Specialist urban and last-mile industrial investor Warehouse REIT is looking to sell Crewe's 1.8 million-square-foot Radway Green development, as the business moves to defend its balance sheet against a harsh economic environment despite posting a pre-tax profit.
In half year results for the six months ended 30 September 2023, the real estate investment trust's chairman, Neil Kirton, said the disposal of all or most of the scheme would support it to deliver "sustainable earnings growth over the long term", and help it continue to capture the reversionary potential of its portfolio.
The decision to put the large North West industrial development on the market, or find a majority partner, comes as the business missed out on a prelet with a well-known food distributor at the site. Warehouse REIT said the undisclosed firm had been "close to signing" but backed out because it needed the space "sooner than originally envisaged".
It has not ruled out the occupier taking space at the scheme in the future. Meanwhile, the group's like-for-like portfolio valuation has increased 1% to £811.3 million, up from £282.8 million on 31 March 2023.
Speaking to CoStar News about the REIT's decision to "extract value" out of Radway Green, co-managing director Simon Hope said: "The difficulty for a company like us in the public arena is that we are having to use our revolving credit facility, our working capital, so you can't hedge it in terms of building these schemes out, no one can. That is costing us 8% today, so it is very expensive.
"We've talked to our major shareholders...and it is priority number one by the end of our financial year in March to either have sold 80% and keep 20% [of the scheme], or to have sold the whole thing. We have good interest in it."
Hope said the group was likely to get a "performance payment" for the scheme, even if it is sold, due to the REIT's efforts in pulling together the planning for it. The group gained outline planning permission from Cheshire East council for a further 1,020,000 square feet of warehousing at Radway Green in July last year. Panattoni is delivering the project.
The investor's decision to offer up one of its large schemes to market was largely put down to the "current environment" as the group, along with the rest of the sector, prepares for "higher for longer" interest rates. Hope hinted that further disposals could follow to protect the REIT's working capital.
Since 1 April 2023, the group has completed £39.6 million of non-core asset sales, 20.1% ahead of March 2023 book value and generating £5.4 million of profit. It means the REIT has completed £94.3 million of sales since beginning a disposals plan last November that targets non-core assets.
Hope said: "This is the final part of that process. From a portfolio perspective, we have sold smaller lot sizes, tireder estates, and more distant geographies.
"If we were going to sell anything else, it would be something that has a capped and collared rent... There is one in particular that we may sell. That will further strengthen our balance sheet and we can afford to wait for as long as it takes for the capital markets to recover."
Headline disposals in the period included Dales Manor Business Park in Cambridge for £27 million, along with smaller assets in Ipswich, Ellesmere Port in Cheshire, the Isle of Wight and Cardiff. Warehouse REIT said the the disposals were at a blended net initial yield of 5.3%.
The business also confirmed it had completed a £320 million debt refinancing, extending the term and improving the covenants on its debt. "This continuing programme of disposals not only strengthens our balance sheet, but also progresses the reshaping of our portfolio, increasing our weighting towards multi-let assets in leading industrial hubs," the group said in its results.
Turning away from its disposals strategy, Warehouse REIT stressed that its focus on multilet industrial had helped to maintain "leasing momentum", adding the sub-sector was enjoying "resilient" demand, while supply is "tight".
The REIT completed 23 new leases on 100,000 square feet of space during the period, adding £700,000 to annual rent. There were also 15 lease renewals on 100,000 square feet of space, seeing occupancy increase slightly to 96%.
Warehouse REIT said it was "particularly pleased" with the performance of its Bradwell Abbey scheme in Milton Keynes which is now achieving rents of around £10 per square foot on the largest units, and up to £19 per square foot on the smaller units.
The deal is reflective of a wider pattern where its leasing activity has captured reversion, growing rents 31.8% ahead of previous rents. Its wider leasing activity over the six months has generated an additional £1.2 million in rent, bringing its contracted rent to £43.8 million as at 30 September 2023, with a like-for-like increase of 1.7% for the six-month period.
Multilet estates now make up around 70% of the group's portfolio by value. Hope said: "Occupationally we are delighted and the rents are growing at inflation-like levels. We were 5.3% last year, we're looking at 5% to 6% next year... It is probably the first time in 30 years that we are seeing this level of rental growth."
The group also reported a 1.5% jump in its operating profit, which increased to £17.3 million in the period from £17 million on 30 September 2022. It put this down to "leasing momentum" and a reduction in the total cost ratio of 440 basis points to 23.2%.
Its adjusted earnings were £9.8 million, falling from £11.1 million on 30 Sept 2022, "primarily reflecting increased debt costs". Pre-tax profits also jumped to £22 million, after the group recorded a pre-tax loss of £46.4 million in 2022.
The specialist industrial investor is managed by Tilstone Partners.