The commercial property market is a long way from reaching its apogee, especially in London where demand for quality office space shows no signs of abating. And with a diverse £1.3bn portfolio of modern well-let properties, CLS Holdings (CLI) is well-placed to exploit these strong market conditions.
- Very strong revaluation boost
- Profits last year up more than 200 per cent
- Strong rental income
- Lowest debt costs in the sector
- Shares tightly held
- Modest dividend yield
The group has property assets in France, Germany and Sweden, but the UK makes up most of the portfolio, with 58 per cent of CLS's properties by value located in the capital and a further 7.5 per cent in other parts of the country. Business is booming. As companies scramble to secure quality space CLS's vacancy rate has dropped to an all-time low of 3 per cent, down from 4.4 per cent a year earlier. While the UK is driving this trend, conditions are improving elsewhere, too. In France, where the group's portfolio is centred on Paris, vacancy rates more than halved to 5.1 per cent.
Several aspects of the London property market are working in the group's favour. High prices commanded by property in key locations in central London and the West End are spilling over to the more peripheral areas where CLS is active. A typical example of the benefit to CLS is one of its sites in Vauxhall, where having obtained permission to change an office block into a residential site it actually proved more cost effective to retain its original use, refurbish it and let it.
The rise in property values contributed to a dramatic 40 per cent increase in adjusted net assets per share last year. The buoyant market conditions have also provided an opportunity, where appropriate, for CLS to sell off assets at a big profit. In April, it sold its Cambridge House building in west London for £29.5m, which was a third higher than the December 2013 valuation and corresponded to an initial yield of just 2.34 per cent.
| CLS HOLDINGS (CLI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,715p | MARKET VALUE: | £736m | |
| TOUCH: | 1,709-1,715p | 12-MONTH HIGH: | 1,750p | LOW: 1.250p |
| FWD DIVIDEND YIELD: | 2.4% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORWARD NAV: | 21% | |||
| INVESTMENT PROPERTIES: | £1.31bn | NET DEBT: | 98% | |
| Year to 31 Dec | Net asset value (p)* | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p)* |
|---|---|---|---|---|
| 2012 | 1154 | 36.2 | 65.3 | 30.4 |
| 2013 | 1268 | 37.8 | 66.2 | 34.4 |
| 2014 | 1774 | 44.2 | 77.4 | 37.0 |
| 2015* | 1979 | 47.0 | 86.3 | 39.9 |
| 2016* | 2162 | 47.3 | 88.7 | 41.9 |
| % change | +9 | +1 | +3 | +10 |
Normal market size: 200 Matched bargain trading Beta: 0.59 *Liberum forecasts, EPRA NAV, adjusted PTP and EPS figures, tender-offer equivalent DPS figures | ||||
Rents are also growing fast. Rental income was up 10 per cent in 2014 to £84.4m, boosted by acquisitions made in 2013 that added £13.6m. Total income would have been higher, but £2m was lost as a result of disposals, and currency fluctuations reduced rent in sterling by £2.4m. Crucially, the quality of the company's revenue stream is extremely high. Nearly half of rental income is from government bodies and around a fifth comes from major corporations. What's more, over half of all rents subject to indexation. New developments have the potential to boost growth, too. There are two big projects in the pipeline. Westminster Tower, where planning consent has been secured for a major refurbishment of the existing 14-storey building, will see the addition of three further stories. Meanwhile CLS will gain vacant possession of its Vauxhall Square project site in 2017.
Net debt remains relatively high at £642m, but interest cover last year was a comfortable 3.3 times. The average cost of debt last year was 3.64 per cent, but following a sub-2 per cent seven-year fixed rate loan on a property purchase in Germany has since fallen to 3.58 per cent. Not only is that one of the lowest in the property sector, it is also significantly below the adjusted net initial yield on the property portfolio of 6.5 per cent. That's one of the largest differentials in the sector.
