God, I haven't seen this many suits for a while. It's normally not in our office. We good to go? Great. Okay. Morning, ladies and gentlemen. Thank you for making the effort on this splendid November morning. Must have been the lure of the bacon sandwiches rather than what I'm about to tell you. You know, familiar format for most of you in the room. I'll open up with an overview of the last six months. Go through some, highlight some of the key numbers that we announced this morning.
Pass over to Martin, who will go into much more detail on the figures, before he handing back to me to give you a deeper dive into the property portfolio and its performances, and the valuations, before sharing with you our thoughts on the outlook for our sector, and obviously for our portfolio. Then I'll open up the floor and the lines to Q&A. Welcome to LondonMetric's half-year results for the period ending the 30th of September, 2022. What a six months it's been. I mean, a lot of this is gonna become relatively well known to you. The investment backdrop has obviously shifted materially since March.
I'd actually ask you to focus on the first line, first number on the right-hand side. You know, the five-year swap is up 200 basis points. You know, the fact of the matter is that is a very, very important number. You know, interest rates are the yardstick by which we value real estate as well as other investment medium. That's courtesy of the fact that the economic and the political environment has deteriorated, and that real estate markets are recalibrating very, very quickly with, you know, some sectors moving quicker than others. I'll come on to talk about that in a little bit more detail later on. Some sectors suffering from what we refer to internally as deal paralysis.
Our portfolio continues to be shaped by the structural trends that we see taking place at, in the wider world and evolving consumer behavior, largely dictated by the advancement of technology. The fundamentals in our core sectors remain strong. Again, I'll dive into this in more detail. Urban logistics remains our strongest conviction call based on a demand and supply equation, which is delivering, you know, excellent rental growth for us. Also, our long income grocery and discount assets will continue to benefit from a increasingly price-conscious shopper hunting for bargains in a higher inflationary environment. Over the period, over the last six months, we've delivered like-for-like income growth. You can see there just shade under 3%, courtesy of lettings and rent reviews. Open market rent reviews there at 22% up from previous passing rent.
Portfolio suffered a valuation decline of 8% courtesy of a 47 basis point outward yield shift. Again, I'll dive into that on a subsector basis later on in the presentation. Our portfolio remains incredibly strong, as you can see there, with 99% occupancy on weighted average on expired lease terms of over 12 years. Such is the timing of rent reviews coming up over the next 12, 18 months, we have a higher proportion of those falling due, and therefore we are in line to collect a higher amount of reversion than would normally be the case. The simple method, methodology of 20, 20 actually, what doesn't apply and that we've got a higher proportion, as I say, coming up over the next 12 to 18 months.
We expect to capture, across our logistics portfolio in particular, another GBP 8 million worth of embedded reversions. We've continued our disciplined approach to capital allocation, both on an equity basis and also on a debt. We disposed in the six-month period, including post-period end activity, GBP 140 million worth of assets and acquired GBP 99 million worth of assets. Also, we announced this morning that we have enhanced our debt facilities with an additional GBP 225 million with a further GBP 75 million accordion, which will give us extra flexibility and duration with no debt maturities now until financial year full year 2026. Martin will go into that in a little bit more detail in a moment.
Turning to the numbers, an incredibly strong P&L metrics here, less so on the balance sheet. Net rental income is up 13.5% at GBP 72.1 million. That's followed through with the net property earnings, up a similar amount at GBP 50.2 million. EPRA earnings per share at 5.14 pence, up 5.5% from where we were 12 months ago. That has allowed us to announce another quarterly dividend of 2.3 pence, bringing 4.6 pence for the six-month period. That is up 4.5% on this time last year. As you can see there on the far right, is 112% covered.
The valuation fall that I touched on earlier has led over the last six months to the NTA moving out by 12.2%, to 229.3 pence. Interestingly, worth noting that over the 12-month period, our actually NTAs actually up 7.5%, at compared to where it was this time last year at 213.4 pence. The fact of the matter is, the last 6 months, the yields have moved out 47 basis points. The six months preceding that, they came in by 43 basis points. What we took in that 6-month period, we've given up in this 6-month period. The reason why the NTA is higher than it was 12 months ago is simply courtesy of the ERVs that we've captured over that period.
I'll come in to talk about that in more detail in a moment. On that note, I can hand over to Martin.
All right. Morning. Thanks, Andrew. The income statement must be really good 'cause he's covered all of it. That's right. In a half year dominated by economic and political volatility, we've delivered a really strong trading performance. As Andrew has already reported, we've delivered net rental income of GBP 72.1 million, an increase of 13.5% over the same period last year. This increase in net rental income is driven by additional rents from new acquisition and rents starting to flow from completed developments of almost GBP 12 million. Taken together with additional rents arising from rent reviews and regears, this more than outweighs rental income lost from property disposals of GBP 4.8 million.
I can report another very strong rent collection performance in the period with 99.9%, I don't know why I didn't call it 100%, of rent due having been collected. Our administrative cost is GBP 8.6 million, an increase of GBP 0.4 million in the period. However, we monitor our costs very closely, our EPRA cost ratio has fallen by 90 basis points since last half year to a low of 12.3%. Our gross to net property cost leakage remains consistently extremely low at just over 1%. Our finance costs are GBP 13.6 million. That's an increase of GBP 1.6 million over last year, primarily due to higher average debt balances and the increase in cost of debt over the period, which I'll come on to.
Our rental income growth and the attention to controlling costs has driven our EPRA profit to GBP 50.2 million or 5.14 pence per share, which supports the increase to our dividend for the period to date to 4.6 pence per share. That's an increase of 4.5% with very strong 112% dividend cover. As Andrew said, we've reported a decline in the profit in the portfolio valuation in the period of GBP 296 million, therefore report an IFRS loss of GBP 243.4 million compared to an IFRS profit for the comparative period last year of GBP 254.1 million.
Turning to the balance sheet, the portfolio valuation of GBP 3.46 billion, a decrease of GBP 143 million or just under 4% compared to the year-end. This is due primarily, as Andrew said, to the fall in the valuation of the portfolio at the end of the period, counterbalanced with GBP 200 million of acquisition and disposal activity. As at the period end, we had GBP 49.1 million of cash on our balance sheet and GBP 1.2 billion of debt. The net liability position at the period end is GBP 48.8 million, a major component of which, as in previous periods, is rent received in advance.
In summary, our EPRA net tangible assets at the period end is GBP 2.25 billion or 229.3 pence per share, a decrease of 12.2% over the year-end EPRA NTA of 261.1 pence per share, which without doubt was a moment of maximum optimism for the valuers. As Andrew said, our NTA is still 15.9 pence or 7.5% above where we were this time last year. We have GBP 1.3 billion of debt facilities on our balance sheet at the period end. In the light of the volatility in financial markets during the period, we have sought to ensure that this debt provides long-term certainty with flexibility and that our exposure to rising interest rates is mitigated.
Consequently, we have lengthened the maturity on GBP 550 million of debt facilities, extended our hedging, the hedging of our revolving credit facilities, and entered into a new GBP 225 million facility through to November 2025, with two one-year extension options and an accordion facility for a further GBP 75 million. This new facility eliminates our refinancing risk through the remainder of FY 2023, FY 2024, and FY 2025. We have no further refinancings until FY 2026. The facility pricing is consistent with our existing RCF facility, which eliminates the risk for us of bank credit spreads widening for refinancings in the new year. The facility is subject to ESG criteria, which will generate a small margin benefit. Call for me. A small margin benefit. I've updated our period-end debt metrics to take account of this post-period-end activity and refinancing.
We now have headroom of GBP 262 million. The new facility has increased our debt maturity from 5.8 years at the period end to 6.2 years. We've increased the proportion of our drawn debt hedged to 85%. Our average cost of debt is 3.4%, and our exposure to rising interest rates is mitigated such that a 25 basis point interest rate rise would reduce our earnings by only circa GBP 400,000. Our loan to value at the end of the period is 32.1%, net of sales proceeds received post-period end on disposals exchanged in the period. We have complied comfortably throughout the period with our debt covenants, and our interest cover ratio remains at a very strong 5.1x .
Our contracted rent roll in the period has grown to GBP 150.5 million as a result of rent reviews and new lettings in the period of GBP 4.3 million, and as a result of net investment and development in the period of GBP 2.9 million. We expect this number to grow materially in the next 18 months as income from current developments starts to pass and our voids are filled. Most significantly, we expect an additional GBP 10 million of rent to flow from rent reviews in the period up to FY 2024. A higher proportion of rent reviews fall due in this period than historically. Increasing our NIY by 35 basis points to generate a contracted rent roll of more than GBP 160 million by March 2024.
It is this significant level of growth in our rent which supports our confidence that we will continue to grow our distributable earnings and be able to continue to progress our dividend from its current 9.25 pence per share. Finally, before I hand back to Andrew, a look back over the longer-term performance of LondonMetric demonstrates that the increase in net rental income in this period continues a growth trend, which has shown a 12% compound average growth rate since 2014. Earnings have progressed each year, allowing us to progress our well-covered dividend each year, which has contributed to a total shareholder return, which has also shown a 12% compound growth rate over nearly nine years.
Whilst the outward movement in yields has caused our total property return and our total shareholder returns to fall back this year, the performance overall continues to be very strong. Andrew.
Thanks, Martin. Thanks, Martin. Right. Deeper dive into the real estate portfolio. Portfolio there, this is a chart that again, should be familiar to most of you in this room. Our GBP 3.45 billion portfolio continues to be dominated by our logistics investments that now account for roughly 74% of the total assets with, excuse me, urban logistics making up by far the largest sub-sector investment. Portfolio continues to enjoy, you know, 99% occupancy, long leases, and benefit from a high percentage of contractual uplifts. The portfolio, the logistics portfolio, as you can see there, showed a 59 basis point outward yield shift split between, you know, urban, regional and the mega subsectors.
It did benefit from 5.5% ERV growth and 2.6% like-for-like income, which combined to give a total property return of a negative 7.5%. Our GBP 800 million long income portfolio continued to exhibit defensive and heavily indexed characteristics. It experienced 15 basis points outward yield shift, but did benefit from 4.3% like-for-like income growth, courtesy of a number of rent reviews coming through in the period to deliver a total property return effective at 0.6% negative. Going, diving deeper into the distribution portfolios, as you can see, these have shown very strong income progression with rent review settlements and ERV growth reflecting the tight demand supply tension that we see across this sector.
50% of the portfolio is now weighted to London Southeast, and we think that will be an increasingly important element going forward. The urban portfolio delivered 25% uplift in rent reviews settled over the period, which is in line with its 3-year average ERV growth. Similarly, the trajectory and the correlation between ERV growth and rent review settlements was similarly tight across the regional portfolio as well. However, in our mega warehouse subsector, the rent reviews were settled at 8% above previous passing, but the settlements here, courtesy of contractual uplifts, have been restricted and therefore lag what the open market rent review settlements would have been, as indicated there by the 18% growth in ERVs that this subsector has enjoyed over the last three years.
Turning to the long income portfolio, as I said, GBP 800 million, or just over GBP 800 million, dominated by triple net assets across the grocery and the convenience sectors that will continue to benefit from increasing consumer demand for bargains in an inflationary environment. The portfolio has long leases 30, over 13 years to expiry. 100% occupancy. Is valued off a Net Initial Yield today of 5%. 67% of the rents in this portfolio are indexed. Rent review settlements over the period came in at 20% above previous passing. I should just point out that that's quite an impressive statistic given that there's nothing, none of the rent reviews in those three sectors, hit 20%.
We had a very strong settlement and the indexation that we have in our leisure portfolio, in our cinemas was extremely high. That's what brought that average up to 20% over the period, even though you don't see any of those buckets starting with a 2%. Turning to the investment market. As we know, the uncertainty is creating dislocation and paralysis across certain investment subsectors. As I mentioned earlier, interest rates remain a critical yardstick in working out what the correct property yields are. Volatile swap rates is creating illiquidity, although at least we are off the peak of the five-year swap. Well, I hope we're off the peak of the five-year swap that hit 5.4% at the time of the mini-budget in September.
Buyers and sellers are recalibrating in what is a challenging investment market. Looking ahead, Martin touched on it briefly, we think that debt availability and debt pricing will become an increasingly key metric as we go into 2023. There will be a focus on the sectors and the assets that can deliver a reliable and growing cash flow. We are seeing some motivated vendors, particularly at the moment across the open-ended retail funds. They seem to be the most active, facing investor redemptions. I also think that we will see refi, sales coming out of refinancing as we travel through 2023.
The fact of the matter is there will be a lot of platforms out there that were predicated on almost zero cost of debt and the platform doesn't work when, you know, the debt cost is gonna be 5+%, if indeed that is the case. As I say, it comes back to where we think the five-year swap settles. The fact of the matter is, you know, market uncertainty is actually the friend of the investor looking for long-term value. We will remain alert, and we'll be wide-eyed to people who are motivated and need to monetize their investments quickly. The occupier market in our chosen sectors, you know, continues to function extremely strongly. Occupation demand is very, very high in our core sectors. Logistics is benefiting from, you know, structural tailwinds, whether or not it's rising online penetration, increasing localization and onshoring.
This is all creating a, you know, deep and broad demand from occupiers. Logistics take up in the year to date is, you can see there, 38.5 million. The, you know, the important number there is that this is still 15% above the long-term average. This has continued post period end. We've done 17 more lettings across our urban portfolio. As you can see, these are at 24 above what the previous passing rent was. Turning now to supply, this remains highly constrained, and that combined with the demand and the, that we're seeing, the granularity of occupiers looking at urban warehousing, is driving rental growth.
You know, it's a fantastic statistic that one of my colleagues uncovered that, you know, over 20 years, the industrial floor space in the major cities has fallen dramatically. You know, 24% in London, 20% in Manchester, and 19% across the West Midlands. As a result of that, you know, that plus the rising demand, we've got logistics vacancy at only 3%. That's just over six months supply. Given the economic outlook, given the cost of finance today, we see very little new speculative development going forward, and therefore that will continue to drive rental tension. In fact, at the half year, we had 148,000 sq ft of vacant space across the portfolio.
That is actually reduced by just over 50,000 sq ft with deals that we have agreed in solicitor's hands. That is, it's a wide range of people, whether or not it's, you know, yoga and Pilates studios, whether or not it is trade counters, whether or not it is, it's dark kitchens such as Jacuna and Deliveroo, whether or not it's a, you know, door furniture wholesaler in Crawley, whether or not it's a coffee roasting house in Stratford, a fine art logistics business in Tottenham. You know, there is a broad range of occupiers that are gonna take our buildings. I was talking earlier that, you know, we've got a building coming up in February, and we're in discussions with some people.
One of them was a fish wholesaler, and the other was an automotive collision operator who just fixes your car. You know, I mean, it's just a broad I have no idea who'll occupy. If we have a vacancy next week, I have no idea what industry will occupy. But what we are seeing is, as I said, you know, we are seeing, you know, material rental growth in or rental uplift from the new let rents that were set, that we're agreeing compared to the previous passing rents that we were receiving. That probably justifies a little bit more detail on rent reviews, which we think is, as well as inflation, important to determine what the correct yields are. We delivered like-for-like income growth over the period at 2.9%.
Contractual rent reviews, courtesy of elevated levels of inflation, helped deliver 17% uplifts in previous passing. Open market reviews were settled at 22% up, urban logistics being the standout performer at 25%. As Martin's already touched on in his slide, but this is just on the logistics bit, the logistics portfolio has got another GBP 8 million worth of rent to be captured over the next 18 months courtesy of both contractual and open market rent reviews that we are looking forward to. Looking at the management of the portfolio, you know, we remain focused on actively improving the quality of the portfolio that we own. We've de-risked 860,000 sq ft of developments by adding GBP 6.7 million worth of high-quality income.
Our refurbishment and asset management initiatives have allowed us to secure another GBP 1.9 million worth of income. We're continuing to push ahead with renewable opportunities in partnership with a number of our occupiers, whether or not that's PV, you know, installing PVs on the roofs of our buildings in partnership with people like Eddie Stobart, Primark, Speedy Hire, The Hut Group, you know, it is something that we are deeply engaged in. Also, we've got two partnerships in EV charging with InstaVolt and MFG, and we'll be rolling, you know, we're starting to roll those out in various sites across the portfolio. I'm pleased that we're able therefore to announce that our EPC rating of the portfolio has improved dramatically. You know, 86% is rated now A to C.
That's up from 74% back in 2021. You know, we've often said, you know, we don't shy away from bad buildings. You know, we think, you know, we have the skill set, the desire, and the capital to turn around bad buildings. Therefore, you know, I think we are excellent stewards of this. You know, it's, in many ways, it's very much part of our DNA. It's part of the asset, active asset management profile that we've, you know, that we've been doing, Mark and I have been doing for the last 30 years. You know, this is not a big shove. The fact of the matter is, it is generally accretive. You know, we spend money on our buildings, we get a return of on average 10% uplift.
In some ways, it's the best capital we can allocate, you know, to the our shareholders' money. Finally, my thoughts, predominantly my thoughts, my colleagues' thoughts as well on the outlook, which is increasingly difficult to predict. We can pick up three or four commentaries, even just this morning and come out with five or six different views of which way this is gonna play through. Look, the portfolio, you know, is in a great shape. It's an all-weather portfolio. We've navigated COVID, and we're navigating, you know, a repricing of the debt markets and a challenging economy for consumers. The fundamentals remain strong in our preferred sectors.
Structural demand from changing consumer behavior and geopolitical events is driving demand for our warehouses. Our value and convenience assets, we think are well positioned given the challenging environment as high inflation strengthens consumer demand for cheaper goods. There will be undoubtedly less supply and less construction. This will lead to stronger occupancy and stronger rents. We think polarization of sector performances will widen. I actually think polarization within subsectors will widen. You know, whether or not it's in the office market, you know, green v brown offices, whether or not it's in the retail market, convenience and grocery versus experience. Therefore, we expect that to play through over the coming period. I think the distribution sector is arguably recalibrating more quickly than other sectors, largely due to better liquidity and the global appeal that the asset class holds.
Other sectors, particularly those with lack of income growth, will reprice aggressively in the periods ahead. Today there's very little liquidity in a number of these sectors, so it's very difficult to get full price transparency. I mean, the suggestion that shopping center values have actually held flat over the last six months, I find very bemusing. However, the glass is half full. We have a strong belief that the challenging macro and investment environment will settle. It will settle. It always does. It's all about when. Inflation forecasts will fall and an inflection point will shortly be reached in interest rates. You know, if we look back at the currency, you know, it wasn't that long ago when we were talking about pound/dollar parity. Yesterday, the pound was at 1.19 to the dollar.
That's a 20, nearly a 20% movement. You know, we are seeing signs that this will pass through. This stability will bring better, you know, bring more confidence and liquidity to the sector, and it will then, it will feed through into where the five-year swap begins to start settling. You know, beginning of, you know, March, we talked about the five-year swaps, it was around about, you know, late ones. Beginning of July, middle of July, it was about 2.45. Middle of August, it was 3.4. Beginning of September, it was up at 4.1. We got a mini-budget, went up to 5.4, and today it's at 3.8. We've come a long way off the peak.
We need it to, you know, for proper, you know, to real estate to become more compelling, it needs to head back down to closer to 3, and I'm sure it will. If you believe in the correlation between the five-year swap and the 10-year gilt, you know, 10-year gilt is an early indicator of where we think it may settle. it is gonna be an interesting few months, but at the end of the day, you know, we will get through this period of uncertainty. We, you know, we've done it before, and I think real estate becomes incredibly compelling, particularly in your chosen sectors where you are capturing that income and rental growth that will allow you to, allow you to drive your returns. On that note, thank you for your patience this morning.
Very happy, my colleagues, I've got Mark and Valentine up here with us, as well, to take any questions that you may have. Once we've finished in the room, I'll go to the phone lines, to see if there's any interest on those. Thank you very much. Morning.
Yeah, morning. It's Rob Jones from BNP Paribas Exane. I've got a few. Do you want me to do them?
Please, sure.
Then? Fine.
Shoot. No, let's do one at a time. Otherwise, my memory's going.
The first one, just now you said, less supply and less construction, this will lead to stronger occupancy and stronger rents.
Mm.
You've done this for 30 years. If I'd done this for 30 years, I'd have been five years old at the time, so clearly you've got more experience than me, but do you?
I have gray hair.
True. Do you genuinely believe that, or is that stronger relative to if we hadn't been in a scenario where supply was tightening as a result of lack of development finances?
Well, it's probably biased by our investments in primarily in the innovative logistics space. We think it's very difficult to get supply. It's very difficult to see new supply coming through. Therefore, we're seeing this demand, you know, in terms of, I talk about, you know, whether or not it's online penetration, whether or not it's localization, you know, whether or not it's onshoring, but also changing consumer expectations for quicker and quicker deliveries. You know, people wanna be in zone two. You know, that's how we get you the delivery the same day.
That's part of it, but also it's also framed by, you know, I was with a leading retailer yesterday in the convenience grocery sector, and they were saying to me, "We can't get any new developments to stack. We can't get them to work. Actually, our store opening program for next year will all be on taking existing buildings from failed retailers and refitting them for their purpose." And, you know, like I said, I mean, we're struggling to get some of them to work. I mean, we actually can get that one to work, providing they show a little bit of flexibility on a few of the terms. But that's what they said. None of the nine that we're hoping to open next year, none of them will be new builds.
The second was, The answer might be no, but do you have a view in terms of the percentage point gap today between buyer and seller price expectations in the investment market? 15 percentage points?
It's very, very. I'll try and give you a three-dimensional answer rather than just one number. The buyers out there are ambulance chasers and there are, you know, people looking for blood on the street. All right? There's that buyer and the people, they will probably trade with the motivated vendor, which at the moment I think is largely confined to the open-ended retail funds. I don't think there's too much leverage in the system outside of those. What you will, where you are seeing a much tighter pricing tension between buyer and seller's aspirations is whether or not you're talking about, you know, very long-term investors.
You know, this is a quality asset that I've wanted to get hold of for a long time, and this is the market where I can get it. Owner-occupiers, special purchasers and the odd emotional buyer. So it's a broad church. In fact, you know, we get approaches all the time. You go, "Oh, yeah, that's interesting. What's that? Oh, that's 5% below what we think it's worth. Okay, fine. What's that one? Well, that's 15% below what we think it's worth." So it's a broad church. I can't give you one number.
Fine. Just two final ones. You and your competitors have been talking so far this calendar year about, obviously, the fact that your occupied market remains very, very strong, and that's reflected in your leasing versus previous passing, et cetera. Are you seeing today, post-period end, any slowdown in occupied demand yet? If not, are you expecting it, and do you expect this to then drive a slowing of the rate of positive rental growth?
I mean, we don't have much vacancy. I've tried to highlight the activity that's happened post-period end to try and answer that question for you. you know, we don't have a lot of, you know, empty buildings. we're capturing some pretty good uplifts, as I've tried to demonstrate. We're not seeing too many cracks. My suggestion, we don't have a vacant 300,000 sq ft building. We don't have a vacant 400,000 sq ft. All I would say is I think to take a big box is a bigger decision. Okay? It's not really a rental decision. It's actually a business decision. It's an employee decision, and it has wide implications.
You know, is it reasonable to think that those big decisions might be kicked down the street by another six months or 12 months? Yeah, it's reasonable to suggest that. Does that mean there's no demand for medium box, big box? Absolutely not. You know, I don't think the market's ever been dominated. You know, Amazon have been an important player in it, but they're not the biggest, you know, they're not the only player in it. I just think in urban, it's just a much the granularity of occupiers that we trade with and we deal with, and I've tried to highlight that in the presentation, is just incredibly wide. Do I think it will come off a bit? It's highly possible. Are we seeing it at the moment? No.
If somebody goes, you know, if we take back possession, we will refurbish the building, and we're pretty confident that in the right locations, we'll relet it at a higher number.
Just the final one for Martin. You've obviously got GBP 300 million RCF. When we look forward to your debt maturity profile, implicitly that means that you've got liquidity at least to fund both the refi needs for, I think it's 2024 and 2025.
Yeah.
Indeed, clearly 2023, which is relatively small for the second half of this current financial year. In reality, the utilization of RCF facilities, my understanding is it's not as simple as an individual's overdraft. You can't just, you know, draw it down with ease. Ultimately, if I'm a RCF syndicate bank or indeed an individual lender, I ideally would like to see a scenario where you're drawing on that RCF, but then you're refinancing in the relative near term with, debt that's not RCF facility. maybe you can give a bit of color on that and how you think about those, that refinance, albeit it's not massively material for you specifically over the next couple of financial years.
I'm not sure we're as constrained in the use of our RCF as you describe. Look, I think it's quite interesting. We've been having this conversation six months ago at the year-end. You know, I would have probably said, "Don't worry about FY 2025, and I wouldn't even worry about FY 2024. We'll probably do a bond issue, or we'll go and do a USPP." You know, all of a sudden, circumstances have changed. We felt we needed to have cover to deal with those, that refinancing risk. The Chairman's really strong on this yesterday.
The issue is, it may be when we get to FY 2025 that those markets will be open again, and we'll refinance that debt, you know, with some other form of debt, and we'll use the firepower we've created this week, you know, for opportunistic new acquisitions, and we can hit the acquisition trailer when there's blood on the street. I think, I think what we're saying today is, look at, you know, from a, from a risk mitigation point of view, we have no refinancing risk. When we get to that, will we be using the RCF to do that? I don't know. Yeah.
Max.
Thanks very much. Max from Numis. Just to kind of follow up, you talked about not that many motivated sellers other than the open-ended funds, and actually it might be the refis that come through over the next 12, 18 months. Just how much kind of visibility do you have over that in order to kind of target that? You obviously said you think over the next 12 months there will be more opportunity.
Well, it's a little bit like commentators writing about the mortgage market. You know, you know, we can say that 75% of the residential mortgage market is fixed. Yeah, but guess what? It comes off. That when, you know, you're going back into the debt markets today, you're gonna find out that you know, you're dealing with a number that's a lot higher than when you know, than when you set out your strategy. You know, for some of these assets, they're gonna find that deficit financing for a bit. Does that work? Is that what the equity investor wants? Does it actually just say, "Do you know what? I'll take my money back." We don't have visibility of when that comes up.
We, you know, we can only play with the ball, you know, the game in front of us at the moment. It doesn't appear on the screen. We're not seeing too many refinancing opportunities coming through, but we are seeing quite a bit coming out of the retail open-ended funds at the moment. It's just a natural view that debt expires.
That's great. Thanks. Let me just follow up on one point on the EPCs. I think it was at 86% to A to C and 47 to A to B. The ability to take those Cs up to Bs, how difficult is that, you know, and your ambition to do it, I guess, as well?
I mean, it requires an engagement with the occupier, and a lot of it actually is in their hands. You know, I could be really flippant and say, "Well, we just have to change the light bulbs in most of these buildings, you know, to LEDs." You know, it does require an engagement with them. When you've got long leases, you don't necessarily get those buildings back as quickly as you might like. I think what I've tried to, I suppose, get across is that there is a desire and an intent to do it. We think it's capital. It gives us a decent capital return as well. Exactly when it happens, Max, is not strictly in our control.
You know, without, you kYow, these are relatively simple buildings, you know. I mean, I don't wanna down the sector, but, you know, this is not a shopping center. It isn't a hotel. It isn't a, you know, an office building, with high fit-out costs, you know. It's four walls and a roof, as far as I'm concerned. What else goes on in it is a lot of it's down to the occupier. We are getting better occupier engagement, but it is not as good as you might imagine it to be from big name companies.
Great. Thank you.
Morning.
Hi, there.
It's, Sander from Barclays. Thank you. Couple questions from me as well. The first one is, you mentioned, I think in your opening remarks, that swap rates are an important yardstick, and they're up 200 basis points, and we've seen yields moving 50 basis points in the first half. Does that mean that you think there's another 150 basis points to go?
Well, apart from the fact that the swap rate is flat and the gilt, the gilt term, the ten-year gilt is, you know, is a flat return. I think that yields should, as I said also, that yields should reflect the trajectory and certainty of what's gonna happen to your income profile. My actual. The first answer to that. First part of my answer is I actually think swap rates will still come in. You know, I still think they'll come in at 3.8% this morning. You know, I do believe there's a correlation with the ten-year gilt. I could see them coming back down to much closer to 3% within the next months. Don't wanna give you a date, but I just think it will.
I think that that makes real estate investing more compelling, because at 3, plus your margin, 150 basis points, you're in at 4.5. If you were to buy an asset that was the cap rate of 4 but it had 3% rental growth in it'll work for you. So yeah, I'm not predicting what happens to yields, certainly across other sectors that I have very little knowledge of. But I think swap rates will probably still continue to traject down. I mean, we're 160 basis points off where we were at the mini-budget. Now, Martin referred to March or February, March, April, which is what we refer to in the office as a period of maximum optimism. I refer to the mini-budget as a period of maximum pessimism.
I think we're off that. I think we're 160 off it. The trajectory of the curve looks positive, although it's never a straight line, as my colleagues know, 'cause I ask them at least four times a day where the hell the five-year swap is. Which means it's gone up. It can't go up. My thesis is based on it going down. I think there will be yield expansion. I mean, I think certain sectors have got illiquidity. They've got no price discovery. You know, I touched on shopping centers. You know, it seems hopeful.
Maybe the very low yielding stuff as well.
The low yieldings, you could argue that's why it's moved so quickly.
Yeah.
The low yielding bits move so quickly. That will come to an end. What I don't see, in answer to Rob's question earlier, is necessarily an immediate end to the rental growth that we're expecting, you know. Everything comes to an end. I just, you know, I'd love to give you some anecdotes or he pulled out of this deal or he or they didn't do that deal or whatever. You will get them from me, you know. Yeah, without a doubt, the reasons why the cap rate, you know, I think British announced 60 basis points also across their logistics warehouses. You know, if they're low yielding, they've got to come up quicker.
Once it settles, you're then looking at where that yield needs to be relative to where the trajectory and security, longevity of your income is. I mean, that's what a yield, you know, an equivalent yield is.
Great. Second question I had was on the business rates. I mean, obviously there have been some changes in the last, what is it? Last week's announcement on that.
Yeah. Go on.
Obviously, maybe not necessarily as much in favor of logistics occupiers. Do you have a sense how that may impact your tenant base?
No.
I mean, well, in terms of how much does it hit?
No. A lot of the business. Look, a lot of the businesses we're dealing with here, you know, the accommodation that they occupy is their business. Okay? They've gotta have it. You know, it's not like retail where you go, "Oh, do you know what? Do we need two shops on Oxford Street?" You know, "Do we need two stores on this, in this out-of-town retail location? We'll close one of them because it doesn't work for us." You know, the fact of the matter is this is their business. You know, they're absorbing that cost. They will try and mitigate it with other cost savings and maybe putting in some price increases through. Maybe getting rid of a member of staff or something. It's critical.
Without that warehouse, you know, that yoga studio doesn't operate. You know, that coffee brewery doesn't work. They will absorb it. There is transition re-relief on the way up as you, as you will have read, as opposed to on the way down. I think they've done a brilliant job, by the way. The rating revalue is exactly what I thought it should do. That was, you know, get rid of the transition relief on the way down 'cause it was too slow.
Mm-hmm.
Keep it on the way up, you know. The fact of the matter is there's nothing wrong with the rating system if that was, if the mechanisms were correct, which I think they've done that. The fact of the matter is, when they were put in in the first place, nobody actually thought that retail rent in particular would fall. They cratered, and that isn't, hasn't been reflected.
Okay. Thank you. The very last question I had is, it's actually on the dividend. I mean, saw that you increased it obviously again. There's obviously strong top-line income progression of what is it? Roughly GBP 8 million over the next 18 months, something like that. At the same time, we're also facing an environment where, with higher financing costs and marginal financing rates you've just mentioned, 0.5%. That is gonna evolve further up as well. Like, why not keep the dividend flat for the time being?
Look, we've, we believe that we've got an income stream. We talk about our portfolio being, you know, all-weather. We think that it is fully occupied. We run a very efficient ship in terms of admin costs and whatever else. We think that the business and the portfolio has got that movement. We've also got high swap rates. High hedging
I don't think earnings is gonna be flat. I think we will continue to progress our earnings. I think our top line will grow. I think we've now got control of where the finance cost is gonna go within a reasonable, you know, yardstick, you know, and we're very tight on our admin costs. I think while earnings, you know, we think we can progress, the dividend should progress, too.
Great. Thank you very much.
We have set out our ambition to be a dividend aristocrat, Sander, okay? Let's not forget that. I don't wanna break that now. We've got another 17 years to go.
Sorry.
Bjorn Zietsman from Liberum Capital. Just a follow-on question around your tenant base and the strength of your tenant base. I mean, going into a recession, it is likely that we are going to see a spike in CVAs. How closely do you monitor the liquidity and solvency position of your tenants, and what percentage of your tenant base would you think is under pressure?
We're obsessed with credit, all right? We have an individual in the business, that's what his main job is, to assess the creditworthiness of our tenants. You look at our rent collection. I mean, we collect GBP 150 million a year. We've got GBP 37,000 of outstanding arrears, okay? We've navigated, you know, we've navigated a Brexit environment. We've navigated a, you know, lockdown of the global economy pretty well with, you know, without having to give, you know, lose income. We've rescheduled payments. Undoubtedly, we will lose some businesses, if you've bought the right assets, you will relet them, okay? One of the businesses that caused us some unease in COVID was a transport business down in Crawley called Howells Transport.
When we were allowed, we decided that it was right to peaceably reenter the premises, 25,000 sq ft. We did a light touch refurb on it. Howells were paying us GBP 10 a foot. We've relet it to the ironmong— or ironmongery business I touched on earlier at GBP 12.50. Yeah, we will deal with it. One of the attractions is the granularity of income. I think that does exhibit some defensive characteristics. Ultimately, it comes back down to owning desirable real estate that alternative occupiers would like to be in at the right rent. We monitor it. I mean, I get a, I get an arrears statement at least every Friday, if not more often, immediately post. You know, we're on it.
You know, we can't give you those metrics at, on rent collection and not be on it. Hemant?
Hi. Good morning. Hemant Kotak from Kolytics. Clearly your team's been around a long time. You've got a lot of experience.
Not that long. Not that. You know. Yeah.
I see a couple of gray hairs there.
They give me a lifetime achievement for being here.
How is this different to prior cycles? It's a three-part question. In that context as well, I think you just alluded to maybe a 4 yield with 3% growth, 7% return. How sort of appropriate is that as the funding rate has changed? Maybe that's the second part. Then some of the REITs in your position are in a good position because they've got low, you know, low LTVs, good cover in terms of interest. They're talking about firepower. We haven't heard that from you today. Can I ask why? Do you not feel that's the case?
Let's, let's start with the first part of the question. How is this different? You know, we're going into a situation today without, with a jobs- full economy, with savings ratios 20% higher than they were pre-COVID. 50% of the population doesn't have a mortgage. The 50 that do, 75% of them are on fixes. Wage inflation. This is very different from, you know, when we went into the GFC, we had higher unemployment. We had unbelievable borrowing. The banks were throwing money at us indiscriminately. And, you know, I would highly recommend The Big Short if you're not quite sure how, what went on. And, so I think it is very, very different. And I think this so this is not a consumer-led downturn.
This is a supply constraint, courtesy of, you know, whether or not you wanna blame the geopolitical issues in Ukraine, but actually it's the reopening of the global economy. You know, and you know, China's not firing on, you know, probably not even firing on half its cylinders at the moment. I think it is very, very different. I think it, you know, When you analyze it looks a million miles away from the GFC. You know, I was frightened in the GFC. You know, cash points were not gonna work. You know, talked about... Again, another film I'd recommend is Too Big to Fail. I do think it's very different. I think the consumer's been pretty well-behaved. Saved some money.
They're all in employment. They're all getting pay raises. I think it is very, very different. Yes, they've got challenges in certain parts of their expenditure, whether or not it's food, whether or not it's energy, okay? But they'll just have to pivot. You know, I was studying the Barclaycard data on Friday. Restaurant bookings were down 11%. Excuse me. Takeaway turnover was up 12%. The caption that got me was, people are swapping the big night in, the big night out for the cozy night in. That's a great line. You know, you know, we do it all the time. I mean, maybe for different reasons, but...
I think it is different, and that's why I don't expect it to be, you know, somebody trying to tell me, I thought it was gonna be a V. I didn't. I just thought it might be a bit shallower than that. I think peak inflation, sort of core inflation has peaked. I don't think we're in the same space as the, quite in the same place as the Americas or American are at the moment, but, you know, we'll get there. That's. What was the second question?
The second part was, the 7% return that might have been appropriate 6 months ago. What is it now based on-
It's higher.
Yeah.
It's higher. I think it'll, again, it'll depend upon the 4 that I talked about is actually, you know, a 4, a flat 4 is not acceptable anymore. You know, people want a higher number. A 4, people will print a 4 today if they know they're going up to maybe a 5.5 or a 6 in a relatively short period of time. I think the 4 today is at least a mid-5s. The 4 yesterday might be a mid-5s today, but it does depend upon when you get there.
That's the yield, right?
Yeah.
Okay.
What was the other last question?
No, I think the last one's firepower, isn't it?
Yeah.
On my debt metrics slide, I put a headroom in, you know, and, you know, that doesn't include certain sales proceeds that we've received since then. I think in answer to Rob's question, you know, that headroom and firepower could be used for debt refinancings, but it could also be used, you know, to go on the offensive. You know, I think, you know, we consider we do have firepower, and, you know, we'll determine how best to use it depending on circumstance.
Yeah. Just to clarify one point on that, is that because of... I mean, a lot of companies are saying that. Is that because I won't ask you to speak for the others, but that you feel that it's this exact case where it's shallow, the repricing, whatever it is, it's not like the GFC and therefore... There's an underlying assumption there that I'm trying to draw out.
Excuse me. I mean, I think, look, I did say we know it'll settle, we just don't know when. All right? We're in a period of, you know, great uncertainty. We still are. I think it's a bit better today than it has been. We will remain alert, wide-eyed for new opportunities, but we're not in a hurry. I think if we do execute and, you know, you would expect us to be in the market. If we do decide to execute, it's because we will see an opportunity to acquire quality that rarely would become available in a normalized market.
I think Q1 next year will be quite interesting from a debt point of view. There's an article in the FT this morning talking about the banks retreating, and I slightly agree with that, but they're also polarizing. You know, they will continue to lend to credits that they're comfortable with. I think the lending will get more expensive for everybody. You know, there will be some people who will find that therefore really difficult to refinance in. I think that will create opportunity.
That's a good color. Thank you.
Mm.
Miranda Cockburn from Panmure . Just a couple of questions. Martin, just on the debt, what's the margin on the RCF? Of your 85%-
I didn't ask her to say that.
On the 85%, which is fixed or hedged, how much is fixed and how much is hedged?
If you refer to the gentleman sitting next to you, I think if I answered the first question, his colleagues will kill me. Andrew wanted me to put it in yesterday, and I said, "I can't. You know, they don't want me to put it in." Andrew allowed it to slip out 1.5%, which is not a million miles off.
Okay.
It is consistent with our existing RCF-
Mm-hmm.
which I was really pleased about.
Yeah. Okay. Just the other question I was just gonna ask, in terms of the bigger picture in your strategy, I mean, you've got the luxury of going in and out of any sectors you want to. Obviously historically, you moved from retail into industrial at the right time, and it sounds as if you're very confident about being in industrial. Are there any other areas of the market that you think may be interesting? Another way of putting it is if you had a clean sheet of paper today, where would you like your portfolio to be, or is it where it is?
It's never exactly where it is, where you want it to be, to be honest with you, 'cause you're always trying to improve it. I feel absolutely comfortable, delighted to be in urban logistics. I just know I couldn't do it from a clean piece of paper today, although some people have come in more recently thinking they could, which is interesting. Interesting timing anyway. I think for me, it comes back to macro trends, you know, consumer evolve, you know, behavior evolution, part courtesy of technology in to a large extent. I'm very into the an extension of the convenience market. I'm very into roadside. I think the drive-through market, you know, for those, there's been some quite well-written articles. The evolution of EV, that will change behavior as well. I think that's great.
Very difficult to get scale, if I'm being honest with you, in it. You know, I think convenience groceries is terrific. I think the days when we spend an hour and a half going around a Tesco supermarket, you know, is time that my children are just not gonna commit to, just not gonna happen. You know, it's time you never get back. Anybody says it's an experience, they've got bigger issues. For me, it's about top-up shopping, convenience over experience, certainly in groceries. The problem with, you know, in GM, built too much stuff, you know. I think a friend of mine said the other day, 25% too much shopping center space. Totally agree. Great. Well, that's it in the room. I don't know if we've got any call questions online. Online. On the phones.
We do. As a reminder to ask a question, press star one. We will take the question from Oliver Reiff with Citadel.
Hi there. Can you hear me?
Yep, we can hear you.
Hi. I'm new to the company, so apologies if I've missed something. I had two questions on business rates. The first one is, I don't think you mentioned business rates and the revaluation at all in the main presentation. The back of the envelope suggests, you know, the change in business rates could be, you know, greater than the portfolio reversion that you quote. I mean, to me, it hits the materiality threshold. Just wanted to check why it wasn't mentioned. The second question was just more broadly, how you think about looking into next year, the combination of, you know, the business rates revaluation and occupancy cost increase, and recessionary pressures on tenants in light of, y eah, it's often low margin businesses for sort of several parts of the occupied base. Thank you.
I mean, I touched on the business rate bit a little bit earlier. I mean, the fact of the matter is, you know, it's gonna be a cost of doing business for occupiers as it, as indeed it should be. I think that, you know, they don't have the luxury that maybe occupiers in other sectors have in just simply saying, "Well, we don't wanna be in this location anymore." I think that, you know, these, some of these businesses are possibly more resilient than you were implying in terms of their ability either to absorb the costs or whether or not it's their ability to pass those through, making you know, other efficiencies and or referred to maybe headcount would, you know, is there.
The business rates is up there. Will it have an impact on rental growth going forward? Yeah, it's possible. It's possible. I don't think it eradicates the reversions that we expect to collect. I mean, the fact of the matter is the reversions that we've touched on this morning are actually historic reversions. We haven't forecast that we're gonna still get another 3%, 4%, 5% rental growth going forward in order to collect that GBP 10 million that Martin talked about over the next 18 months. We'll see how it plays out.
I mean, it's also worth mentioning that business rate increases are phased over a period, so it's not a cliff that they face, in ways they may face with say other costs such as energy or indeed staffing. So we'll see how it plays out. We don't have great... We don't have perfect clarity on it at the moment. But it is a cost that our tenants will have to absorb. How resilient they are, we'll find out. If they're not, and if the tenants are not resilient, we'll find out how good an asset allocation job we've done in terms of picking buildings that have alternative occupier appeal. We'll be judged, I suspect, over the next few years.
Thank you very much. Much appreciated.
There are no further questions, so I'll return the call back to Andrew Jones for closing remarks.
Thank you very much for making the effort. Horrible day out there. Hope you don't get too wet, but do appreciate your interest and engagement. Thank you. Have a great day.