In the past couple of weeks we have seen two big over-subscribed capital raises by property companies that have caught many by surprise.
First Supermarket Income REIT almost doubled its £75m target, raising £139.8m. And this week LondonMetric, the logistics focused company, exceeded its £100m target, raising £120m.
It has caught many by surprise because it comes at a time when most property landlords are fighting for their survival as rents are withheld by struggling tenants. It also comes at a time when you would think many investors would be cautious about piling into real estate assets when a recession is looming.
Supermarket Income REIT’s plans to tap investors was less surprising given the strength of its tenant base during the covid-19 pandemic and the recognition that supermarkets are a vital part of the infrastructure of this country. The size of the raise was remarkable, however.
On the face of it, LondonMetric’s capital raise was more surprising given that its share price has yet to recover to pre-crisis levels, standing at 182p when it announced the plans on 5 May versus 235p in mid-February.
Investors are clearly looking for certainty of income and both companies have proved they can provide it during the pandemic. Unsurprisingly, Supermarket Income REIT has continued to collect all its rents and is paying its dividend in full. While LondonMetric has collected the majority of its rents, with concessions or rent deferrals agreed on a small percentage, and also committed to its dividend.
In announcing the placing, LondonMetric, which last year acquired listed property company A & J Mucklow in a £415m deal, said it was looking to take advantage of opportunities that have arisen during the covid-19 crisis.
Of the £100m worth of transactions it has lined up, the majority are sale-and-leaseback deals and for urban logistics assets. LondonMetric is turning its focus to the urban logistics sub-sector in the belief that that is where the biggest rental and capital growth is likely to come, and was the main reason behind the Mucklow deal.
LondonMetric has form in identifying winning sectors. It started pivoting away from the retail sector more than six years ago into the industrial and logistics sector. It is now further refining its portfolio to the urban logistics sub-sector.
Logistics, and especially urban logistics, is expected to come out of the covid crisis in a positive position. Structural tailwinds driving demand in the sector, such as online retailing, are expected to accelerate as a result of the pandemic and there is a growing need for businesses to secure a network of strategically located buildings close to major population centres and infrastructure.
LondonMetric said a £60m portfolio of five assets will be acquired from an unnamed “convenience/online operator” and let back to them on a 20-year indexed-linked lease. Two further sale-and-leaseback portfolios have also been identified.
From reading this, it can be assumed that the covid-19 pandemic has led to the vendors in these deals needing to free up some cash by selling off their warehouses. In turn presenting LondonMetric with the opportunity to buy real estate that would never have come to the market in normal circumstances and on long-term leases.
The fact that the vendors need to free up cash is probably not that surprising in this climate, but must put a small question mark over the strength of their businesses. LondonMetric has said assets in the £60m portfolio are in strong locations and one of the other sale-and-leaseback portfolios is London-focused.
Well located logistics assets close to city centres are hot property, even in the middle of a global pandemic, and demand is likely to soar for many years as online retailing intensifies. Given this, it’s not surprising that investors piled into the over-subscribed placing.