CLS Holdings (CLI) is taking full advantage of the renaissance in the UK property market, and as landlord to a portfolio of London suburban offices, its performance has been impressive. But while the shares have more than doubled in the last two years, they still trade at an 8 per cent discount to forecast net asset value for the current year, widening to 17 per cent for 2015, which gives it one of the lowest ratings of all the quoted real estate companies.
- Low cost of debt
- Minimal void rates
- Discount to forward NAV
- Strong rental income
- Shares tightly held
- French portfolio underperforming
Given the group’s track record this is remarkable, and it may be that institutional interest has been blunted by the fact that executive chairman Sten Mortstedt and his wife own nearly 60 per cent of the shares. For private investors, this should not be seen as such a big issue. Besides, with with such a chunk of the equity, Mr Mortstedt has a strong interest in preserving the value of the shares.
And using conventional performance metrics, he has been doing a pretty good job. Net assets last year rose 9.9 per cent to 1,268p a share last year using the European Public Real Estate Association (EPRA) valuation method, and headline pre-tax profits jumped 27.3 per cent to £71.4m. Even more impressive was the rise in contracted gross rental income, up 25.3 per cent to £85.6m.
The company does not pay dividends in the usual way, but operates a tender offer buy-back which last year worked out at an equivalent dividend of 22.65p a share. What’s more, total shareholder return (share price movements plus capital returns) last year was 80.3 per cent and the group has achieved compound growth of 27.2 per cent per year over the last six years - the highest return by any UK listed property company.
| CLS HOLDINGS (CLI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,301p | MARKET VALUE: | £563m | |
| TOUCH: | 1,301-1,349p | 12M HIGH: | 1,430p | LOW: 852p |
| FWD DIVIDEND YIELD: | nil | TRADING PROPERTIES: | nil | |
| FWD DISCOUNT TO NAV: | 17% | |||
| INVESTMENT PROP: | £1.13bn | NET DEBT: | 138% | |
| Year to 31 Dec | Net asset value: (p) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 983 | 32.7 | 65 | nil |
| 2012 | 1,154 | 36.2 | 65 | nil |
| 2013 | 1,268 | 37.8 | 66 | nil |
| 2014* | 1,413 | 48.4 | 92 | nil |
| 2015* | 1,565 | 55.3 | 107 | nil |
| % change | +11 | +14 | +17 | See text |
Normal market size: 200 Matched bargain trading Beta: 0.12 *Liberum forecasts, adjusted PTP and EPS figures | ||||
Gearing at first glance looks on the high side. However, CLS boasts the highest spread in the sector between its core-investment-portfolio rental yield of 7 per cent and average cost of net debt at 3.64 per cent. In number terms, finance costs of £23.7m last year were covered comfortably by £73.1m of net rental income.
Importantly, the company has plenty of scope to make canny acquisitions with £199m of liquid resources available. It acquired 42 properties for £165m last year, providing a net blended yield of 11.6 per cent. The biggest purchase was the Neo portfolio of 34 properties for £123.7m at a net initial yield of 12.2 per cent and 99 per cent occupied by 14 government departments.
Tenant quality overall is pretty good, with over 70 per cent of rental income coming from government departments and major corporations, and 60 per cent of this is index linked. Demand for suburban office space is growing strongly, and vacant space of just 4.4 per cent is around half the sector average. CLS also has a finely tuned nose for a bargain, and recently sold Cambridge House in west London for £29.5m, an uplift of 65 per cent over the external valuation in June last year.
The group also operates in France, which represents around a fifth of the group portfolio, and trading here has been hit by the weak local economy. Vacancy rates spiked to 10.6 per cent last year and the portfolio valuation was marked down 3.6 per cent. Conditions are more stable for its German and Swedish properties, which account for 24 per cent of the total by value.
