The warehouse and logistics real estate investment trust has sold off its smaller assets as it targets larger warehouses that give tenants room to grow.
The coronavirus-resilient logistics property sector has become increasingly crowded and Warehouse Reit (WHR ) is honing its portfolio by shedding its smallest assets to make way for larger, more profitable warehouses.
Logistics assets have defied the property downturn and been the standout winners during the Covid-19 crisis as demand for distribution hubs and storage facilities soared amid the online shopping boom.
Half-year results from the £406m AIM-listed real estate investment trust (Reit) show its EPRA standard net tangible assets grew 8.5% in the six months to 30 September with a like-for-like property uplift of 6.6%.
This underpinned a total return on net assets of 8.8% in the first nine months of the year from the 5.6% dividend yielder, whose shares have gained 5% this year. That puts them well ahead of UK generalist property portfolios whose shares have fallen sharply, although the sharholder return lags the underlying 16% growth in net asset value for the nine months to 30 September.
Fund manager Andrew Bird has been making the most of the £153m the trust raised over the summer, already deploying over £90m into a property pipeline.
Bird has honed his portfolio to focus on larger multi-let industrial properties, which allow tenants to rent larger spaces that they will not outgrow.
‘We like large estates of 200,000 square feet that fit 10 units in because we have seen a trend where tenants outgrow the space,’ he said.
As part of this investment focus, Bird is gradually disposing of ‘mature, lower-yielding, or non-core assets’. Nine such properties were sold in the six months, with proceeds of £12.3m being redirected to ‘generate further income growth and higher total returns’.
The disposals – which Bird described as ‘housekeeping’ – included retail warehouses, offices, and some smaller warehouse units.
He said the investment team was constantly ‘challenging ourselves’ on the ‘bottom 5% of the portfolio’.
The assets he sold in the past six months were mainly rented by small ‘white-van man’ businesses which have ‘struggled in lockdown’.
‘We were happy to make disposals at book value,’ said Bird.
Bird has a pipeline in place to feed his remaining £60m of cash into but said there is a concern that asset prices are inflating as property investors ditched retail properties and offices in favour of logistics.
‘Rather than looking at new deals, we are focused on our pipeline but in terms of the wider market we are seeing prices increase with existing investors continuing to look and with new entrants, both UK and overseas capital,’ he said.
‘We are seeing premium prices paid for scale…but there are always anomalies and our job is to identify them.’
Bird said the increase in demand ‘is a trend that will continue’ as the ‘effort ratio – rent as a percentage of turnover – is not expensive and people need it, and there is not a lot of new supply’.
He predicted that prices will continue to rise for the ‘foreseeable two-to-three years’ but this does carry some risk for the portfolio.
‘The biggest risk is pricing gets to such a level that we will not be able to justify raising new capital as at IPO we promised to grow as long as it was accretive to shareholders and if prices get too high we would have to pause,’ said Bird.
If this becomes the case, Bird said there was ‘plenty to do’ with the existing portfolio. Unlike generalist Reits, WHR has maintained rent collection in the ‘high 90%’ during Covid-19 and when rent hasn’t been collected, this has provided an opportunity to ‘churn’ tenants, take back the space, and increase rent.
‘Markets will continue to hunt for income and sustainable dividends and I think against that backdrop, the earnings at Warehouse Reit look to be strong,’ he said.