Time to move in to this property company with a wide discount?
Last Monday, I looked at how some property companies' shares could be found at prices that let you buy £1 worth of assets for as little as 50p, primarily because of investors' concerns as to whether these valuations would hold up in practice.
One such company is the Anglo-Swedish CLS Holdings (LSE: CLI) whose shares, as I write this, trade at 560p -- a 46.5% discount to its most recent net asset value of 1,047.7p.
CLS is unusual in that it doesn't pay dividends but nonetheless still manages to pay its shareholders a regular 'income'. Twice a year it asks if they want to sell some of their shares to the company via a tender offer and, based on 2011's tenders, the shares yield 4.3% before capital gains tax (CGT).
The business
CLS's portfolio consists of 72 properties, mostly office blocks in major cities, which house some 380 tenants. These were valued as of 30 June 2011 at £924.8 million, and are split between four European Union member states as shown in the table below:
| Country | Valuation, millions | % by value |
|---|
| England | £387.3 | 41.9 |
| France | £267.0 | 28.9% |
| Germany | £209.7 | 22.6% |
| Sweden | £60.8 | 6.6% |
CLS also owns a substantial portfolio of corporate bonds, valued at £109.3 million on 30 June 2011 when the last set of results was announced, which yields some 8.5%. In addition it has a 48.3% stake in the unquoted company Bulgarian Land Development, which it values at £9.5 million.
It's all about the rents
Property companies like CLS prefer to have tenants who are on long leases, and are unlikely to get into the sort of financial difficulties that could put their rents at risk.
The weighted average length of CLS's tenants' leases is about eight years; about 41% of the total rent comes from government bodies, while major corporations pay a further 29%. Two-thirds of its total rents are index-linked to provide some protection against inflation.
Last November, some 4% of CLS's properties didn't have tenants. This is in line with the rest of the market, as Hammerson (LSE: HMSO) recently reported a vacancy rate of 2.7% for its office portfolio, while Great Portland Estates (LSE: GPOR) quoted 3.2%. Note that "vacancies" in this context means space that could be let but isn't at the moment.
The "income" that isn't
In 2011, CLS made two tender offers: one share for 47 at 725p in April and one for 72 in September at 700p. So an owner of 1,000 CLS shares at the start of 2011 who accepted both tenders in full would now own 966 shares having sold 21 in April for £152.25 and a further 13 in November for £91.
This works out to be about 24.3p per share, so based on the current share price this is equivalent to an "income" of 4.3% before CGT.
CLS shareholders who pay CGT will need to keep good records because the tenders affect their acquisition cost, although an easy way to avoid CGT is to hold your shares in an ISA. In any event, you can realise capital gains up to your personal allowance of £10,600 in the current tax year before becoming liable to CGT upon any excess.
Tender offers are good news for higher-rate taxpayers who pay CGT because capital gains are taxed at a lower rate than dividends. The downside is that accepting tenders involves a bit of paperwork, although if your shares are in a nominee account then the broker should do this for you when instructed.
Show me the money
Please note that the NAV of 1,047.7p is the increasingly popular EPRA NAV, which excludes assets and liabilities that are not normally expected to crystallise, the most notable of which is deferred taxes. The traditional NAV of 869.1p reduces the discount to 35.6%.
CLS's 2010 earnings per share (eps) were 127.1p, while in the first half of 2011 eps were 69.9p, up 35%. The current forecast for the whole of 2011 of 79.5p puts CLS shares on a prospective price-to-earnings (P/E) ratio of 7.
When considering a property company as a possible investment, it's important to see how easily it can service its debts. CLS has plenty of cover, as its profits represent about 3.4 times its interest payments.
As an investment CLS has a pretty decent track record, given that its shares have outperformed both the FTSE All-Share and Real Estate indexes since it floated on the Stock Exchange in 1994.
A big family interest
A big plus point is that CLS's directors' and shareholders' interests are very closely aligned because executive chairman Sten Mortstedt and his family own 53.2% of the company.
I've generally found that when it is the boss's own money that's on the line through a big equity stake, instead of when the directors have share options and little or no share ownership, a company is run with a much longer-term perspective and is less likely to take the sort of risks that could cause it severe damage.
While I sold my CLS shareholding several years ago, it remains on my watchlist and I'll be paying close attention when the full-year results for 2011 are released in March. If the discount gets much wider, I'll consider buying back in.
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