Urban Logistics (LON:SHED) invests in ‘mid-box’, ‘last-stage’ distribution warehouses. Latest interim results indicate further strong progress, with EPRA NAV per share up 12% in 12 months and EPS and dividends up 25%. Positive market demand for this asset class is broadly based, including e-commerce fulfilment. Management has proved asset values in the market via a series of asset disposals, achieving blended 58% average total property returns since IPO. Supply of such assets is limited. Also, Urban Logistics’ assets contain essential staff of life for the conurbations they service. Thus, we argue that the asset values are particularly conservatively stated.
- Acquisition pipeline: The pipeline update, provided 6 January, indicates £146m assets in advanced stages of negotiation with a similar amount for the medium term. The former comprises three portfolios plus 12 individual assets, on a 6.8% net initial yield and average 7.8-year leases.
- Growth strategy: Management has a deep specialist knowledge and has delivered strong consistent returns as a result. To fund a potential pipeline, an equity fund raise is being considered. Liquidity (percentage of shares traded over a given period of time) tends to be enhanced by greater market capitalisation.
- Valuation: On a 5.3% dividend yield (2H’19 plus 1H’20) and with momentum behind earnings and NAV, and compared with other yields in the peer group, the rating is attractive. We contend there is insufficient appreciation of the investor benefits of this last step logistics supply chain into growing conurbations.
- Risks: A 6.1-year (5.4 to tenant break option) WAULT (weighted average unexpired lease term) means reversionary rent rises are set to come, but also that new leases must be secured. In the past ca.20 years, aggregate rent rises have been minimal. Physical reduction in supply and strong demand mitigate risk.
- Investment track record: Urban Logistics owns a £195m warehouse portfolio. Since listing on the AIM in April 2016, it has generated annual NAV and dividend returns of 16.1%. The experienced management team has bought well. Market rents are ca.9% above the REIT’s current levels as evidenced by two recent reviews. Market vacancies are only ca.5% and Urban Logistics’ vacancy is nil.
