LondonMetric Property

Income compounder: the logistical investor

05 Feb 2018 / Corporate research

LondonMetric’s (LMP) five-year total shareholder return is 122% (FTSE 350 Real Estate sector 69%). Remaining retail-focused, it has raised Distribution investment assets from 28% (2014) to 69% currently (with developments), reducing its retail parks greatly, to 8%. Income is the driver. Management has achieved reliable and predictable results here. The focus is on structurally supported sectors and strongcovenant long leases. 48% have a contractual income uplift. Development and asset management add ‘alpha’, including re-gearing leases and adding new tenants. The last two years saw significant expansion into Urban Distribution.

  • Strategic focus on income: The average REIT dividend yield is ca. 3.5%, whereas LMP delivers 4.4%. We consider this premium payout involves low risk. LMP’s assets are priced at 5.3% net initial yield (NIY), and financial gearing of 34% loan to value of assets (LTV) takes the cash-on-cash return to 6.7% historical.
  • An early mover: LMP invested and built distribution assets ahead of others’weight  of money. 28% of net income derives from seven ‘mega’ assets, let on average £5.30/sq. ft. (£5.60 for all Distribution assets). Lease length (WAULT) for these is 13.7 years; the total across this REIT is 12.4 years.
  • Retail supply chain: LMP includes ‘urban’ logistics, with a good breadth of exposure to retail distribution. Online retail growth drives all such LMP assets. Distribution assets comprise >60% of the contracted rent roll and are growing.
  • Risks: Some development (generating 6%-7% yield on cost) is undertaken; a portion is not pre-let. LTV of 34% (last interims) is conservative, given 99.4% occupancy and only 3.5% of leases expire in three years. Modern retail Distribution assets form a robust sector. LMP has honed its retail parks down to just five attractive assets (from 23 four years ago).
  • Investment case: income plus NAV. NAV is still relevant, but a greater focus is on the cash-backed profits, and thus the ability to grow dividends. REITs have to pay 90%+ of such profits as a dividend. LMP’s strategy supports growth and security, based on the cash returns of the portfolio. Thus, the valuation should not focus overly on price to NAV, but more on the sustainable, progressive dividend