceding H1 statement showed realised gains on the Allsop valuation to be higher at 65%, and this FY 2022 statement revealed the premium to be 66% during H2.
- MTVW’s results commentary has never referred to the Allsop valuation since the assessment was undertaken.
- As such, shareholders are left to guess whether the record 66% premium during H2 was due to a favourable mix of properties being sold…
- …or generally higher sale prices being achieved at auction.
- The aforementioned reference to the “different type of purchaser” attending auctions suggests the 66% is indeed supported by higher sale prices…
- …although whether the aforementioned reference to “difficult economic circumstances” is management code for the 66% to subside remains to be seen.
- A greater realised gain versus the Allsop valuation has positive implications for estimating MTVW’s potential upside (see Valuation).
- During the seven and a half years following the Allsop assessment, MTVW has raised £351m from selling properties that the agent had valued at £236m.
- Selling properties that Allsop had valued at £236m implies the book value (i.e. the original cost) of the properties sold was £113m (£236m divided by that earlier 2.1x multiple).
- Selling Allsop-valued properties with a £113m book value indicates Allsop-valued properties with a £205m book value remain within MTVW’s ownership today (i.e. the £318m book value at the September 2014 assessment less the £113m since sold).
- MTVW during FY 2022 sold Allsop-valued properties with an estimated book value of approximately £11m, suggesting the remaining Allsop-valued properties of £205m could take a further 19 years to sell.
- These FY results showed total trading properties with a £393m book value, implying properties purchased after the Allsop review have a £188m book value (i.e. £393m less the remaining Allsop-valued properties of £205m).
- Bear in mind the figures above are guesstimates and could be rather inaccurate.
- As more Allsop-valued properties are sold and other properties are purchased, the less relevant the Allsop valuation becomes to the share price.
- MTVW refuses to undertake another Allsop-type valuation.
- The 2022 annual report reiterated the following text from previous years:
“The [Allsop] valuation is not a useful tool for running the business because we are always going to await vacant possession, and no perceived uplift in value can justify selling a tenanted property. The nature of our business and the rules and conventions under which we operate place no obligation upon us to value our trading stock at any given time and therefore the valuation has not been updated since.”
- And during the 2021 AGM, the board:
- Repeated it was “reluctant to inflict shareholders the cost” of another assessment;
- Disclosed Allsop was paid £600k for the 2014 assessment, and;
- Described the expense as a “substantial amount for something of very little use”.
- I maintain MTVW ought to implement regular valuations to provide greater clarity as to the inherent value of the group’s property estate.
- Further valuations could also help shareholders judge the astuteness of MTVW’s more recent purchases and the appropriateness of the board’s pay (see Protest votes and executive pay).
- MTVW’s accounts remain very straightforward.
- Some £13m (before acquisition expenses) was spent during the year acquiring 53 additional properties at an average cost of £237k:
- The £14m (after acquisition expenses) was the lowest spent since FY 2009 (£6m), and compares to at least £17m spent on new properties annually since FY 2012:
- £8m of the £14m was spent during H2, although MTVW does not disclose how many of the 53 purchased properties were acquired during H1 and H2.
- I have already pondered whether the low level of property purchases alongside the 275p per share special dividend are leading to a new company chapter, in which MTVW effectively goes into ‘run off’ as the group sells more properties than it buys.
- The market for MTVW’s regulated tenancies will continue to shrink. Such tenancies have (with limited exceptions) not been created since 1989 and Allsop estimates fewer than 75,000 now exist.
- The number of regulated tenancies owned by MTVW topped 3,000 20 years ago, topped 2,500 ten years ago but today stands at approximately 1,800:
- MTVW’s trading-property estate has a £393m book value, of which regulated tenancies represent £313m or 80%:
- MTVW’s conventional investment properties are presently in the books at £25m or £6.53 a share.
- Full-year earnings of £27m funded dividends of £28m and debt repayments of £2m, which in turn left net debt at £19m — slightly higher than the H1 level of £16m but still the lowest year-end level since FY 1999 (£13m).
- Net debt of £19m is equivalent to 5% of the group’s £393m trading-property estate — the lowest year-end percentage since at least FY 1997:
- MTVW’s gearing has been much higher. During FYs 2012 and 2013 for example, net debt was equivalent to 30% of the property portfolio.
- The annual-report small-print disclosed banking facilities of up to £90m — equivalent to 23% of the property estate.
- The modest gearing alongside the debt headroom suggests MTVW would have no problem acquiring future property bargains should any “difficult economic circumstances” emerge.
- Finance costs of just £298k for this FY imply a remarkably low 1.5% interest rate on the period’s £21m average net debt.
- Both trade debtors and trade creditors continue to represent a trivial 3% or less of revenue:
- MTVW’s accounts remain free of defined-benefit pension obligations.
Protest votes and executive pay
- Despite MTVW’s illustrious history of NAV and dividend advances, not every shareholder is content with the way the company is managed.
- The last six AGMs have witnessed c30% protest votes against re-electing independent non-execs, approving the board’s pay and re-appointing the auditors.
- MTVW’s shareholders fall into three camps:
- The Sinclair family concert party, which is led by chief executive Duncan Sinclair and controls just over 50% of the share count;
- The Murphy family and connected parties, who claim to own 24% of the share count and whose leading shareholder is the chief executive’s sister, and;
- Everybody else, who own 25% of the share count.
- The protest votes come from the Murphy family and connected parties.
- From what I can tell, the Murphy family is broadly satisfied with how MTVW’s day-to-day operations are run, but:
- Is aggrieved about the board’s pay;
- Has lost the trust of the non-execs to act on the views of all shareholders, and;
- Is frustrated about a general lack of influence at board level.
- The Murphy family stated during the 2021 AGM that it was no longer in direct communication with the company and would only engage with the directors through a “public forum“.
- The Murphy family and other unhappy shareholders have prevented the re-election of certain non-execs at the 2017, 2018, 2019, 2020, 2021 and 2022 AGMs:
- Following each AGM, MTVW is entitled to convene a general meeting and hold a further vote to re-elect the ousted non-execs.
- The ousted non-execs have (to date) all been re-appointed at the subsequent general meetings because the Sinclair concert party can then vote on the non-exec re-elections (unlike at the AGMs, where the concert party is prohibited from voting on particular ‘independent’ resolutions).
- The voting chart above shows the average AGM votes for and against the re-election of the contentious non-execs. The average protest votes against are slowly increasing, rising from 827k to 1,018k since 2017.
- Stock market rules dictate any company incurring a sizeable AGM or EGM protest vote has to contact the unhappy investors and publish an update to shareholders within six months.
- Six months after the 2021 AGM, MTVW stated:
“Following the 2021 AGM, and as it has done previously, 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. Those shareholders did not wish to engage.
- Then six months after the follow-up 2021 EGM, MTVW changed the wording slightly:
“Following the meeting, the Company identified, as far as possible, those shareholders who did not support the resolutions and attempted to engage with them to seek their views. Some shareholders did not wish to engage..“
- Whether some or none of the opposing shareholders are engaging privately with MTVW is hard to say.
- New pay arrangements for the executives probably encouraged protest votes at the 2022 AGM.
- MTVW’s chief exec claimed the revised remuneration was “vital” for the directors:
“Whilst I am very happy to look after my shareholders in this manner I am very mindful to look after the Mountview staff who make all this possible. My greatest concern is for the most modestly paid but it is vital that the more highly paid are rewarded for their endeavours because it is their decisions which make the future prosperity of Mountview possible. In this light I trust that shareholders will support those resolutions that allow the potential to support the decision makers.“
- The new pay arrangements reflect a rebalancing of executive salaries and bonuses:
- Executive pay is now split 75% salary and 25% bonus versus 55% salary and 45% bonus.
- The remuneration report said the rebalancing was prompted by “observations during the pandemic and also in response to comments from shareholders“.
- The downside to the rebalancing perhaps is the increased scope for executives to earn more money at a time when returns to shareholders may not be so great.
- After all:
- Executive salaries may rise faster than bonuses as MTVW lifts employee pay to combat greater inflation, while;
- Business performance and therefore bonuses may suffer if MTVW and the housing market do indeed endure “difficult economic circumstances”.
- How MTVW’s executive bonuses are derived is confusing, and possibly encourages the protest votes on pay.
- For example, one section of the remuneration report suggests board bonuses are aligned to group profit…
“Base salary is reviewed with regard to seniority, inflationary increases, personal performance, changes in responsibilities, market themes and peer group; whereas the short-term incentive award is reviewed and aligned to:
* the Group’s financial metrics (primarily profit before tax);
* the Executive Director’s personal contribution; and
* non-financial corporate goals to build for long term sustainable success, including management development, succession planning and the maintenance of a robust business infrastructure.”
- …while another section of the remuneration report suggests board bonuses are not linked to group profit:
“The Remuneration Committee considered that, while firmly of the view that there should be a clear link between the Group’s financial results and the short term incentive element of the remuneration of the Executive Directors, the use of metrics that attempted to link Executive Director’s performance with the current year’s profits would be unreliable and, at best, be artificial and, at worst, be misleading. Consequently, the Remuneration Committee concluded that the current approach continued to be appropriate.“
- Bonuses are regular fixtures of the board’s pay. The chief exec has received a bonus every year since at least FY 2001…
- …which does raise the question as to whether the bonuses are effectively guaranteed.
- MTVW is the only company I know that includes executive remuneration within its annual-report summary table:
- The table shows that total executive pay has been maintained at 10-11% of ordinary dividends, which may bode well for future payouts if the remuneration rebalancing leads to much higher director pay… and of course the 10-11% ratio is sustained!
- The chief exec’s basic pay will be lifted from a (rebalanced) £800k to £830k for FY 2023. The finance director will be on £675k.
- Notice within the summary above how the (two) executives collect a sizeable 40%-plus of all employee pay.
- I would venture that if MTVW can afford to pay the executives an aggregate £12m since FY 2016, then the group can also afford a follow-up Allsop-type valuation for a mooted £600k.
- Suffice to say, a follow-up Allsop-type valuation — and any improvements shown — could then be used as an extra measure to determine the board’s performance and bonus levels.
- MTVW’s shares could be worth £210, assuming all of the group’s regulated tenancies (and similar) end immediately and the properties then fetch a fair market value.
- The following table outlines the sums:
|Property stock Sept 2014 (£k)||317,651|
|Less sold Allsop-assessed stock (£k)||(112,791)|
|Stock purchased since Sept 2014||188,415|
|Possible property stock value (£k)||960,276|
- I have taken the original September 2014 estate value of £318m and subtracted the (estimated) £113m book value of Allsop-assessed properties sold since that date.
- I then multiplied the £205m remainder by the 2.1x ‘Allsop-premium-to-book’ multiple and then added a 65% ‘sold-premium-to-Allsop’ gain that was enjoyed during FY 2022.
- I arrived at a £710m estimate 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 £188m book value.
- I have assumed these additional properties can be sold for £251m based on management comments of wishing to buy properties at 75% of their fair market value (i.e. the ‘reversionary’ gain will be 33%).
- Adding the £710m and the £251m together gives £960m.
- This next table adjusts that £960m for 25% taxation, the £25m conventional property portfolio, net debt and other liabilities to give a possible book value of £819m or £210 per share:
|Possible property stock value (£k)||960,276|
|Less tax at 25% (£k)||(141,750)|
|Plus other investments (£k)||25,451|
|Less net debt (£k)||(18,557)|
|Less other liabilities (£k)||(6,683)|
|Possible NAV (£k)||818,737|
|Possible NAV per share (£)||209.99|
- Bear in mind my estimated value of MTVW’s property estate has not really improved during recent years. Previous estimates were:
- The £200-£214 range-bound estimates may explain why the share price has made little headway during the same time:
- The range-bound estimates might also suggest MTVW exhibits:
- ‘Value trap’ characteristics, whereby all the property trading is not really creating much additional benefit for shareholders, and/or;
- ‘Safe haven’ characteristics, whereby the property estate is likely to retain a steady value irrespective of future “difficult economic circumstances“.
- My estimated NAV sums are not perfect, and these questions remain unanswered:
- How long will MTVW take to sell all of its properties?
- Will future house-price advances compensate for being unable to sell all the properties immediately?
- How reliable is the 2014 Allsop valuation today?
- What impact could annual admin costs of £6m have on the calculations? (I have ignored such costs)
- My H1 2022 write-up attempted to address some of these issues through a discounted cash flow (DCF), whereby MTVW continues to sell its properties as normal but no longer buys any replacements…
- …but I am not longer sure the additional complexity of forecasting sale prices, rental income and admin costs provides that much extra insight.
- A watered-down DCF alternative is based on a similar ‘run-off’ scenario, whereby ‘run-off earnings’ are calculated by adding back stock sold during the year to reported earnings but no adjustments are made to reflect future sale prices, rental income and admin costs.
- Run-off earnings have bobbed around the £46m mark during the last four years:
- At the start of FY 2022, MTVW’s trading-property estate had a £398m book value and during the year properties with a £19m book value were sold.
- With the year-end estate carrying a £393m valuation and, assuming stock of £19m is sold every year, MTVW would take another 21 years to dispose of its entire estate.
- 21 years of run-off earnings of £46m give an aggregate £973m or £250 per share valuation.
- Discount all 21 payments of £46m at 7% per annum, and their total net present value would equal the recent £507m market cap.
- In theory at least, the calculations imply shareholders might enjoy 7% annual returns should MTVW never buy another property.
- These run-off sums are not perfect, as they do not account for i) fluctuating sale prices; ii) lower rental income and admin costs as the property estate shrinks, and; iii) the upcoming 25% tax rate.
- Turning to more traditional valuation measures, MTVW’s shares have generally traded ahead of NAV (pink line below) following the Allsop valuation:
- The premium to NAV with a £130 share price is 29%, which is not the smallest surplus the shares have ever traded post-Allsop.
- The best time to buy appears to be when the market cap slides to (or below) NAV, at which point no future gains from the original property purchases are priced into the valuation:
- My original MTVW purchase occurred during 2011 when the £41 shares traded at 0.75x the then £55 per share NAV.
- The 475p per share ordinary dividend meanwhile supplies a 3.6% income that is not quite at the 4%-plus level the shares have occasionally offered:
- With MTVW presently struggling to find suitable purchasing opportunities, perhaps excess cash flow can instead deliver further special dividends and temporarily enhance that 3.6% yield.