Londonmetric Property Plc

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 of the last six months, 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 mediums. 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 core, based on a demand and supply equation, which is delivering excellent rental growth for us. But also our long-income grocery and discount markets Assets will continue to benefit from an 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. Portfolio 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 a 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 the year 26. Martin will go into that in a little bit more detail in a moment. So turning to the numbers, 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 net per earnings up a similar amount at 50.2 million. And, excuse me, net per 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 out 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 rents 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 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, counterbalanced 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, a 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 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 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 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% 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% negative. So 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 South East and we think that will be an increasingly important element going forward. The urban portfolio delivered 25% uplift in rent review 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 portfolio, warehouse subsector the rent views were settled at eight percent above previous passing but the settlements here be 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 pounds or just over 800 million pounds 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. Portfolio has long leases over 13 years to expiry, 100% occupancy and is valued off a 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 there's nothing, none of the rent reviews in those three sectors hit 20% but we had a very strong settlement of the indexation that we have in our leisure portfolio in our cinemas was extremely high so that 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 two 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. Well, 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 sectors. 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 the debt cost is going to be 5 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 monetise 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 they're 38.5 million. 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 that 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. 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 it's a wide range of people, whether or not it's 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've said, we are seeing material rental growth or rental uplift from the new 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 determinant 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 million 1,000 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 installing PVs, on the roofs of our buildings in partnership with people like Eddie Stobart, Primark, Speedy Hire, the Hutt Group, you know, 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'll be rolling, you know, we're starting to roll those out in various sites across the portfolio. And I'm pleased that we're able, therefore, to announce that our EPC rating of the portfolio has improved dramatically, you know, 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. We spend money on our buildings. We get a return of, on average, 10% 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, and 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 call it an all-weather portfolio. We've navigated... 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 polarisation of sector performances will widen. I actually think polarisation 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. 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 macroinvestment 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 feed through into where the five-year swap begins to start settling. Beginning of March, we talked about five-year swaps. It was around about late ones. Beginning of July, middle of July, it was about 2.45. Middle of August, it was 3.4. Beginning of September, it was 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 gill, And 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. Very happy. My colleagues, I've 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.

Yeah, morning. It's Rob Jones from BNP Paribas Xan. I've got a few. Do you want me to do them all? Please, Rob.

Shoot. No, let's do one at a time. Otherwise, my memory's going.

Okay. So the first one, just now you said, less supply and less construction. This will lead to stronger occupancy and stronger rents. You've done this for 30 years. If I'd done this for 30 years, I'd have been five years old at the time, so clearly you've got more experience than me. And greyer hair. True. But do you genuinely believe that, or is that stronger relative to if we hadn't been in a scenario where supply was tightening as a result of lack of development, finance, et cetera?

It's probably biased by our investments primarily in the urban logistics space. We think it's very difficult to get supply. It's very difficult to see new supply coming through. And therefore, we're seeing this demand in terms of I talk about whether or not it's online penetration, whether or not it's localization, whether or not it's... But also changing consumer expectations for quicker and quicker deliveries. People want to be in zone two. That's how we get you the delivery the same day. So that's part of it. But also it's also framed by – I was with a leading retailer yesterday in the convenience grocery sector, and they were saying to me, we can't get any new developments to stack. We can't get them to work. And actually, our store opening programme for next year will all be on taking existing buildings from failed retailers and refitting them for their purpose. And like I said, we're struggling to get some of them to work. I mean, we actually can get that one to work, providing they show a little bit of flexibility on a few of the terms. But that's what they said. None of the nine that we hope to open next year, none of them will be new builds.

The answer might be no, but do you have a view in terms of the percentage point gap today between buyer and seller price expectations in the investment market? 15 percentage points?

It's very, very different. I'll try and give you a three-dimensional answer rather than just one number. The buyers, there are ambulance chasers and there are people looking for blood on the street. There's that buyer, and they will probably trade with the motivated vendor. which at the moment I think is largely confined to the open-ended retail funds. I don't think there's too much leverage in the system outside of those. But where you are seeing a much tighter pricing tension between buyer and seller's aspirations is whether or not you're talking about... Very long-term investors. You know, this is a quality asset that I've wanted to get hold of for a long time, and this is the market where I can get it. Owner-occupiers, special purchasers, and the odd emotional buyer. So it's a broad church. And in fact, you know, we get approaches all the time. We go, yeah, that's interesting. What's that? Oh, that's 5% below what we think it's worth. Okay, fine. What's that one? Well, that's 15% below what we think it's worth. So it's a broad church. I can't give you one number.

Fine. And then just two final ones. you and your competitors have been talking so far this calendar year about obviously the fact the occupied market remains very very strong and that's reflected in your leasing versus previous passing etc um are you seeing today post period end any slowdown in occupied demand yet and if not are you expecting it and do you expect this to then drive a slowing of the rate of positive rental growth

So, I mean, we don't have much vacancy. I've tried to highlight the activity that's happened post-period end to try and answer that question for you. We don't have a lot of empty buildings. We're capturing some pretty good uplifts, as I've tried to demonstrate. We're not seeing too many cracks. My suggestion, we don't have a vacant 300,000-square-foot building. We don't have a vacant 400,000-square-foot building. All I would say is I think to take a big box is a bigger decision. It's not really a rental decision. It's actually a business decision. It's an employee decision. It has wide implications. And is it reasonable to think that those big decisions might be kicked down the street by another six months or 12 months? Yeah, it's reasonable to suggest that. Does that mean there's no demand for medium box, big box? Absolutely not. I don't think the market's ever been dominated. Amazon have been an important player in it, but they're not the only player in it. I just think in urban, it's just the granularity of occupiers that we trade with and we deal with, and I've tried to highlight that in the presentation, is just... incredibly wide so do i think it will come off a bit it's it's highly possible are we seeing at the moment no um and if somebody goes you know if we if we take back possession we'll refurbish the building and we're pretty confident that in the right locations we'll relet it at a higher higher number

And then just the final one for Martin. You obviously got 300 million RCF. When we look forward to your debt maturity profile, implicitly that means that you've got liquidity at least to fund both the refi needs for, I think it's 24 and 25, and indeed clearly 23, which is relatively small for the second half of this current financial year. But in reality... do we really, the utilization of RCF facilities, my understanding is it's not as simple as an individual's overdraft. You can't just draw it down with ease. And ultimately, if I'm a RCF syndicate bank or indeed an individual lender, I ideally would like to see a scenario where you're drawing on that RCF, but then you're refinancing it in the relative near term with debt that's not RCF facilities. So maybe you could give a bit of colour on that and how you think about that refinancing, albeit it's not massively material for you specifically over the next couple of financial years.

I'm not sure we're as constrained in the use of our RCF as you describe, but I think it's quite interesting. We've been having this conversation six months ago at the year end. I would have probably said, don't worry about FY25, and I wouldn't even worry about FY24. We'll probably do a bond issue or we'll go and do a USPP. All of a sudden, circumstances have changed, and so we felt we needed to have cover to deal with that refinancing risk. And the chairman was really strong on this yesterday. The issue is... It may be when we get to FY25 that those markets will be open again and we'll refinance that debt with some other form of debt and we'll use the firepower we've created this week for opportunistic new acquisitions and we can hit the acquisition trailer when there's blood on the street. So I think what we're saying today is from a risk mitigation point of view, we have no refinancing risk. When we get to that, will we be using the RCF to do that? I don't know.

Max. Thanks very much, Max. Just to kind of follow up, you talked about not that many motivated sellers other than the open-ended funds, and actually it might be the refis that come through over the next 12, 18 months. Just how much kind of visibility do you have over that in order to kind of target that? Because you said you think over the next 12 months there will be more opportunity there.

Well, it's a little bit like commentators writing about the mortgage market. You can say that 75% of the residential mortgage market is fixed. Yeah, but guess what? It comes off. And that when you're going back into the debt markets today, you're going to find out that you're dealing with a number that's a lot higher than when you set out your strategy. And for some of these assets, they're going to find that deficit financing for a bit. And does that work? Is that what the equity investor wants? Or does it actually just say, do you know what? I'll take my money back. So we don't have visibility of when that comes up. We can only play with the game in front of us at the moment. It doesn't appear on the screen. We're not seeing too many refinancing opportunities coming through, but we are seeing quite a bit coming out of the retail open-ended funds at the moment. It's just a natural view that debt expires.

That's great. Thanks. And just to follow up on one point on the EPCs, I think it was 86% to A to C and 47% to A to B. The ability to take those Cs up to Bs, how difficult is that and your ambition to do it, I guess, as well?

I mean, it requires an engagement with the occupier. And a lot of it actually is in their hands. I could be really flippant and say, well, we just have to change the light bulbs in most of these buildings to LEDs. But it requires an engagement with them. And when you've got long leases, you don't necessarily get those buildings back as quickly as you might like. I think what I try to, I suppose, get across is that there is a desire and an intent to do it. We think it gives us a decent capital return as well. Exactly when it happens, Max, is not strictly in our control. But, you know, without, you know, these are relatively simple buildings. I mean, I don't want to down the sector. But, you know, this is not a shopping centre. It isn't a hotel. It isn't a, you know, an office building with high fit-out costs. You know, four walls and a roof, as far as I'm concerned. What else goes on is a lot of it is down to the occupier. And we are getting better occupier engagement, but it is not as good as you might imagine it to be from big name companies.

Great, thank you.

Morning, it's Sander from Barclays. Thank you. A couple of questions for me as well. The first one is, you mentioned, I think, your opening remarks that swap rates are an important yardstick and they're up 200 base points. And we've seen yields moving 50 base points in the first half. Does that mean that you think there's another 150 base points to go?

Well, apart from the fact that the swap rate is flat and the 10-year guilt is a flat return, and I think that yields should, as I said also, that yields should reflect the trajectory and certainty of what's going to happen to your income profile. I think the first part of my answer is I actually think swap rates will still come in. I still think they'll come in at 3.8 this morning. I do believe there's a correlation with the 10-year gill. I could see them coming back down to much closer to 3 within the next months. I don't want to give you a date, but I just think it will. And I think that that makes real estate investing more compelling because at 3 plus your margin, 150 basis points, you're in at 4.5. If you were to buy an asset that was the cap rate of 4 but it had 3% rental growth in it, it'll work for you. So, yeah, I'm not predicting what happens to yields, certainly across other sectors that I have very little knowledge of. But I think swap rates will probably still continue to direct down. I mean, we're 160 basis points off where we were at the mini-budget. Now, Martin referred to March or February, March, April, which is what we refer to in the office as a period of maximum optimism. I refer to the mini-budget as a period of maximum pessimism. I think we're off that. I think we're 160 off it. The trajectory of the curve looks positive, although it's never a straight line, as my colleagues know, because I ask them at least four times a day where the hell the five-year swap is. What do you mean it's gone up? It can't go up. My thesis is based on it going down. So I think there will be yield expansion. I mean, I think certain sectors have got illiquidity. They've got no price discovery. I touched on shopping centres. It seems hopeful.

But maybe the very low-yielding stuff as well.

The low yieldings, you could argue that's why it's moved so quickly. The low yielding bits move so quickly. But that will come to an end. What I don't see, in answer to Rob's question earlier, is necessarily an immediate end to the rental growth that we're exerting. Everything comes to an end. I'd love to give you some anecdotes, or he pulled out of this deal, or they didn't do that deal, or whatever. You will get them from me. But yeah, without a doubt, the reasons why the cap rate, you know, I think British announced 60 basis points also across their logistics warehouse. If they're low yielding, they've got to come up quicker. But once it settles, you're then looking at where that yield needs to be relative to where the trajectory and security, longevity of your income is. I mean, that's what a yield, you know, an equivalent yield is.

Great. Second question I had was on the business rates. I mean, obviously there have been some changes in the last, what is it, last week's announcement? And obviously maybe not necessarily as much in favor of logistics occupiers. Do you have a sense how that may impact your tenant base?

No. I mean, in terms of profitability... Well, in terms of how much does it... A lot of the businesses we're dealing with here, the accommodation that they occupy is their business. OK, they've got to have it. You know, it's not like retail where you get, oh, do you know what? Do we need two shops on Oxford Street? Or, you know, do we need two stores in this out-of-town retail location? So we'll close one of them because it doesn't work for us. You know, the fact of the matter is this is their business. You know, they're absorbing that cost. They will try and mitigate it with other cost savings and maybe putting in some price increases through, maybe getting rid of a member of staff or something. It's critical. Without that warehouse, that yoga studio doesn't operate. That coffee barista doesn't work. So they will absorb it. There is transition relief on the way up, as you will have read, as opposed to on the way down. I think they're doing a brilliant job, by the way. The rating review is exactly what I thought it should do. and that was get rid of the transition relief on the way down because it was too slow, but keep it on the way up. And the fact of the matter is there's nothing wrong with the rating system if the mechanisms were correct, which I think they've done that. And the fact of the matter is when they were put in in the first place, nobody actually thought that retail rent in particular would fall. They've cratered, and that hasn't been reflected.

Okay, thank you. And the very last question I had is, it's actually on the dividend. I mean, saw that you increased it, obviously, again. There's obviously strong top-line income progression of, what is it, roughly 8 million over the next 18 months, something like that. At the same time, we're also facing an environment with higher financing costs and marginal financing rates. You were just mentioning 4.5%, 5%. So that is going to evolve further up as well. Why not keep the dividend flat for the time being?

Look, we believe that we've got an income stream. We talk about our portfolio being, you know, all weather. We think that it is fully occupied. We run in a very efficient ship in terms of admin costs and whatever else. We think that the business and the portfolio has got that movement. We've also got high swap or high swap rates, swap, high hedging.

I think our top line will grow. I think we've now got control of where the finance cost is going to go within a reasonable yardstick, and we're very tight on our admin costs. So I think whilst earnings, we think we can progress, then the dividend should progress too. Thank you very much.

We have set out our ambition to be a dividend aristocrat, Sander. Let's not forget that. I don't want to break that now. I've got another 17 years to go.

Bjorn Zietzman from Liberum Capital. Just a follow-on question around your tenant base and the strength of your tenant base. I mean, going into recession, it is likely that we are going to see a spike in CVAs. How closely do you monitor the liquidity and solvency position of your tenants, and what percentage of your tenant base would you think is under pressure?

We're obsessed with credit, all right? We have an individual in the business, and that's what his main job is, to assess the creditworthiness of our tenants. You look at our rent collection, I mean... We collect £150 million a year. We've got £37,000 of outstanding arrears. We've navigated a Brexit environment. We've navigated a lockdown of the global economy pretty well without having to lose income. We've rescheduled payments. Undoubtedly, we will lose some businesses, but if you've bought the right assets, you will re-let them. One of the businesses that caused us some unease in COVID was a transport business down in Crawley called Howells Transport. When we were allowed, we decided that it was right to peaceably re-enter the premises, 25,000 square feet. We did a light touch refurb on it. Howells were paying us £10 a foot. We've re-let it to the ironmongery business I touched on earlier at £12.50. So, yeah, we will deal with it. But one of the attractions is the granularity of income. I think that does exhibit some defensive characteristics. But ultimately, it comes back down to the owning desirable real estate that alternative occupiers would like to be in at the right rent. So we monitor it. I mean, I get an arrear statement at least every Friday, if not more often, immediately post. So, you know, we're on it. You know, we can't give you those metrics on rent collection and not be on it.

Hi, good morning. I'm from Colytics. So clearly your team's been around a long time. You've got a lot of experience. Not that long.

I see a couple of grey hairs there. You're giving me a lifetime achievement for being here.

How is this different to prior cycles and experiences? It's a three-part question. In that context as well, I think you just alluded to maybe a four yield with 3% growth, 7% return. How sort of appropriate is that as the funding rate has changed? So maybe that's the second part. And then some of the... REITs in your position are in a good position because they've got low LTVs, good cover in terms of interest. They're talking about firepower. We haven't heard that from you today. Can I ask why? Do you not feel that's the case?

Let's start with the first part of the question. How is this different? We're going into a situation today with a job-full economy. with savings ratios 20% higher than they were pre-COVID. 50% of the population doesn't have a mortgage. The 50 that do, 75% are on fixes. Wage inflation. This is very different from when we went into the GFC. We had higher unemployment. We had unbelievable borrowing. The banks were throwing money at us indiscriminately. And I would highly recommend the big short, if you're not quite sure what went on. And so I think it is very, very different. And I think this is not a consumer-led downturn. This is a supply constraint, courtesy of whether or not you want to blame the geopolitical issues in Ukraine, but actually it's the reopening of the global economy. And China's not firing on, probably not even firing on half its cylinders at the moment. So I think it is very, very different. And I think it's... When you analyze it, it looks a million miles away from the GFC. You know, I was frightened in the GFC. You know, cash points were not going to work. You know, talked about, you know, again, another film I'd recommend is Too Big to Fail. So I do think it's very different. I think consumers have been pretty well behaved. It's saved some money. They're all in employment. They're all getting pay rises. So I think it is very, very different. Yes, they've got challenges in certain parts of their expenditure, whether or not it's food, whether or not it's energy. But they'll just have to pivot. You know, I was studying the Barclaycard data on Friday. Restaurant bookings were down 11%. Takeaway turnover was up 12%. And the caption that got me was, people are swapping the big night out for the cozy night in. That's a great line. You know, we do it all the time. I mean, maybe for different reasons. So I think it is different. And that's why I don't expect it to be, you know, somebody trying to tell me I thought it was going to be a V. I didn't. I just thought it might be a bit shallower than that. I think peak inflation, core inflation has peaked. I don't think we're in the same space, quite in the same place as the Americans are at the moment. But, you know, we'll get there.

What was the second question? And the second part was the 7% return that might have been appropriate six months ago. What is it now? That's higher. Yeah.

It's higher. And I think, again, it'll depend upon... The four that I talked about is actually... A flat four is not acceptable anymore. People want a higher number. But people will print a four today if they know they're going up to maybe a five and a half or a six in a relatively short period of time. So I think the four today is at least a mid-fives... A four yesterday might be a mid-fives today. But it does depend upon when you get there.

That's the yield, right?

Yeah. Okay. And what was the other question?

I think the last one is firepower. Yeah. So on my debt metrics slide, I put a headroom in, and that doesn't include certain sales proceeds that we've received since then. And I think in answer to Rob's question, that headroom and firepower could be used for debt refinancing, but it could also be used to go on the offensive. So I think we consider we do have firepower, and we'll determine how best to use it depending on circumstances.

Yeah, just to clarify one point on that. Is that because, I mean, a lot of companies are saying that. Is that because, I won't ask you to speak for the others, but that you feel that it's this exact case where it's shallow, the repricing, whatever it is, it's not like the GFC, and therefore there's an underlying assumption that I'm trying to draw out?

I mean, I think, look, I did say we know it'll settle, we just don't know when. We're in a period of great uncertainty. We still are. I think it's a bit better today than it has been. We will remain alert, wide-eyed for new opportunities, but we're not in a hurry. And I think if we do execute, you would expect us to be in the market. If we do decide to execute, it's because we will see an opportunity to acquire quality that rarely would become available in a normalised market.

It will be quite interesting from a debt point of view. There was an article in the FT this morning talking about the banks retreating. And I slightly agree with that, but they're also polarising. So they will continue to lend to credits that they're comfortable with. I think the lending will get more expensive for everybody. And there will be some people who will find that, therefore, really difficult to refinance in. And I think that will create opportunity. That's a good colour. Thank you.

Miranda Coburn from PAMIA. Just a couple of questions. Martin, just on the debt, what's the margin on the RCF? And of your 85%... I didn't ask her to say that. On the 85%, which is fixed or hedged, how much is fixed and how much is hedged?

So if you refer to the gentleman sitting next to you, I think if I answered the first question, his colleagues will kill me. LAUGHTER And Andrew wanted me to put it in yesterday. I said, I can't. They don't want me to put it in. Andrew allowed it to slip out 1.5%, which is not a million miles off. But it is consistent with our existing RCF, which I was really pleased about.

And then just the other question I was just going to ask. In terms of the bigger picture in your strategy, I mean, you've got the luxury of going in and out of any sectors you want to. And obviously, historically, you moved from retail into industrial at the right time. And it sounds as if you're very confident about being industrial. Are there any other areas of the market that you think may be interesting? Another way of putting it is if you had a clean sheet of paper today, where would you like your...

your portfolio to be or is it where it is well it's never exactly where it is where you want to be to be honest with you because you're always trying to improve it um i feel absolutely comfortable delighted to to be in urban logistics i just know i couldn't do it from a clean piece of paper today although some people have come in more recently thinking they could which is interesting um interesting timing anyway um I think, for me, it comes back to macro trends, consumer behavior, evolution, courtesy of technology to a large extent. I'm very into an extension of the convenience market. I'm very into roadside, I think. The drive-thru market, you know, there's been some quite well-written articles, the evolution of EV, that will change behaviour as well. I think that's great. Very difficult to get scale, if I'm being honest with you in it. You know, I think convenience groceries is terrific. I think the days when we spend an hour and a half going round a Tesco supermarket, you know, is time that my children are just not going to commit to. It's just not going to happen. You know, it's time you never get back. And anybody who says it's inexperience, they've got bigger issues. LAUGHTER So for me, it's about top-up shopping, convenience over experience, certainly in groceries. And the problem with, you know, in GM, built too much stuff. You know, a friend of mine said the other day, 25% too much shopping center space. Totally agree. Great. Well, that's it in the room. I don't know if we've got any questions online. Not online. So on the phones.

We do. And as a reminder, to ask a question, press star one. We will take the question from Oliver Lee with Citadel.

Hi there. Can you hear me?

Yeah, we can hear you.

Hi. So I'm new to the company. So apologies if I've missed something. I have two questions. on business rates. The first one is, I don't think you mentioned business rates and the revaluation at all in the main presentation. And the back of the envelope suggests the change in business rates could be greater than the portfolio reversion that you quote. So to me, it hits the materiality threshold. So I just wanted to check why it wasn't mentioned. And then the second question was just more broadly, how you think about looking into next year the combination of the business rates revaluation and occupancy cost increase and recessionary pressures on tenants in light of often low margin businesses for sort of several parts of your occupier base. Thank you.

Well, I mean, I touched on the business rate a little bit earlier. I mean, the fact of the matter is it's going to be a cost of doing business for occupiers, as indeed it should be. I think that they don't have the luxury that maybe occupiers in other sectors have. in just simply saying, well, we don't want to be in this location anymore. I think that they will, you know, some of these businesses are possibly more resilient than you were implying in terms of their ability either to absorb the costs or whether or not it's their ability to pass those through, making other efficiencies, and I refer to maybe headcount, you know, is there. But, you know, the business rates is up there. Will it have an impact on rental growth going forward? Yeah, it's possible. It's possible. But I don't think it eradicates the reversions that we expect to collect. I mean, the fact of the matter is the reversions that we've touched on this morning are actually historic reversions. You know, they're not courtesy. You know, we haven't forecast that we're going to still get another three, four, five percent rental growth going forward in order to collect that 10 million pounds that Martin talked about over the next 18 months. So we'll see how it plays out. I mean, it's also worth mentioning that business rate increases are phased over a period. So it's not a cliff that they face in ways they may face with, say, other costs such as energy or indeed staffing. So we'll see how it plays out. We don't have perfect clarity on it at the moment. But it is a cost that our tenants will have to absorb. How resilient they are, we'll find out. And if the tenants are not resilient, we'll find out how good an asset allocation job we've done in terms of picking buildings that have alternative occupier appeal. We'll be judged, I suspect, over the next few years.

Thank you very much. Much appreciated.

And there are no further questions, so I will turn the call back to Andrew Jones for closing remarks.

Thank you very much for making the effort. Horrible day out there. I hope you don't get too wet, but I do appreciate your interest and engagement. Thank you. Have a great day.