LondonMetric is not a REIT that hits the headlines much. It is not sexy. It does not get involved in development. It hasn’t, so far at least, had to write down the value of its portfolio and has over the past six years delivered a total shareholder return of 156%.
But this week, with the proposed £417.7m acquisition of A&J Mucklow Group, the REIT is set to turn itself into a £2.3bn distribution and industrial firm – still only a third of the size of rival SEGRO – but very much a player in the industrial market.
For LondonMetric chief executive Andrew Jones, however, this is not an acquisition about size; this is an acquisition about reliable, repetitive income.
“I’m not someone who wants to grow for the sake of it,” says Jones, “but the more that we looked at Mucklow, the more it made sense.”
Successful succession
Mucklow had come to a period in its life where it needed to think about succession planning. The family-run firm has been listed on the London Stock Exchange for 57 years and has never been sold. But chairman and chief executive Rupert Mucklow had been keen to retire and was actively looking for a successor, without luck. Discussions with LondonMetric began in March about a potentially mutually beneficial agreement.
“The recommended offer for Mucklow is a natural next step for the company,” says Jones. “With a highly complementary portfolio focused on the outperforming urban logistics sector along with asset management opportunities, which play to LondonMetric’s strengths and experience, we believe this transaction creates a compelling combination, which will offer attractive shareholder returns both today and in the years to come.”
The transaction will add 3.2m sq ft of distribution space and create a £2.3bn portfolio, 72% weighted towards industrial and distribution. The combined portfolio will provide a contracted income of £115.8m and have a weighted average unexpired lease term of 11.3 years.
A true REIT
For Jones, the acquisition allows LondonMetric to deliver on its strategy of being a “true REIT”, and of delivering “reliable, predictable and growing income”.
It also boosts the firm’s urban logistics holdings to some £800m, reflecting 35% of its total portfolio, and increases the value of its “end-to-end” logistics platform to £1.65bn. The urban logistics sector has been one of the best-performing subsectors of the logistics market in terms of rental growth in recent years and is expected to continue to outperform.
LondonMetric’s announcement of the proposed acquisition came as the REIT posted its full-year results for the year ended 31 March 2019. During the period, the group recorded a 3.5% uplift in net rental income to £93.8m, up from £90.6m in 2018. EPRA NAV per share increased by 5.7% from 165.2p to 174.9p.
Chairman Patrick Vaughan says: “While many see property as a trading commodity and an opportunity to reposition and crystallise capital appreciation, we believe the most attractive characteristic of property is its income compounding quality over the longer term.
“The ability to generate reliable, repetitive and growing income returns makes certain property sectors a perfect asset class in which to deploy capital in the current investment environment.”
For Jones, LondonMetric’s ability to deliver reliable and repetitive income returns has come from its decision to pivot away from traditional retail and towards distribution.
“Beds, sheds and meds continue to be clear winners, while operational shopping centres, department stores and retail parks have been the undeniable losers,” he says. “We can’t always predict, but we can prepare, and so we will continue to evolve to ensure that our portfolio remains fit for purpose. If we avoid the losers, the winners will look after themselves. We will stay rational, unemotional and, above all, patient.”
At a glance: A&J Mucklow
Mucklow was founded in 1933 by Albert and Jothan Mucklow – the great uncle and grandfather respectively of current chairman and chief executive Rupert Mucklow – who established a partnership to build houses in the West Midlands. The company was listed on the London Stock Exchange in 1962 and is one of the largest quoted investment property companies in the Midlands.
It ceased housebuilding activities in the 1990s and focused its business towards investing in and developing industrial and commercial properties. It converted to a REIT in 2007. The firm owns 64 investment assets with a weighted average unexpired lease term of 7.2 years let at an average passing rent of £6.20 per sq ft.
The portfolio is 97.6% occupied and provides £26.1m of annual income. Some 14% of its portfolio is in long-income assets with a WAULT of 14.1 years let to tenants including Dunelm, Costco and Safestore. Mucklow has a market capitalisation of £346.5m and, as at 30 April 2019, its property portfolio was valued at £453m.
To send feedback, e-mail samantha.mcclary@egi.co.uk or tweet @samanthamcclary or @estatesgazette
