While Warehouse REIT (WHR) only floated on the Alternative Investment Market (Aim) in September, it spent four years prior to that building up a £109m portfolio in one of the most exciting parts of the UK property market. The portfolio consists of small distribution warehouses in urban areas for last-mile deliveries, which are in increasing demand as e-commerce delivery times shorten. For investors familiar with the popular big-box property theme, think small box instead. Indeed, all but four of Warehouse REIT's properties measure less than 100,000 sq ft. Once fully invested it is targeting a 5.5 per cent fully covered dividend yield, rising to 6 per cent, paid quarterly. The goal is for total annual investment returns of 10 per cent.
Shares trade at a discount to forecast NAV
Very attractive dividend
Highly diversified portfolio
Strong demand for small urban warehouses
The shares are thinly traded
Competition could increase
There's good reason to think the company could easily exceed this. Demand from retailers for logistics space is growing fast, with the number of large retailers offering online same day delivery more than doubling to 10 per cent between 2010 and 2015. This acceleration in demand comes at a time when vacancy rates for small warehouses are at an all-time low. And the shortage of space is likely to become even more acute because rents have only just started to play catch-up following a protracted period of oversupply.
According to analysts at Peel Hunt, Warehouse REIT’s industrial assets are valued at around £63 per sq ft compared with an estimated rebuild cost of £84 per sq ft. And that doesn’t include land and finance costs, which suggests that valuations will have to jump by around 50 per cent to trigger new construction. By their size, big boxes have much lower build costs, but the smaller end, where Warehouse REIT focuses, is bereft of new development. This is driving rents higher after nearly two decades of stagnation, and they are currently rising at around 5 per cent a year. The company also has the additional advantage of working closely with property consultant Savills (SVS) which will provide property management services as well as identifying attractive assets.
WAREHOUSE REIT (WHR) | ||||
ORD PRICE: | 99.5p | MARKET VALUE: | £165m | |
TOUCH: | 98.5-99.5p | 12-MONTH HIGH: | 103p | LOW: 97p |
FORWARD DIVIDEND YIELD: | 6.2% | TRADING STOCK: | nil | |
DISCOUNT TO FORWARD NAV: | 10% | NET CASH: | £53m | |
INVEST PROPERTIES: | £109m |
Year to 31 Mar | Net asset value (p) | Net rental income (£m) | Earnings per share (p) | Dividend per share (p) |
2018* | 97 | 6.3 | 1.9 | 2.5 |
2019* | 102 | 15.5 | 6.1 | 5.5 |
2020* | 110 | 17.5 | 6.8 | 6.2 |
% change | +8 | +13 | +11 | +13 |
Normal market size: | 3,000 | |||
Matched bargain trading | ||||
Beta: | na | |||
*Peel Hunt forecasts. 2018 figures cover 6.5 months. |
Some of the £150m raised at 100p through the IPO has been used to pay down the £84m debt built up while establishing the seed portfolio. A £26m purchase of four estates was announced in September, and with a target loan-to-value ratio of 30-40 per cent, there will be as much as £160m for further acquisitions. At the moment, there are around £60m of assets under negotiation, all of which are off-market, with a further £40m under review.
The experienced management team, which holds an £18m stake in the REIT including £1.8m invested at IPO, is giving a lot of attention to both the quality and location of assets. There are 129 tenants in the portfolio, the largest of which accounts for just 8 per cent of its value, while occupancy stands at 92 per cent, with a net initial yield of 7 per cent. In addition, each asset is situated on average within one mile of a major city or major highway.