Well, good morning, everybody, welcome to our Full Year 2022 results presentation. Thank you very much for taking the time to join us here in person or indeed online. As usual, I'm gonna make a few opening remarks, and then we'll dive into the not inconsiderable detail of the presentation. Now, much of the debate a year ago was around the transitory or structural nature of inflation and our overriding assumption was one of continuing momentum in both occupational and investment markets. What a difference a year makes. War in Ukraine, continuing lockdowns, widespread labor shortages, and the consequential supply-side tightening caused inflation to spike and gave central bankers the opportunity to put an end to the era of free money.
With rates rising and a cost of capital reset taking place through the second half of the year, real estate investment markets more or less ground to a halt. Most buyers and sellers decided to sit it out and wait and see what happened. As a result, prices drifted downwards in search of a new level. Clearly, SEGRO has not been immune to all those pressures. Despite all of this, there is much for us to be pleased and proud about in 2022. Occupier markets stayed very strong, with take-up almost matching the record 2021 levels. We delivered some excellent operating results from our own portfolio. We've made some terrific progress with our Responsible SEGRO commitments. These results are once again the product of our clear and consistent strategy.
Our disciplined approach to capital allocation has created one of, if not the best portfolios of industrial and logistics assets in Europe, focused on markets with the most attractive fundamentals. Asset prices, in particular, property yields, are driven by macro factors and are clearly outside our control. The quality of our portfolio is the reason why we were able to deliver an 11% growth in ERV during 2022, which helped to mitigate the effects of the significant market yield expansion, thus limiting our H2 valuation decline to 17% and 11% overall for the year. Operationally, we generated some impressive results, a record level of new rent signed, significant reversion capture, and strong like-for-like growth in like-for-like rental income.
Despite the market turmoil, we've continued to deploy capital into our highly profitable development program, as well as acquiring some exceptional new sites which will provide further opportunities in the future. This has been possible thanks to having the right capital structure, which has been further enhanced by a busy year of financing, leaving us with modest leverage, very substantial liquidity, a low and almost entirely fixed cost of debt, and a very long debt maturity profile. Meanwhile, we continue to invest in the future of our business through our Responsible SEGRO commitments. We'll have meaningful progress to report to you on these, which I'll come onto later in the presentation. As we look ahead, we're feeling optimistic, notwithstanding uncertainty about the macroeconomic environment. Occupational markets remain in very good shape, with encouraging levels of leasing and new inquiries occurring in the new year.
The health of our very diverse occupier base is good. Most of our customers are coping well with increased cost pressures, and our watchlist remains small. Long-term structural tailwinds continue to drive demand for warehouse space, and these trends are much broader and more enduring than the near-term behavior of any single occupier or indeed next quarter's GDP. Vacancy rates are also low across all our markets, and we expect them to remain so, with new speculative supply likely to decrease. All of this points to continued rental growth and profitable development activity. As I said at the half-year results back in July, I believe our portfolio is in the best shape it's ever been in. We've spent the last decade carefully creating a super strong, modern, and well-located Pan-European portfolio that will perform through the cycle.
2/3 of it is in the most supply-constrained urban markets, and a third consists of high-quality logistics parks situated in prime locations along major transportation corridors. We have an exceptional land bank providing us with future growth potential. Our market-leading operating platform with people on the ground in all the key markets helps us to respond quickly to changing market environments and seize opportunities that come along. Our customer base is highly diversified, with no single name or industry segment dominating. The vast majority of our buildings are extremely flexible and adaptable to many different uses. The sheer diversity of occupiers, the wide variety of uses our buildings are put to, and the dynamic nature of the market are underappreciated by many, particularly in our biggest urban markets.
Our experience is that wherever we find large numbers of people and businesses clustered together in a major city, there's always gonna be demand for space from any number of new or existing occupiers. The bigger the city, the more diversity and dynamism that we see. Now on to the main body of the presentation. Soumen will cover our resilient financial performance. Andy will then explain the strong operating metrics. I'll highlight the progress we've made with Responsible SEGRO, and then turn to the outlook for the business. Soumen, over to you.
Thank you, David. Good morning, everybody. David's highlighted the resilience of our business as a result of that long-term and consistent strategy, and I'll talk you through now how that's translated into our financial performance through 2022. Starting on slide eight. This slide shows you the key financial metrics of full year 2022. Adjusted profit for tax is up 8.4% year- on- year to GBP 386 million. Adjusted EPS is up 6.5% to GBP 0.31. Excluding the impact of the SELP performance fee, which I'll talk about in a moment, the EPS growth rate would have been 10.7%. The full year dividends have been set at GBP 0.263, reflecting that earnings growth.
The portfolio is valued at GBP 17.9 billion, a decrease of 11%, which has led to a 15% fall in NAV per share to 966 pence. Despite that fall, the balance sheet continues to be strong, with loan to value at just 32%. Slide nine, as we've done on previous years, it's important to put the single year performance into some longer-term context. This slide shows you the business has delivered very consistent and attractive returns over a number of years. Through the cycle, we cannot control yields, but we can drive performance through our investment decisions on our portfolio and the operational activities to increase rental income. You can see that passing rent has grown 13% per annum since 2016. That's led to CAGRs on earnings and on dividends per share of 9%.
NAV per share has shown a very attractive CAGR of 12% since 2016. This is extremely strong, consistent and compounding financial performance. As Andy and David will talk about, we believe there is still a lot more to come. Now moving to slide 10. This is the usual slide that looks at our net rental income growth, which is the key driver of earnings. Net rental income grew GBP 83 million in the year to GBP 522 million, an increase of 19% year-on-year. There are three main contributors to that growth. Firstly, rents in the standing portfolio grew GBP 28 million. Now, this continues a trend that we highlighted in the first half, which is that our portfolio is very well placed to capture rental growth in this current higher inflationary environment.
The like for like growth rate for the group was 6.7%, the highest we've ever reported, benefiting from high levels of reversion in the U.K. a nd indexation on the continent. The second big factor for the increase in net rent are development completions, which added GBP 43 million. Thirdly, investment activity also has had a material impact resulting from activity over the past 18 months. Acquisitions, mainly of income-producing sites for future redevelopment, have added GBP 33 million to net rent, which is offset by GBP 14 million due to disposal. Turning now to the rest of the income statement. Slide 11 looks at the key lines of the income statement. You can see on the table that the growth in rental income, which I've just talked about, feeds through to growing profitability.
You can also see the finance costs have increased during the year from GBP 40 million- GBP 74 million. This is due to higher rates, mainly on our new debt, although there is some part-partial offset through capitalized interest, which is higher. We'll continue to see the impact of the higher interest rates through 2023. As a result, adjusted profit before tax grew 8% to GBP 386 million, and EPS was up 7% to 31 pence. A quick recap on the SELP performance fee. You'll recall that we're potentially due a fee from our joint venture, SELP, at the 10-year anniversary, which is this October 2023. The calculation is very sensitive to valuation movements as it's based on the excess return over a base level IRR.
Now, sitting here today, given the level of market volatility, it is impossible to know what the fee will be come October. We are required by accounting standards to make a judgment at each accounting date. We're adopting a conservative approach by not re-recognizing any fee in the accounts for 2022. That does mean that we've reversed the net fee of GBP 21 million, which we recognized at June, given the valuation decline since then. This will continue to be a matter of judgment at the June reporting date until it is confirmed in October. Turning next to the portfolio valuation. To slide 12. 2022 was a year of two halves. The very strong positive momentum from 2021 carried into the early part of 2022, and the investment market was very active for the first few months of the year.
The uncertainty and the volatility in the capital markets inevitably spilled into the property investment market, leading to reduced liquidity in the second half. While we've not seen any distress, there were certainly some motivated sellers who had to transact in very thin markets. The valuers have therefore had to exercise greater judgment as there has been limited comparable evidence of transactions involving prime portfolios held by well-capitalized owners such as us. We value the portfolio as at December 31 at GBP 17.9 billion. That's a decrease of 11% over the whole of 2022. For the movement in the second half of 2022, SEGRO was down 16.6%, and that's shown on the bottom line of the slide.
We don't yet have the index data for Europe, but we have outperformed our U.K. benchmark, demonstrating the resilience of our portfolio due to all of the portfolio and the asset management work that we undertake. The valuation fall in the second half was GBP 3.6 billion. As I was saying a couple of slides ago, it's important to keep this in context. That fall comes after a valuation increase of GBP 6.7 billion in the 2.5 years since the beginning of 2020. On slide 13, you can see how the valuation assumptions have evolved. The valuation fall has been entirely yield driven. 100 basis point yield shift upwards, whether you measure it from December 2021 or June 2022, as yields were fairly stable in the first half of last year.
On the other hand, rental growth was very strong, one of the strongest years we've ever reported at 10.9%. Rents moved up in every market. Poland saw one of the largest moves, illustrating the effect of continued occupational demand when combined with much lower levels of new supply. The contrast in yields and rent demonstrates how the valuation movements have been entirely driven by the cost of capital reset. The fundamentals of our business, which are driven over long term by the demand for space from our customer base against historically low vacancy levels, remain very healthy.
If you assume long-term rental growth rates are in the range of 3%-6%, in line with our typical guidance, then that 4.8% property yield will offer unlevered IRRs of 8%-10%, which we would suggest are very attractive in a long-term context. Now moving on to financing and on slide 14. We were very active in the debt markets last year, raising funding for our investment in the further profitable development, either through CAPEX or replenishing our land bank. We were able to time our deals in what was a very volatile year in the capital markets, using the calmer periods to dip into the market with our largest single transaction, a EUR 1.2 billion issue in March. We used multiple markets to diversify our funding.
We were active across bond, bank, and US Private Placement markets and in EUR and in GBP. We issued two moderately sized long deals, the US Private Placement and the sterling bond, which raised just over GBP 500 million between them of 19-year money. That allowed us to pick and choose maturities at the short to medium term, which for the bulk of our funding activity. Overall, our bonds and our private placements provide an average 10-year money at an average rate of 2.8%. Now on top of that, we put in place some additional capacity working on with our existing and some new banking relationships. The graph on the right-hand side shows you that the funding was used mainly to fund our investment activity with a small amount needed for refinancing, and our liquidity has grown to over GBP 2 billion.
We can use this both to fund our normal levels of CAPEX, which we expect to be above GBP 600 million this year, but also to give us firepower if the investment market throws up new opportunity. Moving to slide 15. It's worth emphasizing that we have one of the longest and most diverse debt structures in the sector as a result of that funding activity. Our average debt maturity is just under nine years, exactly the same as it was a year ago. The graph illustrates we have debt stretching out to 2042, and the maturities are well spread out over the next 20 years. There are no material debt maturities at the SEGRO level until 2026, so we have no refinancing needs. 95% of our debt is fixed or capped, and two-thirds of those caps are in the money.
That provides very healthy protection against any further rises in short-term rates. As we're bringing that together, to summarize our financial position on slide 16. We have an extremely robust and liquid balance sheet and remain one of the very few real estate companies globally with a single A credit rating. Despite the higher average cost of debt, our interest cover is 4.5 x. Our approach to balance sheet management mirrors our portfolio management. We're a long-term investor in what are cyclical markets, so we need to manage leverage for both the up and the down cycles to ensure we have the capacity to invest in the business on a consistent basis. You can see on the graph how we kept our LTV low over the last few years.
As a result, despite the valuation fall, our loan to value is still only 32%. Our values would have to almost halve from here before we hit any gearing covenants. Turning to slide 17 and summing up on the financial slide. By continuing to invest in the business to capture the occupied demand, we delivered earnings growth of 7% through 2022. Driven by reversion and indexation within the existing portfolio, alongside development activity to add new rent. We've increased the dividend by 8%, reflecting those operating results, a payout ratio of 85%. Our portfolio valuation fell 11% with the cost of capital reset causing yields to rise, but partially offset by the rental growth on our resilient prime portfolio. Our balance sheet remains strong to continue to fund our future growth. With that, I'll hand you over to Andy.
Thanks, Soumen. Good morning, everyone. Soumen has outlined the resilience of our financial results. I'm going to take you through our operating performance and provide some color on the demand we're seeing from our customers. As David mentioned in his introduction, occupier markets have continued to be favorable throughout 2022. We've seen strong, broad, and deep demand across our portfolio. This supportive backdrop, along with the active asset management of our portfolio, helped us to sign a record GBP 98 million of new rent in 2022, a large increase on 2021, a year that we thought would be hard to beat. As you can see from the chart, new rent on existing space contributed very strongly this year, GBP 31 million versus GBP 15 million in 2021.
The contractual index-linked uplifts that we have on almost half the portfolio and the capture of reversion on our U.K. open market rent reviews were both very significant. In addition, we had another good year signing leases on new space. We contracted GBP 41 million of pre-lets to be delivered over the next two years. Some were to existing customers, like VIRTUS on the trading estate, and others were completely new to the portfolio, such as Bosch and Maersk, the latter being attracted to the high connectivity offered by our strategic rail interchange at East Midlands Gateway. We also saw high demand for our recently completed speculative space. Letting activity at Hayes and Tottenham, the latter our new urban estate that only completed in the final quarter of the year, was matched on the continent within urban schemes in Paris and Frankfurt. Demand continues to be very diverse.
The logos on the right highlight that. Notably, it was a definite theme of customers looking to improve their supply chain efficiency and build in more resilience. We saw increased take-up from manufacturers, but also from 3PLs, servicing both those manufacturers and retailers. It takes several years for supply chains to be reconfigured, this is another example of a long-term driver of occupier demand that we've been talking about for a while now. Turning now to slide 20. The active management of our portfolio continues to deliver strong operating metrics. Returning again to new rent from existing assets, you can see from the chart on the left that a large contributor was the 23% average uplift on rent reviews and lease renewals.
That was 28% in the U.K. due to the five-year review structure and 2% from continental Europe, where we benefit from annual indexed linked leases. Our retention rate stayed high at 76%. We do continue to take back some space when the opportunity occurs to move rents forward and capture that reversionary potential. Our letting success meant that occupancy stayed high at 96%, which is at the upper end of our target vacancy of 4%-6%. Just to note, much of that vacancy is speculatively developed space we completed very recently and expect to let in 2023. Moving now to our development program. We completed well over 600,000 square meters of new space during 2022. This equates to GBP 46 million of potential headline rent, with 80% already leased at year-end.
We managed our construction partners closely to ensure materials and labor shortages, coupled with some supply chain disruption, did not unduly impact our program. While costs increased, we were able to maintain our margin through increased rents. The yield on cost at 7.4% shows development remains highly accretive when well controlled. It's also worth noting that this yield is higher than we presented for our current development program this time last year. We outperformed by beating the rental levels used in our underwriting assumptions. Despite investment yield expansion experienced during the year, we still returned a very attractive profit on cost for the developments. All of the development completions were rated BREEAM very good or higher, our certification target when we start the projects on site. 68% are already or expected to be BREEAM excellent or higher.
With the introduction of our new, even more ambitious targets, we expect this number to increase. Specifically for the scheme in Tottenham, we're not aware of an industrial development in London that has achieved a higher BREEAM score. Slide 22 shows some of our development completions. Two-thirds of the program was big box warehousing, including our first unit at the high-tech food campus SmartParc in Derby for HelloFresh, as well as one of the last units at East Midlands Gateway for CEVA. On the continent, we completed 380,000 square meters of big box space, with some particularly sizable pre-let schemes for manufacturers Alstom and Stanley Black & Decker. As mentioned earlier, we also completed highly successful speculative schemes in the supply-constrained markets, urban markets of Frankfurt, Paris and London, and added another multi-level data center on the Slough trading estate pre-let to Iron Mountain.
Net investment during 2022 totaled GBP 1.3 billion, and continued to prioritize our highly profitable development program. We spent GBP 638 million on development CAPEX, and a further GBP 149 million on infrastructure, mainly at our Midlands big box schemes. These infrastructure works are now nearing completion, so that spend will be lower going forwards. We estimate about GBP 100 million in 2023. We also spent GBP 451 million on land ready for development, and that included a cracking site adjacent to our successful scheme near Berlin Airport, which will allow us to more than double the size of the whole park, and also a number of plots on the continent which have potential for data center development.
We invested another GBP 261 million into income-producing land, which includes estates for redevelopment in supply-constrained markets such as London and Düsseldorf. We also acquired a number of smaller investments that neighbored existing ownerships, which provide longer term asset management and redevelopment potential. Turning to disposals, we sold GBP 367 million of assets, and that included a high specification unit we built for in Verona, which crystallized profit during the strong investment market of the early part of the year. Some smaller standalone warehouses in non-core locations on the continent, and an Italian portfolio which we transferred to our joint venture, SELP. We will continue to be disciplined in our approach to capital investment during the coming year. We've adjusted our hurdle rates to account for the higher interest rate environment to ensure we deploy capital profitably.
We will also continue with selective disposals to recycle capital where market conditions and suitable pricing allows. With that, I'll hand you back to David.
Okay. Thanks to, Andy and Soumen. On now to the next section, which is about our progress with Responsible SEGRO. It's now been two years since we told you about our ESG framework, which has three clear focus areas. These are the areas that will help to secure the future of SEGRO. They're the areas that matter to us as a business, to our people, and our other stakeholders, and the areas where we felt we could make the most meaningful impact. I'm delighted by the momentum that we've already achieved in a relatively short pace of time, and particularly by the drive and the determination with which everybody at SEGRO is embracing and approaching these commitments. There were some very significant achievements with our low carbon growth strategy in 2022.
We're one of very few in our sector taking responsibility for our customers' emissions within our net zero carbon commitments. Key to this is having good visibility of those emissions, and then helping to influence their reduction. During 2022, we improved visibility by 14% and now can see what's going on in two-thirds of our entire portfolio. This will be driven higher as we increasingly introduce green lease clauses to new contracts. We increased our solar capacity across the portfolio by 34% in the year, which is helping our customers to reduce their emissions. We're now installing panels, and have been for a while, on all our new developments. Now we have an active program to retrofit them to existing buildings. One such scheme in the Netherlands this year added a massive 6 MW of capacity in 2022. What's 6 MW?
Roughly the equivalent of powering 1,500 homes, it's a big investment. On development, we've reduced the average embodied carbon intensity of our new projects by 10%. That's been helped by detailed life cycle assessments and the use of low carbon materials in the construction process. Last year, we talked to you about the framework for our community investment plans, which are focused on providing training and employment opportunities for local people. Creating opportunities for local businesses to become involved in our supply chain, improving the physical environment in and around our estates. This year, I'm proud to tell you that we've launched 10 of these plans across the group, they're already beginning to build momentum and starting to create real outcomes that are changing the lives of people who live in the communities around our estates.
Not only are these plans inspiring and engaging our own teams, but we started involving our customers and suppliers in these programs and have found significant alignment and engagement with them, which is ultimately going to improve the outcome of our own initiatives many times over. I'm also pleased to say we've become a fully accredited supporter of the UK Living Wage Foundation and are making great progress in ensuring that everybody in our supply chain receives at least the real living wage. Finally, in this piece, let's talk about nurturing talent, which is probably one of the hardest areas in which to effect change in the short term, but one of the most meaningful in terms of the future of SEGRO.
The strength of our operating platform and the ongoing success of our business relies on our ability to attract, develop, and retain high-quality people with diverse perspectives and backgrounds. We talked last year about achieving National Equality Standard accreditation right across the group, and during 2022, we've improved processes and put in place a number of actions to address the NES's recommendations for how we can foster an even more diverse and inclusive workforce. For example, we've changed our recruitment process around graduate intake. We've taken part in the 10,000 Black Interns scheme. We've undertaken further D&I awareness training across the business, and we've launched a new management academy. These and various other initiatives no doubt contributed to our achieving a top-quartile 91% engagement score in our latest employee survey. We recognize this is only the start, and we have a long way still to go.
Encouraging progress with Responsible SEGRO nonetheless. Now let's talk about the outlook. It's quite evident to us that these long-term structural themes are continuing to drive demand despite weakness in the global macroeconomic environment. Every week, there are headlines about one particular online retailer, but as we said in the past, there are many others still playing catch up in the digital world and generating demand for space. There are also many retailers, manufacturers, and distributors who are investing for resilience and better supply chain efficiency, and Andy referred to a couple of examples that we've seen this year. Urban population growth will continue to drive demand from new and existing uses and will limit the availability of new industrial supply. Pressures around sustainability, as well as higher fuel costs, will continue to drive occupiers to want modern, low carbon, and really well-located buildings.
In 2023, we're continuing to see very good interest in new and existing space from a wide variety of occupiers, and we expect this to continue, thus fueling more rental growth and profitable development. Even without further rental growth or indeed new developments, we have GBP 130 million of reversionary potential in the portfolio. That's increased by almost 50% despite securing GBP 28 million of rental uplifts in 2022. As you can see from the right-hand side, the majority of this can be captured in the next few years. We've got the U.K., which is subject to the usual five-yearly rent review clauses. On the continent, as Andy touched on earlier, we're benefiting from annual indexation uplifts, so almost automatically.
You can see there's GBP 44 million of reversion to play for in 2023 alone, which includes GBP 16 million of negotiations carried over from 2022. With those structural tailwinds and a favorable supply-demand dynamic in all our markets, we continue to expect further rental growth. We've maintained our medium-term growth, rental growth guidelines, as we believe that over time, the record levels of rental growth we've seen during the pandemic, and more recently, will moderate closer to these longer-term averages. As Soumen said earlier, putting those growth rates on top of current investment yields, we think offers an attractive unlevered return. On top of the existing portfolio, we also have tremendous potential to drive profitable growth from our exceptional bank of land and redevelopment assets.
This comes with the benefit of considerable optionality due to the relatively short construction periods, meaning that we can easily adjust our capital expenditure up or down according to market conditions, with our preference continuing to be biased towards pre-leased development projects. We saw significant cost inflation during 2022, but regardless of this, we've been able to maintain our expected development yields as a result of higher rents. The development program continues to be a profitable source of top-line growth, still offering a 150 basis point- 200 basis point margin over the valuation yield of completed projects. For land already on the balance sheet. There's a very appealing yield on new CAPEX of 10% or more on most projects. The growth potential embedded in our existing business looks something like this.
You can see we've got, starting on the left, GBP 587 million of current cash passing rents. We expect to increase that by GBP 297 million or 51% by capturing the existing reversing potential in our existing portfolio and by completing the current and near-term development projects. From the previous slide, you can work out that we need to invest only GBP 506 million of additional capital to access that first chunk of growth, which is largely baked in. We've got another GBP 446 million of opportunity on the remaining land bank and on optioned land and land under contract.
The overall potential we have now is for GBP 1.3 billion of cash passing rents, which is 20% higher than last December's figure as a result of our land purchases and ERV growth. Of course, all of these figures will increase further as inflation will drive additional indexation uplifts and ERVs will continue to rise. Furthermore, we have not included the additional uplift from redeveloping and intensifying existing income producing investment assets, of which we have several. Let me summarize our view on the outlook, and I'll start by just making a couple of comments about the investment market, because quite clearly there was a disconnect between investment markets and occupier markets during the second half of 2022.
In terms of the investment market, the start of 2023 has seen some encouraging early signs of increased activity, helped no doubt by a little less volatility in capital markets. Liquidity appears to be returning to our sector as many investors, like us, retain their conviction in the long-term fundamentals and see current pricing levels as an attractive entry point. I expect this will gain momentum as and when the path of interest rates becomes more evident over the coming months. Occupier markets continue to be encouraging. There's been little evidence so far of any business or consumer-led slowdown, and on the contrary, as I said earlier, 2023 has got off to a positive start with a good level of new inquiries and leasing deals. We think the structural tailwinds will continue to provide strong support.
We expect speculative supply to reduce, so the supply-demand balance should remain favorable even if there were to be some slowdown in take-up. Our modern portfolio, which is very sustainable and in prime locations, is ideally placed to capture further rental growth. Whilst our land bank offers us the ability to deliver a lot of development-led growth on top of that with an attractive return on investment. All of these things, alongside our market-leading Pan-European operating platform and the strong balance sheet Soumen talked about earlier, combine, we think, to provide a unique competitive advantage which bodes well for 2023 and beyond. To recap, we've shown a resilient financial performance in 2022 in the face of quite extraordinary macroeconomic pressures. The reduction in asset values and NAV caused by the cost of capital reset has been mitigated by our rental growth.
We've delivered a strong operating result with a record level of new rent commitments and impressive like for like rental growth. We continue to invest in the future of our business and are making meaningful progress with our Responsible SEGRO commitments. 2023 has started well, both in terms of occupier and investment markets. We do remain confident in the outlook for our business. Thank you for your attention. We'll now move to questions. We'll as usual take questions from the room first, and then we'll open up the webcast and the conference line. We've got a couple of mics roving around. Who'd like to go first? Hemant.
Hi, good morning. Hemant Kotak from Kolytics. Thank you for the presentation. Very good results, considering the circumstances. Just a couple of questions in terms of the last few slides that you presented. What type of economic environment are you expecting? Because you're obviously saying that demand is expected to stay robust. What is the economic climate and what is the risk to that view, basically? The other side is, you're saying demand is strong, but also that supply, speculative supply is likely to come down. What is the risk to that as well, please?
Yeah. Well, good question, sir. I gave up a long time ago trying to predict the economic environment or indeed what is gonna happen to investment yields. I think the point, you know, we've tried to make and we alluded to it in the presentation is we're setting the business up with considerable optionality. We, you know, we can adjust course and speed according to how the market evolves from here. We do think as we've said repeatedly, we've got some very strong structural drivers. We think actually in terms of occupier demand, that will continue to be positive even if there is a broader macro driven slowdown. It would be crazy to suggest that it will be completely immune.
At the moment, occupier demand is looking quite good, and we hope that will continue through the year. Even if it does, you saw the slide on vacancy rates. Vacancy rates are so low everywhere. With elevated construction costs, higher financing costs, I guess more uncertainty in terms of where You know, what are the investment yields. A lot of developers will struggle to get their funding packages in place. Our expectation is there will be less construction starts in certainly of a speculative nature in 2023. Even if there were to be a slower occupational environment, we think that, you know, the supply demand tension is gonna remain intact. Who knows?
I think the one thing I would say about the macro environment is it's more uncertain than it has been for a while. It certainly started more positively in 2023, it's far too early to conclude that we've got clarity about how things are gonna play out for the rest of the year.
Yes, yeah. A couple of more quick ones. One on the effectively the growth rates. What are you're expecting reasonably strong growth rates that you're expected to continue even in the downturn because of the lack of supply.
Yes, we have. We've given you a range. I mean, you're talking about the ELV growth rates.
Yeah.
We've given a range. We I probably regret the first time we put this slide up. It must have been about five or six years ago. We give a range of growth rates. It's fair to say that the last few years we've massively outperformed those growth rates and we've slightly nudged up our guidance. Our view, it's a range. Our view is, you know, any one particular reporting period, we could be above or below and certainly vary our position in that range. We're pretty comfortable that is a sensible medium term range of rental growth that we should expect in this sector, because we do think there are structural demands that will drive the need for space.
We do think because of very limited land availability, almost non-existent land availability in urban centers, very tight planning control over agricultural land almost everywhere now, and extremely slow planning processes, that the ability of the supply tap in most markets to be turned on significantly is very limited. We do point to continuing ongoing rental growth, maybe not at quite the level we've seen for the last two years.
Yeah. The divergence that you're seeing between the U.K. and the Continent, obviously that's been going on for a number of years. That's pushing, I guess, especially when you factor in the business rates in the U.K., that's pushing the divergence even wider. How long can that continue for, just generally? I mean, speaking to obviously the land availability point I think you talked to.
I mean, Andy, I don't know whether you want to add your perspective on this, but.
I wouldn't say that. I mean, we're absolutely delighted with the level of rental growth in both the U.K. and the Continent, and also in our big box portfolio as well as our urban portfolio. In fact, this time our big box portfolio has outperformed on rental growth. The urban portfolio, we don't see that as a midterm situation, Hemant, because as David said, urban land, urban sites are even more restricted and there's a lot of demand. Anticipate that rental growth on the urban schemes will be stronger than big box. It's an absolute nightmare to get supply into the market, to be frank. That's, you know. I've never seen vacancy rates the way they are. When you try and get something through planning, as David said, it's really hard.
Local authorities are sadly under-resourced, under-financed. It takes an enormous amount of time. Just really don't see any supply coming through in the near term. You know, very confident about those rates moving into the future.
Okay. Just one last question with for Soumen, if that's okay. Sorry. On sale, just on the fee structure. I know it's impossible, as you said, to forecast what it is, but can you just talk about the sensitivities please a little bit around how the mechanics of that piece?
Sure. Look, the fee as calculated at 31 December values would be EUR 160 million, of which our share would be 50%, so EUR 80 million. The way the fee is structured is to say it's calculated as the excess return over a base IRR, and therefore it's highly sensitive to where valuations land. Sitting here today, looking forward from here, we have very volatile market conditions. A 10% move up or down would move that fee about GBP 140 million-GBP 150 million up or down. Now, frankly, it will be what it will be. We're required, as I say, under accounting standards, to have to make a judgment.
Our judgment is it's very difficult with any confidence to put a number in the account, and therefore we've ducked it and have not put any number in the account. We'll see where we are come October.
Okay. Who's next? Osman.
Morning. Osmaan Malik from.
Yes.
From UBS. Morning, guys. One of your early slides was really interesting. You showed the long-term growth rate in rental income, which was very strong, CAGR, I think 13%, and long-term growth rate in some of the other metrics. The issue is it begs the question why earnings growth over that period hasn't kept up with the rental growth. I was just wondering if you could give us your thoughts around that. This is despite a period where interest rates have come down quite significantly. I think looking forward, should we expect that relationship to flip now?
Yeah, of course. The graphs on those long-term CAGRs on sort of page seven or eight, whatever it was. Rental growth has grown because that's a gross figure, and our rents have grown through a mixture of, you know, that like-for-like growth, which has been super strong the last couple of years, but particularly through the development growth. Now you'll be aware that over the last few years we've also raised, as you know, a reasonable amount of equity as part of our overall funding structure. Therefore, earnings per share growth and dividend per share growth has actually therefore, it's been slightly diluted by the new shares in issue.
That's why the 13% you see in the passing rental growth, that being a gross number, and the per share number being 4% below that.
I guess looking forward, should we expect that now to flip round? Are we at a point where we can start to see additional earnings growth in to close that gap?
Look, it depends. We've expanded broadly a lot. Equity has been a component of that. Today, we sit here today with a 32% balance sheet, lots of liquidity. We can continue to fund what we have in front of us. If there is a headwind at all, it's obviously the cost of capital interest rates are higher going forward. The marginal cost of debt on our new borrowings is higher than it would, than it has been historically. But on the flip side, we're capturing far greater like for like rental income growth, which costs no capital at all than we ever have done at all. Where all of that marries up, I'm not really sure.
I think our ability to produce good, healthy levels of earnings and dividend growth forward from here, I think remains fairly intact based on the occupied demand that David and Andy have talked about.
Thank you. Sorry, don't get me wrong, the figures are impressive. It's just an interesting gap that opened up.
Okay. Thank you. Who's next?
Sorry, I'm next to Osman, so I just grabbed the microphone.
Yeah, you grabbed the mic. Yeah.
Peter from Green Street. One for Andy. There are more or emerging regulatory risks. In France, for example, there's a discussion about solar panels on top of car parks, even on smaller sites. Barcelona has just sort of said, no dark stores and sort of trying to ban, you know, B2C logistics sites in the city. Can you chat a little bit about what other emerging regulatory risks you see in your business? That's one question, and then just one on the investment market. I know it's a little bit theoretical, but if you had to sell GBP 1 billion, EUR 1 billion of 10 assets versus 10 assets at GBP 100 million, EUR 100 million each, is there a portfolio discount today?
Okay. Right. Take the first one.
Yep. You're right, cities generally are becoming a lot keener to see green ways of transporting goods. We see that as a real opportunity for us. Number one, the locations of our sites and our assets are perfect to reduce transport miles, so to be close in. Clearly, if you're a long way out coming in, transport miles are much less. We're doing a lot of work on renewables and EV charging, and we're working with our customers really closely to make EV the method of transportation around cities, and I think that's the way that it will go. We see probably consolidation close to cities with EV vehicles coming out of those consolidation centers, and that plays really perfectly to our land bank and our existing estates.
On your PV point, a comment more generally, it's really more difficult than it should be to get PV on roofs. I mean, we've got these beautiful flat roofs, we wanna get PV up there. The biggest sort of regulatory difficulty is actually doing an offtake to the grid, grids nationally not really being ready to receive. They've been ready to send out. It's quite hard work. We're absolutely delighted in the Netherlands, in Tilburg, to get that huge array on an existing asset, a PPA to customer and an offtake to grid. That's what we're working on. It surprises me at times that governments and municipalities are not as welcoming, if you like, of green initiatives, and the bureaucracy to get those green initiatives in play is quite hard.
We're working at it, and we're getting there.
Yeah. The investment market one's quite difficult to really tell right now. I mean, we made the comment that, you know, the second half of last year, there was very little liquidity. I think Soumen alluded to, there were a few sort of motivated sellers, but most well-capitalized owners and most of the sector is quite well capitalized, was just sitting on their hands. There were a few transactions that happened in the latter part of last year, but there, you know, apparently were very, very few bidders for those. In this year, it's still early days, but the early months and early weeks of 2023, there does seem to be a lot more investor interest in putting capital to work.
Quite a number of parties we've heard of looking to transact on transactions. When you go from a market that has very little liquidity to one when liquidity is returning, I would expect that liquidity to return in smaller lot sizes. I don't think, I might be completely wrong, I don't think you'll see many very big portfolios trade, in the, in the early months of this, recovery, if I can call it that.
Certainly, most of the deals that, we are seeing out there are relatively small lot sizes. I think bidding would be stronger on those smaller lot sizes, the GBP 100 million type portfolios than a GBP 1 billion, if someone was to put that on the market right now. Who knows? Mark.
Thank you. Marc Mozzi from Bank of America. Following up on this, on this question about the investment market, let's turn it the other way around. What would be the yield gap or property risk premium you would be happy to apply on a, any risk-free rate for you to invest in a, in a building, in a logistic building right now in the market?
Well, look, I mean, I think we've, both Soumen and I touched on it, that we look at current yields, investment yields, and we look at the rental growth that we think is achievable. I think there is, you know, there's reasonably good value there now. The only issue is we, you know, we've got to make some choices. Our particular priority right now is to deploy more capital into our development program, particularly on land that we've already got on the balance sheet. Cause we made this point that we're getting a 10% plus yield on the remaining capital. We think there's the. You know, right now there's good value.
Having said that, you know, we know that there is still macroeconomic uncertainty. We don't quite know the course of interest rates and, and the broader environment. You know, we will be seeing how it goes and taking appropriate steps. The quality of assets that we have in our business and the quality of assets that we would want to buy, they don't tend to trade very often. I think you'll probably see us putting more of our capital to work in development for a little while yet.
Okay. If I understand you correctly, meaning your marginal cost of debt equal more or less the property yield you have in your book, that sounds to be a fair value for you.
I, I'm not sure fair value is the word I would use. I would say it looks a relatively attractive proposition if you believe you can get rental growth...
Yeah.
from the underlying assets.
Yeah. I'd just follow up on that. I mean, you know, a very wise man I used to work for once upon a time said, "Your property yield's a function of lots of things." The simplistic one is people just compare it to the risk-free rate. The reality is, it's about, we keep talking about it's the IRR, it's the total return. If you can deliver the levels of rental growth on the assets that we believe that are available, back those long-term structural trends, then it's less about what the initial yield is on those assets, and it's much more about what the all-in total returnouSoumen is. Those 8%-10% would seem to be attractive. That's what we would believe the assets in our portfolio should deliver from here.
Makes sense. As we have a clear visibility on top-line growth, now you have set up your own, fixed your balance sheet with no maturity by 2026, what sort of EPS growth should we expect for 2023? I'm not asking you for a specific number, but is it mid-single digit? high single digit? double digit? What sort of help can you provide us with here?
Thanks, Marc. To be honest, we've... Just as we don't really look to forecast property yields, we don't really give guidance on the earnings growth. What we try and do is give you the various components, and let sort of you in the room and on the phone model it up for yourselves. Look, you've got various factors. You've got very good, strong like-for-like rental growth, income growth, which, you know, the reversion and the indexation will continue for as long as, particularly on the latter, as inflation stays high. You've got development income which will come through, and we've got the yields and cost numbers through there, so that's a very helpful tailwind.
As I mentioned earlier, the interest rates are higher and our net debt levels are higher, so that is a higher cost there. If you look at that in the round, I think you'll get good levels of earnings growth this year. What good like, looks like, I think, is in the eyes of the beholder.
Makes sense. A final question from me, which is what sort of ERV growth you delivered in H2? Have you done the math for your ERV growth in H2? Because we have the annual number, which is 11-ish, 10.9%. Do you know what is the number for, just for H2 on a sequential basis?
I'll check on that, Marc. Broadly speaking, that 10.9% splits about sort of 6.5%-7% in the first half and 4.5%-5% in the second half.
Thank you.
There is a slide in the appendices that gives that.
Thanks. Max Nimmo from Numis. Just picking up on the land banking and the land market, and talking about the supply constraints, and appreciate how much of the land bank you already have there. On new land that you're looking to land bank now, what's, what are the discussions there in terms of pricing, and how reflective is that of the overall change in values that we've seen at a kind of, at a portfolio level? Has that been reflected effectively?
In the market?
In the market generally, Max.
Yes.
Yeah. To be honest, I think the term is price discovery at the moment on the investment market, as David was talking about. That applies to the land market really as well. I think landowners probably haven't come to terms with yields and capitalization rates just yet. Buyers are obviously with financing costs and those sort of issues, standing off a little bit. There isn't a particularly active land market just at the moment. We'll see as that moves forward. You know, clearly land values
Will come down if yields have moved out. That's the trend. I can't say there's tons of... It's a bit like the investment market. There's not tons of evidence out there at the moment.
Great. Thanks.
Sorry, Mark, just going back to you on that number. Six-month ERV growth was 5.9% for the first half of 2022. The full year was 10.9%. Five percent was in the second half.
Very good. Any more in the room? If not, We have a couple of questions on the phone lines. Okay, let's go to the lines.
Thank you. If you've joined us via the telephone lines and would like to ask a question, you can press star one on your telephone keypad. Our first question for today comes from Paul May of Barclays. Paul, your line is now open. Please go ahead.
Morning, team. Apologies I couldn't be there. Got a bit of a cold. Just wondering your thoughts moving forward. Obviously LTV's ticked up a bit, understandably, given values have come down, I think slightly above where you're kind of targeting. Leverage probably increases further through development activity. Obviously weighted average cost of debt moving up. As you say, marginal costs not materially different to property yield. Just wondering how you're thinking about the various funding sources moving forward and how you expect to continue to expand the business. I mean, there's a case to be made, as you've said, that things are arguably looking attractive from an investment perspective. Could this be an opportunity to grow more aggressively over the next few years? Thank you.
Thanks for question and thanks for not bringing your cold into the room. Shailen, why don't you make some comments on that?
Yeah, of course. Look, look, David and I have outlined the case for the occupier and the continued investment in it. We think we've got a great land bank on that. As I said in my part of the presentation, the approach to our balance sheet is a long-term one. It's about making sure, and you used the word, David, optionality. It's about ensuring we have optionality at all points of the cycle. Now, values have come off, but our loan to value is only 32%. You know, we were in a position to raise significant volume of new capital through last year, and so we sit on GBP 2 billion worth of liquidity. We can continue to fund the development CAPEX we have in front of us this year and next and going forward.
Having said all that, we've also not been shy in the last sort of six or seven years to kinda make the case for shareholders if we think there's the opportunity to accelerate returns, whether that's by doing more, whether that's by doing things quicker, or whether because something new comes along that we haven't yet seen. If we think that that's a possibility, then of course, equity is a component of our potential capital. As Mark rightly pointed out, you know, where property yields have gone and where interest rates have gone means actually the trade-off between selling assets and issuing equity or raising debt is much finer balance than it has been in previous years. Those are the things in our armory.
Frankly and fundamentally, this has got to be opportunity driven. We can do what we need to do with that, with the capital base that we have today. That's exactly why we raised the capital, what, 3 years ago. Say, if we can do more, we'll of course look to do more, and we'll work out the appropriate way of funding that.
Thank you.
Just to follow up on that. Do you have the capital to be able to invest if the opportunity were to come up? As you say, big portfolios aren't on the market at the moment. I think they could be, given where yields have got to, given where return expectations are relative to where they were, given a number of the private equity investors have made a lot of money. You could be an opportunity to invest, and there could be quite large portfolios at some point over the next 12, 18 months. Do you have the capacity today to be able to take advantage of those? Would you happily see your leverage increase materially and then backfill the equity investment as needed? Would you need to do equity ahead of any big acquisition opportunities? Thank you.
I guess we're talking about hypotheticals, Paul, I'm sort of gonna give you a slightly unhelpful answer. It sort of depends on what the conditions are at the time, and it depends what the opportunity is. If we feel there is opportunity bubbling, and if we feel the market conditions are right, then would we consider preemptively funding to make sure we had the fire in place and the capital structure in place to go? Potentially. If it was a large single acquisition, we could raise the capital concurrently with the acquisition process. In a sense, I'm afraid it kinda depends.
It does keep coming back to, well, the opportunity and also the level of risk that we're willing to take on our balance sheet will depend, frankly, on where the outlook for the market and the macro outlook particularly looks like, which as David rightly said earlier, it would be foolhardy for us to speculate on sitting here today.
I think it's what the politicians say, "I'm not ruling anything out.
Sorry, just the last one. Thanks for that. Did you write down your land values at all in the second half?
Did we write, land values down? Yes, yes, we did.
Yes.
We did write our land values down. I, it was a relatively modest write down, I think.
12%.
12%. I mean, most of our land has been bought over quite a long period of time at pretty attractive prices. There has been a write down in it, and frankly, it relates to the more recent acquisitions, which were, you know, more fully priced. None of which, however.
Thank you very much.
We regret. They're fantastic sites, and they will perform in the long run. You know, when yields move, that's the impact. Thank you, Paul.
Thank you.
Any more questions?
Thank you. Our next question comes from Pieter Runneboom of Kempen. Pieter, your line is now open. Please go ahead.
Hi, team. Thanks for taking my questions. What are your thoughts on the net debt EBITDA level? This number moved up to around 11 times on our numbers. Do you believe this is sustainable and especially as the marginal cost of debt is now close to valuation chunks?
Yes. Look, hi, Pieter. Our net debt to EBITDA is, well, it depends on what base you calculate. We tend to do a look-forward calculation based on the pre-let income we've got contracted, so it's nearer 10. I think many of you in the room have heard me say before that the reality there is no single good measure of leverage. Loan to value is pro-cyclical, and obviously the V is difficult to measure at certain points in time. The problem I have with net debt to EBITDA is that it penalizes, well, development and it penalizes prime assets. The same level of leverage, your secondary asset, which commands a higher yield, will have a better net debt to EBITDA ratio than the prime asset. I'm not really sure that's really right either.
An interest cover, as I mentioned during the presentation, despite the high levels of interest rate, our interest cover is 4.5 times. You know, our rent can fall 80% before we hit covenants. Fundamentally, the level of leverage that we carry is a matter of judgment, triangulating all the different measures that we have there to arrive at a judgment call. Our judgment today is actually that sort of 32% loan to value, given what we have in front of us, is entirely appropriate because it gives us that optionality and gives us, in terms of what we might want to do, while giving us the resilience that we really want as a business.
That's very helpful. Thank you. Another question on discussions with your UK tenants. Say you can increase rents by around 50%. We also see these tenants are facing increasing business rates, low economic growth, higher margins are under pressure. Would you give these tenants some breathing room or are you pushing rents to the max for these guys really to take the ERV levels, which we see in your report?
Well, you know, we clearly have the very best, the very best stock in the very best locations. We are looking for premium rents, and we want that rental progression, as we've talked about in our presentation today. We are pushing forward. Clearly, there's some macro headwinds, and as you say, in the U.K., there's business rates as well, which aren't helpful. From an affordability perspective, rent and business rates are a very small proportion of overall occupational cost if you take in transport and labor. If you need to be in the best facilities and the best locations to serve your customers and get employees, then you will need to pay those rents. They would typically be sort of 5% to perhaps 12%, 15% of total occupational costs.
We do think even with some of the macro headwinds, there is room to keep moving rents forward in line with our midterm forecasts. We're confident about that. Clearly, we work with customers. Some at the smaller end will probably face some difficulties, and we'll work with them on that. I have to say, we saw in a pandemic, they were hugely resilient, and our insolvency levels are very small. Our bad debt levels are very small. Our rent collection levels are very high. You know, we're pleased with the way things stand at the moment.
I think Pieter's gone. Any more questions, anybody?
Thank you. Our next question comes from Craig Abbott from Kepler Cheuvreux. Craig, your line is now open. Please go ahead.
Hello. Yes, just two question as a follow-up for me. Could you comment on the deceleration of rental growth in the U.K. in terms of both ERV and like for like in H2 versus H1? We discussed LTV and net debt to EBITDA, but also see that your ICR ratio is going down from seven to 4 times. Do you have a view on where it is going for 2023, and what would be the average cost of debt in 2023?
Okay. Soumen, do you wanna pick up?
Go for the last one first. Of course.
Do the last one first.
Yes. Look, our cost of debt, as David was saying, is now. Well, I said it as well. It's 95% fixed or capped, and two-thirds of our caps have kicked in. There's very relatively little sensitivity on, in terms of the in-place debt and the interest costs around it. New debt, marginal debt today, well, look, some companies will quote you their revolvers. The reality is we're a long-term business. You need to really know what your 10-year debt looks like, 'cause that's really what you're gonna put in place long term. That's probably in the area of 3.5% for EUR and 4.5% for GBP it will take.
That will, that, the income that we're putting on will more than cover that. I feel really pretty comfortable with where our interest covers are.
In terms of, yeah, rental growth first half versus second half, I may whether Andy wants to comment, but I don't tend to read much into that other than, you know, they were both at the, you know, very high-end compared to our normalized expectations. We said to you, we don't expect to see the exceptional levels of rental growth that we've had in the last couple of years being sustained forever.
You know, we've said this many times before, I wouldn't read too much anyway into one particular quarter, six monthly period or even sometimes a year. It just depends on what particular stock you've got, whether you've got new leases that can set new rental levels. You know, I'm afraid they're a bit like buses and rental growth. Rent setting transactions come, you know, sometimes none for a while and then you get two or three in a hurry. I wouldn't read much into it at all.
Often down to the mix.
Okay, thank you very much.
Thank you. Any more?
Just one more question currently from Aaron Guy of Citi. Aaron, your line is now open. Please go ahead.
Morning. Thank you very much. Just a quick question. I know there's been a few on the capital structure and deployment of capital, but just to get a little bit more sort of clarity on how you might sort of deploy capital over the next year. We're in the price discovery sort of phase, I guess, downwards in assets and, you know, we've all been in markets where those asset values have fallen 40%-50% before. How should we think about the deployment of capital into your development pipeline versus opportunities that are coming up in the market?
Is the first six months of this year kind of a price discovery phase or sort of sit on the sidelines and watch and just do pre-lets and sort of sensible development and then maybe ramp up some acquisitions in the back half of the year or into 2024? Do you think the value decline is largely done and actually you might bring forward some opportunities that you're seeing? Just trying to sort of get a little bit more detail around what investors should be putting in their models for the capital allocation.
Sure. Sure. Yeah. Morning, Aaron. I think we sort of alluded to the answer at various points on some of the other questions, but I You know, our view is that, first of all, there are very few assets and portfolios that trade that would match our high quality threshold. We're not expecting to have a whole sea of opportunities anyway. We do think we've got, you know, we've got a very attractive profitable opportunity to deploy capital into our existing land bank and indeed topping up the land bank in a few cases. That will be our first priority.
We're definitely keeping our eyes open for what's happening in the investment market, and if something of interest came along, we would look at it. Frankly, you know, who knows how the year's gonna play out? We're, you know, we talked about having optionality. We've got a strong balance sheet. We don't have to do anything. Manage our assets well, deploy capital well into the development pipeline and keep our eyes and ears open for other opportunities that may come along, and we'll adapt accordingly.
Yeah.
Okay. I think... Have we got a couple more questions coming?
Yeah. A few quick questions from the webcast. We've covered some of them, so I won't repeat them. The two that we haven't covered, are you planning to expand to any other Eastern European countries given the successful story in Poland?
Not for the time being. We've got plenty to do in our existing markets and, that'll be our focus.
Perfect. The final question: With the development pipeline ambitions, could we see LTV excluding any valuation movements, at 40% by the end of the year?
It depends. It comes back to this whole question as to kind of funding and the various mix of components that we have. Look, I've seen over the last few years a number of analysts try and just take the entirety of what is really a multi-year, five-year development program and throw in GBP 3 billion of CAPEX and see what it does to our loan-to-value. The world doesn't work like that. The reality is, I keep saying, we've kept our leverage low for the last few years to give ourselves the optionality to keep doing what we need to do at any given point in time. We have the capacity to be able to fund that GBP 600, hopefully more, CAPEX through the course of this year and into next year as well.
If the opportunity set grows, then we'll look at how we fund it through the mix of levers that we have.
That's all the questions.
Very good. Right. Well, thank you all very much for your attention and for sticking with us and have a good day and a great weekend. Bye for now.
Thank you.