The decisions to reduce leverage and speed up the disposals of our non-MLI assets in Germany during 2019 have been very beneficial in light of the COVID-19 pandemic. Stenprop is currently well positioned with c.£60 million of free cash (after paying the final dividend of c. £9 6 million), available for deployment into suitable MLI investments in the UK and a low LTV of 40.8%. The UK MLI portfolio continues to perform well during the crisis. We expect our MLI customers to be able to return to work relatively quickly as the lockdown conditions relax in the UK. We believe that the longterm outlook for MLI in the UK will be enhanced by this pandemic (see below), but in the meantime, a mixed portfolio of assets is providing the company with additional income and capital diversity whilst the current volatility in markets and political responses unfold.
Our strategy for dealing with the COVID-19 pandemic is as follows:
- Short term (March-May 2020) In the first few weeks of lockdown in
late March and early April we moved swiftly to reassure our UK MLI customers that we would support their businesses and requested that they get in touch if they were going to be unable to meet their rental obligations. We then moved on from this position to offer those customers who were unable to pay their rents the option of deferring half of their monthly or quarterly rent for six months, so long as they paid the other half immediately. Over the course of the first six weeks of the lockdown, we spoke to the majority of our customers who were unable to meet their rental obligations with a view to gathering information on their specific business circumstances.
To date, we have only offered very limited rent concessions, and in those instances to customers whose businesses have been completely halted by the virus lockdown (such as those in leisure).
We have continued discussions on the sale of our German retail shopping centres where demand remains strong.
- Medium term (June 2020 to December 2020)
As the lockdown measures have relaxed we have seen the majority of our customers able to resume business. In Europe most of our properties were open and trading (including the leisure operators albeit on a reduced basis) by the middle of May, and in the UK we have seen significant activity amongst our MLI customers as they resume trading. It is inevitable that different types of business will be impacted in different ways, and so each rent arrears position will need to be assessed on its own merit. We expect to recover most arrears through deferred payment plans or by reaching other compromises such as lease extensions, future fixed uplifts or other revised lease terms.
Where rent concessions are appropriate, we intend to reach settlements swiftly and without delay, so that the focus of the business can return to managing the day-to-day activities of the portfolio and to address inevitable economic challenges that we will face in the post COVID-19 economy. We also intend to maintain higher levels of capital reserves on the balance sheet whilst uncertainty remains, but we intend to resume MLI acquisitions where opportunities arise which offer the right risk-adjusted returns.
- Long term (January 2021 and beyond)
We believe that the MLI sector in the UK will be impacted by any significant UK recession. However, the supply constraints in the market and relatively low rental levels should mean that rents remain resilient. The high levels of diversification in customer type, size, and location across the MLI business should also provide a degree of protection. We believe that MLI property provides businesses with the opportunity to trade in a socially distanced, compliant way, and that demand for urban industrial and logistics property will grow. We intend to continue with our transition into being a 100% focused UK MLI business, with further sales in Germany and Switzerland.