Focus on long income paying off for LondonMetric

LondonMetric Property reported continued income growth in its half-year results ended 30 September on Wednesday, which led to improved earnings and dividends.

The FTSE 250 company said net rental income was up 5.8% to £47.1m, with reported profit standing at £79.3m and EPRA earnings up 7.3% to £30.9m, or ahead 6.6% on a per share basis.

It declared a 2.7% rise in the dividend to 3.8p, which was 117% covered, and included a second quarterly interim dividend of 1.9p.

The board said sector alignment and asset selection delivered further valuation gains, contributing to total returns, with its EPRA net asset value per share rising 4.1% to 172.1p.

That was driven by a revaluation surplus of £51.0m, which LondonMetric said reflected a 2.7% uplift, with urban logistics increasing by 4.5%.

Equivalent yield compression on its portfolio was nine basis points, and estimated recovery value grew 0.9%.

LondonMetric reported a total accounting return of 6.7% and a total property return of 5.4%, which the board said outperformed IPD All Property by 210 basis points.

The firm’s investment activity increased its distribution weighting to 72%, and further improved its portfolio quality, according to the board, with £139.0m of acquisitions increasing LondonMetric’s urban logistics portfolio to 54 assets, representing 25% of the total portfolio.

It reported a 14 years weighted average unexpired lease term on those acquisitions, with nearly 60% of income subject to contractual uplifts.

A total of £92.5m of disposals were made in the period, including shorter let distribution, convenience, retail parks and residential, with a weighted average unexpired lease term of 10 years on those disposals, with retail assets sold at book, reportedly reflecting their “strong” income characteristics.

Post period end, £39.4m of disposals were made, reducing LondonMetric’s portfolio to 5% retail parks and 1% residential.

That included £17.4m of distribution disposals at book value, with a weighted average unexpired lease term of less than two years.

The company undertook 31 asset management initiatives during the half, leading to a £1.2m per annum income uplift from lettings, signed with a weighted average unexpired lease term of 12 years.

It also led to a £1.1m per annum income uplift from rent reviews, which was a 12% uplift above passing on a five-yearly equivalent basis.

That offset LondonMetric’s loss of income from the Poundworld vacancy, where the firm said it was in “active discussions” on re-letting.

Operationally, the board said short cycle developments were creating future long income at attractive yields, with recently-completed distribution developments now 68% let.

A total of 0.9 million square feet was said to be under construction or in the pipeline, at a 6.5% yield on cost.

At Bedford, construction of three warehouses totalling 180,000 square feet would complete in the second quarter of 2019, with terms agreed on more than half of the space.

Discussions remained ongoing on the remaining 500,000 square feet, and construction was subject to pre-lets.

Looking at its portfolio metrics, LondonMetric said they reflected its focus on long income, contractual uplifts and low operational requirements.

The company’s overall weighted average unexpired lease term was 12 years, with 6% of income expiring within three years.

A total of 54% of income was subject to contractual uplifts, with the firm reporting a 98.3% gross-to-net income ratio.

It said conservative financing continued to enhance its income.

The average cost of debt stood at 2.9%, and debt maturity was 4.5 years, following the firm’s new £75m facility with Wells Fargo.

“Our alignment towards logistics and convenience assets together with the portfolio's sustainable and growing income has delivered another strong performance,” said LondonMetric chief executive Andrew Jones.

“As the real estate markets polarise further, we continue to refine the portfolio to ensure that it remains fit for purpose and outperforms.

“Our exposure to structurally-supported sectors has grown further as we enthusiastically embrace the logistics market buoyed by the ongoing shift from bricks to clicks, constrained supply and rising occupier demand.”

Jones said that, in a “yield tranquil” environment, asset selection as well as sector calls were increasingly paramount to providing income certainty, income growth and capital enhancement.

“Looking ahead, the strength of our assets allows us to take a longer term investment horizon where we can collect, compound and grow our income and be a little less obsessed about predicting exact market movements or timing of cycles.

“This long term approach, combined with our beliefs in the merits of behaving as a 'true REIT' and our full shareholder alignment, will ensure that we continue to make rational decisions, grow our income and progress the dividend.

“After all, it is the consistency of compounding that produces a good performance and satisfied shareholders.”