CLS Holdings plc (CLI) Earnings Call Transcript & Summary

Good morning, and welcome to this live video presentation of CLS Holdings plc full year results 2020. It's the second time we have presented virtually and, hopefully, the last time that has not offered opportunity to meet in person. I'm Fredrik Widlund, Chief Executive; and to my right is Andrew Kirkman, CFO; and to my left is Simon Wigzell, Head of Group Property. The headline of this presentation, well placed for the future, is a reference to a portfolio that is well placed and diversified in terms of countries, cities, tenants and financings. Today, we will present you with the full year results and how CLS and our tenants have adapted to the situation we have all been experiencing during the last 12 months. Let me start with an overview of the year before we go into more details. Turning to Page 4. Last year was a challenging period for both individuals and organizations, and we all learned to live and cope with the new reality. We ensured that all our properties were safe and in compliance with the rules in each of our countries. All properties remain open, which is not just benefiting us but also a necessity since many of our tenants perform vital services given the large proportion of government tenants in the portfolio. It's also worth mentioning that the lockdown restrictions were different by severity and time scale in each country. Despite this backdrop, the company performed well operationally, with net rental income broadly flat at GBP 110 million and core property income from net acquisitions offsetting other investment income after the sale of Catena in 2019. Our rent collection was strong with over 99% collected for the year and with similar numbers for the first quarter of 2021. EPRA NTA was up 5.8% to 345.2p per share, which was primarily driven by operational earnings, valuation increases and foreign exchange gains. Valuations in local currency were up 1.4% with Germany and France showing increases, while the U.K. was down. On a sterling basis, it was up 4%. The total portfolio is now GBP 2.2 billion, we're just over half in the U.K. When the recently announced acquisitions in Germany close, our German portfolio will increase to close to EUR 1 billion or 39% of the portfolio. Our vacancy level was up from 4% to 5.3%. This was due to a few different reasons. We have acquired some vacancy and completed refurbishment, but the main driver was, unsurprisingly, less demand in combination with lockdown restrictions that meant new viewings were not possible. Our EPRA EPS was up 1.7% to 12.2p per share, which, together with valuation increases and gains on sales, plus the dividend that we paid during the year, gave a total accounting return of 8.1%. The Board is, therefore, proposing an increase of 2% to 7.55p per share for the full year dividend. On the next slide, I would like to talk more about our collections and tenant base. In the table to the left, you can see that we have strong collection metrics in all countries. And for the year, we have collected 99% of contractual rent due. For the first quarter in 2021, we are today at 98%. Now some key points on the portfolio in relation to this. Firstly, we have a very diversified portfolio with just over half the rent coming from government and major corporations. On the right-hand side, you can see our tenant industries, which are well spread between the different sectors. We also only have 4% exposure to retail, leisure and travel, the sectors that have all been hard hit by the pandemic. The credit quality is strong, and we have seen very few bankruptcies to date, although we do expect to see some increases, depending upon how the economic recovery takes place, and we have provided that in these results. We also have well-defined internal controls. And given that we perform all property management in-house, we are close to our tenants and can work together early, should there be any problems. Now moving on to valuations on Page 6. Overall group valuations were up 1.4% in local currency with Germany and France showing uplift while the U.K. was down. Starting with the U.K., where overall valuations dropped by 2.6% as an effect of a slight increase in ERVs and flat yields being offset by increasing vacancy and recent acquisition costs. Like-for-like values decreased by 2.3%. In Germany, we saw a strong uplift of 8.6% for the year. The increase was driven by active asset management that increased our average lease term in Germany from 4.6 to 5.2 years, in combination with net initial yields holding 69 bps and ERVs increasing 3.1%. This, again, clearly illustrates attractiveness of our German portfolio. The French portfolio was up a more modest 0.3%, and there was little valuation movement for most of the properties. We saw a 51 bps sharpening of yields, and ERVs were broadly unchanged in the period, up just 0.2%. Next, I would like to go into more detail about the acquisition and sales in the period. CLS has a well-defined investment criteria and a longer-term view on acquisitions, which means that we will continue to be active even in more volatile times. During 2020, we took advantage of the fact that many market participants were less active and closed on several off-market transactions. In the year, we acquired 6 properties for GBP 113 million at a net initial yield of 5.9%, with the majority being in the U.K. Recently, we also exchanged on a further 6 properties for GBP 169 million, the majority in Germany, that we closed in March and April this year. These acquisitions will grow our contracted rent a further 7% to GBP 115 million. We also have clear criteria for capital can -- or for when capital can be redeployed into other opportunities, and we sold a total of 6 properties for GBP 64 million during 2020 and a further 3 smaller properties for GBP 12 million that we closed in H1 of 2021. Overall, we have acquired or changed for GBP 282 million at a net initial of 4.7%, and sold GBP 76 million for a net initial yield of 4% in the last 15 months. So it has been a very active period. I will now hand you over to Andrew, who will take you through the financials in more detail.

Thank you, Fredrik, and good morning to everyone tuning in. This morning, I'm going to run you through the financial results for 2020. Like my hair, the results have shown strong growth. But unlike my hair, CLS is well placed for the future. Slide 9 summarizes most of the key financial metrics for the business. Firstly, new EPRA net asset measures came to force at the start of 2020. As highlighted at the half year, we have, like most interested peers, adopted EPRA net tangible assets or EPRA NTA. EPRA NTA is now our lead net assets key performance indicator as it most closely aligns with our business model. In the appendices of this presentation, we set out a reconciliation of the old and new net asset measures. They are also set out in the alternative performance measures note to the financial statements, where we give all EPRA measures. Following our inclusion in the EPRA indices in September, we will now use all EPRA measures, including metrics such as vacancy, cost ratio and CapEx. As already highlighted, these were a strong set of results in a challenging market. EPRA net tangible assets was up 5.8% and EPS was up 1.7%, more of which in the next 2 slides. Financing activity was particularly pleasing this year with cost of debt falling to 2.28%, a record low for CLS whilst we were also able to substantially increase our weighted debt maturity, adding every year to 4.6 years. This strong performance, together with our robust balance sheet, led the Board to propose a 2% increase in the full year dividend. This dividend increase maintains our long-term track record of growing the dividend. Overall, the total accounting return was a healthy 8.1%. The next few slides gives more detail on these numbers and the drivers behind them. The waterfall chart on Slide 10 sets out the main components of the movement in EPRA net tangible assets with a 5.8% increase driven by EPRA earnings, strong property valuation and profit on disposal and foreign exchange movements. The graph first starts by reconciling EPRA NAV to EPRA NTA as at the start of the year. As is shown and reflecting the long-term nature of our strategy, the difference between EPRA NAV and NTA is minimal, as at the start of the year we expected few asset sales in the medium term. Going through the movements from opening to closing NTA, we have dividends paid in the year of GBP 30.1 million or 7.4p per share. These dividends were more than covered by EPRA earnings of 12.2p per share. As Fredrik has highlighted, our diversified business model again demonstrated its benefits with the 8.6% property rise in Germany offsetting weakness in the U.K., which resulted in a 1.4% rise in property valuations overall, equating to GBP 27.9 million or 6.8p per share. Profit on property disposals was GBP 11.6 million or GBP 8.8 million after tax. It is also worth noting that in the last 5 years, we have made over GBP 75 million of profit on disposals, achieving profit in all years. Other includes the mark-to-market movements on derivatives but also reflects a slightly higher deferred tax adjustment as we are forecasting to make slightly more disposals in the medium term than at the start of the year. And lastly, sterling weakened by 5.4% against the euro in 2020, resulting in a 7.3p increase, being the increase in the value of our properties in Germany and France partly offset by the natural hedge of the associated euro debt. On the next slide, we have set up movement in EPRA earnings per share, which grew by 1.7%. The principal movements are highlighted in the graph. Rental income and other income were understandably lower in 2020 as our one hotel and student accommodation property were impacted by COVID-19 with 0.9p per share fall in revenue. Without this, rental income would have increased, reflecting the impact of previous year's acquisitions. As commented upon throughout the year, rent collection was very strong at over 99%. Despite this, we have taken an appropriate increase in our bad debt charge, which we have managed to offset by an equal amount of cost savings. Following the sales in 2020 of our stake in Catena and our bond portfolio, finance income has consequently dropped. The resulting increase in our cash position bolstered our balance sheet at the start of the year when there was the greatest uncertainty. Later in the year, we continued with acquisitions to drive rental growth with the latest 6 announced in December 2020 and January 2021. And finally, while most foreign exchange movements go through other comprehensive income, movements on U.K.-based euro-denominated bank accounts go through the income statement. The weakening of 5.4% against the euro, together with tax movements, resulted in 1.1p per share increase. Slide 12 sets out the movement in CLS' liquid resources during 2020. Our cash position remains strong with over GBP 235 million of cash and GBP 50 million of undrawn resources. The last 3 -- sorry, the first 3 bars effectively show operational cash flow. These demonstrate that cash from operations less interest, tax and other, of GBP 45 million comfortably cover the dividend and provided GBP 15 million to reinvest in the business to grow NTA. The last 3 bars show our capital activities and how we are utilizing our strong cash position to invest in the business. Sale proceeds of GBP 53 million, a net loan drawdown of GBP 52 million, were used to fund acquisitions of GBP 125 million and CapEx of GBP 19 million to keep growing the business. Our cash position will naturally reduce over the next few months as we complete the acquisitions, which exchanged in December and January. However, with the accompanying financing, we will keep our cash position well in excess of a minimum targeted level of GBP 100 million. Speaking of financing, Slide 13 sets out the debt activity which we executed in 2020. It was a busy and challenging year but, ultimately, very successful with all 2020 maturing loans refinanced as well as some notable highlights. We executed 6 transactions, being 2 financings, 2 refinancings and 2 extensions, which totaled GBP 261.5 million at a 2.08% rate of interest. 2 of the financings are particularly worth highlighting. In September, we executed our first green loan, which was also our largest and longest loan. The loan with Aviva investors, we secured over 12 properties at an average rate of 2.16%. In addition, there is a potential 10 basis point reduction for the achievement of certain sustainability targets. And we are on track to achieve these in the first year. The other notable deal was the extension of the loan with Deutsche Pfandbriefbank, which was originally drawn in 2017 to part finance the acquisition of 12 properties, known as the Metropolis portfolio. Following property sales, we were able to restructure and extend this loan at a competitive rate and avoid break costs. As shown by the chart on the bottom right, these transactions, in particular, drove the significant increase in our average debt maturity to more closely match the WAULT of our portfolio. All of this whilst being able to reduce the cost of debt to a record low for CLS of 2.28%. We are already well advanced with our financing activity for 2020, and we will look to secure more long-term and green loans. My penultimate slide summarizes our debt position, showing that we are well positioned, with good interest cover, well over 80% of our debt is fixed and strong banking relationships with loans from 26 different lenders. I've already highlighted the increased debt maturity and low cost of debt. As the acquisitions announced in December are generally complete, our loan-to-value will increase from 33.7% to the high 30s. However, the position remains comfortable with headroom across our 3 main covenants of between 26% and 52%. Turning to my last slide. This shows that our property portfolio has grown to almost GBP 2.2 billion by the end of the year, which is a doubling in only 7 years. The 2 main drivers of the movements were, firstly, the acquisitions of GBP 119.1 million, comprising the 6 buildings and 2 additional floor purchases that Fredrik highlighted on Slide 7. This amount also includes the deposits for the 3 acquisitions which changed in December. As highlighted, these December exchanges plus the 3 acquisitions exchanged in January will considerably grow the portfolio on contracted rent. And secondly, the 5.4% weakening of sterling against the euro, which increased the value of the portfolio by GBP 54.5 million. The positive valuation movements and the CapEx investment were almost equally offset by the book value of disposals. And with that, I will hand you over to Simon to give you further information on our property portfolio.

Thank you, Andrew, and good morning, everyone. If we turn to Slide 17, I'll take you through some of the property highlights. With 99% rent collection for the full year, we clearly have high-quality tenants and 743 across 3 markets also makes them well diversified. 25% of our rents come from government and 25% from major corporates. Looking at the bottom left, 1/3 of our contracted rent comes from 15 tenants, all strong covenants, and now includes T-Mobile in Nuremburg, Germany, and Her -- more recently, Her Majesty's courts in Chelmsford, U.K. Across the group portfolio, the average rent per square foot is tracking upwards at 4.25% per annum on a cumulative basis since 2016 but still a very affordable average at GBP 18.85 per square foot. 92% of our properties are office use with the remainder spread across student and hotel accommodation in Vauxhall and 2% food retailing, providing important amenities for tenants. If we turn to the next slide, we can see the added value our in-house property teams achieved during 2020. We completed 116 transactions, securing GBP 13.6 million of annual rent, which, whilst being slightly down on the previous year, those transactions were, on average, an impressive 8.2% above ERV compared to 3.3% in 2019. Most of the deal activity came from lease extensions accounting for 72% by value with the largest transaction coming from Germany, following the 10-year lease extension agreement with the City of Bochum. New letting activity at 28% compared to 43% in 2019 was going to be lower due to market conditions as, frankly, we had a period of at least 3 to 4 months when viewings simply were not taking place. They are, however, now picking up notably in Germany. Due to the extra lease extension activity, our weighted average on expired lease term is up on the year from 4.75 to 4.89 years. And if you look at the top right, you can see we have a gap between contracted rent and ERV. This is an opportunity as it plays to our core strength, which is letting, vacancy and regearing existing leases to capture that reversionary rent. The bottom right chart shows our vacancy now at 5.3%, which is slightly above our target of 5% or less. The vacancy correlated to each country's economic activity and the opening up of the various economies. Hence, most of the uptick has come from the U.K. and France, both about 200 bps, which has been slower at getting back to work compared to Germany, which has seen stronger leasing activity. If we turn to the next slide on sustainability. At CLS, our overarching purpose is to transform properties into sustainable modern spaces, and COVID has not wavered our commitment to achieve this. On the left of the slide are some key achievements for the year. 91% of group electricity comes from a combination of renewable and low-carbon sources. Carbon emissions were down 6% on the year. As you heard from Andrew, we secured our first green loans facility with Aviva, accounting for 15% of group debt, which rewards our focus on reducing carbon. 100% of waste was diverted from landfill, and we continued our investment in solar PVs with the installation of a further 135-kilowatt peaks in Germany, bringing the group total to 440. Continuous improvement in our GRESB rating, 3 green stars now, and an increase in our peer group rating to 72 points. And finally, I'm pleased to say that we undertook BREEAM assessments of our managed assets, with 80% achieving good or better. We're finalizing our net zero carbon pathway, which we plan to launch early this summer. If we turn to the next slide, I've highlighted some examples of where we'll be generating additional income from existing properties. One of the advantages of having a larger portfolio is that there are more opportunities to increase income. In addition to our normal rolling refurbishment by just approximately GBP 20 million, we now have some bigger projects. We've identified at least 4 rooftop extension opportunities in the portfolio, and we're about to start construction on our first in Bochum, Germany, investing GBP 12 million, which also includes major underground carpark works. The rooftop will provide 20,000 square feet and be ready summer next year. At Prescot Street in London, we are investing GBP 20 million completely overhauling the vacant floors, providing modern, sustainable grade A space, new agile reception hub with an integrated café, full tenant amenities. Works have started and are due to complete at the end of next year, boosting rents by approximately GBP 1.25 million per annum. And at Park Avenue, we're investing in Lyon -- sorry, we're investing GBP 8.5 million refurbishing 42,000 square feet of vacant floors, communal areas, landscaping and replacing the dated firmly inefficient facade, boosting existing ERVs and letting opportunities. If we turn to the next slide, looking at where we're creating new workspaces. Lockdown has not hindered our progress on the development projects with planning successes all around. At Vauxhall, we secured planning for 28,500 square feet, and site preparation works commenced last month, delivery being in 2023, and the expected rent when let is GBP 1.4 million per annum. Our flexible base office product will feature in part of the building offering short-term incubator units for small businesses. At Vor Dem Lauch, Stuttgart, we also received planning consent for 140,000 square foot office development. We start marketing this month to secure a significant pre-let before proceeding. The expected rent is GBP 3 million per annum. And in Maidenhead, our resubmitted planning scheme gained consent, 39,000 square feet. The ERV is GBP 1.5 million per annum. In the spring, we will investigate pre-let opportunities before making a decision on building commencement. All 3 development opportunities have been designed to the highest sustainability standards, focusing on low carbon, efficient plant, renewable energy, thermal performance, full tenant well-being amenities, including roof terrace, cafés, lockers and, of course, openable windows. On the next slide, I want to talk briefly about the resilient design of a typical CLS building. Because the CLS building is not located in the prime CBD, it is generally low rise and offers tenants easy access as well as public transport, low lift reliance and openable windows, private outdoor space and cost-effective rents. The average rent is GBP 18.85 per square foot across the group. So it's an affordable option for tenants to create more agile workspaces for their employees. By contrast, you just need to walk around the Square Mile, Canary Wharf or La Défense to see how massively impacted these tall buildings have been due to the lack of parking and the reliance of passenger lifts, et cetera. This slide summarizes the resilience of our buildings, on average, only 6 floors, plenty of parking and bike storage. 86% have openable windows and 70% private outdoor space or roof terraces. This brings me on to my last slide, which touches on some of the important areas for reimagining the workplace. Office flexibility is possibly the most important evolution we have seen over the last decade, and it continues. This comes in 2 principal forms, namely flexibility in leasing and flexibility in the physical space. At CLS, we've always embraced and, in some ways, preferred flexible lease terms with our tenants. And this is because we like to focus on retention. So we work closely with our tenants, offering rolling break options, varying lease terms midway through the lease and helping out with fit-outs. The physical space needs have become clearer recently and tenant amenities are more important than ever. These 2 wonderful photos show our recently launched creative space at one of our larger multi-let buildings in Stuttgart, where our German friends can relax, destress and reenergize. So grab your towels if you want to reserve a place. There is a growing industry focus on biodiversity. And this year, we'll be rewilding some of our external areas and supporting local ecology through considerate design and maintenance. Tenants are more mindful of these topics, and I think they will appreciate our focus on it. Lastly, technology can be a double win by helping to reduce our use of natural resources but also by improving our work environment. Air quality monitoring in the office can improve how we feel but also avoid excessive ventilation. Sensor taps reduce touch points and also save water. The key point is that office space needs to maintain flexibility, be innovative and create environments that people want to work in rather than have to work in. Thank you. And with that, I'll hand you back to Fredrik.

Thank you, Simon. If we move to Slide 25. On this slide, I'd like to cover our 3 markets and what we see at the moment. So in the current markets, there are clearly many polarizing views around offices and what the future might hold. This is not unexpected given the threat to economic growth and changing working patterns that the pandemic has created or accelerated. The U.K. has been severely impacted by the pandemic and the subsequent lockdowns with larger cities in London at the forefront given its reliance on public transport. Despite this or perhaps due to this, the longer-term fundamentals for quality offices located outside of the city center with good and easy transportation look attractive. This limited development activity, attractive yields, and any long-term shift in working patterns should also benefit these locations. The current sentiment has also created acquisition opportunities and well-capitalized investors, who take a longer-term view, will benefit from. However, even if we have seen an increase in activity in 2021, in the short term, we expect that leasing activity and demand will continue to be challenging before all restrictions are eased by June. In Germany, the resilient economy and the more decentralized political structure have meant, in our view, that a quick return to work and economic activity has happened. And underlying office market has also strong fundamentals with low vacancy and supply in the larger cities. The downturn has not changed this in any material way. Lending condition also continues to be favorable, and we will continue to look for acquisitions even though our immediate focus is on integrating the recent acquisitions. Activity in German market, both for leasing transaction and acquisition, is still high, and we expect that to continue. The French economy has a large proportion dependent on the domestic market. And although we have seen vacancies increase in Paris, Lyon and Lille have been more resilient with positive rental growth. Smaller space is also holding up better, which is beneficial for our French portfolio. In Paris, we are monitoring La Défense due to the increased supply and any knock-on effects on neighboring areas to the west of Paris. Overall, the picture in France is similar to the last few years and that we see more value in the U.K. and Germany. And our main focus in France is on cash flow and future-proofing the portfolio with investing in our own existing properties. On Page 26, this last slide, I would like to summarize and wrap up the year 2020. Despite the challenges during the year, we had a good year, and the portfolio performed well across the board. EPRA NTA were up 5.8% to 345.2p per share driven by operational earnings, valuation increases and foreign exchange gains. Valuations were up 1.4% in local currency with Germany up 8.6%, France 0.3% and the U.K. down 2.6%. We take an active road in working with our tenants, and we have strong collection metrics with 99% of 2020 and 98% of Q1 2021 rent collected. The portfolio is diversified with a large part of rent coming from government and major corporations, together with low exposure to sectors hard hit by the pandemic. This meant that EPRA earnings per share was up 1.7% in the period to 12.2p. And the Board is recommending increasing the dividend by 2% to 7.55p per share for the full year. Vacancy increased to 5.3% for various reasons, but there's no doubt that the short-term demand and lockdown measures had a negative impact, especially in the U.K. The type and location of our property should benefit from changes to working practices with increasing demand for easy-to-reach, well-located and affordable but high-quality offices. We're also making good progress on ESG initiatives, and we'll publish our net zero carbon pathway later this year. The recent acquisitions in Germany, together with existing opportunities to add value by pursuing selective refurbishment and development, will also drive income growth going forward. CLS is well placed for the future with a portfolio that has taken many years to build by following a core strategy for the type of properties and locations, and we believe this is key to long-term performance. With that, I'd like to conclude today's presentation. Thank you all for listening in, and we will now open for the Q&A part.

[Operator Instructions] The first question is from the line of Kieran Lee with Berenberg.

Just a few questions from me, if I may. The first one is on the future of the office. I've seen your commentary in the report published this morning and in today's presentation. But how do you expect the hybrid model to differ across each of your geographies? And what prospects do you think that will result in for the portfolio? And second one was on ESG. We've seen some peers talk about the impacts of EPC certificates in the U.K., especially, and the investment going into Prescot Street to bring that to a Grade B. Have you done any sort of modeling of the portfolio to see a likelihood of the cost of bringing all of your properties up to that standard just in case that legislation has passed? And then finally, is a question on tax. We've seen corporate corporation tax rates being jumped up from 2023. Has this impacted your thoughts regarding REIT conversion?

Right. Thank you, Kieran. If I start with the first one and then hand over to Simon and Andrew for the second and third one. The future of the office and the need for flexibility, in our view, counts in 2 ways. More flexibility in terms of how leases are structured. It could be more breaks, it could be more opportunities for customers and tenants to change the lease as things change and develop. That is certainly one thing that we believe will continue to happen. Secondly, you also have flexibility around the physical space itself. That you want to make sure that you could change the space you have and at least to react to demands and requests from your own workforce. So we're pretty convinced that there will also be more demand to have space that is possible to reconfigure in a different way than we've had in the past. Is that different between the countries? Long term, no. We believe that is a trend that will happen in all 3 countries, but I think it's fair to say that it's probably more dominant in the U.K. right now, but we do expect to see that happening as well in Germany and France a bit further down the line. Simon, do you want to take the ESG question?

Yes. It's a tough question. I mean we sort of follow, monitor EPC, and I think we're one of the first back in '17 to align our portfolio to make sure that it was ahead and complied with the changes that were coming out in '18, and it's something that we constantly monitor. Every building won't be able to get to EPC B, and that's fundamental. And like the current system, there are economic tests which apply if you're not able to achieve the necessary rating. And we find EPC a slightly blunt instrument. What we're really focusing on going forward is actually operational carbon and looking at reducing that. But clearly, when we invest in major refurbishments and new developments, we seek to outperform what is required under the building regs. And I think the -- going for an EPC B at Prescot is not a requirement at the moment, but it's just, again, future-proofing the new developments. We're targeting EPC As. Again, it's not a planning requirement and but that's just us future proofing. So it's an ongoing task.

We'll take 3 questions? It might be me. So Kieran, your question is a good one around tax and REITs. As I'm sure you're aware, there is already an ongoing consultation about whether there should be any changes to the REIT rules. Clearly, the increase in the corporation tax rate makes that even more interesting, and we are going to give serious consideration to what this might mean. It's hard to prejudge it till we know what the changes to the rules might be. As you have seen from CLS' track record, the flexibility of not being a REIT has been to our advantage and has allowed us to drive a very impressive track record of total return. But if we went down possibly a part REIT route maybe in one or more of our countries to keep that flexibility, that could be an option. So we are going to give it serious consideration.

[Operator Instructions] There are no further telephone questions at this time.

So our next question comes from James Carswell. The dividend cover remains very healthy. Will you consider increasing the payout ratio over the coming years? And the next question is, are tenants now willing to pay a premium for buildings with the best sustainability credentials? What else should the real estate sector be doing to improve sustainability?

Why don't I take the dividend question? So we previously had said that we were looking to pay out around about half of our dividend -- half of our EPRA earnings as a dividend, so retaining half to invest in business, as I said, to grow that net assets. When we publish our annual report this month, have slightly tweaked the wording. As you have probably noticed, we haven't been paying out around half. It's been a bit more than half of our earnings. So we have changed the wording to between 1.5 and 2x, which again gives us a bit of greater flexibility in terms of that dividend cover. And yes, we will monitor the dividend and keep growing it in line with the business. As you've seen, our track record is we have always grown the dividend, and we will look to do that both through good years and bad, if we can.

Thank you, Andrew. And just touching a bit on the sustainability question, and our tenants are looking at this and if you get a premium or not. It's very clear that the demand from tenants have shifted quite rapidly in the last sort of 12, 18 months in terms of asking for a much more sustainable space as well as more flexible space. And I'm not sure yet if you actually get a premium for that, but I think you certainly get a brown discount if you can't offer that. So it's probably more a question of time before properly green and sustainable buildings will start giving a premium compared to buildings that don't meet that.

We have one more question from Chris Spearing at Liberum. Slide 7 shows an initial yield of 3.9% on the 1 point -- GBP 169 million of acquisitions so far in 2021 at a much higher reversionary yield of 6.1%. When do you expect this reversion to be captured?

Right. Yes. I mean, on the face of it, 3.9% net initial yield could look low. To start with, the reason for that is that we have acquired vacancy. So we've acquired properties in Germany with an opportunity to really add value. So that's the reason why it -- perhaps on the face of it is a bit lower than what we would normally do. In our plan for this, we would expect that it would take between 12 and 24 months to capture that one before we get there. In one of the buildings, which we haven't even completed on, completed at the end of this month, we have already managed to let one more floor of that one. I mean vacancy rates and demand in Germany is strong. Our vacancy in the German portfolio fell last year. And certainly for properties located in places like Berlin, Düsseldorf, Essen, et cetera, there's a lot of demand for that. But between 12 and 24 months, we could capture the reversion.

And the next phone question is from the line of Miranda Cockburn, Panmure Gordon.

I would just like to ask a bit more detail on the drivers behind the yield compression in Germany and France, if it was all market moves or asset specific.

It's a bit of a combination. The 8.6% increase was clearly a very strong performance driven by a few different things. As you pointed out, it's asset management activities, it's yield compression and its rental growth. Of the 8.6% up, we would estimate about 2/3 is coming from the market shift, so yield compression and rental growth, while about 1/3 is coming from asset management activities.

The next question is a follow-up from the line of Kieran Lee with Berenberg.

Sorry, another one for me. Just a quick one on hedging and foreign exchange. We -- I know that there's an element of sort of natural hedge with the debt. But foreign exchange has been a big tailwind over the last few years. Looking at where sort of sterling and the euro is, there are signs that could be reversed. Are you looking at any more hedging from a foreign exchange basis?

It's a good question, Kieran. We're not -- I mean, we are not currency speculators. As you rightly highlight, we do operate a natural hedge in terms of financing acquisitions in Germany and France in euros. So that obviously gives about a 50% offset. Clearly, on the rental side, we've got the costs that are in local currency. But it's one of the things that we accept there is a degree of movement. But on the vice versa, diversification benefits we get by being in the 3 geographies, we think, more than outweighs that small amount of our lucidity.

If there are no more questions, okay. So thank you again for attending, and we'll wrap up today's presentation. Thank you.