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Conclusion: abrdn European Logistics Income PLC  

Thesis Published: 01/26/2024

Conclusion: 05/24/2024

abrdn European Logistics Income PLC (LSE:ASLI); Strategic review went south, management team not trustable anymore. Concluding the thesis with a slight outperformance vs. the S&P500.  

Conclusion

On May 20, ASLI issued a press release saying that it had concluded its strategic review process. However, the outcome is pretty disappointing in my view, given that the fund will not be sold immediately in its entirety but that the fund’s management has opted for a winding down process in which it seeks to dispose of all assets by Q2 2025. You can read the full press release here.

The sale process is still subject to a shareholder vote at the AGM in June. My best guess is that shareholders will unfortunately approve this proposal.

I believe that while there might still be some upside left here, the uncertainties around a lengthy winding down process do not warrant to hold shares any longer given that a cash payout from the proceeds of the asset sale process is still about a year away – if everything goes to plan.

What I find particularly irritating is that management has not fully committed to a sale of the entire portfolio but is now rather opting for a lengthy winding down process and the sale of assets on an individual basis. This potentially opens the fund’s investors to risks such as some assets being difficult to sell on an individual basis, wich could have potentially been sold as part of a portfolio transaction.

Their decision to resume paying dividends also does not make any sense when a (tax-efficient) return of capital should be the absolute highest priority on the to-do list of this management team.

Yes, the overall portfolio as a whole is not unattractive. However, as with most portfolios it has some assets that I would view particularly difficult to sell on an individual basis.

Further, it is beyond me how one can initiate a strategic sales process without prior sniffing out the appetite for a full portfolio sale. To me, this is just plain stupid behavior by management. I went ahead to contact a number of large real estate investors in the European logistics scene – not one had received an investment memo by the fund or its advisors regarding the sale. So this management team now claims that there were no buyers when they didn’t bother to advertise their portfolio?! What a fucking clown show. Still, I am glad that they apparently see that they are not fit to run a public company let alone a real estate firm and are winding down.  

Examining what can be achieved in the sale process

Following the announcement of the cancellation of the strategic review and the implementation of the asset disposal program, I went through the sub-portfolios once again to get a better understanding of a realistic (individual) disposal value.

Based on my estimates and being particularly conservative in regard to the fund’s Spain sub-portfolio due to its pretty optimistic book valuation and high vacancy rate, I arrive at approx. €574m in potential disposal value (again, overly conservative given my trust issues in the management team). This is vs. their estimate of a GAV of €616m.

The Spain portfolio is heavily tilted towards a large, quite recently built portfolio close to Madrid – a sub-market in which vacancies have risen, the acquisition price had been way too high, and a large percentage of its asset value lies within a custom-built Amazon facility. This facility is rented for another 13 years to Amazon (with an extension option for another 10 years), however, is custom built for them with a large EV-van charging car park and boasts sky-high rents that would never be achievable on the open market, even in 10 year’s time.

With approx. €574m in real estate assets and about €256m debt and €20m cash, I assume that approx. €5m of expenses will be needed in order to sell all assets, wind down the company, pay severance to its directors. My overall conservative asset value estimates following their announcements leave a reserve for one medium-sized asset that will simply not sell.

After accounting for those winding down costs as well as reducing the portfolio value to the Spain problems and giving the portfolio a slight “fire sale” discount (even though the disposals are not that urgent), I would argue that the shares are now fairly valued with just about 12% upside to a capital-return after all assets are disposed.

There may be some upside in this thing as my discount applied might be a bit too conservative here, but after what this management team has demonstrated with their flimsy and outright stupid strategic review, I would not put any trust into them anymore.

Conclusion: UK closed-end funds - they just never work out

After now dabbling around in some UK-listed closed end funds I am beginning to capitulate on this investment instrument. The incentives are just not aligned with outside investors and these external management teams have a lot on their mind – just not the wellbeing of their shareholders. Again, I am glad that this joke of a management team will be removed from public markets.

The investment thesis returned 10.7%, just slightly ahead of the S&P500 (7.7%) in the timeframe. I believe there are better destinations for one’s capital than to wait for the conclusion of the asset sale program.

Original Thesis below.

Type of situation: Strategic alternatives being explored, high likelihood of sale of this undervalued logistics property portfolio in the coming 6-12 months

Market cap: £230m – Share price at publication: £0.56

Why look at this?

This is a special situation regarding the externally managed fund abrdn European Logistics Income PLC (LSE: ASLI) listed on the London Stock Exchange whose equity is currently significantly undervalued vs. private and public market comps. Its external fund manager, abrdn plc, has announced in November 2023 that it is exploring strategic alternatives ahead of this years’ AGM in which a continuation vote will have to take place. It is also weighing asset sales to conduct share buybacks.

The fund is a simple to understand construct consisting of an attractive pan-European logistics property portfolio. The fund currently fully owns 26 modern logistics and light industrial properties across The Netherlands, France, Germany, Spain, and Poland which has a lettable area of 525,000 sqm and has no developments under construction, further simplifying the portfolio.

Judging from experience, such portfolios are highly sought after by asset managers and real estate investment firms given the portfolio quality and dynamics of the asset class. There is, in my view, a high likelihood that a buyer will be found that will be paying a significant premium to take the fund private vs. its current share price and I find an upside of 40-60% to the equity a not unreasonable expectation within the next 6 to 12 months.

The fund’s share price has lost about 37.2% since its IPO in 2017 and 25.1% in total return terms. Investors are likely not delighted with this performance. During this years’ AGM, to be held in June in London, shareholders will have the opportunity to vote on a continuation or liquidation of the fund.

The fund has a number of features to it that cumulatively have likely played their part to its underperformance:

• The fund is externally managed, a fact that in the past has resulted in (relatively) high management fees and investment decisions potentially not always made with the exclusive interests of shareholders in mind;

• The funds’ dividend remains uncovered, meaning it must eat into its NAV to pay out a promised high yield to investors, actively destroying value;

• The fund invests in logistics assets exclusively in the Eurozone – however, is listed on the London Stock Exchange with a pound sterling quotation;

• Size matters: The fund is quite small with just €270m / £230m market cap and therefore not investable for many investors due to size constraints;

• Given it is externally managed, it is difficult for funds to find it due to its classification and to justify investing in it with regard to having to pay asset management fees;

Although listed real estate securities in Europe have experienced some heavy losses in 2022, European logistics real estate peers have rebounded in 2023 and are all trading above their EPRA NTA, while shares of ASLI are currently changing hands at a 37% discount to its NTA (The EPRA NTA (Net Tangible Assets) is an NAV-type valuation metric calculated including all property at market value but excluding the mark to market of financial instruments, deferred tax and intangible assets).

While there are certainly issues with valuations based on NAV (or EPRA NTA in this instance as it is the European standard) as a valuation metric, the math checks out quite nicely to anchor and validate the NTA in the case of ASLI.

Given that the logistics assets in the portfolio are of similar quality to that of its listed peers, the above-mentioned reasons for the fund’s underperformance will continue to weigh on its share price if it is not sold.    

Strategic Alternatives

In light of the disappointing performance, on November 27, 2023, the fund announced together with a regular trading update, that its manager is actively seeking to explore strategic alternatives and a potential sale of the company. Shares briefly ticked up but are again trading below prices that were seen shortly after the announcement.

The manager gave a number of reasons for the decision to seek a sale of the company, among them the low market cap and the persistent discount to its EPRA NTA.

ASLI has mandated Invesco with initiating a “formal sales process” under the guidelines of the UK takeover code. While a bidder for the full company can still submit an offer at any time, bidders participating in the formal sales process are given certain relaxations of some rules of the UK takeover code that mainly touch on making timely disclosures of an approach to the target for an intention to bid which also places offerors under a strict timeline to publish a firm offer or recede within 28 days of an announcement that the offeror is interested.

Essentially, any potentially interested party participating in the formal sales process is now exempt from disclosing that is has formally approached the company and is also exempt from the 28-day timeline rule. This gives the fund some more wiggle room to compare offers and chose the one in the best interest of shareholders, as to my understanding.

The fund further said that it also may consider asset disposals in order to buy back stock; while under normal circumstances, this might make some sense, in this specific situation, a full sale of this attractive portfolio would certainly be the most clean and straight forward path for all parties involved.

Fund Profile

abrdn European Logistics Income plc invests in logistic real estate properties in Europe. Its property portfolio includes big-, mid-box and urban logistics warehouses. The company was formerly known as Aberdeen Standard European Logistics Income PLC and changed its name to abrdn European Logistics Income PLC in January 2022 following the rebranding of its manager. The fund IPO’d in December of 2017 on the LSE.

As the fund is externally managed, all investment decisions are made by its manager, abrdn plc, for which the fund must pay a management fee (currently 0.75%/year of NAV). The fund can terminate the management agreement with its manager with a 12-month notice period. I am not sure whether this notice period would apply in case of a complete sale of the company, though, or whether a new owner would be able to cancel the management agreement a little bit earlier.

Shares of the fund see approx. 1m in average daily trading volume (based on past three months), so approx. €600-700k in transaction volume per day.

Properties in the fund are of above average quality with the majority invested in modern big box logistics or fulfillment properties, featuring docks (sometimes cross docks), ceiling heights of >10m in almost all cases and are almost all exclusively located close to larger European cities and logistics hubs.

The fund’s properties are mostly let to higher quality tenants such as DHL, Amazon, Dachser, and various other European mid-market logistics and fulfillment companies such as JCL Logistics, Arrival, A.S. Watson etc.

Most properties are quite young, with construction completed in the last ten years. The portfolio consists of mostly single-tenant properties, with some odd ones used by multiple tenants. As the fund does not participate in developments, there is no risk related to construction costs or permit issues here. However, after going through the portfolio one-by-one, the properties in most cases do not have additional land reserves that could be further developed. The portfolio “is what it is” in its current state.

The fund’s assets are located primarily in Spain (with a large asset outside of Madrid consisting of multiple properties), The Netherlands, France, Poland, and Germany.

Tenants stem mostly from the logistics, manufacturing, and food logistics sectors with some additional retail/fulfillment exposure.

65% of all rental revenue is 100% linked to CPI-increases (with “ILAT” being the French equivalent rent inflation index), with a further 27% linked to CPI but capped at 2-3%/annum. High inflation in 2023 should lead to a nice uptick in rents that will be visible in the 2023 numbers and for the FTM (forward twelve months) estimate of rents, I have assumed a growth of 2.5% over the entire portfolio.

A quick analysis of the rental rates of its top 10 tenants also checks out nicely at around €5.9/sqm/month which is certainly in-line with European logistic rents. While there is no obviously under-rent situation here, there is certainly room for modest increases of rents should a tenant leave.

While this analysis is not completely exact given that the rent data is over one year old, the exercise to validate rental levels still gives comfort that the manager has not engaged in any activity to prop up rents to unreasonable levels to justify a higher NTA valuation.

Potential buyers

What makes the portfolio a little bit tricky from a buyers perspective is how spread out the properties are throughout Europe.

One could imagine a buyer with an already large existing footprint in these markets from either the listed real estate peers (WDP, CTP, Montea, WDP come to mind) or large institutional real estate investors such as Blackstone, SwissLife or AXA.

For example, just in December Blackstone announced it was going on a large buying spree throughout Europe to pick up properties around the old continent given their currently attractive valuations. Blackstone alone has about $40B in dry powder to put to work in global real estate.

Large asset managers with Europe-wide footprints make the most sense as potential acquirers of the portfolio, potentially followed by some kind of real estate private equity firm that could split up the portfolio to sell its pieces.

Given that ASLI is the last remaining listed “simple” logistics portfolio and its currently attractive valuation, combined with all the dry powder private real estate investors are looking to spend, I would find it hard to believe should it not be possible to sell this portfolio in due time.

Should the sale process not be successful, a low odds event in my view, shareholders will have the opportunity to vote on a continuation or liquidation of the fund. In light of its performance, a liquidation would be the most straight forward procedure which would likely yield at least the current share price and highly likely a premium to its current market valuation.

As already alluded to, the portfolio consists of modern and well-located logistics properties spread throughout the continent. To illustrate the portfolio quality, I have picked six random examples of properties in the ASLI portfolio:

Comparing ASLI to its listed peers and private market comps

ASLI is the by far smallest of the listed European logistics/light industrial companies with just €270m of market cap. Even though the quality of its assets can rival that of most of its peers, its valuation per sqm remains the by far cheapest, while it is also the cheapest portfolio with regard to its EPRA NTA. Some of that valuation discrepancy can be justified by the current structure of the fund, having an external manager and having to pay out a promised high yield which eats into its NAV.

However, all its peers are internally managed and have shown high discipline in capital allocation over the years. The current structure of the fund illustrates that listing real estate without a coherent strategy by promising a high yield is simply not a winning strategy.

Comparing its cap value valuation to that of recent (2023) private market transactions, it becomes clear that ASLI trades well below range of transaction values in its relevant markets and at about fair value on an NTA basis (see private market comps below).

While ASLI boasts similar quality to its listed peers, the only material negative differentiator is the short remaining duration of its debt maturity at just 2.5 years. The company has a revolving credit facility in place which is yet to be drawn in the amount of €70m, which gives some comfort in regard to immediate refinancing needs that will arise starting in June 2025 (total refinancing needs are €153m in 2025).

Given how many unencumbered assets the portfolio has, in combination with its revolving credit facility, I do not see the fund running into material refinancing problems in 2025. Where interest rates will trade then is anyone’s guess, but given the current trajectory, it seems that refinancings will be available at moderately higher interest rates in 2025 than what the fund is currently paying for the loans that come due then.  

Shareholders

The shareholder base consists mostly of UK based funds, asset managers and institutions. As per the latest figures, the fund has no controlling shareholder and given how the performance has played out in recent years, are all likely to vote in favor of a sale should any reasonably attractive offer come to fruition to recoup some of their losses. 

One can understand the allure of the fund upon its initiation and listing in 2017, promising (mostly institutional) investors a high yield for their investment.

The fact that this strategy almost never works as it will someday run into the issue of eating into the NAV given that its promised high dividend is unsustainable has led to stark losses for these institutional investors.

I see no reason why these investors would not agree to a sale at an attractive price which is certainly possible to potentially leave this investment with a net zero total return.

Risks to the thesis

Generally, I would put the odds of a successful sale of the fund quite high given its quality, geographic footprint, valuation, and the lack of complicated developments. It is an easy to understand portfolio that is very well suited for institutional real estate asset managers that have the capability to actively manage the properties and free them from the ill-suited closed end fund structure.

Certainly, there are risks to the thesis: Potentially, against all odds, nobody will be interested in the portfolio at an attractive price, perhaps the asset manager pulls the formal sales process again, the investment bank may mess up the sales process or that the investment landscape for European real estate suddenly deteriorates.

Given the above mentioned reasons, I reiterate that the odds of a successful sale at a price close to NTA valuation as quite substantial and find an upside to the equity of 40-60% not unreasonable in the next 6-12 months.

Regarding downside, in the case of an unsuccessful sales process, shares may touch the all-time low again, currently about 10% down from the current share price. Should the sale process fail, I would expect the funds’ shareholders to vote against a continuation of the fund at the AGM in June and to liquidate it. Even in this scenario, a liquidation value below current equity valuation is a little hard to fathom given comps to private and public markets for similar quality portfolios.

Full ASLI portfolio