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Residual retail and residential exposure holds back LondonMetric

LondonMetric Property says its EPRA NAV fell to 143p from 147.7p over the course of the six months ended 30 September 2016. Its EPRA earnings per share climbed to 4p from 3.7p however. The interim dividend has edged up by 0.1p to 3.6p.

Year to date they have sold GBP84.2 million of retail and leisure assets and made GBP79.4 million of distribution acquisitions as they switch the focus of their portfolio.

Distribution

The weighting towards the distribution sector continues to grow and, including assets under development, totalled GBP867.0 million as at 30 September 2016, representing 58.5% of the total portfolio. This portfolio is 100% let, has a WAULT of 12.7 years and 57.1% of rental income is subject to contractual rental uplifts; retailers account for 74% of our distribution rental income. They say that large distribution warehouses let to good covenants with long leases continue to be in high demand from investors. They have continued to build their larger distribution warehouse portfolio by investing in development sites in Wakefield and Warrington. These two developments total over 880,000 sq ft and have an attractive combined yield on cost of 6.6%.

They continue to see good value in last mile distribution warehouses. These are increasingly critical to the distribution networks for retailers and third party logistics providers servicing their spoke operations to larger hubs. These assets are typically c.100,000 sq ft or less in size, are well located and facilitate next day and same day delivery to major cities and conurbations. Yields are up to 100bps higher than available on larger hub locations and, as demonstrated by rent reviews that we have settled this year, offer stronger rental growth prospects. During the half year, they acquired GBP32.2 million of last mile warehouse investments at a NIY of 6.4%. The portfolio of last mile assets currently totals GBP120.1 million across 1.2 million sq ft and 19 assets, with over 60% located in the South East.

In November 2016 we disposed of our Hut Group warehouse in Warrington which they funded the development of and completed over twelve months ago. The occupier had exercised its option to purchase the asset for GBP53.7 million and they generated a geared IRR of c.20% from the disposal.

Retail

All of retail investment activities during the period related to disposals, which has helped to reduce exposure to retail parks, inclusive of developments, to 16.8% of the portfolio with our long income JV assets representing 7.1%. They have continued to grow the convenience retail portfolio which now accounts for 5.4% of the portfolio. Seven retail assets were sold in the period for GBP86.3 million (Group share: GBP78.4 million) at close to book value: lease shortly prior to purchase.

The MIPP Joint Venture continues to see opportunities in selective high quality assets that have smaller lot sizes and offer the potential to generate stable, consistent income returns whilst providing capital protection. Following discussions with our MIPP Joint Venture partner, they have agreed to extend the term of the Joint Venture by a further three years to 2023. The portfolio of convenience assets has grown to GBP80.0 million, representing 5.4% of the portfolio, with a WAULT of 18.3 years. They say that the convenience portfolio offers an attractive hedge against inflation with 79% of their convenience income benefiting from some form of indexation.

Residential

Moore House in Chelsea is their last remaining residential asset, they have a 40% share. Purchaser interest has been strong over recent months and they sold eight units in the period. A further four units have been sold post period end and nine units are currently under offer. There are 70 units remaining which represents less than half of the original 149 units owned.

Lettings

11 lettings were undertaken generating a rental uplift of GBP0.9 million at an average of GBP17.80 per sq ft, 2.1% above ERV and with average lease lengths of 13.8 years. Post period end, they agreed terms to let their completed 357,000 sq ft distribution development in Warrington and 140,000 sq ft of our 270,000 sq ft distribution warehouse development in Stoke.

Rent reviews

During the period, they agreed 22 rent reviews, including fixed uplifts, across 3.1 million sq ft at 4.8% above previous passing and 4.3% above ERV. Post period end, they have settled a further seven rent reviews across 950,000 sq ft. Distribution assets are benefiting from strong rental growth and, year to date, they have settled eight logistics rent reviews at 5.0% above previous passing and 3.5% above ERV. Three of these reviews related to open market settlements on last mile and regional warehouses where, across 354,000 sq ft, the average uplift was 16.2% above previous passing. The remaining reviews were RPI or fixed uplifts, four of which were annual uplifts and the other a five yearly review.

On their retail and leisure assets, year to date, they have settled 21 rent reviews at 2.4% above previous passing and 6.7% above ERV. The majority of these reviews were RPI linked rent reviews although they did settle six open market reviews at 2.7% above previous passing.

Valuation

Overall, the valuation of the total portfolio was 1.5% lower. The core portfolio valuation was 1.1% lower, benefiting from distribution assets which held up strongly, falling by only 0.6%. The retail and leisure portfolio saw moderate softening, falling by 2.1%, albeit significantly outperforming the comparative IPD retail measure by 90 bps. Performance was polarised with larger retail parks falling 3.2% whilst our convenience, leisure and single let retail assets held up well, falling only 0.7%. The long lease lengths and attractive lot sizes of our retail portfolio gives us confidence in our valuations, as evidenced by our recent retail disposals where aggregate pricing was close to March 2016 book value. The last two non-core buildings at Moore House and Marlow saw more of an adverse valuation impact. Their office in  Marlow was the worst performer, falling by 9.6%. They continue to let up the vacant third floor and closely monitor the South East office market to determine the best timing for disposal.  Their residential building in Chelsea was also impacted and residential valuations fell by 5.7%.

LMP : Residual retail and residential exposure holds back LondonMetric

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