Is Servcorp a buy?

Among the real estate investment trust industry, Servcorp (ASX: SRV) stands out as an interesting business model. Rather than purchasing or developing real estate such as office and commercial sites, it takes out leases of whole floors of buildings in many different cities around the world. It offers up office space and associated services to business people and companies that may need office space on a temporary basis or don’t want to take out long-term leases. However they still want a place to do business or meet clients in established business districts in major cities. Also, it offers business people the opportunity to have a virtual office that acts as their place of business, although they could be working at home or abroad.

As of 30 June, it operated 132 floors in 52 cities across 21 countries. In 2013 it had $207 million in revenue, upon which its $21 million NPAT was up 44% compared to its $14.8 million result in 2012.

Since a post-GFC fall in earnings in 2010, business has been picking up well and it has been able to lock in office leases at reduced rates when the property market wasn’t that strong. That feeds into its earnings by way of lower running costs. It has low gearing with no long-term debt, and both net profit margin and return on equity have been building up over the past several years, now at 10.7% and 10.2% respectively.

Regular office property management companies like Dexus Property Group (ASX: DXS), Investa Office Fund (ASX: IOF) or Charter Hall Group (ASX: CHC), deal in leasing office space, but their customers have multi-year leases and their kind of business is geared for long-term tenancy. Servcorp fills a niche for businesses and business people on the go.

Foolish takeaway

As an investor, I would want to know what the market prospects are for this kind of company and how this kind of office leasing is being taken up by current and potential customers. One thing that investors also need to look at is tenancy rates and the need to provide incentives to entice customers to lease. The company stated in its 2013 annual report that they have been able to achieve tenancy rates of 81% for its mature floors in the fourth quarter of the FY2013. This is approaching its goal of 85%-90%. Tenancy rates need to be watched carefully to gauge earnings and growth.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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