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LondonMetric goes out of town

Landlord LondonMetric is working rapidly towards full dividend cover, prompting us to upgrade our advice to buy
April 11, 2014

■ Significant investment in high-yielding regional developments

■ Steady progress towards achieving dividend cover

■ Solid gains on asset disposals

IC TIP: Buy at 141p

Evidence of growing interest in the regional commercial property market came with news that real estate investment trust (Reit) LondonMetric (LMP) has secured one of Britain's largest ever pre-let development projects. It will build a retail distribution centre roughly the size of a football pitch on a 70-acre site in Northamptonshire that already has outline planning consent. The shed will be occupied by a "top 25" UK retailer, which has signed a 25-year lease at an annual rent equivalent to 6.9 per cent of the all-in purchase price of £77m. The deal takes LondonMetric's distribution assets up to a third of its property portfolio by value.

Chief executive Andrew Jones pointed out that retailers are forecast to require around 50m sq ft in distribution space over the next five years, providing the company with an opportunity to grow its rental income stream. Other recent acquisitions have included the Oak Furniture Land distribution centre in Swindon and the Marks and Spencer (M&S) distribution centre in Sheffield, with M&S entering into a new 10-year lease.

However, Mr Jones is not averse to realising a capital return. Soon after acquiring 27 property assets leased to furniture retailer DFS for £175m, with an attractive net initial yield of 9.3 per cent, 10 of the assets were sold in three separate transactions at a combined initial yield of 8.6 per cent - implying a higher price.

Peel Hunt says...

Buy. LondonMetric has had an extremely busy financial year to the end of March. In that time it has recycled almost £500m out of residential and offices and reinvested around the same amount into higher-yielding out-of-town retail and distribution assets. Crucially, acquisitions have been made at an average yield of 7.5 per cent, comfortably ahead of disposal yields of nearer 5 per cent. In addition, average lease length on acquisitions of 14.5 years has been double that on disposals. Occupancy rates are high, and the overall lease length on the entire portfolio is one of the longest in the sector. We are forecasting dividends of 7p for the financial year just started, with book value of 124p in March 2015.

Oriel Securities says...

Hold. For Reits, a crucial element is generating sufficient recurring revenue to cover the dividend. While we expect full cover to be achieved some time this year, this will only be achieved by including funds generated through disposal gains. At 141p, the shares are trading at a 21 per cent premium to our 2014 forecast net asset value (NAV) of 117p - although this falls to 7 per cent against our 2016 forecast NAV of 131p. Valuation yields are improving, but the premium still looks wide.