Urban Logistics REIT

This article is another addition to the material originally planned for the packed December newsletter, due out this weekend.

URBAN LOGISTICS REIT (SHED, 117.6p)

A lot of water has flowed under the bridge and a lot of parcels have been delivered since our last write-up on this ‘last mile’ logistics trust in May 2022, when the shares were 172p, already 15% down from their high of 200p set in mid-April 2022. The turn in the interest rate cycle brought values down sharply, although SHED has rallied of late from its low of 98.5p in October. We caught up with the managers after the trust’s interim results for the six months to September 30th.

The results, first of all, demonstrated some resilience, with net tangible assets slipping by just 0.5% over the six months to 161.7p per share, adjusted earnings per share up to 3.46p, more than covering the interim dividend of 3.25p, and 99% of rents collected. The trust’s portfolio of 130 ‘mid-box’ urban logistics assets leased to customers including Theo Muller Group, Unipart Group and Giant Booker cover 9.7m square feet with a valuation of £1.1bn. Nearly half of these assets are classified as core, with what the managers call “long, strong income”, and the other half falls into the asset management classification, where the managers see opportunities to increase rents and extend lease terms. This is really where the managers like to work, and there is also a small sliver of development activity, where the trust will forward fund new developments. At present the activity is subdued in that area, but the trust can allocate up to 10% of assets to developments, or 20% if they are pre-let. In these difficult markets the ‘core’ element is larger than usual as the trust consolidates its position in the absence of fresh capital, benefiting from past years of asset management work. SHED actually stopped allocating to new developments in early 2022 and completed its last building in the second half of this year. There is generally a lack of new supply coming on, the managers say, which is good for future supply and demand dynamics.

In terms of portfolio turnover now, the trust has sold a couple of assets to pay down some short-term debt, which means it has only £11m left of its expensive floating rate debt, costing around 7.4%. Transaction volumes are low in the market though, so this is not the best market for selling. The managers say that some investors are “coming back to the table” but this is not the ideal time to be recycling from core to asset management opportunities as the managers might normally be inclined to do. There is no urgency to sales, no pressing need for action. The macroeconomic environment is capping the scope to pursue external deals, so SHED is concentrating more on the asset housekeeping that is core to the business.

Maintaining and growing the income is an important aim, and we asked about the dividend, which is an important component of the return here. The 7.6p annual dividend implies a yield of 6.5%. Although the earnings for the half did cover the dividend, the dividend payments have not been fully covered since 2020, and the trust is continuing to work to improve rentals and bring in more income. In the next six months, another £6m of reversion in contracted rents should add to earnings, and analysts at two firms of stockbrokers are forecasting earnings of 8p-8.1p per share for next year. The managers said “we are pretty comfortable with those numbers” and they are not worried about tenant strength, even if recession hits the UK. In June the trust was informed that the parcel delivery firm Tufnells, which accounted for 3.3% of the rent roll, had fallen into administration. With a matter of weeks the trust had reassigned eight of the 12 buildings to another tenant, and limited the lost income to £0.27m, indicative of the generally strong demand for these buildings. The resulting rent collection figure of 99.1% was SHED’s worst-ever figure, “not exactly a bad number” as the managers observed. Manager Richard Moffitt has always been very particular about the tenant selection, avoiding more volatile sectors such as fast fashion. Lots of clients are in much steadier industries like pharmaceuticals and food, essential to the needs of customers.

This was a reassuring update, we felt, with no new complications, and the managers are sticking to their knitting, focusing on the asset management. SHED shares rallied after the better news on interest rates as the Bank of England held rates for a second month, but it came as no surprise that the managers still said “the share price does not reflect the inherent value in this business. It reflects the macro concerns that a lot of the market has.” We hope those concerns will recede as we enter a new year, which should provide a more supportive backdrop for Urban Logistics REIT.