Urban Logistics REIT (SHED) has taken a step closer to full dividend cover, as adjusted earnings jumped 3.2% in the six months to 30 September 2024 (click here to read our analysis of the results).

Adjusted earnings per share for the period were 3.57p (7.14p on an annualised basis), bringing coverage of its 7.6p annual dividend to 94% (March 2024: 90%).

Gross rental income for the six months was £30.6m, which was up 3.0% on the same period in 2023.

EPRA net tangible assets (NTA) were down 1.4% to 158.05p, mainly due to costs involved in the acquisition of assets in the period. The group’s portfolio saw an uplift of 0.2% on a like-for-like basis and including the acquisition of four properties was valued at £1.14bn.

The company’s share price was up 10.3% over the six months as inflation fell back to target and the first interest rate cut was made in August. However, following the budget, the company (along with the wider real estate sector) suffered a sharp fall in its share price as concerns that the chancellor’s tax raid would add inflationary pressure and keep rates higher for longer.

The group’s discount to NAV at the end of September was 20.2%, but has since widened to almost 30%.

The company has prioritised achieving dividend cover and is implementing several strategies to attain this. In August it refinanced and extended a portion of its debt, fixing the cost and releasing capital to deploy on earnings and NAV accretive assets.

It bought four properties in the period for a total of £42.2m and a net initial yield of 6.6%, rising to 7.1% on the execution of near-term asset management initiatives.

It is also undertaking a portfolio recycling programme to sell lower yielding assets and acquire higher returning properties. Post period end it sold a property in Peterborough for £7.7m at a net initial yield of 4.85% and acquired an asset in Dunstable for £3.6m at a net initial yield of 7.1%.

Ongoing asset management in the portfolio has also delivered earnings growth, with 13 lease events in the period seeing a 21% like-for-like rental increase.

Vacancy in the portfolio is 8.1%, consisting of 2.3% under offer to tenants.

The group’s loan to value (LTV) is higher at 33.2% (March 2024: 29.3%) following the refinancing but remains at the lower end of its stated target range of 30-40%. The weighted average maturity was 5.1 years and the weighted average debt costs was 4.0%.

Richard Moffitt, chief executive of SHED’s manager, commented: “The first half of the financial year has been a highly active period for Urban Logistics, which has not only delivered a refinancing of one of its debt facilities, but also demonstrated the Company’s ability to make attractive acquisitions in the current market place. The refinancing has delivered a 47bps reduction in the margin the Company pays, extended the maturity of the near term debt and provided additional investment capital at attractive rates. Urban Logistics has utilised this capacity to acquire assets with a significant arbitrage between day one Net Initial Yield (NIY) and debt cost, providing not only EPS enhancement but also increasing the portfolio weighting to the Asset Management segment, which provides the team with the opportunity to deliver a strong total return for shareholders.

“Seeing attractive acquisition opportunities in the current marketplace Urban Logistics has also initiated a selective recycling programme and post period end has unconditionally exchanged on the first of these planned disposals – a £7.7 million property, at a NIY of 4.85%, representing an ungeared internal rate of return (IRR) of over 12%. The capital released will be recycled into higher yielding opportunities. Underpinning all of this is of course active asset management, as we continue to let vacant units, settle rent reviews and capture the reversion that exists in the portfolio.

“Looking forward we see significant value potential within the portfolio, which the Company will continue to realise through the team’s hands on approach to asset management as well as the recycling of the value created in ‘Core’ Assets into higher yielding assets as the Company drives for full dividend cover.”