As e-commerce grows, particularly in China, it is leading to significant changes in logistics. This includes demand for warehouses, where only about 20% of the installed base in China is sufficient to serve the needs of modern logistics systems. Global Logistic Properties (or "GLP") (OTCPK:GBTZY) is among the largest developers and operators of warehouses in the world, with a very strong leading presence in China, as well as the #1 and #2 positions in Japan and the U.S., respectively (and a leading, albeit small, portfolio in Brazil).
Once a relatively popular name, GLP shares lost close to half their value from mid-2014 to early 2016 as the Chinese weakened on softer consumer demand and growing supply. The share price started to really recover in late 2016 on news that the company was undertaking a strategic review and now is near a "put up or shut up" point for potential strategic bidders. I would be surprised if management accepted a bid below S$3.10/share, or about $23.65 per ADR - offering the prospect of a decent near-term return. While there is definitely a risk that this review process will not lead to a bid and that investor worries about still-weak conditions in China will lead to another sell-off, I believe the fundamentals can support a longer-term fair value of (or above) S$3.25/$24.50.
Investors May Not Have Long To Wait
Investors considering GLP may not have long to ponder over whether to take a position. As part of a strategic review process that has gone on for more than half a year, the company has June 30 deadline in place for any interested parties that want to bid on the company.
Recent rumor-mongering over this process has led to some volatility in the share price, with a Financial Times article claiming that several potential bidders had walked away. More concerning was the report that these bidders walked away because they believe that the process has been skewed toward an insider-led bid from the CEO, with the Financial Times running a quote from a person involved in the bidding that "the process is a farce and the most unprofessional I have ever seen." This report led to a trading halt on the shares in Singapore, and management's comment did acknowledge that it had not yet received a formal bid. While that may sound ominous, I don't believe that's the case - there's really no reason or incentive for an interested party to submit a bid early, particularly as that information could leak to later-bidding rivals and compromise the initial bidder's position.
An Asset Worth Owning
Provided that GLP is interested in a fair and transparent sales process, I would expect a strong level of interest in this company. This company has proven its aptitude in developing and managing logistics properties, with GLP often earning 25% or greater spreads on its development activities.
Not unlike Brookfield Asset Management (NYSE:BAM), GLP has also come to realize the advantages in applying its skills through investment fund structures. Launching its first funds in 2011, GLP now has $27 billion active funds under management (and another $12 billion callable) across China, Japan, the U.S., and Brazil. Under this fund management model, GLP collects management fees and still shares in some of the benefits of its development/management skill, while also getting to operate with a much larger pool of capital. Although fee income is still a modest portion of earnings (below 20%), it is a growing business for GLP and the company has not had trouble closing new funds, nor syndicating down its interest in its U.S. funds (where it targets 10% ownership positions).
Out of around 55 million square meters of property, China accounts for nearly half, with about 60% of that completed and operating. GLP is far and away the largest operator in China, where only about 20% of warehouses are really built and equipped to serve the needs of modern logistics systems (particularly for e-commerce). GLP counts the likes of JD.com (NASDAQ:JD) and Amazon (NASDAQ:AMZN) as among its top tenants in China, and GLP is far and away the leading operator and developer of modern warehouses in China.
On the negative side, this market has become considerably more challenging in the last couple of years. Lease ratios have fallen from the 90%s into the mid-80%s, and even though same-property income has held up well (growing at a double-digit rate), consumer demand has weakened, and a lot of new supply has been coming into the market. While China is still "under-warehoused", this is a tricky time for GLP and investors have been worried about how long it will take to drive leasing rates back above 90%.
Although China makes up more than 50% of GLP's net asset value, the company has strong positions in Japan and the U.S. as well. The company is the number one operator of warehouses in China, with its 6 million-plus square meters of space more than twice the size of Prologis (NYSE:PLD). Lease ratios have remained firmly in the high 90%s, though momentum has slowed recently.
In the U.S., GLP has built through acquisitions, with three large transactions since 2015 establishing the business. GLP is now the second-largest operator of warehouse space in the U.S. (behind Prologis), though the company takes a more distant approach in this geography - targeting 10% stakes in its funds and not operating on a direct basis as it does in China and Japan. Lease ratios in the U.S. have been healthy (mid-90%s) with fairly healthy trends in same-property income.
GLP also has a small, but long-standing, position in Brazil, where it is again far and away the largest operator in the market with about four times the leasable space as the second-largest player. With the well-known economic challenges in Brazil, it probably won't surprise readers that Brazil hasn't been a major positive driver for the company for a while, but Brazil too is under-penetrated with modern warehouse capacity, and GLP has been conservative about committing new capital to this market during the country's economic difficulties (though at 89%, the recent lease ratio is not bad).
A Familiar Plan
Like Brookfield, CapitaLand (OTCPK:CLLDY), and many other property developers, there are several moving parts to GLP's success.
Property development success is paramount, as development gains (and revaluation gains) are a major part of the company's earnings base (50% in many cases). While warehouses are not the most challenging type of property to build, there are still opportunities for strategic differentiation and particularly so in China. Getting land rights can be difficult in China, and particularly so when local governments would rather let the land go to residential or commercial developments that will produce more jobs and taxes. GLP has learned to work within the system, though, as well as partner with strategic investors that can help them access the land they need. What's more, knowing where (and sometimes more importantly, when) to build is an important part of development success, and GLP has shown over the years that it can time the markets relatively well.
Capital recycling is another important part of the story, and that's where the challenges in China become more of a concern. While owning a warehouse and collecting rents is a steady way to generate cash flow, it doesn't offer the sort of returns that are available in property development. With that, companies like GLP look to develop properties and manage them to a certain point and then sell those assets and reinvest the proceeds into new developments. GLP has done a good job of this in Japan (often selling properties into its J-REIT), but capital recycling has been more sluggish in China with the market pressures. GLP has several billion dollars of assets it would likely prefer to sell into management funds or to third parties, and that capital is currently earning less than management (and shareholders) would like.
As China's economy recovers, I believe GLP will be able to grow adjusted earnings at a low double-digit rate. I expect ROEs to start recovering, and while management's mid-teens target (on an adjusted basis) may prove challenging, I believe double-digit returns are possible. It also helps matters that GLP has a very manageable level of debt and a comparatively low cost of capital.
Looking at GLP's adjusted earnings prospects, as well as a cap rate-based NAV approach and a more simplistic price/book approach, I believe the stock has a standalone fair value between S$3/$22.50 and S$3.25/$24.50. That's assuming rising cap rates across its operating regions, as well as a more protracted recovery process in China that keeps a lid on the company's capital recycling options. Given the strategic review process, I would be surprised if management accepted a bid below S$3.10/$23.65, though I wouldn't rule out the possibility that no bid emerges. In such a scenario, I would expect management to talk more about returning capital to shareholders and accelerating its capital recycling activities, but I do think the shares would sell off in disappointment, as I think a S$3/share-plus bid has been the ongoing expectation for some time now.
The Bottom Line
If I'm right and management wouldn't sell below S$3.10, investors could get a 10% return in a relatively short time frame. That's not bad on an annualized basis, and though it comes with the very real risk of a disappointment sell-off if no bid emerges, I believe the underlying value of this business is still higher than what the market reflects. It will take time for management to deliver on that value on its own, but I do believe management has shown it has the ability to generate good returns on capital through its warehouse development and management activities.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.