Good day, and welcome to the Tritax Trading Update conference call. At this time, I would like to turn the conference over to Ian Brown, Head of Investor Relations. Please go ahead.
Good morning, everyone. As Jeff mentioned, I'm Ian Brown, Head of IR for Tritax, and I'm joined this morning by Colin Godfrey and Frankie Whitehead, the CEO and CFO for Tritax Big Box. To coincide with our trading update this morning, we are hosting a call for investors and analysts. Colin and Frankie will run you through some of the highlights from the announcement, and then we'll open up the phone lines for Q&A. For the Q&A, I would note that this is a trading update, and we will be more limited in our ability to discuss some of the details at this stage, but we will, of course, be publishing our audited full year results on the 2nd of March with our normal disclosures. With that, I will hand over to Colin.
Good morning, everyone. Colin Godfrey, CEO. I'd like to start by saying how very pleased I am with the performance of the business, given the challenging macroeconomic backdrop that's impacted our market. The quality of our real estate portfolio, resilience of our income, backed by a diverse array of high caliber customers, point to this resilience. This, of course, is the bedrock on which our business plan is taking effect. The continued implementation of our strategy is now clearly delivering as we take advantage of strong market fundamentals. We've increased development activity, producing new prime investments that enhance our investment portfolio and grow our income. With the market.
While lettings remain strong at 38 million sq ft, the third highest on record, that level was constrained by available supply, with vacancy remaining at near record low levels of only 2%, reminding you that most of the near-term deliverable land is carefully controlled by investor developers, not trade developers. The end of June market high in terms of investment values. Of course, the increased cost of capital, driven by interest rates responding to the hike in inflation, produced a significant outward movement in yields. That resulted in a market slowdown in investment transaction volumes in the second half, which has been well reported. Prime yields now stand at around 5% for 15-year income.
With inflation coming under control and the 10-year yield rate softening, it does feel as though most of the correction is behind us, noting that there is significant dry powder waiting to invest into the sector. Whilst we don't have a crystal ball, the mood music on the street does point to more optimism toward the second half of this year. To our operational performance, and more particularly, how we've successfully captured the strong operational market opportunity through our development activity. I'm really pleased to report that we've delivered an additional 23.3 million sq ft of extra contracted rent through 3.1 million sq ft of development lettings secured in 2022, all of which has remained within our guidance range of 6% to 8% yield on cost.
The development yields we're achieving remain attractive against the prime investment yield and are improving now that construction cost prices have stabilized, we continue to capture that strong rental growth that we're seeing in the market. It's worth reminding you that the option structure through which we control most of our land is capital efficient and allows us to benefit from buying in land at softer land prices in the current market after securing planning consent. We made 2.9 million sq ft of development starts in 2022, of which 82% has already been let. There's the potential to deliver further income growth of around GBP 5 million from the circa 400,000 sq ft of developments currently underway and available to let. We also completed the development of an 83,000 sq ft small unit scheme at Littlebrook in the period.
In terms of asset management, we continue to generate value and grow income with GBP 5.1 million added to our rent from rent reviews and 1 lease renewal conducted during the period. Noting that of the 34% of our portfolio subject to lease events, we achieved a 7.6% increase in passing rent. Benefiting from underlying strong rental growth, which I mentioned earlier, our portfolio ERV grew 9.1% during 2022, resulting in an increased reversion of over 19% at year-end. We also exchanged contracts on the sale of the new developed small unit scheme I mentioned earlier at Littlebrook, in line with the year-end valuation level, and we're continuing to pursue investment sales in support of our development CapEx requirements.
This is in line with guidance, and you should therefore expect to see further activity in the first half of 2023. With that, I'll now hand over to Frankie, who'll provide more detail about our capital performance, balance sheet strength, and income characteristics. Frankie.
Good morning, everyone. Moving on from the strong operational performance, I will run through some of the information published on our portfolio valuation, and balance sheet this morning. In some ways, the characteristics of our portfolio have been designed for the more turbulent of economic periods.
Colin has spoken to the growth in contracted income being driven by our operational activity, with our development performance especially justifying the increase to our development delivery targets for 2022. Overall, when bringing together the asset management and development lettings, our contracted rental income has risen by just under 15% across the year, now standing at GBP 224 million, and it's that income growth that will be supportive of our future earnings growth. The resilient nature of that income and our customer base has allowed us to continue to collect 100% of our rents, and we have no customers on any sort of payment plan. Now turning to the portfolio.
Given the level of interest from the market, we have included a high level update on our portfolio valuation, at that 31 December 2022 within today's trading update. We will be providing greater detail in line with our usual disclosures made for our full year results in March. In terms of the overall portfolio performance, we have seen a like-for-like reduction in investment asset values of approximately 15% across the 12 months, which included a like-for-like reduction of 20% across the second half. For context, this compares to some of the key monthly indices demonstrating annual falls of between 18% and 21% across 2022. With our performance primarily reflective of the high quality nature of our assets, along with the significant rental reversion inherent within the portfolio.
This takes the overall portfolio value to GBP 5.1 billion at December 2022, compared to GBP 5.5 billion at December 2021. Rental growth and development gains have both had a mitigating effect against the yield expansion experienced of approximately 120 basis points over the 12 months, taking our equivalent yield on the portfolio to 5.3% at December 2022. As a result, we expect the EPRA NDV of the company to be in line with that of consensus, which is currently a little over 180 pence per share. With the volatility of the second half, preserving the balance sheet strength was a real focus, which included a more cautious approach to capital allocation.
Consequently, we moderated our speculative development activity in Q3 and Q4 of last year, and therefore we're likely to deliver just under the GBP 350 to 400 million target in terms of deployment into development for 2022. A combination of our balance sheet positioning, combined with this moderation in CapEx, means that even with this adjustment to asset values, we closed the year with an LTV position of 31%, which is the lower end of our medium-term target range of 30% to 35%. In addition, we opted to increase our liquidity levels during the second half, via a GBP 200 million top up to our revolving credit facilities. As such, we closed the year with total available liquidity in excess of GBP 500 million.
The increase in our CF was executed on the same terms of our existing facilities, leaving the overall debt book in a position with approximately 5.5 years average term to maturity, 99% of drawn debt either fixed or hedged, and with an average cost of debt of 2.6%. To conclude, through a combination of the high quality nature of our portfolio and the strength of our balance sheet, we are effectively weathering the volatility in the investment market and maintaining our ability to deliver value to shareholders through the implementation of our strategy. I will now hand you back to Ian.
Brilliant. Thanks, Frankie. I, we'll now open up the line to Q&A. Jess, if you'd be kind enough to do that. It'd just be great if you could just announce the, your name and the institution you're calling from, when asking a question, please.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally, as you'll be advised when to ask your question. Once again, that's star one if you would like to ask a question. The first question comes from the line of Alastair Fein from Bank of America. Please go ahead.
Hi, good morning. I just have one question on the statement when you said you're seeing currently early signs of stabilization in investment market. Can you give me a bit more color as in what kind of signs you are seeing exactly to feel more comfortable in the coming 12 months? Thank you.
Sorry, When you are asking about stabilization, are you talking about cost price stabilization or?
Oh, no. It's just.
Yeah.
on the first page of the CEO comment. There is a very general line in the second paragraph. You said, "We are seeing encouragingly early signs-
In, in, in invest-
of stabilization in the investment market.
Yeah.
Yeah.
In this part. I think obviously we saw, you know, some of the biggest yield shifts ever experienced in the second half of last year. It's been very acute. I think one of the encouraging things is the fact that the valuers have moved very fast, unlike during GFC when it was a very long drawn out affair and the general feeling was that the value was behind the curve. Whilst there was limited evidence in the, you know, the valuers feel there is sufficient evidence such that they're not having to put material uncertainty clauses on valuations. We have seen, I think, increased buyer interest. There are more transactions happening, and we are seeing more buyers running the rule over opportunities.
We know there's quite a lot of dry powder in the market, waiting to get deployed into industrial logistics. So, you know, whilst we're not calling the bottom of the market at this point in time, and look, there could be some further falls to come, I would sort of, kind of describe it as brackish water we're in right now, and we may see some contradictory evidence on the upside and the downside for a while. It does appear that values are stabilizing, and that the expectations of buyers and sellers are coming closer together, which is why I talk to, you know, the general feeling in the market that the second half of this year is likely to be one of greater degree of optimism.
Again, probably a bit more uncertainty in the first half.
All right. Clear. Thank you. The next question comes from the line of Hemant Kotak from Green Street Advisors. Please go ahead.
Hi, good morning, guys, and thanks for the trading update. Just a couple of questions from me, please. Just to start with, in terms of the development pipeline, you've given a guidance of 6% to 8% on costs. Can you just tell us, just looking back, what that GBP 23.3 million equates to on a weighted basis, please? Looking forward, what you expect the next year to be on a weighted basis because 6%-8% is obviously pretty wide range, and obviously 6 on 5 is not too much of a development profit on cost whereas 8 is.
On the first question there, the weighted average was in the low to mid-60s on the delivery for 2022. Basically, Hemant, obviously the cost price inflation that we saw had brought that down from a midpoint of around about the 7% mark. We are now seeing, as we've mentioned here, a cost price stabilization, and some of the costs are actually softening a little bit, which is good news. Obviously against the backdrop of stabilizing yields and with continuation of rental growth in the market, we are now seeing the yield on cost starting to improve and moving back up towards that 7% mark again.
In fact, the last couple of transactions that we've done have been around the 7%. You know, there is a bit of a delayed reaction there, but we're hoping that we're clawing back into that now and that the yield on cost number will start to improve. It is still obviously highly accretive and very attractive with a backdrop of a 5% prime investment yield in the marketplace.
Thank you. That's very clear. And then just another question in terms of your capital allocation and your LTV. Obviously you've managed your debt well. Your LTV is within range and on the lower end. If we see some valuation declines, obviously that could brush up against the top end of that. And given the fact that you've got, you've got these CapEx for development, is there an ability to sell assets a bit faster than what you have done?
We might double team on that one. The first thing, if we look back into last year, we had a sales program mapped out, and of course the second half was really quite acute in terms of the slowdown in investment activity and the value declines. We didn't feel it was the right market to be selling into. The only people that were selling into the second half were distressed sellers. We didn't feel that would deliver good value for our shareholders, and we were under no immediate pressure to do so either. We've essentially checked out powder dry.
You saw we've done 1 small investment sale in the second half. We are currently undertaking a process of investment sales, so you should see some further activity in the first half of this year. I think the key thing to mention here is of course, is we do have the best quality investment assets, which we believe are, you know, as liquid as any other, if not more liquid than any other investments in the marketplace. We do believe that we have the ability to dispose of investments to meet our CapEx requirements.
Of course, we also have the ability to flex in terms of our CapEx expenditure in the development portfolio, which is, you know, highly, you know, we can flex the timing of that to our own requirements, subject of course to the contracts we've already placed.
Thank you. That's clear. One last question if I may, please. You've obviously had a good year for rental growth, ERV growing at 9%. Obviously inflation was high as well and arguably that was slightly below inflation. If inflation is gonna be relatively high this year as well, it's obviously easing. Where do you expect rental growth? It's early in the year, so it's obviously difficult to say, but are you expecting another good year of rental growth given that some of the development has switched off and the supply is relatively low?
Yeah. The short answer is yes, Hemant, we do. I think one has to apply a little bit of caution around the backdrop of the macroeconomic position. you know, we don't know what... I mean, you know, if I had a crystal ball, I could answer you more specifically, but we don't know when or if we're gonna enter recession. I think the expectations are we will. you know, how deep and long that will be, the impact on UK PLC, how that might affect occupied demand. When we look at the backdrop of the market, we talk about these, you know, these structural tailwinds which, you know, continue very favorably for us. you mentioned it yourself, you know, supply is still at a very, very low level at 2% vacancy.
The land delivery and development is being controlled by investor developers. It is very carefully controlled automatically by the market, which is important. Of course, a lot of developers have eaten up their near-term planning consents buckets significantly as well, and the planning system isn't very flexible, so it doesn't naturally produce lots of planning consents if that's what the market desires. It just doesn't work that way. You've got these natural inbuilt breaks into the market to prevent oversupply. I think so long as we don't see a very sharp reduction in demand, and we're not seeing that right now because occupation demand remains very, very strong, then I think we will continue to see healthy levels of rental growth.
I do believe that the levels we've seen in recent times have been unsustainable in the long term, so it must slow a little bit. Of course, inflation is coming down quite quickly. I think you might well see an overlap at some point where the level of rental growth in our market actually sort of, you know, is in equilibrium with the level of inflation. I think in the medium term, because of those structural benefits we have in our market, in the medium term, we do have the ability to outstrip inflation, but of course, that's not gonna happen immediately.
Great. That's great color. Thank you very much.
We currently have no questions in the queue. As a reminder, please press star one if you would like to ask a question.
Great, Jessica. If there's no further questions, I think we'll probably wrap things up.
Yes, there are no further questions in the queue.
Look, everyone, thank you so much for taking the time to review our trading update this morning, join us on the call. If you have any follow-up questions, do feel free to reach out to Ian, and we'll hopefully be able to answer those to you later, noting that we can't give too much granular detail ahead of the second of March, but hopefully, we'll have some further detailed information for you. Really appreciate you taking the time to join this morning. Good morning. Bye-bye.
Thank you for joining today's call. You may now disconnect your lines.