Overview

I am pleased to be presenting the Company’s half yearly report for the six months ended 30 June 2023. The Company’s investment objective remains solely focused on investing in logistics real estate in Europe,  with our strategy targeting both mid box assets and smaller format ‘urban logistics’ that serve ‘last mile’ functions for the growing near-shoring, supply chain diversification and e-commerce activities of businesses across Europe. Unprecedented inflationary pressures, global uncertainty as to future macroeconomic developments and increased energy costs, leading to the sharp increase in interest rates witnessed over the second half of 2022 and into 2023, saw a consequent adjustment to property yields and asset values. Our portfolio has not been immune from such yield movement; and over the first six months of the year  the portfolio value, (excluding disposals) declined by  €47.3m (6.4%). However, the underlying premise of  growth from in-demand assets, buoyed by the continued  near-shoring of operations, growth in e-commerce,  land scarcity and rising construction costs, remains. Additionally, we have seen inflation feeding through into annual lease reviews, a major benefit of many European lease agreements which are predominantly linked to local CPI or its equivalent, helping to underpin income and, to an extent, valuations. Market overview GDP growth in the Eurozone has been muted,  with seasonally-adjusted quarter -on-quarter figures  of 0.0% and 0.3% in Q1 and Q2 2023 respectively.  Both were disproportionately affected by Ireland’s volatile national accounts, creating the impression of a pickup in momentum that is not reflected across other Eurozone members. Indeed, surveys suggest the Eurozone carried poor momentum into Q3, and purchasing manager indices (PMI’s) point to contraction in July. Additionally, with retail sales falling, the industrial sector shrinking, bank lending conditions becoming more restrictive, and the impact of monetary tightening building, there is every chance that the Euro economy will fall into recession in Q4 of this year. Encouragingly the ECB is no longer signalling further rate increases. It increased the deposit rate by 25bps to 4.0% from 20 September due to concerns around strong wage growth and sticky inflation. Ultimately a recession would likely mean a rate cutting cycle during 2024.

Strategy

Like many in the wider sector, whilst our financial and operational performance may have been resilient, it has nonetheless been impacted by the higher interest rate environment. With that in mind, the Board has continued to monitor the current dividend level, and is exploring options which could allow for improvement in the Company’s dividend cover. Alongside the portfolio indexation which is underpinning rental growth, predicted lower interest rates for 2024 will support capital values and earnings. The yield correction witnessed over the past 12 months is widely expected to have slowed by early 2024, and with a possible economic recovery in H2 2024 and a rate cutting cycle possibly commencing later in H1 2024, real estate capital markets  are anticipated to react ahead of this when green  shoots appear. We continue to monitor, through the Investment Manager, credit quality and tenant risk. At the same time, consideration may be given to the early small repayment of borrowings using any sales proceeds, or use of additional security from our currently unsecured assets,  to provide greater capacity with regards to our income and loan to value covenants.

In May the Board took the opportunity to visit the Company’s two German assets to meet with tenants  and to see first hand the Investment Manager’s operations in Frankfurt. As with Madrid last year, it was pleasing to meet the experienced asset and transaction teams on  the ground who deal so closely with our tenants and various stakeholders. Further details on the Company’s portfolio are provided in the Investment Manager’s Report that follows.

Results

The unaudited Net Asset Value (“NAV”) per share as at  30 June 2023 was 108.3 euro cents (GBp – 92.9p), compared with the NAV per share of 118.9 euro cents (GBp – 105.4p) at 31 December 2022. With the interim dividends declared, this represents a NAV total return of -6.6% for the six month period under review, in euro terms. The closing Ordinary share price at 30 June 2023 was 66.0p (31 December 2022 – 68.5p), implying a discount  to the NAV per share of 29.0%.

The Company launched on 15 December 2017, therefore discrete performance figures are not available for full years prior to 2018. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.

Rent collection & asset management

The Company’s rent collection remained robust,  despite the continued economic pressures, with 96%  of the expected rental income for the half year ended  30 June 2023 collected. Following the planned lease surrender in August,  the Investment Manager is now actively seeking a tenant for the smaller, modern unit in Madrid previously occupied by Amazon, with interested parties in active discussions with agents. Talks are also ongoing with Arrival as we  seek agreement on their proposed surrender of two  leases in Madrid. The warehouses in question provide  good optionality for splitting into up to five smaller units,  which could help to satisfy local occupier demand. During the period the Company completed four leasing transactions, in three countries, across 80,819 sq m extending the WAULT to expiry to 8.7 years. It also completed the disposal of the warehouse in Leon, Northern Spain, for €18.5 million, reflecting a small premium to the 31 March 2023 valuation. Dividend On 17 February 2023 the Board declared a fourth interim distribution of 1.41 euro cents (equivalent to 1.20 pence) per Ordinary share in respect of the year ended  31 December 2022. In aggregate a total dividend of  5.64 euro cents was paid in respect of the 2022 financial year, unchanged from 2021. The equivalent sterling rate paid was 4.79 pence. First and second interim distributions of 1.41 euro cents (equivalent to 1.23 pence and 1.22 pence respectively) have been declared in respect of the year ending  31 December 2023. Interim dividends continue to be declared in respect of the quarters ending on the following dates: 31 March, 30 June, 30 September and 31 December in each year.

Revolving credit facility/ financing

The €70 million Revolving Credit Facility (“RCF”) provided to the Company by Investec Bank affords flexibility for the acquisition of new properties and can help to avoid immediate cash drag on investment returns. The facility is undrawn at the time of writing, providing ample liquidity should it be required. Following the sale of Leon in April and the associated debt repayment, overall debt at the portfolio level fell to €259.5m with an all-in cost of debt of 2.0%. The Company’s low, secured, fixed rate debt provides support to its investment objective, with no re-financing required until mid-2025. The LTV was 35.3% as at 30 June 2023. The maturity of the Company’s non-recourse loans ranges between 1.9 and 5.6 years, with interest rates ranging between 1.1% and 3.1% per annum. The Board continues to keep the level of borrowings, calculated at the time of drawdown for a property purchase, under review. The actual level of gearing may fluctuate over the Company’s life as and when new assets are acquired or whilst short-term asset management initiatives are being undertaken. Banking covenants are reviewed by the Investment Manager and the Board on a regular basis.

ESG

Our portfolio has strong ESG credentials, and has retained the four stars (out of five) which it was awarded in the 2022 GRESB survey (Global Real Estate Sustainability Benchmark). The Investment Manager continues to seek to enhance areas where improvements can be made, including investigating further solar panel projects,  LED lighting and analysis of energy and water consumption.  This process is informed in part by our ongoing tenant satisfaction survey, and we have hopes of an even better score this year. The Investment Manager has maintained its focus on asset management initiatives, leveraging its network of locally based asset managers in order to enhance the value of the portfolio’s assets. This includes initiatives around building extensions and improvements to sites, both internally and externally, for the benefit of tenants and their workforces and to enhance the future value of the assets.

Outlook

Prospects for both the sector and the Company remain positive. As the uncertainty surrounding the macroeconomic backdrop begins to clear, we believe that the combination of strong underlying market fundamentals and positive structural drivers will continue to attract capital to the European logistics sector, and will support rental growth. Interest rate rises and tougher economic conditions have undoubtedly left their mark on the real estate sector and have impacted valuations. Investor confidence has also been tested, with the share price falling as risk aversion took hold, as has been the case for many in the real estate sector. Nonetheless, with the Eurozone seeing an end in sight for rate tightening, the signs are promising for the European logistics occupier market. We should benefit in time from strong leasing momentum, with Europe still at a relatively early stage of its supply chain reconfiguration and e-commerce penetration still some way behind the UK. The incontrovertible shift in the way in which consumers shop, and the infrastructure required to service this new form of demand close to population centres, underpins the positive longer term prospects for the Company’s investment approach. The Board continues to look at best options to improve the Company’s share price rating. There are clear challenges ahead, but the Company’s portfolio is characterised by carefully selected, tenant critical assets in well-located areas close to population hubs with good transport links. Vacancy rates in Europe remain close to historic lows, reflecting the lack of new supply being delivered into the market as a result of financing costs. The Investment Manager believes that our logistics assets remain relatively defensive, with our success in effecting the Leon disposal above book value demonstrating the liquidity in the part of the market on which we are focused. We remain confident that our well-positioned high quality portfolio, combined with our solid balance sheet, will be able to generate continued growth and attractive returns for our shareholders over the longer term as we move into an improving environment in 2024.

Important information

Risk factors you should consider prior to investing: 

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.