Robert Stephens, CFA, discusses the growth outlook for two warehouse and logistics companies from the FTSE 350.
The pandemic has had a profound impact on shopping habits. One year ago, 21% of all goods purchased in the UK were bought online. Today, that figure stands at 31%.
A shift in spending from in-store to online has the potential to not only benefit digital-focused retailers. Commercial property companies such as Segro (LON:SGRO) and LondonMetric (LON:LMP) have portfolios that are focused on warehouses and logistics operations.
As a result, they could experience strong rental growth amid high demand for their properties. In my view, their valuations suggest they offer wide margins of safety.
Growth opportunities in logistics
The pandemic appears to have accelerated retail trends that have been present for many years. Consumers have increasingly turned to digital avenues when purchasing goods such as groceries and clothing, since delivery options and mobile phone technology have improved dramatically over a sustained period.
These trends are likely to remain in place over the long run. A range of consumers who previously did not purchase any, or limited, items online may have become used to doing so during the pandemic. They may not switch back entirely to past habits of purchasing goods in-store on the same scale as previously.
This could increase demand for warehouses. At the same time, their supply is limited – particularly in urban areas. High competition for land for residential or other purposes means that companies with large warehouse portfolios could enjoy rising rental income in future.
LondonMetric’s focus on warehousing
FTSE 250-listed LondonMetric has refocused its property portfolio over the past few years. It has gradually shifted from retail parks and offices to logistics assets. They now account for the majority of its £2.4 billion portfolio, which is based entirely in the UK. Its latest half-year results showed a rise in net rental income of 12%, while only 1% of rent was forgiven or outstanding for the period.
The firm has major expansion plans that could further enhance its long-term growth potential. It completed 251,000 sq ft of new developments in the first half of the year, and plans to build a further 657,000 sq ft of logistics assets in future. Its loan-to-value (LTV) ratio of 32.4% has been strengthened through a £120 million equity raising, as well as cost efficiencies.
Segro’s long-term growth ambitions
Likewise, Segro has ambitious plans to increase the size of its asset base. Its latest trading update showed it was on track to invest £800 million in its development pipeline in 2020. The company has taken advantage of low interest rates to refinance debt, while an LTV ratio of 24% suggests it has the financial means to grow its asset base.
Segro’s UK and European presence means that it offers some geographical diversity. Its investment in urban warehouses and larger, out-of-town warehouses known as ‘big box’ assets mean that it has the capacity to benefit from a likely increase in demand driven by e-commerce growth. With 88% customer retention and a limited amount of suitable warehouse supply, its capacity to raise rents could improve in the long run.
The uncertain outlook for the UK economy means that both stocks have valuations that could offer margins of safety. LondonMetric’s price-to-book ratio is 1.3, while Segro trades 35% higher than its net asset value (NAV).
In the short run, factors such as weak consumer confidence and a potential return to shopping in stores as lockdown measures abate remain present. However, the long-term outlook for warehouse and logistics companies appears to be bright as online shopping continues its long-term growth trend.