The property investment trust that offers deep value
One of the most promising areas of the UK commercial property market is the multi-let industrial (MLI) sector, which consists of small, convenient units that are ideal for e-commerce and other new start-ups. These sorts of sites are in short supply with the excess demand likely to lead to strong returns.
An interesting way to take advantage would be to invest in Stenprop (LON: STP), whose shares recently started trading on the London Stock Exchange. I first wrote about it a few months ago when it obtained its dual listing and the interim results confirm that it has made good progress yet still offers deep value.
Stenprop is an established property business that is undergoing a two-year transition to a pure multi-let industrial portfolio. During this period it plans to sell approximately £470m of non-core assets and then use the money to acquire £220m of MLI property, whilst reducing leverage from 47% to 40% by 2020.
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The company has made good progress
The company has made good progress over the 6 months to the end of September with sales of £120.9m of non-core assets and the purchase of 6 multi-let estates for £24.9m. After paying the associated debts and transaction costs there remains a further £30m of proceeds available to be invested. There is still some way to go, but MLI assets now represent 31% of the fund’s rental income and 27% of the portfolio by value.
Of this, the UK element currently consists of 36 estates, comprising 2.6 million square feet of space, housing 489 tenants and generating a rent of £12.4m. The 53 new lettings and lease renewals arranged during the period were concluded with an average increase in rent of 15.2% and occupancy levels improved to 86.6%.
Stenprop’s in-house management team is aiming to develop a serviced industrial model that will offer more flexibility to tenants and create additional income streams for the company. A key part of this is an online leasing tool, which enables tenants to make shorter-term commitments, with greater flexibility, and no liability for repairs and maintenance, in return for a rental premium.
Key milestone
There is obviously a risk investing in a fund that is in transition, but the broker Numis says that the last 6 months marks a key milestone in Stenprop’s transition to a UK Multi-Let Industrial specialist.
“Disposals of its non-core assets have continued to be made ahead of valuation, and gearing is falling as part of the proceeds are used to repay debt. In addition, acquisitions continue to complete at attractive net initial yields, which supports the income return and provides scope to enhance capital returns as the management roll out its operational platform.”
Stenprop has an attractive, fully covered, prospective yield of 6%. It also offers deep value as the current share price represents a discount to the latest NAV of 20.1%, which compares with a more modest 3% discount from its industrial focussed peers. All in all it is an interesting opportunity.
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