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.

Value

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.

Dividend 

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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