Warehouse REIT H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2024

Key Takeaways

  • Our portfolio saw a 2.3% like-for-like valuation uplift to £811m, driven by a 5% rise in multi-let assets and yield contraction, lifting NTA per share by 2.5% to 127.5p.
  • Active leasing secured £5.5m of new rent and drove 8% operating profit growth, boosting reversionary potential to over 16% with £3.2m available in the next 18 months.
  • Sale terms agreed for Radway Green Phase 1, a non-income producing development, expected to complete by year-end and unlock significant capital for redeployment.
  • Strong balance sheet with LTV at 34.1%, £250m of interest rate caps in place and a 4.2% blended cost of debt, with planned refinancing to save ~£800k annually.
  • Dividend cover reached 90% in H1; the board aims for full coverage by H2 next year through asset disposals, reversion capture, cost reductions and a management fee restructure.
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Earnings Conference Call
Warehouse REIT H1 2025
00:00 / 00:00

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Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

Good morning and Welcome to Warehouse REIT's half-year results presentation for the six months to September 24. I'm Simon Hope, Joint Managing Director of Tilstone Partners and co-founder of the Warehouse REIT. I'm joined this morning by Paul Makin, our Investment and Property Director, and Peter Greenslade, our Finance Director. We'll follow the usual running order. I will cover the highlights of the period, provide an overview of our markets, then Paul will talk through the portfolio performance, and Peter will present the numbers. I'll wrap up with a conclusion, and we'll leave plenty of time for a Q&A. Starting with the highlights, the key takeaway for the half-year is our valuation performance. The whole portfolio is up 2.3% on a like-for-like basis to GBP 811 million. But most strikingly, the value of our multi-let assets is up 5%.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

Not only does this reflect our continued leasing momentum supporting an increase in ERVs, but we have also seen yield contraction on the multi-let assets for the first time since 2022. So the portfolio is now valued on an equivalent yield of 6.4%. This positive valuation movement has driven an increase of 2.5% in the NTA per share to 127.5p. We've continued to capture reversion with our leasing activity securing GBP 5.5 million of rent and supporting an increase in our operating profits of 8%. And we've continued to deliver on the strategic priorities we set ourselves in June last year. These priorities are summarized on slide six. I'll give you the highlights now, but between the three of us, we will cover them off in detail throughout the presentation. First, we've added GBP 1.4 million of new rent and captured GBP 0.6 million of reversion in the half.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

The last few months have been busy with a further GBP 0.8 million of new rent added since. The GBP 3.2 million of reversion available short-term, and with strong ERV growth, we've increased the reversionary potential of the portfolio to over 16%. We've made further sales ahead of book value, proving our valuation and focusing the portfolio on higher value opportunities. And as you know, we've made one acquisition in the period, Ventura Retail Park in Tamworth, which has performed exceptionally well for us. At the time we bought it, we envisaged that it would be the seed investment for a joint venture. Markets have moved quickly, more quickly than we thought. And as a result, it has not proved possible to deliver the joint venture as we hoped, and it is no longer under consideration.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

However, with a valuation uplift of 9.6% in just three months, it's proved a positive addition to our portfolio. Making progress on Radway Green, our development asset in Crewe, is our third objective, which I'd like to spend some time on, and is one of the biggest drivers of our fourth objective, which is rebuilding dividend cover. One final point before I turn to Radway. You may have seen in this morning's announcement that the board is evaluating the management arrangements. It wouldn't be appropriate to comment before the outcome of this process is known, but what I can say to you is it will deliver cost savings for the REIT and further increase alignment between us, the investment advisor, and shareholders. So turning to Radway, we announced plans to realize capital from this scheme last year.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

It is not income-producing, and with interest rates remaining elevated, holding on our balance sheet impacts our earnings. Following a thorough process, we've now agreed terms for a sale of the first phase, which is the first part of the site we acquired. It has probably taken a bit longer than we envisaged. That's partly because it's a complicated scheme, and the macro environment over the past year has not been supportive of development. But also because getting reserved matters approvals, dealing with the Environment Agency, and securing the power took time and was absolutely critical to unlocking value. Solicitors have now been instructed, and we'd expect the sale to complete by the end of the calendar year. We can't talk about the price at this stage, but our valuation, which Paul will talk you through, reflects offers received on this asset.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

That brings me to the second phase, which is where the bulk of the value lies. We have outline consent for five units covering 1 million sq ft, but we think that could be increased with the flexibility to deliver a single or multiple units. Again, refining the planning consent will be key to getting the right price. And as a team, we are very clear on the need to progress this as quickly as possible. Before I talk about the wider market, I'd just like to remind you why we believe multi-let warehouses are such an attractive asset class and why they sit at the heart of our strategy. First, this is a highly reversionary sector, and the frequency of lease events means you can access that reversion faster.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

Around 95% of our leases are on an open market basis, which means we are not tied by capped or collared arrangements, which are typical of big boxes, so we can push the rents ahead of inflation. We also only invest in assets with good bones, so the rate of obsolescence is very low, and it requires very limited CapEx to deliver high-quality space. Paul will give you some examples of how we are doing that. Conversely, building these assets from scratch is expensive, so supply is very constrained. For our multi-let warehouse assets, the reinstatement value is over GBP 120 per sq ft, which compares to a capital value of around GBP 100 a sq ft. So the land is in for nothing. Warren Buffett calls this an economic moat.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

A range of unit sizes also means we can cater to occupiers as they grow, and the diversity of the occupier base makes our income streams more resilient through the cycle. What's been very noticeable this year is that these attributes are gaining recognition more widely. So the volume of investment into the multi-let industrial sector, both from private equity and in the listed space, is increasing and has already surpassed last year's total. Looking at the market more broadly, you can see how the cost of building multi-let assets is constraining development. There is just 3.3 million sq ft of multi-let space currently under construction, equivalent to only one month's supply at current take-up levels. That's why voids are generally low in the sector at sub-6% in our key markets, which compares to 7% for big box and prime industrial.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

And of course, lower vacancy is very supportive of rental growth. What you can see on the right is how the reversion for multi-let industrials has been building, and it's that potential for rental growth that's really attracting capital to the sector and driving cap rates down. To give you a few examples, I've set out on this slide some recent multi-let transactions. You can see that assets are changing hands at yields of between 3% and 5%. That compares to 5%-6% a few years ago. This has, of course, supported our own valuations, and we've seen some very strong individual performances. For example, Gateway in Birmingham and Tramway in Banbury were both up 11% at the half-year. Bradwell Abbey in Milton Keynes was up 10%, and Granby also in Milton Keynes was up over 20%.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

On that note, I'll hand over to Paul to provide a review of the portfolio.

Paul Makin
Investment and Property Director at Tilstone Partners

Thank you, Simon. To start, I'd like to highlight some of the key numbers, and then I will set out how capital activity has impacted on the headlines and run through some of our active asset management activity. The value of the portfolio now stands at GBP 811 million and benefited from a like-for-like valuation uplift of 2.3%, more than offsetting our GBP 23 million worth of sales. Contracted net sales, contracted net rents at GBP 43.6 million was pretty much in line with the full year, but up marginally on a like-for-like basis. We had a few new vacancies in the period, which softened like-for-like rental growth, but creates opportunity to drive rental growth in the near future. Portfolio ERV was also in line at GBP 53.4 million, but up 2.6% like-for-like.

Paul Makin
Investment and Property Director at Tilstone Partners

Reflecting the valuation increase and capital recycling, the capital value has risen to GBP 102 per sq ft, but is still a good margin below the building replacement cost, so the land is still in for nothing. Finally, we've seen weighted average unexpired lease term come down a bit, but that largely reflects the sale of Chesterfield, a large single-let asset with close to 10 years unexpired. Looking at our capital activity in a bit more detail, you can see that we have exchanged a single-let lower-yielding assets where our ability to capture reversion is limited, with a higher-yielding multi-let asset that offers more opportunity. Ventura Retail Park in Tamworth was our sole acquisition during the period. It benefits from an excellent location in a market where ERVs are growing strongly and where we see potential to significantly raise the rental tone through active asset management.

Paul Makin
Investment and Property Director at Tilstone Partners

As Simon has said, we no longer expect to create a warehousing joint venture, but we are pleased with the asset, and it has supported our overall valuation performance with an uplift of 9.6% in just three months. Looking at the valuation in a bit more detail. It's clear that the benefit of a multi-let strategy is bearing fruit, with the value of the multi-let portfolio up 5% like-for-like. ERV growth was also strong at 2.7%, and for the first time since 2022, we saw yield compression of around 12 basis points on these assets. Our last-mile assets also performed well, with ERV growth of 2.8% and 2.2% valuation uplift. Larger single-let assets were a bit weaker overall, but still showed a like-for-like valuation increase.

Paul Makin
Investment and Property Director at Tilstone Partners

This is an asset class that we have been actively reducing our exposure to, with a preference for multi-let industrial, where the supply-demand dynamics are more favorable, as Simon has set out. The valuation of our developments, principally Radway Green, Crewe, was down 13.4% like-for-like. This was partly as a result of macro factors, with interest rate cuts being slower to materialize than initially hoped. But this also reflects offers received on Radway Green, which were below book, but consistent with the broader risks of a larger-scale development in the current environment. Overall, the investment portfolio is now valued at a net initial yield of 5.5%, which compares to a reversionary yield of 6.7%. Remember, these are based on valuers' ERVs, which we continue to outperform.

Paul Makin
Investment and Property Director at Tilstone Partners

The average rent per square foot on the portfolio is now only GBP 6.50 per sq ft compared to an ERV of GBP 7.60 per sq ft, demonstrating that our space is highly affordable to occupiers and offers considerable uplift from here. I'd now like to set out how we are capturing that reversion. We've maintained our leasing momentum with 46 lease events in the half-year, nearly two a week. Excluding fixed uplifts, deals are on average 25% ahead of prior rents. Occupancy has ticked down a little, but with three notable vacancies arising in the half. But these assets are well located in strong towns and cities such as Leicester, Peterborough, and Swindon. We've allocated CapEx to fund comprehensive refurbishment programs and delighted to have either agreed terms or are seeing significant interest in each at levels well ahead of prior rents.

Paul Makin
Investment and Property Director at Tilstone Partners

Post-period end, thanks to the hard work of our asset managers, I'm pleased to say that we've maintained the deal momentum and have concluded another 15 lease events, covering GBP 3 million of contracted rent, 29% ahead of ERV, and capturing GBP 800,000 of additional rent. I'd now like to take you through a brief case study on a multi-let asset management, which really brings our strategy to life. At Gateway Park in Birmingham, which sits on the apron of Birmingham Airport and is a flagship asset for us, we continue to work through our active asset management, taking advantage of having a range of unit sizes. We've agreed an early surrender on 22,000 sq ft prime unit fronting the airport, securing the full rent paid up to the break date of the 24th of December.

Paul Makin
Investment and Property Director at Tilstone Partners

Refurbishment tenders have been twin-tracked with the dilapidations process, with the result being that the outgoing occupier covered the majority of the capital expenditure required. Marketing of the unit commenced ahead of refurbishment, and contractors are now on site. We've already agreed terms for a new 10-year lease to an airport logistics occupier at a new high-water mark rent, 50% ahead of the previous rent, and we expect the occupier to take occupation once works complete at the start of January 2025. Not bad, considering we secured rent up to Christmas Eve. Elsewhere on the park, we're working with two occupiers, both looking to double their space. The active asset management and flexible approach enables us to create new rental evidence and capture reversion quicker than waiting for the next lease event, helping to drive rental income and value.

Paul Makin
Investment and Property Director at Tilstone Partners

This also releases a smaller unit, allowing us to attract a new occupier onto the estate, which will hopefully grow in the future. We've talked before about this process being like musical chairs, but now I think it's better to refer to it as a conveyor belt of lease events driving rents upwards. This is just one of multiple opportunities we have to capture reversion. On this slide, I've set out more examples of where we have done just that. At Gawsworth Court in Warrington, we renewed a lease to a multinational manufacturing business, signed 56% ahead of the prior rent. At Bradwell Abbey in Milton Keynes, we signed a new lease to Abbey Precision, a high-tech engineering business, 30% ahead of the prior rent. And at Stadium Industrial Estate in Luton, we let space to a vehicle glass repair business, 38% ahead.

Paul Makin
Investment and Property Director at Tilstone Partners

These aren't isolated examples, and we're doing deals like this across the business. Bringing this all together, assuming we maintain a circa 5% vacancy, you can see on this slide that the full reversionary potential of the portfolio is now GBP 7.1 million a year, of which more than GBP 5 million is in the multi-let portfolio. We have another GBP 3.2 million to target in the next 18 months. Post-period end, we've already captured another GBP 600,000 of annual reversion. This is clearly a big year for capturing reversion, but as I set out in June, a lot of it only becomes available towards the end of the year. Since it typically takes a few months to negotiate transactions or carry out a light refurbishment of the space to maximize rents, we don't expect to capture it all this year. It will be captured.

Paul Makin
Investment and Property Director at Tilstone Partners

Given we usually beat valuers' ERVs, we hope to do better than that. Again, as Rocky Balboa would say, this is a case of capturing the reversion one lease at a time, one review at a time, one renewal at a time. As well as our ability to grow rents, ensuring that our rental streams are robust and resilient is also really important. The diversity of our occupier base, which is one of the key benefits of a multi-let estate, gives us a lot of comfort in that respect. As well as some household names such as John Lewis, DHL, and Sainsbury's, and the NHS, we have a number of successful smaller local businesses, but they're not necessarily that small. In fact, 73% of our occupiers have turnover above GBP 10 million a year, and 90% of our occupiers have a turnover above GBP 1 million a year.

Paul Makin
Investment and Property Director at Tilstone Partners

Looking at our rent collection, I'm pleased to say we've collected 99% of the rent for the half-year, and we're working on the rest. I'd like to finish by touching on sustainability. Improving our EPC rating is a key prior priority, and every refurbishment targets a B rating. So we were pleased that 15 units achieved a minimum B rating on assessment in the half-year. And by the end of the year, 64% of the total portfolio was EPC A to C. We've also spent some time evaluating the opportunity to fit solar PV panels to the roof, and we're pleased that panels were fitted to our asset in Stone, covering 40,000 sq ft, and there are other opportunities across the portfolio.

Paul Makin
Investment and Property Director at Tilstone Partners

Our good progress in sustainability reporting was again recognized, and we've maintained our EPRA Gold Award for both financial and sustainability reporting this year, and we're working with our advisors to set a Scope 3 target, and on that note, I'll hand over to Peter to take you through the financials.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

Thank you very much, Paul. I don't propose going through the results line by line, but aim to pull out the salient numbers and ratios. But if you have any questions, I'll be only too happy to answer them at the end. NAV increased GBP 0.027p - GBP 1.288p at the end of September, reflecting the 2.3% like-for-like revaluation increase in the period, with other balance sheet movements broadly netting off. Adjusted earnings per share were GBP 0.029p for the half-year, up from GBP 0.023p for the comparative period, with higher property income benefiting from controlled costs and from dilapidation income, which was ahead of normal run rates. The GBP 0.029p of earnings give dividend coverage of 90% for the half-year, and I will return to our pathway to full coverage shortly.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

LTV increased marginally to 34.1% at the period end, but will trend downwards as a result of post-period end sales, and will remain below our self-imposed target of 35% as we continue with our constant review of the portfolio. I'll talk more to our debt strategy later, but with GBP 37 million of facility headroom, a comfortable LTV, GBP 250 million of interest rate caps, and a weighted average cost of debt of 4.2%, our balance sheet is robust. IFRS profit increased to GBP 25.1 million, which is 14% higher than a year ago, reflecting the revaluation gain combined with the earnings increase I've already mentioned. Adjusted EBITDA was 8% ahead at GBP 18.7 million, and adjusted earnings were GBP 12.3 million in the period against GBP 9.8 million a year ago, up 26%.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

EPRA and adjusted earnings were similar at 2.8p and 2.9p, with the only difference being surrender premiums, which are now excluded under new EPRA guidance recently issued. I've already mentioned the NAV at 128.8p, which compares to the EPRA NTA of 127.5p, up 2.5% half-year on half-year. The cost ratio was 19 basis points higher than a year ago at 26.3%, driven largely by higher void costs, but it is lower at 22% when vacancy costs are excluded. The 2.3p of earnings for the six months to September 2023 tracked 2.9p for this half-year through higher dilapidation income, growth from capturing reversion, and lower net interest cost, offset by lower rents due to disposals and operating and admin costs marginally ahead. Looking ahead as Simon has set out, we're focused on rebuilding our dividend coverage.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

On this slide, you can see the key drivers to that increase. First, the disposal of non-core and low-earning assets. The sale of Radway Green will contribute materially as it is non-income earning. We hope to complete the sale of the first phase by the end of this calendar year, so we will start to see the benefit from Q4 this financial year. The full benefit won't be felt until the next fiscal year when we expect to sell phase two. Second, we will capture reversion through focused leasing activity. Every GBP 1 million of new rent adds 2.5p to earnings. Third, we will look to refinance the debt to take advantage of lower banking margins.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

To give you some idea of the upside, were we to refinance today, we would expect to achieve a margin some 40 basis points lower, according to a cost saving of some GBP 800,000 or 0.2p per share earnings based on current debt levels. Fourth, we will maintain our discipline on costs within the business. And lastly, by working with the board to restructure the investment management arrangements that Simon has already referenced. Clearly, there are a lot of moving parts here in terms of both timing and quantum, but together, these initiatives should support a fully covered dividend on a run rate basis by the second half of the next financial year. When we look at the NTA bridge from 124.4p-127.5p, you will see that half-year earnings of 2.9p covered the 3.2p dividend by 90%.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

And there was a favorable fair value movement of 4p and a small 0.6p outflow in relation to the deferred payment of interest rate caps. Adjusting our balance sheet and hedging in a little more detail, it's worth noting that we are 88% hedged with GBP 200 million of caps at 1.5%, half for a further nine months and half for a further two years and nine months. There is also a cap of GBP 50 million at 2% for further two years. The average cost of debt was 4.2% in the period, as it was for the whole of the last financial year.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

The debt is constantly reviewed, and with lower net debt levels than anticipated, there's opportunity to cancel some of the RCF and therefore avoid non-utilization costs, obtain lower banking margins through a refinance, as I mentioned earlier, and as interest rates fall, weigh up the requirement for new caps alongside fixed-term debt opportunities. There are GBP 100 million of caps that expire in July next year, and we will replace these as appropriate with the objective of maintaining the average cost of debt at the current level. It should also be mentioned that all covenants have been comfortably met, and this is projected to continue. Net debt at March 2024 was GBP 268 million, and that compares to GBP 276 million at the half-year end. This will, however, fall to GBP 264 million when GBP 13 million of recent disposals complete.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

The main changes in net debt over the half-year were disposal proceeds of GBP 55.2 million and operating profit of 19.1 million in terms of income, offset by dividends paid of GBP 13.6 million, net finance costs of GBP 9.2 million. CapEx spend was GBP 2.4 million plus GBP 11 million for the final payments of the phase two Radway land. Working capital rose GBP 4.9 million, largely due to GBP 6 million owed from an interest-bearing deferred payment from the sale of Chesterfield. With recent sales agreed, our pro forma debt is trending towards our GBP 250 million hedge level, and of course, a sale of Radway phase one will accelerate that. Simon.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

Thanks, Peter. I'd like to conclude by revisiting this slide showing our progress against our strategic priorities. In summary, we've made good progress capturing the reversion, but there's plenty of upside in the portfolio to come, and the occupancy market for multi-let industrial continues to be buoyant. We've also undertaken significant capital recycling. A lot of the heavy lifting has been done, but we continue to refine the portfolio to focus on the highest quality assets with the most potential. The principal outstanding transaction is Radway Green, and here we expect to close the first phase by the end of the year. A sale of both phases would get us well below our hedging level of GBP 250 million, which will be a milestone for our business and instrumental in improving dividend coverage, which is the last pillar of our strategy.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

As I mentioned earlier, we're working with the board to deliver changes to the management arrangements, which will reduce costs for the REIT and help rebuild dividend coverage. As significant shareholders ourselves, we are very much behind this. Thank you, and I'd like to now turn the meeting to questions. James.

James Carswell
James Carswell
Analyst at Peel Hunt

Good morning. I'm James Carswell from Peel Hunt. Some of your peers have talked a little bit about some of the smaller kind of 3PL companies struggling, and we've seen a few kind of tenant failures elsewhere. I'm just wondering if you've seen any of that in your own portfolio, and just what is your exposure to that kind of subsector?

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

I'll ask Paul to answer that.

Paul Makin
Investment and Property Director at Tilstone Partners

I think the statistics speak for themselves. We've got a 99% rent collection during the period. We do get the odd smaller occupier who gets into difficulty, but for us, because I think we've got the diversity of the unit sizes, this gives us opportunity to work with other occupiers. And what's really pleasing is when all of a sudden one of our occupiers hears that next door is struggling and comes and knocks on the doors and says, "Before we talk to anyone else, can we take it?" And so having this relationship with our occupiers means that we can work these estates. And at the moment, we're being able to hoover up any that do come back to us, and it gives us opportunities.

James Carswell
James Carswell
Analyst at Peel Hunt

Thanks. And then maybe just in terms of non-core selling, Radway has clearly been pretty clear there. But in terms of other non-core sales, what parts of the portfolio are they likely to come from? Is that more going to be the single-let units? And then what are you seeing in terms of the market, the investment market, where are you seeing the best demand?

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

Very strong investor demand for core multi-let, but we're adopting good estate management and portfolio principles, and the bottom 10% by way of lot size, by way of geography, by way of depreciation, we're rotating. So we've sold GBP 74 million to this point of a portfolio of GBP 811 million. Clearly, over and beyond anything, the strategy behind Radway is clear. There's no income from land, and therefore that's the biggest needle mover in our dividend coverage.

James Carswell
James Carswell
Analyst at Peel Hunt

Thanks.

Matt Saperia
Matt Saperia
Analyst at Peel Hunt

Morning. Excuse me. It's Matt Saperia from Peel Hunt. You've very clearly got some real upsides coming from capturing the reversion in the portfolio, and there seems plenty of it to go for in the near term. I was just wondering how much of that do you think you can actually capture with the existing tenants in place, or how much of it you're going to have to intervene to capture? And if there are interventions to be made, will there be sort of minimal CapEx to be spent to actually realize that?

Paul Makin
Investment and Property Director at Tilstone Partners

I think we've got, there's some 100,000 sq ft of vacancy, which I would just point at this moment in time. That generates three locations: Swindon, Leicester, and Peterborough. We're deep in negotiations on all of that space. That would throw up significant reversion on a rent of GBP 800,000. What we're finding on the whole is the dilapidations under the 1954 Landlord and Tenant Act is largely covering the refurbishment. What's different from the pre-COVID times, so post-Brexit, post-COVID, post-quantitative easing, post-inflation, is that we're seeing significant rental growth like we've never seen before, particularly in the multi-let sector. So as Paul has alluded, at Gateway Birmingham, Federal Express have retreated back to another airport center, and we've let that space to an occupier. It's on the apron of the airport. Aviation market, hospitality market is booming. Rents have gone there from GBP 8-GBP 12.

Paul Makin
Investment and Property Director at Tilstone Partners

We're very, very critical and forensic when we buy an asset. We have a clear scorecard of what characteristics that estate or unit has to have in terms of its location, in terms of its connectivity to road, rail, air, water, but also labor. And that's coming home in terms of performance, in terms of occupiers. And I can go to the five major gateway estates we've got, and we've got between 30% and 50% reversion sitting out there. So we're confident in all parts of our portfolio that if we get a surrender or an insolvency or whatever, what that allows us to do is to harvest that reversion.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

I think if we looked at the deals that we've done post-half-year end, just to give you an example, they're live. So across the three sectors, we've done six lettings, 40% ahead of prior rent, where we have taken them back or perhaps done the refurbishment exactly as you say. But on the other side, we've done five renewals, 29% ahead of the previous passing rent, and we've done four reviews, 27%. And I think because if you look, we've now only got about 5% of our leases that have actually got any form of indexation or cap in them, we're exposed, and we like the fact that we can grab the open market, and that's where the rental reversion's coming.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

And again, the beauty of a multi-let estate is we can refurbish the unit next door to one that's let, and we can take advantage of the new tenant that we've created next door without having to do it on that unit itself, and then we can capture it through the rent review and the reversion and the renewal process.

Andrew Rees
Analyst at Deutsche Numis

Thanks, Andrew Rees, Deutsche Numis. Just touching on Radway, obviously positive news on phase one there. I wonder if you can give a bit more color on phase two and some of the further enablement works that are required to sort of get that to a position where it could have become marketable and sellable. And then I guess just sort of building on the question around that disposal and also sort of other disposals, looking where rates have moved over recent months and sort of expectations of higher for longer, does that increase the urgency for you guys and can bring down that kind of portion of unhedged debt? I guess particularly thinking about GBP 100 million of caps at 1.5% rolling off in six, seven months' time, are you kind of more urgent in that kind of other non-core disposal process?

Paul Makin
Investment and Property Director at Tilstone Partners

Dealing firstly with Radway phase two, we've got an outline planning consent there for 1 million sq ft. We could do two boxes, 800 and 200. There is scope, we believe, to expand that planning consent by as much as 20% to 1.2 million. Further work's needed in terms of reserved matters, in terms of detailed planning consent, and that is being worked on and refined at the moment. We've secured the power. Power is probably the biggest issue facing development in all sectors in the U.K., and that's contracted to be provided in 2026. Sequencing-wise, we're looking to expand the planning consent. The Environment Agency in terms of sign-off is pretty much there. Highways are there. Biodiversity's there. The timing around the power is critical in terms of developing that space.

Paul Makin
Investment and Property Director at Tilstone Partners

What the sale of phase one does is it further cements the placemaking of the location. Crewe in its greater sort of environment, you've seen developers such as Panattoni, Prologis, PLP, all build here. So it's a very well-established location. We're right on the roundabout on the M6 with major traffic movements. What we've seen is that there was a major site in Northampton, the Coca-Cola site that was offered 53 acres, but it only got 473 W of power. So you could build 1 million sq ft unit there. That sale has not gone through now because you've got to wait for four or five years for the power. And we have seen parties come to us to talk about the capability of our site to deliver 1 million sq ft. Phase one, we've got to get it done. We're hoping to get it done by Christmas.

Paul Makin
Investment and Property Director at Tilstone Partners

We're expecting and hoping to get a closure on phase two, but it is a liquid site. It has got outline. It will get detailed, and we're not seeing major hurdles to stopping that liquidity event in 2025. On the caps, let me hand over to Peter. I mean, we've got pricing at GBP 100 million worth of caps today, haven't we?

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

Yes. I mean, as I said in the presentation, there are a whole load of moving parts in there, and we want to maintain the 4.2 blended cost of debt going forward. And part of that will be replacing a portion of those caps. I don't think we will need to do the whole GBP 100 million. I think it'll be 60 or 70 probably at the end of the day. We've got pricing. The pricing was rather nice three weeks ago. It spiked in the last week, but we don't have to do it till July next year. So the hope is that it won't be the semi-horrible pricing of today. So if for sake of argument, we end up buying 60 or 70 million of caps, that's our level based on the prices of three weeks ago and hopefully next year, GBP 3 million. It's that sort of number.

Peter Greenslade
Peter Greenslade
Finance Director at Warehouse REIT

But it will just provide us with that base level and constancy of the cost of our debt.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

The sales point, which was the third point you raised, the sale of phase one would bring us down below the 250. Phase two would bring us down even lower again. In terms of allocation of capital, share buybacks is a standing item on the agenda for the board. We are starting to see some opportunities that we really like. We think there's real value outside of the Southeast, places like Liverpool, where we have a big estate next door to Jaguar Land Rover, significant reversions there. The South Manchester area, we have a big estate at Middlewich. It's a stellar performer for us.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

So I think we've got a good eye for spotting where the performance can come, and we've got a very good management team that Paul runs that rotates the, I say the bottom element, it's assets that maybe are ex-growth or somebody bids a very strong price. So there was a sale yesterday, Paul, that you could talk about in terms of Rugby.

Paul Makin
Investment and Property Director at Tilstone Partners

Yeah. So, asset which we have been looking to, we were approached off market for an opportunity to sell, low yielding, agreed to sell.

Simon Hope
Simon Hope
Joint Managing Director and Co-founder at Tilstone Partners and Warehouse REIT

No more excitement.

Miranda Cockburn
Miranda Cockburn
Analyst at Berenberg

One more on the website. Can you give us a bit more clarification as to why the retail warehouse joint venture is no longer going ahead and related to that, whether you would make further retail warehouse acquisitions on balance sheet? And that's from Miranda Cockburn at Berenberg.

Paul Makin
Investment and Property Director at Tilstone Partners

So we envisaged a structure whereby Tamworth was a seed investment in a joint venture. However, the retail warehousing market has moved very quickly, and indeed Tamworth is up 9.6% in three months. So we didn't think it's in the shareholders' best interest to make further acquisitions in these elevated levels, and that was agreed with our partner. So it's no longer under discussion. Any future investment activity will be focused on the core sector of multi-let industrial. So there's no more, but we're delighted with the performance of that asset. Finito.

James Carswell
James Carswell
Analyst at Peel Hunt

Thank you.

Executives
    • Simon Hope
      Simon Hope
      Joint Managing Director and Co-founder
    • Peter Greenslade
      Peter Greenslade
      Finance Director
Analysts
    • Andrew Rees
      Analyst at Deutsche Numis
    • Paul Makin
      Investment and Property Director at Tilstone Partners
    • Matt Saperia
      Analyst at Peel Hunt
    • Miranda Cockburn
      Analyst at Berenberg
    • James Carswell
      Analyst at Peel Hunt
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