This week we look at two more REIT’s, this time both US based. The first is a global footprint of industrial and logistics facilities, Prologis (PLD.NYSE), while the second focuses on self storage, Public Storage (PSA.NYSE).
Prologis (PLD.NYSE)
Prologis is one way for investors to gain access to a global footprint of industrial and logistics facilities with a focus on the consumption side of the equation (much like VGP from last week, it increasingly focuses on last-mile delivery). It is to date the largest industrial real estate company in the world, operating 995m square feet and $169bn USD under management. So, why Prologis? First, to give a little context, any portfolio that targets REIT’s and doesn’t have an allocation to this company would be similar to allocating to Australian Financial Services without an allocation towards CBA.
Importantly, despite its valuation premium (i.e. it now trades at a price approximately 30% above its pre-covid high or a P/E of 62x), we feel that management has demonstrated a consistent and enviable track record in not only creating value but also the ability to adapt with changing environments. Starting off in the early 80s with a $50,000 USD line of credit, the team has survived and expanded through market cycles, initially buying retail and commercial property to now becoming the largest industrial and logistics focused real estate company in the world. The geographic footprint now includes North America, Latin America, Europe and, importantly, a fast growing Asian market. As with any stock, we like value-add created in adjacent categories and PLD continues to deliver services through its workforce solutions (i.e. logistics training and recruitment) in addition to a ventures division. Their strategy has paid off to date, annualising an Internal Rate of Return (IRR) of 20% over the past 19 years.
Author: Sid Ruttala
Returning once again to the idea of a reflation trade, there are three components of the balance sheet that are attractive from an investment perspective:
Their focus on e-commerce with Amazon being by far their biggest customer;
the geographic footprint; and
debt composition.
On the first point, this is an attractive way to get exposure to a secular growth story without paying the same multiples (i.e. Amazon multiples). The second, the geographic diversification ensures substantial exposure to higher growth markets, with Asia being on par with the US in nominal value. Finally on the third point, the vast majority of their debt (59%) is Euro and Yen denominated two economic blocs that are likely to be laggards in rate normalisation compared to the US.
With that context, let’s quickly run through the numbers. Revenue on a TTM (Trailing Twelve Month) stands at a stellar $4.49bn USD. They have a 96% occupancy rate and a net income of $1.54bn USD with an annualised growth rate in AUM of about 14% p.a. Over the past decade, Price to Book stands at 2.98.
My Expectations: A great long-term staple for the portfolio, though the price as it currently stands represents a price-sales ratio of 21.98 (much more relevant in a growth context). Our view is to buy over the trailing average and sequence in at circa. 15x for the more conservative or around 17x for the reasonable, more likely given the rate environment. It is nevertheless a hold for me over the long-term (broadly speaking, buy the dips or set and forget).
Dividend Yield: 1.87% with expectations of continued double digit growth (circa. 15% p.a.).
Public Storage (PSA.NYSE)
Much like Prologis, Public Storage represents another story of American entrepreneurship. Simply put, it is in the business of self-storage across the US (where it is the market leader), Canada and Europe. Some of you may have come across the company if you have a penchant for American television and watched the series Storage Wars, where contents of a storage unit are put up for sale, practically sight unseen, via auction for failure to pay rent.
The business started with a simple concept. Allowing consumers to pay for square footage to store belongings and doing so at effectively the same rate as commercial or residential space but with a cost layout low enough to break-even at 35% capacity. Since the initial investment of $50,000 USD in 1972, and through the use of RELP (Real Estate Limited Partnerships), PSA now owns and operates 2500 self-storage facilities across 28 states or 1m square feet in real estate as well as exposure to the European and Canadian markets through equity investments (Shurgard Europe).
So, why do we like it?
This is a rather simple business and, while it may not be headline grabbing, there is a reasonable business case to be made for looking at self-storage as a viable investment given the significantly lower capex required and the demographic shifts occurring. Let’s start with the percentage of the broader population that uses self-storage. In the US, starting at 3% in 1980, the number stands at 9% today. With an increasingly aging population along with immigration within the 30-60 demographic, who remain the primary users for the business, we are likely to see continued organic growth across the sub-industry. Moreover, in comparison to her peers, Public Storage not only has scale across the US market but also brand recognition in what is a relatively consolidated market. To give some context to the actual numbers underlying the business, it has a market leading NOI (Net Operating Income) Margin at 75.9% compared to the nearest competitor, Extra Space, at 71.3%.
Going back to reflation (sensing a theme here?), the firm has continued to take advantage of the low rates of financing its debt at a blended rate of 1.9% with an 80-20 split in USD and EU (we would have preferred to see more Euro) and, more importantly, 86% fixed with maturities of 16.6 years (if we see CPI keep to our expectations then this is a great transfer of wealth mechanism from debt holders to equity holders). Debt stands at $5bn and additional acquisitions and developments continue to be financed with substantial injections from retained free cash flow. 2021 has seen them commit to higher rates of acquisition, $2.1bn USD, and there is over $700m USD in the development pipeline. This second aspect bodes well for solidifying their market leadership and sustaining earnings growth well into the future (in addition to increasing pricing power).
Getting to the numbers, revenue on a TTM (Trailing Twelve Month) stands at a stellar $2.97bn USD with a net income of $1.17bn USD. P/E stands at 46.45 and EPS at $6.88 USD/share.
My Expectations: A great business to own over a longer time horizon, much like PLD. They are operating in a secular growth story and are a reasonable reflation trade. The business’ development pipeline and acquisition binge should be reflected in future earnings growth as well as increased pricing power. There is a premium built in to the current valuation but it is worth paying given their market leadership and demonstrable track record. A long term hold for me.
Dividend Yield: 2.55%
A slightly lower result given the acquisitions over the past 24 months but, going forward, the payout should revise back to 2019 levels. Assuming this to be the case, 3.55% from CY22 onwards and 10% CAGR estimate from there (based on historic context).
Disclaimer: Both stocks are held in the G-REIT segment of TAMIM’s Listed Property portfolio.
This week we look at two more REIT’s, this time both EU based. The first is Frankfurt listed, LEG Immobilien (LEG.FWB), while the second is dual-listed, VGP Group NV (VGP.BR).
LEG Immobilien (LEG.FWB)
LEG Immobilien is a pure-play residential REIT. Created in 1970 as part of a push to develop urban areas and increase small-scale settlements in the state of NRW (North-Rhine Westphalia), it continued to grow its mandate to include the development of fallow land in the 80s and was privatised in 2008 (i.e. bought out by a consortium of private equity investors including Goldman Sachs, Whitehall and Perry Luxco). Since privatisation, the business has expanded and diversified geographically across the West German Federal States to now include close to 145,000 properties with and more than 400,000 tenants. The business listed in 2013.
What has been unique about this particular evolution from state-owned enterprise to private has been the businesses ability to use economies of scale to target particular niches, including smaller-scale developments than would otherwise be impossible as well as value-add services including partnerships with Vodafone for multimedia, B&O for maintenance and various other utilities providers.
Author: Sid Ruttala
So, why do we like this proposition and what exactly is attractive about it? After all, it’s not every day that Australian investors get pitched residential property plays on the other side of the planet. Let us explain it as simply as we can. If we consider the return of investment in property, there are simply two aspects to it in my view; 1) the headline cash rate, which has the multiple impact of determining capital growth as well as debt servicing costs; and 2) rental growth as well as the ability to service said rents. On both of these aspects Germany ticks the boxes, depending on where you look though main cities such as Berlin do tend to have rent controls.
On the first point, the fantastic thing about having a single bloc currency is the asymmetry that is created. The ECB, by having to cater to a diverse economy, is somewhat curtailed in its ability to normalise rates than would otherwise be the case. For example, the headline interest rate targets would have to take into account inflation and inflation expectations across the EU (as opposed to any single national polity), so should we see a better recovery rate across Germany (as has been the case) especially in comparison to the southern states then we are not likely to see this reflected in the monetary policy (and hence cost of capital). Importantly, Germany is able to maintain a current account surplus due to her exports being more attractive than would otherwise be the case in the absence of a single currency (i.e. a free floating Deutsche Mark would arguably be a lot higher in relation to say the Italian Lira). This helps with regards to the second aspect of what matters to the property investor, rental yields and the ability of tenants to service said rent (given that close to 20% of the workforce is employed in the manufacturing industry and 47% of the nation’s output is export dominated). Germany also remains one of the few outliers among the OECD to pass increases to the minimum wage during the depth of Covid-19, despite push-back. This helps given that residential plays such as LEG Immobilien focuses on the mid-tier and lower socioeconomic stratas for tenants.
With that context out of the way, let’s get down to the numbers for LEG. In short, revenue at TTM (Trailing Twelve Months) currently stands at approximately €2.08bn, WALE of 7.5 years, LVR of 37.7% with a market cap of €8.3bn. In terms of medium term catalysts, 75% of the current portfolio, or 25,000 additional units, are set to come off rent control with significant upside when compared with market values. Over the next five years the theoretical upside to this is about 38% of the current base. Importantly for the cynics amongst, the nature of the business ensures that outsized events such as a pandemic don’t materially impact the business with vacancies only slightly increasing (the German social safety net and subsidies ensure that the business gets paid).
Sticking with our reflation thematic, the business has issued €823m in debt to add to its war chest for growth. This was done at an attractive 0.40% p.a. coupon with a duration of 8 years. Importantly, the debt is senior unsecured convertible notes. The strike being €155.25 (or a about 20% premium to the last traded price), this represents about 5% of the float.
My Expectations: A great reflation trade and bond substitute. In the absence of inflation (just in case I’m wrong), there are significant escalations already built in through the expiration of rent-control terms. Significantly, in the absence of inflation, the continued low yields across the EU and the negative yields on the 10-year Bund should see capital growth. If I am right on inflation, then it can act as a hedge given the unique circumstances of the German residential property market and the low fixed debt servicing costs.
Dividend Yield: 3% (historic growth of 11.8% p.a.) and, in our view, there is no reason for this to be at risk. The trust has a payout ratio of 70%.
VGP Group NV (VGP.BR)
VGP Group is another mid-cap REIT we remain quite bullish on given their existing partnerships and the space they operate in. Simply put, it is an owner, developer and operator of prime logistics/light industrial parks. Many of the readership, we feel certain, have at the very least heard of the tremendous strain that has been put across supply chains globally as a result of Covid-19. It has created a clear catalyst for rethinking supply chains and re-localising infrastructure. VGP’s geographic footprint is pan-Europe, including the Baltics, Germany, Spain and Italy. Their clients are almost entirely made up of blue chip companies such as Volkswagen, Amazon, Nagel and DHL with the advent and maturity of online retail acting as a tailwind.
For the more ESG oriented amongst you, the business has a 0-emissions target by 2025 (i.e. this includes both Scope 1 and Scope 2). For those of you not so worried, it should nevertheless make financial sense given the appetite and institutional flows that such a strategy warrants (hence a stronger multiple).
Looking at the numbers quickly, 99.6% occupancy with a WAULT (Weighted Average Unexpired Lease Term) of around 8.3 years (a more apt metric to use with regards to multi-tenant industrial assets). Moreover, what is rather more interesting in our view are the significant catalysts in terms of a 88.6% pre-let development pipeline and a strategy to focus on last-mile delivery (and the additional value add services that would bring to the table). Management certainly seems to be aggressive in its outlook, with the land bank reaching all-time highs at a 21% p.a. CAGR over the past five years and 22.2% p.a. CAGR in gross lettable space. Importantly, the development side of the business remains attractive with the JV model allowing the business, in conjunction with Allianz Real Estate, to develop and manage the assets while de-risking by having the JV partner buy out the assets at market value over a sequential period. To date, the company has spent €1.97bn in Capex with net cash inflow from divestments over the period equating to €1.57bn. To explain this more succinctly, they have the opportunity to grow their own portfolio over the longer term horizon while also taking part in larger scale developments than would otherwise be the case.
Risk wise, net gearing stands at a conservative 25.2% and EBIDTA stands at a stellar €407.33m, an attractive proposition given their market capitalisation of €3.7bn. On the negative side however, operating profit came in at €370m though this represents a substantial upside by about €167m from the corresponding calendar year. It was primarily driven by property revaluations and seemingly hides the increases in administration expenses (something we will certainly keep a keen eye on going forward).
My Expectations: Similar to Digital Realty (as we mentioned last week), this is a growth play more than a traditional REIT play. VGP is trading at a reasonable (in my view) premium given the categories and markets they operate in. Their footprint is predominantly western europe and significant growth is coming from their exposure to e-commerce as well as last mile delivery. A higher risk proposition than the likes of LEG or VICI, which we also wrote about last week, but a well run operation nevertheless.
Dividend Yield: 2.5%
Expecting double digit growth on a nominal basis over a five year time horizon given significant tailwinds both in the overall space and their specific development pipeline.
Disclaimer: Both stocks are held in the G-REIT segment of TAMIM’s Listed Property portfolio.
EML Payments (EML.ASX) provided a nine-month trading update with $43.8m of EBITDA in the nine months to March ‘21. Q4 is seasonally weaker but with $10m of EBITDA delivered in Q1, typically the other seasonally weak quarter, EML was already on track to land at the top end of EBITDA guidance ($50-54m) and most likely beat it (prior to CBI regulatory issue).
We believe a reasonable resolution with the CBI, both in terms of timing and materiality, will be announced in the next few weeks and FY22 remains exposed to several positive trends as well as an encouraging pipeline of new business. We see a recovery in high margin multi-currency card volumes in Europe and gift card mall volumes should underwrite strong FY22 EBITDA growth.
Additionally, the PFS processing synergies should be delivered and the recently announced acquisition of Sentenial (pending final approval) will start contributing to the open banking opportunity. Finally, we have seen Marqeta IPO in the US with a valuation of 49x Gross Profit in 2023, compared to 6x for EML. Our valuation remains in line with previous estimates.
People Infrastructure (PPE.ASX)
People Infrastructure (PPE.ASX) announced two acquisitions, the first a leading staffing business and the second a surveying business in Queensland. EBITDA across both acquisitions is expected at $8.2m and earnings per share accretion of approximately 19%. PPE will pay $31m, funded from cash and debt facility. Management continues to execute well on their strategy and the business is growing both organically and through acquisitions. With a pipeline of possible deals and further $50m in capacity, we see PPE as well positioned.
Empired (EPD.ASX)
Empired (EPD.ASX) has secured a digital services contract with the Department of Innovation and Skills (DIS) in South Australia. The contract is for an initial term of two years. Work is scheduled to commence in July 2021 at an estimated value of $9m and a split across FY22 and FY23 of approximately $5.5m and $3.5m respectively. This contract represents a material win for EPD and demonstrates the progress management is making in executing on its Australian East Coast expansion strategy. We are expecting a strong result in August, showing improvement in all metrics and dividends. [Since this piece was originally written EPD has received a take over bid from Capgemini]
Cardno (CDD.ASX)
Cardno (CDD.ASX) announced a strategic review following the receipt of a number of unsolicited approaches from interested parties looking to acquire the company. The Board has decided to commence this strategic review process with the objective of maximising shareholder value. This process will involve an assessment of Cardno’s strategic options and the alternative strategies available to unlock and enhance value for Cardno shareholders. In other words, the company is in play.
We believe that CDD’s largest private equity owner, Crescent Capital, has decided that it may be time to realise their investment in CDD and Intega (ITG.ASX). We first took our position in CDD at around 30 cents and we forecast cash EPS of 7-8 cents in FY21. Assuming a takeover premium and a conservative multiple of 15x, we expect any takeover offer to be $1.20+. Watch this space!
Intega (ITG.ASX)
Intega (ITG.ASX) as per CDD above, they have announced a similar strategic review which is supported by their largest holder Crescent Capital. This is the result of increased activity and interest in the sector. The Board of ITG will be exploring ownership options for the company.
More importantly, management noted that ITG is performing well and is well positioned to benefit from the strong pipeline of infrastructure investment in both the US and Australia. The business has significant organic and inorganic growth potential, particularly in the US markets, as well as adjacencies.
The Board believes that the business is undervalued by the market and we tend to agree. We bought ITG at around 32 cents and we see cash EPS of 4-5 cents in FY22. We see any takeover premium landing around the 60-70 cents range.
Disclaimer: EML, PPE, EPD, CDD and ITG are all currently held in TAMIM portfolios.
This week we will be talking about two stocks in our Asia Small Companies portfolio. This portfolio focuses on investing in small companies (up to $10bn market cap) predominantly in north Asia due to the increased levels of governance. Asian markets are typically unloved, especially China and Japan, and this opens up a large opportunity to gain exposure to misunderstood companies that have big growth potential. More recently, there have been improving levels of governance across Asia with a greater emphasis on delivering shareholder value.
Author: Adam Wolf
The Opportunity in Chinese Equities
China has been rapidly growing their domestic economy through ongoing urbanisation, which is projected to rise to 70%. As most are probably aware, there have been increased political tensions surrounding China, causing an isolation of China’s economy and increased concerns about political risk when it comes to investing in Chinese companies. Our Asia Small Companies portfolio only invests in Chinese companies that are listed on the Hong Kong Stock Exchange to somewhat mitigate these risks. The negative attention surrounding China has led to cheaper valuations of Chinese companies which is creating a huge opportunity for investors to capitalise. To give some perspective, the US accounts for 25% of the world economy and has a 65% world cap weight compared to China who account for 15% of the world economy but only have a 1% world cap weight.
Source: BMO Global Asset Management, Bloomberg, MSCI, IMF, March 2019
Xinyi Glass (0868.HKG)
Xinyi Glass is a glass manufacturing company headquartered in Hong Kong providing high-quality float glass, automobile glass and energy-saving architectural glass. Xinyi has a sales network covering over 130 countries and regions around the world. Float glass currently represents 67.5% of Xinyi’s revenue with automobile and architectural glass making up the remainder. Xinyi’s share price is up 224% in the past year and expects their net profit to increase by 260-290% due to current glass supply dynamics.
Tightening Global Glass Supply
Source: Bloomberg Finance L.P., NBS, JP Morgan
Driven by a strong rebound in construction demand and limited production growth, the glass industry’s prices and profitability are approaching historic highs with float glass prices up 75% YoY. New capacity addition could be low in 2021 and the glass industry’s margin should remain at close to these historic highs, driving strong earnings growth. The supply of float glass has and will be constrained in 2021 and 2022 because of stronger environmental protection measures. Some production line repairs are unlikely to continue to operate despite the favourable market environment. Xinyi Glass will continue to expand their capacity to capitalise from the higher prices. Xinyi plans to increase its float glass capacity by 26.0% by the end of 2021. They will also look for more acquisition targets in the Chinese market alongside opportunities in overseas markets. Given their capacity expansion, Xinyi Glass is expected to outperform the industry in terms of shipment growth.
The EV Tailwind
Automobile production is starting to gain some traction due to the increased production of electric vehicles. Emissions mandates are putting more pressure on car companies to shift away from combustion engines while the general sentiment towards clean energy has also shifted and this is enticing a race for practical and scalable electrification for auto manufacturers. This is a tailwind for Xinyi’s automobile glass business given their key customers include Volkswagen, Ford and General Motors, all of whom are investing significant capital towards developing electric vehicles.
New Plant in Malaysia
As mentioned before, with the increased isolation of China’s economy, many Chinese companies have chosen to list in Hong Kong as opposed to Beijing as well as establish overseas production plants to maintain and expand their exporting capabilities. Xinyi established a plant in Malacca, Malaysia which spans over 444 000 square metres. This plant is essential for Xinyi increasing both their domestic and international market share. The Malacca plant will feed product into international markets, allowing more of the domestic production in China to stay in the home market.
Xinyi Solar
Xinyi Solar Holdings (0968.HKG) is the world’s largest solar glass manufacturer, trading on the HK stock exchange with Xinyi Glass owning 23% of the company. Xinyi Solar has been benefitting from the roaring solar panel industry, projected to reach $223bn by 2026 growing at a CAGR of over 20%. Xinyi Solar recently announced guidance of a 100-120% increase in net profit for the half year ended June 2021, they have significantly expanded their production capacity and are benefiting from the incentive programs in place to reduce emissions thus increasing demand for their solar glass. Xinyi Solar is currently trading at about 10x EV/EBITDA and are paying a 1.64% dividend yield.
Source: Company data, Mirae Asset Daewoo Research
Thesis
Simple, Xinyi Glass has been the biggest benefactor of tightened glass supply and they are ramping up production to fully capitalise. Their half year guidance puts them at an EV/EBITDA ratio of approximately 12.3x (a conservative estimate given that their holdings in Xinyi Solar and Xinyi Energy combined are worth over $33bn HKD), a compelling metric with their 200%+ increase in NPAT. Xinyi also stands to benefit from the shift towards cleaner energy through their automobile glass segment which will see increased demand on the back of electric vehicle production and through their holdings in Xinyi Solar. Management have announced share buy back programs and have already bought 1% of the total shares outstanding since March, showing great confidence in the company and something which has been reflected in the share price.
Lien HWA (1229.TPE)
Our next stock is Lien HWA Industrial Corporation, a Taiwan-based company mainly engaged in the processing and distribution of wheaten food products. These wheaten food products include flour, wheat bran and pasta, amongst others. The company operates a number of business operations, including a leasing segment which operates real estate leasing and a development business. While they started off as a flour producer they are now a holding company and the hidden gem is their 73% stake in MiTac, an innovative electronics business that is driving Lien’s profits.A feature we like of the Taiwan stock exchange is that companies must report their sales figures monthly, providing greater transparency to shareholders and giving us more timely information to make investment decisions.
The Hidden Gem: Subsidiary MiTAC
MiTAC is a provider of smart technologies, electronics and cloud services. MiTAC is looking to capitalise on the emerging thematics of IoT, smart cities and autonomous vehicles, something we touched upon in a previous article. To capture these markers MiTAC also provides integrated hardware and software solutions including dashcams, smart cameras and navigation systems to the automotive industry. These products also tie in with their connected car and smart city solutions. MiTAC currently accounts for around 50% of Lien’s earnings, recording $11b TWD of revenue for the first quarter.
Source: MiTAC Investor Presentation
Property Development
Lien HWA Property Development is a subsidiary company, established in 2019 from the real estate & leasing division of Lien HWA Industrial Corp, with management and development of company-owned real estate across Taiwan as its core business. A special unit has been established in conjunction to provide professional services to meet customer demands including real estate leasing, assets enablement and value-added developments. The property development segment further diversifies Lien’s revenue mix and currently accounts for 4% of their revenue. Lien holds around $4bn TWD worth of property.ThesisRIght now there are very few analysts covering Lien. Lien HWA is a misunderstood company and, just like some of the Asian markets in general, it has hidden gems that aren’t being appreciated to the extent they should. Lien HWA may look like a simple flour business but it is actually a flour business with a key stake in an innovative electronics business as well as an established real estate business. Lien HWA presents an extreme value proposition with the growth upside of a tech company targeting emerging thematics. We see MiTAC continuing to drive Lien’s earnings, benefiting from autonomous vehicles and smart cities given their IoT and connectivity offerings. Lien is currently sitting on a 5.8% dividend yield and distributes both a cash and stock dividend.
Note: Figures calculated from the 2020 Annual Report, all denominated in TWD.
Disclaimer: Both stocks are currently held in TAMIM’s Asia Small Companies portfolio.
This week we continue on the thematic of REITS and look at two US based entities one of which, VICI Properties, we feel makes a rather rational investment case for inclusion in portfolios while the other, Digital Realty, is on our watchlist.
VICI Properties (VICI.NYSE)
Author: Sid Ruttala
For those of you familiar with this particular REIT, you may know it as the spinoff from Caesars when that particular company filed for bankruptcy a few years back. Given the unique tax treatment for REITs in the US, the administrators at the time thought it prudent to take the underlying casino assets from Caesars, including iconic assets such as Caesars Palace in Vegas, and put the assets in a REIT structure. Since emerging from bankruptcy in 2017, the trust has made significant headway in not only diversifying the business to now include categories across gaming, hospitality, entertainment and leisure destinations but also strengthening their balance sheet and geographic exposure. The most recent acquisition has been the Venetian (another iconic piece of real estate in Vegas) at a cap rate of 6.5%. The operating segments now comprise both real property and golf courses across Vegas, the Midwest and East coast.
So, why is this company worthy of consideration as an investment proposition? Let’s get to the numbers first. Revenue at TTM (Trailing Twelve Months) currently stands at approximately $1.34bn USD, growing from $900m USD in 2018. Price to book stands at an attractive 1.8 while the PE (again, on a trailing basis) stands at 14x. This in itself stands as an attractive proposition in comparison to some of their peers in the market. While the securities did take a hit during the Covid related sell-off last year, the market seems to have woken up to the fundamentals. Firstly, the nature of the rental contracts ensured that the business continued to get paid while the underlying valuation of the properties continued to grow.
As the economy across their major markets, including the Midwest and East coast, continues to recover we should see the business come back into the spotlight. In addition, the nature of her revenue stream, especially gaming, ensures sustainability through market cycles. Take for example, the last major crisis before Covid, the GFC, from peak to trough from ‘07 to ‘09, the gaming industry overall lost 9% in revenues compared to 11% in broader retail and 18% overall in terms of the S&P500. This indicates the durable nature of her revenue streams. Moreover, the Weighted Average Lease Term across the portfolio stands at stellar 34.5.
From a portfolio allocation perspective, what is attractive about this business is the nature of her revenues. What we are referring to here is the fact that there are built in escalations of an average of 1.5% and a further 94% of the contracts indexed to CPI. This proposition is further enhanced by the fact that 91% of the debt is fixed (as opposed to floating) and 69% unsecured, which should see it protected against any surprise changes to Fed policy.
My Expectations: A great reflation trade and bond substitute that should see more interest from the broader market over the next 24-months. The attractiveness is further enhanced in an inflationary environment (as a protection against loss of purchasing power). Significant growth as it is somewhat insulated, in my view, from the “Amazon effect.” By that we mean that people remain attracted to the physical experience of going to the casino (you also can’t physically play golf online). In addition, the moat comes from the capital intensity and high barriers across most of their revenue stream.
Dividend Yield: 4.14% (historic growth of 9.5% p.a.) and, in our view, there is no reason for this not to remain the case as the trust has a payout ratio of 71% even at this yield, a significantly lower proportion in comparison to her competitors Spirit or Realty Income (an average of 80%).
Digital Realty Trust (DLR.NYSE)
Digital Realty is quite possibly one of the biggest businesses you’ve never heard of. A technology business masquerading as a REIT. It owns and operates nearly 300 data centres globally, operating in every continent apart from Antarctica. To put it simply, they invest into carrier-neutral data centres. It works like this, say you’re NAB (who are in fact a customer) trying to move and compete in a digital world with requirements ranging from online banking to internal ERP (Enterprise Resource Management) systems and handling sensitive information. The requirements can be summed up simply:
Storage capacity;
Expertise to maintain the infrastructure;
Doing so in a secure manner;
Ability to take the data and turn it into actionable insights for strategy purposes;
Digital Realty helped by creating a 5,600 square meter facility based out of Deer Park (this also consolidated their close to 20 smaller existing data centres based out of various commercial properties across the nation). If you have a NAB account or have interacted with the business, all things equal, your information may have just passed through the infrastructure. What is more interesting in my opinion is the long-term nature of the lease and the moat that is built around their revenue stream. Just like most ERP systems, once customers have made the decision to allocate capital, it becomes exceptionally sticky as customers grow more reliant and their requirements increase in complexity. Anyone who has experience with this kind of software/technology knows how exceptionally difficult it becomes to migrate away.
On top of being a traditional REIT, DLR operates a unique value-add model that has two attributes: 1) cash flow; and 2) stickiness of revenue. For the ESG-focused amongst you (which will help it make it more palatable for the institutional flows), the company also has a 100% renewable target. From a strategy perspective, they seem to have taken the old adage “if you can’t beat ‘em, join ‘em” to heart, offering multi-platform solutions working with IBM, Oracle and Equinix (who are also customers, which is rather handy). For the Australian investor familiar with a company we used to own in Megaport (MP1.ASX), the business has a partnership there too. In emerging markets, the go-to partner is Brookfield (Latin America) and Mitsubishi in Japan.
Coming to the numbers, revenue on a TTM stands $4.17bn USD and Net Margin stands at 10%. Price to book at 2.66 and P/E at 111.11. The last number is off putting but it has to be considered in conjunction with the Net Margins as well as the growth potential going forward. Looking back to the thesis around inflation, similar to VICI, over 94% of the debt on the balance sheet is fixed and, more than VICI, this remains unsecured.
My Expectations: This remains an expensive proposition (which is why this no longer owned but rather on our watch list) but, to paraphrase the PM of our Global Mobility strategy, data is the oil of the 21st century. I would go further, oil is rather pro-cyclical but data will be the lifeblood of business going into the 21st century (i.e. oil with attributes of consumer staples). From that perspective, DLR still remains on our watchlist with some of the risk mitigated by the stability of revenues, the fixed nature of the debt on the balance sheet (any increases to CPI is effectively a transfer of wealth from debt holders to bond holders) and de-risked given the unsecured nature of said debt.
The risk remains the high P/E and any changes to the headline rate environment should impact the business. But for the long term investors, this is not a yield story but rather a dividend growth story.
Dividend Yield: 2.98% with the expectation of long-term growth within the high single or double digits given the space it operates in.
Disclaimer: VICI is held in the G-REIT segment of TAMIM’s Listed Property portfolio. DLR, while not currently held, is being monitored.
Prologis is one way for investors to gain access to a global footprint of industrial and logistics facilities with a focus on the consumption side of the equation (much like VGP from last week, it increasingly focuses on last-mile delivery). It is to date the largest industrial real estate company in the world, operating 995m square feet and $169bn USD under management. So, why Prologis? First, to give a little context, any portfolio that targets REIT’s and doesn’t have an allocation to this company would be similar to allocating to Australian Financial Services without an allocation towards CBA.
Much like Prologis, Public Storage represents another story of American entrepreneurship. Simply put, it is in the business of self-storage across the US (where it is the market leader), Canada and Europe. Some of you may have come across the company if you have a penchant for American television and watched the series Storage Wars, where contents of a storage unit are put up for sale, practically sight unseen, via auction for failure to pay rent.
LEG Immobilien is a pure-play residential REIT. Created in 1970 as part of a push to develop urban areas and increase small-scale settlements in the state of NRW (North-Rhine Westphalia), it continued to grow its mandate to include the development of fallow land in the 80s and was privatised in 2008 (i.e. bought out by a consortium of private equity investors including Goldman Sachs, Whitehall and Perry Luxco). Since privatisation, the business has expanded and diversified geographically across the West German Federal States to now include close to 145,000 properties with and more than 400,000 tenants. The business listed in 2013.
VGP Group is another mid-cap REIT we remain quite bullish on given their existing partnerships and the space they operate in. Simply put, it is an owner, developer and operator of prime logistics/light industrial parks. Many of the readership, we feel certain, have at the very least heard of the tremendous strain that has been put across supply chains globally as a result of Covid-19. It has created a clear catalyst for rethinking supply chains and re-localising infrastructure. VGP’s geographic footprint is pan-Europe, including the Baltics, Germany, Spain and Italy. Their clients are almost entirely made up of blue chip companies such as Volkswagen, Amazon, Nagel and DHL with the advent and maturity of online retail acting as a tailwind.
EML Payments (EML.ASX) provided a nine-month trading update with $43.8m of EBITDA in the nine months to March ‘21. Q4 is seasonally weaker but with $10m of EBITDA delivered in Q1, typically the other seasonally weak quarter, EML was already on track to land at the top end of EBITDA guidance ($50-54m) and most likely beat it (prior to CBI regulatory issue).
Source: Bloomberg Finance L.P., NBS, JP Morgan
