Equites Property Fund Limited (EQU) Earnings Call Transcript & Summary

Welcome to the interim results for Equites Property Fund for financial year ending Feb 2021. It's been an interesting year to say the least. And we obviously are really pleased with the numbers that we'll be presenting to you today. Just a little bit of protocol in terms of what will be happening today. I'll just do a brief synopsis of where the business is. Following that, Riaan will come in and give you some detailed operational information, will give you a bit of an update on our Shoprite transaction. And then following that, then Laila will come in and give you the nuts and bolts of the money, which obviously is obviously very important, a little bit on ESG, a little bit of. And then I'll be back, talk a little bit about what's going on in the U.K., and then we'll finish off with our partners in the U.K. that will be online today to first introduce what they've been up to. And then secondly, we'll be finishing off the presentation with some questions. So I look forward to spending the morning with you guys, and hopefully, you'll be as pleased as we are with the results. So maybe we can start with just a quick overview for the period. The distribution per share at ZAR 0.7444 is plus/minus flat on the same period last year. The NAV at 0.4% up is basically almost flat on the same period last year. It is slightly off the year-end in Feb. Our loan-to-value at 29.5% is very much in the halfway zone of our sort of self-imposed 25% to 35% loan-to-value metric. Our weighted average lease expiry profile obviously at 10 years is, I suppose, we'll talk more detail as the presentation unfolds, but it's clearly one of the key metrics that has allowed us to present numbers that we have got today. The portfolio also has grown ZAR 16.2 billion. And Riaan will talk a bit more detail on that and what the future is bringing. And then obviously, the really pleasing factor is the operational team have done absolutely sterling work with 99.1% collection, and we'll get a bit more detail of that in the presentation as we go ahead. From my point, I mean, as Equites, what I would like to do is, obviously, is, again, restate our strategy, which is, as we've probably been sort of stating this statement now it's been in our presentations for the last few years, and we want to really sort of send the statement home again. And Equites basically has ambitions to be a globally relevant specialist REIT, focusing on the top end of the logistics sector. We have a single-minded focus on this. It's been there since Day 1 and nothing has veered from that. And if anything, the activities of this year have just reinforced this statement. And as you know, we operate in 2 jurisdictions. We operate in the U.K. and we operate in SA. In the U.K., we've entered a joint venture with the Newlands team, and this has probably been extremely critical to our business with the yield compression coming through in that market in terms of valuations and pricing on deal flow of the quality of product that Equites would like to own. We probably wouldn't be very much in the market at the moment. A consequence of that is that the Newlands team are exceptionally good at identifying land which can be taken through a process into getting the correct zoning and then eventually bringing the pre-let occupier to the site and building specific logistics facilities for these occupiers. So we will look to develop buildings within the JV, which we will look to retain the ones that meet our investment criteria. The ones that don't, we would be happy to deal them, and we will recycle the profit from that into the system. The other thing which is very important is that we still are exposed to the market, so we're still very much in the know of what's going on. And if acquisition opportunities do arise in the open market, the Newlands relationship does not preclude Equites from engaging in those things, which is, I think, very important as well. In SA, we're still looking to develop best-in-class on our strategic land holdings. As we've done in the past year, the deal with Shoprite on the sale and leaseback, we see that as a vehicle of potential opportunity with other major retailers within the South African framework. And then obviously, should any meaningful portfolio or single asset opportunities arise that meet our investment criteria, we're very much in the market for those. In terms of our operating sector. I mean, I'm not going to harp too much on about the economic climate. I mean, I'm sure a lot of you guys are very aware of what's going on there. I mean, COVID has had a massive impact. U.K. obviously, we're talking 10% down. And if we look at South Africa, you're potentially looking at maybe just less, a little bit less than that, but not much less than that. So I'll leave the economic climate as a frame and as a reference in the presentation to you guys, but look to really look at what's actually happening on our operational side. And from our point of view, we are massive beneficiaries of the tailwinds that are coming out in the U.K. on the back of e-commerce. Online sales are currently sort of leveling off at about 26% of all sales, but we did hit a peak at the heart of the COVID sort of lockdown of 33%. And I think what's important here is that a lot of people that may not have sort of ventured into online were almost forced to. And the simplicity of it and the efficiency of how it works, especially in the U.K. framework, has proven that we have taken a massive leap forward. The consequence of that is that the logistics sector has obviously been a massive beneficiary of that. But over and above that, I think what COVID has done is also has brought about the risks of outsourcing all production to the world, if you like. And what we're seeing is a lot more being onshored and certain production being brought back home. And over and above that, the inventory levels that people are maintaining have grown as a consequence of the risk of this pandemic, but potentially other ones that may be coming out of the system going forward. In terms of the take-up, we have had an absolutely phenomenal year in the U.K. After 3 quarters, we've already broken the all-time record for take-up in the logistics space. And we still have 1 quarter to go with some substantial deals still to be announced. So what obviously needs to be sort of brought to the attention of everybody is that Amazon obviously is contributing a massive amount to that. They are really taking the U.K. by the horns and really are looking to cement their position of dominance in the situation. In terms of the retail sales and the continued emphasis on basically the efficiency of an e-commerce platform is necessitating so much more technology, so much more emphasis in terms of the real estate solution that needs to be achieved to match the opportunities in the U.K. In terms of South Africa, obviously, our base is quite small. And what I would like to sort of reference here is that because the base is quite small, even though you've got numbers like Dis-Chem 344% up. You've got Mr Price, 75%. Woolies Beauty and Home up 41%. I mean, and then across the Massmart stable, you've got 100% for Game, 160% for Builders and 84% for Makro. Obviously, these are all off very small bases. So I would like to emphasize that a lot of decision-making around real estate is not being driven by e-commerce yet in South Africa, whereas in the U.K., it is. So I think what's important here is, though, that with this level of growth, we will approach the need to make real estate decisions for e-commerce a lot sooner than maybe we had anticipated even a year ago, which obviously bodes very well for us. I mean, on the graph, you also see TFG by 2025 expecting at least 10% of their sales to be online. And the consequence of that and how that online can be matched and utilized in the most efficient way possible, real estate will play an important part in that decision-making. In terms of the impact of COVID. I mean, we presented in May where we were right in the heart of it. And I think we did sort of outline plus/minus what we were doing as an organization. I think one of the key elements, obviously, is that we went into capital preservation mode. We had a strong balance sheet. We knew that we had a pipeline that was coming through. On the development side, we knew we had the Shoprite deal that was coming through. And it was very important for us to ensure that our balance sheet remains strong in that. Over and above that, we also were wary of the banks. So we decided to pull out some money out of our facilities, and we ensured that we had the necessary capital available to us to undertake the commitments that we had already made. Over and above that, our staff, obviously, are critical to the organization, and we had to ensure their safety and well-being. Everybody worked from home for a sustained period of time. Obviously, Teams and Zoom, the world changed, but we ensured that staff that didn't have the luxury of WiFi at home were provided with the necessary tools and everything so that they could carry on working. Over and above that, we also engaged with some of our subcontractors, especially on the construction side of the industry and especially guys that we've been working with for many, many years to ensure that our most humble sort of fellow citizens were guaranteed some sort of salary and some sort of income during the lockdown period. And so we contributed to those things and obviously, very proud of that. And then the final element, let's not underestimate the importance of tenants in everything we do. I mean, ultimately, the rent that we receive from them makes everything tick. And we had to listen to them, and I really want to praise my operational team for the unbelievable work they did and the engagement there. And we try to understand as best we could what their needs and requirements were, and we tailored a solution for every tenant that required one. I think what this all adds up to is that the direct costs that we can physically attribute to COVID are approximately ZAR 29 million. But I think what this sort of slide does not sort of indicate are the indirect costs of the opportunity costs that were lost and various other costs, which is very difficult to quantify an exact number for, but they need to be taken into consideration too. Very quickly, I'm going to go through our developments. But maybe the first element I'd like to sort of highlight to everybody is our baseline spec. This is the Equites dream, effectively, which is 45-meter yards, 7-meter canopies in front of the docks, 18-meter canopies in front of the on-grade doors, sectional doors, Kelley docks, LED lights, solar on the roof, mechanically ventilated, tilt-up paneling. And generally, the environment that we're looking to create for the future of logistics in this country is really the cutting edge. I think we are very much at the forefront of what's going on here. In terms of the development pipeline, you'll see that the 2 buildings next door to each other here. That's Altron on the one side, Digistics on the other. I mean, Altron should be PC-ing effectively at the end of the month and then the client starts moving all his stuff in. And I really want to commend the construction teams as well as my development team in terms of managing to get this as much as possible back on track after a 9-week lockdown. Digistics is hot on the heels and following. Also a fantastic development for us with an existing client which we've had numerous business dealings with over many, many years. This thing out on the R21 in Johannesburg. Obviously, we've got the Sandvik facility, which is going to be a state-of-art sub-Saharan African head office as well as operation for Sandvik, feeding into the mining industry across the whole of sub-Saharan Africa, very, very happy. That deal should be complete by the end of March next year. And then the final one is the Imperial pharma-grade building, which is coming up on the R21 as well, an exceptional building, which should be complete before the year is out. In Cape Town, we've got the Philippi development, a 7,000 square meter development that we're doing on a piece of land adjacent to one of our existing buildings. And we're just basically ensuring that the land is utilized as efficiently as possible. And that should be finished sort of March, April next year. And we currently don't have a tenant for that, but we will be looking for one and are engaging with several tenants as we speak. The final one is the DHL in the U.K. And if you look at it, you'll see that there's some fingers on there. This is the new DHL design, which is actually quite exciting in terms of their new state-of-the-art last-mile delivery platform. In terms of developments then, some of the completed developments, we've got DSV Pharma. We sort of increased the size of the facility in Joburg. And that obviously was an operational warehouse, and we've had to build in there when they had sort of ZAR 5.5 billion of stock in there. So you can imagine it was quite complicated, and we're very happy that, that's all come to an end and they've actually moved stock into the new section this last weekend. So that seems to have gone quite well. And then Röhlig-Grindrod here in Cape Town at the airport. And this really is building on a relationship of a building that we did with Grindrod, Röhlig-Grindrod in Johannesburg. And again, we've always said that the cheapest business you can do is business with existing clients, and this is another example of that. In terms of where I'm at the moment, that's me done. I'm going to hand over to Riaan now. Riaan is going to take you guys through a bit more detail on where we are in terms of collections and where the business is operationally. I'll engage with you again a bit later on. So let me just get my stuff out of the way here then.

Thank you, Andrea. It certainly has been a very interesting and challenging 6 months. And we've been very fortunate that our business has showed its resilience and withstood the worsening economic climate. Our portfolio consists of 63 properties with an aggregate value as at 31 August of ZAR 16.2 billion, and it's underpinned by impeccable property fundamentals, as shown on the slide. Firstly, our weighted average lease expiry profile is 10 years at the moment. In South Africa across our portfolio, we've got in-contract annual escalations of 7.8%, and 94.6% of our income is derived from A-grade tenants. These property fundamentals are the reason why we were able to withstood the challenging times and it really gives us the platform from which to operate in the years to come. When the COVID pandemic broke, it really forced us closer to our tenants because they were uncertain times for everybody. And we tried to, as Andrea indicated, create solutions for those tenants that were the hardest hit by the lockdown. Fortunately, 85% of our tenants remained operational during the lockdown, 85% in South Africa and 100% in the U.K. But there were those that were very hard hit by the measures implemented, and we assisted most of those tenants through cash flow relief by implementing deferred payments for them over a mostly 12-month period. Fortunately, because of the resilience of our portfolio, we collected 99% of our contracted rentals during the 6-month period with a 100% collection rate in the U.K. Obviously, the COVID pandemic and the lockdown has impacted our tenants across the board. During our discussions with them, most of these businesses has been impacted on their income statement, on profitability. Fortunately, we've not had any tenant failures. And through our discussions, we're very confident that our tenants will come through this strongly and that we will be able to build on that going forward. And interestingly, we also looked at the segments of the industry that we cover, and 68% of our tenants come from the transport, logistics, FMCG and food sectors. Obviously, those are the sectors that are the most resilient and where we're looking to build on as we build the business going forward. A lot of you will remember that we started the business with a portfolio of ZAR 1 billion in June 2014. As you can see from this slide, we've been successful in building this into a ZAR 16.2 billion portfolio as at 31 August 2020. And with the addition of the 3 Shoprite warehouses and some of the developments being concluded in the next couple of months, our portfolio will be just shy of ZAR 20 billion. 80% of our portfolio is made up of logistics assets, properties, 10% is land holdings and about 10% are noncore assets and 2 assets that we're holding for sale at the moment. We've coined a new slogan that encapsulate best what we're trying to do at Equites. And it says long, boring and safe. And I think the next couple of slides that illustrates our impeccable property fundamentals will show why that somewhat strange slogan is very appropriate for our business. Now firstly, as you can see on the left-hand side, the long relates to our WALE. And it's 10 years at the moment, and it will grow to 13.7 years with the introduction of the 3 Shoprite properties. The boring part is the in-contract escalation across the portfolio of 7.8%. It's the predictability and sustainability and quality of our income, and the fact that we continuously meet our guidance targets and we are a transparent business with very little and very few moving parts. The safe part of the slogan relates to the top-quality tenants we have with, as I referred earlier, 94.6% of our income being derived from A-grade tenants. And you'll see on the right-hand side of that slide is that our WALE increased further from 9.5 years to 10 years over the last 6 months. And on the left-hand side, there's only 3 leases that are expiring over the next 12 months, making up less than 24,000 square meters. I'm pleased to advise that we've already engaged with those 3 tenants and in principle agreed extensions on those leases. I think the fact that we are so specialized in our focus and only have a business consisting of 63 buildings, it allows us the opportunity to engage directly with the tenants and really be proactive and making sure that we provide the solutions for our tenants that meet their objectives. The next slides talk to the geographical spread of our portfolio and the tenant grading. You'll see that 43% of our tenants are in the Gauteng area with 17% in the Western Cape, 2% in Kwa-Zulu Natal, which is an area we would like to expand further and 38% by value is in the U.K. I've referred earlier to the tenant grading where more than 94% of our income is derived from A-grade tenants. This all adds up to the quality, sustainability and predictability of our income. Next up, I'm very pleased to confirm that all the conditions precedent in terms of the Shoprite transaction have been met and that we expect to take transfer of the 3 properties by the end of the month. The Shoprite transaction has been a very important one for Equites. It further diversifies our tenant base. It increases our exposure to the food sector. With Shoprite being the leading and largest food retailer in Africa, it's an incredibly powerful and important tenant into our portfolio. And again, it increases the predictability of the income. We've got in-contract escalations of 5% over the 20-year duration of the lease. And that escalation will continue after the 20 years into the extensions. And we did announce the transaction in February, but the next slide just highlights the salient features of the transaction. The total portfolio value is ZAR 3.2 billion. The acquisition price was calculated at a 7.5% net initial yield. The leases are fully repairing and insuring and are triple-net leases for 20 years. And as I stated, the in-contract escalation rate of 5%. It's a joint venture between Shoprite and Equites, with Equites owning 50.1% of the JV company called Retail Logistics Fund Proprietary Limited and Shoprite owning 49.9%. We are hoping that this will be a long-term relationship. And there are some unutilized bulk around these properties which can be used for further extension to the facilities, and we will also be looking to potentially including and acquiring further Shoprite assets as we go forward. The next slide show the impact of the transaction on our LTV. It takes our LTV up to just over 30%, but we still have about ZAR 1.3 billion of headroom before we meet our self-imposed target range of 25% to 35%. The expected return on equity of the transaction will be between 14% and 15%. And it really further diversifies our tenant base and increases our exposure to the food sector, as previously indicated. That's all for me. And now probably the highlight of the day, Laila with the financial information.

Thank you, Riaan. Thanks very much, Riaan and Andrea. And I think before we jump into the financial section, what's important to note, and Andrea and Riaan both alluded to this. And at the onset or the beginning of these 6 months, our intention was really to preserve capital to protect the strength of our balance sheet and to ensure that we could continue to stick to our fundamentals. So in light of those objectives, I think it's quite admirable that we managed to achieve distribution per share of ZAR 0.7444, which is relatively flat from the prior corresponding period. Our NAV per share, slightly up from the prior corresponding period, but I would say it's reasonably flat. Our LTV remains at 29.5%, which is in the midpoint of our 25% to 35% target range and really illustrates that we have further flexibility to implement our development and acquisition pipeline. Our weighted average debt maturity is at 3.5 years, which is slightly down from the prior corresponding period, which was 3.6 years. And at 31 August, we had ZAR 1.1 billion of cash and available facilities, which we'll talk about a little bit later on. And if we just move on to the financial performance and we look at the distribution statement. I think it's important to look at the increase in gross property-related income. This is underpinned by strong like-for-like rental income or rental growth of 6.2% and then the impact of acquisitions and developments since 31 August 2019. Other admin expenses, and there was a marginal increase in these expenses, but it is important to note that, as Andrea alluded to, there were certain one-off COVID costs which are included in that line item. The net finance costs are definitely lower compared to the prior corresponding period, but this is as a result of the capital raise which occurred in March and as well as a lower all-in cost of debt and then the capitalization of interest to developments. If we just look at the next slide, and this is a question which we often get asked on rental deferrals, how we treated these. So Riaan spoke about the cash flow relief, which we provided to tenants. And at period end, there's about ZAR 36 million of outstanding rental deferrals, which is included in trade and other receivables. And out of these, we performed a detailed credit analysis on all of these outstanding receivables, and we've provided ZAR 3.7 million in terms of expected credit losses in line with IFRS 9. In addition to this, we performed a detailed analysis as to whether any of the agreements made constitutes lease modifications. Our conclusion was that only ZAR 7 million of these agreements constituted lease modifications. And the impact of these are really immaterial. The next slide talks about our recon from cash generated from operations to distributable earnings. I'm not going to spend too much time on this slide, but it really does illustrate the quality of our distributable earnings and the nature of the adjustments or working capital movements and some noncash items and movements in accruals. Okay. If we move on to the statement of financial position. I think it's important to talk about the fair value of investment property. And we're at ZAR 16.2 billion at 31 August. And the movement from the prior corresponding period is really relating to acquisitions, developments, fair value adjustments and FX movements. The deferred tax asset is quite a big line item. Those assets arise as a result of the acquisition or development of assets in the U.K., which have associated capital allowances. Those capital allowances really allow us to manage the tax expense across the U.K. group, and it has allowed us to maintain our effective tax rate at almost 0%. And the trade and other receivables, I've spoken about this before. This refers to, it includes rent deferrals as well as quite a large VAT receivable from SARS. And then other financial assets include cash and short-term deposits held at 31 August. As Andrea said, it was important for us to protect our liquidity, and that's why we had a rather large cash and short-term assets sitting on our balance sheet. If we continue to the next page of our statement of financial position. The loans and borrowings are in line with our growth in the property portfolio. There was a large increase in our loans and borrowings. What's important to note, and we've spoken about our strategy to reduce our cross-currency interest rate utilization is that a large increase in the borrowings result to U.K. borrowings. So there was an Aviva facility which was concluded. We increased our HSBC facility. And there's some FX movements on these balances. And then there was a note issuance, a ZAR 200 million note issuance and a Nedbank refi, which have all contributed to the growth in the loans and borrowings. Other financial liabilities, I mean, we understand that over the last 6 months we've had massive reduction in JIBAR and LIBOR, and we've seen massive rand devaluation. All of those have resulted in financial liabilities on our interest rate and currency derivatives. We've put together a little NAV bridge. There isn't much movement when we look at it, but I think it is important to note that the primary contributor is really our generation of net operating income, net of the dividend. There's some fair value adjustments on both the property portfolio and on the derivative instruments. There's some FX exposure and then a tiny bit of uptick as a result of our capital raise. And that's sort of how our NAV has evolved. An area which has received a fair amount of attention is our property valuations. We just wanted to reiterate our policy. We have changed our policy to result in more frequent valuations where we've valued or we've undertaken to value each property at least once every 18 months. As a result of our change in policy, we've externally valued 78% of our properties between Feb and August '20. The next slide summarizes the various assumptions we've used and how those translate across the various asset types in our portfolio. What's important to note, if you look at Feb '20 compared to now, when we since check these valuations, if you look at the average value or the rand per square meter, this has moderated slightly from February. So it's decreased. And cap and discount rates have remained relatively constant, but the market rental assumptions as well as rental growth assumptions have been moderated. So that translates into a lower rand per square meter. And we've tried to really include a fair amount of disclosure around this, which is available in our commentary. And obviously, we're happy to take any questions on that. Just moving along to our net debt dashboard. We're quite proud of what we've managed to achieve. Our LTV has remained below the midpoint in terms of our target range of 25% to 35%. And it really illustrates that we still have a significant amount of flexibility to execute our development and acquisition pipeline. The expiration of debt facilities illustrates that it's at 3.5 years, which is slightly down from last year at 3.6 years. But it is important to note that less than 25% of our debt facilities expire in the next 2 years, which really limits the liquidity risk in terms of our facilities. And just moving on, our all-in cost of debt has decreased by 93 bps in South Africa and 4 bps in the U.K. Obviously, there have been massive reductions in JIBAR and LIBOR, but due to our hedging policy, which we're very comfortable with, we haven't managed to take full advantage of these. But as previously alluded to, our hedging policy is to ensure certainty as opposed to taking advantage of short-term gains. In terms of available liquidity, we had ZAR 1.1 billion in cash and available facilities at 31 August. Subsequently, we issued or we placed ZAR 600 million of notes in the debt capital market. And at present, we have about ZAR 1.6 billion at September 2020. Our unencumbered properties, as you would know, we've embarked on a program of really ensuring that we have a significant amount of unencumbered properties to support our debt capital market program or our DMTN program. And at 31 August, we have ZAR 3.2 billion of unencumbered properties as opposed to ZAR 2.9 billion at February '20. Quickly going to touch on hedging. We always get asked about our cross-currency utilization. And what you can see is that this has further tapered off. So we're at 27.6% of cross-currency utilization. Our internal limit is 45%. But as I spoke about earlier and as we have been saying over the past few periods, we're really looking to match our in-country assets with in-country debt. And this is just further testament to the fact that we're doing this successfully. On foreign exchange risk, we have a progressive hedging policy, which is to ensure certainty of our distributable earnings. During the period, we reached our enhanced level, which means that we triggered a bucket above what our base rate would be. And we've hedged 85%, 80%, 60% and 47.5% in terms of our 6 monthly bucket. I think what's important to note is that we've managed to lock in some fairly favorable rates in the longer term while still managing to create quite a stable growth profile over the 24-month period. On interest rate hedging and our limit, so our internal policy states that we need to hedge 80% of drawn and term facilities and 70% of term loans plus capital commitments. We're slightly above these levels. And that's as a result of transactions which we know will be occurring in the very near term, as Riaan alluded to, the Shoprite transaction. So I mean, that's pretty much it for me on a financial level. And I think that Riaan said long, safe and boring -- long, boring and safe. Really, from a financial management point of view, we've tried to support the business so that we can ensure that we continue to execute on that strategy. We can continue to stick to our fundamentals. We can create value through our development and really just ensure the long-term sustainability of the business. And that sort of segues quite nicely into the focus on ESG. Over the period and even prior to the 6 months, sustainability has really become top of mind for Equites and I think for many businesses globally. So we have refined our approach to ESG. And we have, for the first time, adopted a comprehensive review undertaken by Sustainalytics where they provided us with a risk rating. In terms of a Sustainalytics rating, our risk is determined to be low, which is quite favorable. But what we've decided to do is really to keep improving upon our risk rating. In addition to undertaking the Sustainalytics rating for the first time, we've also been pioneering in terms of issuing a sustainability-linked funding agreement or in terms of a green sustainability-linked funding agreement with Standard Bank who were incredibly supportive in the process. The mechanism that we undertook with them is that as we improve our Sustainalytics rating or as we improve our ESG metrics, we obtain a pricing benefit in terms of our loan funding. And I think what this does quite nicely is it really ties everything together where we can act as responsible corporate citizens and at the same time be rewarded financially for really sticking to best practice. So what we'd like to do in all elements of our business is to focus on these ESG metrics, and going forward it will definitely be a bigger part of our business. That's it for me. I'm handing back to Andrea.

Thank you, Laila. And this really leads us into the final part of our presentation. I'm just going to give a little bit of an overview in terms of our U.K. strategy with our joint venture partners in the U.K. So if we can start with the U.S. strategy. I mean, we entered the U.K. in 2016 with very much an acquisition model that quickly evolved into a funding model as a consequence of yield compression and us not being able to afford to buy the kind of quality product that we would like to have on balance sheet, and we currently do have on balance sheet. And that evolved into us having 11 direct assets in the U.K., ZAR 6.3 billion of value. The type of assets are a combination of last mile and also general logistics warehousing. And then over and above that, I mean, that equates to about 178,000 square meters of space. And what we can say is that the portfolio was assembled at varying yields, but as an average at approximately a 5% yield. But I can just put some context around 5%. I mean, our portfolio obviously has got a weighted average lease expiry profile of sort of almost 14 years in the U.K. The portfolio currently in the market in the U.K. and it would seem with a WALE of 6%. It's got 2 properties in Scotland and 1 in Wales, which always come in a little bit of a discount. But the consequence of that is that, that particular portfolio, and it's a GBP 400 million portfolio, plus we'll be going sub-5%. So it just talks to the demand drivers for the asset class in the U.K. and the volume of money that there is around for the asset class. And I think this leads nicely into what our joint venture with Newlands really is. And I think what it's done is it's given us the opportunity to continue growing a best-in-class portfolio, with the best-in-class product, with best-in-class covenant, but within a joint venture that allows us to make some development profit and with a partner that has got many, many, many years of experience in this sector and unlocking the kind of value from many other players over the year. The partnership obviously will result in a development profit coming out of a building. 60% of that development profit will be Equites', 40% will be Newlands'. Newlands provide the expertise, we provide the liquidity and the cash. However, what needs to be emphasized here is that Newlands, as they make more and more development profit through the process, they have got an obligation to reinvest 50% of their profits back into the vehicle, thereby really aligning their interest with ours. What we can say is that the target pipeline over the next 19 months of approximately GBP 400 million, which is a product that is best-in-class product that we would never have been able to afford to be involved in a clearly open market scenario. The focus, obviously, of everything for us is big box and last mile as that is where the essence of the engagement is in the U.K. I've spoken a little bit about it, but this really illustrates the diagram on the right-hand side of this slide. Really, if I can just add one little element to it is that within the context of what we're doing, we will have certain investment criteria that Equites will want to retain the product. There will be some product that we may not want to retain or maybe too big or maybe a covenant that we have got too much exposure to, which because of the deep liquidity of the U.K. market, we will be able to sell into the open market at full value, thereby creating capital for Equites, which will be recycled back into the system. Over and above that, what we will not precluded from doing either is there are some owner occupiers in the U.K., the reference is normally called a freehold deal, and we will also be happy to do freehold deals. And again, the same thing would happen there is that we would make the development profit and that profit would be recycled back into our operations in the U.K. And I think we've got a little example here in terms of how the deal would happen at a 6% yield on cost. After the pay away to Newlands and everything, Equites would basically walk away with a product at approximately 5.3% yield, which would be valued in the open market at about 4.5% yield. And really, that 80 bps in it. And there will be examples where it could be slightly more and there will be examples where it could be slightly less. But obviously, the covenants in the U.K. know the value of their covenants. And they will want a bit bigger piece of that development profit or where they don't have the same strength or where we have a unique piece of land, which is a one-off as some of the Newlands team will explain some of the metrics around the different portions of land that we control, the evolution of that will result in us being able to grow a portfolio at a meaningful discount to value. On that note, I'm now going to introduce the Newlands team and let them, well, introduce themselves as well. So on that note, I'm going to hand over to Graham, David, Ashley and Simon in the U.K., and they join us online. Fantastic. Gents, and on that note, you're up on the screen now. I'm going to hand over to, I think Graham is going to sort of start the process if I'm right.

Presentation to talk you through. So I'm just going to kick off initially talking about 3 of our sites that we are sort of in advanced discussions on with various customers, talk a little bit more about the market, customer experience and the green agenda and then perhaps open to Q&A. So over to you, Simon.

Thank you, Graham, and thank you, Andrea, and good morning to everybody. For those of you who were on the call 6 months ago or so, we provide specific detail of sites and development opportunities that we've been working on as a team at Newlands. And I'm glad to report this morning we've had some real progress on those sites, which has resulted in some occupier traction which the 3 slides that we're going to talk about today in terms of occupier deals are the ones we're going to come on to you now. The first being Peterborough Gateway, which is a 17-acre site on the A1 motorway, which is about 1 hour and 20 minutes just north of London, where we are working with a leading e-commerce retailer to build a facility of 140,000 square feet. This is a pure last-mile delivery facility. And you can see that looking at the plan on the screen. To give you an example of this, within the specification, they've allowed for 800 van parking spaces for that last-mile delivery. Each one of those will have its individual charging point for electrical charging vehicles to future-proof that in terms of sustainability moving forward. In terms of the planning for that building and the site, the site already has an outline planning consent. We've submitted a reserve, what we classify as reserved matters planning consent, which provides the detail around the building 6 weeks ago or so. And we're expecting a determination for that planning application in early December, which would enable us to start on-site at the end of Q1 next year for a PC end of September. So this time next year, we would have a finished building on that plot. In terms of the proposed lease terms, what we're looking at is a 15-year lease with a geared rent to cater for the development density of the building, along with the cost of the build with fixed uplifts and rent review throughout the duration of the lease term with a total cap value of circa GBP 45 million. And we are expecting to make an announcement on that development in the next couple of weeks. The next slide is a development we're undertaking for Hermes up at Hoyland. The site is at Junction 36 of the M1 motorway, which is the main arterial motorway north-south leaving from London, and this site is in South Yorkshire. We are working with Hermes there who I'm sure many of you will know, a leading parcel delivery operation. I think statistically the second largest parcel delivery company in Europe. We have a historical relationship with Hermes having built their biggest regional distribution unit in the U.K. at Rugby in the Midlands, which is about 300,000 square feet, which we completed for them in 2016. They made us aware that they had a very similar requirement to serve northern conurbations. So working with their property team, we've identified a site. It was actually the same landowner as the site at Peterborough. So we worked in conjunction with the land owner and Hermes to design the specification. The building being 340,000 square feet on a site of 50 acres. Terms are agreed and we are just awaiting final signatories. So again, we expect to make an announcement on this project in the next couple of weeks. In terms of the structure, it's a leasehold deal with a long-term 20-year lease. Again, it's a geared rent, which reflects the site's density and the construction cost of the unit with fixed uplifts and rent review throughout the duration of the lease with a total cap value of GBP 80 million. The final slide for me is at Basingstoke, Basingstoke Gateway, which is a site on the M3 motorway at Junction 7, approximately 25 miles southwest of the M25, the London Orbital Motorway. Again, we're in advanced discussions with a major e-commerce retailer to take a very good building. On the main plot, you could see a building of over 2 million square feet and a multistory facility. The structure of this deal is a freehold deal. So that will involve the initial purchase by the customer for the land and then they will fund the construction progress on a monthly basis, leading to completion. And in terms of timing, the planning has been submitted for this. And we're expecting determination by the local authority at the end of November, which will lead us to a start on-site date in March next year for a completion date of summer 2022. We expect to have announcement on this development in the next 4 to 6 weeks. And following this, we also have additional interest in a great deal of balance at the site as well. So the site has been very successful for us. I'd now like to pass to Graham and Ashley who will provide some detail around key market trends in the U.K. logistics market.

Thank you, Simon. So Andrea touched on some of this earlier, but just to perhaps sort of elaborate a bit further where we sort of see the market in the U.K. I think it's fair to say, pre-COVID, we were already seeing a pretty big shift in the sort of e-commerce sector or the retailers starting to look heavily at their sort of online platform. The parcel sector growing sort of side by side with the growth in e-commerce sector. And that shift was firmly sort of underway pre-COVID. I think what's happened in sort of whole pandemic with the lockdown that we've had in the U.K. is the shift has accelerated significantly. And retailers that perhaps haven't had a real drive on sort of e-commerce side and have had to sort of look at that. The guys that have already got a strong platform have continued to grow strongly. The parcel sector that sort of feeds into the whole e-commerce sector and provides all the deliveries have started to sort of grow further, hence, looking at our deal that we're about to do with Hermes in Hoyland, Barnsley. So we've seen a real big shift anyway, but that's just been accelerated massively by the whole COVID effect. I think that's probably further evidenced by the JLL latest market report, which Andrea touched on earlier in that we've got to Q3, we've already seen the levels of 2019 take-up being reached already, and we've still got one quarter to go. And I think that's being driven largely by the e-commerce sector. So some of the major players like DPD, Hermes, Amazon, DHL have continued to sort of roll out expansion programs, which has really sort of driven the market. I think importantly, the U.K. continues to be constrained by land supply, and there's a number of reasons around that. We're not the largest country in the world. There's a lot of planning policy that restricts the supply of land coming through. It's quite time-consuming, complicated and expensive. So whilst the sector is very active and is the flavor of the month at the moment, the sector is sort of constrained still by land supply. And what we're seeing is that the sort of impact of that is leading through to strong rental growth because the availability of land and plots with planning consent for customers is limited in the right locations. So we're starting to see strong rental growth and we're also starting to see yield compression. One of the more recent anecdotes in the market that we've picked up on is a 20-year lease that's let to Amazon, which we believe is under offer at a yield of sub-4%. So there's real strong evidence of the rental growth and yield compression. So Ashley is just going to talk a little bit about perhaps some of the customer experience in the market.

Yes. I think I'll just pick up on customer experience. It's something that you don't necessarily see in analyst reports, agent reports. I think there's 2 elements to this. One is the sort of online platform, so the sort of Internet retailer interface. And a lot of those guys have been really getting to grips with how customers use their websites, et cetera. But the other piece is actually what's it like to then receive the parcels. And I think there's quite a diversity here in the quality of delivery between the different companies. And I think we will discuss this and our experience is that perhaps DPD is perhaps a great customer interface. And just to put some color on that, as the market leader, everyone here has got an app, which is the DPD app. And on there, it will tell you where your driver is, what time your driver is expected to arrive, the name of your driver. And you can actually watch him online as to where about that driver is on a Google-type map. If you're not in, you can communicate live with the driver that you want that parcel to be left with a neighbor or in a safe space like an outbuilding. And then when the driver arrives, it will leave a photograph of that parcel so that you can see it on the app that it's being delivered and where it is. Now contrast that, some of the other parcel hub services are still very much scattered in approach for that last mile. You can get people that are using local taxi firms. You can get quite a variety of service. And that really is where some of the other players are sort of punching towards this last-mile delivery and some of the huge take-up and the discussions that we're having around last-mile fulfillment. And I think that really is what we're going to see over the next 5 years. Certainly, DPD have been doing this for 8, 9, 10 years and are therefore ahead of the game. And I think we really are in discussions with a lot of the other providers really catching up on that. So we're seeing that as a huge opportunity for the Newlands and Equites business. The other piece that nobody has really cracked yet is the ability to send things back. So what we're experiencing is parcels coming, but the goods aren't the right size, et cetera, if it's clothing. You want to send them back. The best that we've got at the moment is maybe a return label that you can then put on the parcel and take it, but you still have to take it physically to a local convenience store or post office to return it. Nobody has yet cracked how do we send a van around and pick all these parcels up. And I think part of that customer experience is that's where people are asking for that technology to take them in order to do the whole start to finish experience. So I think that will be what we're looking at over the next couple of years. And of course, that will require more property, more vans, more logistics capability to crack that one.

So yes. So I'd just sort of emphasize Ashley's point there that we're really seeing a big shift anyway from the high street to these online e-commerce sector, sort of an emerging subsector in the parcel sector that sort of feeds off from that and the last-mile delivery and a lot of growth still to come from the market leaders there and the team here have a fantastic sort of track record with all of those guys. So we're really excited and confident about the next sort of few years ahead. And we're seeing a lot of interest in our other schemes from those sort of customers already. So that's very exciting. I think the other thing to say in the U.K., Laila touched on this earlier in one of her slides, is the green agenda remains very sort of important to both customers, but also the planning process in the U.K. I've sort of alluded earlier to the planning process in the U.K. being quite sort of cumbersome and bureaucratic in many ways. And planners are seeing and wanting the sustainability credentials of the schemes to really move on with the agenda that's sort of very much there in the U.K. So there's a lot of focus now on how we can meet sustainability targets. Simon talked earlier about electric vehicle charging that has implications to schemes in terms of how we feed that from a power sort of battery storage requirements. There's a lot of technology there that we're looking at in how we sort of bring that into schemes. Things like photovoltaic panels on the roofs, how efficient are they, how can we utilize that, again, feeding into battery storage. So there's a real drive both from the customers to sort of tick the sustainability box, but also from a planning point of view, and that should then lead through to us delivering sort of very sustainable buildings, which from an ownership point of view is key. And I think there's a stat there that we thought was interesting from a U.K. perspective that recently there's been an announcement for the first time that there were more electric cars, which does include hybrids as well as pure electrics, sold than diesel cars. So I think there's a real shift in the U.K. towards sort of green vehicles and transport measures. And we're seeing that sort of come through to vans and probably in due course to HGV. So it's a key part of what we think we'll be doing moving forward. So I think that probably concludes our presentation. Over to you, guys.

Thank you, Graham. Am I on? Yes. Thanks for that, guys, very insightful. I'm just going to wrap the presentation up now with our prospects. And then once we've got through that part, then we'll have a bit of a question and answer to the Newlands team, but obviously also to the Equites team. So in terms of where we're at, yes, I mean, COVID is still unfolding. We don't really know the true effect of how it will all play out. We await, from a South African point of view, we wait, obviously, the government's plan in terms of how they are looking to foster some shovel-ready infrastructure projects to try and get some momentum into the economy. In the U.K., the government is also making decisions and then changing their minds. And so there's also a large degree of uncertainty. In the U.K., very differently to SA, I think the uncertainty is helping the logistics and the e-commerce platform. In SA, I just think that the platform is probably still not developed enough to benefit from that. But within the context of all that, the quality of product that we have, the quality of covenants that we have, the longevity of lease profile, talking to Riaan's statement earlier, I think we are an organization that will be very defensive going through all of this. It affects us all in some way or form. We believe that the effect on us will be less so. And obviously, the big unknown is tenant failures and will there be any. I mean, we have been very fortunate that we haven't been exposed to any of those to date. And hopefully, that will remain the case going forward for us. And we're very grateful, as I said earlier, to our tenants. And in line with that, I think as a management team, we are comfortable basically giving some guidance, which we didn't give at year-end in May, but we're looking to give guidance for this financial year of a 2% to 4% distribution growth for the financial year ending Feb 2021. And that really brings the presentation to a conclusion. However, we are now opening it up to a bit of a Q&A. And I see that I've already been given a couple of questions here. And please, if there are any more, please do send them through to our info e-mail address and they will be brought to me.

So I think I've got one here from Adrian Williams. And this is to the Newlands team. Can the Newlands team hear me?

Yes.

Fantastic. Okay. So Adrian asks, what do you think the market demand will be over the next 3 years? Do you think there will be any letup?

Okay. No, it's an interesting question. Yes, I think the general view is, we don't think there'll be any letup. We touched on earlier the sort of parcel sector growth and expansion plans that people like DPD, DHL and Hermes have. We believe Amazon are looking at rolling out their own last-mile network as well. And then I think the continued shift from high street to e-commerce for the platform will also drive the sector. It's got a long way to go. I think in the U.K. at the moment, we're running at something like 27% of sales are sort of based online. And I think there's a general consensus that, that's likely to shift to sort of 50% in the next 5 to 10 years. And actually, the whole COVID sort of pandemic is probably accelerating that and bringing it forward. So I think all of that should, in our sort of view, equate to continued growth in the sector.

I think it's worth just saying that the market here is not just about e-retailing parcels. Recently, Land Rover announced they are bringing all their distribution into one campus, and they're building 3 million feet in the next 3 years. So it's another example, a big manufacturer there, bringing all their logistics under one roof. So whilst the e-retailing parcels is a big part of our world, the market is much bigger.

It's broader than that.

Yes. And I think you look at the manufacturing base, we've recently sort of completed a big scheme at Peterborough and a lot of, probably, what, 40% of that was manufacturing?

Yes.

So the market here is not just e-retailing and parcels. It's much bigger than that, yes.

Thank you for that, guys. Okay. Got from Rainer La Barre. We've got, what are the best asset class demands from the institutional market and your views on any shift?

I think just in terms of what Graham and David were just explaining, obviously, in terms of the shift to online retailing, clearly, there's been an impact as a result of demand from customers on the high street, which I think has filtered through and will continue to filter through in terms of demand for retail as an asset class. Also I think in terms of general working trends as employees or businesses, I think the shift to kind of working at home will have a relatively long-term effect. I think companies will have a slightly different outlook moving forward in terms of potential cost savings on overhead, et cetera, et cetera. And as a result, I think in markets such as out-of-town offices, I think the institutional demand for that as an asset class will reduce. And as Graham sort of alluded to, what we're seeing is a huge weight of money that's coming forward and looking for logistics and warehousing as an asset class in the U.K. So we see demand for this type of asset that we're producing only moving in one direction.

Thank you for that, Simon. I think, Riaan, have you got a question there?

I've got a question from Daniel. He asks...

Hang on, hang on, just speak into mine.

I've got a question from Daniel. He asks, does 99% collection rate exclude the rental deferrals? Maybe just some color around that. Wherever we entered into an arrangement with a tenant in respect of cash flow relief, we drafted an addendum to the lease and there's a contractual document that regulates the repayment of the deferred amount. So the 99% is based on the contractual rental payments due, and that includes, obviously, the newly drafted and signed addendums.

Thank you for that. Let's have a look. Okay, this is to the Newlands team again. Obviously, you're more interesting than we are, obviously, but anyway. Just maybe a bit more insight in terms of your view on, this is from Kelly Jacobs, your view on rents and are they sustainable? And the growth in rent that you alluded to, is that sustainable? And how low can these yields actually go to?

Okay. Well, that's another interesting question. I think rents, our view is historically rents will continue to grow. And I think that's because if you look at the base from which they're going from, it's still a relatively low cost base here, ignoring the bespoke buildings where you're perhaps rentalizing certain expensive elements of fit out. Prime rents in the Midlands are anywhere from GBP 6 in Peterborough to maybe GBP 7, GBP 7.50 in Northampton. And 10 years ago, they were perhaps sort of GBP 4.50. So they're not like City of London rents that could go from GBP 40 a foot to GBP 80 a foot and then back down again to GBP 40 a foot. They tend to sort of go on a fairly steady continuous curve. And then I think that's also driven by what I alluded to earlier. There's a sort of lack of supply of land coming through. I think that will feed into sort of continued rental growth. So we're pretty confident we will continue to see that sort of steady upward curve of rental growth. I think yield compression is an interesting one. I think clearly, the cost of capital as well as the weight of money coming into the sector is driving that. How low can it go? I don't know is the honest answer. We are seeing evidence of sub-4% yield on sort of prime assets 15-, 20-year income, which we alluded to earlier. If you had asked me that a few years ago I would have said, I would have been surprised to see that at sub-4%. So yes.

And we're now talking about negative interest rates aren't we in the U.K.?

Yes.

So that, do you want to be paid to store your money or are you going to invest it in property. And I think that's what will drive it lower.

Yes.

Fantastic. Thank you for that guys. A question now from Sheldon Kisten. Sheldon basically asking, can you envisage a scenario where you drop below a 100% payout ratio? And can we safely assume 100% payout ratio going forward into the foreseeable future? So in terms of Equites, if I can, the reason that we've decided that we are paying 100% is that the nature of our leases are very much a triple-net basis. So the amount of capital required to regenerate our existing buildings will be limited for many, many years to come, partially offset by the fact that we've got very good reinstatement clauses in our leases. So when tenants do move out that there will be certain obligations based on them that we'll need to rehabilitate the facilities. And over and above that, I think as Equites, we see massive growth opportunity in our portfolio on the development stuff and the newer stuff coming through. And I think as we continue to grow at the top end of the market, we would be looking to sell some of our maybe older and smaller assets. And the consequence of that is the need to rehabilitate those facilities to the 21st century will not be a dominant feature in our world. So the intention from Equites' point of view is to pay out 100% because I think our business model allows for it to pay out 100%. Obviously, the big question mark is massive tenant failure. And if there is massive tenant failure across the whole portfolio, then certain things may need to be looked at. But the reality of it is that the rent that we receive because of the triple net or the nature of it, we have an internal belief that, that should be paid out to our clients. Laila?

So I have a question from Riaan de Jager. He's just asking for some color on fair value adjustments, like-for-like fair value adjustments, sorry, like-for-like fair value adjustments both in South Africa and the U.K. And I think that on the U.K. portfolio, let's maybe start there given what the Newlands team has alluded to, given all the trends we're seeing, that's remained relatively flat. I mean, there was a slight uplift on those valuations. In South Africa, there's about a 1.7% devaluation of our South African like-for-like portfolio. And we spoke about it in our valuation section where it was really as a result of the moderation of rental growth assumptions as well as market rentals. So that's where we're at right now. I mean, I'm happy to unpack it further, Riaan, if you want to chat about it in more detail.

Cool. Thanks for that, Laila. And I think, on that note, I think that's us done. Again, thank you, guys, for having sort of joined us today. Obviously, we, as a team, I'd like to first, obviously, thank our Board and our Chairman, in particular, always great to have Mr. Campher look after us and give us the insight that he has. I mean, many years of wisdom there, and we're very grateful to him. Over and above that, I'd like to thank my executive colleagues for amazing work in very, very trying times. And then I don't want to sort of forget the team. I mean, ultimately, the team have performed admirably under very, very difficult circumstances. Whilst being at home by yourself can take its toll after a while, and we've always been quite a close-knit small family at Equites. So again, I'd like to sort of thank them for their contribution to what we've achieved. And then, obviously, lastly, I would like to thank our tenants. I mean, I think I mentioned it a couple of times in the presentation, but our business really does rely on them having fantastic businesses, which most of them do, but also them paying their rent on time and they certainly have done that for Equites. So thank you very much to them. And on that note, yes, all the best and have a fantastic day. Goodbye.