Commercial property has been hit hard by the pandemic, but some companies have withstood it better than others, with the multi-let industrial specialist Stenprop being a prime example.
Stenprop (LSE:STP) is a £350m real-estate investment trust that aims to deliver a sustainable growing income to its investors. The company is currently transitioning its portfolio to focus entirely on the UK multi-let industrial (MLI) market, a process that should be complete by March 2022.
MLI units offer a versatile space, with each one typically ranging from 500 to 10,000 square feet and arranged on a purpose-built, serviced estate that is let to multiple tenants. They attract a range of occupiers from small and medium sized enterprises to larger nationals and are located close to significant populations with good road links.
These sorts of units are cheap to rent and the flexibility encourages a number of different types of tenants with Stenprop’s MLI portfolio mainly consisting of manufacturing businesses, wholesale and retail trade including online retailers, as well as admin support and other services. This results in a highly diversified and reliable source of income.
Positive trading update
The management team has recently provided a positive trading update for the three months to the end of September. Following the latest disposals and acquisitions MLI now represents 63% of the portfolio with over five million square feet of space as the company works towards its target of being 75% invested in this area by the end of March 2021.
Unlike other parts of the commercial property market these assets are delivering solid rental growth with like-for-like passing rent increasing by 2.5% during the quarter and 5.1% over the last 12 months. This reflects the favourable supply/demand dynamics that underpin the strong income growth prospects of the asset class.
By 21 October, 94% of the rent billed for the July to September quarter had been collected, with 80% of the October to December quarter’s income also secured. In total, 88% of rents due since April 2020 have been paid with one percent deferred until a later date.
Another good sign is that the company has continued its track record of achieving profitable disposals, which bodes well for the rest of the transition. Since starting the process in 2017 a total of £483 million of property has been sold and the management team describes the pipeline of potential acquisitions as the strongest it has been for over 12 months.
The analysts at Numis calculate that the company has around £40 million of free cash to deploy, which could increase by a further £45 million on the successful conclusion of the German retail disposal programme. This means that the company’s gross loan to value ratio was a manageable 38% on drawn facilities and just 31% after allowing for the free cash.
Numis believe that the shares offer both absolute and relative value for access to a strong management team and exposure to a dynamic sector of the commercial property market. The discount to NAV has narrowed in the year-to-date, but at 13% it is still too wide compared to the broader industrial peer group, especially given the attractive 5.6% historic yield.