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Don't overlook LondonMetric's long-term growth prospects

The warehouse landlord looks defensively positioned against the market tumult afflicting the income prospects of the broader real estate sector
Don't overlook LondonMetric's long-term growth prospects

For LondonMetric (LMP), acquiring rival logistics property specialist A&J Mucklow last year beefed up its exposure to the high-growth ‘last mile delivery’ sector. A lack of urban warehousing space, coupled with the rise of e-commerce, has driven up the average estimated rental value (ERV) of the group’s portfolio. What's more, there is the chance that disruption to businesses trading in high-street stores and shopping centres across the country in the wake of the Covid-19 outbreak will accelerate the long-term shift towards online retail. Since the shares heavily sold off over the past month in line with many real estate sector peers, we think now could be a good time to buy into the group’s long-term income growth potential.

IC TIP: Buy at 163p
Tip style
Value
Risk rating
High
Timescale
Long Term
Bull points

Increased urban logistics exposure

Rental values rising

High interest cover ratio

Long lease terms

Bear points

Small exposure to leisure and retail

Big-box growth slowing

Demand for logistics assets has been reflected in the rents commanded upon recent lease reviews. Contractual rent reviews were completed on six assets during the six months to September at 13 per cent above passing rents, adding £0.4m of annual rental income. A further four reviews were completed post-period-end at an average 33 per cent ahead of passing rents. 

During the six months to the end of September, ‘last mile’ delivery assets – which comprised 35 per cent of the portfolio following the Mucklow deal – generated a 1.1 per cent increase in ERV. Overall ERV growth was o.5 per cent. Growth from mega and regional distribution sites has been muted, reflecting the industry’s development of big-box assets. Disposals since the end of the first half have reduced big-box exposure from 18 per cent to 14 per cent of LondonMetric’s portfolio. 

The group’s tenant base is more diverse following the Mucklow acquisition, with the top 10 tenants accounting for 39 per cent of income compared with 51 per cent at the end of March 2019. It has also largely sold out of retail assets, with retail parks comprising just 3.7 per cent of the portfolio value at the end of September. In addition, while the weighted average unexpired lease term (WAULT) of the Mucklow assets was 6.5 years, compared with 12.5 on the group’s existing portfolio, management expects the overall portfolio’s WAULT to revert back towards the longer-term average over time. 

The group’s balance sheet also looks robust, with a loan-to-value ratio of 35 per cent following some recent disposals and finance costs covered 4.3 times by property income during the first half. What’s more, almost four-fifths of debt was unsecured, giving it greater operational flexibility, and it does not have any debt due to mature until April 2021. 

Management has yet to update the market on any potential impact of Covid-19 on its operations, but it is worth bearing in mind that many companies have announced the suspension of dividend payments this year as they seek to conserve cash. That means, although the half-year dividend paid in January was covered 1.14 times by earnings, there is an element of uncertainty over the security of payments in respect of the second half. As part of its long-income portfolio, the group also has some exposure to retailers and leisure facilities, some of which will have been forced to close by the government in order to contain the spread of the virus. However, that constituted 26 per cent of contracted rental income last year and also included food retail tenants such as Aldi, Lidl, Co-Op and Tesco's wholesale group Booker that have experienced a rush in demand. 

LONDONMETRIC PROPERTY (LMP)   
ORD PRICE:163pMARKET VALUE:£1.37bn
TOUCH:163-164p12-MONTH HIGH:245pLOW: 133p
FORWARD DIVIDEND YIELD:5.5%TRADING PROP:£1.1m
DISCOUNT TO FORWARD NAV:11%  
INVESTMENT PROP:£2.4bnNET DEBT:59%*
Year to 31 MarNet asset value (p)**Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201715051.08.27.5
201816559.18.57.9
201917560.88.78.2
2020**17873.29.18.6
2021**18379.89.58.9
% change+3+9+4+3
Normal market size:10000   
Beta: 0.53   
     
*Includes lease liabilities of £6m
**Numis forecasts, adjusted NAV, PTP and EPS figures