Bonus Article - abrdn European Logistics Income plc (ASLI)
by guest writer Waseem Shakoor
Introduction from Paul - I have known Waseem for over 20 years, and watched him achieve remarkable investing success, with a highly disciplined approach looking at compelling special situations, both in shares, but also more complex distressed bonds. He researches everything in great depth, and has a remarkable hit rate. Hence why he’s worth listening to. I’ve invited the best investors I know to submit occasional guest articles, with this being the first. Many thanks to Was.
(Moved to free 6/12/2024)
Special Situation -
abrdn European Logistics Income plc (ASLI)
By Waseem Shakoor, Shakoor Capital
(Additional research credit, S Muzaffar)
What is it?
abrdn European Logistics Income PLC
Mkt cap: £242m
This is a Real Estate Investment Trust (REIT) which specialises in warehouses across Europe.
Details can be found here:
https://www.abrdn.com/en-gb/asli
Paul has touched briefly on the REIT sector as being something of interest, recently discussing Warehouse REIT (WHR), which is a UK version of ASLI. I currently own some WHR, but I’m much keener on ASLI as a Special Situation.
It's something I intend to invest in, track and report on here to show how expectations below match with reality.
Why is it a Special Situation?
The answer to this is because it’s closing itself down, alternatively known as a Managed Wind-down.
Property REITs have been a very poor investment for risk averse investors over recent years as the model that worked for them in a zero interest rate environment has broken down.
Why Has The Model Broken Down?
Most of them are effectively run by a Fund Manager (aided by a non- Executive Board) who raised a lot of cash to buy some nice, sparkly assets - in this case, warehouses. These are meant to provide dependable and growing rental income from which investors get a healthy dividend. The Fund Manager gets paid a fee based on total asset value under management.
Historically, the shares would trade at or above the Net Asset Value (NAV) of the company, especially when interest rates were basically zero. That would allow the Board (guided by the Fund Manager) to issue new shares for cash whenever they wanted to buy a bright new shiny asset. In a low rate environment, hard assets generally went up in value along with rent, so issuing new shares for cash was value accretive.
However, the story changed when interest rates went up rapidly and commercial property of all kinds started going down in value. A lot of them had bought properties on the mistaken assumption that cheap funding would always be available. I never understood why people would assume that interest rates would stay low forever, so this sector was always bargepole territory as far as I was concerned. Wealth Managers loved it for their clients, however, as everyone was chasing yield at what they thought was low risk.
Share prices of REITs cratered so that - even when property prices bottomed out - the share prices traded at well below Net Asset Value. Issuing new shares for cash to buy or build these properties became dilutive to existing shareholders, so property REITs have largely stopped doing it.
In most cases, the Fund Manager charges their fee based on the total NAV, with no consideration of share price, which means interests aren’t aligned with the owners of the company. There is currently a suspicion by the market that NAVs aren’t real, and investors want proof via disposals of representative portions of the portfolio. The Fund Manager, however, is incentivised to have a larger pool of assets under management, as fees are based on that. To make things worse, the market caps of these companies (once they drop below £500m) makes them unattractive due to liquidity issue over their shares. The market value of ASLI is about £240m. Institutions that want exposure to the sector would rather invest in the likes of SEGRO, which is worth billions, and have proven to be smart operators in all markets.
The people invested in the smaller companies in the sector just want their money back as much as possible, so the pressure is on to close the discount to NAV.
The Opportunity
ASLI has given up trying to attract fresh capital in order to grow, so has decided to close itself down by selling its warehouses, and returning the money to shareholders. Other companies in this space, such as Tritax EuroBox (EBOX), have recently succumbed to a takeover bid at a pretty lousy price, simply to put shareholders out of their misery. Bigger players like SEGRO and Brookfield see the long term potential in these assets, and are happy to buy them at distressed prices, whilst at the same time offering a material premium to the undisturbed share price in the market.
I was a shareholder in EBOX, having bought it about a year ago when it was trading at a very big discount to NAV, and made a nice profit watching SEGRO and Brookfield carve it up for themselves at a much higher price than I paid. They got a bargain (taking a long term view), and shareholders had some value restored from disastrous levels.
I still want exposure to the sector, however, so have been recycling those funds in size into ASLI at prices at under 60p.
ASLI did review all options earlier this year over selling themselves to a larger player but came to the conclusion that anyone wanting to buy the whole company wanted an unacceptable high discount to NAV. Instead, they thought the sum of the parts sold to different buyers would recoup more cash for shareholders. They didn’t want to give anyone like SEGRO or Brookfield a bargain, which is fair enough.
Details are here, back in May:
They have just updated again on 28 November 2024
The Numbers
ASLI have said that the majority of the portfolio will be sold by mid 2025, or 7 months from now.
Let’s say it’s going to take a year, at worst.
Share price 59p
NAV 73.2p
Crucially, the NAV of 73.2p has already been discounted by 4.2% to reflect the costs of closing down.
Dividends are running at about 0.77p per quarter, or 3p over a year.
If all goes to plan over, let’s say, a year, then shareholders should get a return of (73.2 + 3) = 76.2p
Things won’t go to plan though - they rarely do. There’ll be some other costs that pop up, further currency exposure losses, or just a failure to get the price that they want. EBOX got a poor price, but they just took the view that shareholders would prefer to get their money back quickly so that they could recycle their money into the next distressed company in the sector.
In my case, they were right. I’d sooner take a cheap takeover offer and put the money into a very similar set of assets at ASLI, knowing that they’ve already taken the decision to wind down operations.
ASLI should get a better deal by waiting, and by carving themselves up amongst multiple bidders who have targeted specific assets. We are six months into that process, however, so we shouldn’t have to wait much longer.
Let’s say we get 70p in NAV returned, plus 3p in dividends, and it takes a year.
All figures on a per share basis below:
NAV realised 70p
Dividend 3p
Total Return = (70 + 3) = 73p
Price paid 59p
Profit = (73 - 59) = 14p
14/59 * 100 = 23.7% annual return
What if we get the money quicker, say, six months?
The overall profit will be less as we won’t be getting dividends for as long, but the annual rate of return goes up quite significantly.
NAV realised 70p
Dividend 1.5p
Price paid 59p
Profit = (71.5 - 59p) = 12.5p
12.5/59 * 100 = 21.1% over 6 months, or 42.2% annualised
The shares go ex-div for 0.77p on 5 December 2024, so the figures are actually a bit better than above as the return of capital starts almost immediately.
The numbers change depending on how long it takes, and what value is finally returned. There are complexities regarding the dividend, particularly if the assets supporting it are sold quickly, but I think that will balance out in terms of getting money back quicker.
Individuals may also have tax issues to think about.
I’ve tried to keep things simple, however. What I really like about this Special Situation is that I’m having great difficulty seeing how I can lose money buying at under 60p. I might not get the full return I’m after, of course, but I always think not losing money is a very good start, so I’ve invested heavily here.
In reality, it is far more likely that the bulk of money invested will be returned within six months, rather than a year. I’d be disappointed if an annualised rate of return of 20% couldn’t be achieved from this point. I can then take that money and put it into some other unpopular REIT or IT, which hasn’t been as proactive in restoring value.
Who is selling?
A lot of REITs and ITs are suffering greatly as Wealth Managers who bought this stuff back in the day are facing redemptions, causing forced selling in a lot of cases.
More recently, a spike in interest rates (Government borrowing costs) has had a knock-on effect to interest rate sensitive stocks such as this, where people fear NAVs may get hit again.
Final Thoughts
Personally, I think there is enough fat to make a decent return, even if things don’t go quite as planned. Play around with the numbers yourselves - there are a few moving parts here - and I’d challenge anyone to make a case for losing money. EBOX was sold in a rush at a 12% discount to NAV (without the costs of break-up) to a single buyer so I don’t see why ASLI would do worse than that when selling off assets individually to maximise value?
This obviously isn’t an investment that promises spectacular returns but - in my experience - the kind of shares that do offer bigger rewards come with a lot more risk. ASLI has good assets, with good tenants, and they are actively looking to break themselves up.
There is no battle between a greedy Board (desperate to cling on) and shareholders who want an exit. There is no shareholder activism required to restore value and - you never know - someone might just make an approach again for the whole company to save on the costs of break-up, ASLI will require more than they were offered back in May to veer off into Plan B.
Plan A is to sell off the assets to different buyers, however, and I’d expect that to be progressed in short order.
What a brilliant article, thanks Paul & author. Clear, simple explanation of the investment case in straightforward language. I love a good stock pitch and this is one of best I've seen in a while.
Super write-up, an actionable suggestion and a new investor to follow- this is exactly what I signed up for. Thanks Was and Paul