Outstanding results from CLS: NAV +18%, 35% discount to FY17 NAV.

8th Mar '17 by VegPatch

9 comments 7869 reads

CLS Produced some great results for 2016. EPRA net assets per share rose by 17.9% to 2,456 pence (2015: 2,083 pence),I The 373 pence increase in EPRA net assets per share to 2,456 pence largely comprised underlying earnings (131 pence), foreign exchange gains (119 pence) and property valuation uplifts (97 pence). These results stand CLS firmly out from the rest of the property sector and I will explain why I think it has a very attractive business model.

Income generation
What is attractive about CLS is that its focus on higher yielding property assets and low funding rates allows for a strong stream of retained income. The portfolio produces a net initial yield of 5.6%, (rising to 5.9% on the expiry of rent-frees), and is financed by debt with a weighted average cost of 2.91%. The Group's strategy is to have diversity of financing from banks and other debt providers and to ring-fence debt on individual properties where appropriate. This allows greater flexibility to buy and sell assets than if the properties were all lumped into a securitisation (just go and ask Enterprise Inns, Punch or British Land their views on securitisations...). During the year, £177 million was financed in 14 new loans at a weighted average rate of 1.90%, and CLS's weighted average cost of debt reduced to 2.91%. Debt financing is provided by 24 debt providers, which means the Group is not over reliant on any one provider. Medium-term interest rate swaps have remained attractively low. Sensibly CLS has increased the proportion of loans at fixed rate to 63% (2015: 51%), with a further 5% protected against rising rates with interest rate caps. 32% of our debt remains unhedged. Overall the Group will suffer from rising rates as higher interest payments will compress income, but given interest over of over 3x the effects won't be too bad. Also set against this, 50% of rents are indexed so there will be some offset.

Coming back to the income generation. The portfolio is worth £1536m, and has rental income of £95m with a weighted average lease length of 6.2 yrs and vacancy of just 2.9%. There are also some sundry income streams, which boost Group income to £107m. Net Finance costs were £27m in 2016, and admin expenses £14m. So all in costs of running the business and paying the bank loans was £41m, leaving…

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extrader

8th Mar '17

Hi vegpatch,

Good write-up. As the ad puts it : " I'm a fan".

ATB

Richard Goodwin

12th Mar '17

High quality stuff as always Vegpatch. I assume the valuation anomaly is due to concerns over exposure to Vauxhall with Capco catching a cold over the Earls Court development? Also because there aren't many property firms which operate in multiple countries?

VegPatch

13th Mar '17

Thanks Richard, v kind of you. No I dont think the static valuation anomaly is huge compared to say BLND or LAND, all of which trade at large discounts to NAV. However I do think the anomaly compounds up over time as CLS generates income well in excess of its cost of debt, which then accretes to the NAV. So I would much rather own CLS than any of the large cap property proxies.

Vauxhall is around 90m of the GBP1bn NAV, so a pain if it goes wrong (c9% of net assets) but certainly not terminal. Underlying use value is GBP72m, although as they are knocking it about then existing use I guess goes out the window (or under a bulldozer). I expect the value to go up as a % of NAV as they add capex of GBP25m to the site. They are a conservative bunch though and should have built in some developers profit which can be released upon completion to offset a certain amount of negative revaluation if there is any.

Its up there with Mountview and Daejan for conservative value. I own it.

6th Apr '17

A frankly brilliant sale announced yesterday of Vauxhall Square for £144.1 million. "It is expected that completion will be on or around 4 May 2017. The Company will retain the freehold interest in the Miles Street student accommodation block (having sold a long leasehold interest for £24.8 million in December 2015) and residential houses in Wandsworth Road. At 31 December 2016, Vauxhall Square was valued at £100 million and in 2016 generated net rent of £1.9 million. "

"CLS will make a profit on disposal of approximately £40 million after costs, which will add some 70 pence to pro forma EPRA NAV. "

The reason this is a great sale is that it is in the Vauxhall area which anyone using South West Trains into Waterloo will tell you is a area of huge building and thus supply. A number of investors were worried that this development could be worth a substantial discount in the current slightly depressed market. But to sell it for cash at a 44% premium to the December valuation is great because not only do you remove a worrysome asset, but you achieve a huge premium. Hats off to the management team!!

The premium is 70p a share and as the proceeds will be in cash they can be recycled into higher yielding assets.

As you can guess as a shareholder I am very happy !

I first mentioned this share at 1200p post BREXIT, and I feel it goes to show that you need to bide your time with shares until the moment is right. What I didnt do, which is a habitual mistake for me as a relatively risk averse investor, is invest enough in it. However that way i tend to live to fight another day.

Happy investing, Veg Patch

ExpectingValue

7th Apr '17

Great news. Sale premium is fantastic and, actually, I expect the share will rise far more than is justified simply by the increase in asset value, even if you already had it pegged in your model at a discounted value.

People were attributing a disproportionately large amount of worry to this site, and now they don't have to.

I Agree.

Interesting chart from Redburn this morning highlighting the recent move in UK REITS. CLS has done so well relative to most other REITs, therefore I expect it may go quiet for a while. Having said that there is a still a large discount to spot NAV which is probably around 2550p / share post the sale of Vauxhall sq, so at 1875p = 27% discount to NAV.

This is slightly higher than the average discount (c20-25%) and the outlook for the UK is unclear so I see little reason for the discount to narrow materially from here but I will remain a long term holder. Although maybe time to switch a tiny bit into Mountview Estates (LON:MTVW)....which has lagged most other property stocks of late.

jonno

Hi Vegpatch

Have read your review and the comments from other contributors I had a look at the latest RNS from CLS. I had looked at CLS before but never got as far as pushing the buy button. Anyway the clincher for me was the Vauxhall sale aided by the introduction of a dividend and proposed share split, not to mention the gaping discount to NAV. So this morning I bought a small holding. Provided the sky doesn't fall in on the economy post Brexit and with Europe in recovery mode my view is that CLS will continue to be a sound investment.

Best wishes to All

Jonno

Good luck
A good company and really sensible management
I hope it goes well for you

pone

6th Nov '17

So a few questions here:

* If inflation takes off, won't this increase property values and rents? So there might be short-term compression of rents versus interest expenses on properties, but over time the spread should remain?

* Paying a dividend seems less tax-efficient than buying back discounted shares. I guess they are giving into retail customers and the perception that a dividend makes the shares more valuable?

Outstanding results from CLS: NAV +18%, 35% discount to FY17 NAV.

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VegPatch

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