Frequently Asked Questions | Urban Logistics

What is an Investment Company/ Real Estate Investment Trust (“REIT”)?

An investment company is a collective investment vehicle that invests in a number of underlying assets in accordance with an investment objective which sets out the markets and sectors in which it can invest. A UK REIT is a type of investment company, which, provided certain conditions outlined in legislation are satisfied, is exempt from corporation tax on rental income and capital gains from property. Investment and unitised funds (e.g. unit trusts or Open-Ended Investment Companies (“OEICS”) are also types of collective investment vehicle but they differ from investment companies in a number of different ways, as they are open-ended funds, as discussed below.

Investment companies are structured as a public limited company and will therefore have an independent board to ensure shareholder interests are protected. Investment companies are listed and traded on an investment exchange (i.e. stockmarket). However, open-ended funds can only be bought or sold directly with the fund’s investment manager, though investment platforms may facilitate this process.

As they are listed companies, the longevity or structure, investment objective or strategy of the investment company may be impacted by corporate activity in the form of mergers with other investment companies or early wind downs.

Unlike open-ended funds where the shares or units can be issued or redeemed in order to satisfy investor demand, an investment company is closed-ended, meaning that the number of shares in issue is fixed and will not change unless there is a corporate event whereby the investment company issues new shares or shares are cancelled as part of a share buy-back scheme.

There are also a couple of other factors that differentiate investment companies from open-ended funds.

1. Determination of the value of an investment

The value of an investment in a unit of an open-ended fund (i.e. the Net Asset Value or NAV) is determined solely on the value of the underlying investments and liabilities at a pre-determined pricing point (e.g. mid-day) and at a pre-determined frequency (daily, monthly, quarterly or even annually). Exchange Traded Funds are a type of open-ended fund which is traded on the stockmarket, and trades while the stockmarket is open at a price linked to it is estimated NAV. Due to the fact that an investment company is closed-ended and only has a fixed number of shares in issue, the share price is determined by supply and demand, as is the case for all companies traded on the stockmarket. There is a bid/offer spread, whereby, investors sell at the bid price which is lower than the offer price at which investors buy shares.

2. Ability to redeem an investment

Investors in open-ended funds can invest in or exit their investment subject to the terms and conditions applicable (and potentially market conditions) at a price linked to the NAV.

An investment company also has a NAV linked to the value of the underlying investments and any liabilities. However, as the share price is determined by the supply and demand for its shares, an investment company may be priced by the market at a premium (more than its NAV), or a discount (less than its NAV). As noted, there is a bid-offer spread and investors seeking to invest or sell their shares need to pay a fee to an executing broker as well.

To illustrate the potential discount or premium, the NAV per share of an investment company may be 100p but the price investors are willing to pay for a share may be 125p (a 25% premium) or 75p (a 25% discount).

The discount or premium at which an investment company’s shares trade can be influenced by a number of factors, including:

The performance of the investment company and the market’s expectation of prospects for future returns;
Investor interest in the asset class it provides exposure to;
The economic/ interest rate cycle, particularly in the case of REITs;
Liquidity in the shares, i.e. the ability to easily buy or sell them in the size investors wish to trade in; and
Imbalance in investor demand in the form of large sellers or buyers of shares.

3. Levered returns through borrowings

Unlike open-ended funds, investment companies can borrow money on a longer-term basis to invest. Gearing has the effect of magnifying gains when markets are rising but will have the opposite effect when markets are falling. The more borrowing an investment company has, the more volatile the share price is likely to be.

Interest payments associated with borrowings will also impact the net revenues of investment companies, and their ability to pay dividends. If the interest payments are not fixed or otherwise hedged, fluctuations in the interest rate cycle may have an adverse impact on dividend payments.

It should be noted that borrowings are generally subject to covenants which require the investment company to satisfy certain conditions, generally with respect to revenues or capital values, on an ongoing basis. Whilst investment companies are generally careful in ensuring that there is plenty of headroom over the covenant, the breach of these covenants can have adverse impact on the ability to manage the portfolio or pay dividends, and the lender may recall the loan at short notice.

Open-ended funds can also seek to mirror the effects of leverage to an extent through the use of derivatives, though this may not work equally with all asset classes.

4. Nature of the asset class

Investment company structures are better suited to investments in less-liquid asset classes in particular, as the structure allows the investment manager to take a longer-term view when investing, in the knowledge that the capital available for investment is fixed.

Investors who take an appropriately long-term view are also protected from the actions of other investors who may take a short-term view and exit their investment early, and would otherwise, in an open-ended structure potentially give rise to unnecessary costs, impact on the NAV of selling an asset when market conditions are poor and the resulting increased concentration in less-liquid assets.

5. Smooth dividend payments

Investment companies are able to smooth out the distribution of income by way of “dividends” from one year to the next by retaining a proportion of net revenues when market conditions are good and using this to support dividends when market conditions are less favourable. UK open-ended funds are unable to maintain revenue reserves to smooth out distributions to investors from one year to the next.

FAQs

Investment companies listed on the London Stock Exchange are subject to the UK Listing Rules of the Financial Conduct Authority. The UK Listing Rules set out mandatory standards for any company wishing to list its shares or securities for sale to the public. They include principles on executive pay, a requirement to comply or explain non-compliance with the UK Corporate Governance Code and the information to be provided in a prospectus.

Investments made by investors on a non-advised basis in investments companies are not covered by the Financial Services Compensation Scheme (“FSCS”).

If you hold investment company shares in a packaged product such as a share plan, ISA or pension, the product provider must be regulated by the Financial Conduct Authority.

At any one time, an investment company share will have an offer price (to buy it) and a lower price to sell it back, the bid price. The difference between the two (the spread) represents the incentive for market makers to provide liquidity in the shares, this relates to the risk that the market maker takes in holding the shares themselves in order to make them immediately available to a buyer. I.e. the risk that they may have to sell them to an investor at a lower price than they bought them for. Due to this risk element, the spread can change depending upon demand for the share and market conditions. If there is high demand, and therefore it is likely that the market maker will not have the shares for long, the spread will be narrow, if there is little demand meaning the broker may have to have the shares on their books for a while, the spread will be wider. Market volatility may also give rise to wider spreads. The spread also compensates the market maker for using their capital to provide liquidity.

Your executing broker will also likely charge a stock broking fee.

There is no guarantee that any discount will have narrowed by the time you come to sell, and it may widen. The Board of Directors of an investment company can take measures to narrow the discount, e.g. by buying back shares in order to increase the demand and therefore the value of the shares that remain available in the market, but there is no guarantee that this will reduce the discount in the long term.

All things being equal, buying shares at a discount means that you have more capital working to provide you with a capital return and generate revenue which can be distributed as dividends (after costs). However, a discount can on occasion be the market’s expression of its expectations of the true value of the underlying portfolio or risks to future returns.

Some investment companies also have other discount management measures such as periodic wind-down or continuation votes, which are designed to give investors comfort that if performance is poor or there is a lack of demand for the shares, an exit might be possible, if the required majority of other shareholders vote in favour.

It depends. Most investment platforms will hold the shares in a ‘nominee’ account on your behalf. The nominee will then become the registered owner of the shares. If this is the case, you will need to ensure that the investment platform will pass on all documentation in relation to your shareholder and voting rights.

However, it is important to note that investment companies usually have more corporate actions and other events such as votes on the appointment or reappointment of Directors, which ideally require responses from investors.

The NAV and price of open-ended funds move up and down and therefore carry the risk that you may get back less than your original investment when you come to sell. However, an investment company’s share price may move by markedly more than its NAV, as a result of the discount/ premium feature.

It should be noted that investment companies which invest in illiquid assets such as real estate or private equity may see wider swings in their share price that open-ended funds in general, due to changing market sentiment and swings in investor demand.

We are unable to recommend a broker. However, the Association of Investment Companies (“AIC”) have provided the following list of platforms that provide access to the Investment Company - Availability on Platforms | How to Invest | The AIC. It should be noted that this is not an exhaustive list of all executing brokers who can provide access, for example, your bank may also be able to help you. Please, note that this should not be taken as a recommendation or an endorsement of the website.

What we consider sets us apart from other investment opportunities

Urban Logistics REIT plc (LON: SHED) is a FTSE 250 property investment company. The Company is the only London listed REIT offering exposure to the specialist last mile / last touch logistics sector, with a single-let tenant base which delivers essential goods within the UK. The Company’s strategy is to invest in mid-sized logistics properties with the objective of generating attractive dividends and capital returns through active asset management and asset recycling to generate significant valuation uplift.

Urban Logistics’ investment adviser team has significant experience in investing in the fast-growing logistics sub-sector within the broader real estate market. The team’s ability to source important and strategically located mid-sized single let properties, with high-quality tenants, off-market at favourable terms, creates considerable value for shareholders. Tenants include Amazon, XPO, DHL, Evri, DPD, Unipart (for NHS), Royal Mail and J Sainsbury Plc.

Buying well and pursuing additional value enhancing asset management initiatives has driven the Company’s growth, enabling Urban Logistics to grow from a £10m market cap company at IPO in April 2016 to a FTSE 250 constituent with a portfolio valued at over £1bn.

Logistics Asset Management LLP acts as investment advisor to G10 Capital Limited which is AIFM and portfolio manager for Urban Logistics REIT PLC. G10 Capital Limited is part of the IQ-EQ Group. Additionally, Logistics Asset Management LLP has been appointed by Urban Logistics REIT PLC to carry out physical asset management.

Logistics Asset Management LLP is an appointed representative of G10 Capital Limited which is authorised and regulated by the Financial Conduct Authority (FRN:648593).

How do I find out more and stay informed?

Please refer to the following for further detailed information on us:

AIFMD Investor Disclosure
Factsheet
Annual Reports and Accounts/ AGM Presentations
Interim Reports and Accounts
RNS news section for the latest updates
If you need more information, please contact us on ir@urbanlogisticsreit.com