Falling footfall and a rising level of traders entering administration has hampered portfolio valuations and rental growth for landlords with a focus on traditional retail over the past 12 months. It is understandable, then, that LondonMetric (LMP) would seek to dilute its exposure to shopping centres and high street locations in favour of urban logistics, via its £415m bid for A&J Mucklow (MKLW).
The recommended offer values each Mucklow share at 655.2p, a 19.7 per cent premium to the company’s undisturbed share price or 11.4 per cent to its adjusted net asset value at December 2018 plus a £10m valuation uplift. Under the terms of the deal, shareholders would receive 2.19 new LondonMetric shares and 204.5p in cash.
The enlarged group will have gross assets of £2.3bn and contracted rent of £116m, with distribution and industrial comprising 72 per cent of the portfolio. That will make LondonMetric the third-largest public player in the sector, behind Segro (SGRO) and Tritax Big Box Reit (BBOX).
For LondonMetric, the acquisition is part of its efforts to grow its urban logistics exposure, which will stand at £0.8bn, from £0.5bn, or 35 per cent of the portfolio. Full-year trading figures demonstrate the rationale behind that strategy – like-for-like net rental income growth for its urban operations was 28 per cent compared with 5.7 per cent across the board.
LondonMetric’s increased scale means it can launch a more “intensive asset management programme”, said the company’s chief executive, Andrew Jones. “They have one asset manager and we have five,” said Mr Jones.
The deal – which is expected to be immediately earnings accretive – could also boost the shares’ income prospects, given the steady, long-term income that letting ‘last mile’ delivery spaces typically provides. The weighted average unexpired lease term on the £107m in urban logistics acquired last year was 12 years, with60 per cent subject to contractual rent reviews.
As the name suggests, Aim-traded Urban Logistics (SHED) is a pure-play on growing demand from ecommerce. Supply has been constrained by the cost of building new assets outstripping the valuations placed on existing ‘last mile’ delivery assets, according to Hardman & Co analyst Mike Foster. Adding value to assets via refurbishment means rents can be lifted when they’re up for renewal – rental income almost doubled last year.
Meanwhile, disposing of £11.3m in assets represented a total property return of 25.2 per cent of the initial book value. Bolstered by a 2018 £20m capital raise, seven logistics centres worth an aggregate £48m were acquired. Yet management has steered clear of letting to fashion retailers. “We know from previous downturns that volatility within that sector is inevitable,” said chief executive Richard Moffitt.
On the timing of further capital raises, Mr Moffitt said he is keen not to dilute existing shareholders – an issue considering the shares continue to trade at a discount to net asset value, with investors perhaps deterred by less liquidity. “Large investors today are increasingly focused on companies with a much greater capitalisation,” Mr Moffitt said. He hopes that Urban Logistics, solid rental growth record and valuation uplift will help to attract investors in time.
