This week I am looking at CLS Holdings, the UK listed property Investment Company, primarily involved in letting offices in non-prime locations. The company has recently announced two deals; a pair of office acquisitions in London and a disposal of Swedish-listed Catena AB shares.
Management hope that the announced acquisitions will deliver a ‘meaningful’ addition to the company’s rental income, with the two properties producing rent of £4.2m per annum, an initial net yield of 6.2%.
Prior to the recent acquisitions, CLS had a market cap of £900m with a property portfolio worth £2.1bn. The difference in valuation is made up of debt at a 39.3% Loan-To-Value ratio and the shares trading at a 29% discount to property value. The discount is a familiar aspect of closed-ended property funds, as investors sometimes have concerns over the underlying tenants paying their rent.
The company uses an active management approach, which entails buying properties with fairly short tenancies remaining, refurbishing the space and letting it out on a longer lease. The company is often then able to sell the property for more than the purchase price, generating capital uplift whilst also gaining a steady rental income in the meantime.
While CLS primarily invests in direct property it has also owned listed property company shares in the past. In September CLS sold their interest in Catena AB, a logistics real estate company, to focus in the company’s core geographies; the UK, Germany and France, reassuring investors that management are committed to adding value through active asset management.
While the recent announcements have been taken positively, there are ongoing concerns from investors that 51% of the shares are owned and controlled by founder Sten Morstedt’s family. This stops CLS from enjoying the tax benefits of becoming a REIT and also reduces liquidity in the shares, perhaps driving the attractive discount to Net Asset Value.