Global Logistic Properties (GLP)

[VIS]

hey, GLP dropped from $2.60 (1.5mths ago) to $2.05 (now)...this is a huge slide.

Anybody calculated its intrinsic value for market entry?

[greengiraffe]

• Sep 13 2015 at 4:01 PM 
   
  
  
•  Updated Sep 13 2015 at 4:01 PM 
  

Brazil faces a tough year but joint venture 'fine', says Goodman

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[img=620x0]http://www.afr.com/content/dam/images/g/j/l/f/m/6/image.related.afrArticleLead.620x350.gjlea2.png/1442124094835.jpg[/img]Greg Goodman says Brazil is facing a tough year but land opportunities were emerging. Nic Walker
by Robert Harley
Greg Goodman, the chief executive of the Australia-based logistics heavyweight, Goodman Group, acknowledged Brazil's property problems at this year's annual results in August.
Goodman has projects in Brazil, in a joint venture with local construction firm WTorre, with an end value of $A1.3 billion.
The investment is relatively small, about $US100 million ($141 million) but according to company reports, "management continues to progress partnership initiatives in Brazil."
At the half-year results in February Mr Goodman forecast Brazil was "in for a pretty tough year as far as the economy is concerned," and suggested that "counter-cyclical land acquisition opportunities" might arise.

In August he was more cautious. "Potential counter-cyclical plays are emerging," he said.
Analysts questioned the health of the partnership.
"They're fine, I had a nice meal with them a couple of weeks ago in Sao Paulo," Mr Goodman said.
Macquarie Research also noted that problems in Brazil were a risk to the group's overall development roll-out.


In early 2014 the group came close to buying 34 warehouses in Brazil for $1.5 billion. In hindsight, the group made the right call in leaving the deal to Singapore-based rival, Global Logistic Properties.

[alex]

Not much discussion about this. Been looking at GLP awhile, but not sure of the business model, but more than half of the profit relates to development gains. Isn't this model kinda dangerous, since it is heavily dependant of the economy to continue to engine forward, else, huge asset base will be under utilized, and high profit from development gains being stripped out and shift to revaluation losses?

Any opinion on this to provide more insights?

[d.o.g.]

Warehousing is a low-return business. GLP tries to do better by building the warehouses from scratch to lower its cost base. But all the large warehouse operators also build, which means everyone is competing on an even keel.

GLP may be the largest operator in China, but that does not mean it can charge more. It does not have lower costs since warehouses by their nature will be far apart enough that very few goods and services can be shared or obtained in bulk. It may have an easier time signing large nationwide clients, but at the same time such clients may also demand discounts in exchange for giving it so much business.

The likes of UPS, FedEx, DHL and JD.com are well aware of the volumes they generate and will not willingly pay a premium for warehousing and logistics services. Remember that a warehouse, whether modern or antiquated, is ultimately just four walls, a roof and a door. For corporate image purposes there is of course a minimum standard required, but any major operator will maintain its facilities well above this level.

Despite their common emphasis on high-quality assets and blue-chip customers, peer companies like Goodman Group and Prologis (the original owner of GLP's China and Japan assets) have either added very little value or actually destroyed value for shareholders when measured by growth in book value per share. So far there is no evidence that GLP will be any different.

It will be obvious to anyone who studies the logistics sector that the money is in services and not assets. The asset-light companies have done very well for their shareholders. For the asset-heavy companies the returns have been far more modest.

Each group of companies is priced accordingly. Graham-type investors may well prefer the second group for the low price paid for hard assets which provide a floor in terms of liquidation value. On the other hand, Fisher-type investors may find the first group more appealing given that growth is not limited by the availability of capital.

As usual, YMMV.

[ghchua]

One should not view GLP purely as an asset heavy logistics asset owner but rather a developer, operator and a fund manager for logistics assets. If you want higher ROE, you should look at their fund management business which had been growing in AUM and therefore fund management fees throughout the years. Growth in book value per share doesn't capture the asset light business nature of their fund management business, thereby leading to a wrong analysis of their business. The fund management business should be separately analyzed using PE multiple of their net fee income earned from from their AUM.

Put it simply, GLP's return is much higher than a normal pure logistics asset owner or operator simply because they can scale up their business using the "network effect" of developing assets, operating them and divesting for development gain, plus earning recurrent fees from the fund management platforms created from their reduced stake in those divested assets. There is also further upside from those funds from promotes. In this way, GLP can recycle capital efficiently to develop more assets, while at the same time maintaining some exposure to those divested assets by earning fees from fund management platforms with higher ROE.

[d.o.g.]

GLP's fund management platform generates much higher returns than its development and rental businesses. Unfortunately it is not separately listed, and if you buy GLP most of your money buys the asset-heavy businesses.

The fund management business has a direct analog in ARA Asset Management. We can use ARA as a proxy to understand how much GLP's platform is worth.

ARA managed S$35.4bn as of 31 Dec 2015. It has a current market value of S$1.1bn or about 3.0% of AUM. Including advisory fees and profit sharing from its private funds, ARA's reported net profits have averaged 29 basis points of AUM over 2005-2015.

GLP managed US$32bn as of 31 Dec 2015. Using the same ratios as ARA, GLP's fund management business would be worth about US$960m or S$1.3bn. At 30 basis points of AUM, GLP would earn US$96m (call it US$100m) from its funds business. That is still small compared to its main business.

It is true that GLP's funds business could grow much more rapidly than its development/rental business, and if this happens then GLP as a whole gets interesting. But so far all the money freed up from selling warehouses to its funds has gone back into buying yet more land and warehouses, which means the relative contribution of the funds business remains small.

Things would be different if GLP decided to never buy or build another warehouse ever again and returned all the proceeds of asset sales to shareholders. That would make it extremely attractive at the current price.

However, so far GLP's fund management platform has just been another way to find buyers for the warehouses it builds or buys, rather than the target end-state, where the fund business is the only remaining asset and everything has been sold off to third parties or its self-managed funds.

Since GLP is behaving like a "normal" property developer i.e. build, hold/sell, repeat, I see no reason why it should trade any differently from such companies, which persistently sell at a discount to net asset value.

As usual, YMMV.

[ghchua]

Hi d.o.g.,

We have to give GLP time to scale up their fund management business in order to see the results. Yes, it does seem small at this moment but do remember that their fund management platform was established only in FY12. During the past few years, its AUM had grown from US$2.6bn in 2012 to US$20bn as of 31 March 2015 and as you have indicated, US$32bn as of 31 Dec 2015. As you can see, its growth rate is quite strong. If they can continue to scale up at this rate, you can be looking at an annual fund fees of more than US$150 million and above pretty soon.

As to returning cash to shareholders from asset sales, GLP had been paying increasing dividends since listing.

Certainly, GLP behaves much as a developer in a way but their timeline for realizing asset value through sale into a fund management platform might be shorter than most other developers out there. This is because they have a platform in place to realize value, unlike some other developers. Therefore, they are faster and more nimble than their counterparts out there. With this view, I think we should not lump them as any other logistics warehouse developer but one which has a strategy in place to unlock value and achieve higher IRR.

With the above in mind, it should deserve to at least trade at a premium as compared to other logistics warehouse developers out there.

[mulyc]

$1.81 now. Yet I cannot see anything wrong with this counter.

[shadow_walker]

I always have my doubt on GLP's business model and view its fund management model as over-rated. In fact, the business model is more complicated than the picture it tries to paint. The management team, Mr Jeffrey H. Schwartz and Ming Z. Mei, have also made themselves really rich in the whole process as compared to the minority investors.

GLP was the former China and Japan portfolio of Prologis. Prologis was overwhelmed by debt in GFC and forced to sell off the Asia portfolio. The late Jeffrey was also the former CEO of Prologis from 2005 to dec 2008, when he left on disagreement with the board on the method to solve the credit crunch. GIC then partnered with Jeffrey and Ming to take over the China and Japan portfolio of Prologis in 2009 before it was listed in 2010. Since GIC does not have the capability to manage those portfolio, Jeffrey and Ming was put in charge. Both guys were given a total of 189.8 million shares in a classic private equity arrangement when GLP ipo. That's the equivalent of $340 million in today's price, although they sold off 38 million vendor shares in the IPO at $1.96. Huge compensation indeed, but not the end to their windfall.

GLP's original business is a developer and owner of investment properties in logistics in both China and Japan. This original business is an asset heavy business where GLP acquires land, develop the properties, books a non-cash development gain of around 25% on completion and owns it as a landlord that earns gross rental yield of around 6-10%. As a result of the development gain, GLP is unlike the typical developer where the properties can be severely undervalued against market value. The properties are marked as investment properties on the balance sheet, therefore it will be revalued every year under accounting rule.

GLP started its fund management business in late 2011 by selling its Japanese portfolio to its self-managed fund. Income funds are for mature assets while development/opportunistic funds took over the development business. This was followed by the Brazil funds with the blessing of GIC. However, GLP is never a truly asset light business - just like how Noble is never an asset light business. GLP typically co-invest in the funds for 1/3 to 50% of the total equity commitment. The development fund requires at least 50% co-investment usually, while the income fund is around 1/3 stake. In essence, this is no different from the other listed properties companies in Singapore with their own reits platform - OUE, CDL, CapitaLand, FCL and e.t.c. While GLP reports fund fees of $150 million annually, more than 40% of it are paid from GLP as a Limited Partner in the funds to GLP as the General Partners. ARA is considerably lighter in asset intensiveness as it only provides at most 10% seed capital for its private fund. ARA's aum should be worth more than that of GLP.

If the business is truly light, we should see ROA going up over the years. However, ROA has been on a downward trends even if we don't strip out the non-cash development gain. The company has also raised perpetual securities and raised more than 230 million shares in 2 placement exercises. In FY2011, equities attributable to shareholder was USD 6.6 billion. In FY 2015, equities attributable to shareholder was USD 8.76 billion. However, if we stripped out the perpetual securities (Capital securities) of USD 595 million and the 2 additional placement of ~USD 480 million, add in the total dividend paid USD 430 million, additional equities generated over the 4 years will be USD 1.51 billion on FY 2011 equities of USD 6.6 billion. This is an annualized return of only 5.25%, despite revaluation accounting for half of those gains.

Corporate actions have also not benefitted shareholders. Most significant event for GLP was the China Investor Consortium's investment of USD 2.3 billion in the 34% stake of the whole China's operation for GLP (inclusive of the China's fund management business) in Feb 2014. The transaction implies a 1.05x net tangible asset for the consortium as compared to GLP's valuation of around 1.3x in 2014. Both Jeffrey and Ming subscribed for 56.75 million shares each in the New China Holdco (66% owned by GLP now) at the same price (US$1) as the China Investor Consortium and where it was financed by loans from the investment consortium. The 2 guys were also given another 21 million options each in the New China Holdco should an IRR of 15% be achieved for the China Investor Consortium. Given the significant contribution of the China's portfolio to GLP, the deal was probably destructive to shareholders.

Subsequently, GLP started to look to Brazil and US where one has to wonder where's the edge? In Apr 2014, GLP acquired USD 1.34 billion of properties in Brazil before finding LP to set up a new fund. It was only half a year later where it got a USD 700 million fund set up to buy over part of the assets. In 2015, it co-invested in US with GIC before finding other limited partners to pare down its US stakes. The company has deviated from its core development model to a business model where GLP thinks it can buy good assets at a cheap price and sell to other limited partners. GLP's new model of buying properties in bulk before it finds its LP is also different from other asset management firms that set up a fund before they start to figure which properties are worth acquiring.

When valuing GLP, one can use the equities as the investment properties are at fair value (assuming they are really at fair value) and strip out the intangible asset and perpetual securities. ARA's 2015 revenue is S$156 million while GLP is expected to generate US$150 million for its fund management business. However, more than 40% of the fees are paid from the left pocket to the right pocket. It is also more asset heavy in the fund management structure than ARA. Therefore, the worth of this fund management business should not be more than 50%* USD/SGD exchange rate * ARA's market cap. As compared to other Singapore properties company, I won't say GLP is really that cheap.

[mulyc]

I always have my doubt on GLP's business model and view its fund management model as over-rated. In fact, the business model is more complicated than the picture it tries to paint. The management team, Mr Jeffrey H. Schwartz and Ming Z. Mei, have also made themselves really rich in the whole process as compared to the minority investors.

GLP was the former China and Japan portfolio of Prologis. Prologis was overwhelmed by debt in GFC and forced to sell off the Asia portfolio. The late Jeffrey was also the former CEO of Prologis from 2005 to dec 2008, when he left on disagreement with the board on the method to solve the credit crunch. GIC then partnered with Jeffrey and Ming to take over the China and Japan portfolio of Prologis in 2009 before it was listed in 2010. Since GIC does not have the capability to manage those portfolio, Jeffrey and Ming was put in charge. Both guys were given a total of 189.8 million shares in a classic private equity arrangement when GLP ipo. That's the equivalent of $340 million in today's price, although they sold off 38 million vendor shares in the IPO at $1.96. Huge compensation indeed, but not the end to their windfall.

GLP's original business is a developer and owner of investment properties in logistics in both China and Japan. This original business is an asset heavy business where GLP acquires land, develop the properties, books a non-cash development gain of around 25% on completion and owns it as a landlord that earns gross rental yield of around 6-10%. As a result of the development gain, GLP is unlike the typical developer where the properties can be severely undervalued against market value. The properties are marked as investment properties on the balance sheet, therefore it will be revalued every year under accounting rule.

GLP started its fund management business in late 2011 by selling its Japanese portfolio to its self-managed fund. Income funds are for mature assets while development/opportunistic funds took over the development business. This was followed by the Brazil funds with the blessing of GIC. However, GLP is never a truly asset light business - just like how Noble is never an asset light business. GLP typically co-invest in the funds for 1/3 to 50% of the total equity commitment. The development fund requires at least 50% co-investment usually, while the income fund is around 1/3 stake. In essence, this is no different from the other listed properties companies in Singapore with their own reits platform - OUE, CDL, CapitaLand, FCL and e.t.c. While GLP reports fund fees of $150 million annually, more than 40% of it are paid from GLP as a Limited Partner in the funds to GLP as the General Partners. ARA is considerably lighter in asset intensiveness as it only provides at most 10% seed capital for its private fund. ARA's aum should be worth more than that of GLP.

If the business is truly light, we should see ROA going up over the years. However, ROA has been on a downward trends even if we don't strip out the non-cash development gain. The company has also raised perpetual securities and raised more than 230 million shares in 2 placement exercises. In FY2011, equities attributable to shareholder was USD 6.6 billion. In FY 2015, equities attributable to shareholder was USD 8.76 billion. However, if we stripped out the perpetual securities (Capital securities) of USD 595 million and the 2 additional placement of ~USD 480 million, add in the total dividend paid USD 430 million, additional equities generated over the 4 years will be USD 1.51 billion on FY 2011 equities of USD 6.6 billion. This is an annualized return of only 5.25%, despite revaluation accounting for half of those gains.

Corporate actions have also not benefitted shareholders. Most significant event for GLP was the China Investor Consortium's investment of USD 2.3 billion in the 34% stake of the whole China's operation for GLP (inclusive of the China's fund management business) in Feb 2014. The transaction implies a 1.05x net tangible asset for the consortium as compared to GLP's valuation of around 1.3x in 2014. Both Jeffrey and Ming subscribed for 56.75 million shares each in the New China Holdco (66% owned by GLP now) at the same price (US$1) as the China Investor Consortium and where it was financed by loans from the investment consortium. The 2 guys were also given another 21 million options each in the New China Holdco should an IRR of 15% be achieved for the China Investor Consortium. Given the significant contribution of the China's portfolio to GLP, the deal was probably destructive to shareholders.

Subsequently, GLP started to look to Brazil and US where one has to wonder where's the edge? In Apr 2014, GLP acquired USD 1.34 billion of properties in Brazil before finding LP to set up a new fund. It was only half a year later where it got a USD 700 million fund set up to buy over part of the assets. In 2015, it co-invested in US with GIC before finding other limited partners to pare down its US stakes. The company has deviated from its core development model to a business model where GLP thinks it can buy good assets at a cheap price and sell to other limited partners. GLP's new model of buying properties in bulk before it finds its LP is also different from other asset management firms that set up a fund before they start to figure which properties are worth acquiring.

When valuing GLP, one can use the equities as the investment properties are at fair value (assuming they are really at fair value) and strip out the intangible asset and perpetual securities. ARA's 2015 revenue is S$156 million while GLP is expected to generate US$150 million for its fund management business. However, more than 40% of the fees are paid from the left pocket to the right pocket. It is also more asset heavy in the fund management structure than ARA. Therefore, the worth of this fund management business should not be more than 50%* USD/SGD exchange rate * ARA's market cap. As compared to other Singapore properties company, I won't say GLP is really that cheap.

Bro shadow_walker, your insightful sharing is very much appreciated. 

If I may further prod you for your valuable two cents, then can you (or anyone) comment about its current P/B right now is around 0.7, whether there is that possibility that GLP might be taken private?