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Songbird Estates (Buy)

Strong Interims continue to push up NAV

Stellar interim results demonstrated the significant momentum behind Songbird on development operations and the rental side. Rental income growth (+4.75%) reflects strong demand for office space (97.2% occupancy at Canary Wharf) and over 90% of 20 Fenchurch Street now let. The 97.2% occupancy reflects a small improvement on FY13 97%.

Songbird has delivered an impressive track record of net asset per share growth in recent years. Partly this reflects continued portfolio valuation growth, new investment assets and uplift from planning approvals/ the development cycle.

Songbird H1 2012 FY2012 H1 2013 FY 2013 H1 2014
Share Px (p) 110 120 145 165 252
Adj NAV (p) 199 210 223 290 319
Adj NNNAV (p) 152 146 173 236 266
Disc to NAV (p) 44.7% 42.9% 35.0% 43.1% 21.0%
Disc NNNAV (p) 27.6% 17.8% 16.2% 30.1% 5.3%

Source: Songbird Estates plc

Assuming trends in net asset per share growth continues, it is possible to extrapolate a NAV of 493p by end 2016 using trend analysis. Songbird’s net asset growth has been helped by a zero dividend policy, also employed by subsidiary, Canary Wharf Group. Adjusted NNNAV takes into account the fair value of financial assets/ liabilities, deferred tax and minority interests.

Songbird FY 2014 (F) H1 2015 (F) FY 2015 (F) H1 2016 (F) FY 2016 (F)
Adj NAV (p) 344 387 427 456 493

Source: Collins Sarri Statham

Songbird has outperformed its peer group quite considerably in the last 52 weeks -against sector gains of 15%-20% – Songbird has delivered >

Screen Shot 2014-09-26 at 10.38.40

Source: www.google.finance/com

Investors like Songbird residential plans and estate growth

Songbird development properties will add significant size to its commercial portfolio (8.04m sq ft/ end 2013). This pipeline will add commercial, mixed use and residential assets to the current Canary Wharf/ City of London portfolio. In addition the board have proved adept at picking up properties on an opportunistic basis. No 7 Westferry Circus (originally sold by Songbird in 2005 for £96.6m) was re-acquired in March 2013 for £46.6m is now fully let.

The recent partial sale of the skyscraper 10 Upper Bank Street for £795m leaves Songbird subsidiary CWG with a 10% stake in the partnership. The sale took place at £15m more than its 2013 valuation. The sale substantiates the board’s estimates for an uplift of 8.4% in valuation for the existing portfolio.

The development pipeline can more than double the existing portfolio (9.8m sq ft v 8m currently) and lead to uplift in the valuation of properties as properties under construction (£502m H1 2014) migrate into investment properties / rental assets. The valuations for properties under development were estimated at £817.5m (+16.8%) v £700m (end December 2013) reflecting the higher content of residential developments.

Property development pipeline (m.) square foot Comment
Heron Quays West 1.40 Outline consent received
North Quay 2.39 Revised application made
Newfoundland 0.48 Construction underway
One Park Place 0.65 Revised application made
Wood Wharf 4.90 1.25m residential/ 3.1m offices
Sold to JP Morgan:-
Riverside South 1.90
In JV with Qatar Diar:-
Shell Centre 1.40 6 year build-8 new buildings
Total 9.82 Not including Riverside/Shell

Current valuation £5.871bn

Source: Songbird Estates plc

The Wood Wharf development included in development properties, below*, is valued on the basis of present value of ground rents. Canary Wharf bought out 75% owners British Waterways and Ballymore in 2012 paying £90.5m. There is considerable potential for Wood Wharf (4.9m sq foot) to add value to Songbird Estates. The build out of 30 new buildings is expected to start in autumn 2014 with first buildings occupied in late 2018.

30th June 2014 Market Value (£m) 31 Dec 2013 Market Value (£m) 30 June 2013 Market Value (£m)
Investment Property 4961.0 4,735 4,345.5
Sold 780 675
Construction

Property

502 356 212.5
Development

Property

817.5* 700 440
Sold 143.1 151.2 143.1
Total 6,423.6 6,722.7 5816.1

Source: Songbird Estates plc

Conclusion

Songbird Estates has significant development momentum over the 2014-2015 period and the opportunity to double its investment assets/ retained estate by 2019. We view Songbird’s 21% discount to NAV per share as shrinking as the new asset stream arrives.

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