Sunday, 20 November 2016

The GLP Story

It has been about a year since I started to build a large position in Global Logistic Properties (GLP). The company initially caught my attention when it bought back a large chunk of its shares. For the Financial Year ended Mar 2016, it spent about SGD222 million in share buybacks. If a company could spend so much money in share buybacks, it must be doing something right. That set me to investigate and understand the company further.

GLP is a logistic property developer. However, it is not solely a property developer; it is also a REIT and a REIT manager. Broadly speaking, whether you like GLP or not depends on whether you like REITs or REIT managers more. REITs provide steady distributions, while REIT managers provide growth. While I like both REITs and REIT managers, between the two, I have a slight preference for REIT managers as I prefer capital appreciation to dividends.

REIT managers generally own a small percentage of the REITs that they manage. However, let us put aside their small ownership for a while and consider the theoretical differences between a REIT that owns the properties and a REIT manager that manages the REIT but does not own any properties. The returns on the REIT are from the rental income generated from the properties. The returns on the REIT manager are from the management fee paid by the REIT for managing the properties. The management fee is definitely much smaller than the rental income generated by the properties. However, remember that the REIT manager (in theory) owns no assets? When the earnings are some positive numbers and the assets are close to zero, the return on assets tends to infinity! Not only that, because there are almost no assets, there are no capital constraints to limit expansion. Just look at Uber, which owns no taxis but has expanded rapidly to become the world's largest "taxi company" within a short period of time. Likewise, through less than 100% ownership of the logistic properties, GLP has quickly established itself as the No. 1 player in China, Japan and Brazil and the No. 2 player in US.

Fig. 1: Market Position of GLP

Coming back to reality, REIT managers will never be like Uber, as they own some percentage of the REITs/ properties they manage. For GLP, the percentage ownership ranges from 10% in more developed countries like US to 66% in less developed countries like China.

Recently, GLP has been in the news as a group of Chinese investors was rumoured to consider buying over the company. While the takeover has not materialised, coincidentally, another REIT manager is the subject of another privatisation around the same time. The REIT manager being privatised is ARA Asset Management. The price is $1.78. Compared to its book value of $0.55 and 2015 earnings of 8.96 cents, the price represents a Price/Book ratio of 3.24 times and Price/Earnings ratio of 19.9 times. Just a few months back, in Jun, Croesus Retail Trust internalised its own REIT manager for SGD50 million. The estimated P/E ratio for that transaction is 126 times! Going back further in time, Capitaland privatised its REIT manager, CapitaMalls Asia (CMA), in Jun 2014 at a price of $2.35, representing a P/B ratio of 1.27 times and P/E ratio of 15.3 times. Thus, while more and more REITs are being listed, more and more REIT managers are being privatised. This gives a glimpse of just how valuable REIT managers are!

Having said the above, there are important differences between GLP and ARA. ARA is a pure REIT manager, while GLP is a combination of (1) property developer, (2) REIT (for the properties that it has not spun off to the REITs/ property funds) and (3) REIT/ fund manager. Thus, its valuation will not be as high as that of ARA. It is more similar to CMA than ARA at the current stage of development. However, GLP is still a work-in-progress. With the passage of time, more and more properties will be spun off into the REITs/ property funds. Thus, over time, GLP will look more and more like ARA and its valuation will approach that of ARA. Although it has a lower valuation than ARA currently, the key advantage of GLP over ARA is that it has a huge pipeline of properties to feed into the REITs/ property funds. The figure below shows GLP's growth in Assets Under Management.

Fig. 2: GLP's Growth in Assets Under Management

GLP will become more and more valuable with time. Thus, now is not the right time to discuss privatisation of GLP. It is definitely a stock for the long term.


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