Is there still a hole in your Christmas present list? Something for the grandchildren or maybe the boss? Why not buy them a property convertible?
In this column over the years I have banged the drum for convertibles for property companies anxious to raise funds on a cheaper and more flexible basis than either debt or equity. Convertibles combine the best aspects of both types of finance. They are nearly as cheap as equity in terms of debt servicing, but much cheaper in terms of the price at which the equity is issued.
But while the convertible stock is attractive to issuing companies, especially as a means of financing long-term property development, it is also very attractive to investors.
Convertibles tend to be cheap. They are cheap in absolute terms because they offer both a good yield and an effective call option on equity at a set, flexible period in the future. And most are cheap in relative terms compared with ordinary stock.
Take the London & Edinburgh Trust 6% convertible preference shares. At their current price they offer a yield of 9.4%, four times the yield on the ordinary shares.
The preference shares are convertible at a price of 126p from August 1989 through to the year 2001, and although that is well in advance of the price of the ordinary, the gap is all covered by the value of the extra income that the shares will generate.
It should be remembered that as soon as the ordinary price passes the conversion price, it will begin to drag the price of the convertible stock behind it. LET shares have already this year been well beyond 200p before the crash. The price of the 6% convertible preference shares has been over 150p, compared with the current price of below 90p.
They are better secured than ordinary shares and, so long as the company remains capable of paying its dividends, the price has a natural floor which is linked to the running yield.
Given that conventional wisdom is that fixed interest yields are set to fall, then the floor on the convertibles will be rising. Buy now seems to be the message.
For those investors tended towards property, but keener on the value of real assets than aggressive management, Capital & Counties has a 5.75% convertible stock yielding 6.9%, while Chesterfield Properties, which I reckon will not see many more years as an independent company, has a 5.25% convertible preference yielding 6.3%.
The Chesterfield preference shares were issued by way of rights only in August, and investors are currently looking at a loss on their investment. But the management of the company has been strengthened, and somewhat disappointing net asset growth over the past few years should be reversed.
That will be positive for the ordinary shares, although they still have a gallop ahead of them to catch up with the conversion price for the preference.
Finally, how about Mountleigh? Tony Clegg’s non-stop vehicle has £83m of a 5.25% convertible preference outstanding. The current yield is 8%, but the conversion price is only pennies away from the price of the ordinaries.
