An update from manager Evert Castelein
In this podcast, manager Evert Castelein looks at how the logistics market has changed in recent months, the structure of the portfolio, feedback from tenants and his thoughts on the future.
Recorded on Thursday 28th May 2020
Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series where our investment trust managers discuss how the Covid-19 outbreak has impacted their portfolios to date and the outlook from here. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust. Hi, Evert.
Evert Castelein: Hello, hi.
Interviewer: I wonder if we can start with a look at kind of the bigger picture? So how have you seen the market change in the last few months and how do you think things will work out going forward?
Evert Castelein: Yes, I think to answer this question it's relevant to make a distinction between short term and mid or long term implications. The first reaction we have seen in Europe in March is that countries went in full or partial lockdown and companies shut in order to flatten the curve as we say. So the global supply chain was immediately disrupted and especially companies depending on international trade have felt this immediately but also discretionary spending, for example, in the automotive industry and high street fashion and restaurants and many others. At the same time, we've also seen companies that have benefited from the situation such as groceries and pharmaceutical companies and packaging and e-commerce related industries in particular. So the rise of e-commerce, or the growth in online sales, is a very strong trend and it's a structural one, not a cyclical trend. And it’s a driver behind the growth of the logistic market and the demand for logistics space. So this trend really has accelerated enormously in the last few months with people working from home and shops being closed. So as consumption has moved online, more people are just buying more online, and new groups of people have entered the online market. For example, older generations have started to buy more online as well, realising that delivery of food is maybe the safest way to get groceries at this point of time. And as always, I think Amazon is the best example in the market to see how e-commerce is evolving and they've recently announced that they're recruiting an additional 100,000 staff and needed six million square meters extra warehouse space within the next 18 months. So that's an additional 20% of their existing stock, so that’s a lot and we think that growth in online sales has a much larger impact on logistics than, for example, growth in traditional bricks and mortar shops. And that's been calculated by Prologis - that roughly two and a half times more logistics spaces required to support the central volume of e-commerce sales compared to store retail sales. So these are things that we are seeing happening right now, and for us therefore the focus is very much on managing the weaker tenants that we have, or that have mobility issues, but also the stronger performing tenants in our portfolio that need more space. So there's a wide variety and just depending on the sort of sector you’re in, what the impact will be on their business. If we look at the mid and long term implications of COVID-19, besides the continuous growth e-commerce, we see a restructuring of supply chains by making them shorter and more resilient to shocks by reshoring manufacturing activities and bringing it closer to home. If you take, for example, car manufacturers in Germany or Jaguar and Land Rover, have all mentioned that they couldn’t have completed production of cars because some parts come from Asia, but also a lot of medical equipment, such as medicines and face masks need to come from Asia. So all of a sudden, supply chains and logistics have become of national importance. I think supply chains were maybe too efficient, too much focus on ‘just in time’ deliveries and this is now changing. A final and third effect and impact is the increased inventory levels for the same reason to reduce risks in the supply chain and absorb delays in deliveries. Also cold storage, by the way, is in high demand now the supermarkets are doing good business. So these factors altogether have accelerated growth of e-commerce, the increasing inventory levels and also the reshoring of manufacturing activities from Asia to Europe will be beneficial I think for the demand for logistics. Although in the short run, we also will see some demand falling away with companies that are having liquidity issues or maybe even going bust as a result of the recession we are in. That's why I think it's really important to have scale and local offices across Europe like Aberdeen Standard Investments. That enables us to work really closely together with our tenants and help them where needed. This is really one of our main USPs I would say.
Interviewer: Okay, I mean with that in mind, can you talk us through how the portfolio looks today - the type of companies you've got exposure to and geographic regions and that kind of thing?
Evert Castelein: This is a core strategy and we're focusing on the most liquid part of the logistic market, which is the range of mid price, big box warehouses with asset sizes through portfolio around 30,000 square meters, and urban logistics as we think this part of the market has really strong growth prospects thanks to the growth in last mile deliveries. We’re fully invested right now with 14 buildings in the portfolio in five different European countries. These are France, Germany, Spain, Poland, and the Netherlands where half of the portfolio is located, which makes by the way perfect sense to me as the Netherlands is a small country, yes, but it's big in logistics as a team as the gateway to the West European markets thanks to its strategic location and the presence of the largest port in Europe, the Port of Rotterdam. So for an income driven strategy like ours, it has always been really important to create durable income streams from which we can pay a healthy dividend. We think the best way to achieve this is by buying warehouses that have a second life, meaning we have not spent the capital on very large bespoke assets in the middle of nowhere and then hope for the best. No, we have invested the capital with a long term view, meaning we've had a focus on established locations alongside main transport corridors and on high quality warehouses with modern specifications and good asset sizes, because these are the sort of assets that are highly sought after by companies and that would give the asset a second life. So the ultra big boxes which also have a role to play, we haven’t invested in these because we're more concerned about the second life. If we look at the most recent additions to the portfolio, I think they're all really good examples of this strategy. Since the second capital raise held almost a year ago, we've invested in three warehouses in Europe all with a very strong urban profile. Just to give you a couple of examples we’ve bought assets in Madrid and Warsaw, in Poland with DHL as main tenants. And we bought an asset in Den Hoorn, that's in the Netherlands between the cities of the Hague and Rotterdam which is by the way the most densely populated area in the Netherlands. Den Hoorn is the largest asset that we currently hold. It's a development that has been completed in January this year, that’s a size of 33,000 square meters and it’s a very liquid and flexible building which can easily be split into parts. That for us is really important. It has a long index lease and green credentials with LED lighting and solar panels that we hope to put in place this year showing our management capabilities.
Interviewer: Okay, I mean it's been a tough time for valuations in the wider commercial property market but obviously this area has some structural growth trends in its favour. What is the picture for valuations in the logistics market across Europe?
Evert Castelein: I think property values have held up quite well in the first quarter of the year. On the fund’s level we have experienced an increase in portfolio value of 0.7%. That's no surprise because that was until the end of March and since then the virus has spread of course. Going forward you would expect that theoretically that yields should go up due to this recession we're in, which should result in high risk premiums due to low liquidity and also the impact of high financing costs. But so far we have not seen this happening in deals that have recently transacted. And I think logistics and core logistics in particular will really be on top of many business lists going forward. I expect a wall of capital will be directed towards logistics for the obvious reasons. If you look at the alternatives, office and retail in particular are struggling, retailed because the sales, retail sales are moving online which is beneficial for logistics so it's not really difficult to explain why logistics is very much in vogue nowadays. And it will be a flight to quality and core strategies just like ASELI’s strategy have that quality and have that low risk profile with a lower gearing than for example, value added or more opportunistic strategies which will struggle a bit more I would say on the capital side. If we look at the rents of core logistics, we think rent levels will be quite resilient and hold up well as there was an undersupply situation across Europe with vacancy rates around 4% on average. So the starting point is really low although we expect vacancy is likely to rise just modestly, but from a low starting point, also with only limited new developments taking place right now.
Interviewer: Okay, and what feedback are you getting from your tenants on the rental side at the moment ? Do they feel they've got their kind of business under control and they can predict going forward?
Evert Castelein: Well, we get a wide range of sort of feedback from our tenants. Some tenants are working at full capacity and some tenants are having difficulties as they experience decreased turnovers. We've had a couple of discussions with tenants on deferrals, for example, with a distributor of bikes that had difficulties with imports of these bikes from Asia, and the fact that many bike shops in Europe were closed in Europe for a period of time. Since then bike sales have picked up very rapidly, so based on latest information we have received from that company I think I feel quite comfortable that they will be able to pay back the deferred rents in due course. But we have had similar discussions with a sports retailer, a retailer in home furnishing, but also a food caterer. However, there are several tenants in the portfolio that have told us that they have experienced much higher turnovers than before and that they are running at full capacity. So just to give you an idea none of the top five tenants representing almost half of the total annual rent have come to us. Companies like a transport company with direct links to the food sector, a leading supermarket chain, a distributor of fruit and vegetables, a leading drug store running a national ecommerce business and an industrial company specialised in the production of sprinkler parts which is working on their order book, so they are just doing great business. It's really a wide range of feedback that we have received so far.
Interviewer: So I see the Trust has maintained its quarterly dividend. Could you just talk me through that and also what you expect to happen going forward?
Evert Castelein: Yes, last week's announcement stated that the company is going to pay the full interim dividend of EUR1.41 cents per share in line with the dividend policy which makes perfect sense as we have collected all rents for Q1 which we're going to distribute. We are closely monitoring the quarterly rent collection together with the board. Actually we realise income is really important for our shareholders - it’s fair to say I think that we are at the moment in a very good position to deliver. We have invested in a high quality portfolio with very liquid investments that have a second life if, let's say, a tenant would fall over. And we have a cash positive position and sufficient headroom in our loan covenants with banks. So the fact that we have local feet on the ground as well makes a huge difference and this will, going forward, enable us to stay really close to our tenants and survive this period together.
Interviewer: Great, okay thank you Evert for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.eurologisticsincome.co.uk and please do look out for future episodes.
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