Investing in Shaftesbury PLC

Shaftesbury PLC is a real estate investment trust which invests exclusively in London’s west-end districts. 

The company was founded in 1986 by the Levy family with an initial injection of around £10M. Today it’s a big operator which capitalizes more than £1.5B at the London Stock exchange and owns portfolio of about 15 acres and a market valuation of £4B.

These first numbers should alone catch the attention of the reader, who would probably be surprised by the disproportion between Shaftesbury’s asset value and its market cap. Maybe is it one of those leveraged REITs which increased consistently their assets through indebtedness, favored by a decade or so of record low interest rates? Not really: it’s book value accounts for about £2.7B!

Accordingly, the P/B value of the firm is 0.67: a serious discount which rarely occurs.

Dark clouds over the London real estate market

Sure, the troubling Brexit process and all the uncertainty it brought didn’t bode well for the real estate market in the UK, but London will always be London; it’s hard to imagine a serious and prolonged drop in the real estate demand in one of the richest and most visited cities in the World.  

But what about the Covid-19 outbreak? The unprecedented UK lock-down and the foreseeable social distancing measures that will be probably taken in the months to come after the reopening, is a serious threat to the businesses in the British capital. We should mention here that a big part of Shaftesbury’s tenants is made by shops and restaurant.

 

Shaftesbury portfolio – source: company’s annual report

 

Moreover, about 50% of the portfolio could suffer from structural changes, as the retail is more and more threatened by the e-commerce wave and offices will be challenged by the future “work from home” mega trend.

However, as the landlord of such businesses, Shaftesbury will not be immediately negatively affected, as tenants have contractual obligations (9 years weighted average unexpired lease terms for restaurants, 3 years for shops and offices), not easy to break even in case of bankruptcy.

It’s worth considering too that have a “shopping session” in London is quite different from going to the nearest mall, in other words the exclusive Londoner boutiques could be not much affected by the shopping on-line mania. A lot of big retail chains for example, even with a well-established on-line business, can’t avoid to own a physical shop in the very earth of the British capital, even if that shop will not be profitable: it’s simply impossible for famous brands just work through an only web-based organization.

I am also quite skeptical about the real potential of the so-called remote working. I think that nowadays a vast majority of organizations have already considered the option, so the ones that find appropriate let their employees working from home, already did it. The rest simply is not interested, as this option comes with a series of unwanted consequences for the business, in terms of productivity decrease or security costs and reputational damage. 

While with no doubt Shaftesbury’s cash flow will be temporarily impacted by all the present headwinds, the company has a healthy balance sheet with slim fixed costs (a small staff of just 34 employees) and can therefore easily navigate these difficult times.

 

     Shaftesbury's balance sheet

 Source: company’s annual report

EPRA earnings came in mostly in line with last year’s figures (£25.3M). For the rest of the fiscal year Shaftesbury will try to help its fellow tenants and it is therefore aiming to collect just about 50% of the previous targeted rental income (according to CEO Brian Bickell): that should be enough for a slight profit (or a slight loss) in the second half of the fiscal year. If properties valuation won’t take another hit after the £300M write-off of H1 (as it should be the case) the NAV should remain intact and poised for growth in the next fiscal years.

First half results and guidance for the rest of its fiscal year

 

 

With a stock price at a considerable discount versus the NAV, Shaftesbury is definitely a buy now for long-term oriented investors. Capital & Counties Properties PLC (Caco), another Londoner REIT which accounts Covent Garden among its properties, agreed to acquire a stake of 26% of Shaftesbury, from the tycoon Samuel Lee. 

There is also a possibility that the two funds will merge in the future in order to create a stronger entity.

Conclusion

Shaftesbury is priced for a fast bankruptcy but indeed, in spite of some short-term headwinds, the company is a long-term value play: some of its tenants will go bankrupt but it will not be that difficult to find new ones, given the quality of the company’s portfolio.

Its small amount of debt allows it to finance new acquisitions and investments which will be abundant in few months, the low interest rates will help the firm to re-finance its credit lines at more favorable conditions anyway.