Warehouse Reit in a nice niche

There are sound reasons behind the flood of investor and tenant demand for large logistics assets. First, as rents typically comprise 5 per cent of supply chain costs, there is room for rental growth. Second, the forces of near-shoring and e-commerce aren’t slowing. Third, tenants want long leases.

But ahead of a looming shortfall in stock, transactional activity looks hot. The initial yields on some big boxes are heading to 3 per cent, and many industry watchers expect further compression.

Aim-traded Warehouse Reit (WHR), with its greater focus on multi-let sites and smaller average asset sizes, is acutely aware of the trends. Andrew Bird, head of the Reit’s manager, is keen to avoid what he terms “portfolio padding” and has instead been busy acquiring smaller sites, typically adjacent to existing properties.

So far this year, five properties have been acquired for £35m, at a blended net initial yield of 4.6 per cent, excluding development land. Despite this, a first-half like-for-like upward property valuation of 9.4 per cent – powered by positive lettings activity and which accounts for most of statutory profit growth – meant the period finished with a loan-to-value ratio of 26.2 per cent.

This is a way below a maximum 35 per cent gearing ambition, suggesting portfolio development activity could kick on. Capital expenditure, which hit £3.3m in the first half, is currently generating double-digit returns. Expect refurbishment activity to increase, says Bird.

Analysts at Peel Hunt recently upgraded their EPRA net tangible asset forecast to 158p per share for March 2022, rising to 169p a year later. Excellent tailwinds and a strong niche justify the slight premium. Buy.

Last IC View: Buy, 141p, 25 May 2021