Good morning, everyone, and welcome to Grainger's full year results. 2022 was a very successful year for Grainger. Indeed, it's been a year of record performance. Record increases in our income, in our occupancy, and importantly, our near-term growth is secured, de-risked, locked in, and that's for the next four years. Grainger is in a strong position. We're ahead of the plan I set out six years ago, and we're in a position of strength to take advantage of the increased demand for renting homes in the U.K. The agenda this morning is that I'll take you through the highlights, the strong growth driven by new openings and our letting momentum, our pipeline, which is delivering and expanding, and the factors that make this business resilient in a period of economic uncertainty.
Rob Hudson, our CFO, will take you through our financial review, the growth in our income in 2022, the strength of our balance sheet, and how we have secured and de-risked our funding. He will also demonstrate how our secured pipeline translates to growth in earnings. I'll then give you more data on the market, our portfolio, new launches, and new acquisitions. We'll have an opportunity for questions, and we have a number of the Grainger senior leadership team here this morning. As the U.K. emerged from the COVID-19 pandemic, the foundations that we laid over those years enabled us to outperform. Demand for renting over the past year accelerated significantly across all of our key markets, and our high-quality homes and scalable operating platform have supported our record growth.
Our net rental income is up 22%, and our like-for-like growth is 4.7%, and our PRS occupancy is 98%. Our stabilized gross-to-net costs are below our 2021 costs, and our customer retention is high at 63.5%. Our new completions mean that our operational portfolio is GBP 3.2 billion, and we've got a further secured pipeline of GBP 1.2 billion. Of that, nearly GBP 1 billion is committed. Our committed pipeline is funded, permissions granted, and costs are fixed. This pipeline gives us great visibility in the growth in our earnings for the next four years. Illustrated on this slide here, you have the new openings in Birmingham, Leeds, Newbury, and the recent openings in Milton Keynes, all with strong lease up.
We've generated high occupancy and rental growth, and our income is up 22% to GBP 86.3 million, and this will deliver for shareholders a 16% growth in our dividend. Through the year, rental growth has continued to build. Like-for-like rental growth for the year was 4.7%, but 5.5% in H2, reflecting 5.7% in our regs and 5.5% in PRS. Our adjusted earnings were up 12%. Our EPRA NTA is up 7% to GBP 3.17 per share. We had a strong sales performance, delivering GBP 63.3 million of residential sales profit. We refinanced and fixed our debt with no new debt required for our committed pipeline, and this means that our continued growth is secured.
The fundamentals of our market are stronger than ever with occupational demand strengthening and supply reducing. We have four years of growth, de-risked, funded, and locked in, and next year will be a record year of delivery for us. 1,640 homes generating GBP 17 million of net rental income, and the benefit of that will be seen in 2024. Our PRS portfolio is now almost GBP 2.3 billion, representing 73% of our portfolio. We know that we are delivering the right product into the right market. Our customer satisfaction scores are high. Our Net Promoter Score is +34 points. Our first scheme in Birmingham leased up in two months. Now, that's 10 months quicker than underwriting at rents 5.4% ahead of ERV, breaking previous records set at the Pin Yard and The Headline in Leeds.
In these turbulent economic times, it's important to reflect on what we're seeing since the September year-end. Well, the market for high-quality rental homes continues to improve. Inquiries for our homes are high. Rental growth is continuing at 5.5% overall, and lease-up of our new schemes are continuing at pace. Our occupancy has remained at an all-time high of over 98%. As with during the COVID pandemic, we are seeing no signs of rent arrears. We saw a strong September in sales, and sales are continuing. It's worth remembering that what we sell are the sales of the ex-regulated properties for which there is strong demand.
Now, they're rarely bought by first-time buyers, and that's because they've been let for a number of years, over 40 years. They're structurally sound, but they're often in need of updating. We're seeing about 40% are bought by cash buyers, and the majority of the remainder are bought by those with high levels of equity. There's been a lot of talk about property value falls. As a reminder, our regulated properties are prudently valued and held at 83% of their open market value on vacancy. There is a reversionary surplus of GBP 248 million, which is not included in our NTA or in our LTV. We've continued to see strong interest in our Chelsea portfolio and certain central London properties, which attract the interest of the dollar-denominated buyers.
Since the year-end, we've continued to recycle our older PRS stock, including investment regs, and we've delivered so far over GBP 20 million of sales. We started on three secured schemes, and we're seeing construction inflation ease. We stay very close to our construction partners, and all of our committed pipeline is on fixed price. Grainger is a resilient business in a resilient sector, and there are strong structural drivers that make this sector more resilient. These are both occupational and investment drivers. We know that there is an increasing demand for renting. People are delaying their first home purchase, and we also know that the fiscal changes and increased costs and burdens for smaller landlords is leading to them selling. Rents track wage growth and provide an inflation hedge.
As you can see by the orange line on this slide, supply and demand and wage inflation, particularly in our demographic, means accelerating rental growth. Over the longer term, residential rental values exhibit much lower volatility than commercial rents. The market for good quality rental homes has rarely been stronger, and Grainger is in a great position to benefit. We have a strong balance sheet, and our funding is secured. We have a leading operating platform powered by CONNECT, and it's delivering enhanced customer service and increased customer retention. Our pipeline is fully funded with construction costs fixed, but we have refinanced all of our significant near-term debt and now have an average debt maturity of six and a half years, and 97% of it is hedged.
Our LTV target range of 40%-45% has been designed to withstand a fall in values of 50% and still remain within our covenants. We have a high-quality, well-positioned assets in areas where we've researched that the supply-demand imbalance is most acute. We have deep customer insights, and because we directly lease to our customers and we stay close to them, we know that on average, our customers have greater earnings than the national average, and their rents represent about 29% of their income, and this is comparing with 45% for mortgages for many first-time buyers. To our pipeline. Our operational portfolio is GBP 3.2 billion, GBP 881 million in the regulated portfolio, and just under GBP 2.3 billion in PRS.
We continue to recycle both our regs and our subscale older PRS properties, and last year, our asset recycling was GBP 110 million. We delivered 669 new homes, and we secured 1,500 homes in London, Bristol, Oxford, Exeter, and Sheffield. The first three of these schemes are already on-site. Our committed pipeline is 3,658 homes. It's de-risked and fully funded. We have a further 769 homes we've secured and 2,411 homes in planning and legals, and 1,240 of those have a planning approval and in our joint venture with TfL. This represents 6,838 homes.
Over 1,600 of those across seven schemes will be delivered in calendar year 2023, giving a GBP 17 million boost to passing net rental income in 2024. Overall, 2022 has been a strong year of delivery. We maintain our market-leading position in a sector where demand is increasing, and we have clear visibility of future growth. Our income is up 22%, our rental growth is 4.7%, and we've delivered spectacular lease-up on our new launches. Our balance sheet is strong, with GBP 663 million of headroom, and our growing portfolio of modern, high-quality rental homes are located in areas of highest demand. Our best-in-class operating platform differentiates us and puts us close to our customers, giving greater insights and driving better margins.
We have a pipeline of GBP 953 million committed and a further GBP 241 million secured, 14 schemes delivering between now and 2026. That's four years of locked-in income growth. I'll now hand over to Rob, who'll take you through the details of our performance.
Thank you, Helen, and good morning, everybody. Today I'm going to cover off the key financial highlights for the year and also to provide you with some color over our current trading performance, which continues to be strong. I'll also outline how, despite the changing environment, we've got strong growth locked in over the medium term in both our net rents and our earnings. Our committed pipeline is funded, our development costs are fixed, and our debt costs are hedged. Given the secured nature of our pipeline, with costs locked in and rents growing in line with wages, the earnings growth trajectory over the medium term remains unchanged. This will deliver a doubling of our EPRA earnings compared with FY 2022.
Our balance sheet and our liquidity remain in a strong position, and we have the flexibility to manage our debt through disposals as we continue to reinvest into our pipeline. We've delivered a strong set of results this year. Our pipeline and our lettings performance have generated an acceleration in both our occupancy and growth during the year. Net rents increased by 22%, reflecting the strong lease up of our launches over the last 18 months, strong levels of like-for-like rental growth at 4.7%, and our record levels of occupancy. Adjusted earnings were up 12% as a result of both the performance in net rents and the continued strong delivery of residential sales in the period. With this, our full-year dividend per share continues to grow up 16% from our strong underlying performance.
During the second half, we transferred a number of long-term asset holds from our trading stock into investment property. Whilst this has no impact on our mark-to-market balance sheet, it did result in a GBP 81 million IFRS one-off valuation uplift, and it's also improved our NTA by GBP 0.03, with no further impact on any other key metrics. I've included more details in the appendix for you on this. Profit before tax was up 96%, reflecting valuation growth from our strong leasing performance, ERV growth, our performance on disposals, and also residential market strength during the year. It also includes the benefits of the transfers just outlined. With this, our total property return for the year was 7.5%, total accounting return grew to 8.8%, and EPRA NTA was up 7%.
The balance sheet remains in a very strong position, with LTV at 33%, reflecting reinvestments into our pipeline. Overall, we've delivered a strong set of results and the business is very well placed for the year ahead. Turning now to the income statement. Net rental income was up 22%, reflecting strong rental growth and the strong lease-up on our launches. Our occupancy is at a record 98%. At the start of the year, we guided to a recovery in rental growth to our pre-pandemic levels of 3%-3.5% for the year, and I'm pleased to say that we've outperformed that with PRS growth for the year at 4.8%. PRS rental growth accelerated in the second half to 5.5%, and so we're going into FY 2023 with good momentum.
We saw little variation between London and the regions, with strong rental growth and occupancy across both. Stabilized gross-to-net was 25.5 %, improved from 25.9% in the same period last year, reflecting our reduction in voids and our strong cost control. We've continued to deliver a strong sales performance with residential profits in line with plan and reflecting the natural runoff from vacancies and mix. With this, our adjusted earnings were up 12%. Now, looking ahead at our sales program, we continue to see a strong pipeline of disposals into FY 2023 and expect to deliver an increased level of asset recycling, and that's always been in line with our plans to convert to a REIT within the next few years. Turning now to movements in net rental income.
Net rent was GBP 16 million ahead of FY 2022, with outstanding growth of 22%, reflecting the let up of our FY 2021 launches, strong like-for-like rental growth of 4.7%, and also the rapid recovery of our occupancy earlier in the year to our record levels. PRS rental growth was 4.8%, and this was made up of new lets at 5.6% and renewals at 4.1%. Overall, net rent for the year is GBP 86 million. Looking forward, we're starting FY 2023 with GBP 91 million of passing rent. With high levels of recycling in FY 2023, I'd expect the rent reduction impact from our disposals to increase when compared with FY 2022.
The new launches in FY 2023 are largely weighted towards the second half of the year, with the majority of this impact from lease up therefore benefiting FY 2024. I'd expect FY 2023 rental growth on a like-for-like basis to continue above the long-term average rate of 3%-3.5% . So with this, I'd expect good net rental income growth for FY 2023, with the pipeline delivery translating into even stronger growth for FY 2024. Turning now to the valuation summary. Overall, we delivered valuation growth of a GBP 170 million for the year. That's up 4.4% . The ongoing delivery of our strategy means that PRS has now increased to 73% of our operational portfolio.
PRS valuations were up 4.6% , with the vast majority of PRS assets being valued on a rent and yield basis. Valuation growth was driven primarily through ERV growth, 3.1% , along with the delivery and lease up of our new launches. Conversely, our regulated portfolio is now reduced to 27% of the portfolio. The majority of our regs are based in London and the South East where HPI has been more muted. We saw good growth in the regions of 7.5% , so overall regs were up 4.1% . This slide sets out the EPRA NAV measures. We consider EPRA NTA the most relevant measure for Grainger. The 7% increase in EPRA NTA to 317p is driven by the strong valuation growth.
The reversionary surplus in our portfolio is excluded from this measure and is still a significant amount at GBP 248 million, and that equates to GBP 0.33 per share. Also, a further reminder, our NTA also excludes the value of our platform and technology, as well as our pipeline. This chart shows the key movements in NTA over the year. Rental income and valuations continue to be the key drivers of growth in NTA. With this, our EPRA NTA was up 7%. Our net debt increased by just over GBP 200 million to GBP 1.26 billion in the year. Our operating cash flow remains strong at GBP 94 million, with GBP 110 million of asset recycling on top. We continue to invest in our pipeline as we accelerate our PRS growth with GBP 350 million invested during the year.
I'd expect a similar level of investment in FY 2023. For FY 2023, we expect to deliver increased disposals in line with our plan to convert to REIT within the next three years. We continue to operate with a strong balance sheet and funding position, and we've taken actions in the year to further de-risk our finances. A key action that we delivered early in the summer ahead of the mini-budget and the subsequent debt market volatility was accelerating the renewal of our bank facilities whilst maintaining margins in line with previous terms and obtaining a GBP 75 million increase to GBP 575 million. This demonstrates our continued attractiveness to our lenders, who like the growth in our PRS portfolio and the reduction in volatility that this brings.
We continue to hedge a high proportion of our debt with over 97% of our debt fixed or hedged and matching our maturity profile. Our weighted average debt maturity stands at six and a half years, giving us all of the debt funding that we require over the medium term with rates locked in. Our weighted average interest cost is 3.1%, and I'd expect this to increase marginally in FY 2023 to circa 3.3%. Given the high degree of hedging, I'd expect our weighted average interest rates to remain in the mid-threes over the medium term. We've always operated the business with prudent financial policies, one of which is to secure funding up front for our committed developments.
We operate a strong balance sheet and funding position, having over GBP 660 million of headroom today, and that more than covers our total committed CapEx of GBP 480 million over the next few years. Our LTV target range of 40%-45% is prudently set because at that level, we can withstand a major fall in values of nearly 50% and still operate within our covenants. Our LTV today is 33%, and despite the broader macro uncertainties, we expect to continue to operate at the lower end of our target range. The significant liquidity in our balance sheet gives us the ability to flex disposals to manage our debt levels accordingly. It's also worth noting that LTV excludes the reversionary surplus of GBP 250 million, and that reduces LTV by 2%- 31%.
This slide shows the progression of our passing net rents based on the delivery of our pipeline. Recurring income continues to form an increasing component of our earnings as we continue to build out a pipeline in line with our strategy. FY 2022 reported rent was GBP 86 million, and overall, our secured pipeline sees this further increase by around 70% to GBP 148 million. The opportunities in our planning and legals, including TfL, give us the potential to increase net rents by a further GBP 27 million. Given the investments in technology and the high degree of operating leverage and net margin improvement that this delivers, our business continues to benefit from scale.
Given the secured nature of our pipeline with costs locked in and rents growing in line with wages, the earnings growth trajectory over the medium term from our secured pipeline remains unchanged, and this is going to deliver a doubling of our EPRA earnings compared with FY 2022. Likewise, our medium-term outlook of an 8% total return post the delivery of the secure pipeline remains unchanged. That's assuming constant yields. As net rental income grows, so will the dividend as our policy is to distribute 50% of our net rents by way of dividend. To summarize, we've delivered a very strong performance this year and we've seen our momentum further strengthen with strong rental and adjusted earnings growth. With this, our dividend per share is up 16%.
We're on track to deliver a doubling of our EPRA earnings underpinned by our secured pipeline, our above-average rental growth, and our low fixed debt costs. This earnings growth is a major component of our medium-term total returns target of 8%, which remains unchanged assuming constant yields. Our liquidity and our balance sheet are strong, and that gives us the flexibility through disposals to manage our debt as we reinvest into our committed pipeline. With that, I now hand you back to Helen.
Thanks, Rob. In this section, I'll take you through our market and the trends we're seeing and how our in-house operating model secured our strongest year of leasing performance and customer satisfaction, as well as looking at our newly secured investments and our 2023 launches. Earlier, I said that we were a resilient business in a growth sector. There are positive long-term structural trends and near-term tailwinds in the residential rental market, and Grainger is well-positioned to take advantage of these. Over the next three slides, I'm going to set out the data supporting this. First, the headlines. We live in a country with a shortage of homes, that's all homes, and an acute supply and demand imbalance in rental homes, and that gives us a strong occupational market and competition is constrained.
In the medium term, this strong structural benefit is set to consolidate further with people pausing on buying their first home and seeking a better rental experience. Demand is outstripping supply and small private landlords are leaving the market. We've positioned Grainger to face into this market with high-quality, modern, mid-market properties with low running costs, good customer service, and we have great demand for these. We know that our main customer demographic of young professionals have the capacity to withstand the economic headwinds better than most. The positive structural trends. Build to Rent is still a very small part of the market at 1.5%. Our main competition is still the buy-to-let landlord, and that segment is shrinking. At the same time, demand for renting is increasing across all age groups, except the 16-24 age group.
These structural fundamentals have supported real rental growth considerably ahead of commercial rents and with lower capital volatility. We're seeing a positive PRS market outlook. The Rightmove data, top left, shows that the weight of demand for leasing is reducing the time to let, and Grainger's time to lease is considerably quicker. On the right, we have rising mortgage costs, which have closed the gap and, in many cases, moved ahead of renting. That's excluding all of the other costs associated with homeownership. Rents have some way to grow. Over the longer term, they closely correlate with wage inflation, but ONS data shows that rents post-pandemic still have room to grow.
These structural and positive rental market trends are still attracting a large amount of capital, GBP 6.1 billion in 2021 and in three quarters of 2022, GBP 4.9 billion. At Grainger, our homes are well-positioned to benefit. Our main demographic is the 25-34-year-old customers, and they're paying affordable rents below the rental level recommended by Shelter of around a third of income. Top left is the current age of Grainger renters. Top right is the percentage of income they spend on rent. Our homes are affordable, below the market as a whole and below the Shelter guidelines. Our homes benefit from lower running costs. 87% are EPC A-C, making substantial savings in our customers' energy bills.
Rental growth is predicted to stay elevated and revert to the long-run correlation with wage inflation in 2025. Our business model is designed for outperformance, and this year we've delivered again. In our origination, our experienced in-house team have navigated the challenges of a high number of developments on site. They've contained costs and delivered a suite of homes that our customers have loved, as demonstrated by the speed of the lease-up and customer reviews. Our acquisitions and investment team have secured six new schemes in our core cities and delivered GBP 110 million of asset recycling. In our operations, where we keep close to our customers, we've delivered a great performance, a 16-point increase in our Net Promoter Score.
Now, no one seems to love their landlord, but at Grainger, we have a positive 34-point Net Promoter Score, and this part of our organization has delivered exceptional customer service and launched great schemes, and also, in a period of rising costs, have delivered improved efficiencies from 2021. This was a record year of leasing, and this has been driven by our in-house leasing team, enabled through technology and our CONNECT platform. We've leased up new launches in record time, well ahead of underwriting. We have strong occupancy at 98% and a record retention of 63.5%. We've had high levels of customer satisfaction as independently verified, and our onboarding team have delivered high quality award-winning schemes. Our platform is scalable and our high performing teams deliver. As we build scale, that will deliver further efficiencies and further margin improvements.
We are continually enhancing our customer experience and the program that we designed is delivering high levels of customer satisfaction and customer retention. We've improved and enhanced our resident app, and this is now rolled out across our whole estate. Every member of the Grainger team, whether external facing or not, has undertaken bespoke customer experience training to embed our service values throughout the entire organization. In addition, I and all the senior executives spent time in the front line with our customers. I discovered how challenging but valuable parcel management is and how to mend a bed head. Rob, who is at Gilders Yard, was snagging our new scheme, and also he visited some of our older regulated tenancies.
We launched Living a Greener Life, an engaging campaign to help our customers to, amongst other things, reduce their energy bills and taking our steps towards reducing our Scope three carbon emissions. These programs, the data and feedback, the reviews, all go into continually understanding our customer's needs and improving customer satisfaction. It really differentiates us from landlords who outsource their management leading to, for us, greater customer retention, greater income, and for our shareholders, delivering greater returns. Our purpose of creating homes and enriching lives and our core values guide our decisions, making us a socially responsible business. Our ambitious ESG program reflects this. We are proactive in driving significant reduction in carbon emissions in Scopes one, two, and three, and to make a positive lasting impact locally. Our board is highly engaged through the establishment of a Responsible Business Committee this year.
I mentioned earlier that 87% of our PRS portfolio is EPC A to C, but we've also delivered a 26% reduction in Scopes one and two carbon emissions, which is where we have the most control. Scope three is underway, seeking to measure and reduce our customers' carbon emissions. We've piloted and measured the social value that we create when we launch a new scheme in a community, and we held 572 community events last year. We know that this year has been challenging for customers and for colleagues, and we led the sector in a GBP 1,000 cost of living payment to all our employees below ExCo announced in the early summer, so relieving concerns about the imminent cost of living rises.
Just as importantly, we've trained our teams to help support and signpost help for our customers facing the same concerns. Our people tell us that they enjoy working in a company with good initiatives to support others, and this year we moved to Very Good in the Best Companies rating. Two things I'm particularly proud of is the work we did to house six Ukrainian refugee families together so they could be together, and also the work that we've done to help our customers reduce their energy bills, all the time retaining our best-in-class benchmark scores. Our investment remains disciplined, research-led, and you'll see that we have secured schemes this year in Oxford and Exeter, as well as new schemes in London, Bristol, and Sheffield.
We continue to focus on areas of high demand, constrained supply in those areas which have good prospects for economic and rental growth. The progress that we've made since the start of the strategy has created a nationwide high-quality portfolio, which is second to none. This slide shows our new openings since the start of the strategy. This portfolio will deliver for our customers and our shareholders, and this portfolio is set to double again. Onto our new acquisitions. We had six new schemes, three already on site. At Southall, next to the Crossrail station, there's 401 new homes. In Bristol, 468 homes. Bristol is a great rental city, and Redcliffe Quarter represents our third scheme there. In Oxford, 150 homes in a land-constrained city that we've been seeking to access for many years.
We have flexibility for the future with land purchases at Exeter, Sheffield, and in Berewood in Hampshire, where we are revisiting the master plan to give greater flexibility and more homes. That's locked in growth and future flexibility. We know that we buy well through the customer's enthusiastic response to our product. Over 2021 and 2022, our new schemes were leasing well ahead of underwriting. In 2023, we will see seven new developments. That's the latter stages of Newbury, plus six new schemes in four new cities, adding GBP 17 million of income. In summary, 2022 has been a record year of performance. A record 22% increase in income, a record lease up of our new schemes, record occupancy, record rental growth, record customer retention, and record customer satisfaction. We're a strong business in a structurally supported growth sector.
Our occupational markets are stronger than ever, and the foundations that we put in place means our growth is secured. Through our disciplined approach, our finance and our costs are fixed. This business is delivering for customers and shareholders. It's a resilient growth business in a resilient growth sector. Thank you. I'm now going to invite you to ask questions, and I'll be joined by Rob Hudson, our Chief Financial Officer, Mike Keaveney, our Director of Land and Development, and Eliza Pattinson, our Director of Asset Management and Operations. I'll take questions in the room first, and for those on the webcast, you can submit a question. I think Kurt's going to ask the questions.
Cool. Morning, Kieran Lee from Berenberg. I've actually got a few if that's okay. We've seen that you've got the sort of secured but uncommitted development pipeline. Given market conditions, what are you looking for in the market before you actually seek to commit to those schemes and bring them through? Secondly is somewhat related. The markets are obviously quite weak. You've identified a number of disposals that you'd like to make. Do you expect to get them away? How do you expect pricing to fare given market conditions? Thirdly is operating margins. We've seen them go from 25.9% down to 25.5%. We've obviously got even more scale coming through. Where do you see the long run of those operating margins sort of working out? Lastly is actually politics.
After we've almost worked through this period, we're staring down a general election and perhaps a change of government. How do you see the market for residential given potential for rent controls, freezes, eviction bans, et cetera?
Thanks, Kieran. Give someone else a chance. Right. Your first was about the uncommitted or secured, but uncommitted. You know, the business is moved into a situation where we get the opportunities to acquire new sites. Our entry price, because our land payments for Build to Rent are significantly lower than the house builders. The land payments are quite a small part of that. Exeter and Sheffield were small land acquisitions that give us that flexibility. You wanted to know what the trigger was. Well, obviously the real trigger is construction costs. What we're seeing at the moment is construction cost inflation easing. Our timing will be very much dependent on that. Mike, do you want to add anything to that?
That's really it, Helen. It's just about the optimum timing for when we think it's the right time to buy into the construction.
Your second question was about disposals. Kieran, that's why I put the fact that, you know, in the six weeks since our year end, we've already made GBP 20 million of disposals, which is about a fifth of what we did last year. You've got to remember, yes, the market is, you know, overall, I think the markets are trying to find where the price point is. Having said that, remember the market that we're selling into is actually often smaller lot size, independents, not the main investment market, 'cause we're really chopping off the tail of our older PRS portfolio. You know, we're confident about disposals. The disposals of our regs, we make investment disposals as well as vacant disposals. We're still seeing strong demands there.
I think I mentioned earlier, we've got that 17% buffer in terms of what we held them in terms of value. The average lot size that are sort of going out at the moment, you know, the sales are sort of GBP 5 million lot size. They're quite often, they're not in what you might call the main investor market who's, you know, pausing. You asked the question about operating margins and the reduction that we've made. I'm gonna come to Eliza about driving efficiencies at the moment. At the moment, we're bringing that down. The holy grail. Eliza, what's the holy grail?
Oh, I think we're looking at 24%-25%. You know, that comes through scale. The more scale that we deliver, the better we're able to procure with our buying power. Our clusters also help with efficiencies in terms of our customer teams that deliver our customer experience in those buildings.
Finally, the nutty question of politics. You won't see many CEOs the night before their results schmoozing it with the Labour Party, but I'm afraid I had to go last night and meet Rachel Reeves and Keir Starmer. Look, this government has always been really clear about rent control, that they would not introduce it 'cause they understand the impact it would have on supply. We're already in a position where they're seeing a weakening of supply because of the small buy-to-let landlord. They have signaled that they would put rent control on, and we might hear something about it today. Rent control on housing associations and the figure that they're talking about there at the moment trailed is about 7%. There may be, they put for the public sector some capping.
Our business is extremely resilient. Our group that actually occupy our properties, you know, have the capacity, and I think our business model has been structured not to, you know, attract the concerns of politicians. We do actually talk to both parties. Labour had a very consistent shadow housing minister for many, many years, and he always used to say to me, "Don't worry. If we ever introduced anything, it would be around caps." Not moving ahead of CPI. Whether you'd feel when CPI is north of 11, that would be an appropriate cap is something else.
Whilst I think it's vote-winning for the Mayor to sort of suggest rent controls, we know that they don't work, and I think we've got a government that understands that they don't work and is trying to obviously stimulate new homes. Has Kieran pinched all the questions?
No, he hasn't.
Thank you. Good morning. Hemant Kotak from Kolytics. A great set of results, so thank you for the presentation. Lot in there. I'm just picking up on slide 39. There's a very good slide there which talks about the fully funded committed pipeline and basically your capacity. Just like to maybe just touch on that. What are some of the underlying assumptions on this in terms of, you know, when you're looking at market values and things like that, and especially related to where your LTV can progress to, basically?
Thanks, Hemant. I think you were looking at Rob there, so I'm gonna ask Rob to answer that.
In terms of particularly slide 39, this looks at the headroom within our facilities in particular. Just looking at it from that lens, 'cause as you say, there are two dimensions. There's our LTV and then there's our headroom within our facilities. This assumes effectively generating combined operating cash flows and recycling of around GBP 150 million per annum. You've seen the operating cash flows that we've generated GBP 94 million for the last year and the disposals of GBP 110 million on top. This is a, you know, a reasonably conservative view as shown on this slide.
We've indicated we would expect recycling to pick up a little bit in the year ahead as the result of the existing plans that we've always had to transition to a REIT. Secondly, when considering LTV, our guidance target range is 40%-45%, and we're very comfortable with that for the reason that that has always been designed to withstand a fall of nearly 50% in values and we would still remain within our covenant. That gives us obviously a very significant amount of headroom.
I think the final point to note is, although we've got our development program in place, we've got plenty of optionality and flexibility over the disposals to manage the debt and we would expect to operate at the lower end of that range over the medium term as a result of that.
Miranda Cockburn, Panmure. Just following up on Kieran's comment on the disposals. Can you just clarify a bit more? Because you're saying that this is all about the sort of progression to becoming a REIT. When you're talking about more disposals, are we thinking that there's more gonna be on the regulateds, selling them out before you get them vacant? Is that gonna be the acceleration or are you talking more still on the selling sort of some of the weaker PRS? The second question is just in terms of the PRS portfolio now, appreciate that it's obviously done on a yield and rent basis, but where does it sit just at the moment versus vacant possession value, or do you have an indication of that?
I'll take the first bit, and then Rob, if you want to take the second one. In terms of the mix of what we sell, before we were accelerating towards REIT, we always had somewhere between GBP 50 million and GBP 75 million of asset recycling. We do a very disciplined review of every single asset in the portfolio, and then we recycle the bottom. That's just good discipline in terms of making sure that we, you know, keep a really strong portfolio with strong performance characteristics. The mix is going to be, and always has been, the smaller PRS, Regs where they're geographically remote. Last year we sold a portfolio, for example, in Cornwall, where, you know, we were sort of subscale, if you like.
Also we had elements of Stratland as well. It's a mixture of assets that make up that portfolio. Rob, do you want to?
I think to go on to your elements around the PRS and how that compares against vacant possession if we were to sell it instead. It's typically there is a little bit of headroom there as well. It's not like the rates are 83%, but typically we have, you know, 4%, 4%-5%, that kind of level.
Chris.
Morning, everyone. A couple if I could, please. Perhaps you can just talk around yields quickly. Please tell them what you've seen. I assume there's not a lot of transactional evidence, but it'd be useful to hear what you've got to say there. Can you make a quick comment about how you're managing regulated rental increases? 'Cause clearly they've got a link to inflation and I presume there's an affordability, you know, kind of rent control point there. The final one is just, I suppose the potential for opportunistic acquisitions in this climate. You know, are you likely to buy stabilized assets? Are you seeing any stress coming out from the housebuilders, more engagement? Just any thoughts in that regard.
Okay. In terms of the yields, our September year-end valuation, we were valuing right the way up to the end of September. That was post the mini-budget fiscal event. Our valuers did move our yields out slightly, about five basis points, even though there was no evidence. I think that you can see in the back of the pack, in terms of our acquisitions, because we do a lot of forward funding, there is always some sort of margin in there in any event. You're right, I think there's sort of a certain amount in the market of price discovery.
We have seen people continue to transact in terms of Build to Rent assets since. Obviously the strength hasn't been as strong as we saw in the first three quarters. Yields, I'm expecting, and I think we have the slide in there that shows that, you know, residential yields traditionally have been far less volatile than commercial yields. That's obviously because of that linkage back to sort of home ownership as well. The second part of your question was regulated tenancy increases. The regulated tenancies, it's quite a complicated structure, but they are linked to a certain extent to RPI. They do hit a cap where they're starting to move ahead of market rents, and also they look backwards.
We've still got a bit of a drag on the regulated rents from historic market movements during the pandemic when rental growth wasn't quite as strong. Where we are at the moment is on our regulated tenancies, 5.7%. We are very mindful of the fact, and our teams are very mindful of the fact that a lot of people are on fixed incomes in that area. There is still a negotiation, albeit it is formulaic. If people do appeal them, actually quite often they go up. In other words, that might suggest that, you know, we could push our regs harder, but we are also very mindful of that age group as well. Opportunistic buying.
You know, the sector's performed really well, and so those that own it, and it's still quite small, have tended to hang on to it. What we're not seeing is a lot of distressed selling. It's in terms of our area, it's not held by the gated funds. It's not held, you know, sort of by people who have got a high debt leverage. We're not seeing a lot coming forward. You know, part of what the asset recycling will give us is that capacity if opportunities do come to the market to take advantage of that. You don't want to add anything?
House builders?
Yeah. In terms of house builders, we've always stayed quite close to them. The one thing that I would say about the house builders is that, you know, at the moment, I mean, they're not in a distressed situation that they were during the GFC. They might have slowed down. They've got land banks. We've had conversations with them. We do have a suburban portfolio, as you know, so we do like suburban stock. Obviously we can use our own land portfolio to actually generate activity with the house builders. Mike, do you want to add to that?
No. There's early signs of some of them looking to de-risk and offer forward funds. It's very, very early. They're not really, they're not distressed. We don't expect it to be massive. Certainly not. It would only be in the suburban space, not the urban Build to Rent.
Chris, any other questions? Kurt, have we got some on the webcast?
Yeah, there are a few on the webcast. I'll read them out. The first one is from Reid Associates. It's around interest rates and costs of debt. How do you hedge the interest rates you pay on borrowings?
Your average borrowing rate seems high in light of the blue-chip borrower. Is 3%+ a reasonable average interest rate, bearing in mind the high quality of the borrower? The security available seems rather high.
Go for it, Rob. I thought you'd done a good job, actually.
Oh, thank you. It's kind of you to say. I think the first part of the question is, how do we hedge the interest rates we pay in our borrowings? We take a really prudent approach to all of this, which I think is obviously paying off well in this environment. We forecast the amount of debt over the debt maturity period over the next six years. That includes our development as well. We put in place enough hedging to cover that. A lot of our underlying debt is fixed by nature with the bonds, but in terms of the bank debt, we actually put hedging in place on top.
We're near fully hedged on all of that, so we've got a high degree of predictability. In terms of, you know, the rate itself, well, I think in this environment, you know, we're very glad that we've taken the actions that we have because clearly the market would indicate something higher if we had to go out and refinance everything today. We don't have to do that. We actually don't have to raise any new debt for our committed pipeline or to refinance. There's no material refinancing until 2027. Effectively, we've got a very high degree of protection and visibility, which is the trade-off against that.
I mean, interestingly, when you look at our final EPRA measure in terms of EPRA NRV, we have a very significant amount of hedging gain that we've had, nearly sort of GBP 250 million, as a result of those actions we've had in place. It gives you a sense of the value that those hedges have in fixing the interest rates in the threes.
The next question, we've actually had two similar questions, one from James Carswell at Peel Hunt and Daniela Lungu at First Sentier regarding timing of REIT conversion.
Yes. Yes, I can. Yeah. We indicated with the last set of results that we'd expect this to be within the next three years. There's no change to that profile. The reason being that there's actually three ingredients to what determines the rates of conversion. It's firstly the corporation tax, which is now remaining unchanged. Secondly, it's the rate of build-out in terms of the new Build to Rent, which is also unchanged because we're funded and we're continuing. The final piece is the sell down of the regs. We'd always factored in the sell down of the regs at a higher rate as part of these plans. That was already factored in.
There's actually no change to our underlying assumptions as a result of all of that. The most significant element to all of this is actually meeting the balance of business test on profits. We're nearly there on assets because we're 73% now sitting in PRS. To meet the profit test, we obviously make quite significant profits on historical cost on our residential portfolio. It's really just reaching that point of conversion that we then trip into with under three years now.
Great. James had another question. This is James from Peel Hunt. Given the current risk-free rates, what sort of yield would you be looking at to achieve today on acquisitions and future development opportunities?
Okay. We talked earlier a little bit about yields. We've obviously got what we would want in terms of our return, and that's made up of assumptions about rental growth, development profit, and the yield. I think the difficulty then is you're facing into a market that finds Build to Rent very, very attractive, and the question about whether or not you're able to acquire at those yields in terms of the degree of competition. I think there is quite a lot of price discovery going on at the moment in terms of what those yields are. Obviously, they do take into account cost of debt and also cost of equity. Rob, do you want to add to that at all?
No, I think you've covered it well.
The next question is from Sander Bunck at Barclays. Can you talk a bit about potential incremental investment and development opportunities given the weaker investment markets? Are you seeing increased opportunities, or do you prefer to focus on your existing committed and uncommitted pipeline? Would you fund this with incremental disposals or additional debt?
Yeah. We're not seeing a vast amount of opportunities yet because there, as I mentioned earlier, there isn't distress, and those that hold the good quality assets are holding them. There's a few disposals where they're part of a larger fund. They're first-generation and not necessarily the sort of things that we like in our portfolio. I don't necessarily think that right now there's lots of opportunities. Of course, what asset recycling will do, and also our very strong operational cash flow, which is growing, will give us capacity to be ready to look at those opportunities. We will always judge them against the opportunities that we have currently in our book and the optionality we have there.
You know, I mean, it goes without saying that a good quality stabilized asset will add value to our portfolio immediately, is something that if it's correctly priced, is the sort of thing that we'd like to bring into the book, and we would pause on maybe some of our longer-term development if such assets were around.
There are two more questions, both from Paul Gorrie at Columbia Threadneedle. Paul's first question, can you please comment on the slowdown in H2, the true underlying earnings of the business, i.e., the adjusted EPRA earnings per share after tax? In H1, it was GBP 0.019, but in FY, it was GBP 0.033, so H2 was only GBP 0.014.
I'm gonna let Rob answer that one, but it's more to do with the speed of our lease-up in the first half, isn't it?
Yeah. I mean, there's a few factors which feed into that. I mean, there isn't an underlying challenge in terms of the rate of growth. It's more about phasing, and particularly, as well as what Helen said, our costs are naturally more phased. There's a variable element, and that's more phased in the second half of the year. There's always additional costs around lease-ups of new openings as well, which obviously initially bear an initial cost before then they become fully let. That and the timing of central costs have been weighted more to the second half of the year, but there's no sort of underlying sort of slowdown in the underlying run rate.
Yeah. I'd also say that, of course, we have seen an acceleration of rental growth, so that's actually improving in the second half in terms of our headline income.
Paul's second question, and the final question from the webcast is, can you comment when you expect the business to break even on underlying earnings basis? Looking at slide 15, contributions from rent are effectively offset by finance costs, overheads, and tax. When will this change?
Um, so in terms of the underlying earnings and the cash generation characteristics of the business, um, the dividend policy has always been designed with REIT in mind, and that's currently paying out 50% of net rent by way of dividend. The delivery of the secure pipeline obviously enables the conversion to REIT. Uh, and obviously then we would review, um, uh, the new policy in accordance with other REITs, which is typically paying out sort of the, you know, a high percentage of the net profits, and that is self-funding, um, by its nature. Um, so, uh, and the other element here as well, is that the secure pipeline delivers a doubling of our adjusted EPRA earnings. So we've got very high visibility in terms of the, um, interest costs.
There's a significant yield pickup as we sell out of Regs, which are lower yielding into high yielding PRS. These are all the ingredients which effectively drive, you know, that strong growth in adjusted EPRA earnings, which are the cash elements of the profits of the business.
I'm just gonna ask if there's any more questions in the room prompted by those on the webcast. No? Great. Well, thank you very much, everyone, for spending time with us this morning. If there's anything that occurs to you, please reach out to either Rob, Kurt, or myself. Thank you.