Grainger plc (GRI) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Grainger's Half Year Results. I'm pleased to be able to tell you that we've delivered another excellent set of results as we continue to accelerate our growth. We're adding to recent years of record delivery with another strong year. This is a resilient business in a structurally supported sector and it's delivering growth immediately. And of course, this is a significant year for Grainger as we plan to convert to a REIT before we present the next set of results, delivering on our long-term promise to shareholders ahead of time. So the agenda this morning is I'll take you through the highlights. Rob will talk you through the financial results. And then I'll come back and talk about Grainger's shareholder value creation model, the market and the drivers of growth. Before I get to the results, I want to take a moment to remind people of just how resilient this business has been over this period of financial volatility and also how we're in a period of accelerated growth. We have delivered an outstanding performance in a structurally supported sector and we're continuing to deliver growth. Now it's an outstanding performance because our performance has been sector-beating. We've delivered top-line growth in our income through portfolio expansion, excellent like-for-like rental growth and growing valuations. And there is a strong investment market in build-to-rent. Our sector is one that is structurally supported. We have a growing population, a growing demand for rental homes and supply is highly constrained and small landlords are leaving the market and there is an opportunity for us to increase our market share. And we're delivering growth now and into the future. We've once again generated strong year-on-year earnings growth and we're leveraging our central costs and overheads to deliver compounded earnings growth from what is a sector-leading operational platform, which has the capacity to deliver further efficiencies as we grow further. Our accelerated earnings growth will deliver 50% growth in our EPRA earnings by financial year 2029. So turning to the headlines of our performance. It's been an excellent 15% growth in our net rental income, in part supported by continued strong like-for-like rental growth at 4.4%. We've achieved 23% growth in our EPRA earnings as we leverage our sector-leading operational platform and we're delivering for shareholders a 12% dividend growth. Our valuations are continuing to grow with an NTA at GBP 3 per share. Now these financial results and our record growth in earnings have been delivered by our strong operational platform, delivering 96% occupancy, which we consider to be full, maintaining efficient gross to net at 25% despite rising costs and securing customer retention high at 62% and a customer affordability remaining healthy at 28% of income spent on rent. Now the resilience and performance of this asset class has been recognized by numerous investors and it is attracting capital. In Q1 2025, GBP 1.1 billion was invested into the sector and advisers predict that 2025 will be a record year of GBP 6 billion of investment. In 2024, residential was 10% of all real estate investment sales, and this is up from 3% in 2017. This is evidence of a maturing mainstream asset class, which is attracting strong investment interest. We have a significant portfolio growth to come. We have over 11,000 operational homes. Our regulated tenants is just over 1,300. We have grown our build-to-rent portfolio to over GBP 2.8 billion, and that's 9,689 homes. We have a healthy pipeline of 4,565 homes, which will deliver a significant step-up in our earnings. Our committed pipeline alone will see us deliver 50% growth in our EPRA earnings even after absorbing an increase in interest rates. We will deliver 25% growth by full year '26. The growth in our portfolio will leverage our central costs and will drive EBITDA margin expansion. And the outer pipeline will deliver a further GBP 40 million of potential net rental income. So we've secured significant growth to come. How do we fund it? Our committed, secured and planning and legals pipeline is funded by our asset recycling. This has been a constant driver of the growth in our portfolio. We're a highly cash-generative business with over GBP 200 million in operational cash flows each year. We have around GBP 1 billion of lower-yielding non-core assets, which we are recycling to invest in higher-yielding build-to-rent. And we have a great track record on asset recycling, delivering GBP 549 million over the last 2.5 years. We're efficient at matching cash flow with CapEx. Now this is a slide I showed in November, and I said it was my favorite, so I'm showing it you again, but it's a slide I like so much because it tells you a lot about Grainger. It demonstrates our track record of delivering. That's delivering our growth in our income, delivering our growth in our earnings and delivering a vast improvement in margin from our operational leverage. Now this growth is set to accelerate with a doubling of our net rental income from our pipeline, a 50% growth in our earnings by full year 2029 and that's just from our committed pipeline and much more EBITDA margin expansion to come as we drive operational leverage from our sector-leading platform. We have a track record on building a bigger and more valuable business and there is a lot more to come. So I'm now going to hand over to Rob, who will take you through the details of our excellent results.

Thank you, Helen, and good morning, everybody. Today, I'm going to run through the financial performance for the half year and illustrate the exciting phase of growth that we have ahead of us. The first half has been another period of accelerating growth, demonstrating Grainger's resilience and our market-leading position. Like-for-like rental growth across our stabilized portfolio was 4.4%. Overall, total net rental income continued to grow strongly, up 15% in the half. And this top-line growth drove even stronger EPRA earnings growth, which was up 23%, demonstrating the operational leverage in our business that delivers strong compounding earnings growth. Adjusted earnings were up 13% to GBP 50.1 million with strong sales profits as we continue our success in disposing of our regulated portfolio. And our dividend per share increased by 12%, reinforcing our commitment to delivering robust, sustainable returns to our shareholders. EPRA NTA grew by 1% to GBP 3, continuing valuation growth and underscoring the quality of our portfolio. Now looking at the income statement in more detail. Our overall like-for-like rental growth of 4.4% was driven by strong performances in both BTR, which was 4.2% and our regulated portfolio of 7%. Stabilized gross to net was in line with the full year at 25%, demonstrating our ongoing focus on cost efficiency. Overhead costs were up 4% in the half year, in line with wage inflation, with costs continuing to be tightly controlled as a result of the benefits of our CONNECT platform. Interest costs increased due to slightly higher average levels of debt in the first half. EPRA earnings saw very strong growth of 23%, demonstrating the strong compounding earnings growth that we're delivering. Sales profits were in line with prior years with appetite and pricing for our sales remaining strong. Other adjustments include a derivative valuation movements of GBP 2.9 million and an additional GBP 1.9 million fire safety provision. Now looking at the moving parts of the 15% increase in our net rent for the period. Strong like-for-like rental growth of 4.4% contributed GBP 1 million of this growth. And the successful lease-up of our recent pipeline deliveries has been a large contributor, adding GBP 10 million of net rent. Our asset recycling program offset this growth by GBP 3 million. Looking forward, we'd expect rental growth to continue to remain above long-term averages in FY '25 with second half net rent to be slightly higher than the first half due to pipeline lease-up. This chart shows the key movements in NTA over the course of the year, and our EPRA NTA came in at GBP 3 per share, which was up 1% for the half, which saw continued valuation growth. Net rents and fees added 9p with overheads and finance costs offsetting this by 5p. And overall, our portfolio valuation for the period was up 0.8%. The BTR portfolio saw 1% valuation growth in the half with ERV growth of 1.7% and largely flat yields. Valuations on the regs portfolio were up 0.4%, demonstrating their resilience. And further details of the valuation can be seen in the appendices of this presentation. As a reminder, there are many elements of our business not captured in our NTA as we outline on this slide. Now turning to net debt. Net debt was broadly flat in the half with just a modest increase of GBP 22 million to GBP 1.475 billion. Operational cash flows remained very strong with GBP 95 million generated, and that was ahead of the GBP 84 million generated in the first half of the prior year. And we continue to invest in our build-to-rent pipeline with GBP 64 million invested in the period. Our self-funded growth, where we recycle out of our lower-yielding and returning assets into our pipeline enables us to continue to drive growth, while managing our balance sheet in line with our plans. Going forward, we'd expect net debt to remain broadly flat in the near-term with a modest deleveraging to occur as we near the end of our remaining 3.5-year low rate fixed hedge maturity. Our balance sheet remains in excellent shape, providing a solid foundation for future growth. We maintain strong liquidity and robust hedging profile with rates fixed in the mid-3% range for the next 3.5 years and no material refinancing requirements until 2029. Both net debt at GBP 1.475 billion and LTV at 38.5% are broadly in line with last year-end, demonstrating our ability to manage our capital structure by flexing sales of our highly liquid asset base. As previously highlighted, we plan to reduce our debt and LTV over the medium-term. And this LTV reduction will be managed with reference to our 3.5-year hedge maturity. As LTV is brought down over the medium-term, this will help mitigate the impact of rising finance costs as our low rate hedging rolls off. We'll manage the quantum of this deleveraging to ensure we continue to deliver the 50% earnings growth whilst fully absorbing the impact of the higher interest rate environment. REIT conversion has been a long-term ambition since the start of our strategy, and I'm pleased to say, we're now very close with conversion set for early September and preparations are largely complete. The benefits of the business of being a REIT are substantial as we'll no longer have to pay corporation tax on the profits of our build-to-rent business. And in the first year alone, this is expected to generate GBP 15 million of savings with this increasing as we deliver further growth. We see the resilient growth our residential business is delivering as arguably the perfect fit for the REIT structure with no impact on our business model or our strategy. The dividend distribution requirements of paying 90% of REITable profits will also have no impact on our dividend given existing payout levels. And we believe that the dividend income stream we give to our shareholders should mirror that of our underlying asset class, which means long-term compounding resilient growth. Post REIT conversion, we'll move from our current dividend policy of distributing 50% of net rents to a policy of distributing at least 80% of EPRA earnings as a dividend. And we're firmly committed to delivering a strong progressive dividend across the short, medium and long-term time horizons. And we therefore, expect continued growth in FY '26 and FY '27 with a top-up of regs profits in these years. Beyond that, we'd expect the dividend to be fully covered by EPRA earnings. The first half was a period of strong net rental income growth and we have very clear visibility of the substantial growth to come with pipeline completions and that's going to drive significant year-on-year increases in our net rent. Net rents will increase by GBP 43 million to GBP 153 million compared with FY '24 as we deliver our committed pipeline. And beyond that, our secured and planning and legal schemes will deliver a further GBP 40 million of net rent. Combined, the entire pipeline will see our net rents continue to accelerate to GBP 193 million. This strong top-line growth delivers even stronger earnings growth as the operating leverage from our business model and our CONNECT technology platform continues to drive meaningful margin improvement. Near-term, we're on track to deliver our guidance of GBP 60 million of EPRA earnings by FY '26. That's an increase of 25% when compared with FY '24. We've also had the potential to grow our EPRA earnings by 50% by FY '29 and that's from the delivery of our committed pipeline alone, whilst also fully absorbing the impact of higher interest costs. The bridge on the slide breaks down the key drivers and that includes the benefits of like-for-like rental growth assumed at our long-run average of 3.5%, the yield pick-up from recycling out of our lower-yielding regs assets into our growing build-to-rent portfolio, scale efficiencies with EBITDA margins growing to over 60% and the mitigating impacts of reducing debt on higher interest rates, which are currently assumed to have fully rebased to 5.5% by the end of the period. We see this as conservative as it excludes any further accretive opportunities, as outlined by Helen, and it's based only on the delivery of our committed pipeline. We see Grainger is delivering a medium-term sustainable return of at least 8% with stable yields. And this comprises 2 components: our recurring earnings yield of 3.5% plus 4.5% capital growth, that's based off the long-run rental growth assumption of 3.5% whilst adjusted for leverage. This total return is extremely robust given the predictable income element and rental growth assumption that's been backed up by decades of evidence. And it's also based on an NTA of GBP 3. And given the discount we're trading at today, this return would be over 11%. I've provided further details for you in the appendix. So to summarize, we've continued to deliver a very strong operational performance with rental income increasing by 15% and even stronger earnings growth with EPRA earnings up 23%. And this growth is being delivered from a position of real financial strength. Our liquidity and our balance sheet is strong and that gives us the flexibility through disposals to manage our debt as we reinvest into our committed pipeline. And we're on track to deliver our FY '26 EPRA earnings guidance of GBP 60 million and the delivery of just our committed pipeline alone gives us the potential to grow earnings by 50% from FY '24 levels, whilst also fully absorbing the headwind of higher interest rates. This earnings growth is a major component of our medium-term total returns target of 8% and we see that as a low volatility return and that remains unchanged assuming constant yields. And with that, I'll now hand you back to Helen.

Thank you, Rob. In this section, I'm going to cover the fundamentals of our sector, our business model and our operating platform, which is driving shareholder value. Now Grainger is focused on driving shareholder value. Our model is simple. We are investing in a great sector with structural market tailwinds. Our investment model has shown a strong correlation between inflation and particularly wage growth and rental growth. Our operating platform is accelerating EBITDA margin growth and our growth is set to continue with a substantial pipeline of GBP 1.3 billion. Our growth is funded from our asset recycling. Our regs and our non-core assets are Grainger's growth funding engine. And as we recycle, we capture the reversionary potential. And all of this is based on a strong balance sheet and all of this is focused on driving shareholder value. So looking first at the structural market tailwinds. In the U.K., there is a demand for housing of all types, but there's a particular growing demand for rental housing. And the English National Housing Survey and Savills predict rental demand is set to grow by 20% over the 10 years to 2031. Now this is driven by the growth in population, but people renting for longer and the growth is strongest in the Grainger's core demographic of 25 to 34-year-olds. In addition, there is a tremendous opportunity to gain market share. Although Grainger is the market leader, build-to-rent still only represents 2.3% of the U.K. private rented market. And as renters rent for longer, they are increasingly looking for the quality, convenience and professionalism that Grainger delivers. Now at the same time as demand is growing, supply remains constrained. The U.K. faces a severe under-supply of housing, an estimated 4.3 million shortfall across all tenures. Planning consents and housing starts have fallen. And just as an example, in the U.K., London, the U.K.'s largest rental city, 33 boroughs, 23 of them have recorded 0 housing starts this year. This under-supply is exacerbated by small landlords exiting the sector. There has been a net reduction in small landlords since 2016 as small landlords have faced rising regulation and finance costs. And despite government policy to stimulate housing supply, we see housing shortages will continue. Now residential is a strong and attractive asset class. Residential yields, particularly in London, are the highest they've been since the early 2000s and they're higher than most European cities. In an unregulated environment, residential will deliver highly attractive inflation-linked returns. And whilst real estate is often compared to the 10-year gilt, it's more appropriate to compare residential investment to the 10-year inflation-linked gilt, which is currently 1.4%. And our build-to-rent portfolio at 4.5% delivers a very healthy spread. Residential has outperformed CPI with more than double the rental growth of commercial real estate and rental growth is underpinned by wage growth. And it is this quality of the risk-adjusted returns that sometimes missed. And we have a strong rental growth outlook. We have excellent customer demographics with our customers' wages growing faster than average. 89% of our customers are aged between 20 to 44. Now I hate to break it to the over 45s, but the 20 to 44-year-old is the group where pay increases fastest as people develop their careers. And we know our customers' affordability is strong and it's further supported by the fact that our buildings are energy efficient. They include gyms and Wi-Fi in the rent. So rental growth is expected to stay above long-term historic average for full year '25. Now our research and carefully selected investment locations informs our capital allocations. Now London remains the best rental city. And in the first half, we added to the London portfolio with the second phase of Windlass Apartments in North London. We also launched in February in Oxford another strong rental city. Our cluster strategy, which drives our gross to net with operational efficiencies, buying power and customer retention is developing further. And we've reinforced our clusters and committed to secured acquisitions and secured acquisitions in key locations by investing in strategic adjacent site acquisitions to reinforce these clusters, for example, at Guildford, Sheffield and Cardiff. Another driver of performance is our leading operating platform, delivering excellent customer service. We have invested in technology and we're leveraging our data and we're using AI to drive customer experience and we're using sentiment analysis to drive actionable insights. In the first half, we upgraded our app to provide better customer service and more immediate responses. And all of this is delivering great service to customers and great insights and value to shareholders. What people sometimes don't realize is how supportive the regulatory and political backdrop is for Grainger. The new government were quick to condemn rent controls and to support the growth in the build-to-rent sector. We now have visibility on the Renters' Rights Bill, and we have clarity of what the government expects of the sector. Their requirements of improved rental standards are easily achieved by Grainger. We have a high-quality, modern, energy-efficient portfolio. Now there will be operational changes, but we are adapting our policies and processes, training our people to the new requirements, which in a customer-centric business like Grainger is business as usual. We at Grainger see Renters' Rights as a positive evolution of our business model and essential to the positive -- maintain the positive support that the build-to-rent sector has achieved from this government. Now Grainger's growth has been achieved primarily by developing our own stock and our routes to growth are widening with stabilized acquisitions becoming increasingly available. There are also opportunities for asset repositioning, and these exist in our portfolio, but our deep understanding and experience and customer insights tell us what customer wants. And we also bring that skill to stabilized acquisitions. We continue to see development opportunities by developing out our pipeline of sites and particularly efficient are the adjacent land ownerships, where we already have a deep understanding of the market and the submarket and we continue sourcing opportunities, particularly sourcing opportunities through our strategic joint ventures and partnerships. So returning to our shareholder value creation model. In summary, we're in a great sector. We've got a strong structural market tailwinds and we're in a sector that delivers real rental growth and offers great inflation-linking characteristics. Our leading operating platform is delivering for customers and shareholders and our EBITDA margin is accelerating. So we have an enviable pipeline for growth and that is funded from our lower-yielding historic assets. And all of this is creating shareholder value; 50% earnings growth by 2029, 25% by 2026, an 8% plus of total accounting return with low volatility and that's 8% of our GBP 3 NTA. And at current prices, that represents over 11% a progressive dividend, which we are committed to maintaining and we see this business as delivering excellent risk-adjusted returns. So Grainger's shareholder value creation model is delivering for shareholders. Thank you. Now I'm going to invite you to ask us some questions, and I'm going to be joined by Rob Hudson, our Chief Financial Officer; Mike Keaveney, our Director of Land and Development; Eliza Pattinson, our Director of Operations and Asset Management, and I've got other senior leaders in the room. So anyone listening in, you can submit questions through the webcast, but I'll take questions in the room first.

This is [indiscernible]. If I can just dig into the 8% TAR that you quote and particularly how you get to the 3.5% income return? Because just doing some sort of back of the envelope, your adjusted net initial yield is 4.1%. After costs, you're probably already coming down below that 3.5% then the effect of leverage is going to further impact that negatively. So just how do you get to that number?

Yes. So it's based off our 5-year EPRA earnings bridge. So clearly, we've got 50% growth in our earnings locked in. That's after rebasing to higher interest costs, but we do have some modest deleveraging, which is effectively then offsetting that impact of finance costs or certainly a very large impact of that. And the key reason that our earnings yield has been driven up so much is because of the compounding benefits of scale on our platform. So we've got our committed pipeline, which is locked in and delivering. Our central costs are being tightly controlled. So we have this very beneficial operating leverage coming through. So really, it's an effect of that compounding impact on the earnings coming through.

That makes sense. And then just one extra point on that. Does that 8% include sort of maintenance CapEx that you're expecting to spend or should that be taken off that 8%?

Yes. That's a great question, Sam, because for us, we actually do fully expense our ongoing maintenance and refreshment costs as we go. That's factored into our 25% gross to net that we have today. So we are a truly fully expensed net yield.

Can I just ask about, you're obviously talking about quite a lot of investment activity in the space at the moment. Are we seeing any change in the sources of capital there? Perhaps you could just talk around that subject. I'll go one at a time because I've been told of for doing this in the past.

Yes. We are seeing new entrants into the market and that's obviously what's driving up the investment demand, a wide range. We've always seen the institutions and sovereign wealth because of the nice protective characteristics of our returns. But we are seeing a mixture of private equity and a whole range of people entering the market. There's been about 8 major transactions this year and it's a very broad area. And I think people are looking at how residential investment has delivered, particularly in times of volatility and have seen that compared to all other real estate asset classes, it has actually maintained its value.

You've obviously done some work around the index-linked gilt, which I think is quite a good point you made. How has that looked historically, that spread? I mean, it's running at well...

Yes, it's the widest it's been -- I think I was sort of alluding to that in the slide about the market. It's probably the widest it's been for some time. Obviously, in -- we almost got to negative rates, didn't we, at one point. But equally, sort of we have -- we've been as low as 3%. So we're up 50%, if you like, on yield. So yes, it's a long way.

And they were slightly leading questions into this one here about what you're thinking about the outlook for yields. Obviously, you have conversations regularly with the valuers you're seeing the transactions better than us. I mean, do you think we've hit a period of stabilization now with lower rates kicking through?

Be careful. My valuers are here, I think. Well, the one thing I would say is we're off very, very historic high values. And if you look at world cities, Paris, Berlin, New York, London, at sort of 4% plus 4%, 4.25%, 4.5% is way off beam, especially as some of those cities have regulation in them. So actually, I think what's happened is we've been very much grouped with other real estate asset yields are moving out. And I think they have been incredibly stable now for a good couple of years.

That's helpful. I did have one last one, if I can read my own writing. So it was -- it's just about when the secured pipeline is going to fall into the committed pipeline. You're putting a lot of focus on committed and perhaps a little less unsecured. Just thinking about times and milestones to get us there.

Yes. I think you make a good point, Chris. We do the committed because I think everybody wants certainty, certainty that things are going to be delivered. And just as a reminder, what committed means. Committed means, it's actually on site at the moment. We've only got about GBP 166 million of CapEx to go on that GBP 400 million. So it's delivering immediately. The secured pipeline has got planning consent and we control the land. And so in some cases, we're taking it through to improve in the improved planning environment. We're taking it through to improve consents and obviously taking it through all the necessary regulation to make a start on site. But it's a very, very healthy pipeline. Any other questions?

Alastair Stewart from Progressive Equity Research. Two, three questions based really around the same subject, mainly London. Are you seeing any increased urgency to start to get development in general and BTR in particular, going? How is the planning landscape moving? And it's interesting you've avoided some of the building safety regulator carnage that's been seen among other developers. Could you go through why that's been the case?

Yes. So I think it's a huge distress that it's an engine for our country. It's so annoying that we don't have more housing supply coming through in London. As I say, 23 of the 33 boroughs have seen no starts at all. I think the Mayor will obviously want it to happen. The boroughs are sometimes a little bit more difficult to deal with. We have been incredibly successful at getting consents in London. One of the things I should say is that housing for sale versus housing for rent, housing for rent can deliver a lot quicker. And just as one example, not a London example, but we did 8.5 years supply in one of our schemes in Manchester against sort of a normal private for sale housebuilder because the decision people make to rent rather than buy is very, very different. And so you can lease-up much quicker than you can go through a sales process. And we are seeing a positive reception for build-to-rent in London and in London planning. So that's quite important. Alastair, I'd like to say, we probably threaded the needle with the building safety regulation. And I'm going to ask Mike to explain why that is.

I'd like to say because we're brilliant. But the reality is, yes, the building safety regulator, it's all bedding in. It just so happens that because of our time line when we redesigned schemes for the latest fire safety regulations, went back into planning, got more density. They don't land on the regulator's desk for a while. So I guess that was timely. And we fully expect by the time we are in front of them with our applications that things will have changed. They are already changing. There's an awful lot of work going on within the industry and with MHCLG or Deluxe, sorry, to try and deal with that bottleneck. So by the time we get there, I suspect it will be a lot easier.

Neil Green from JPMorgan. Just one question really. Given your ongoing development activity, can I just ask what you're seeing and hearing around construction cost inflation, please?

I'm going to go back to Mike on that one.

So obviously, our scheme is on site. We have fixed price contracts, so it doesn't really affect us and we've got a couple of schemes starting in the next 6, 9 months, again, fixed price contracts. So that doesn't really affect that part. There is a lot of news about inflation, generally comes from the housebuilders because they don't use fixed price contracts, and therefore, they experience inflation as they build. We don't. We sign-up fixed price contracts when we develop. In terms of the levels of inflation, so we rebase our cost plans a lot, very regularly to make sure that we're not caught out. We're actually seeing tenders coming in at or below the estimates at the moment. I wouldn't say it's massively below, but it certainly has moderated and it's in and around where we expect it to be.

Other questions? Kurt?

I have a few from the webcast. The first one is from Aakanksha Anand from Citi. It's a 2-parter. The first one is, given the positive trends in transaction markets, what can we expect as an approximate time line for the GBP 1.1 billion of firepower that you have to materialize?

It's a great question. I mean, we have -- just to put this in context, we've done over GBP 2 billion of asset recycling from our old portfolio into our new portfolio and we've done nearly GBP 550 million over the last 2.5 years. We have not found it difficult to asset recycle, which is very different from other asset classes where people have had to take a haircut. So we've been actually recycling, maintaining values, not having to write down values on sales, et cetera. And I think I alluded to it in my commentary that actually what we do is we match CapEx with the recycling program. So it won't mean necessarily that we'll look to accelerate that. We will consistently sell to match our CapEx.

Second part of the question, I think you may have probably just answered it. How do you think about the decision to allocate the firepower between the pipeline and stabilized acquisitions? And is there a yield threshold for acquisitions?

Yes. So the -- obviously, we look at -- we're watching the market all the time. I'd like to think that our acquisitions team is talking every asset and know every asset in case the owner wants to sell it. The benefit of stabilized acquisitions is an immediate rental uplift rather than having to take the -- wait for the development. The benefit of the development is you get exactly the product that you want and you do get some development return. And so we look at the returns in relation to that on an IRR basis. So I'm not going to reveal my thresholds for my competition.

Andres Toome from Green Street had a few questions. He's next. Cost inflation is running high, is his comment. How do you expect to mitigate this as rent growth momentum is decelerating? Are you able to keep NOI margins flat?

I think we've done a pretty good job. I mean, if you think of everything that's been thrown at us from energy costs and construction costs historically, wage inflation, NI, we're absorbing all of that in our overheads and in our 25% gross to net. But I'm going to ask Eliza just to talk about the ways that you do approach costs within the buildings.

Yes. So definitely it's our full in-house operational platform means that we can deliver and manage our NOI. And that's around -- we're able to have our cluster efficiencies, procurement, really strong void management and all of that feeds into making sure that we can manage our gross to net.

Andres' second question, I think you sort of answered it with Aakanksha's, but I wondered if you have any more comments because it's specific around the yield levels we're negotiating on forward funding projects when we're looking to replenish the pipeline. Are there any changes there or are they similar to the past?

I mean, all the way through the presentation, I talked about risk-adjusted returns, and that's exactly how we look at our capital allocation. What risks are we taking on either counterparty risks or new location risk, et cetera. And obviously, stabilized acquisitions. We've got more visibility on how it's run at present, but we can add value to it. So it will depend very much on a project-by-project basis. And some of the projects we've done over recent years, we've been pioneering in a location and they've come through very well and that's driven really impressive in returns. So being the first build-to-rent in a location, for example. I don't know if anyone wants to add to that.

Well, we highlight, aren't we, even not -- we tend to be first in. And because of the quality of our research, we -- and we're prudent, they tend to overperform.

Final question from Andres Toome. His final question is, EPRA earnings, the run rate for this first half HY '25 seems to be going at FY '26 guided pace. Is the guidance super conservative or is there a cliffhanger that you are budgeting for in the next 18 months that will drag on EPRA earnings?

I'll let Rob do that one.

Yes, sure. So I guess the first point to make in the context of our guidance is that we've got strong growth over the short and medium-term coming through. So 50% growth in our EPRA earnings by FY '29, 25% by FY '26. So that growth is happening now and also in the future. And there's no change to that guidance. When we look at the first half, there are a couple of factors that you can't just annualize the first half number to get to the full year. So we're maintaining our guidance on that basis. And that's because we've had some -- within our management fees, some liquidated damages where we're fully compensated for project delays, and there's always a little bit of lumpiness in that. And then our costs are naturally seasonally weighted towards the second half of the year. So in terms of our guidance, it's based on what's locked in. It is just the committed pipeline alone, and of course, after fully rebasing interest rates. And of course, we've got substantial growth ambitions and we're always looking at ways that we can grow further. And it's a really exciting time for the business, but no changes in the trends there and continue to grow over short- and medium-term horizons.

Any more questions?

I have one final question from online. It's from Mr. Mike Whittles, and he's asked a question about the optimistic commentary in today's statement. And if management could comment on how this can be squared with net asset values, which have grown less than 10% over the last 6 years and 1% in this period?

Okay. Not in our slide deck, but the -- I think I started off by reminding people how resilient this business has been in any other real estate asset class, whether you're talking about retail being down over 40%, offices high-20s, industrial and logistics, very, very low. Grainger, if you look at that chart, is up 1%. Now 1% doesn't sound fantastic, but bearing in mind what's been thrown at the sector over the last few years, I think this is actually a very, very good result.

No further questions from the webcast.

Any more in the room? Great. Thank you very much for joining us this morning. If you think of anything afterwards, contact me, Rob, Kurt and we'll get back to you. And yes, thanks for getting up early and spending some time with us. Thanks.