With headlines dominated by a certain £5bn merger and a potential lifeline thrown Regional REIT’s way, I suspect a smaller deal announced by Warehouse REIT may have gone unnoticed.
Already on our radar this week due to annual results being published, the company made the surprising additional announcement of a retail park acquisition. That’s not a typo – the specialist industrial-focused REIT splashed £38.6m on Ventura Retail Park in Tamworth, near Birmingham.
Management was quick to stress that the deal does not represent a pivot from its specialist focus of warehouses (from which it bares its name) but is in fact complementary to its multi-let industrial portfolio. Whether retail or industrial, the asset is ostensibly a warehouse, it argues.
Still, investors would be forgiven for being a bit confused.
The bones of the deal look great. It acquired phase two of the retail scheme, which covers 13 units and 120,000 sq ft of space, at a healthy net initial yield of 7.4%. It is fully let to retailers including Boots, Sports Direct and H&M, with contracted annual rent of £3.1m, and is located adjacent to phase one, which boasts Next, Primark and M&S among its occupier line up. Combined, Ventura Retail Park ranks in the top three centres for comparison goods spend in the UK.
While the deal helps in the company’s quest for dividend cover, some will question how it marries up to its specialist focus, after all, shareholders bought the company for its exposure to the industrial sector.
The management team, Tilstone Partners – led by Simon Hope and Andrew Bird, will have to convince shareholders of the synergies between multi-let industrial and retail parks. Otherwise, it could look like they are abandoning their investment mandate in search of yield and encroaching on the domain of the generalist REITs.
They are not the first industrial/logistics REIT to look at retail parks. As part of its offer for abrdn Property Income, Urban Logistics REIT had proposed buying not just the logistics assets but also the retail parks.
In an analyst call on the morning of Warehouse REIT’s results, Hope argued that the impact of e-commerce had largely played out in the retail park sub-sector, with rents rebased and occupiers adopting an omnichannel approach to retailing through click and collect.
The only difference between multi-let industrial and retail parks, he added, was the direction of travel of the goods/customers – with goods leaving the warehouse to be delivered to homes and customers travelling to retail parks to pick up/return goods.
This may seem an over simplified way of looking at it (especially when you consider the broad mix of uses in industrial estates), but the general point around omnichannel retailing stands true.
The two sectors share similar, favourable supply and demand dynamics too, with low vacancy rates (with very little by the way of new development coming through) and healthy demand.
These fundamentals have seen retail park rents on the up again from their rebased levels, with 16.5% growth from 2020 to 2023 (following a fall of 31.6% between 2016 and 2020), according to Savills. Industrial rental growth has been strong for a long time and is set to continue.
With the manager’s top priority achieving a fully covered dividend, more deals at higher yields can be expected. Earnings were left depleted due to the company’s debt cost spiralling with rising interest rates in 2022, only covering its 6.4p dividend in the year to March 2023 by 73%. That recovered slightly to 75% in the 12 months to March 2024 (95% including profits from sales), but the need for further earnings growth and improved coverage remains.
Hope admitted that the team could not find any adequate investment opportunities in the UK multi-let industrial sector anywhere near the 7.4% yield it paid for Ventura Retail Park, citing an example of an industrial park in nearby Coventry recently trading hands at a 4.25% yield.
The yield spread between retail parks and multi-let industrial, although exaggerated in this example, is on average about 200 basis points meaning more retail park deals are likely. The company says that it has held initial discussions on bringing in a joint venture partner to focus on the sector, which could see it set up a separate fund. It stresses, however, that no more than 20% of the company will be exposed to retail parks.
With the company trading on a wide discount to NAV, some have questioned the merits of buying an asset at par value (with extra acquisition fees on top) against buying back shares in the portfolio it has assembled at a circa 35% discount.
Shareholders seem nonplussed about the company’s new path, with the share price barely moving since the deal announcement on Tuesday. If a move into retail parks helps to bring about dividend cover, and shareholders can get comfortable with the ‘wider warehousing’ investment mandate, it could prove a popular one.