Strong demand continues to drive Industrials REIT’s rental growth

Paul Arenson, CEO of Industrial REIT Limited.
Paul Arenson, CEO of Industrials REIT Limited.

UK multi-let Industrials REIT Limited has published its trading update for Q2 FY22.

This has been another strong period of rental growth across the multi-let industrial portfolio, resulting in a fourth successive quarter of 20%+ average rental uplifts at renewal or upon reletting” comments CEO, Paul Arenson.

This growth continues to be driven by a combination of strong tenant demand and a lack of available product in the market, leading to customers competing for space when good quality units become available. Occupancy levels remain strong, and the underlying estimated rental levels are currently showing an underlying growth rate of 6.5% year-on-year”.

We also made progress transactionally, successfully completing the £55 million disposal of our largest remaining non-multi-let industrial asset during the quarter, taking our total multi-let industrial percentage to 92% and having also deployed £36.5 million into 7 new multi-let industrial estates. Since the quarter end, we have successfully closed on a further £18 million of new multi-let industrial purchases in Stockton on Tees, Birkenhead, and Coatbridge and we have a strong pipeline of potential multi-let industrial opportunities heading into the second half of the financial year” he commented.

Following the company’s rebrand to ‘Industrials REIT’ in September 2021, the company has entered the second half of the financial year with the anticipation of moving to the premium segment of the Main Market of the London Stock Exchange (LSE) in early 2022 while completing the sale of its remaining 2 non-multi-let industrial properties to complete its 4-year transformation into a 100% multi-let industrial company. Going forward, its focus will be on scaling the business and enhancing returns through its Industrials Hive operating platform.

Strong demand continues to drive rents:

  • The REIT recorded a 27% weighted average uplift on the previous passing rent on new lettings and 17% on lease renewals, averaging 21% across all leasing transactions (previous quarter: 18% and 25% respectively, averaging 21% across all transactions).
  • Its rental incentives remain low on new lettings and renewals with average rent-free incentives of 1.1 months on an average lease term of 4.2 years and 3.6 years to earliest break (previous quarter: 1.6 month rent free on an average term of 4.4 years and 2.7 years to earliest break).
  • Like-for-like passing rent was stable during the quarter (previous quarter: +2.50%) and up 6.70% over the past twelve months with the average passing rent of £5.57 per sq. ft. diluted marginally due to new acquisitions with lower-than-average passing rents (previous quarter: £5.60 per sq. ft.) while rents generally remain affordable.
  • The like-for-like estimated rental value of the portfolio increased to 6.5% in the 12 months to 30 September 2021, resulting in a 9.8% premium to the average passing rent (previous quarter: 5.5% like-for-like growth and a 10.1% premium to passing rent).
  • Occupancy across its multi-let portfolio decreased by 0.8% to 93.9% as at 30 September 2021 (30 June 2021: 94.7%, 31 March 2021: 93.7%, 31 December 2020: 93.1%). 2 large lease expiries in September were accountable for 1.3% of the decrease in occupancy i.e., over the remainder of the portfolio occupancy improved by 0.5% during the period.
  • £1.18 million per annum of rental income was contracted through 26 new lettings and 27 new lease renewals over 170 081 sq. ft. (previous quarter: £1.44 million of new income over 39 new lettings and 27 renewals on 213 519 sq. ft.) In addition, a further 13 lettings across 72 963 sq. ft. of space had exchanged by the quarter end (previous quarter: 4 deals over 30 000 sq. ft., taking the total amount of space upon which new leases were completed or exchanged to 243 000 sq. ft. (previous quarter: 243 500 sq. ft.)
  • 47% of completed leases were contracted through Industrials REIT’s short-form digital Smart Leases, while 70% of leases signed included at least a 3% annual uplift in rent throughout the term of the lease.

The company successfully renewed 2 leases to a single national trade counter operator at Excelsior Industrial Estate in Glasgow. The tenant is the largest tenant at the estate with over 32 000 sq. ft. of space in 2 units and their new lease was for a further 10 years with an uplift in rent of £19 295 per annum, reflecting an increase of 8.8% on the previous passing rent and a premium of 8.5% to the Estimated Rental Value (ERV) set when the estate was acquired in September 2020.

The strong demand and its record pipeline of potential lettings include:

  • At quarter end there were 86 leasing transactions under offer on over 415 980 sq. ft. of space compared to the previous quarter’s 76 transactions over 286 000 sq. ft. of space, of which 258 814 sq. ft. related to new lettings and 161 166 sq. ft. to existing customer renewals (previous quarter: 113 000 sq. ft. and 173 000 sq. ft. respectively).
  • During the quarter, average weekly leasing enquiries were 0.5% higher when compared to the last quarter of -18%, largely due to changes in the company’s digital marketing strategy to focus on fewer but higher quality enquiries. These changes also impacted where users where down by -8.7% over the quarter (previous quarter: -14%), albeit still up 7.6% year-on-year.
  • The number of leads increased by 3.9% over the quarter.

Rent collections continue to improve

Industrials REIT reported that all multi-let industrial collections for 2020 are now ahead of its target of 95% of rent collected versus originally billed, while 2021 is trending towards similar levels as tenants are paying faster and bad debts have continued to reduce.

The company expects this to continue to improve as it moves towards the end of government restrictions on bad debt enforcements which are due to expire in late March 2022.

A strong pipeline of multi-let industrial opportunities

7 new multi-let industrial estates, totalling £36.5 million, were acquired during the quarter as well as the significant disposal of Trafalgar Court in Guernsey:

  • Bradley Hall Trading Estate in Wigan in July 2021 for £20 600 000, reflecting a net initial yield of 6.4% and a capital value of £67 per sq. ft. on the buildings and £9 per sq. ft. on the yard areas.
  • Whitacre Industrial Park in Huddersfield in July 2021 for £2 300 000, reflecting a net initial yield of 6.7% and a capital value of £94 per sq. ft. This estate adjoins an existing estate owned by Industrials REIT (the Ellis Hall Industrial Estate), taking its total holding area to over 100 000 sq. ft. over 18 units.
  • The Duke Portfolio in August 2021, comprising of 5 purpose-built multi-let industrial estate for £13 600 000, reflecting a net initial yield of 6.7% and a capital value of £60 per sq. ft. The Duke Portfolio totals 225 139 sq. ft., with an average unit size of 3 300 sq. ft and it is currently 82% let to 54 tenants. The portfolio generates a total annual passing rent of £1 050 000, equating to an average rent of £5.69 per sq. ft. The individual assets are two estates – both called Acorn Industrial Estate in Hull and Corringham Road Industrial Estate in Gainsborough; Motherwell Food Park in Bellshill; and Caldwellside Industrial Estate in Lanark.
  • The disposal of Trafalgar Court, Guernsey, in September 2021 for a price which reflected an asset value of £55 million versus a March 2021 valuation of £56 million.

In addition, since the quarter end, the company has completed a further £18 million of multi-let industrial acquisitions:

  • Arkgrove Industrial Estate in Stockton on Tees in October for £4 200 000, reflecting a net initial yield of 6.5% and a capital value of £78 per sq. ft.
  • Junction 1 Industrial Estate in Birkenhead on 27 October 2021 for £10 800 000, reflecting a net initial yield of 7.1% and a capital value of £64 per sq. ft.
  • Dundyvan Industrial Estate in Coatbridge in October for £3 000 000, reflecting a net initial yield of 7.8% and a capital value of £75 per sq. ft.

The company has a further 2 industrial estates currently under offer with a combined value of £13.6 million.

Industrials REIT’s loan-to-value (LTV) ratio was 32% on drawn facilities and approximately 22% when allowing for unrestricted cash.