Small Cap Value Report (25 Oct 2021) - SHED

Good morning, it’s Paul amp; Jack here with the SCVR.

Paul here – a very boring weekend here in Madeira – but at least the weather is pleasant.

Agenda –

Jack’s section:

Urban Logistics Reit (LON:SHED) – logistics REIT specialising in units that store products just before they reach consumers. Rental collections are strong, the dividend yield is around 5%, and a main market listing beckons.

Explanatory notes -

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Share price: 170p (pre-open)

Shares in issue: 324,916,587

Market cap: £552.4m

This company looks for buildings that sit between ‘big box’ units and more traditional industrial estate outlets, between 20k-250k sq ft.These buildings are fit for purpose logistics buildings where products typically have their last stop before arriving at customers’ homes. It’s an opportunity as these are mission-critical points in an increasingly complex supply chain. You can see more of its estate here.

The share price performance has been positive since listing and, although SHED trades at 1.43x tangible book, it manages to pay out a c5% dividend, which should hopefully continue to appreciate as rents for this type of property increase.

The Quality metrics are also encouraging.

Trading update

Highlights:

• 99.4% occupancy across 91 logistics properties,
• Rent collection over 99% for the half year ended 30 September 2021,
• Deployment or commitment of capital from recent fundraising across 8 transactions for £103m (5.5% weighted net initial yield),
• Around £50m of further investments in advanced stages and are expected to be completed in the near term at a weighted average 6.2% NIY,
• New pipeline of over £400m of high-quality logistics properties identified, ‘utilising the Company’s extensive proprietary network to source off market deals’.

There have been 15 new lease events completed across the portfolio, totalling 813,939 sq. ft. generating an uplift of £1.6m in contracted rent. These events comprise 11 new lettings, 3 regears and an open market rent review.

Notable asset management events include:

• The Unipart Group (part of a logistics contractor for the NHS) has extended its existing lease for the 136,383 sq. ft. property for an additional 10 year period. The rent rose 18.0%, from £593,250 to £700,000 (£5.12/sq. ft.),
• An open market rent review was completed with Meritor Aftermarket UK Ltd, for the 26,179 sq. ft. property they occupy in Redditch, just south of Birmingham. The rental rate increased from £117,806 (£4.50/sq. ft.) to £138,749 (£5.30/sq. ft.), an increase of 17.8%,
• Wincanton has signed a new 15 year lease for a 132,487 sq. ft. unit in Paisley, near Glasgow. The building was purchased a year ago and the lease in place at the time was extended on a short term basis before the unit was substantially refurbished, The agreed rent was £828,044 (£6.25/sq. ft.), up 13.7% from the previous recognised rent of £727,986 (£5.28/sq. ft.)

The company is also now planning a move to the premium segment of the Main Market.

Richard Moffitt, CEO, comments:

The logistics real estate sector continues to enjoy very positive market conditions in recent months with an ongoing supply and demand imbalance for suitable properties. We remain highly focused on our last mile, or last touch, strategy, where we have built a market leading position. Last mile logistics assets play a crucial role in the supply chains of our tenants demonstrated by our occupancy figures of 99.4%. Our activity in this sector is underpinned by a focus on acquiring high quality, well located assets let to robust counterparties as demonstrated by our recent rent collection figures, in excess of 99% for the past half year.

Conclusion

The rental uplifts here suggest there is a high demand for the type of logistics space that Urban Logistics specialises in. Meanwhile, the move to the Main Market plus the recent capital raise shows an ambition to grow. Everything we are hearing suggests supply chain issues and likely an increased demand for space, which could help push rents up.

Going forward, the group will focus on active asset management to drive capital value creation in the existing portfolio. It will also use its network to access ‘attractive off market deals at compelling valuations’.

Urban Logistics is building a strong reputation here, and it now has a major portfolio of 91 ‘last mile’ assets. REITs tend to be more geared towards income investors, so it’s good to see a couple of special dividends in recent years. The £50m pipeline also bodes well though, as the group is operating in a bit of a sweet spot, away from the troubles of Hammerson et al.

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