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Stocks in Focus: CLS Holdings

This week I am writing on CLS Holdings, a FTSE 250 property company with a portfolio worth approximately £1.9bn.  CLS has a large historic family holding, with the Sten and Karin Morstedt Family and Charity Trust owning 51% of the company. It published its first half results on 15 August 2018.

CLS Holdings owns and manages property in the UK, Germany and France.  It is primarily (over 90%) office space and focusses on good non-prime locations close to major transport links.  They rent the properties to reliable tenants, with 28% of rents paid by governments and a further 28% by major corporations. A large proportion of these rents are index linked, so increase in line with inflation.

The first half results were broadly positive.  The value of CLS’s underlying properties increased by 3%, mainly driven by a 4.6% increase to their German property portfolio.  The company’s earnings increased by 15% and management announced an increase to the interim dividend of 7%.  CLS also redeemed a retail bond early at the end of July and thereby reduce its cost of debt.

Property companies have a number of dynamics to consider when deciding to invest.  They tend to have a higher amount of borrowing (as people understand with their own mortgages) so the cost and level of debt are important.  CLS maintain that the rental yield they receive is greater than their cost of borrowing and so the difference, or arbitrage, is a primary driver of returns.

The share price of a property company can deviate from the underlying value of the property assets held by that company.  This can give rise to a discount or premium, which gives an indication of how expensive the shares are.  Currently the shares of CLS trade on a 25% discount with a 2.7% yield.  This seems reasonable value considering the company’s proven track record of managing a diversified portfolio of assets.

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