LondonMetric Property Plc

I haven't seen this many suits for a while. It's only night in our office. Are we good to go? Great. Okay. Morning, ladies and gentlemen. Thank you for making the effort on this splendid November morning. Must have been the lure of the bacon sandwiches rather than what I'm about to tell you. So, you know, familiar format for most of you in the room. I'm going to open up with an overview. over the last six months, go through, highlight some of the key numbers that we announced this morning, pass over to Martin, who will go into much more detail on the figures, before he handing back to me to give you a deeper dive into the property portfolio and its performances and the valuations, before sharing with you our thoughts on the outlook for our sector and obviously for our portfolio. And then I'll open up the floor and the lines to Q&A. So welcome to London Metrics half-year results, the period ending the 30th of September 2022. And what a six months it's been. I mean, a lot of this is going to become relatively well-known to you. The investment backdrop has obviously shifted materially since March. I'd actually ask you to focus on the first number on the right-hand side. The five-year swap is up 200 basis points. And the fact of the matter is that is a very, very important number. Interest rates are the yardstick by which we value real estate as well as other investment medium. And that's courtesy of the fact that the economic and the political environment has deteriorated and that real estate markets are... recalibrating very, very quickly with some sectors moving quicker than others. I'll come on to talk about that in a little bit more detail later on. And some sectors suffering from what we refer to internally as deal paralysis. Our portfolio continues to be shaped by the structural trends that we see taking place in the wider world and evolving consumer behaviour, largely dictated by the advancement of technology. The fundamentals in our core sectors remain strong. And again, I'll dive into this in more detail. Urban logistics remains our strongest conviction call based on a demand and supply equation, which is delivering excellent rental growth for us. But also a long income grocery and discount assets will continue to benefit from a increasingly price conscious shopper hunting for bargains in a higher inflationary environment. Over the last six months, we've delivered like-for-like income growth. You can see there just shade under 3%, courtesy of lettings and rent reviews, open market rent reviews there at 22% up from previous passing rent. Portfolios suffered a valuation decline of 8% courtesy of a 47 basis point outward yield shift. And again, I'll dive into that on a subsector basis later on in the presentation. But our portfolio remains incredibly strong, as you can see there, with 99% occupancy on weighted average unexpired lease terms of over 12 years. And such is the timing of rent reviews coming up over the next 12, 18 months. We have a higher proportion of those falling due, and therefore we are in line to collect a higher amount of reversion than would normally be the case. The simple methodology of 20-20-20 actually doesn't apply in that we've got a higher proportion, as I say, coming up over the next 12 to 18 months, and we expect to capture across our logistics portfolio in particular another £8 million worth of embedded reversions. We've continued our disciplined approach to capital allocation, both on an equity basis and also on a debt. We disposed in the six-month period, including post-period end activity, £140 million worth of assets and acquired £99 million worth of assets. And also, we announced this morning that we have enhanced our debt facilities with an additional £225 million, with a further £75 million accordion. which will give us extra flexibility and duration with no debt maturities now until financial year for year 26. Martin will go into that in a little bit more detail in a moment. So turning to the numbers, an incredibly strong P&L metrics here, less so on the balance sheet. Net rental income is up 13.5% at £72.1 million. That's followed through with an EPRA earnings up a similar amount at 50.2 million. And, excuse me, EPRA earnings per share at 5.14 pence, up 5.5% from where we were 12 months ago. And that has allowed us to announce another quarterly dividend of 2.3 pence, bringing 4.6 for the six-month period. That is up 4.5% on this time last year. And as you can see there on the far right, it's 112% covered. The valuation fall that I touched on earlier has led over the last six months to the NTA moving out by 12.2% to 229.3 pence. But interestingly, worth noting that over the 12-month period, the NTA is actually up 7.5% compared to where it was this time last year at 213.4. The fact of the matter is, the last six months, the yields have moved up 47 basis points, The six months preceding that, they came in by 43 basis points. So what we took in that six-month period, we've given up in this six-month period. And the reason why the NTA is higher than it was 12 months ago is simply courtesy of the ERVs that we've captured over that period. And I'll come in to talk about that in more detail in a moment. But on that note, I can hand over to Martin.

Good morning. Thanks, Andrew. The income statement must be really good because he's covered all of it. So in a half year dominated by economic and political volatility, we've delivered a really strong trading performance. As Andrew has already reported, we've delivered net rental income of 72.1 million, an increase of 13.5%. over the same period last year. This increase in net rental income is driven by additional rents from new acquisition and rent starting to flow from completed developments of almost £12 million. Taken together with additional rents arising from rent reviews and re-gears, this more than outweighs rental income lost from property disposals of £4.8 million. I can report another very strong rent collection performance in the period with 99.9%, I don't know why I didn't call it 100%, of rent due having been collected Our administrative cost is £8.6 million, an increase of £0.4 million in the period. However, we monitor our costs very closely and our EPRA cost ratio has fallen by 90 basis points since last half year to a low of 12.3%. And our gross to net property cost leakage remains consistently extremely low at just over 1%. Our finance costs are £13.6 million, that's an increase of £1.6 million over last year, primarily due to higher average debt balances and the increase in cost of debt over the period, which I'll come on to. Our rental income growth and the attention to controlling costs has driven our repra profit to 50.2 million, or 5.14 pence per share, which supports the increase to our dividend for the period to date to 4.6 pence per share. That's an increase of 4.5%, with very strong 112% dividend cover. As Andrew said, we've reported a decline in the portfolio valuation in the period of £296 million today. and therefore report an IFRS loss of £243.4 million compared to an IFRS profit for the comparative period last year of £254.1 million. Turning to the balance sheet, the portfolio valuation is £3.46 billion, a decrease of £143 million, or just under 4% compared to the year end. This is due primarily, as Andrew said, to the fall in the valuation of the portfolio at the end of the period, counterbalance with £200 million of acquisition and disposal activity. As at the period end, we had £49.1 million of cash on our balance sheet and £1.2 billion of debt. The net liability position at the period end is £48.8 million, the major component of which, as in previous periods, is rent received in advance. In summary, our EPRA net tangible assets at the period end is 2.25 billion or 229.3 pence per share, a decrease of 12.2% over the year end EPRA NTA of 261.1 pence per share, which without doubt was a moment of maximum optimism for the valuers. But as Andrew has said, our NTA is still 15.9 pence or 7.5% above where we were this time last year. We have 1.3 billion of debt facilities on our balance sheet at the period end. In the light of the volatility in financial markets during the period, we have sought to ensure that this debt provides long-term certainty with flexibility and that our exposure to rising interest rates is mitigated. Consequently, we have lengthened the maturity on 550 million of debt facilities, extended the hedging of our revolving credit facilities and entered into a new 225 million debt facility through to November 2025 with two one-year extension options and an accordion facility for a further £75 million. This new facility eliminates our refinancing risk through the remainder of FY23, FY24 and FY25. We have no further refinancings until FY26. The facility pricing is consistent with our existing RCF facility which eliminates the risk for us of bank credit spreads widening for refinancings in the new year. The facility is subject to ESG criteria, which will generate a small margin benefit. I've updated our period end debt metrics to take account of this post-period end activity. and refinancing. We now have headroom of £262 million. The new facility has increased our debt maturity from 5.8 years at the period end to 6.2 years. We've increased the proportion of our drawn debt hedged to 85%. Our average cost of debt is 3.4% and our exposure to rising interest rates is mitigated such that a 25 basis point interest rate rise would reduce our earnings by only circa £400,000. Our loan to value at the end of the period is 32.1%. Net of sales proceeds received post-period end on disposals exchanged in the period. We have complied comfortably throughout the period with our debt covenants and our interest cover ratio remains at a very strong 5.1%. Our contracted rent roll in the period has grown to £150.5 million as a result of rent reviews and new lettings in the period of £4.3 million and as a result of net investment and development in the period of £2.9 million. However, we expect this number to grow materially in the next 18 months as income from current development starts to pass and our voids are filled. but most significantly we expect an additional £10 million of rent to flow from rent reviews in the period up to FY24. A higher proportion of rent reviews fall due in this period than historically, increasing our NIY by 35 basis points to generate a contracted rent roll of more than £160 million by March 2024. It is this significant level of growth in our rent which supports our confidence that we will continue to grow our distributive learnings and be able to continue to progress our dividend from its current 9.25 pence per share. And finally, before I hand back to Andrew, a look back over the longer-term performance of London Metric demonstrates that the increase in net rental income in this period continues a growth trend which has shown a 12% compound average growth rate since 2014. Earnings have progressed each year allowing us to progress our well-covered dividend each year which has contributed to a total shareholder return which has also shown a 12% compound growth rate over nearly nine years. So whilst the outward movement in yields has caused our total property return and our total shareholder returns to fall back this year, the performance overall continues to be very strong.

Thanks, Martin. Thanks, Martin. Right, so a deeper dive into the real estate portfolio. Portfolio there, this is a chart that, again, should be familiar to most of you in this room. Our £3.45 billion portfolio continues to be dominated by our logistics investments that now account for roughly 74% of the total assets, with urban logistics making up by far the largest portfolio. Subsector investment portfolio continues to enjoy 99% occupancy, long leases and benefit from a high percentage of contractual uplifts. The logistics portfolio, as you can see there, showed a 59 basis point outward yield shift split between urban, regional and the mega subsectors. But it did benefit from 5.5% ERV growth and 2.6% like-for-like income, which combined to give a total property return of a negative 7.5%. Our £800 million long-income portfolio continued to exhibit dispensive and heavily indexed characteristics. It experienced 15 basis points outward yield shift, but did benefit from 4.3%. percent like-for-like income growth courtesy of a number of rent reviews coming through in the period to deliver a total property return effective at 0.6 percent negative. So going diving deeper into the distribution portfolios as you can see these have shown very strong income progression with rent review settlements and ERV growth reflecting the tight demand supply tension that we see across this sector. 50% of the portfolio is now weighted to London Southeast. We think that will be an increasingly important element going forward. The urban portfolio delivered 25% uplift in rent reviews settled over the period, which is in line with its three-year average ERV growth. And similarly, the trajectory and the correlation between ERV growth and rent review settlements was similarly tight across the regional portfolio as well. However, in our mega warehouse subsector, The rent reviews were settled at 8% above previous passing, but the settlements here, courtesy of contractual uplifts, have been restricted and therefore lag what the open market rent review settlements would have been, as indicated there by the 18% growth in ERVs that this subsector has enjoyed over the last three years. Turning then to the long income portfolio, as I said, £800 million, or just over £800 million, dominated by triple net assets across the grocery and the convenience sectors. that will continue to benefit from increasing consumer demand for bargains in an inflationary environment. The portfolio has long leases over 13 years to expiry, 100% occupancy, and is valued off the net initial yield today of 5%. 67% of the rents in this portfolio are indexed, and rent review settlements over the period came in at 20% above previous passing. I should just point out that that's quite an impressive statistic, given that none of the rent reviews in those three sectors hit 20%, but we had a very strong settlement, and the indexation that we have in our leisure portfolio and our cinemas was extremely high, so that's what brought that average up to 20% over the period, even though you don't see any of those buckets starting with a 2%. Turning into the investment market, as we know, the uncertainty is creating dislocation and paralysis across certain investment subsectors. As I mentioned earlier, interest rates remain a critical yardstick in working out what the correct property yields are, and volatile swap rates is creating illiquidity, although at least we are off the peak of the five-year swap. I hope we're off the peak of the five-year swap that hit 5.4% at the time of the mini-budget in September. Hence, buyers and sellers are recalibrating in what is a challenging investment market. And I think looking ahead, Martin touched on it briefly, we think that debt availability and debt pricing will become increasingly key metric as we go into 2023. Therefore, there will be a focus on the sectors and the assets that can deliver a reliable and growing cash flow. We are seeing some motivated vendors, particularly at the moment across the open-ended retail funds. They seem to be the most active, facing investor redemptions. But I also think that we will see sales coming out of refinancing as we travel through 2023. The fact of the matter is there will be a lot of platforms out there that were predicated on almost... zero cost of debt and the platform doesn't work when you know the debt cost is going to be five plus percent if indeed that is the case as I say it comes back to where we think the five-year swap settles and the fact of the matter is you know market uncertainty is actually the friend of the investor looking for long-term value so we will remain alert and we'll be wide-eyed to people who are motivated and need to monetize their investments quickly The occupier market in our chosen sectors continues to function extremely strongly. Occupation demand is very, very high in our core sectors. Logistics is benefiting from structural tailwinds, whether or not it's rising online penetration, increasing localisation and onshoring. This is all creating a deep and broad demand from occupiers. Logistics take up in the year to date is that you can see there 38.5 million occupiers. But the important number there is that this is still 15% above the long-term average. And this is continued post-period end. We've done 17 more lettings across our urban portfolio. As you can see, these are at 24% above what the previous passing rent was. Turning now to supply, this remains highly constrained. And that, combined with the demand that we're seeing, the granularity of occupiers looking at urban warehousing, is driving rental growth. It's a fantastic statistic. One of my colleagues uncovered that over 20 years, the industrial floor space in the major cities has fallen dramatically. 24% in London, 20% in Manchester, and 19% across the West Midlands. And as a result of that, plus the rising demand, we've got logistics vacancy at only 3%. That's just over six months' supply. And given the economic outlook, given the cost of finance today, we see very little new speculative development going forward. And therefore, that will continue to drive rental tension. In fact, at the half year, we had 148,000 square feet of vacant space across the portfolio. That is actually reduced by just over 50,000 square feet with deals that we have agreed in solicitors' hands. And that is, it's a wide range of people, whether or not it's, you know, yoga and Pilates studios, whether or not it is trade counters, whether or not it's dark kitchens such as Jakuna and... and Deliveroo, whether or not it's a door furniture wholesaler in Crawley, whether or not it's a coffee roasting house in Stratford, a fine art logistics business in Tottenham. There is a broad range of occupiers that are going to take our buildings. I was talking earlier that we've got a building coming up in February and we're in discussions with some people. One of them was a fish wholesaler and the other was an automotive collision operator who just fixes your car. I mean, it's just a broad shift. I have no idea who will occupy. If we have a vacancy next week, I have no idea what industry will occupy. But what we are seeing, as I said, we are seeing material rental growth or rental uplift from the new let rents that we're agreeing compared to the previous passing rents that we were receiving. So that probably justifies a little bit more detail on rent reviews, which we think is, as well as interest rates, an important determiner of what the correct yields are. We delivered like-for-like income growth over the period at 2.9%. Contractual rent reviews, courtesy of elevated levels of inflation, helped deliver 17% uplifts in previous passing. Open market reviews were settled at 22% up, urban logistics being the standout performer at 25%. And as Martin's already touched on in his slide, but this is just on the logistics bit, the logistics portfolio has got another £8 million worth of rent to be captured over the next 18 months, courtesy of both contractual and open market rent reviews that we are looking forward to. Looking at the management of the portfolio, we remain focused on actively improving the quality of the portfolio that we own. We've de-risked 860,000 square feet of developments by adding £6.7 million worth of high quality income. Our refurbishment and asset management initiatives have allowed us to secure another £1.9 million worth of income. And we're continuing to push ahead with renewable opportunities in partnership with a number of our occupiers. Whether or not that's PV, installing PVs, On the roofs of our buildings, in partnership with people like Eddie Stobart, Primark, Speedy Hire, the Hutt Group, it is something that we are deeply engaged in. And also, we've got two partnerships in EV charging with Instavolt and MFG, and we're starting to roll those out in various sites across the portfolio. I'm pleased that we're able, therefore, to announce that our EPC rating of the portfolio has improved dramatically. 86% is rated now A to C. That's up from 74% back in 2021. You know, we've often said, you know, we don't shy away from bad buildings. You know, we think, you know, we have the skill set, the desire, and the capital to turn around bad buildings. And therefore, you know, I think we are excellent stewards of this. You know, in many ways, it's very much part of our DNA. It's part of the active asset management profile that we've been doing, Mark and I have been doing for the last 30 years. You know, this is not a big shove. And the fact of the matter is it is generally accretive. You know, we spend money on our buildings. We get a return of on average 10 percent uplift. So in some ways, it's the best capital we can allocate to the shareholders money. And then so finally, my thoughts, predominantly my thoughts, my colleagues thoughts as well on the outlook, which is increasingly difficult to predict. We can pick up three or four. Commentaries, even just this morning, have come out with five or six different views of which way this is going to play through. Look, the portfolio is in great shape. We've called it an all-weather portfolio. We've navigated COVID, and we're navigating a repricing of the debt markets and a challenging economy for consumers. But the fundamentals remain strong in our preferred sectors. Structural demand from changing consumer behaviour and geopolitical events is driving demand for our warehouses. Our value and convenience assets, we think, are well positioned given the challenging environment as high inflation strengthens consumer demand for cheaper goods. There will be undoubtedly less supply and less construction. This will lead to stronger occupancy and stronger rents. We think polarization of sector performances will widen. I actually think polarization within sectors will widen, whether or not it's in the office market, green v. brown offices, whether or not it's in the retail market, convenience and grocery versus experience. And therefore, we expect that to play through over the coming period. I think the distribution sector is arguably recalibrating more quickly than other sectors, largely due to better liquidity and the global appeal that the asset class holds. Other sectors, particularly those with lack of income growth, will reprice aggressively in the periods ahead. But today there's very, very little liquidity in a number of these sectors, so it's very difficult to get full price transparency. I mean, the suggestion that shopping centre values have actually held flat over the last six months I find very bemusing. But, however, the glass is half full. We have a strong belief that the challenging macro investment environment will settle. It will settle. It always does. It's all about when. Inflation forecasts will fall and an inflection point will shortly be reached in interest rates. If we look back at the currency, it wasn't that long ago when we were talking about pound-dollar parity. Yesterday, the pound was at 119 to the dollar. That's nearly a 20% movement. We are seeing signs that this will pass through. And this stability will bring more confidence and liquidity to the sector. And it will then, it will feed through into where the five-year swap begins to start settling. You know, beginning of March, we talked about five years. It was around about, you know, late ones. Beginning of July, middle of July, it was about 2.45. Middle of August, it was 3.4. Beginning of September is up at 4.1. Then we got a mini budget, went up to 5.4. And today it's at 3.8. So we've come a long way off the peak. We need it to, you know, for proper, you know, to real estate to come more compelling, it needs to head back down to closer to three. And I'm sure it will. If you believe in the correlation between the five-year swap and the 10-year gilt, 10-year gilt is an early indicator of where we think it may settle. So it is going to be an interesting few months, but at the end of the day, we will get through this period of uncertainty. We've done it before, and I think real estate becomes incredibly compelling, particularly in your chosen sectors where you are capturing that income and rental growth that will allow you to drive your returns. So on that note, thank you for your patience this morning. I'm very happy my colleagues have got Mark and Valentine up here with us as well to take any questions that you may have. And then once we've finished in the room, I'll go to the phone lines to see if there's any interest on those. So thank you very much.