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Now Warehouse Reit bags bargains from open-end funds

21 May 2019

Warehouse real estate investment trust deploys over half of the £76 million it raised in March as under-pressure open-ended property funds sell assets to meet investor redemptions.

Open-ended property funds desperate for cash have provided Warehouse Reit (WHR) with bargain buys this year.

The £250 million AIM-listed real estate investment trust (Reit), which buys smaller multi-let warehouses in ‘last mile’ locations, raised £76.5 million in a share placing at the end of March.

Andrew Bird, managing director of Tilstone Partners, investment adviser to Warehouse, said £45 million of this had been invested in six weeks of the raise, taking advantage of what  said was a ‘hiccup’ in the first quarter.

Reits have been snapping up cut-price properties from open-ended property funds, which suffered a wave of redemptions, with investors concerned of a re-run of 2016 when open-ended funds suspended trading after the EU referendum result.

The need for cash to pay back investors leaving open-ended funds meant closed-ended funds had negotiating power, a point that LXI Reit (LXI) also highlighted at its results on Monday.

‘We have definitely benefits from being able to buy from [open-ended] funds, and that was the point of the capital raise,’ said Bird.

‘We bought one or two assets that would have been 50 basis points more expensive last year.’

Bird said investors who took part in the capital raise had moved out of open-ended funds for ‘the strength of the underlying dividend and potential for growth’.

The shares issued in March were priced at 2p discount below net asset value (NAV), a situation that would normally annoy existing investors who will see their holdings diluted. However, Bird said the fund raise, even at a discount, mean ‘we can buy assets that were more expensive six months ago, and we will more than make that up’.

Warehouse floated in 2017, raising £146.8 million, with the aim of tapping into the increased demand for storage facilities as e-commerce and online shopping, which is expected to grow to 26% of retail sales by 2022, from 18% in 2018.

Bird said there was ‘a weight of capital trying to get access to the market’ and the ‘hot prices’ are in the large warehouse assets and long-dated leases are at a ‘premium price’ but Warehouse was focused on small and medium-sized warehouses under 50,000 square feet.

In a competitive market, Bird believes the fund has found another profitable investment route in buying older stock that needs ‘light levels’ of investment.

‘We are buying buildings that are 10-20 years old and that respond to light levels of capex,’ said Bird.

‘In a 20-year-old building the basic fabric is fit for purpose but it could need a lick of paint or replacement shutters, things that aren’t that expensive; £5 per square foot of capex can equal £1 on the rent per foot.’

Bird is confident Warehouse will not be short of opportunities to deploy its freshly raised capital, expecting the rest of the £76.5 million to be invested with six months.

‘Last year £8.4 billion of stock was traded so there is vibrancy to the sector and our job is stock selection,’ he said.

It will not, however, attempt to buy any property portfolios with the cash raised following the failed attempt to buy fellow Reit Hansteen Holdings (HSTN).

Warehouse shares were suspended for six weeks while it attempted a transformational reverse takeover of £460 million Hansteen, home to the former Ashtenne Industrial fund.

‘It is better to have loved and lost,’ said Bird. ‘We were attracted by the scale – which shows you the ambition of this trust – but we had to remain diligent in terms of acquisition price.

‘We remained true to our cause [of deals being accretive to shareholder value] and stepped back from the deal. We do not anticipate that we will revisit that deal and buying portfolios is not a focus at the moment – we do not want to pay a premium and the market may be at that point.’

In annual results for the year to 31 March, Warehouse delivered a total return on net assets of 13.3%, ahead of its average target of 10%. Excluding dividends of 6p per share, net asset value per share rose 7.4% to 109.7p valuing the portfolio at £307.4 million. Returns were evenly spread with a total gain including 3p of dividends of 6.6% in the second half of the year. 

Although EPRA earnings per share of 5.1p did not cover the dividends, adjusted earnings, excluding the costs of a tenant default in Deeside and the exceptional costs of the Hansteen talks, did at 6.4p per share.

Tbe shares closed 0.5p up at 104.5p on a 5% discount to NAV and an historic yield of 5.8%.

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