Good morning and welcome to Tritax Big Box's full-year results presentation for the financial year ended 31 December 2023. I'm Ian Brown, Head of Corporate Strategy and Investor Relations. Before I hand over to our Chairman, Aubrey Adams, a few points to note. Firstly, this presentation is being recorded, and a replay and transcript will be available on our website later today. Secondly, there will be a live Q&A session for investors and analysts after the presentation. You can submit questions via the text box on the presentation viewer, or if you would prefer to speak with the team, please ensure you use your phone to dial in using the details in this morning's announcement. Thank you.
Good morning everyone, and welcome to Tritax Big Box REIT's annual results presentation for the year ended 31 December 2023. 2023 was another successful year both operationally and strategically. Against an uncertain macroeconomic background, we have continued to generate income growth, and the quality and resilience of our investment portfolio and customer base are reflected in a tenth successive year of 100% rent collection. The quality is further evident through the asset sales we have achieved at attractive valuations despite a more challenging investment market. We have successfully recycled capital into higher-returning opportunities in our development pipeline and investment acquisitions with strong value creation potential. We have also carefully managed the balance sheet to ensure we are prudently financed and can respond as attractive opportunities present themselves.
As we enter 2024, we're confident in delivering our strategy, and we are well positioned to take advantage of the opportunities both inherent within our business and from an increasing number of prospects in the market. The group has good potential for long-term growth, supported by long-term structural change in the logistics/real estate market, the reversal in the portfolio which is now at record levels, and the benefits of our asset management and development programs. Against this positive backdrop, we're pleased to announce in February that we had reached agreement with the board of UKCM for a possible all-share offer. While we work towards a potential firm offer, we are restricted in what we can say by the takeover code. However, we believe the offer has a compelling strategic and financial rationale by bringing together complementary logistics-oriented investment portfolios with a shared focus on resilient and growing income.
We hope to update you further on this in due course. I'd also like to take a moment to thank everybody at Tritax for their support throughout the year. Our ability to deliver consistently against our strategy is testament not only to the quality of our portfolio but also to the hard work of our team. I will now hand over to Colin and Frankie for the formal part of the results presentation.
Thanks, Aubrey, and good morning everyone. As Aubrey said, our key message today is that we continue to make further excellent progress in delivering our strategy. I'll start by setting the scene, Frankie will then walk you through our financial results, and I'll return with a strategic and operational update. Ian will then coordinate Q&A. Before we start, I want to echo Aubrey's thanks to the team at Tritax who have been critical to delivering the performance that we present today. On behalf of the management team, I would also like to thank Aubrey and the board for their support and input over the course of the last year. 2023 was a year in which we continue to produce strong operational performance. We delivered attractive earnings growth through active management of the portfolio and efficiently deploying capital by recycling disposal proceeds into higher-earning assets.
There are signs that the investment market has stabilized, while the occupational market has remained resilient, supported by long-term structural drivers. We've prudently managed the balance sheet to support our strategy, our ongoing growth, and capitalize on opportunities offered by our market. Despite the more challenging macroeconomic and geopolitical influences that we've seen over the last two years, our business continues to deliver. We're doing what we said we would do: delivering our strategy and driving strong operational performance. I'll now hand you over to Frankie to run you through the financial results.
Thank you, Colin, and good morning everyone. Our results for the full year 2023 once again demonstrate good operational performance, resilient income growth, and our disciplined approach to balance sheet management. Encouragingly, we saw stabilization within the investment market as we moved through the year, with our own portfolio values broadly stable across 2023. We were particularly pleased with our disposal activity, which has allowed us to recycle capital into more accretive opportunities, some of which we will cover within this presentation. Turning to the key financial highlights: our Adjusted EPS has risen by 3.2% to GBP 0.0775, driven by development completions and like-for-like rental growth. In line with our policy, we have declared dividends equaling GBP 0.073 per share, a 4.3% increase over the year. Our EPRA NTA has seen a modest reduction of 1.8% to GBP 1.772 per share.
Our balance sheet remains in great shape, with our LTV largely unchanged at 31.6%. As the right-hand chart shows, our portfolio ERV continues its strong progression. The rent secured within our development pipeline, along with the portfolio rental reversion, means that our current portfolio ERV sits a combined 27% ahead of today's passing rent. This provides us with great near-term visibility over the future growth in net rental income, and we'll come back to this in more detail in a moment. You can see here the progress made during the period in terms of delivering growth in net rental income, and this supports the underlying growth in our dividend. The group net rental income increased by 7.8%. Our in-year development completions were a significant contributor to this growth. The total contracted annual rent closed the year at GBP 225.3 million.
An important point to highlight at this stage is the fact that there was no DMA income recognized during the year. DMA income, by its very nature, is more variable, and it's driven by the timing of specific development projects. It's important to recognize this when looking at the makeup of earnings growth this year. As a result of a fall in operational costs, we record our lowest ever annual EPRA cost ratio of 13.1%. Headline adjusted earnings per share was in line with the prior period at 7.75p, remembering that in 2022 this included over GBP 9 million of DMA income. Consistent with the previous periods, we also looked through to our adjusted earnings excluding additional DMA above GBP 4 million, which we consider to be our recurring earnings metric. So adjusted EPS excluding additional DMA grew by 3.2% over the period.
Finally, the 4.3% increase in our dividend to GBP 0.073 equates to a payout ratio of 94%. Here I've stripped out the DMA income entirely so you can see the strong underlying growth in adjusted earnings, which stood at 6.2%. On the left, we start with the 2022 position of GBP 0.0779 and remove all DMA income to reach GBP 0.073. In the dashed box, you can see we delivered growth from our investment portfolio, which was driven by 3.6% of like-for-like rental growth. Then with a significant element coming from development completions, which added GBP 19 million to net rental income.
This was partially offset by our net disposal activity. A reduction in admin costs driven by a 15% fall in the investment manager fee and the increase to net finance costs due to the slightly higher average cost of debt and average indebtedness are the other key moving parts here.
This brings us to the GBP 7.75p per share, as shown on the right, which, as I said, is an attractive 6.2% increase on a like-for-like basis when compared to last year. Now we turn to capital value performance in greater detail, which demonstrates a yield environment which stabilized through the year. The equivalent yield on our portfolio expanded by 30 basis points to 5.6%. As you can see from the middle chart, our own ERV growth has been consistently strong, increasing by 6.9% through 2023, with a large part of our portfolio in core regions which have performed the strongest. Finally on the right, this translated into valuation performance, which has stabilized over the course of 2023 with just a 0.7% reduction.
As we will come on to highlight, development profits and income growth have been helpful mitigants to the yield softening we experienced. We're also closer to the point at which we can capture any reversion, and therefore this is also reflected within our 2023 yield profile. As I mentioned in my opening, we have maintained our disciplined approach to balance sheet management. In terms of key balance sheet metrics, our overall portfolio value is largely unchanged at GBP 5.03 billion. As we suggested, we have maintained a neutral net debt position while investing over GBP 300 million into opportunities across a combination of our development pipeline and two investment acquisitions, which Colin will touch on in a moment. With other funding options less attractive during the period, we achieved this by delivering GBP 327 million of disposals at or above book values, which allowed us to recycle capital accretively.
This also means that we report a stable loan-to-value of 31.6%. Our EPRA NTA has modestly reduced to 177.2p, and our total accounting return driven by income stood at 2.2% for the 12 months. This slide sets out in detail the components of the movement in EPRA NTA. A key point to highlight here is the split between the capital performance from operations, shown in the left-hand box, and the one-off charge recorded in relation to the B and C shares, which you see on the right. Our actual portfolio performance was very resilient, with some small write-downs across our investment assets. These were in part offset by growth across our development assets and our land pipeline. Alongside operating profit and dividends paid, this led to a 0.8% reduction in NTA.
Just to remind you of some of the detail surrounding the B and C share buyback: the B and C shares were a 13% interest retained by the Symmetry management team in the Symmetry development portfolio. We felt that the timing was right to buy back these shares early, which extinguished a future balance sheet liability and generated a one-off accelerated charge to NTA of 1.8p per share. As highlighted at the time of our interim results, this additional charge translates into an approximate 1% reduction in NAV. Having fully extinguished the B and C shares, shareholders now benefit from 100% of the future profits attached to our attractive development pipeline. It's also important to note that we have maintained the strength, diversity, and liquidity of our debt financing, which continues to support our strategy.
During the year, we refinanced our largest revolving credit facility, which was due to mature at the end of 2024. In doing so, we agreed a new, sustainability-linked five-year RCF, increased the size of the facility to GBP 500 million, and agreed this on the same margin as the previous facility. This new RCF now matures at the end of 2028, and subject to lender consent, may also be extended to 2030. Elsewhere, our available liquidity remains in excess of over GBP 500 million. Our average cost of debt remains attractive at below 3%, of which 96% is either fixed or hedged. We continue to report interest cover and net debt to EBITDA ratios, which comfortably support our Baa1 stable rating from Moody's. Importantly, we now have no refinancing events until the middle of 2026.
Now a familiar slide, but one which highlights how we are continuing to convert our land pipeline into growth in contracted income. This rental income bridge illustrates the potential we have to grow today's passing rent from GBP 270 million, as shown on the left-hand side, to an estimated GBP 655 million, shown on the far right. Moving from the left, GBP 7 million is attached to current vacant space. We have assets under construction with lettings also attached, totaling GBP 7 million. We have a further GBP 16 million of potential rent, which is attached to assets under construction, which are currently unlet. We do, however, have GBP 8 million agreed and in solicitor's hands. Looking ahead to our anticipated starts over the next 12 months, we have a potential GBP 22 million of rent attached to these assets.
ERV growth has led to an improved mark-to-market rental position, totaling GBP 45 million of further opportunity, and Colin will set out a possible timeframe over which we could capture this reversion. Taking all of this into account, this gets us to the terracotta bar setting out the total embedded opportunity at GBP 313 million, which is some 44% ahead of today's current passing rent, the vast majority of which is available for capture over the next 2-3 years. Moving further out, we continue to progress our near-term and future development sites through the planning process and have added two new sites to the portfolio this year to replenish our pipeline. To remind you, this significant opportunity assumes no future rental income growth beyond today's ERV level. Finally, I want to finish by outlining some financial guidance for the year ahead.
We will be looking to maximize the performance within the current portfolio, which includes driving income growth through that current reversion, but also looking to continue intelligently rotating capital into more favorable opportunities. Our disposal guidance for 2024 is GBP 100 million-GBP 200 million. While we will target the higher end of this range, this will remain subject to the level of investment opportunities that we see. We expect our capital deployment to be focused on development once again, and for 2024 target development CapEx towards the higher end of our GBP 200 million-GBP 250 million range, all targeting an attractive 7% yield on cost. Our prudent management over the last few years puts our balance sheet in a strong position, and this supports the business with good optionality around its future funding needs.
Given the deferral of the DMA project previously mentioned, from 2023 into 2024, we therefore expect to recognize DMA income this year in excess of GBP 8 million. With a strategy founded on income quality alongside a highly flexible growth engine through development, the total embedded opportunity for income growth being 44% above today's passing rent gives us confidence in producing attractive levels of dividend growth as we move forward. That concludes the financial review, and I shall now hand you back to Colin. Thanks, Frankie. Frankie's described our resilience and how we're financially well-positioned for the future. I'll provide an update on current market dynamics, take a closer look at how we are applying our strategy, and explore the significant growth opportunity that underpins our positive outlook. The industrial logistics capital market has been through a challenging 18 months, with transactional volumes down 40% on 2022.
But the investment market is now showing signs of price stabilization, with the prime yield holding at 5.25% in the second half. Continued attractive rental growth, weakening inflation, and the prospect of interest rate cuts later this year are giving rise to increased optimism. Starting top left, after three years of exceptional demand, 2023 saw take-up revert to pre-pandemic levels, encouraging given the more challenging economic environment, which negatively impacted some business decisions in the year. Looking forward, demand remains well-supported. Across the market, there was just over 11 million sq ft under offer at the year-end, and inquiry levels for our development sites remain very healthy. If the macroeconomic picture improves this year, we would expect to see an increase in overall lettings. As shown top right, low vacancy, buoyant demand, and strong rental growth encouraged a wave of construction starts in 2022.
In response to an increased cost of capital and higher vacancy, the market demonstrated discipline by reducing the pace of new construction starts in 2023, and this has continued in the first few months of 2024. At 5%, vacancy remains low historically. Occupational market dynamics remain healthy, and we've seen further rental growth across the UK but differentiated regionally, as we see bottom left, with attractive levels in core markets, but noting a particularly strong showing in the northwest. As the map bottom right shows, we're well-positioned to take advantage because our investment and development portfolios are weighted in favor of the regions which are delivering the strongest growth. This opportunity is core to our strategy, which is carefully designed to capitalize on the long-term structural trends that underpin our market. We have deliberately built a portfolio focused on high-quality assets attracting great customers, which provide compounding income.
This represents 92% of GAV and is the largest logistics real estate portfolio in the U.K. This quality also provides resilience through economic cycles. We add further value to our portfolio through direct and active management and sell assets that we believe have reached their full potential. We reinvest the proceeds into higher-returning opportunities, particularly within our land portfolio, the largest in the U.K., where we are developing at a very attractive yield on cost while maintaining a disciplined approach to capital allocation. Running through all elements of our strategy is ESG, and we've made further excellent progress in delivering against all four ESG pillars. We're delivering sustainable buildings fit for the future by further integrating our ESG targets across the investment and asset management lifecycles, including through our due diligence and asset selection. Power resilience and carbon performance are now key considerations for our customers.
So we've increased solar capacity with 17.4 megawatts operational today and 20 megawatts in the near pipeline. We're rolling out more EV charging, now available across 54% of the portfolio, and we're working ever closer with our customers on their decarbonization plans. We're also enhancing biodiversity, well-being infrastructure, and adding to the communities around our assets. To accelerate this, we've established the Tritax Social Impact Foundation, which will help us deliver more and allow us to better measure our social impact. Our data-driven approach supports clearly defined targets. We measure our progress against these and consequently take pride in achieving the market-leading ratings that you can see here. We're implementing our path to net zero across the business. We now measure carbon risk upon investment acquisition and then build in our customers' carbon objectives into our asset management plans.
For developments, we've updated our low-carbon baseline specification to achieve our targets more quickly. I said earlier that the first key element of our strategy is quality in our buildings, customers, and what we do as a team. Through a more unsettled macroeconomic period, quality is more important than ever. Our buildings are modern, well-configured, and flexible. They have high EPC ratings, are well-located to serve their markets, and are often critical to our customers' operations. We have a wide range of building sizes from 2.3 million sq ft down to 12,000 sq ft, so serving both the first and last mile of our customer supply chains. Our customers, as shown here, represent globally familiar brands. They're typically large and strong across a diverse range of sectors.
We have a good mix of rent review types, noting that we purposely increased our exposure to hybrid and uncapped open market rent reviews from 36% in 2021 to over 42% today to enhance overall returns. These factors underpin the resilient and growing income characteristics of the portfolio, reflected in 100% rent collection and zero voids in our investment portfolio over the last 10 years. We don't rest on our laurels. We're always trying to add further value through our active approach to management, even to a high-quality portfolio such as ours. Starting with disposals. Despite challenging market conditions, we sold six assets above book value for a combined GBP 327 million. This was achieved through an in-depth understanding of buyer appetite, strong relationships, and an unrivaled track record of transactional performance.
The assets varied in location, age, size, and lease length, and were selected based on risk and future performance expectations. Through these disposals, we have crystallized value at a blended net yield of 4.3%, reinvested these proceeds into highly accretive development opportunities with a current yield on cost target of around 7%, acquired attractive urban logistics assets with higher reversionary potential, and maintained balance sheet strength. We have acquired two prime urban logistics parks at Birmingham and Enfield in London for GBP 108 million at a blended initial yield of 4.2%. We've commenced a program of upgrading the estates and have further asset management initiatives identified. We have the potential to increase the passing rent by 50% and are making good progress. At Birmingham, we've let one vacant building and extended the lease of another, while at Enfield, we have let the only vacant building.
We are already exceeding our ERV assumptions at the time of purchase and expect to achieve a blended running yield of 5.5% by the end of the year. This type of asset complements our existing big box weighted portfolio and enables us increasingly to offer our customers an end-to-end solution for their supply chain networks. In addition to optimizing the portfolio through acquisitions and disposals, we continue to actively manage assets, seeking ways to continue to grow their income. Starting top left, during the period, 19% of rents were subject to review, with a further 3.5% held over from 2022, totaling 22.5% of rents in 13 rent reviews. The fixed and inflation-linked ones were annual reviews, whereas the open market and hybrid reviews were five-yearly. Together, these reviews generated a GBP 4.9 million increase in annual passing rent, reflecting annualized like-for-like rental growth of 3.6%.
With market rents continuing to rise at attractive levels, our rental reversion increased from 19% at the start of 2023 to a record 23% or GBP 51 million at the year-end, as shown top right. Turning to the bottom left, we have a healthy cadence of reviews and expiries, providing opportunities to grow our income. 27% of rents are due for review this year, and 3% are subject to lease expiry, so 30% in total. Looking forward, we also have a healthy level of rents subject to review, particularly in 2026 and 2027. To provide you with further guidance on this, as outlined bottom right, we have the potential to capture around GBP 40 million of income growth through rent reviews and lease expiries by the end of 2026.
We've been busy adding value within our investment portfolio, and we've also been very active in the third key element of our strategy, our land portfolio. This has the potential to deliver over 42 million sq ft of logistics real estate over the course of the next decade and currently comprises 24 well-diversified schemes in key locations across the U.K. During the year, we completed the construction of eight buildings, totaling 2.2 million sq ft in six locations, all to EPC grade A.
Since June 2023, all of our buildings have been constructed to a minimum standard of BREEAM Excellent. Seven of these buildings, totaling 1.9 million sq ft, were either pre-let or let during construction. These development completions have added a further GBP 13.6 million to our contracted rent, and the vacant building at Dartford, Littlebrook, has the potential to add a further GBP 3.5 million in rent when let.
So that covers development completions in 2023. Let's now look at development starts in 2023. With investment market uncertainty and rising vacancy levels in the occupational market, we adopted a more prudent stance in 2023 with 1.7 million sq ft of development starts and were consequently below our medium-term guidance of 2-3 million sq ft per annum. Our 2023 development starts have the capacity to add GBP 15.6 million in annual rent once completed and let. In the year, we made six lettings, totalling 900,000 sq ft, securing GBP 7.8 million in rent, largely from buildings which completed in 2022. In addition, we placed three potential lettings in solicitors' hands, totalling approximately 900,000 sq ft, and which have the potential to add a further GBP 8.3 million to our rent roll. We're also seeing positive momentum on profit as rents continue to increase and construction costs reduce.
Our blended yield on cost has improved from 6.7% on lettings made last year to over 7% expected for our 2023 development starts. During the year, we also secured a further 900,000 sq ft of planning consents, increasing our planning consented land total to 6.3 million sq ft. Turning then to 2024. Occupational interest in our pipeline remains at record levels, and we have a strong level of occupier interest across our near-term development locations, with positive engagement on 8.4 million sq ft. Reduced development starts in the market are likely to help lower vacancy rates, and we expect a continuation of attractive levels of rental growth in the big box market. We're consequently targeting the mid-range of our 2-3 million sq ft guidance for 2024, backweighted in the year, but noting that this will remain flexible and subject to market conditions.
To conclude, we continue to make further excellent progress in delivering our strategy, having produced solid capital performance and continued attractive operational performance. Through our successful investment sales program and by maintaining financial discipline, we have maintained a strong balance sheet, modest LTV, no near-term refinancings, and a range of funding options. Our high-quality portfolio with strong ESG credentials generates attractive, sustainable, and growing rental income with embedded reversion. We're recycling capital from investment sales into development. This is scalable, flexible, and significantly enhances earnings growth for our shareholders. Structural change continues to benefit our market, with occupational demand remaining robust and controlled levels of supply supporting further attractive levels of rental growth. The investment market is demonstrating stabilization, and there is hope for improving economic conditions in 2024. With a strong balance sheet, we're well placed to take advantage of market opportunities as they arise.
Thank you for joining us. That concludes today's presentation, and I'll now hand over to Ian to coordinate the Q&A session.
Good morning, everyone. So thank you. We'll now turn to Q&A. Just as a reminder to ask your question, you've got two options. If you've joined us on the webcast, please do type your question into the text box on the screen. And if you've joined on the phone, you need to press star one on your keypad. What we'll do, we'll begin with a few questions that have come from the webcast whilst people on the phone get the chance to log their questions, and then we'll turn to the calls. The first question that's come in, I think it's come in from Rob Jones at Exane. He's asked three questions, the first being, given the rate of e-commerce penetration growth slowing in the UK, how much of a headwind is that for us?
Can we take that one first?
Yep.
Let's take them one at a time, then.
Yeah.
So the first thing is, I think it's been relatively stable in the high 20s. Obviously, it peaked as a consequence of COVID. If you look at the constituents of the market, actually, following Amazon's withdrawal a few years ago from the market significantly, it has, in the main, been quite broad, which is pretty attractive. Third-party logistics constituting 36% of take-up last year. And from memory, I think manufacturing was 28%, the two largest components. And Amazon is actually back in the market again, and we have quite a number of inquiries from Amazon across our development portfolio.
Great. So the second part of the question is, with the U.K. vacancy at 5.1% versus our portfolio at 2.5%, is this evidence of a bifurcation between prime and secondary assets, and how are inquiries for your big box assets holding up?
OK, well, the first thing to say is, I think that we have a really high-quality portfolio. We are highly cognizant of the importance of quality. I do think, into the face of a recession, that one has to be cognizant of weaker income from SMEs, by way of example. There are, of course, strong occupiers at the larger end and the smaller end of the market, but we do tend to find stronger balance sheet companies supporting larger-scale assets. I think on the scale point, we are still seeing really healthy levels of demand for larger-scale buildings. And in fact, I would say that the 500,000 sq ft plus bracket is probably the most attractive at the moment in the context of the relationship between supply, i.e., current availability in the market, and demand that we're seeing.
On our own portfolio, we're actually seeing quite a number of inquiries for larger-scale buildings.
Final question from Rob. He asks, We see increasing evidence of construction costs rolling and development margins improving. How does this affect your thinking on capital allocation between development and acquisitions?
Should I pick that one up?
Yeah, you can pick that one.
Look, I think it's important that we continue to appraise all options, all ways and means of deploying capital. For us, development and development IRRs are particularly attractive. We've increased our yield on cost target for our 2024 development starts to 7%. And I'll also quote that if we look at our current development pipeline and our near-term starts within the next 12 months, the incremental yield on cost from that is around 11%. So the 7% number is an all-in cost. The incremental yield on cost on that particular part of the portfolio is around 11%. So that is particularly attractive. I think when we look at the investment markets, we do see opportunities growing, potentially, as we move through 2024, but that will be opportunity-driven, as it always has been for us.
Great. The next question is from Andrew Sheridan at Shore Capital. He asks, how did land values per acre move during 2023, and can you tell us how plans to add more sites are progressing? He also asks, given the strong rental growth in the northwest, can you remind us of the current delivery projections for Parkside East and likely rent contribution?
OK, well, the first thing to say is that land values have been stable during 2023. Obviously, we continue to look for opportunities where we see value to add to our future development pipeline. Typically, they would be several years out. Turning in particular to the northwest, where rental growth has been particularly strong, as you saw in our presentation, Parkside East, we are targeting around 2.3 million sq ft. That's a DCO-led application, which we would be looking to be on site around about 2027, so about three years away. We do have a couple of other sites, one at Wetherby and another site in the northwest as well, Wetherby around about 1.1 million sq ft, and another larger site of around about 3.5 million sq ft, which I can't say too much about at the moment.
But so quite active in the northwest, and the rental contribution from that will be obviously very healthy, but we're not giving any detail at this time.
Great. Look, as Aubrey outlined at the beginning of the session, we are in an offer period in relation to UKCM. We have had a number of questions regarding that, so we are very limited in what we can say. But Colin, do you want to make a few points in relation to that?
Sure. OK, so I would obviously point you to the 2.4 announcement. It would be a share-for-share deal, NTA to NTA. We do see the highly complementary relationship between the assets in the portfolio. There's a high-quality logistics component in the UKCM portfolio with around about 38% rental reversion. We've identified asset management opportunities. We believe that there are clear capital recycling opportunities, which we believe will be accretive, both in terms of investment and development assets. There will be clearly cost savings that would emanate from the transaction, and they would be set out in the 2.7 announcement should we reach that stage. And of course, one would expect to benefit from a stronger balance sheet with a lower gearing level. We've indicated around about 29% from the enlarged company. And of course, scale.
The transaction would give rise to a business with a GAV of around about GBP 6.3 billion and a market cap of just under GBP 4 billion, with the increased liquidity that would naturally flow from that.
Great. Look, let's turn to the phone. Jess, our operator, I think, will facilitate the Q&A on that. So Jess, would you mind taking our first question, please?
Of course. The first question, it comes from the line of Paul May from Barclays. Please go ahead.
Hi team. Thanks for the presentation and a good set of results. I won't ask anything on UKCM, hopefully. But just following up, I think all my questions are kind of linked to the last point you made on that. It's not related to that, but with regard to scale, if you look at your contracted annual rent on an annual basis, year on year is hardly moved because the capital recycling, as you've sort of highlighted a few times, basically offsets the growth. And I appreciate there's a timing differential there. You mentioned around capital deployment into development that you're pre-letting at the moment is only 17%, and so there's probably a risk to that moving forwards.
And certainly, with your marginal cost of debt of near 7% and probably a longer term of near 5%-5.5%, the accretion from using debt probably doesn't make sense either. So isn't the best opportunity now to be looking at acquisitions, so similar to what you've highlighted with UKCM, funded by equity, basically taking Big Box back to what it was originally set up to do and capitalize on, especially, as you say, scale matters? And that was a key point that you've just made on the UKCM deal. Thank you.
You OK taking that, Frankie?
There's lots in there. I mean, talking about the cost of capital point, but obviously, yeah, marginal cost of debt for us, from a floating rate perspective, is around 6%. From a term perspective, it's more like 5.25%-5.5%. I think against a day one yield on cost from development, a day one incremental yield on cost at 11%, the margins there are sufficient to warrant that development risk and provide attractive returns. That's a day one standpoint. Clearly, there is future income growth to come once those investments are up and stabilized. And from an IRR perspective, that's particularly attractive. So development continues to be an attractive way of deploying capital for us. Equally, from an investment standpoint, yes. We have recently acquired one particular asset in January of this year, an attractive day one yield with some embedded reversion.
And again, from an unlevered IRR perspective, we're getting pretty quickly into territory of sort of high single digits from a return standpoint. In terms of the opportunity and the landscape to deploy capital given incremental cost of debt, given our weighted average cost of capital, and given the relativity within our own portfolio and future returns, we absolutely feel that we can deploy capital well and deploy it accretively for shareholders as we move forward.
And just, sorry, following up on that, you mentioned a lot around deploying debt capital. Why no mention around deploying equity capital moving forwards, given that, I suppose, cost differential between debt and equity has closed materially, and the risk profile of equity is probably significantly lower, and you get the scale benefits that you eloquently highlighted from the UKCM deal?
Yeah, look, I think from a funding perspective, it's important to continue to evaluate all of the options that you mentioned. I think over the long term, we absolutely see equity, debt, and capital recycling as funding sources for the business. I think for 2023, we rotated capital particularly well. We're pleased with the investment sales. That was the best ways to fund the business through 2023. I think as we look forward, you're right, the options are becoming closer in terms of the attractiveness of the ways of funding the business. So it's about evaluating all of those in the context of the opportunity, and as we have done in the past, where we see opportunities to accelerate the value creation within the business, accelerate EPS growth, equity is absolutely something that we will consider and continue to do so.
Just slightly changed that, sorry, from the last question. The cost ratio, 13%, obviously looking very attractive relative to peers. Am I right that's likely to come down again, given where the NTA is at the year end?
Excuse me.
I think Frankie's choking at the prospect of bringing it down still further, Paul. I think given NTA has nudged down ever so slightly, Paul, I think it's fair to say that, yes, we'll expect marginal improvement on the 13% position as we move through 2024.
OK, thank you very much, Chris.
Thanks, Paul.
Lena. Can I just make a quick comment? Alison Sun from Bank of America. Please go ahead.
Hi, Moni. Two questions from my side. First is on the valuations, because we noticed there's an acceleration of value decline in the second half. Can you give a bit more color on what's going on at that time, and do you think the trend will continue into the first half of 2024? Second question is on the urban logistics. So I wonder, besides the UKCM portfolio, do you intend to even buy more after that? And if that's the case, what's your acquisition criteria, if there is any? Thank you.
Thank you, Alison. So the first point you make, yes, there was fragility in the investment market in the second half of 2023. We saw lower transactional volumes. There was very little liquidity and price discovery. And I think this was really a delayed reaction to the macroeconomic position and the expectation for improving market, particularly in the context of inflation, which was really taking longer than people expected. However, we did approach the Christmas period with a much more buoyant mood, and I think that's carried into the early part of 2024. And that's really what you've seen in the stabilization of values. We believe that the market is in a position of stability right now. We're not really expecting much, if any, further softening of values in the market. We do expect to see probably some hardening of values during the course of 2024.
How much remains to be seen. But so we do see upside potential during the course of this year. Turning to the second component of your question, urban logistics, well, as we mentioned in the presentation, having sold GBP 327 million of investments during the year above valuation, we did choose to invest GBP 108 million into two urban logistics parks, one in Birmingham and one in London. And the reason we did that was because we saw a change in the attractiveness of those. When London urban yields were, for instance, down into the twos, we didn't see value in that market. The backsolve against where rental growth would have to be year-on-year consistently didn't make sense to us at that time, against the relative performance of big box assets and the growth that we were seeing coming through there.
And by the way, I think that the big box rental growth has been far more sustainable levels. We saw pretty explosive levels of rental growth in London, 55% growth in about 2 years at the prime end of the market. We said that it wasn't sustainable, and that's proved to be correct, because London rental growth has come off very significantly. It's pretty flat. I think it was 4% across the board, but actually on the west side at the prime end of the market, flatter. And I think, therefore, once the change in the cost of capital impacted and we saw yields move out, we saw urban logistics as a much more attractive proposition. And that's why you saw us make those moves. But they were every transaction we look at will be considered on its own merits. We're not setting ourselves any targets. We're looking for value.
Of course, we continue to create small box urban logistics investments in our own development activity.
Thank you. The next question, it comes from the line of Venci Ilyev from Kempen. Please go ahead.
Yeah, good morning. Thank you for taking my questions. First one on the April like-for-like. So we report 3.6%. If I'm not mistaken, that's more or less just in line with previous years. So could you perhaps add a bit more on the moving parts?
Yeah. So within that, I think slide 23 lists the reviews that have been set within the year. So about half of our portfolio is inflation linked, and typically they are a combination of annual and five-yearly reviews. And the inflation-linked reviews do come with caps and collars. So the average cap on those sits at about 3.7%. So with regards to the capture of income from that part of the portfolio, whilst it provides that sort of regular inflation-linked income for us, there is that natural ceiling on that. The bit where I think we're particularly pleased this year with the way we've captured that income growth and the consistently strong ERV growth that we've witnessed is through the open market rent. So about 40% of our portfolio is linked to open market. These are five-yearly backward-looking reviews.
And we've averaged around a 30% cash-on-cash increase on the reviews that we've settled with regards to that. So broadly, a 6% per annum increase. Now, I suppose overlaying all of this is the frequency of the reviews. So again, page 23 highlights that not all of our portfolio reviews every year. So we don't have the ability to move the like-for-like on in sequence with that ERV growth necessarily. So it's about the makeup of the reviews and the frequency of the reviews in any one given year that's going to underpin and generate that April like-for-like rental growth figure.
OK, thank you. And then there's a slide where you mentioned that you have 23% reversion, and you expect to capture 78% in the next three years. So just that by itself implies that you will be able to increase rents by 6% annually. Is that the right way to look at it? So in that perspective, do you expect like-for-like to move from 3.6%-6% or even above?
Yeah, so there'll be an upward trend subject to the capture of that ERV. We're not quoting a kind of forecasted ERV like-for-like figure as we move through time. I think you're looking at that in the right way. I think the other thing that I would just caveat within that is there is some vacancy in there as well. So it would be subject to the timing and the lettings of those buildings with regards to the numbers that you've quoted.
So there is essentially a catch-up that is taking place where, obviously, as Frankie mentioned, there's a five-yearly backward-looking review process for open market rents. And while the market rents have been strong, we're obviously backward-looking over that time frame. And given rental growth has been particularly strong in the market in the last few years, we're looking to capture that, but in a rise, essentially.
OK, thank you. And then just one more question. It is on UKCM. You mentioned that there are capital recycling possibilities. I'm assuming that applies for the non-logistics assets. Could you shed some light on your expectations for how quickly you can dispose those?
I'm afraid we can't say any more on that for the time being. The information that we've delivered on that element has been captured within the 2.4 announcement. To the extent that we subsequently make a 2.7 announcement, then further information will be contained within that statement.
OK, thank you. That's it from my side.
Yeah, sorry, we can't say any more for the time being. Thank you. Thanks for the questions.
The next question, it comes from the line of Tom Maylin from Goldman Sachs. Please go ahead.
Hi. Morning, Jens. Thanks very much for the presentation. You mentioned in an earlier question Amazon sort of coming back to the market, which is interesting. Can you give some color, perhaps, on what type of space that they're looking at, whether they're back in any material size? Appreciate some is sort of that classic big box you mentioned from your development pipeline. But do you know if their requirements are perhaps a little bit more broad than that?
Yeah, thanks, Tom. Actually, it's quite broad. We're currently seeing Amazon with requirements at the lower end of the spectrum in the urban market. But also, they've got some very large requirements out as well. So for the fulfillment centers, right the way up to sort of 2.3 million sq ft, similar design profile to the building that we have at Littlebrook. And that's a ground plus three structural mezzanine floors. And also, Amazon have a large-scale format, which is around about 1 million sq ft, 1.1 million sq ft. So they have requirements out for all of those buildings across several locations in the U.K. at the current moment in time, obviously looking through to what would now be sort of 2025, 2026 delivery.
Got it, thanks. And then maybe just a second question on mix of assets. You sort of increased the mix of value-add assets in the portfolio over the last couple of years. Now it's 31%, and understandably why, more recently, given what sort of stabilized yield on prime is and we're in a higher cost of capital environment? How do you see how do you want to see that mix evolve and settle at going forward, whether organically or not? And does changing that mix affect have much an effect on the cost of the business, either within the NRI margin or perhaps in terms of needing more people?
Yeah, thanks, Tom. So look, yes, of course, more active smaller-scale assets with more occupiers does mean that we need more people on the ground. It is a more active process of asset management. And that's something that we've been recruiting significantly into in recent times. But we do see it I mean, we do see it as a way of being able to generate I mean, as Frankie mentioned, the five-year review cycle, but being able to generate and prove rental growth more regularly throughout a 12-month period. But I think one needs to think about this as well in the context of the really high-quality, long-term income that we have in our business. We've got a very, very strong core to our rental income, noting that we've had 10 years of 100% rent collection in our portfolio.
We've never had a void in one of our investment assets that has come to lease expiry, having released all of those either to the incumbent tenant or immediately let to a new occupier. So I think the strength of that quality of income and our assets gives us confidence that we can bring in a proportion of more active smaller-scale assets to help drive that income growth.
That's great. Thanks very much.
The next question, it comes from the line of Callum Marley from Colitics. Please go ahead.
Hi guys, thank you for the presentation. Just two questions, please. I appreciate you might not be able to give too much information away here. But is it fair to assume a slightly higher development CapEx going forward, potentially above the GBP 250 million target, given the attractive 7% yield on cost and any potential cash you might generate this year?
Just say that one second. Yeah, the guidance as we stand is the 2% to GBP 250 million per annum run rate. And we're kind of signaling we'll be at the higher end of that. I think one of the joys in the way we position the development portfolio is that it's got a large degree of flexibility. So we can rein back if required, and equally, we can put the foot down slightly harder and deploy capital slightly faster. So it will be kind of whilst those are top-down kind of guidance ranges, this is a bottom-up approach in terms of occupier interest, where we think we can deploy it at start building in respect of that. So at the moment, we're looking towards the top end of that range.
Subject to how we see the year plan out on occupier interest, we can go hard on that and obviously push closer towards the 300 mark. That is something that we'll keep an eye on as we move through the year.
And I'll just add to that that we obviously review that in the context of occupier inquiries in our development portfolio, which is at an all-time high of around 20 million sq ft. We actually have, very encouragingly, 8.5 million sq ft of active engagement with potential existing and new customers. And we currently have over 1 million sq ft or around 1 million sq ft in solicitor's hands. So it's obviously marrying the development activity against the confidence we have in occupier interest in our development sites.
Got it, thank you. And last one. We saw a few weeks ago that one of your peers was getting involved in the data center space, which is quite a hot topic at the moment. Do you see any opportunities for these assets in your portfolio going forward?
Yes, we do. We've analyzed the portfolio, our existing investment portfolio. We think that around what's the sort of percentage we were talking about, Ian, in terms of the.
It's around about 10%.
20%.
10%.
10%, OK. We think around about 10% of the investment portfolio could be of interest to data center operators. I mean, it's very difficult to analyze that precisely. Obviously, power is a very important component part to that. So we have a power team that's looking at all of our sites in terms of the ability to increase our power delivery. We're very conscious of doing that in an environmentally sustainable way as well. So we're looking at bringing in solar into those sites. And of course, this segues into what we're doing in our development portfolio as well, where exactly the same credentials are really important in terms of high levels of solar and very sustainable buildings. But again, in our development portfolio, we're increasingly looking at the potential for data center operations in terms of our customer engagement.
And I think it's worthwhile just mentioning that for those that aren't in tune with this is that data center requirements are changing. I mean, they used to be driven very much by the financial sector. Lower levels of latency now in terms of the use for long-term data storage, gaming, and all these sorts of things is very much changing the locations of where data centers can be in the country. And I think that that sort of plays to our strengths in some of the locations where we have development sites and existing investment assets.
Got it, thank you.
The next question, it comes from the line of Matthew Sheridan from Peel Hunt. Please go ahead.
Thank you. Morning. Very quick one from me. I was just interested if you could provide a bit more color on the comment around falling construction costs.
Sure. I mean, yeah, it's really quite gratifying to see them coming down. I would say that it's around about 5%, maybe a little more in construction cost savings we've seen over the course of the last six months or so. I mean, labor costs have been fairly stable. The majority of that cost has come in cost savings come in through commodity prices having softened off. And we do have quite a lot of live proof points on this in relation to sites where we've got live tenders out and this competitive tendering. Obviously, we're also being very conscious of the quality of contractors that we are engaging with as well, given that there have been a couple of casualties in the sector more recently.
Thanks, Colin.
Thank you, Matthew.
Great.
Look, thank you very much. There's one important point of clarification I should make. I incorrectly attributed these three questions at the beginning of the webcast to Rob James from Exane. They're actually from Rob Sherdy at Green Street. So apologies for that to the two Robs. But there are no further questions, as I see it, either from the webcast or from the phone line.
In that case, well, thank you very much, everyone, for taking the time to join us today on the presentation and supporting the company. Enjoy the rest of your day. Thank you. Goodbye.