Urban Logistics REIT plc. (SHED) is a high-quality micro-cap being ignored by the market due to unpriced structural shifts in the warehousing industry which SHED is poised to capitalise on. Since listing in 2017, SHED has aggressively expanded by more than 500%(by acquisition cost) and is likely to grow to a size where institutional investors start coverage in the medium-term future. They raise capital on a nearly 6-month cadence, with the most recent raise in September 2020 and the capital raised in March fully deployed.
Investment Thesis
SHED specialises in mid-box(20,000<200,000sq ft.) warehouses located in densely populated urban areas in the United Kingdom. The growth of e-commerce and demand for next-day/same-day delivery services has led to a shift in the warehousing industry from big-box, >200,00sq.ft warehouses located on arterial motorways to the smaller, mid-box warehouses that SHED specialises in.
Besides a structural difference on the demand-side, we believe there is also an unrealised difference on the supply side. Whereas big-box warehouses essentially have an unlimited potential supply, area in urban areas is very limited, and in some places supply is even decreasing due to councils preferring to zone land for residential use rather than industrial. National supply in this subsector has fallen 36% since 2012. Management has stated that they prefer acquiring properties in the Midlands and SE of England in part due to these areas trend of zoning conversion. By controlling much of supply-constrained market, it is likely SHED will be able to have much higher rental yield growth than its competitors.
Tenants for this type of warehouse are extremely sticky. The average tenant in their properties has been in place for more than a decade. Due to the smaller size and usage patterns of the warehouses, capital investment by the tenant in each warehouse can often be higher than the empty value of the warehouse. This means the rent savings of any potential relocation would have to high enough to negate the capital expenditure related to it. This alleviates one of SHED’s big issues, its’ below average WAULT of 5.1 years to break. Tenant mix is sufficiently diverse, and 89% of tenants have been rated as low/moderate risk. Management has a stated policy of leasing to tenants within non-cyclical industries. All but one tenants have paid rent on time through the Covid-19 crisis.
Management is the strongest point of SHED’s offering. The CEO Richard Moffitt is extremely well-connected in the industry and through his contacts has acquired all properties in the portfolio off-market, at rates of 30-70% of replacement cost of building the warehouse. SHED is likely to be able to outperform competitors on the acquisition front for the foreseeable future. There is no suggestion of Moffitt leaving, but for the sake of conservatism we have assumed that he does so, and SHED consequently can no longer make value accretive purchases.
Risks
- Overestimation of the demand boom from e-commerce
- Shift in government policy that increases supply dramatically.
Valuation
Our custom DDM suggests a fair value price of £2.08.