I have written numerous articles addressing the opportunities within the growing e-commerce market space. However, with more businesses setting up shop online, the demand for storage facilities and a robust delivery infrastructure has subsequently started causing problems. That’s where Warehouse REIT (LSE:WHR) comes into play.
As a reminder, Warehouse REIT operates smaller-scale warehouses for businesses. By focusing on the ‘last-mile’ side of delivery, the firm has been able to avoid intense competition from the larger warehouse operators. It purchases depreciated properties in prime locations, spruces them up a bit to increase their value, and then leases the property to businesses at a premium.
Today the company announced its half-year results as of September, and in my opinion they are impressive.
The Warehouse REIT portfolio
The favourable market conditions continue to grant Warehouse REIT more substantial pricing power within its lease agreements. It successfully renewed 13 contracts with existing customers — including Iron Mountain — with an average increase of 28% in monthly rent. This, combined with 23 new lettings of vacant space, has increased the total occupancy rate for 2020. It now stands at over 94% — up from 93% in March — while securing approximately an additional £1m in rent per year.
Average lease duration continued its steady climb from 5.2 to 5.8 years. While this an improving figure, it remains relatively lacklustre. By comparison, rival warehouse operator Tritax Big Box typically signs lease agreements that are 12 years in length. As the company’s portfolio predominantly consists of smaller warehouses, it is unlikely to secure decade long lease agreements. However, an average of eight years or more would be much more desirable.
To better satisfy the needs of online retailers, Warehouse REIT has disposed of nine non-core properties. The proceeds, in combination with capital raised earlier in the year, were used to purchase three new warehouses. These latest additions to the portfolio expand the firm’s storage capacity by 996,100 sq ft. According to the research firm Savills, this can support over €1.2bn of online sales for its customers and will generate approximately £5.1m in additional rent each year.
The financial highlights
| £m | September 2020 | September 2019 | %Change |
| Revenue | 15.7 | 13.6 | +15.4 |
| Operating Profit* | 10.8 | 9.7 | +11.3 |
| Dividends per Share (p) | 3.1 | 3.0 | +3.3 |
* Reported Operating Profit does not include gains realised on investment properties.
The Covid-19 pandemic has allowed e-commerce businesses to thrive at an accelerated rate, something which Warehouse REIT has been able to turn to its advantage with little effort.
The combination of higher occupancy rate, more dominant pricing power and faster rent collection has resulted in topline revenue expanding by 15.4%. Subsequently, the company’s operating profit has also grown by 11.3% compared to a year ago.
With more cash flowing into the business from both operations and equity raised capital earlier in the year, management has reduced total debt by 37% from £181m to £114m. In addition, dividend per share has also seen an increase of for investors by 3.3%, in line with the final year target dividend of 6.2p per share.
The bottom line
While the favourable market conditions won’t last forever, the need for storage facilities connected to logistics networks far exceeds the current supply. This allows Warehouse REIT to continue to raise its rental fees by double-digits.
I think investors can continue to enjoy a high dividend yield of around 6% as well as explosive increases in share price for the foreseeable future.
