Entra – A Safe Haven?

Introduction and summary:

Entra (Eiendom) (tickercode is Entra) is a Norwegian real estate company – owner and manager – listed on Oslo Stock Exchange. It was recently included in the OBX-index, the main index that tracks the 25 most liquid companies. The market cap is 22 billion NOK, pretty modest by international standards.

Entra will not set the world on fire, but should provide a little bit of “safe haven” over the next decade due to these factors:

  • 58% of the tenants are public entities. The Norwegian state has an enormous buffer in the Sovereign Wealth Fund (SWF) and there is no lack of money. Thus, Entra has reliable tenants.
  • Very little exposure to both oil and Covid-19 industries.
  • In a zero interest rate policy (ZIRP) environment I believe real estate is one of the places where you can achieve good risk adjusted returns. I base this on the experience from Japan, but this could of course be a spurious correlation. Norwegian real estate is at all time high.
  • Entra is now trading at the lower end of its historical NAV.
  • If the interest rates go up, Entra is a good hedge against inflation as rents are passed on to the tenants, albeit with a time lag.

First some (boring) facts:

  • Occupacy at the end of 1Q2020 was 97.4%.
  • The lowest occupacy rate was in 2014 during the oil crisis (94.6%).
  • The biggest 20 tenants are 44% of the rental income.
  • 42% of the tenants are private entities, 58% are public entities.
  • The Oslo area is 73% of the portfolio value, Bergen is 11%, Trondheim is 11% and Stavanger is 5%.
  • Oslo prime yield before Covid-19 was 3.7%.
  • WAULT (weighted average unexpired lease term) is 6.9.

The rental yield based on estimated market values of the portfolio has slightly decreased in line with the interest rates:

2015 5.95%
2016 5.31%
2017 5.18%
2018 4.92%
2019 4.77%

Entra owns 90 properties worth around 50 billion NOK, which they rent out and manage. Hence, they are also property managers. The revenue derived from property management has been around 40% compared to the rental income.

Performance:

Entra has a relative short history as a public company. It was listed in 2014 when its main shareholder, The Norwegian government, decided to file for an IPO. Since then it has compounded at 12.5% with dividends reinvested, of course helped by falling interest rates.

Since 2015 EPRA NAV has compounded at 13%, but most of the growth came in 2016 and 2017.

Shareholder structure:

At the IPO The Norwegian government owned 34% but it has gradually sold off its shares. Among the 5 846 shareholders at the end of 2019 Folketrygdfondet (public social security fund) was the biggest shareholder with 8.8%. The inside ownership is practically insignificant. Thus, this is not an owner-operated company.

The dividend:

I suspect many private investors own Entra because of the dividend. Dividends are paid twice a year, where the latest in May 2020 was 2.4 NOK. A similar payment is expected in 6 months, thus giving a yield of 3.9% as of today.

The dividend per share has grown substantially:

2015 3
2016 3.45
2017 4.1
2018 4.5
2019 4.7

The high growth is unlikely to continue and the future dividend hikes will most likely be similar to the inflation rate plus some. But I consider the dividend safe.

Leverage:

Real estate companies are leveraged, but I would say Entra is somewhat conservatively leveraged: the LTV has gradually gone down from 46% in 2015 to 39.7% today. At the same time the interest coverage ratio has increased from 2.5 to 3.3.

Moody’s rates Entra’s debt to Baa1, which is investment grade and thus moderate credit risk.

Valuation:

Entra is currently trading at the lower end of its EPRA NAV (current price of 125 NOK per share):

Entra Eiendom: discount to EPRA NAV. Source: annual reports and my own calculations.

This might be justified due to the uncertainties surrounding Covid-19. However, management thus far see little impact from the virus and the “lockdown”, but the long-term effects of the virus are of course yet to be seen.

Conclusion:

I have a small position in Entra, and I expect to own it for the foreseeable future and add when I see any meaningful pullbacks.

I own it because of these reasons:

  • I mainly own Entra to conserve my capital against inflation.
  • I expect lower returns from equites over the next decade (no matter what) compared to 2010-2020. If inflation remains subdued Entra could outperform, just like real estate has in Japan over the last two decades.
  • The large share of public tenants should provide “safety”.
  • It has a somewhat conservative balance sheet.
  • Less exposure to oil than the general Norwegian economy.
  • They focus on the urban areas where I expect to see population growth.
  • Less than 10% of the income is from industries that is affected by the Covid-19.
  • The track-record indicates high occupancy, both during 2008/09 and the oil crisis in 2014-16.
  • Basically no retail exposure, mostly offices.
  • Real estate in the form of offices will “always” be in demand.

 

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 3rd of July 2020.)

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