James Carthew: a fair wind fills the sails of logistics funds

The big question on investors' minds as they look to a post-pandemic future is which, if any, of the changes forced on us by the lockdown measures will end up being permanent?  Thinking about the potentially profound impact on companies and sectors, property leaps to mind as one that will probably have to adapt. There is plenty of anecdotal evidence that the lockdown is accelerating the shift towards online shopping.

My hunch is that many of us that were resistant to this trend ahead of the pandemic are now starting to embrace it.  The penetration of e-commerce is much more pronounced in the UK than in Europe, but Europe has been playing catch up. This process has put considerable pressure on most retail-focused property funds and triggered the launch of a number of focused on the warehouses needed to support online shopping and delivery.

Therefore, it has been surprising for me to see over the emergence of discounts on the once popular retail logistics sector. From the flagship Tritax Bix Box (BBOX)  real estate investment trust (Reit), which is now on a 12% discount, to smaller players such as Urban Logistics Reit (SHED) on a 9% discount, and from the 20% discount on Tritax Eurobox (BOXE) to the 10% discount on Aberdeen Standard European Logistics Income (ASLI), value has emerged in a sector that ought to be booming in the current market environment. By contrast, Supermarket Income Reit (SUPR) has held up well and stands on a 13% premium, despite the increasing take-up of online groceries - an area that looked relatively under-penetrated within e-commerce before the Covid-19 outbreak.

I get the attraction of SUPR - principally long, inflation-linked leases with good covenants and the ability to use stores as last-mile delivery facilities - but why is it trading on a valuation premium to many of the logistics property firms? To be fair, not every one of these firms is trading at a discount. For example, Warehouse Reit (WHR) is on a 5.8% premium. LondonMetric Property (LMP), which has more than a third of its portfolio in urban logistics, was able to raise GBP120m in an oversubscribed placing earlier this month at a 4.7% premium to NAV.

The shares have performed strongly since and now trade on a 13% premium. LMP wanted the money to finance additions to its urban logistics and long income portfolios. In the latter group it is buying five assets on a sale-and-leaseback basis with a convenience store/online operator.

Those leases are for 20 years and the rents are indexed to the consumer price index measure of inflation. LMP reckons that e-commerce and convenience retail are complementary and will continue to grow at the expense of traditional retailing. Having collected 92% of the rent due by 1 April, LMP felt able to commit to its upcoming dividend ahead of its fundraise, putting it on a 4.3% yield.

It is fair to say though that some of the tenants of these companies are finding life difficult. ASLI said in a recent statement that it had collected two thirds of the rents it was due and was keeping its dividend payments under review as a result. ASLI will do what it can to help those tenants that are struggling to get through the current crisis but, on a longer term view, it should be set fair. 

Those tenants that are exposed to the food, pharmaceuticals and home delivery sectors are booming. As online shopping ramps up in Europe, the supply of high quality, well-located and right-sized logistics assets is unlikely to match demand. If needs be, ASLI should be able to find replacement tenants at attractive rents.

BOXE recently reported an increase in its net asset value (NAV) over the six months to 31 March. As of 12 May the company had allowed four tenants to defer their rent, equivalent to 15.7% of what was due. This real estate investment trust has higher levels of debt than ASLI but still has headroom within its covenants or bank agreements. 

I was encouraged to see the portfolio had been diversified by property and tenant having become a bit uneasy by the earlier dominance of a Barcelona warehouse let to Mango. BOXE points out that Covid-19 related construction delays could exacerbate the shortage of logistics property - this could help underpin rental growth. SHED plans to publish results at the end of the month, as does WHR.

SHED raised GBP136m in February/March and has spent GBP103m of this already. It might be that investors think its focus on smaller single-let assets makes it more sensitive to economic disruption. However, at 30 April it said that all of its rents had been collected.

SHED's shares are trading below the recent issue price. If the boost that the e-commerce sector has received from the lockdown proves to be long lasting, it is hard to see how these investment companies won't continue to do well. Most were launched relatively recently to take advantage of a multi-year trend.

I cannot help thinking that there is value to be had here, in Europe in particular.

James Carthew is a director at Marten & Co, operator of the QuotedData website.

The views expressed in this article are his and do not constitute investment advice.

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