Comments by Amazon’s chief financial officer in April that the e-commerce giant had taken up too much warehouse space have cast a cloud over the industrial property sector, but can’t diminish what has been a ‘transformational’ year for Urban Logistics (SHED ).

Annual results last week showed the real estate investment trust, which specialises in ‘last mile’ distribution depots, enjoyed an exceptional 12 months, doubling in size to just over £1bn by 31 March as it took in £358m from two share issues and saw the value of its properties soar 25.4%.

Although the ‘cash drag’ from the fund raisings meant dividends for the increased number of shares were held at 7.6p per share and were only 0.88 covered by adjusted earnings of 6.71p, the payouts helped generate a total investment return of 28.9%. 

The company guided investors to expect the semi-annual dividends to be held at the same level this year as the board seeks to restore a covered dividend. This puts the Reit on a forward yield of 4.3%.

The 23.9% leap in net asset value (NAV) to 188.8p per share means Urban Logistics has delivered an average annual investment return of 16.4% since it floated on the London Stock Exchange six years ago.

Chief executive Richard Moffitt (above) said the trust’s promotion during the year to the ‘mid-cap’ FTSE 250 index from the junior AIM market was driven by a strengthening in demand for logistics assets as companies on-shored and built ‘resilience’ into their supply chains following Covid-19 setbacks, a blockage in the Suez Canal, Brexit and petrol and HGV driver shortages, as well as the war in Ukraine.

‘Investment volumes in the warehousing market have been exceptionally high in the calendar year 2021, at £18.4bn, almost double 2020’s record of £10.2bn,’ he said with price rises driven by ‘yield compression’ as capital poured into the sector.

‘Despite this, we have continued to source assets off market, allowing us to generate attractive pricing, even as yields for logistics assets continue to tighten, as we have seen in our own portfolio, now valued at a blended yield of 4.3%.’

Forward funding

The portfolio finished the year with 113 assets, having invested £282m of its fund raisings at a net initial yield of 5.3%, that fell as the properties were revalued higher. It also advanced £52.9m to forward fund nine developments at a 6.7% yield on cost.

The demand for warehousing amid ongoing crises ‘shows no sign of slowing down’ and Moffitt noted that take-up of warehouse space in the first quarter of this year was 10.4m square feet, double what it was in the first three months of 2021.

‘This demand-side pressure has led to a response on the supply side, as more project starts have been recorded in 2021 as compared to 2020,’ he said.

‘Nevertheless, the constraints on supply are not easy to surmount as planning for this class is not easy to come by. In addition, build costs have been rising sharply, as has the cost of suitable land, leading new space coming to market at well over £150 per square feet – which is exceptionally high when considered as a replacement value for our stock which is currently valued at £122 per square feet.’

With inflationary pressures mounting on developers, Moffitt expects speculative development opportunities to become ‘more constrained’ which will inevitably put upward pressure on rents and reduce vacancy rates. The portfolio has already seen its rents increase, with rates up 16.4%.

Inflationary pressure on rents will also work in the trust’s favour a Moffitt said ‘we are able to capture inflationary uplifts in rental incomes quickly’.

The flip side of inflation is the rapidly rising interest rate, but Moffitt said the trust’s debt is 74% hedged against rate rises and he recently entered into a 10-year fixed rate term loan to extend the debt maturity to 5.1 years and increase ‘our overall fixed or hedged position to 95%’.

Waiting for opportunities

‘Towards the end of the year we took a decision to slow the pace of investment to allow us to take advantage of opportunities in the market in a time of economic turbulence,’ he said.

By the year-end the company had cash of £127.4m and £239m of borrowings to give it a net loan-to-value of 11.3%, well below its target range of 30%-40%.

Moffitt still expects the logistics sector to outperform over the next five years. He said the UK economy will ‘not go back to the way things were’ and there will be continued emphasis on supply chains as ‘global trade rules are rewritten’.

‘All of this provides tailwinds to our business model of last-touch, mid-sized logistics assets, let to financially resilient tenants,’ he said.

‘As an active manager, we don’t rely on yield compression for our portfolio valuation, instead we focus on moving rental rates and covenants forward. Given our long experience in this sector, we are still able to source assets off market at attractive yields.

Since last Thursday when the results were published, SHED shares have narrowed their discount from 13% to 8% to Numis’ current estimated NAV of 190.5p per share. At the time Numis analyst Andrew Rees said the discount ‘offers some potential value given the underlying prospects for rental growth remain attractive and management’s track record of extracting value from the portfolio.’