Urban Logistics Reit (SHED ) has been on a buying spree as it rotates its portfolio into higher-yielding assets to drive earnings growth and fully cover the dividend.

Following a debt refinancing over the summer, which lowered the cost of borrowing on its extended £190m facility by 47 basis points (0.47%) to 4.5%, the £771m investor in mid-sized urban logistics buildings has been taking advantage of the current ‘arbitrage’ opportunity.

Most recently, having upgraded a ‘core’ asset in Peterborough, which includes measures such as installing more energy efficient LED lighting, Urban Logistics sold it in September for £7.7m at a net initial yield of 4.85%.

Chief investment officer Justin Upton, who joined from M&G a year ago, bought four assets off market in August and September at a net initial yield of 6.6%, rising to 7.1% after SHED carried out improvements.

‘The cheapest form of funding is to sell lower-yielding assets at 4.8-5% and buy 6-6.75%-yielding assets to get that arbitrage. The current cost of capital means lots of investors haven’t been in the market,’ Upton (pictured below) told Citywire.

The arbitrage, or the spread between the debt interest payments and properties’ net initial yields, has driven earnings growth, while the portfolio’s estimated rental value of £80.1m remains a large 27% above current contracted rent, meaning that when current vacant properties are leased, earnings will jump. Currently, the 7.60p per share dividend is 0.9 times covered.

Chief financial officer Jamie Waldegrave said that with 15% of the portfolio due a rent review, there was an opportunity to catch more than half the reversion, which is the highest level since launch in 2016, reflecting huge demand for logistics assets.

‘Dividend cover is a point on the journey and it should be well covered next year, when conversation will likely be more about raising dividends,’ Waldegrave said.

Over the six months to 30 September, the 6.8%-yielding fund’s net asset value softened 1.4% to 158.56p, reflecting the uncovered dividend and costs associated with acquisitions and debt refinancing, but interim results show that the payout lifts the total return to 1.3%.

Shareholder returns have tumbled 11% over the last month, according to Deutsche Numis, given investors’ concerns about Labour’s Budget and the US election, despite interest rates being on a downward trend.

The board has chosen not to buy back shares, which sit 32% below asset value, given buying properties was more accretive over the summer when the discount was a bit tighter, but Upton and Waldegrave said this had not been ruled out.

The pair are hopeful that stability following the two main fiscal events – and a softening in the 10-year UK government bond yield from the current 4.5% – could help to improve sentiment.

‘If you can add value, improve and grow income, you’ve got a better chance of protecting value and show that we’re not just a bond proxy,’ Upton said. ‘As long as I can trade assets at a good arbitrage and we can sign leases at market rental rates, we can grow and add value.’

Valuations have proven very attractive for US private equity, which has swooped into the UK’s Reit market and picked up several trusts. Earlier this year, Urban Logistics tried to acquire Abrdn Property Income, but was pipped by GoldenTree.

Upton and Waldegrave emphasised that the trusts taken over this year – ‘big ticket items’ that include Abrdn Property Income, Balanced Commercial Property Trust and Tritax EuroBox – all have heavy weightings to the industrial logistics sector, underlining how attractive their sector is.

‘Private equity is paying market rate, they’re paying low single-digit discounts to prevailing net asset values,’ Upton said. ‘It feels like they’re calling the bottom of the market and putting their chips on the table.’