Urban Logistics REIT H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

Key Takeaways

  • The portfolio holds a 27% reversion gap between contracted rent (£63.3m) and market ERV (£80.1m), the highest since IPO, offering ~1.6p/sh of near-term earnings upside from rent reviews and vacancies.
  • Vacancy stands at 8.1% but every vacant unit is under offer or in active discussions, providing £6.5m of ERV fillable in H2 to boost earnings and dividend cover.
  • The Group refinanced and extended its debt, fixing 100% of borrowings at an average cost of 4.54% through to 2027 (with options to 2029), while reducing bank margins by 47bp and maintaining LTV at 33%.
  • Capital recycling is ramping up with £25m of core asset disposals underway at yields below 5% and at least 12 institutional buyers re-entering the market to fund new opportunistic acquisitions.
  • Operational resilience remains strong with >99% rent collection, 94% of tenants at low/moderate risk, and 60% of the portfolio now at EPC A/B rating under the ongoing ESG upgrade program.
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Earnings Conference Call
Urban Logistics REIT H1 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Well, good morning, everyone. Thanks very much for taking the time and the interest to listen to what we've got to say. Interesting times in the last gosh, seems like every day is a new paradigm. But I think I'll probably start off by saying it's we all get very focused on dividend cover. We all get very focused on LTVs and ESG and all the good stuff that our real estate demands.

Operator

But if we just pause for a second and I think focus on a few positives. Today, we've seen Aldi announce, I think, the something like 800,000 square feet of expansion. We've seen Rockwall announce 115 acre acquisition in Birmingham, which is equivalent of another 5,000,000 square feet. Another announcement in Chawley of another 1,200,000 square feet. And I think it's very, very easy to sort of focus where we've been over the last twenty four months and that sort of increase in supply and a drop off in take up.

Operator

And I think the important thing about today is that we contextualize all of that so we actually understand what our market is saying because I think the specifics of what we're doing are so important in the context of the wider picture. And I think, also, just on vacancy, clearly, I think it's important to stress that every single one of our vacancies is either under offer or we've got a meaningful dialogue going on with an occupier. So I think whilst I think your point this morning, Tim, about deal cadence not necessarily mirroring year end is a really valid one. And you'll see over H2 that we will be contractually letting up this vacant space, which, of course, goes to earnings, goes to dividend cover. So just by way of update, our core assets in terms of the breakdown of our portfolio, our core assets sitting at 48% of the whole.

Operator

We have started that recycling, I know a lot of the commentators were clamouring for us to do it over the last twenty four months. The reality is we knew that selling assets into a weak capital market was not the right thing to be doing. And actually, we're going to be repaid for our patience in that regard because we've seen a firming of the capital markets today. There are at least 12 institutions I can think of that are now ready and are acquiring assets within our marketplace, none of whom have been seen in the last twenty four months. That is a positive for our marketplace and our recycling.

Operator

We've gone a further £25,000,000 which we are likely to put under offer in the next couple of weeks. So you will see us now in H2 driving that recycling program. So by inference, therefore, the Active Asset Management side, which currently stands at 51%, is going to increase as we rebalance into that more opportunistic stock. Development, for the time being, is not something you'll see us doing very much of at all, other than if we progress some of our sidecar discussions to maybe look at how we can use our skill set to grow that area of expertise at a time when, clearly, increasing voids through development is not the right thing for us to be doing. In terms of our geographical split, you can see pretty constant.

Operator

We're in the areas we want to be. London at the moment is very tricky. Of that, there's little doubt. But our wider Southeast component of 29% is good and we feel that we don't have any voids in the Southeast well, we do actually, technically. Southampton is one, which is under offer.

Operator

So that's we don't we won't very shortly have any voyage in the Southeast, which I think is a good place to be. The core Midlands market is still as strong as ever. And we're pretty comfortable, as I say, with the voyage that we have. You've heard me talk a lot before about in the context of dividend cover, I think a lot of analysts who maybe haven't and were not as old as me, probably have not seen these more difficult times when it's all very well saying you've got 100% of your dividend covered by the earnings. But who's actually paying your rent?

Operator

That's absolutely fundamental to real estate. It always has been. And you look at the types of covenants we've got here, we're still producing over 99% rent collection, 94% rated low or low moderate risk. Yes, we've had shift and the sort of Tuff Nalls experience, but that was always a decision based on assets which had low rent and the ability. Therefore, if Tuffnalls went, we would replace that income with stronger covenants.

Operator

That is what's happened. That is what will continue to happen. And we're very comfortable with the tenants we have. One or two people have said, Are you anxious about the number of 3PLs we've got? The short answer is no.

Operator

But again, it comes back to our due diligence. Do we know who that contract's with? Know, we've seen NHS is a good example. We've seen in the life of Urban Logistics, we've seen the NHS contract go from DHL to Unipart and now they've taken all of those units themselves. And in many cases, we have tenant customers with step in rights.

Operator

So it's really fundamental to understand who those contracts are with and who's ultimately going to pick up the rent demand. Moving on to supply constraints and the ongoing demand. In short, we're at pre COVID levels. Now Savol's predicting a fall in vacancy in 2025. We'd certainly concur with that.

Operator

I mean, just to set the scene, it's unfortunate, but the data sets that are out there don't actually cover the part of the market that we're in, in other words, that 50,000 to 250,000 square feet. I promise you that by year end, we will have independent data to support this area that we're in. But at a headline level, UK vacancy at 56,300,000 square feet, only 55% of which is Grade A. Pounds 10,000,000 of space under construction, speculatively, and 6,200,000 of that is in the 400,000 square feet and above size range. There is currently, across all specifications, there's 12,000,000 square feet of supply in the 250,000 to 400,000 square foot category.

Operator

You've heard us talk before about the dumbbell effect. We're seeing demand really polarise now into that sort of 50,000 to 250,000 size range and the 400 sorry, the 500 and above. So this area in the middle is where the real difficulty is. We are not exposed to that. And we will see, I think, as time goes on, these rental growth forecasts actually alter to reflect what's actually happening on the ground.

Operator

Across The UK for 2025, CoStar predicting 3.4%. We'll see. I'm a little bit more confident than that. And then this reversion in the portfolio, platform for earnings growth. Don't Jamie will correct me, but I don't think we've seen this level of potential since IPO.

Operator

Is that correct?

Speaker 1

No, that's right. The reversion in the portfolio today is higher than it's ever been since IPO.

Operator

Yeah. So I'll hand over to Jamie now to talk about this reversion and to deal with our balance sheet adjustments and debt and so on. Do you want to stand up, Jamie, or do you want to do it there?

Speaker 1

No, I can speak from Otherwise, we're going to be running up and down the whole time. I think that's a really important point, that the reversion in the portfolio and by reversion, what we're looking at in this graph is that on the right we've got where our external valuers view the contracted market rent should be for our portfolio at 80,100,000.0, and on the left where the contracted rent sits today, 63,300,000.0. That's a 27% uplift between where we're contracted and where the market is for those assets. And that's important because that reversion is what's providing the platform for earnings growth here at Urban Logistics. There's three distinct areas we'll run through quickly.

Speaker 1

The first is on the vacancy. And now we break that vacancy down to look at a couple of different types. The vacancy at thirtieth September, '8 point '1 percent. From left to right, as you'll you'll see, a number of buildings are are already under offer, 1,800,000.0. And in the normal course of events, you'd expect to see those leases complete in the coming weeks and months.

Speaker 1

Next up is 2,800,000.0 of acquired vacancy. This is a property that that we we acquired with a very short term on the lease. The intention being for it to become vacant and for us to lease that up, getting both an earnings uplift as well as, of course, a significant capital value uplift. Next up, moving right, there's 900,000.0 in assets that are under refurbishment. This represents assets where the tenant has come out as planned at the end of their lease, and we've taken the decision to take those assets back and put it refurbish those assets, put some CapEx into them to increase both the rental value and the capital value of those assets, but it does result in a short period of vacancy.

Speaker 1

And then the final million pounds in that vacancy area is, of course, the underlying vacancy. The normal churn you'd expect to see in the portfolio where our asset managers are working to improve covenants, rental rates, fundamental asset quality. And now this vacancy is important because that offers the fastest route to earnings growth. That vacancy is available for leasing now to a large extent. And as Richard said, I think everything has active, very active conversations on that.

Speaker 1

As that leases up, that flows through into earnings. Next up on this graph we have rent reviews. Now if vacancy offers the fastest route to grow earnings, rent reviews offer the most secure view. We know what the date of those reviews is, we know where the market is and there's no opportunity for the tenant to leave putting revenue at risk. Finally, renewals and expiries.

Speaker 1

This is where we capture a version on the end of a lease, but there is always a risk of a vacancy there. And I think it's worth saying, of course, that doesn't mean there will be a vacancy. We have a very high renewal rate, but we like to highlight where where there's risk. And I think what we're highlighting here today is that in the next six, twelve months, there's a very small percentage of the portfolio subject to an expiry as we'll see in due course. And of course, those breaks are highly reversionary, allowing us to capture rental uplift.

Speaker 1

You put that together and what you get is a remarkably stable base to grow top line rent. A lot of opportunity in that vacancy in those rent reviews and very little contractually risk in those expiries and breaks. Top line rent of course, as we know, very quickly translates into bottom line earnings. We have very much fixed cost base in terms of our PLC costs, advisory fees and of course the debt, is now a % fixed due to term as we'll come to talk about. So the opportunity just within those vacant assets is 6,500,000.0 of ERV.

Speaker 1

That breaks back to about 1.4p per share. The opportunity in the total six months, including those rent reviews, comes up to 1.6 p. Rich has mentioned the the the covered dividend point, and it's worth just just touching on. We have a dividend of 7.6 p, marginally uncovered last year by about 0.7 p with earnings of 6.9. Now today, the results we're presenting show a an EPS of 6.2 p.

Speaker 1

Double that for a run rate at at 7.2, you can see the progress we've made against that dividend cover. And again, with that 1.6 p of reversion on the board, you see where where our dividend is and earnings has the potential to get to in the very short term. And of course, this is only really looking so far we've spoken through this financial year. There is significant reversion, 9,100,000.0 in the years to come and a lot of that to capture in the short term. The final point I'd make on this table here that we're looking at is this is done on today's ERV.

Speaker 1

Richard's spoken just now about the forecast ERV growth we see in the market. And if we would therefore be expecting that 9,100,000 to capture in future years to be growing significantly over the coming years. And this is of course before any of the recycling that Justin will talk through shortly. We might move on to ESG quickly. We've continued to focus on our ESG priorities, and today 60% of the portfolio stands at AB in terms of EPCs.

Speaker 1

And I think it's really important to note that we've done that while operating our core business model, which is to buy in poorer performing assets and sell out of our better performing assets. So you'll see Justin has bought a lot a number of assets that have slightly lower EPC ratings, and we sold a number of assets that have higher EPC ratings. And despite that, the EPC percentage of the of the portfolio has grown. The way we do that, of course, is the expertise of our asset management team, the low CapEx nature of these buildings, and the fact that our tenants share our ESG goals, as Richard has spoken about. At a portfolio level, we've been doing significant work on the on our SBTI scope three baseline using the very recently published building sector pathway and we've made significant progress against those targets and we're now publishing our carbon intensity on a per square meter basis for the first time.

Speaker 1

And we can come back to ESG in due course. We'll now just jump in to talk through the the financials that we're presenting here today. I think, what we can see here on the on the financial side is that we have a very gross rent has continued to grow, 3% increase in gross rent, and 3.2% increase in adjusted earnings. And that's despite the vacancy rate increasing marginally to 8.1%. On the balance sheet side, net assets has remained stable.

Speaker 1

A 1% fall in net asset has been driven largely by the costs associated with acquiring properties as well as our marginally uncovered dividend. The balance sheet that we'll come to talk about remains very robust. Our LTV is low at 33.2% at the bottom end of our 30 to 40% range, and our debt is a % fixed or hedged through to term, which given where interest rates have moved over the last few days, we think is a very good place to

Operator

be. Sorry? Term. What is the term?

Speaker 1

Sorry, term on the rate and on the debt is five point one years term with our earliest refinance in August 27 with the option to extend that out two years to August 29. When we digging further into EPS growth, what you can see here on this slide is gross revenue growing as we settle rent reviews, as we let out vacant assets, offset to some extent by those property operating costs associated with the vacant assets. And you'd all things being equal, as though as our vacancy drops, as we let up those assets, you'd expect to see that property operating cost reduce significantly. Admin expenses down due to the new management contract coming into effect, new advisory contract, I should say, coming into effect, which has significant reductions in the fee levels. There's a mild increase in interest expense in the period, and that's driven by a small amount of unhedged debt before our refinance and a greater quantum of debt post the refinance, which we'll come on to talk about in a moment.

Speaker 1

If we turn now to the key driver of rental income, leasing activity, We can see that there's been a we've added 1,200,000.0 of additional rental income generated in the period across 13 lease events. As as Richard has said, the occupational market has been slower and we've seen decisions take longer, but it is really noticeable that the these lease events were done at a 21% like for like increase, and in fact significantly ahead of where the value has had our ERV. And that's actually in contrast to the position when we sat here twelve months ago, where our like for like on the same table would have been 10% and we were signing deals at roughly ERV. Now that that really shows the the resurgence in demand for our properties. You can also see this demand in the ERV growth for the portfolio.

Speaker 1

Richard mentioned a few minutes ago forecast for ERV growth at sort of 3.5% CAGR. Well, the ERV growth on a like for like basis in our portfolio has been 3.5 over the last six months, which really demonstrates that reversion. As we say, the reversion in that portfolio has never been higher and that's incredibly important for our growth projections and our forecasts. And it's really telling that nearly half of that reversion is available capture in the near term. Turning to the balance of the portfolio in terms of contracted rents where we see the lease expiry profile.

Speaker 1

What we see when we look at the portfolio is as I say a very low number of leases with it breaks or expires in the coming period, two percent in the next twelve months. That gives us that stability of income and a secure base to grow from. You look at the graph there on the right and you see a very different view in terms of rent reviews. 15% of the contracted rent in the portfolio is subject to a rent review in the next twelve months. Crucially, these leases are structured to allow us to capture the ERV growth we've just seen in the previous slide.

Speaker 1

The vast majority being open market rent reviews that allow us to capture that upside. And we continue to believe that's the best outcome for shareholders, and that's where we will be able to provide the best outcome for shareholders. I'll turn on next to the balance sheet, and we want to just talk through the recent refinance that we announced in September. As we sat here six months ago at the annual results, the start of the period we had a debt maturing in August 25. And we signaled that we'd look to refinance this, and in period we're reporting on now, we did so.

Speaker 1

In doing this, as we say, we pushed that earliest maturity back from August 27 August 25 back to August 27. And in fact, we've got those two one year extensions options, push it back to '29. What's important is we were able to take advantage of very optimistic, as they now look, market expectations around interest rate cuts at the time of the of the refinance and secure very favorable hedging terms. And that's allowed us to fix our debt cost and leave us unexposed to post budget gilt rate changes, post Trump inflation expectations. And you can see there's more pessimistic views on rate cuts in this three year swap chart on left here.

Speaker 1

So we're very pleased with the timing of that refinance. It's locked in debt rates that are no longer available to us. It's also worth saying that our additional scale, since that that debt that we refinanced was taken out in 2020, between 2020 and last September, the scale of Urban Logistics has grown significantly. And that scale has allowed us to attract to to secure a significant 47 basis point reduction in margin, causing a day one reduction in the total rates on this facility from 5% down to 4.5% as we continue with our existing hedges, and then rising to 5% as the new hedges taken out at the time of the refinance come into effect. Now the cost of this debt, combined with our our very low LTV levels and the pipeline of opportunities that Richard and Justin have put together, prompted us to increase the size of the facility to provide firepower to fund new EPS accretive acquisitions.

Speaker 1

Now, Justin will come on to talk significant about those acquisitions, but the opportunity, the fundamental opportunity that we were looking to take advantage of was that day one arbitrage between our debt costs and where we could buy in the market. And that arbitrage increasing over time as we can fix the debt costs and we can apply asset management abilities to the stock we bought to increase the rental rates, allowing that day one arbitrage to grow over the coming years. If we look at the wider debt book, we'll see that top line being that bank facility that we've just refinanced. And you'll see that that rate reducing from 4.99% as it was at the year end down to 4.54%. And that's brought our total ongoing cost of debt from 4.23 down to 4.15% at thirtieth September twenty four.

Speaker 1

Our LTV remains very low at 33.2%, right at the bottom end of that 30 to 40% range that we talk about. And interest cover, again, main maintains a very conservative position. Crucially, we are, as we've said, now 100% fixed or hedged through to term. And our debt maturity timeline is, as we've said, moved to five point one years. All in all, we think that gives us a very stable base to grow from.

Speaker 1

And with that, I'll hand over to Justin. He'll talk us through some of the capital investment decisions that we've taken in the period.

Speaker 2

Thank you, Jamie. Good morning, everybody. We've entitled this slide a disciplined capital allocation. And I think over the last sort of eighteen months, two years, have been incredibly disciplined in our approach to capital allocation via acquisitions and disposals. As Richard stated, our clear aim has been on executing against the strategy we talked to the shareholders about during the March results.

Speaker 2

Now the very core of this strategy was rebalancing the portfolio away from core assets, which are typically lower yielding with lower growth potential, especially those linked to CPI or RPI reviews where you can't capture the rental growth, especially if you've got a ten, twelve, fifteen year lease. Tilting the portfolio more towards the core of this business, which is asset management opportunities, again, which are typically high yielding and have significant reversionary potential. Now the aim of the strategy is to drive EPS to assist in that covered dividend. The acquisition program wasn't there to solve the dividend cover. It is there to assist in the journey.

Speaker 2

In addition, some of the assets we've bought, we believe, set us up well for capital performance going forward. Now the first component, which we talked about in June at the annual results, was to take advantage of what we saw was a very dislocated market. Invest the capital that's been set at a fixed cost rate of debt, as Jamie has talked about, at very advantageous rates than potentially we're looking at today. If we were looking at the debt in terms of where we acquired, we acquired €45,000,000 of assets in five separate transactions, a net initial yield of around 6.73% with a reversion of north of 7.3%. Now that was at a fixed rate of debt at around 5%, which when we talked to you back in June, swap rates prevailing suggested we are anticipating an all in cost of debt around 5.75%.

Speaker 2

So day one yield arbitrage on the fixed cost of debt today on the portfolio is around 160 basis points. We stuck to our strategy. All the assets reflected good credit, short term asset management opportunities to allow the continuation of the rotation of these buckets. At the same time, we saw the reintroduction of, as Richard said, institutional low cost of capital, family trusts, institutions, private investors. The emergence of these lower cost of capital are where we believe these core assets should be sold to.

Speaker 2

Now we started the recycling program back in April post period end. We sold 3,800,000.0 at a net initial yield of 5.3%. Last year, we last week, we completed on 7,700,000.0 of disposals at a net initial yield of 4.85%. And I think we should dwell just on a couple of seconds on those two yields because ultimately, the two assets we sold were very similar in profile. Good credit, twelve year income, modern buildings with rent reviews linked to CPI.

Speaker 2

That's over a 50 basis point yield compression from where we were in April to where we sit here today in October. So I think it justifies our approach in waiting for that low cost of capital in order to continue our recycling program. As Richard has often said in these presentations, why would you sell your core assets when the lowest cost of capital is not currently in the market? We are seeing the institutions return. We are seeing allocations to real estate return.

Speaker 2

Most institutions have sat in fixed income for the past two years quite safely. We're now seeing allocations again. I think it's too early to say short term what the implications of the current debt market are doing. That cost of debt, as I said, today from what we looked at would be over 100 basis points more expensive. So if your all in cost of debt today is 6% plus, will we see a pullback from the institutions?

Speaker 2

Potentially. Are some of those prices that we saw earlier in the summer? Trafford Park or Premier Park in Trafford, Three Point Two Five Percent initial. Compare that to the ten year gilts there, 4.5%, it feels punchy. But I think a lot of real estate professionals are now looking through the short term, and they genuinely believe in the downwards trajectory on interest rates.

Speaker 2

It just depends how quickly it all comes. If I actually look at the acquisition portfolio we undertook, we set it out in June to you all and we executed on it quickly and efficiently. From the completion of Jamie's refi and the certainty of that refi, which is quite key, We undertook five asset acquisitions, as I said. If you look at the metrics, 90% of those were off market one to one opportunities. The actual metrics portfolio, a net initial yield of 6.7%, short term income, a weighted unexpired term to break or reversion four point five years, but all having very good credit.

Speaker 2

Now the last asset we completed on post period end, Dunstable, I think is quite an interesting example of our approach to how we acquire assets. It was acquired vacant, so we exchanged on it at a vacant value per square foot. In between exchange completion, our asset management team poached a tenant on a new fifteen year lease from a nearby institutional estate and slotted it in pre completion. So from day one, the REIT had an income yield of around 7.1%, a, to service the debt, but b, to, as I said, enhance that EPS. Now a lot of people often ask us, what is our typical acquisition?

Speaker 2

What are we looking to buy? And I think the acquisition we made in Doncaster is a really good example of where we're willing to take risk in an undersupplied market and be creative in our acquisition approach. The asset was acquired back September for 11,695,000.000. It's a 30,000 square feet. It's built in 02/2005, owned by Syntner PLC, the car operator, and was operated as a as a sort of car shop, car supermarket from 02/2009.

Speaker 2

So fundamentally, the shed hasn't been knocked around. It's in very good condition. The EPC is a c. We put CapEx in the budget in terms to improve that from a c to a b. We approached Centrum and said, we'll acquire this from you, but we want an eighteen month rent rate service charge guarantee.

Speaker 2

So from day one, the the REIT is getting around seven and a half percent income yield, and we will take leasing risk in what we believe is an undersupplied market. The rent we acquired the or underwrote the the asset at was £7.25 a foot. As I said, we acquired this in mid September. As we sit here today, we're under offer on a ten year lease to a five a two covenant at a rent of £7.95 a foot. So that's a 10% uplift on that that we underwrote.

Speaker 2

Now to put that into context, that would take the day one initial yield on this asset against the current sitting valuation up to about 8.25%. So immediately EPS enhancing. But then more importantly, ten year income on this sort of shed in the market is trading for about 6% in the market. So that would equate to a potential £2,500,000 capital uplift on the asset or 20% capital return within the space of two to three months. So a very innovative approach, and not just going out and buying the market or buying bond type income.

Speaker 2

Now, a key function of the disposal program, as Jamie and Richard both said, is to sell low yielding, dry income where rental growth is either limited by CPI or RPI, or where the lengths of the leases are such that we can't capture that growth. Now, those of you who attended our Capital Markets Day earlier in the year will hopefully remember touring Anglian Water in Peterborough. It's a very shiny, modern box. I also think it's a prime example of our sort of cradle to grave approach in acquiring, asset managing, and then exiting assets. The site was acquired in June 2020, and the site we effectively bought it vacant.

Speaker 2

We backed a developer to effectively give us a fixed cost price, which is the way we undertake development in in this REIT. We took leasing risk. So we ultimately let it to Anglian Water for a fifteen year term with five yearly reviews to CPI and RPI. In September, in direct discussions on a one on one with a private client of State Street, We sold this at a premium of 2.1% to the September valuation, the ones that we've just released this morning, at a net initial yield of 4.85%, well below our dividend yield and our cost of finance. Jamie talks openly that our lowest cost of capital currently is asset recycling of low yielding assets.

Speaker 2

The proceeds of which we will reinvest back into the market in assets very similar to that which I've just talked to you about on our acquisition profile. We are seeing quite a bit of opportunity in the market. Risk, I would certainly say, in the current context where the debt market is sitting, I would say, is going to add probably an element of uncertainty. So actually, we think we can deploy this capital back into a very similar vein to that which we've recently done. So to try to put into context the activity that we've undertaken in the capital markets, you've heard from quite a number of our peers, Richard said earlier on, it's been a more challenging leasing environment with deals taking longer and decision making somewhat more protracted.

Speaker 2

If I look at the headline statistics, we've taken Savol's data from this. The picture really does suggest a functioning leasing market. We've seen improved take up over 2023, and we on the ground are seeing more businesses willing to take space in a more stabilized macro environment. I caveat the last twenty four hours, but I do believe people are looking through that. Near shoring, continued online penetration and improving business and consumer confidence really is what's driving that demand going forward.

Speaker 2

Now again, harking back to the last twenty four hours, do we see the threat of global protectionism actually assisting in onshoring in The UK and and and in Europe? I I would probably argue so at this point, but again, it's very too it's far too early to tell with such a snap election result. The headline vacancy of around 77% at market level has been very much influenced by that speculative development cycle we saw coming through in 2023. When we last spoke to you in June, there were 23 vacant or coming to market three to 400,000 square foot boxes. There's now an excess of 30.

Speaker 2

So you can see where that that development cycle has actually increased the overall vacancy in The UK. Now, as that development starts to to lease up, and as Richard said, around around 10% of of suspected development is already under offer, Savills and other market commentators suggest they anticipate a falling in that vacancy rate, especially because the development starts are slowing as people look to get that supply demand imbalance back into equilibrium. If I drill further into the detail, we can see the market for our range of space, that mid box of circa 70,000 up to a 50, two hundred thousand square foot is functioning far better. The CBRE data on the bottom graph shows the amount of deals we're seeing in the space. The range of occupiers continues to remain diverse, and we're seeing new entrants coming in from services and leisure against existing demand from manufacturing, 3PL, infrastructure, food and pharmaceuticals.

Speaker 2

Richard mentioned earlier on this this barbell effect, which I continue to see in the occupational market, with tenants really focusing on their last mile fulfillment in conjunction with their national distribution facilities. On the capital markets, I mean, I've talked to you about what we've done in the capital markets. They continue to operate. A lot of our peers do our marketing for us. Their main focus of reinvestment is last mile logistics, and that's a key for both domestic and international capital.

Speaker 2

Circa 2,600,000,000 of logistics has been transacted in the first half of twenty twenty four, I anticipate a similar, if not more, amount in the second half. And it's the second half of the year I have found far more interesting. Liquidity has significantly improved. The depth of buyers in deals we're coming up against has improved. And there's an improving range of risk requirements and return hurdles out there that is making a far more wider landscape for the capital market.

Speaker 2

Now a key feature we talked about over the summer and we're certainly seeing coming back is this low cost of capital into the market, the institutions, private investors, family trusts. And I think that was admirably shown by the two sales we undertook, as I said, on virtually identical buildings, a 50 bp inward yield spread. In addition, we've seen private equity start to move in significant quantum, particularly most recently in the listed markets. Aberdeen Property Income Trust, a portfolio we know acutely well acquired by GoldenTree. Tri tax Euro Box under offer to Brookfield.

Speaker 2

Project Tiger, is the Charles Street Buildings Group acquired by Lone Star for in excess of 560,000,000. And BCPT is currently under offer to Starwood for in excess of 600,000,000. The key feature of all of these portfolios is they are industrial and logistics heavy. Private equity are acquiring these portfolios at a low single digit discount to the prevailing NAV, which to me says they are calling the bottom of the market and placing considerable quantum of capital into industrial heavy asset portfolios. Now when you look at that in conjunction with the stable valuation market we've witnessed throughout 2024, there's been minimal movement in the logistics sector.

Speaker 2

Prime yields from the major houses of Savills, Jones Lang, Knight Frank, Seabury have all remained stable. And you can see a picture is starting to emerge of both domestic and global capital chasing this narrow urban logistics sector attracted by the fundamentals, it's a low CapEx model, ESG improvements, and of the ongoing rental growth. So the effects of the deals I'm seeing in the market today, I think, will be reflected more in Q1 twenty twenty four as the value is naturally backwards looking, start to see some of the deals coming forward. I do caveat that there will probably be a spread. Some of those early deals we saw in the summer of yields in the threes, if this continued elevated debt market continues, may look a little under pressure.

Speaker 2

But the sort of deals that we've been acquiring are still out there to buy. We think we can deploy the capital, and we think there are vendors there who would probably quite willingly accept our capital as we anticipate this slightly volatile environment we see post The UK budget and the U. S. Election. I'll hand over to Richard now for the final comments.

Operator

Thanks, Justin. So if we turn to Slide 28. H1 really was absolutely about putting the balance sheet to work, getting that additional debt drawdown at 5%, acquiring five new assets at 6.7% net initial yield with that reversion to at least 7.3%. H2, much more about recycling core assets. And I think, hopefully, we'll be sitting here in six months' time and saying, well, we got that bit right as we see more capital coming back into the market.

Operator

And as I say, post period end, 8,000,000 sold at 4,850,000.00 and further conversations going on, and we've got a further £25,000,000 should happen in relatively short order. Capturing the reversion in the portfolio, increasing that rental growth, clearly, is also a key focus for us. 27% further reversion in the portfolio. 13 asset management events in H1, adding 1,200,000. As I said earlier on, every single void in our portfolio has a name against them.

Operator

We would expect to let our vacant space in relatively short order. Two of those assets under offer post period end. And then really, in terms of Slide 29, the final slide, we know we're in the right sector. We're in an investable asset class, which in real estate is quite a good place to be today. Single let, last mile, mid box logistics still enjoys those macro tailwinds driven by that supply demand imbalance.

Operator

And as I said earlier, we will have commissioned the research to produce a more in-depth analysis of the available and the take up within our size range because it's a source of complete frustration to me that two of the biggest research houses only look at assets of 100,000 square feet and above, which is right in the midpoint of our portfolio, so it's not massively helpful. But nevertheless, we can see that, overall, our market is outperforming the wider industrial space. And I think the other thing I'd say is obsolescence is something which, if you go back to IPO in 2016, we made the point then that we're very fortunate in this area of real estate where obsolescence isn't really or hasn't been a factor. Compare that to office buildings where the core literally has to be completely refitted at the end of a twenty or twenty five year term. We are, however, now seeing obsolescence as something that we need to be concerned about.

Operator

And if we look at the total amount of available space in The UK today, 55% of it only is Grade A. So I think it's of that total available space, I would hazard a guess that at least 15% of it is pretty much obsolete and will end up being demolished for either replacement stock or open storage. That robust tenant selection, which we've talked about forever, means we have low tenant default, we have high retention rates, we have high rent collection rates, and that will continue to be a focus of ours. In terms of our Clear Growth Plan, significant post period end activity in letting up vacancy, and you will see that continue. Fixed costs our fixed cost base ensures that top line growth results in fast bottom line earnings a fast route to bottom line earnings, and that's something which Jamie has covered very eloquently.

Operator

Our deep understanding of the market is, I think, in the good times, I think people think it's bluntly, anyone can do it. I think in more difficult times, you will see us or you are seeing us outperform our peer group in terms of the number of lettings and number of lease restructurings. And that will continue. I mean, the experience we have in this marketplace, evidenced by the two vacant assets we've bought post period end, which are now either let or under offer to new tenants. And the majority of our assets continue to be acquired off market.

Operator

We know the owners, operators of this sort of real estate. As Justin has very eloquently said, we've been buying at 6.7% net initial yield and selling at well under 5% net initial yield. So that clearly puts us in an advantageous position. Our close relationships with occupiers and potential occupiers, again, is going to be significantly important. We've gone through a period where, as the growth in e commerce has been witnessed from even going back to pre COVID.

Operator

But as there was this huge growth in e commerce, we also saw 3PLs trying to capture some of that business activity. And inevitably, not all of them will make the trip, and we've seen some of those smaller 3PLs who probably grew too quickly, and as volumes have dropped, they've found themselves struggling. So being very cautious about the tenants we take on is really important, unless, of course, we think the passing rent is so low that actually we can take a chance on them and then reel out at a much higher rent. But I think it is something which, by and large, is less relevant to our size of buildings than, say, the MLI area where you're talking about 5,000, 10 thousand, 15 thousand square foot units, which will attract that type of occupier. And our platform for growth, careful use of the balance sheet to acquire accretive assets flowing through to future earnings, the further dry powder that we will have following our recycling will, I think, set us up very nicely for the period ahead.

Operator

But nothing is certain in this world in which we're currently inhabiting, but I think we are well positioned versus the as I say, versus the peer group. Probably time for questions, I just thought. Miranda?

Speaker 3

Miranda Koban, Berenberg. A couple of questions. Firstly, just ERV growth. Obviously, a big jump up this year versus last year, that 3.5%. Can you just elaborate a little bit more on it in terms of was it very strong in particular locations?

Speaker 3

Or was it particular types of properties that saw that strength? And then the second point, just coming back on your point about obsolescence and obviously seeing a divergence maybe in terms of rental growth between sort of prime and secondary as we go forward. When you look across your portfolio, do you are you sort of looking at more now thinking, oh, these are maybe a bit more secondary, we're going to see lower growth? How do you see your portfolio? Do you sort of believe it's all category A?

Speaker 3

Or is there more divergence there?

Operator

There's quite a lot in there, Miranda. Do you want to talk about the mathematical bit, first bit of the question?

Speaker 1

So if we talk about the ARV growth, it's 3.5% in six months, we think, is very strong. And we look at that we break that down across the portfolio. And in fact, in terms of if you look at it, we break the portfolio, as you know, into core and asset management opportunities. And actually, that 3.5 has been relatively consistent across both of those groups. In terms of geographies, again, it's hard to pick out because the geographies are so the micro locations, if you like, are very important to that.

Speaker 1

It's hard to pick out any very clear trends in geographies. We've seen Richard's mentioned Central London. We have some relatively central properties in London. Perhaps the ERV growth has been slightly slower there. But again, across the South East as a whole, that ERV growth has been relatively consistent.

Speaker 1

So it's not actually it's not there's not a clear story of one part of the portfolio is holding up the rest, if you like. It has been relatively consistent.

Operator

I think that's right. I mean there are still locations in the country where we're significantly undersupplied. The Northwest is a good example of that, and we would see that continuing. London, Jamie has rightly pointed to, is difficult. But we equally, we don't have any assets within the M25, which would cause us concern in that area.

Operator

I mean, actually, the wider M25 market is still very, very strong, so we're relaxed about that. In terms of obsolescence, I think the way that, certainly, I've always looked at logistics real estate, if you go back over the last thirty years, typically, Grade A assets versus Grade B assets, if you like, should really be discounted to the tune of about 1.5 per square foot. That's the way it's always been. So if you look at our passing rent across the board today, allowing for those low side cover assets, we're broadly at about £6 a square foot. The wider market is seeing Grade A space in if you take the Middle of the take the East And West Midlands, we're now at double digit rents.

Operator

So we are we're 40% under that. That gives me a huge degree of comfort. As far as obsolescence is concerned, we've always said the first thing we do when we're introduced to an opportunity is we get onto site and look at what's going on, how fit for purpose is the building to the operation that's being undertaken, how mission critical is that building to the occupier. But strip away the current leasing arrangements and actually look at what happens if you get that unit back. Is the microlocation good enough?

Operator

Is there enough circulation space? Is there enough lorry parking? Is there enough trailer parking? Are there enough loading doors? Every building should have at least one loading dock to every 10,000 square feet.

Operator

All of this sort of granular part of the specification is absolutely fundamental because, in a good market, you can almost let anything. In a more difficult market, you most certainly can't. And it's not a question of reducing the rent from £10 to £8 or whatever else. It's actually can you let it at all? Can you get a viewing at all?

Operator

I mean, those of us who were around during the GFC knew it didn't matter what you did, if that building was not fit for purpose, you weren't letting it. Period. So, you know, we've been scarred by that. We absolutely turn our attention to the specification of the buildings at each and every turn. And I think that's why we have the comfort of knowing that our buildings will re let.

Operator

And the other thing, of course, is you've to remember, the construction of these things is pretty straightforward. It's Macarno esque. Ultimately, you've got a steel portal frame, which is clad with a steel profile sheet. And ultimately, the steel portal frame will last at least sixty years, and the steel portal frame will the steel sheeting will last twenty five, thirty years. And, you know, basically, there is very little else to do.

Operator

I mean, things like how is the heating arranged and things like that They are important in the context of EPCs, the old gas fired boilers and things need to come out. But as far as the majority of the space is concerned, as long as the yards are good and you don't see structural cracking, as long as the warehouse floors are in good order, then as long as they're laid to FM1 standard and they're 50 kilonewtons and all that good stuff, then the reality is those buildings will stand the test of time. So we're pretty comfortable with assets that we've got throughout.

Speaker 1

Andrew Soldiers from Shaw Capital. Justin, you touched in your piece about gilt yields moving up from the September. I appreciate it might be slightly early to try and call this, but I wonder if you could give us a flavor of what's happening out there with pricing expectations. I know we've obviously seen more stable valuations, but is it possible we could see another shift downwards? I'd be interested to hear your views.

Speaker 1

There's a

Speaker 2

broad as I there's a broad range of capital in the market at the moment. I'll go back to the institutions. Buying at 3.25% when you're ten year guilt at the moment is 4.5%. You've got allocations, so you're investing in real estate, but your risk free rate of return suddenly shifts back out, it it feels like it could go back into fixed income quite easily. I think a lot of real estate professionals have sat there for two years.

Speaker 2

I think you're seeing so the private equity moving in quantum now. People are perceiving this as the bottom of the market, and they don't want to miss out, especially on quality sort of unique opportunities as M and G acquired with with Premier Park. It's a very unique asset. Certainly, in the the deals I'm coming up against at the moment, there is a better depth of buyer there. There are more whereas it used to be sort of two or three.

Speaker 2

We went to something the other day. We bid on it. It was 6.5%. It was in Warrington. I liked it.

Speaker 2

It went to 5.75. Now I think that will feed through into q one. I do think at the moment, this current environment takes a lot of the debt in debt players out because if your debt has gone up a hundred basis points in the space of when Jamie fixed our debt, that's a lot of return to suddenly give away. And I think real estate is a long term asset class. The capital I'm talking to is very focused on I hate the phrase sheds better meds, but I'll I'll use it.

Speaker 2

It is very focused on that area of the market. So there is continual demand. What we're seeing is it just the pressure comes in and out almost as the debt market comes slightly in or out.

Operator

I think I'd also add to that. If you go back twelve, twenty four months, the UK institutions who operate on an unlevered basis just weren't there. You look at the market at the moment, you've got lots of roll under with £1,700,000,000 to deploy. We've seen M and G with their new opportunity funders. There's a lot of capital LNG.

Operator

All those UK institutions are back out looking for assets in our space, and that inevitably is going to feed through to sustained lower yield levels, I think, going forward. So yes, I mean, I'd be bold enough to say I think seen the bottom. And certainly, volumes are also increasing. When we came to market in 2016, we said then there was about £4,000,000,000 of assets traded within our size range, and we've seen nothing like that in the last twelve to twenty four months. But I wouldn't be at all surprised if by the end of H2 that we've seen at least £2,000,000,000 of activity.

Speaker 4

Andrew Rees, Deutsche. Just wanted to building on that in terms of the capital recycling. I think, Richard, you touched on the start, there's 5,000,000 potentially going under office soon. Do you sort of have an indicative range in your mind in terms of kind of quantum of capital that you're sort of looking to recycle, given that's going to be what's going to fund sort of the further investment opportunities for Justin, sort of $25,000,000 in HD, we think about a range more or less than that kind of going forward as a run rate?

Operator

I think, as I said earlier on, when we came to market, we said then that we'd expect about onethree of our portfolio to be in our core income category and twothree to be in the more opportunistic. So I think as a headline, that's where we'd like to be. Are we going to do it all in H2? No, we're not. But I think if the market goes the way that we think it will, I think we'll have a unique a relatively unique opportunity to recycle perhaps more than we might have imagined over this certainly over the coming twelve months anyway.

Operator

So yes, I won't make any prediction around that, but I think you'll see us certainly do a lot more than GBP 25,000,000 that we're talking about. Yes, we do have one question online actually. If I just pass it over to Abi quickly.

Speaker 5

So one question from James Caldwell at Peel Hunt. Given the near term reversion, what should we expect for like for like net rental income growth over the next twelve months?

Speaker 1

So we look, we don't forecast and make predictions of course. But we see over the next twelve months a very secure base and we see a huge amount of opportunity. Now if we look at those vacant assets, the £6,500,000 of the RV available, 5,500,000.0 of which is within four leasing decisions. Do I know when those leasing decisions will happen in terms of the next twelve three, six, twelve months? No.

Speaker 1

But do I know that they will happen? Yes. We hope. I take Richard's comment on that there are significant conversations on each of them. So it's very hard to predict where our like for likes will sit back the next month.

Speaker 1

But if you look at where we've signed leases in the past, the like for like contracted like for likes have been in the 20% range and you wouldn't expect that to change. On the net like for likes, you'll see that, that will depend very much on the timing of those leasing decisions.

Operator

What I would say on that, I think having historically worked across both big box, Urban Logistics and MLI, you will see that greater constraint within Urban Logistics will drive that rental growth a whole lot harder than, for example, at the moment in Big Box, where there's a lot of land availability. Typically, occupiers will do it on a pre let basis. And at the smaller end of Big Box, there's quite a bit of quite a number of buildings in the market currently, which will which has created a soft marketplace. So I think you will see that distortion between the subsets of the wider I and L market.

Speaker 5

Perfect. Hand back to Richard for closing comments.

Operator

Think really, we've covered hopefully the key points. I think we've had a really tough twenty four months, frankly, in terms of the capital markets and our train, which was going along very nicely, I think from 'sixteen to 'twenty two, we delivered 16% total property return consistently. And clearly, it has been a whole heap harder. But what we have done is we have demonstrated that our rent collections have stayed high. We've demonstrated that our tenants are robust and focusing on essential goods, eschewing fashion retail and anything that constitutes fashion like, to some degree, automotive has served us well.

Operator

And if you look at the rises and fallers in the market yesterday in terms of the impact of the Trump administration, the automotive sector is probably going to have a pretty tough time. And so we're grateful for the fact we're not sort of susceptible. And who knows what's going to happen in the wider economy, but one thing's for sure that things like fashion retail will suffer, as they've continued to do. So I don't I'm not remotely worried about our tenant base across the piece. I think in terms of delivering on that performance, we do need that bit of attention to capital markets, which we've touched on, which I think is now here.

Operator

And I think there's as I said earlier on, there's at least 10 institutions I can think of who've got at least £1,000,000,000 to deploy into our marketplace. So I think we will see a changed picture there. Thank you very much, everybody.

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