During the period, Stenprop – which is listed on the JSE’s Main Board and the Bermuda Stock Exchange and has a £785.0 million property portfolio located in the UK, Germany and Switzerland - generated net rental income of £15.96 million. Adjusted EPRA earnings - the measure used by the company to gauge its earnings performance - increased from 4.35 pence to 4.87 pence per share.
Projected diluted adjusted EPRA EPS for the full year is 9.1 pence, in line with guidance. Headline earnings per share increased from 4.75 to 5.3 pence and fully diluted EPRA net asset value was £1.35.
Stenprop has declared an interim dividend of 4.0 pence per share, a 2.6% increase over the prior year and in line with the company’s full year guidance of 8.0 pence per share, which represents an attractive yield of 7.5% on Stenprop’s current share price of £1.07 (R20).
Adding to the company’s strong results, Stenprop took major steps in advancing the strategic decisions taken at the beginning of the period to invest significantly in the U.K. multi-let industrial sector, to actively pursue a listing on the London Stock Exchange and to convert to a UK REIT.
“We are particularly happy with the success of our move into the multi-let industrial space,” said Paul Arenson, CEO of Stenprop. “We had been looking for a sector that had real potential to deliver sustainable growth in earnings for some time, as we didn’t see value in the sectors where we had historically invested. The multi-let industrial sector met all our criteria.
There is a clear supply-demand imbalance, with long-term structural demand growth and static, or in some cases falling, supply. While we were excited about the rental growth possibilities, we recognised that we needed scale and a top-class management team and platform to properly take advantage of the opportunity.
The £130 million acquisition of the industrials.co.uk portfolio and C2 Capital management team, which completed in June, delivered all of these,” continued Paul Arenson. “In a single transaction, we were able to acquire a portfolio of 25 estates with over 400 tenants and an expert and experienced management team.”
Reflecting on the acquisition, Paul Arenson continued “The new team has integrated exceptionally well and the performance of the portfolio since acquisition has reinforced our views on the inherent potential for growth in the sector. Since the acquisition completed, the team has signed 18 new leases at an average 8% above our June 2017 estimated rental values and renewed a further 12 leases at an average of 6% above estimated rental values.
We are not seeing that sort of fundament rental growth in any of the other sectors of our portfolio. There is also a lot of scope to unlock future earnings through active asset management strategies and by investing in our technology platform to enable us to improve profit margins, drive efficiencies, create new revenue streams and make significant cost savings.”
The company intends funding further acquisitions of multi-let industrial properties by recycling out of assets with lower growth prospects. In line with this strategy it has concluded a number of disposals (including the £80.9 million post balance sheet disposal of the Company’s Pilgrim Street London office property) which will collectively generate £71.0 million of proceeds to fund purchases and reduce debt.
“In the current market conditions, we don’t see ourselves making any acquisitions outside of the multi-let industrial sector,” said Paul Arenson. “As long as we can continue to find multi-let industrial opportunities, we will continue to sell other assets to fund those acquisitions. Unless market conditions change, we see Stenprop transitioning to a specialised, focused, multi-let industrial company over the next few years.”
The person tasked with finding the opportunities to make this a reality is Stenprop Group Property Director, Julian Carey, the founder of the C2 Capital business and platform that has been integrated into Stenprop. “We are very active in the sector, the market is large and we see a lot of transactions,” said Carey.
“A lot of them don’t meet our criteria and there is growing competition for large portfolios which is driving prices up. We expect that a lot of our opportunities, at least in the short term, will come from buying individual estates where there is less competition and where our networks and relationships give us a big advantage.
We are currently under offer on a number of estates that meet our criteria and are confident that, by the end of the year, we will have grown the multi-let industrial portfolio by at least £20 million. Having bedded down the integration of the C2 Capital team, we expect this figure to grow significantly in the next financial year.”
Given Stenprop’s ambitions, management of the company’s balance sheet and funding requirements is key to successfully managing the implementation of its multi-let industrial strategy. “We are funding acquisitions out of disposals and it is important that we manage the process, and our balance sheet and funding, so that we are always able to meet our purchase commitments while trying to limit cash drag,” said Patsy Watson, CFO of Stenprop.
“We made use of a bridging facility to partially fund our acquisition of the industrials.co.uk portfolio, which we can repay from our disposals, and we will continue to use bridge funding going forward where we need to. Making sure that we have appropriate facilities in place has been an area of priority for us during the period, and we are well-advanced in securing an additional, flexible, bridging facility that meets all of our requirements.”
The use of bridging may temporarily increase Stenprop’s loan to value while it embarks on its multi-let industrial strategy, but the company has taken the strategic decision to reduce its long-term gearing levels from 50% to no more than 40% by March 2020. “By reducing debt levels, we will lose some of the gearing effect of the current low interest rates,” explained Patsy Watson.
“We feel that, with emerging inflation the interest rate cycle in the UK is changing and that there is the risk that we are entering a cycle of increasing interest rates. In these circumstances, the board felt that it was prudent to start a process to lower our gearing levels and we believe that, in the long term, this will better position us to deliver sustainable earnings growth.”
Although the company does not anticipate raising equity capital in the short term, a liquid share and access to a broader pool of investors are important long-term components of Stenprop’s strategy. In this context Stenprop has made good progress on its intention to list on the LSE and convert to a UK REIT.
The company is in the process of appointing a UK financial advisor and expects to be in position to secure a listing on the Specialist Fund Segment of the LSE and to convert to a UK REIT in the first half of its next financial year. “We expect that, after the REIT conversion and LSE listing, Stenprop will appeal to a broader investor base, particularly in the UK,” observed Patsy Watson. “Over time we are confident that this will improve our liquidity and access to equity.”
“This has been a very exciting period for Stenprop,” said Arenson. “Our objective as a company has been, and remains, to deliver sustainable growing income to our shareholders. In that sense nothing has changed.
What is new is our conviction that investing significantly in UK multi-let industrial assets, with the clear objective of establishing Stenprop as the leading, specialised, UK multi-let industrial REIT, is far and away best way to deliver this growth. This is a significant strategic shift for Stenprop that requires a lot of work and will not happen overnight,” continued Arenson.
“We are confident in our team, and in our strategy. We look forward to walking this path with all of our stakeholders, and to delivering on our objectives and creating sustainable shareholder value.”