August 6, 2020
A focus on in-demand last-mile delivery facilities has meant that rent has continued to roll in for Urban Logistics Reit (SHED) despite the pandemic, which is supporting attractive dividend payments. While the shares have regained all of the value lost in the immediate aftermath of March’s equity market crash, they still trade at a discount to forecast net asset value (NAV), which we think is undeserved given strong prospects.
The Reit lets single-tenant, mid-sized (between20,000 and 200,000 square foot) logistics sites across the UK. Most tenants were able to continue their trading undisturbed throughout lockdown, with just two out of 39 sites not fully operational. The group collected all second-quarter rent and, by 6 July, 98 per cent of third-quarter rent had been received, with the remainder expected imminently.
Admittedly, the weighted average unexpired lease term of just under five years is shorter than peers and its tenant base is not as diversified, with multi-national logistics group Uni part accounting for around a tenth of contracted rent. However, after acquiring two portfolios using part of the proceeds from its £136m February equity raising at137.5p, the top 10 tenants accounted for 56 per cent of contracted income, down from 72 per cent prior to the purchases. The effect of the dilution from issuing new shares is reflected in the forecasts in the table.
However, the group is not only reliant on acquisitions to increase rental income. Rents are benefiting from the short supply of urban logistics property and strong demand from growth in ecommerce. Four rent reviews completed last year generated average income growth of 38 per cent on previous passing rent. Together with three new lettings, that boosted rental income by 3.4 per cent. In a market as strong as this, short lease lengths are not such a bad thing for landlords.
Rent growth has enabled the group to raise the annual dividend paid in each of the four years since shares in the group – then named Pacific Industrial and Logistics Reit – began trading on the Alternative Investment Market (Aim) in 2016. After paying total dividends of 7.6p a share in respect of the 2020 financial year, management intends to declare a first interim dividend in respect of the financial year to March 2021 when it announces half-year results in November.
Demand for urban logistics assets – combined with asset management initiatives – means it has managed to dispose of property either at or above book value during the year to March. Selling three sites generated £18m, which taken together with the rental income earned during ownership represented an average total property return of almost 50 percent on the purchase price.
After deploying £98m of the proceeds raised earlier this year, the loan-to-value ratio stood at around 15 per cent. However, after agreeing a £151m senior debt facility, which matures in 2025, management is targeting a range of between 30 and 40 per cent in the medium term.