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QD view – Property tinkermen worth their weight in gold

There can be no doubt that the COVID-19 pandemic has changed the landscape in the property sector forever. So, it has been interesting to observe how different property companies have responded with the composition of their portfolios.

Any manager worth their salt would have been exiting high street retail a long time ago. But it is the nuanced moves within the property sub-sectors that paints a picture of the thinking and the skillset of a property fund manager.

Take LondonMetric for instance. It had been markedly increasing exposure to urban logistics way before the pandemic highlighted the structural fundamentals driving growth in that sub-sector (increased online retailing seeing demand for smaller parcel delivery hubs near large conurbations grow).

LondonMetric is somewhat of a poster child for the retail to logistics structural switch. From the early 2010’s, the company was selling out of retail at the top of the market and buying warehouses at a huge price arbitrage.

While the finessing of its focus on to urban logistics has been a shrewd move, another growing proportion of its portfolio caught the eye this week.

It has bought a portfolio of seven service/petrol stations for £21.9m, bringing its service/petrol station portfolio to 20. Owning the infrastructure that is likely to play a part in the electric car future, or possibly supply other cleaner fuels such as CNG and LNG or even hydrogen, could be another canny move by the company.

It acquired the seven service stations, with attached convenience stores, at a blended net initial yield of 5.1% – a good return for a long income portfolio that has a weighted average unexpired lease term (WAULT) of 18 years and contractual rental uplifts in place.

Among the numerous reshuffling of portfolios going on at listed property companies, Standard Life Investments Property Income Trust’s activity has stood out to me.

Its share price has been hit hard during the pandemic, falling from 93.8p in late February 2020 to 60.8p yesterday and is now trading on a 22% discount. This is despite it having a near 50% weighting to the industrial and logistics sector.

Its manager Jason Baggaley is known for being a very active manager and in recent months has made a flurry of sales – most notably in the industrial sector, which most would find surprising and may mistake it for desperation to shore up its balance sheet.

The group is in decent financial position, with a conservative loan to value (LTV) of 23% – way below its bank LTV covenant of 55% – and an interest rate cover of 595% against the banking covenant of 175%.

Baggaley said the sale of the four multi-let industrial estates for £37.75m was to realise profit on the assets at a time when investor demand in the sector is strong, while believing that future performance within the sector is going to be polarised. It makes sense that smaller multi-let industrial assets (which tend to be let to SMEs) are at risk of an increasing number of businesses failures due to the economic impact of COVID-19.

With less savvy investors indiscriminately pumping money into industrial, crystalising profit on assets that you do not believe have strong future return prospects is good portfolio management. The group used the proceeds to repay a loan and give it dry powder to pursue investment opportunities.

Plenty of opportunities are sure to be thrown up in the months ahead as the fallout of the pandemic rumbles on. A manager with the knowhow to take advantage of it is worth their weight in gold.

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