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Urban Logistics' last mile strategy in good shape as fulfilment demand grows

Urban Logistics focuses on the last mile of the logistics supply chain, which means its properties are smaller than the huge depots but there is a chronic shortage even so
warehouse
It's all about sheds these days

Investors have become familiar with the big box warehouse story but they seem to be overlooking the arguably even stronger case for Urban Logistics Reit PLC (LON:SHED).

Urban Logistics focuses on the last mile of the logistics supply chain, which means its properties are smaller than the huge depots dotted around the country’s motorways.

Watch:Urban Logistics CEO hails security of income and quality acquisition pipeline

That does not mean they are less in demand, however, far from it.

Total returns (dividends plus asset growth) by the trust over the past three years have been 17.7%, 10.9% and 19.1% respectively.

That’s more in line with a tech company than a property trust and reflects both the growing demand for e-commerce fulfilment but also a structural shortage of good logistics properties says Richard Moffitt, the trust’s chief executive.

Some 8.5mln sq ft of space was acquired in the UK in 2018 in the under-200,000 sq ft category.

Chronic shortage of logistics space

That, though, compares with new build development running at 2.5mln sq ft, which amounts to a ‘chronic shortage’ and something likely to keep the market for good quality logistics bases buoyant for some time.

Urban’s portfolio comprises 34 properties currently with a size of between 90-000-100,000 sq ft on average.

Leases are six years on average but Moffitt says tenants have been in situ for up to 19 years.

Research suggests it can cost £4mln to shift a logistics base so as long as the buildings are in good shape there is a substantial disincentive to move.

Strong tenant base

Urban Logistics also has a strong base of tenants ranging from logistics giants DHL and XPO to retailers Sainsbury’s, Boots and Travis Perkins.

Solidity is key to the portfolio, which is fully let, and that explains why there are no fashion retailers on the tenant roster.

Moffitt is bullish on prospects for property demand at Urban’s end of the market.

“We are a B2B business,” he says and points to the US where the market is growing exponentially.

“The US is 4-5 times ahead of where we are currently, so there is a long way to go yet.”

Brexit buffer

Even so, Urban is structured to deal with potentially tougher conditions in a post-Brexit Britain.

Properties are valued at 30-70% of the rebuild cost, which gives a good buffer if there is a stickier period ahead.

The trust has also proved adept at raising the rents on properties it has acquired and Moffitt believes there is plenty more of this reversionary uplift to come from within the portfolio.

In May, for example, Urban sold a property in Bedford for £9.2mln generating a total return on its purchase cost of 74%.

When it acquired the property, rentals were about £4.24 per sq ft but at the time of its sale had risen to £6.26 or more.

NAV rising

In the year to March, its net asset value on a reversionary basis (EPRA) - ie. based on market comparable rents - rose by almost 12.6% to 138p.

The share price at 122p currently sits at a 12% discount, while the market cap is £109mln, a figure Moffitt wants to increase to £500mln eventually.

Income is a key part of the trust’s plans.

Urban Logistics committed to paying a 6% yield based on the 100p price when it joined AIM in 2016, but has done better than that recently.

The trust paid out 7p in the year to March just ended to give a dividend yield of 5.7% currently, even with the handy rise in share price since it listed.

Sector nous

Moffitt is confident that Urban can continue to find good locations to acquire and improve.

He and his fellow manager Christopher Turner hail from the property tycoon Sir John Beckwith’s Pacific Capital Group and have extensive experience of the logistics sector.

“We have been involved in logistics for 20 years and know most of the market, owners of logistics real estate, operators and developers.

“As logistics has become more and more popular other are muscling in, but we have been at it a very long time and know where the good assets are.”

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Urban Logistics Reit PLC Timeline

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