Merchant Securities tackles demerger fallout

Merchant Securities tackles demerger fallout

Nick Friedlos, Finance director at London Merchant Securities, is in the midst of demerging Leo Capital and developing new products. Here he discusses how he has managed the changes at the investment company

You’ve announced strong results, net asset value up 18%. What’s
driven that performance?

Yes, we did have strong results. If you look at the underlying performance of
the property in the investment division that’s behind those results, the
property division grew 22% and that’s really off the back of the outstanding
revaluation surpluses on the investment portfolio.

The investment division contributed 7%. That was, to an extent, held back by
the provisions that we had to book at the half year but what’s interesting, in
relation to the investment division, is that it has actually grown by 20% in the

second half of the year.

And how are your returns compared to the investment property
division?

Our total property portfolio returns are 25.9% compared to 20.7% for the IPD
benchmark. So something like 20% out-performance there.

We believe that’s a reflection of the key attributes of our portfolio, which
is that we are in the right sector ­ offices ­ we’re in the right location ­ the
West End ­ and we’ve got a significant development pipeline, which also allows
us to create value.

But rental income has fallen. Can you explain why that is?

That is just a reflection of where we are in the cycle. We’ve sold quite a
lot of property in the year and the fall in rental income is really attributed
almost entirely to that.

At the end of the year our rent-roll was £54m. What’s interesting, though, is
if you look what happens as the current schemes that are being built come
on-stream, and the one scheme that’s recently refurbished is let up, you’ll be
able to see that adds about £11m to the rental roll over the next three years or
so. So that takes us from mid-£50m to mid-£60m in terms of rent roll.

What will the demerger of Leo Capital do to your gearing?

The demerger of Leo will increase the property gearing to just over 70%.
That’s high by reference to London Merchant Securities’ corporate levels in the
past, but not high for the property sector.

The other interesting thing to bear in mind is that, looked at on a
loan-to-value basis, our borrowings are still less than 40% of the total value
of the properties.

And how do you intend to fund the development pipeline?

The development pipeline of schemes that are currently being built is
entirely funded from the new bank facility that we’ve put in place. That
facility also gives us the headroom to go out and make new acquisitions.

The remainder of the development pipeline ­ because it has a significant
residential element, which will be disposed of and sold for cash ­ is largely
self-funding.

Are you happy with the shape of your balance sheet?

We’re very happy with the shape of the balance sheet. We are more highly
geared, but we believe that’s appropriate and it will give our equity investors
greater exposure to the upside, which we still think is to come, from rental
growth in the locations that we’re in and from the value that we create from the
development pipeline.

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource