Plenty of future growth stored up

Urban Logistics (SHED) results (24 May) were robust. Prospects for continuing value-adding investment and capital recycling are clear and strong. SHED owns “mid-box”, “last mile” distribution warehouses. Just as important is that this asset class is clearly placed to benefit consistently from engrained market trends in logistic requirements. SHED’s marketplace is broader than the rising demand for logistics space from online (or multichannel) retail. But, this driver alone sustains strong demand. Supply is strictly constrained by the dominant trend ‒ that the cost of new-build is generally above the current valuations placed on assets in SHED’s category (last-mile logistics).

• FY’19 (March): Results showed an encouraging total accounting return (NAV rise plus dividend) at over 17% and solid asset growth at 41%. The scale of this underlines the sustainable ambition and another year of success since the IPO in April 2016 – and the dichotomy of a sub-NAV share price.
• Sector dynamics: Attention focuses on the different, “big-box” sector. Asset price rises there have bid net initial yields (NIYs) below 6.0%. SHED’s average purchase NIY is 7.1%. There is no obvious logic; demand is just as strong and, in SHED’s “mid-box” specialism, supply is falling and demand rising.
• Valuation: The shares trade at 94% of 2019 EPRA NAV. We find this odd, as 20% of SHED space has short leases, meaning prospects for growing rental income are clear, as rents rise to current market levels. MSCI states 6.5% 2018 sector market rental growth. SHED adds value through asset management.
• Risks: 5.5-year leases mean there are reversionary rent rises to come, but also that new leases must be secured. In the past ca.20 years, aggregate rent rises have been minimal. So, once rents and values rebase to higher levels and omni-channel retail growth tails off, new macro drivers need to be found.
• Investment track record: SHED listed on AIM in April 2016 and has since built a £185m portfolio of warehouses, generating annualised NAV and dividend returns of 17.7%. Across the market, nationwide, vacancies are low, ca.5% (and SHED nil), so there are many years of growth “baked in”, yet to come. Market rents have risen to ca.25% above SHED’s current £4.83 sq. ft. level.