23 June 2014

Summary company financials (m)

Year end December FY2011 FY2012 FY2013 FY2014E
Price 2.55 Rent receivable 251.3 263.8 274.3 302.0
Market cap (m) 1,849.0 -12.6% 5.0% 4.0% 10.1%
Enterprise value (m) 4,596.9 Other income 102.3 102.2 111.1 122.3
35.1% -0.1% 8.7% 10.1%
Free float 21.1% Gross income 353.6 366.0 385.4 424.4
-2.0% 3.5% 5.3% 10.1%
Op. profit ex revaluation 215.0 225.7 226.2 249.1
Cash interest -245.2 -232.3 -228.8 -216.5
Gross property assets 4,802.0 5,281.9 6,444.2 6,322.7
Growth 1.8% 10.0% 22.0% -1.9%
Net asset value 1,653.4 1,063.0 1,746.7 2,320.8
Growth -5.7% -35.7% 64.3% 32.9%
Valuation yield 5.4% 5.4% 5.1% 5.1%
Discount to NAV 47% 16% 31% 20%
Loan to value ratio 66% 80% 73% 63%
Songbird Estates PLC
Growth
Growth
Growth
Songbird Estates Plc ("Songbird") is a 1.8bn market capitalisation, AIM-listed real estate operating company, whose principal activity is the
management of its operating subsidiary, Canary Wharf Group Plc ("CWG"). Songbird controls CWG via a 69.4% stake and specialises in integrated
property development, investment and management.

Songbird trades at a 15% discount to YE2014 net asset value (assuming no revaluation movement in the year), and is financed with a loan to
value ratio of 64%. The actual discount to NAV may prove larger, based on recent transactional datapoints - in June the group sold a flagship
property at a 13% premium to NAV. The shareholder return opportunity at Songbird arises, however, as the completion of the Crossrail
development in 2018 is likely to drive property values higher in the Canary Wharf area. According to property consultants GVA, the shorter
commute times and increased capacity as a result of the Crossrail development will drive rental growth in Canary Wharf at an average 6.2% per
annum from 2014 to 2018. The research I've undertaken supports these assumptions, as prime Canary Wharf rents remain c. 25% below
comparable City of London rents, and the commute times to both areas post-Crossrail will become comparable. Canary Wharf will also benefit
from a c. 50% reduction in transit times to Central London and Heathrow as a result of Crossrail. Assuming Songbird's leverage remains at
around 65% loan to value, and some continuing share buybacks, I arrive at a mid-point average net asset value growth at Songbird of c. 20% per
annum to 2018, primarily driven by the rental income growth dynamic provided by the Crossrail development.

Acccording to property consultants GVA, the largest beneficiary from the Crossrail development will be Canary Wharf. The public transport
capacity at Canary Wharf will increase by 50%, and journey times from Paddington to Canary Wharf will be reduced from 34 minutes currently,
to 15 minutes. Under the current network, the journey time from Paddington to the City of London, by comparison, is 26 minutes.

The increase in transportation capacity to Canary Wharf is likely to alter the development potential of the area, making it ripe for expansion and
fundamentally shifting its value proposition. The situation is perhaps comparable to the 1980s, when Canary Wharf (then referred to as "the Isle
of Dogs") was dominated by low quality, local authority housing stock and there was no office market. However, the arrival of improved
transportation links - in that period the Docklands Light Railway and over a decade later, the Jubilee Line - changed this. These large-scale
transportation improvements helped transform Canary Wharf into one of the capitals leading office markets and one of the worlds most
influential financial districts. Crossrail may now play a similar role as a catalyst for investment and development.

Investors may question the risk element of an investment in Songbird - the company faced bankruptcy in 2009 as its balance sheet had
difficulties weathering the global financial crisis. Songbird was not well-financed as its ownership stake in Canary Wharf was secured by a 1.0
billion holding company loan that matured in 2010. Due to the decline in commercial real estate values in the UK, Songbirds stake in Canary
Wharf, prior to its recapitalisation, was determined to be worth only slightly more than the total amount outstanding on the companys
loan. Songbird negotiated a discounted payoff (95% of face amount) with the lender and then raised 1.2bn of fresh equity capital. The equity
was issued to existing shareholders through a highly-dilutive rights offering.

Songbird today, however, is positioned with less financial risk. Its loan to value ratio of 64% compares to a 91% loan to value ratio in 2008.
Songbird's average loan maturity is 11.8 years. And - unlike in 2008 - the Crossrail development offers value uplift potential which should reduce
leverage further.

In summary, Songbird Estates trades at a 15% discount to NAV and has a loan to value ratio of 64%. Rental growth to 2018 - driven by the
Crossrail development - may average c. 6.2% per annum according to property consultants GVA and modelling this out leads to estimated annual
NAV growth of c. 20% per annum. Crossrail is Europe's largest rail project under construction and once complete will enable commuters to travel
from Canary Wharf to Heathrow in less than 40 minutes and to Bond Street in less than 15 minutes. This should not only further accelerate the
development in the Canary Wharf but may also lead the rents on existing properties to converge with rents in the City, which are c. 25% above
rental rates on Canary Wharf.

Songbird is 79% controlled by an investor group - Qatar Investment Authority, Simon Glick, China Investment Corportation and Morgan Stanley
Real Estate Fund. The interests of this investor group are theoretically aligned to minority shareholders. The group was significantly written
down during the 2008 financial crisis and, logically, should therefore be unlikely to support exessive leverage levels at Songbird subsequently. I
would expect therefore the company to retain its financing at around its current loan to value levels and thereby offer equity holders an
attractive risk / reward profile to participate in that the economic benefits the Crossrail development will bring to Canary Wharf.