As Andrew Jones points out, his job as chief executive of real estate investment trust LondonMetric Property (LMP) is to collect rent from tenants and give most of it – about 70 per cent – to shareholders. And with 67 per cent of the property portfolio focused on distribution, including the fast-growing urban logistics sub-sector, the potential to increase revenue and dividends is significant.
Attractive dividend
Development arm largely pre-let
Index-linked and fixed-increase rents
Exposure to fast-growing distribution sectors
Competition could intensify
Still some retail exposure
Urban logistics is one of the fastest growing parts of the real estate market as retailers respond to an ever-growing percentage of shopping being conducted online, with customers looking for home delivery with very short lead times between ordering and receiving goods. To make this possible, major retailers are building spokes leading out from central hubs, comprising so-called last-mile delivery centres.
And this is where LondonMetric is now concentrating, because as Mr Jones pointed out intense competition has made acquiring big hubs an expensive business. And while there was not much interest a while ago, long leases and index-linked rent reviews have suddenly become attractive.
Demand is strong for such assets, with occupancy at 99.4 per cent on a weighted average unexpired lease length of 12.4 years, with only 3.5 per cent of income expiring within the next three years. The company has 800,000 sq ft under construction, of which 84 per cent is already pre-let and there is a further 700,000 sq ft in the development pipeline. Within this, the urban logistics platform has risen from £82m a year ago to nearly £300m – or 17 per cent of the total portfolio – and by next year could be nearer £500m.
| LONDONMETRIC PROPERTY (LMP) | ||||
| ORD PRICE: | 180.6p | MARKET VALUE: | £1.26bn | |
| TOUCH: | 180.5-181.1p | 12M HIGH: | 184p | LOW: 138p |
| FWD DIVIDEND YIELD: | 4.4% | TRADING STOCK: | nil | |
| PREMIUM TO FWD NAV: | 13% | |||
| INVEST PROPERTIES: | £1.65bn | NET DEBT: | 62% | |
| Year to 31 Mar | Net asset value (p) | Net operating income (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 141 | 72.0 | 6.6 | 9 |
| 2016 | 148 | 79.9 | 7.8 | 7.3 |
| 2017 | 150 | 83.6 | 8.2 | 7.5 |
| 2018* | 154 | 88.6 | 8.2 | 7.8 |
| 2019* | 160 | 94.4 | 8.8 | 8 |
| % change | +4 | +7 | +7 | +3 |
| Normal market size: | 7,500 | |||
| Matched bargain trading | ||||
| Beta: | 0.44 | |||
| *Peel Hunt forecasts, adjusted NAV and EPS figures | ||||
New lets brought in an additional £1.6m of income in the six months to September 2017, with lettings achieving an average 21.5 per cent premium to estimated rental value, with an average lease length of 14.3 years. Meanwhile, rent increases brought in an additional £700,000 of income growth. About half of all rents are subject to fixed increases or are inflation-linked.
Focusing on logistics is turning out to be a smart move, made smarter still by the fact that much of the financing has come from running down other, more mature assets. So the 23 retail parks the company owned four years ago is now down to just four, while its last asset in the office sector was sold in September for £68.5m. Retail parks now represent just 8.3 per cent of the portfolio, and further disposals are likely.
However, there are sweet spots in the retail sector, notably in convenience shopping, which now accounts for £118m, or 7 per cent, of the portfolio. As well as a trend towards this type of shopping, these assets have the attraction of having long leases, low operational requirements and built-in rental growth achieved through regular uplifts.
