Results for the Year Ended 31 March 2023

Urban Logistics REIT PLC

22 June 2023

 

22 June 2023

Urban Logistics REIT plc

("Urban Logistics", the "Company" or the "Group")

Results for the Year Ended 31 March 2023

Active asset management drives robust results in a challenging environment

Urban Logistics (LSE: SHED; FTSE 250), the last mile logistics focused REIT, is pleased to report its results for the year ended 31 March 2023.

Richard Moffitt, CEO of the Investment Adviser, commented:

"The portfolio has proved to be resilient against a backdrop of challenging market conditions, with persistently high inflation and rising interest rates leading to repricing of assets across commercial real estate. Despite these challenges, our active asset management strategy of moving rents on, improving tenant covenants and increasing lease lengths has allowed us to add value to the assets and shield the Company against the impact of a negative yield shift. This is demonstrated by the portfolio's like-for-like downward revaluations which is below that of the wider sector and above most expectations. Post period end we made two disposals as part of our asset recycling strategy, selling for 3.4% above the valuations."

Key Highlights

Outlook:

Fundamental mismatch in supply and demand remains unchanged in mid-box last mile assets, helping generate an additional £6.1m in rental income via lease events.

Asset pricing has been rebased, creating new acquisition opportunities for the Investment Adviser's experienced team to capitalise on via asset recycling strategy.

Extremely well positioned to enhance value for shareholders, with a strong tenant base, low LTV and debt materially hedged.

Robust Performance & Strong Balance Sheet

·     Net rental income up 45% to £53.0m (FY22: £36.5m)

·     Adjusted earnings up 39% to £32.7m (FY22 £23.6m)

·     Adjusted EPS up 3.3% to 6.93p (FY22: 6.71p)

·     Total dividend per share for FY23 of 7.60p (FY22: 7.60p)

·     Like for Like Portfolio valuation down 9.8% (FY22: 25.4%)

·     Total portfolio valuation of £1,107m (FY22: £1,015m) driven by £160m of acquisitions

·     Total Property Return of -5.0% (FY22: 30.3%)

·     IFRS Net Assets £769.8m (FY22: £892.6m)

·     EPRA NTA per share of 162.44p (FY22: 188.78p)

·     IFRS loss before tax of £82.7m (FY22:profit of £171.8m)

·     Total Accounting Return of -9.9% for the period (FY22 28.9%) and 12.6% p.a. since IPO to 31 March 2023

·     Debt of £351m with a weighted average cost of debt in the period of 3.21% (FY22: £239m, 2.55%)

·     Debt is 85% hedged and a weighted average maturity of 5.4 years (FY22: 74% hedged and 3.7 years) and no refinancing required until 2025

·     LTV of 29.0%, below stated range of 30 - 40%

·     EPC of portfolio rated A-B 52% (FY22: 27%)

Active year of acquisitions, developments and lease events

·     Record year for leasing activity, with 42 new lease events, generating £6.1m in new rental income, with 34% like-for-like rental increases

·     Substantial capital deployment in FY23:

o  Acquired £160m of assets during the year at a blended NIY of 5.2%

o  Completed Developments: 3 forward funding agreements fully let post period end with £43.7m gross development cost, generating a yield on cost of 7.1%

o  Ongoing Developments: 2 forward funding agreements in progress with £17.4m committed, generating a target yield on cost of 7.4%

·     Total portfolio of 130 mid box urban logistics assets covering 9.7 million sq ft with a valuation £1,107m (FY22: 113 assets covering 8.3 million sq ft with a value of £1,015m)

·     Average rent per sq ft of £6.02; EPRA vacancy rate of 7.4% (FY22: £5.59 and 6.9%)

·     Gross to net rental income ratio 96.3% (FY22: 97.2%)

·     Consistently high rent collection: 99.9% of FY23 rents demanded were collected (FY22: 99.9%)

·     WAULT of 8.2 years (FY22: 7.7 years) - balanced portfolio split between core assets with secure, long‑term income as well as an active asset management pool where we can drive better shareholder returns

Post-period end: secured ongoing successful management team at a reduced fee and disposals above net book value

·     Shareholders approved the changes to the management arrangements, whereby Logistics Asset Management LLP (led by Richard Moffitt) was appointed as the Investment Adviser to the Company with effect from 12 May 2023 for a term through to 2027. G10 Capital Limited was appointed as the Company's new AIFM with effect from the same date.

·     Lynda Heywood joined the Company's Board on the 1 May 2023 as a Non-Executive Director adding a wealth of relevant and complementary experience.

·     In May 2023, 2 assets were sold for a sales price of £15m, representing a 3.4% premium to March 2023 valuations

Nigel Rich, Chairman, said:

"Challenges continue to confront the UK Economy, but despite this Urban Logistics' portfolio has continued to perform well. Market driven declines in asset valuations were somewhat offset by our active asset management, while earnings per share rose marginally. Our conservative balance sheet, with a high proportion of our debt fixed or hedged and a low LTV, reduces our exposure to interest rate fluctuations. We have retained the management team for a further term until 2027, giving us stability and security. At time of writing we trade at a significant discount to NAV and therefore are restricted in our ability to raise money through a share offer, however there is significant potential within our own portfolio to drive growth through asset management, recycling and more efficient use of the land we already own. We are cautious, but believe we are very well positioned, and have everything we need in place to perform in an uncertain future."

			Change
Summary Data	31 Mar 23	31 Mar 22	(%)
Income Statement
Net rental income (£m)	53.0	36.5	+45.0
Adjusted earnings per share (p)	6.93	6.71	+3.3
IFRS profit before tax (£m)	-82.7	171.8	-148.1
Balance Sheet
Portfolio valuation (£m)	1,106.5	1,014.7	+9.0
EPRA NTA per share (p)	162.44	188.78	-14.0
IFRS net assets (£m)	769.8	892.6	-13.8
LTV (%)	29.0	11.3
Portfolio like-for-like growth in value (%)	-9.8	25.4
Total Accounting Return (%)	-9.9	28.9
WAULT	8.2 years	7.7 years
Dividends
Total dividend per share paid or declared in respect of the financial year	7.60p	7.60p	0.0

CHAIRMAN'S STATEMENT

Overview

Challenges continue to confront the UK economy, particularly inflation with the consequences to interest rates, the expectation of significant wage increases, and a high level of government debt which the government is combating with tax increases.

Despite these challenges, Urban Logistics' portfolio has continued to perform well in the financial year. We have successfully completed 42 lease events during the year, have seen minimal bad debts, and occupancy was 93% at year end. We have maintained our LTV just below our target range and are well-hedged against rising interest rates in the medium term. Our EPRA NTA per share at the end of the year was 162.44 pence, down 14% compared to 2022, driven mainly by yield shift from 5.2% to 6.2%. Together with our peers, we trade at a significant discount to NAV, but we believe the industrial and logistics sector of the property market is underrated, given the continuing demand for space and the expectation for further rent increases.

Management

During the year, we initiated discussions with the managers on the future of the management arrangements, which were due to expire in April 2024. In May 2023, the shareholders approved at a general meeting new arrangements which are now being put into effect and will extend the investment adviser's  appointment until 2027, on more favourable terms for the Company. The Pacific Group who helped to found the Company in 2016 will no longer be involved in its affairs. We are grateful for their part in growing the Company over the last seven years. Two Pacific employees who were already fully committed to the Company's business have joined the management team of the Investment Adviser, which continues to be successfully led by Richard Moffitt, with Christopher Turner still responsible for the asset management. The management team has been further strengthened by the appointment of Justin Upton as Chief Investment Officer.

ESG

We have performed well against the ESG targets we set the Company twelve months ago, and have achieved a number of important milestones, including over half the portfolio holding an EPC rating of A/B, up from just 27% on 31 March 2022. We also report in line with the TCFD requirement for the first time, fulfilling a commitment we made in our last Annual Report.

Financials

During the year, the remaining funds from the December 2021 fundraise were invested at a slower rate than originally anticipated due to the economic outlook, however rental income increased significantly as a result of the acquisitions and asset management activity, from £37.8 million to £55.3 million, an increase of 46%. Adjusted earnings increased from £23.6 million to £32.7 million, an increase of 39%, while adjusted EPS rose marginally, due to the additional shares in issue, from 6.7 pence to 6.9 pence.

The balance sheet remains strong despite the lower valuations with LTV at 29.0%. The debt has an average maturity of 5.4 years, with no refinancing required until 2025. 85% of the interest costs are hedged at an all in cost of 3.66%.

Dividends

A first interim dividend of 3.25 pence per share was paid in December 2022 to shareholders. A second interim dividend of 4.35 pence per share will be paid on 21 July 2023 to shareholders on the register at the close of business on 30 June 2023. Total dividends declared amount to 7.60 pence per share, the same as the previous year. The dividends are not covered by earnings in the year, mainly due to the slower pace of property acquisitions.

Board

Post period end, a number of changes have been made to the Board as a consequence of the new management arrangements. Jonathan Gray and Mark Johnson resigned following the general meeting in May. We are most grateful to them for their respective contributions. Jonathan will continue to be involved with the Company as Chairman of the Investment Adviser. On the 1 May 2023, after an extensive search, Lynda Heywood joined the Board, bringing with her considerable finance experience. In addition, following Jonathan Gray's resignation, Heather Hancock has become the Senior Independent Director. Heather remains Chairwoman of the ESG Committee.

With these changes, and following the recent external review of the Board's performance, we will be giving further consideration as to whether we have the appropriate mix of skills on the Board, and at the same time consider succession and diversification.

Outlook

The current stock market volatility and the related difficulties, such as companies being unable to raise money through follow on fundraises means that it is unlikely that we will be able to fund a pipeline of acquisitions in the immediate future. We will therefore look to recycle assets where we have maximised the income and replace them with properties offering lease events, as well as capitalising on the significant reversionary opportunities in the portfolio. These actions of recycling and asset management allow us to add to shareholder value in uncertain times. With a full year of income from the properties purchased during the last year, as well as the continuing asset management opportunities, we would expect to maintain the same level of dividend in 2023/24.

Nigel Rich CBE

Chairman

21 June 2023

INVESTMENT ADVISER'S REPORT

CHIEF EXECUTIVE OFFICER REVIEW

Overview

The last twelve months have been an important reminder of the importance in taking a "through the cycle" approach to real estate. Over the course of the year, the impacts of Russia's aggressive and unjustified war in Ukraine, coupled with short-lived economic experiments by the UK government, have fed through into global and UK inflationary pressures that have defined central banks monetary policy, and in turn the outlook for all sectors of the real estate market.

Throughout this, our strategy of active asset management aims to add value to assets whatever stage of the property market we are in - by moving rents on, improving our tenant covenants and increasing lease lengths, we are able to protect against the impact of negative yield shift. We can see this in the valuation results, only down 9.8%, set against an 18.9% capital decline in the 'Distribution Warehouse' category of the MSCI index for the year. By holding firm to the strategy first set out in 2016, we aim to mitigate the worst effects of the economic downturn.

Market and performance

Continued high inflation and interest rates have led to a repricing of assets across commercial real estate. The like‑for‑like downward revaluation of just 9.8% outperforms the wider asset class, and this is down to both the quality of the assets in the portfolio and the asset management undertaken. The portfolio's last mile, single-let logistics assets are in high demand given the undersupply of assets of this type, driven by long‑term structural shifts in our economy and a chronic lack of supply. This supports the occupational market and allows us to offset yield erosion with rising rental rates, captured in 42 lease events over the year, generating £6.1 million in additional rental income.

Management arrangements and team

The changes in the management arrangements referred to in the Chairman's Statement have been completed post year end. My team and I are pleased to recommit to our roles, and look forward to continuing to deliver for shareholders.

To help us do this, we continue to add experience and depth to the property and finance teams, both at junior and more recently senior levels, with the appointment of Justin Upton as our Chief Investment Officer, as well as Jonathan Gray as non‑executive Chairman. This depth provides sustainability to the team, and is also key to our ability to further scale the portfolio and carry out asset management and performance enhancing initiatives to the benefit of the underlying shareholders.

To support our team, we provide training and career development activities, as well as coaching and support programmes. Together with competitive pay and bonus programmes linked to share price to align all staff with the REIT performance, these measures help us to recruit and retain the highest quality team members, who are key to our success.

ESG

We firmly believe that the global push towards ESG-related goals represents a significant opportunity for Urban Logistics. MEES legislation requires huge improvements in EPC ratings, providing opportunities for an active asset manager like us to acquire buildings in need of improvement and apply our asset management expertise - as evidenced by the fact that over twelve months we improved 37 EPCs and 52% of the portfolio is now rated A or B. We also tend to work with tenants who care about ESG issues and are willing to invest in the asset they lease from us to hit their own ESG goals, making it easier for us to hit our targets. We have a scope 1 and 2 net zero goal, and are working hard towards hitting it next year, both by reducing emissions and offsetting where required.

Looking ahead

The macroeconomic and geo-political picture for 2023 and beyond continues to evolve. Given the re-pricing of real estate assets and land values in 2022, we believe that the equilibrium level where buyers and vendors will trade has been found more quickly than witnessed in previous cycles. Investors are already returning to the market, attracted by re-based higher yields, rental value growth and the long-term drivers of the logistics sector.

As the take-up statistics for the last twelve months have borne out, an emphasis on resilient supply chains continue to be a key focus of our occupier base, coupled with the fact that e-commerce remains a fundamental and growing part of the economy. This provides a sound footing to our business model of last-touch, mid-sized logistics assets, let to financially resilient tenants.

The market continues to be characterised by low vacancy rates in the occupational space, providing confidence to investors looking to deploy capital. Whilst we are conscious of the weakening consumer environment (exacerbated by the cost of living crisis) and the rising occupational costs of labour and business rates, the fundamentals of the logistics sector continue to be attractive.

Our core belief is that, irrespective of market driven yield movements, shareholders are best served by us adding value to the portfolio through asset management. Our team is focused on moving rents and tenant covenants forward, extracting value from mispriced areas of the market and making physical improvements to the underlying properties and their surroundings in order to promote enhanced ESG criteria. Given our long experience in the sector, we are still able to source assets off market at attractive yields, funded through portfolio recycling from assets where we have already added value through asset management.

We continue to take pride in what we have achieved in what has been a challenging twelve months. We have renewed leases with existing tenants, built warehouses for new tenants and welcomed new team members and shareholders into the Company. We see significant opportunity and value within the portfolio and look to the future with a mix of caution, ambition and excitement.

THE INVESTMENT ADVISER

21 June 2023

Detailed Information

Urban Logistics REIT plc's annual report and accounts for the year ended 31 March 2023 are available at https://www.urbanlogisticsreit.com/investors/results-reports-presentations/ and will be available today, along with the notice of meeting for the Company's AGM on https://www.urbanlogisticsreit.com/investors.

It has also been submitted in full unedited text to the Financial Conduct Authority's National Storage Mechanism and is available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

About Urban Logistics REIT

Urban Logistics REIT plc (LON: SHED) is a FTSE 250 property investment company. The Company is the only London-listed REIT to focus on specialist last mile / last touch logistics assets, with a tenant base which delivers essential goods within the UK. The Company's strategy is to invest in mid-sized logistics properties with the objective of generating attractive dividends and capital returns through active asset management.

Urban Logistics' investment adviser, led by Richard Moffitt, has many years' experience in investing in the logistics sector of the broader real estate market. The team's ability to source vital and strategically located mid-sized single let properties, with high-quality tenants, off-market at favourable terms, aims to create considerable value for shareholders. Tenants include Amazon, XPO, DHL, Hermes, DPD, Boots, Unipart (for NHS), Royal Mail and J Sainsbury Plc.

Buying well and pursuing additional value enhancing asset management initiatives has driven the Company's growth, enabling Urban Logistics to grow from a £10m market cap company at IPO in April 2016 to a FTSE 250 constituent.

LEI: 213800P6ODJW2UFNDC37

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For further information please contact:

Urban Logistics REIT plc
Richard Moffitt Justin Upton	[phone]
Buchanan
Helen Tarbet	[phone]
Simon Compton	[phone]
George Beale	[phone]
Singer Capital Markets - Joint Broker	[phone]
James Maxwell / Alaina Wong / Oliver Platts (Banking)
Alan Geeves / James Waterlow / Sam Greatrex (Markets)
Panmure Gordon (UK) Limited - Joint Broker	[phone]
David Watkins (Corporate Broking)
Emma Earl (Corporate Finance)
G10 Capital Limited (part of IQ-EQ) - AIFM
Paul Cowland	[phone]

 

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