Tuesday, 10 March 2015

BUY: Hansteen Holdings (HSTN)--Made of the REIT stuff?

Price: 113.669
Shares: 570
Predicted annual dividend income: £28.50

March has been a busy month again. Less than a fortnight in and I have added three new positions to my portfolio: Amlin, Babcock and this one.

"Which one?" I hear you call. The newest is the real estate investment trust (REIT), Hansteen Holdings (LON:HSTN). With a market cap of about £780 million it sits nicely in the FTSE 250 index.

I have been watching Hansteen for some time. Sadly, I was attracted away from investing in them when they were trading for between 100p and 105p for a long time.

Sometimes that happens. I'd rather be overly patient than overly rash.

Hansteen--like many property investment companies--has a pretty simple business model. Buy property, manage it and distribute rental profits to investors. Excellent.

Hansteen in particular targets industrial units. It looks to buy them when they have lower occupancy rates. Manage them and seek to fill the rental space. Then when the occupancy rates are higher they often look to sell them on at a profit before doing a "wash, rinse, repeat" job.

The simplicity of this is very comforting.

Well Diversified

What is more, they have a pretty nicely diversified portfolio. A lot of their property is in Germany (about 62% of wholly owned property).  Another large amount is in the Benelux countries (about 25%) and the smallest major area being the UK (about 12.5%). Indeed, they have invested a lot recently in property in the Netherlands.

Of course, as a result of this high exposure to Europe it has been faced by a somewhat bleak picture with the various issues the Eurozone has come up against. As a result, its price has been depressed for about a year. Only now is it sitting at the price it did about a year or so ago.

All in all, then, it looks a very sound business with a solid and simple business model and not a too extreme price.


Traditional valuation measures are usually considered ineffective in valuing REITs. As a result, you will not see a P/E cropping up here. Usually (Net Asset Value) is a more convenient measure of value.

In Hansteen's recent final report their NAV per share was stated as 102p. This means the price I paid was about 11% higher than the NAV. Ideally this would be at a discount (and could have been if I had acted a bit more swiftly!).

Nonetheless, I expect that with the Quantitative Easing (QE) programme in Europe kicking off we will see the value of Hansteen's extensive Eurozone portfolio receiving a not insubstantial fillip in value. What is more, it should be easier for them to service their debts. As such, I suspect that things should look even brighter going forward.

Others seem to agree as since the ECB announced the QE programme a rocket has been put under Hansteen's shares shoving it back up to around the price it was trading a year ago (however, with a now much higher NAV).

As such, although not a bargain (i.e. trading below NAV) and trading at a slightly larger premium than some of its larger rivals I think it is a premium worth paying.


Being a REIT it has to distribute 90% of its rental profit to its investors. Funds distributed in this manner are called PIDs (property income distributions). It is one of the great appeals of the likes of REITs.

In Hansteen's case, it seems that because sales of the properties is as important to Hansteen's business as rental income its PIDs make up a lower proportion of the dividend distributions than most REITs (for example, British Land).

I have not yet figured out whether that situation is better or worse for an investor. However, evidence suggests that it is better. Its dividend history has been very impressive during the difficult financial cycle we seem to be slowing pulling out from.

Indeed, it has a strong dividend history since it started distributing cash to investors. As its recent Final report for 2014 states:

Hansteen has paid a covered dividend every year since the first dividend distribution in 2006 and during that period, it has increased by 66.7%. Our dividend policy is designed to reflect the high income generated by the business and we remain committed to a prudently progressive dividend policy.

Indeed, as this highlights, it maintained its semi-progressive dividend policy throughout the financial crisis. From the maiden 3p dividend in 2006 it rose to 3.2p in 2007 staying there for two more years. Since then, however, it has been progressively growing every since up to the 5p recently announced.

Of course, this stable recent dividend history is in stark contrast to most REITs (and indeed many other property investment vehicles) over this period. This is good.

What is more, growth is expected to continue going forward. Analysts have pencilled in dividends of 5.3p and 5.6p per share for this year and next.

This would represent a yield of 4.66% and 4.93%. That is very good indeed.

Unusual Dividend Coverage

What is also interesting here is the dividend coverage expected. 

Most of you are probably now expecting me to explain that it is exceedingly low like most REITs. After all, they have to distribute 90% of rental income profit.

Cover of 1.1 times earnings (or thereabouts) should be expected then.  

However, thanks to the unusually high non-PID income Hansteen generates the coverage is a pretty solid 1.33 and 1.29 times predicted earnings. That is pleasantly high for a REIT.

Cash and Debt

Hansteen does have quite a lot of debt. It's debt to equity ratio is running at around 0.73. This is slightly higher than most other major REITs but does not seem too burdensome.

Fortunately, they are also sitting on a fairly large pile of cash. According to the final report their cash levels are now £110.3 million. This represents about 16.11p per share. Pretty sizeable. What is more, that has almost doubled (from £58 million) since this time last year. 

Hansteen and My Investing Goals for 2015

So does Hansteen fit snugly into my goals for the year? Yes, very snugly, in fact.

Hansteen has a comparatively low volatility. Sitting with a Beta of about 0.82 it is just below my portfolio target of 0.85. As a result, it should have a small but important role in bringing my volatility down somewhat.

Also I had been looking to include a REIT or other property investment vehicle in my portfolio sometime over the course of this year. Hansteen had always been my favourite of the lot followed by the big guns of the FTSE 100: British Land, Land Securities and Hammerson. So in this regard, I can happily say it has satisfied that goal quite nicely.

It's yield is also very helpful. With a yield expected of about 4.6% it will help maintain my portfolio yield above the 4% I am targeting.

Also, I have invested in time for a full interim and final dividend payment to be received in 2015. Obviously, there is the announced 2014 Final and Special dividend coming in May and the 2015 Interim due in November. As such, it should contribute a nice amount of funds towards my £800 dividend income goal for the year.

Being another new holding, as well, I am now sitting on 26 different companies. As a result, I am now securely within my target of between 25 and 30 stocks in my portfolio.

And with regards to reducing my broker charges over the year I am also on track with this purchase. Below 1.3%? No problem, all told fees made up just 1.27% of my purchase price. It is moving in the right direction.

All in all, I am delighted with my purchase. Obviously, property investments are highly cyclical investments even without the added volatility of equities in general. But hopefully Hansteen should provide some welcome income both in the short and long term and continues its strong dividend record. Fingers crossed!

[Image reproduced from Hansteen Holdings PLC]

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  1. Pretty nice purchase my man. I don't own any REITs but I have been wanting to get one with a lot exposure to Germany, so this pretty much fits the bill. Now, if only the price would come down closer to the NAV, I'd be more pulled ot buying...

  2. Thanks. I am happy with it! Just a shame, as you say, it is not trading below the NAV. It may fall further, in which case I will be delighted to add more! However, it does seem there are plenty of future catalysts for the NAV which may explain the premium (as well as the bumper yield, much larger than most REITs).

    Their exposure to Germany was a massive appeal to me. In a past life I worked as a trade journalist and visited Germany many times. Mostly this was to smaller industrial operations (i.e. mittelstand). They obviously operated out of the very industrial units Hansteen is interested in. Even during the height of the recession, these businesses (and thus their tenancies) were incredibly robust indeed. Very attractive.

    I don't own any property myself so I did want a little exposure in some way. Hence why I set a REIT as one of my goals for the year.

    I recognise that, of course, property is highly cyclical and that property equities are cyclical as well as volatile as a result. But a little exposure is much welcomed!

    You should definitely look into Hansteen a little more. They are a very solid and well-managed company which seems to be expanding at a slow but steady pace which is also good!

    PS: If you see any other Germany-heavy REITs during your research do flag them up!

  3. Ah, the good old Mittelstand, backbone of the German economy, sort of.

    Yes I have come across Hansteen in the past, but having not long purchased our own property, I think I immediately rejected anything related to property at that time.

    The cyclicality is not an issue for me, as I tend to load up on whatever's good value, as long as all my eggs are not in one basket, then I'm happy.

    1. Yes, it is sometimes played up for more than it is. It is certainly a central part of their economy. But then again, so are SMEs in the UK!

      I don't blame you. Best not to overload. I don't expect to be "propertied" for many years yet. Unfortunately, by particular job often results in high mobility during the early stages of your career. As a result, it is more expedient to rent. Of course, house prices also play a huge part as well!

      No, cyclicality is not really a major consideration this end either. The trend--both share price and dividends--should tend upwards which is what is aimed for. You just need to be patient (and brave when necessary!) I suppose.

  4. sometimes I wish we still rented too, but no point at the time we bought we got a fantastic mortgage deal and so we're paying way less than what our rent was for a house that's way bigger.

    I do think the Mittelstand plays a much more important role in Germany, partyly because everyone knows and respects it, whereas here in the UK, I'm not sure many people feel that they can relate to our SMEs - they are not celebrated like our German cousins are.

    1. Renting has its benefits (especially for me at the moment). However, if I was in a position to buy at the low point a few years ago I would have jumped on it I suspect.

      Hopefully I will find myself more permanently settled around the same time as a more favourable house price period. You never know. I may be lucky.

      That is the key difference. In Germany they are seen as small but perfectly formed and efficient little powerhouses which helped turn the economy around. Here not quite so!

  5. Would you not consider buy a little terrace or something to let out? You could pick upa cheap one in somewhere like Manchester, or Birmingham where there's an oversupply of housing and so it's still fairly cheap.

  6. Maybe in the future. As it stands, my earnings visibility does not really extend beyond this October. As a result, I am playing it safe with as many comparatively liquid assets as possible! I have a very healthy cash reserve and, obviously, growing investment portfolio. Both are helped by a high savings rate.

    Luckily there is no real pressure in that direction at the moment. It is only me and my girlfriend so we have the luxury (and at the moment necessity) of being flexible with housing.

    If situations change such a family arrives or earnings visibility improves then I may well reconsider. Who knows what the future holds!

  7. cool. I'm not a huge fan of property, but if the price is right, then it can be okay. at the moment, that isn't the case though. plus there is the downside of having to put down a whopping deposit! I'd rather put that into a proper investment that gives me some of kind of income

    1. Exactly! At the moment equities feel the better place to head for now. That definitely may change of course!