Whereas I like actual property, a number of the valuations in Europe have been pricing belongings for perfection and the one logical consequence was a actuality test for some REITs. City Logistics REIT (OTCPK:PCILF) reached a excessive of 200 pence earlier this yr however has misplaced in extra of 30% of its share worth. On this article, I will have a more in-depth have a look at the REIT’s efficiency whereas I may also mess around with the capitalization price to see how the honest worth per share holds up utilizing extra conservative parameters.
City Logistics has its main itemizing in London, the place it’s buying and selling with SHED as its ticker symbol. The common each day quantity is roughly 1.7 million shares per day, which clearly makes it the very best market to commerce within the REIT’s shares. The present market cap is roughly 650M GBP. I’ll use the GBP as base foreign money all through this text.
The primary half of the yr confirms the REIT is heading in the right direction
The REIT’s identify offers it away: City Logistics invests in logistics properties in Nice Britain, with about 95% of its belongings in England.
Many of the tenants are giant counterparties with low to a low-moderate danger profile, with the German DHL Group (a subsidiary of Deutsche Put up) as City’s largest tenant.
One of many parts I like most about City Logistics is its comparatively lengthy WAULT of 8.3 years, with about 30% of its leases lasting for for much longer than 10 years.
Through the first half of the yr (which ended on September 30, as City Logistics’ monetary yr runs from April 1 to March 31), the REIT reported a net rental income of 25.4M GBP. After deducting the 5M GBP in administrative bills and the 4.6M GBP in finance bills, the online money earnings offered by the properties have been roughly 16M GBP, leading to adjusted earnings per share result of 3.38 pence primarily based on the present share rely of 472 million shares.
This implies the present distribution of three.25 pence for the primary half of the present monetary yr remains to be absolutely coated by the adjusted earnings and the EPRA earnings. Primarily based on the present share worth of 137.50 pence, the present yield is roughly 5.5% because the interim dividend was adopted by a ultimate dividend of 4.35 pence for a complete of seven.6 pence per share prior to now few years. Not dangerous in any respect, however bear in mind the overwhelming majority of the earnings is spent on the distribution. Distributions from REITs are topic to a 20% withholding tax within the UK, so you need to seek the advice of with a tax advisor to see whether it is attainable to reclaim a portion of these international taxes.
I am not satisfied concerning the e-book worth of the properties – however the LTV ratio holds up anyway
As of the top of September, the official Internet Asset Worth per share was estimated at 185.54 pence per share, primarily based on the e-book worth of the properties of roughly 1.13B GBP. The EPRA Internet Tangible Property got here in at 183.11 pence per share, and this can be a metric I would like to make use of going ahead.
My first query clearly is ‘how dependable is the 1.13B GBP e-book worth of the properties?’ We noticed within the revenue assertion the REIT already needed to document a damaging impression of in extra of 20M GBP, so I needed to dig a bit deeper into this.
We all know the online rental revenue within the first half of this yr was 25.4M GBP (see beneath). On an annualized foundation, we will realistically anticipate 51M GBP.
Nonetheless, merely annualizing the H1 outcome wouldn’t be the neatest thought because the REIT has been in a position to hike the hire at a bunch of properties whereas it additionally closed a couple of additional acquisitions. The present run price of the online rental revenue is estimated at 57M GBP.
I will not get so far as utilizing the REIT’s near-term steerage of 62.8M GBP as this assumes the emptiness will drop to zero, however I’ll embrace the 1M GBP addition from improvement tasks and 1.7M GBP in anticipated hire hikes to finish up at 59.5M GBP as run-rate for the online rental revenue.
This implies the present e-book worth of 1.15B GBP for the rent-generating properties and the properties below improvement characterize a internet rental revenue yield of 5.18%. That is not very excessive, however I’ve seen a lot worse on the European continent these days, the place some logistics REITs valued their belongings at a 4-4.5% internet rental revenue yield. Within the desk beneath, I calculated an up to date honest worth for the belongings in addition to the impression on the NAV/share and the LTV ratio. I used the present share rely of 472 million shares and a internet monetary debt of 248M GBP.
Primarily based on the desk above, the market is already utilizing a 6.5% Internet Rental yield, so there’s some leeway right here. Utilizing 6% would nonetheless lead to a NAV/share of 158 pence per share (+14% above the present share worth) whereas the LTV ratio would nonetheless be low at roughly 25%. Even in a extra conservative state of affairs utilizing a 7% rental yield, the draw back could be restricted to only round 7% whereas the LTV ratio will keep beneath 30%.
I used to be pleasantly stunned after digging into City Logistics. I just like the low LTV ratio as this can protect the corporate from rate of interest will increase (a 200 foundation level enhance to a median value of debt of 5% would cut back the EPRA earnings by simply 6M GBP per yr. That is very manageable and contemplating the 5-year UK bond yield is simply round 3.2%, I do not suppose we’ll see 5% anytime quickly.
The present share worth can also be comparatively enticing in comparison with the official NAV/share, however even when I apply extra conservative parameters, City Logistics remains to be buying and selling at a reduction to its honest worth primarily based on each a 6% and 6.5% capitalization price primarily based on the web rental revenue.
I at present haven’t any place in City Logistics, however the REIT is definitely fairly attractively priced proper now.