The Lemon Fool

CLI is a European operation – 45% UK, 42% Germany, 13% France – but has been savaged by the UK Market as they are wholly in the Office sector.

That said, the extent of the fall would seem to be wholly unjustified. Whilst the NAV has fallen 17% from Dec’21 (far less than all UK REITs), the share price has fallen 53% from 218p to the current 102p. At this level the NAV discount is a cavernous 65% and the very well covered dividend provides a yield of 7.8%. Through individual ownership and family trusts, the Morstedt family own 62% of the equity and have been large buyers on the way down.

The shares fell as low as 85p at the end of October, formed a base and are now seeming set to recover. Last week they broke through the psychological 100p threshold and seem primed for a short-term run back up to the 130p level.

Bulls will hope that the Morstedt family might decide to buy-in the company; or sell out to the hungry PE sector. Notwithstanding, the shares offer considerable upside, with a healthy yield whilst you wait.

A strong BUY in my view.

https://www.clsholdings.com/

I'm no expert on this but I have seen articles in the press about huge falls in office values, not remotely reflected yet in 'NAVs'. One reason is that many offices need massive expenditure to meet energy efficiency requirements which are not economic to implement and new tenants won't take out leases on properties not fully up to modern standards. One report recently was of a block only 14 years old that had sold at about half its last valuation and for an amount equal to the guaranteed future rent from the current high quality tenant.

You need to have intimate knowledge of their properties before touching this and maybe you do?

Scrumpyjack - thnx for that - and the answer is - Yes, I do.

If you look through the website and read both Annual Reports and Updates (recent one in November); you will notice that CLI trades in Prime properties with high ESG credentials, rather than the secondary offices which may fall short of modern workplace requirements.

Read the last Prelims Presentation and you will see they make quite a play of their advantage in that respect.

https://www.clsholdings.com/~/media/Fil ... tation.pdf

SKYSHIP, thanks for this post. CLS has a thirty-year track record. In the last annual report they say: "Since CLS was established 30 years ago in 1992, the Company has successfully weathered several difficult periods. This current period is no different and our resilient strategy, quality offices and dedicated team are continuing to deliver, which leaves CLS well placed for future growth."

These are already on my radar as a holder and are on the top up pile.

I did read an article about European property declines expected this year and pressure on rents.

Still I suspect much of that is already priced in.

I will have to find a home for the rest of my EPIC shares in a fortnight or so if I don't do something sooner

clissold345 wrote:SKYSHIP, thanks for this post. CLS has a thirty-year track record. In the last annual report they say: "Since CLS was established 30 years ago in 1992, the Company has successfully weathered several difficult periods. This current period is no different and our resilient strategy, quality offices and dedicated team are continuing to deliver, which leaves CLS well placed for future growth."

Well they would say that wouldn't they?

Dod

One should bear in mind that gearing very much distorts the discount % (ie 2.2 bn properties, 1.2 bn borrowings = 1 bn net assets, SP valuation 400m)

The current SP represents about a 30% mark down on the value of their properties, not 65%.

One may still take the view that that is excessive but it isn't necessarily crazy!

scrumpyjack wrote:One should bear in mind that gearing very much distorts the discount % (ie 2.2 bn properties, 1.2 bn borrowings = 1 bn net assets, SP valuation 400m)

The current SP represents about a 30% mark down on the value of their properties, not 65%.

One may still take the view that that is excessive but it isn't necessarily crazy!

How is the discount calculated?. (Net assets - market cap)/Net assets = (1000-400)/1000 = 60%?

clissold345 wrote:

scrumpyjack wrote:One should bear in mind that gearing very much distorts the discount % (ie 2.2 bn properties, 1.2 bn borrowings = 1 bn net assets, SP valuation 400m)

The current SP represents about a 30% mark down on the value of their properties, not 65%.

One may still take the view that that is excessive but it isn't necessarily crazy!

How is the discount calculated?. (Net assets - market cap)/Net assets = (1000-400)/1000 = 60%?

Yes that would be the normal calculation. But you need to take into account borrowings, both as regards risk (the higher the gearing the greater the risk (both ways!) and because the market will be concerned about the real (whatever that is) value of the properties. The properties might go down in value but the liabilities (ie borrowings) won't.

Also in a flaky property market, there may well be problems with the covenants that have been given re the borrowings. Having said that 50% loan to value is not a particularly high level for a property company. It is good that much of their rental income seems to be inflation linked.

Scrumpyjack - There seems to be some confusion in your above posts.

# NAV = Net Assets / Shares in Issue. In this case the EPRA NAV = 291.60p as at Jun'23 (See accounts)

# Discount is (NAV - Sp) / NAV; ie (291.60 - 101.60) / 291.60 = 65.1%

The NAV discount IS 65.1%

Your wording about current sp representing a 30% markdown on property values is, to put it very politely, not accepted procedure.

Furthermore - re your comments on borrowings. Most of their borrowings are tied to individual properties and are non-recourse.

Once again - go take a look at the Accounts to get yourself better acquainted on the facts; or perhaps better in your case just to forget about CLI.

Scrumpyjack - sorry about the above. Went back to EDIT, but too late!

I think my comments should have been directed at Clissold...

Excellent point raised by scrumpyjack. NAV discount as a ratio is a useful concept in the absence of leverage/borrowing, but not so when the liabilities side isn't 100% equity; else, one would imply a discount on the borrowing, and I don't know any lender who gives out discounts on repayments based on discount of equity (=falling SP). Debt liabilities have to be repaid at 100%, so the equity (and not the debt, or debt+equity) has to absorb all the P&L from the assets (=in the main, properties). It's just 2 different concepts; there's NAV discount, and there's asset discount (=the discount implied by the market pricing of the equity with respect to the company's assets).

Nevertheless, CLI is getting interesting given the further SP fall this year. Will bite if it ever hits sub-90 territory again.

One concern is that only 1/3 of UK leases are inflation-linked, unlike their EU leases, where the ratio is much higher. A plus is, as already mentioned, the relatively low gearing/LTV.

SKYSHIP wrote:For perhaps better in your case just to forget about CLI.

Entirely unnecessary.

I asked an actual property trader what you meant by your post. He replied:

“Badly worded, but what I think he means is that if you buy say a 90% leveraged REIT at a 50% discount you are getting the underlying properties at a 5% discount (being the debt of 90 plus the equity value of 5 relative to the properties at 100). Whereas if you buy a 50% leveraged REIT at a 20% discount then you are getting the properties at a 10% discount (eg Equity of 40 plus debt of 50 against 100 of property)”

So, with the stock in question – CLI – which has 45% debt and trades at a 67% discount; does that means we’re buying the properties at a 37% discount by your frankly rather irrelevant and contorted procedure?

So what? We all understand NAV/NTA. It is what the recent property mergers (LMP/LXI & CREI/API) base their sums upon. Not your strange definition.

SKYSHIP wrote:I asked an actual property trader what you meant by your post. He replied:

“Badly worded, but what I think he means is that if you buy say a 90% leveraged REIT at a 50% discount you are getting the underlying properties at a 5% discount (being the debt of 90 plus the equity value of 5 relative to the properties at 100). Whereas if you buy a 50% leveraged REIT at a 20% discount then you are getting the properties at a 10% discount (eg Equity of 40 plus debt of 50 against 100 of property)”

So, with the stock in question – CLI – which has 45% debt and trades at a 67% discount; does that means we’re buying the properties at a 37% discount by your frankly rather irrelevant and contorted procedure?

So what? We all understand NAV/NTA. It is what the recent property mergers (LMP/LXI & CREI/API) base their sums upon. Not your strange definition.

"actual property trader" ...

Yes, someone who actually works in the Industry, not some minor commentator who doesn't understand
the fundamentals and how things actually work...

SKYSHIP wrote:Yes, someone who actually works in the Industry, not some minor commentator who doesn't understand
the fundamentals and how things actually work...

Love it. Maybe try X/Twitter instead?

What's your friend's annual trading volume in the financial market, rounded to the nearest $tn (don't bother with $bns, please)? Does he hold an FCA registration as material risk taker? How about yourself?

Si tacuisse ...

Bond,

I'm struggling to see what you are trying to say. The trillion/billion comment doesn't seem relevant or helpful although you advocate buying sub 90p

So it looks like you think it has merit and it's not far off that position. Are you just arguing that the discount should be calculated a different way.

Even so you must think there is a discount.

MDW1954

Gerry557 wrote:Bond,

I'm struggling to see what you are trying to say. The trillion/billion comment doesn't seem relevant or helpful although you advocate buying sub 90p

So it looks like you think it has merit and it's not far off that position. Are you just arguing that the discount should be calculated a different way.

Even so you must think there is a discount.

Now that the unhelpful personal attacks are out of the way, back to CLI.

The above mentioned hypothetical example of a 90% leveraged REIT with a share price trading at a 50% discount to NAV is actually quite helpful. Let’s see how that situation would have played out if this company was CLS Holdings (whose actual leverage is ~half that).
In its trading update dated 15/11/23, CLI stated

Disposals
The sale of Westminster Tower exchanged in the first half of 2023 and we expect it to complete for £40.8 million, 1.2% ahead of valuation, to Third.i on 30 November 2023.
In addition, we have agreed heads of terms for the sale of a further four properties for £51.2 million, on average 13.1% below half-year valuation. We expect at least three of these to exchange before year-end.

Let’s assume that was their entire property portfolio, then the sale would imply the below:

Property Sale Proceeds (GBP) II Sale price relative to valuation (%) II Last valuation (GBP) II Profit/Loss on Sale (GBP)
40,800,000 II 1.2 II 40,316,206 II 483,794
51,200,000 II -13.1 II 58,918,297 II -7,718,297
92,000,000 II -7.3 II 99,234,502 II -7,234,502 [TOTAL]


The last property valuation (which would have driven the NAV on the asset side) was GBP 99,234,502. At 90% leverage, this would mean a liability structure of

Debt: GBP 99,234,502 * 0.9 = GBP 89,311,052
Equity: GBP 99,246,502 * 0.1 = GBP 9,923,450

After the sale of the properties and repayment of the debt, the debt goes to zero (repaid) and the equity has to absorb the overall loss from the property sale, so

New equity value: GBP 9,923,450 – GBP 7,234,502 = GBP 2,688,948 (-> new NAV, no more debt)
Another way of looking at it: Property sale proceeds of GBP 92mm minus debt repayment of GBP 89,311,052 = new equity of GBP 2,688,948

As per the example given, you originally bought into the equity at a 50% discount to NAV, so you paid GBP 9,923,450 * 0.5 = GBP 4,961,725.

Post property sale you’d have lost

GBP 4,961,725 [investment amount, at 50% of the old NAV]
minus GBP 2,688,948 [new equity value; NAV]
= loss of GBP 2,272,777

That’s a loss of 46% of your original investment, all despite buying in at a 50% discount, and the sale – and that’s a real example of where CLI transacted in properties in 2023 – occurring at a “mere” ~7.3% average loss to last book valuation; all due to the fact that the loss on the property sales is being leveraged up by the 90% leverage. It also assumes that the NAV discount rallies from 50% discount to 0% discount - the new equity value of GBP 2,688,948 is assumed to be realised at 100% without any discount, which isn't a given at all, even when all assets have been sold - there are plenty of examples of companies whose management was so distrusted that the market assumed a NAV discount even on cash balances (=management is expected to continue the value destruction with further miserable investments, or mgmt fees). Not the case with CLI imv, where I don't blame the management for the current difficult headwinds they're weathering.

As mentioned, CLI operates at half the leverage, but the example demonstrates the pitfalls of applying a logic driven by NAV discount to a leveraged company.