With the U.S. property bubble filling the financial headlines, it's hard to imagine a fresh angle on property stocks. Homebuilders shot up and deflated; mortgage REITS like Accredited Home Lending soared and crashed like fireworks; and commercial REITs are looking very pricey. Office property giant Boston Properties (NYSE:BXP) trades at 4.3 x book value with a meager projected dividend yield of 2.3% this year.
That's why U.K. office property manager Mapeley Ltd (OTCBB: MPEYF.PK) caught my eye. With less than two years as a public company, its modest $2.2 billion market cap puts it in the junior varsity ranks, but its business model holds a lot of promise.
Founded in 1999, Mapeley set out "to become the leading owner and operator of U.K. regional commercial real estate let to Government or investment grade tenants." The British housing market may fluctuate up or down, but Mapeley's future income is largely locked in. CEO Jamie Hopkins calls this "more effective management of property risk."
Almost three-fourths of Mapeley's $4 billion property portfolio consists of the "HMRC" portfolio, purchased in 2001. HMRC stands for Her Majesty's Revenue and Customs department; Mapeley purchased HMRC's facilities in 279 towns around the United Kingdom. Today it gets monthly rental and facilities management income from the safest tenant in the country, Her Majesty's Government. Did I mention that Mapeley has a 20-year leaseback deal with HMRC?
The commercial side of its holdings is anchored by the "Abbey" portfolio, most of the properties used by Abbey National PLC, the sixth-largest bank in the U.K. Abbey is owned in turn by Banco Santander (NYSE:STD), the seventh-largest bank in the world. Mapeley manages all of Abbey's bank branches, offices, and call centers in 520 towns nationwide. Like HMRC, the Abbey portfolio is locked in for a 20-year period.
The newest major contract came from Her Majesty's Identity and Passport Service. Mapeley will procure, fit out, and operate 69 interview offices for the IPS in the next five years. Fifteen percent of those offices will come from Mapeley's existing property portfolio, guaranteeing cash flow for even more of its current holdings.
Not content to stand pat, Mapeley also has a Direct Property Investments program with an $800 million annual budget to buy new regional office properties. It doesn't invest in speculative new floorspace; instead it opts for buildings with established current tenants who plan to stick around. The DPI portfolio has an average remaining lease period of almost eight years with a 97% occupancy rate. Mapeley also maintains a careful spread between the net initial yield on new properties and their financing costs.
So far in 2007, Mapeley has closed $190 million in new acquisitions with a further pipeline of deals under consideration. The company added $720 million in new assets last year.
Mapeley fits both sides of my value stock checklist: strong operations and assets on the one hand, and an appealing valuation on the other. Last year, net asset value (NAV) rose 5.7% to $48 per share, so you can buy Mapeley at less than twice its book value today. U.S. commercial REIT giant Equity Office Properties was taken private in February at well over three times book value.
Most real estate plays are also valued by their funds from operations (FFO), an industry measure that adds back depreciation and amortization to net income. Mapeley scored a 79% increase in FFO in 2006 to $90 million. Their price-to-FFO ratio is now just under the industry average.
The other interesting wild card in the Mapeley story is the 50% stake held by U.S. buyout fund Fortress Investment Group (NYSE:FIG), plus significant holdings by Goldman Sachs (NYSE:GS), Fidelity, and Soros Real Estate Investors. When retail investors have a chance to follow the big-money players into a relatively cheap stock, it's worth taking a stake.
While Mapeley is not a REIT, it pays a growing dividend. If the fourth-quarter payout is annualized to $3.60, the yield is close to 5% at today's share price. Mapeley chairman Wesley Edens pledged to pay out all future FFO as dividends. Additions to the DPI portfolio will be financed with new equity offerings.
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Fool contributor Dale Baker, a private client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns Mapeley shares. He never misses a chance to get back to the U.K. and welcomes your questions or comments. The Motley Fool has a disclosure policy.
