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

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 a pretax income stream of c£60m (after other bits and bobs get taken off).

The point that many people miss is that £50m-ish of post tax income falls onto the balance sheet as retained income and increases the NAV/share by over £1.20 per year which equates to c5%. So you have inbuilt NAV growth from income which you don't get with some of the more development focused REITS like Great Portland.
 


Portfolio Management
CLS Has also shown itself to be shrewd property managers, in buying, selling and developing. 2016 was no different.

Of the £45.7 million spent on acquisitions in the year, £39.3 million related to two properties in Germany, and £6.4 million to two in London. The German properties have a net initial yield of 6.9%. A further £31m of assets have been purchased in the U.K. since the year end with a net initial yield of 8%.

Disposals amounted to £85.5m, over £9m above book value and releasing tax of over £6m.

This is another stream of value creation that the group has consistently delivered. Capital gains from revaluation and disposals added 119p / share to NAV over the year. As an investor you can't always count on this, so to me it's great, but remains a bonus, rather than my core thesis.

Discount to NAV
Prospective 2017 is in the region of 2600p is income is retained from rents offset by interest payments and assuming only a v mild contribution from revaluations.

That puts the shares on a 35% discount at 1700p. I first wrote about CLS post BREXIT when they were on a 40% discount at 1200p. Management has delivered this year and been helped by sterling weakness. I am not forecasting any change in GBP/EUR. So I feel the same way now that I felt back then. This share is very attractive.

Finally for those that are interested in income, the Group has implemented a dividend policy, rather than rolling share buybacks. The shares yield c3%.

For the avoidance of doubt I own CLS shares and this is entirely my own view. Please DYOR.