LondonMetric Property Plc (LMP) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen. Thank you for making the effort on this splendid November morning. It's been a lure of the bacon sandwiches rather than what I'm about to tell you. So a familiar format for most of you in the room. I'm going to -- I'll open up with some -- an overview of the last 6 months, go through to highlight some of the key numbers that we announced this morning. I'll pass over to Martin, who will go into much more detail on the figures, before he handing back to me to give you a deeper dive into the property portfolio and its performances and the valuation, before sharing with you our thoughts on the outlook for our sector and obviously for our portfolio. And then I'll open up the floor and the lines to Q&A. So welcome to LondonMetric's half year results with period ending the 30th of September 2022. And what a 6 months it's been. I mean a lot of this is going to become -- is relatively well known to you. The investment backdrop has obviously shifted materially since March. I'd like to ask you to focus on the first line efforts number on the right-hand side, the 5-year swap is up 200 basis points. And the fact of the matter is that is a very, very important number. Interest rates are the yardstick by which we value real estate as well as other investment medium. And that's courtesy of the fact that the economic and the political environment has deteriorated and the real estate markets are recalibrating very, very quickly with some sectors moving quicker than others. I'll come on to talk about that in a little bit more detail later on and some sectors suffering from what we refer to internally as deal paralysis. Our portfolio continues to be shaped by the structural trends that we see taking place in the wider world and evolving consumer behavior, largely dictated by the advancement of technology. The fundamentals in our core sectors remain strong. And again, I'll dive into this in more detail. Urban Logistics remains our strongest conviction call based on a demand-and-supply equation, which is delivering excellent rental growth for us. But also our long income, grocery and discount assets will continue to benefit from an increasingly price-conscious shopper tempting bargains in a higher inflationary environment. Over the period -- over the last 6 months, we've delivered like-for-like income growth. You can see there just shade under 3%, courtesy of lettings and rent reviews. Open market rent reviews there at 22%, up from previous passing rent. Portfolio suffered a valuation decline of 8%, courtesy of a 47 basis point outward yield shift. And again, I'll dive into that on a subsector basis later on in the presentation. But our portfolio remains incredibly strong, as you can see there, with 99% occupancy on weighted average unexpired lease terms of over 12 years. And such is the timing of rent reviews coming up over the next 12 to 18 months, we have a higher proportion of those falling due. And therefore, we are in line to collect a higher amount of reversion that would normally be the case the simple methodology of 20-20-20 actually work doesn't apply and that we've got a high proportion they say, coming up over the next 12 to 18 months, and we expect to capture across our logistics portfolio, in particular, another GBP 8 million worth of embedded reversions. We've continued our disciplined approach to capital allocation, both on an equity basis and also on our debt. We disposed in the 6-month period, including post-period end activity, GBP 140 million worth of assets and acquired GBP 99 million of assets. And also, we announced this morning that we have enhanced our debt facilities with an additional GBP 225 million, with a further GBP 75 million accordion, which will give us extra flexibility and duration, with no debt maturities now until financial year -- full year '26. Martin will go into that in a little bit more detail in a moment. So turning to the numbers, an incredibly strong P&L metrics here, less so on the balance sheet. Net rental income is up 13.5% at GBP 72.1 million. That's allowed us -- that's followed through with a net per earnings up a similar amount of GBP 50.2 million and, excuse me, EPRA earnings per share at 5.14p, up 5.5% from where we were 12 months ago. And that has allowed us to announce another quarterly dividend of 2.3p, bringing 4.6% for the 6-month period. That is up 4.5% on this time last year. And as you can see there on the far right, is 112% covered. The valuation fall that I touched on earlier has led over the last 6 months to the NTA moving out by 12.2% to 229.3p, but interestingly worth noting that over the 12-month period, our actually NTA is actually up 7.5% at -- compared to where it was this time last at 213.4p. The fact of the matter is in the last 6 months, the yields have moved out 47 basis points. In the 6 months preceding that, they came in by 43 basis points. So what we took in that 6-month period, we've given up in these 6 months period. And the reason why the NTA is higher than it was 12 months ago was simply courtesy of the ERVs that we've captured over that period. And I'll come in to talk about that in more detail in a moment. But on that note, I can hand over to Martin.

Good morning. Thanks, Andrew. The income statement must be really good because he's covered all of it. So in the half year dominated by economic and political volatility, we've delivered a really strong trading performance. As Andrew has already reported, we've delivered net rental income of GBP 72.1 million, an increase of 13.5% over the same period last year. This increase in net rental income is driven by additional rents from new acquisition and rents starting to flow from completed developments of almost GBP 12 million. Taken together with additional rents arising from rent reviews and regears, this more than outweighs rental income loss from property disposals of GBP 4.8 million. I can report another very strong rent collection performance in the period with 99.9%. I didn't why I didn't call it 100% of rent due having been collected. Our administrative cost is GBP 8.6 million, an increase of GBP 0.4 million in the period. However, we monitor our costs very closely, and our EPRA cost ratio has fallen by 90 basis points since last half year to a low of 12.3%. And our gross to net property cost leakage remains consistently extremely low at just over 1%. Our finance cost at GBP 13.6 million. That's an increase of GBP 1.6 million over last year, primarily due to higher average debt balances and the increase in cost of debt over the period, which I'll come on to. Our rental income growth and the attention to controlling costs has driven our EPRA profit to GBP 50.2 million or 5.14p per share, which supports the increase to our dividend for the period to date to 4.6p per share. That's an increase of 4.5% with very strong 112% dividend cover. As Andrew said, we've reported a decline in the portfolio valuation in the period of GBP 296 million and therefore, report an IFRS loss of GBP 243.4 million compared to an IFRS profit for the comparative period last year of GBP 254.1 million. Turning to the balance sheet. The portfolio valuation at GBP 3.46 billion, a decrease of GBP 143 million or just under 4% compared to the year-end. This is due primarily, as Andrew said, to the fall in the valuation of the portfolio at the end of the period, counterbalanced with GBP 200 million of acquisition and disposal activity. As of the period end, we had GBP 49.1 million of cash in our balance sheet and GBP 1.2 billion of debt. The net liability position at the period end is GBP 48.8 million, a major component of which, as in previous periods, is rent received in advance. In summary, our EPRA net tangible assets at the period end is GBP 2.25 billion or 229.3p per share, a decrease of 12.2% over the year-end at per NTA of 261.1p per share, which, without a doubt, was a moment of a maximum optimism for the valuers. But as Andrew said, our NTA is still 15.9p or 7.5% above where we were this time last year. We have GBP 1.3 billion of debt facilities on our balance sheet at the period end. In the light of the volatility in financial markets during the period, we have sought to ensure that this debt provides long-term certainty with flexibility and that our exposure to rising interest rates have mitigated. Consequently, we have lengthened the maturity on GBP 550 million of debt facilities; extended our hedging -- the hedging of our revolving credit facilities and entered into a new GBP 225 million facility through to November 2025, with 2 1-year extension options and an accordion facility for a further GBP 75 million. This new facility eliminates our refinancing risk through the remainder of FY '23, FY '24 and FY '25. We have no further refinancings until FY '26. The facility pricing is consistent with our existing RCF facility, which eliminates the risk for us of bank credit spreads widening for refinancings in the new year. The facility is subject to ESG criteria, which will generate a small margin benefit call for me -- a small margin benefit. I've updated our period-end debt metrics to take account of this post-period end activity and refinancing. We now have headroom of GBP 262 million. The new facility has increased our debt maturity from 5.8 years at the period end to 6.2 years. We've increased the proportion of our drawn debt hedged to 85%. Our average cost of debt is 3.4%, and our exposure to rising interest rates have mitigated such that a 25 basis point interest rate rise would reduce our earnings by only circa GBP 400,000. Our loan-to-value at the end of the period is 32.1%. Net of sales proceeds received post period end on disposals exchange in the period. We have complied comfortably throughout the period with our debt covenants, and our interest cover ratio remains at a very strong 5.1x. Our contracted rent roll in the period has grown to GBP 150.5 million as a result of rent reviews and new lettings in the period of GBP 4.3 million. and as a result of net investment development in the period of GBP 2.9 million. However, we expect this number to grow materially in the next 18 months as income from current development starts to pass and our voids are filled. But most significantly, we expect an additional GBP 10 million of rent to flow from rent reviews in the period up to FY '24. A higher proportion of rent reviews fall due in this period than historically, increasing our NIY by 35 basis points to generate a contracted rent roll of more than GBP 160 million by March 2024. It is this significant level of growth in our rent which supports our confidence that we will continue to grow our distributable earnings and be able to continue to progress our dividend from its current 9.25p per share. And finally, before I hand back to Andrew, I look back over the longer-term performance of LondonMetric demonstrates that the increase in net rental income in this period continued a growth trend, which has shown a 12% compound average growth rate since 2014. Earnings have progressed each year, allowing us to progress our well-covered dividend each year, which has contributed to total shareholder return, which has also shown a 12% compound growth rate over nearly 9 years. So whilst the outward movement in yields has caused our total property return and our total shareholder returns to fall back this year, the performance overall continues to be very strong.

Thanks, Martin. Thanks, Martin. Right. So a deeper dive into the real estate portfolio. Portfolio there is the chart that's again, should be familiar to most of you in this room, our GBP 3.45 billion portfolio continues to be dominated by our logistics investments that now account for roughly 74% of the total assets, with urban logistics making up by far the largest subsector investment. Portfolio continues to enjoy, what, 99% occupancy, long leases and benefit from a high percentage of contractual uplifts. The portfolio -- the logistics portfolio, as you can see there, showed a 59 basis point out with yield shift, split between urban regional and the mega subsectors, but it did benefit from 5.5% ERV growth and 2.6% like-for-like income, which combined to give a total property return of negative 7.5%. Our GBP 800 million long income portfolio continued to exhibit defensive and heavily indexed characteristics. It experienced 15 basis points outward yield shift, but did benefit from 4.3% like-for-like income growth, courtesy see a number of rent reviews coming through in the period, to deliver a total property return effective 0.6% negative. So going -- diving deeper into the distribution portfolios. As you can see, these have shown very strong income progression with rent review settlements and ERV growth reflecting the tight demand-supply tension that we see across this sector. 50% of the portfolio is now weighted to London Southeast. We think that will be an increasingly important element going forward. The urban portfolio delivered 25% uplift in rent reviews settled over the period, which is in line with its 3-year average ERV growth. And similarly, the trajectory and the correlation between ERV growth and revenue settlements similarly tight across the regional portfolio as well. However, in our mega warehouse subsector, the rent reviews were settled at 8% above previous passing. But the settlement here be courtesy of contractual uplift have been restricted, and therefore, lag what the open market rent review settlements would have been, as indicated there by the 18% growth in ERVs that this subsector has enjoyed over the last 3 years. Turning then to the long income portfolio. As I said, GBP 800 million or just over GBP 800 million, dominated by triple net assets across the grocery and the convenience sectors. That will continue to benefit from increasing consumer demand for bargains in an inflationary environment. The portfolio has long leases of 13 years to expiry, 100% occupancy and is valued off a net initial yield today of 5%. 67% of the rents in this portfolio are indexed, and rent review settlements over the period came in at 20% above previous passing. I should just point out that, that's quite an impressive statistic given that there's nothing -- none of the rent reviews in those 3 sectors hit 20%, but we had a very strong settlement of the indexation that we have in our leisure portfolio and our cinemas was extremely high. So that's what brought that average up to 20% over the period, even though you don't see any of those buckets starting with a 2. Turning then to the investment market. As we know, the uncertainty is creating dislocation and paralysis across certain investment subsectors. As I mentioned earlier, interest rates remain a critical yardstick in working out what the correct property yields are, and volatile swap rates is creating illiquidity, although at least we are off the peak of the 5-year swap. I hope we're off the peak of the 5-year swap that hit 5.4% at the time of the mini budget in September. Hence, buyers and sellers are recalibrating in what is a challenging investment market. And I think looking ahead, Martin touched on it briefly, we think the debt availability and debt pricing will become increasingly key metric as we go into 2023. Therefore, there will be a focus on the sectors and the assets that can deliver a reliable and growing cash flow. We are seeing some motivated vendors, particularly at the moment, across the open-ended retail funds, they seem to be the most active facing investor redemptions. But I also think that we will see refinanced sales coming out of refinancing as we travel through 2023. The fact of the matter is, there will be a lot of platforms out there that were predicated on almost 0 cost of debt, and the platform doesn't work when the debt cost is going to be 5-plus percent, if indeed that is the case, as I say, it comes back to where we think 5-year swap settles. And the fact of the matter is market uncertainty is actually the friend of the investor looking for long-term value. So we will remain alert, and we'll be wide-eyed to people who are motivated and need to investments quickly. The occupier market in our chosen sectors continues to function extremely strongly. Occupation demand is very, very high, and our core sectors Logistics is benefiting from structural tailwinds, whether or not it's rising online penetration, increasing localization and onshoring. This is all creating a deep and broad demand from occupiers. Logistics take-up in the period -- in the year-to-date is that you can see that GBP 38.5 million. But the important number there is that this is still 15% above the long-term average. And this has continued post period end. We've done 17 more lettings across our urban portfolio. And as you can see, these are at 24% above what the previous passing rent was. Turning now to supply. This remains highly constrained, and that, combined with the demand that we're seeing, the granularity occupiers looking at urban warehousing is driving rental growth. It's a fantastic statistic that one of my colleagues uncovered that over 20 years, the industrial floor space in the major cities has fallen dramatically, 24% in London, 20% in Manchester and 19% across the West Midlands. And as a result of that, looking at that plus the rising demand, we've got logistics vacancy at only 3%. That's just over 6 months supply. And given the economic outlook, given the cost of the finance today, we see very little new spectate development going forward. And therefore, that will continue to drive rental tension. In fact, at the half year, we had 148,000 square feet of vacant space across the portfolio. That is actually reduced by just over 50,000 square feet with deals that we have agreed in solicitor's hands. And that is -- it's a wide range of people, whether or not it's yoga and Pilates or studios, whether or not it is trade counters, whether or not it's dark kitchens, such as Jacona and Deliveroo, whether or not it's a door furniture wholesaler in Crawley, whether or not it's a coffee roasting house in Stratford, a fine art logistics business in Tottenham, there is a broad range of occupiers that are going to take our buildings. I was talking earlier that we have -- we've got a building coming up in February, and we're in discussions with some people. One of them was a fish wholesaler and the other was an automotive collision operator who just fixes your car. I mean it's just a broad shot. I have no idea who'll occupy. If we have a vacancy next week. I have no idea what industry we'll occupy. But what we are seeing is, as I said, we are seeing material rental growth or rental uplift from new let rents that were set that we were agreeing compared to the previous passing rent that we were receiving. So that probably justifies a little bit more detail on rent reviews, which we think is a lot of interest ratio important determine what the correct yields are. We delivered like-for-like income growth over the period of 2.9%. Contractual rent of use currency elevated levels of inflation helped deliver 17% uplift in previous passing. Open market reviews were settled at 22% up. Urban logistics being a standout performer at 25%. And as Martin has already touched on in his slide, but this is just on the logistics bit, the logistics portfolio has got another GBP 8 million worth of rent to be captured over the next 18 months, courtesy of both contractual and open market rent reviews that we are looking forward. Looking at the management of the portfolio. We remain focused on actively improving the quality of the portfolio that we own. We've derisked 860,000 square feet of developments by adding GBP 6.7 million worth of high-quality income. Our refurbishment and asset management initiatives have allowed us to continue -- allow us to secure another GBP 1.9 million worth of income, and we're continuing to push ahead with renewable opportunities in partnership with a number of our occupiers, whether or not that's PV, installing PVs on the roofs of our buildings in partnership with people like Eddie Stobart, Primark, Speedy Hire, the Hut Group, it is something that we are deeply engaged in. And also, we've got 2 partnerships in EV charging with InstaVolt and MFG, and we'll be rolling -- we're starting to roll those out in the various sites across the portfolio. And I'm pleased that we're able, therefore, to announce that our EPC rating of the portfolio has improved dramatically. 86% is rated now A to C. That's up from 74% back in 2021. We've often said, we don't shy away from bad buildings. We think we have the skill set, the desire and the capital to turn around bad buildings. And therefore, I think we are excellent stewards of this. In many ways, it's very much part of our DNA. It's part of the asset -- active asset management profile that we've been doing -- Mark and I have been doing probably over the last 30 years. This is not a big shock. And the fact of the matter is it is generally accretive. We spend money on our buildings. We get a return of, on average, 10% uplift. So in some ways, it's the best capital we can allocate to the shareholders' money. And then so finally, my thoughts, predominantly my thoughts, my colleagues' thoughts as well on the outlook, which is increasingly difficult to predict. We can pick up 3 or 4 commentaries even just this morning and come out with 5 or 6 different views of which way this is going to play through. Look, the portfolio is in great shape. We call it an all-weather portfolio. We've navigated COVID, and we're navigating a repricing of the debt markets and a challenging economy for consumers. But the fundamentals remain strong in our preferred sectors. Structural demand from changing consumer behavior and geopolitical events is driving demand for our warehouses of value and convenience assets we think are well positioned given the challenging environment as high inflation strengthens consumer demand for cheaper goods. There will be undoubtedly less supply and less construction. This will lead to stronger occupancy and stronger rents. We think polarization of sector performance is with widen. I actually think polarization within subsectors will widen, whether or not it's in the office market, green, be brown offices, whether or not it's in the retail market, convenience and grocery versus experience. And therefore, we expect that to play through over the coming period. I think the distribution sector is arguably recalibrating more quickly than other sectors, largely due to better liquidity and the global appeal that the asset class holds. Other sectors, particularly those with lack of income growth, will reprice aggressively in the periods ahead. But today, there's very, very little liquidity in a number of these sectors. So it's very difficult to get full price transparency. And the suggestion that shopping center values have actually held flat over the last 6 months, I find bemusing. But however, the glass is half full. We have a strong belief that the challenging macro investment environment will settle. It will settle. It always does. It's all about when. Inflation forecast will fall, and an inflection point will shortly be reached in interest rates. We have to -- if we look back at the currency, it wasn't that long ago when we were talking about pound dollar parity. Yesterday, the pound was at 1.19 to the dollar. That's nearly a 20% movement. We are seeing signs that this will pass through. And this stability will bring more confidence and liquidity to the sector. And it will then -- it will feed through into where the 5-year swap begins to start settling. Beginning of March, we talked about 5 years, so it was around about late ones. Beginning of July -- middle of July, it was about 2.45. Middle of August, it was 3.4. Beginning of September, it's up at 4.1. Then we got a mini budget, went up to 5.4. And today, it's at 3.8. So we've come a long way off the peak. We needed to -- for proper -- to real estate to become more compelling, it needs to head back close to 3, and I'm sure it will. If you believe in the correlation between the 5-year swap and the 10-year gilt, 10-year gilt is an early indicator of where we think it may settle. So it is going to be an interesting few months. But at the end of the day, we will get through this period of uncertainty. We've done it before, and I think real estate becomes incredibly compelling, particularly in your chosen sectors where you are capturing that income and rental growth that will allow you to allow you to returns. So on that note, thank you for your patience this morning. Very happy and my colleagues. I've got Mark and Valentine up here with us as well to take any questions that you may have. And then once we finished in the room, I'll go to the phone lines to see if there's any interest on those. So thank you very much.

It's Rob Jones from BNP Paribas Exane, and I've got a few questions do them all, please.

Let's do one at a time. Otherwise, my memory is going.

Okay. So the first one, just now, you said less supply and less construction. This will lead to stronger occupancy and stronger rents. You've done this for 30 years. If I've done this for 30 years, I'd been 5 years old at the time. So clearly, you've got more experience than me, but.

I've grey hair.

Sorry. But do you generally believe that? Or is that stronger relative to if we hadn't been in a scenario where supply was tightening as a result of lack of development finance?

Well, it's probably be biased by our investments in the -- primarily in the end logistics space. We think it's very difficult to get supply. It's very difficult to see new supply coming through. And therefore, we're seeing this demand in terms of I talked about whether or not it's online penetration, whether or not it's localization, whether or not it's onshoring, but also changing consumer expectations for quicker and quicker deliveries. People want to be in Zone 2. That's how we get the delivery the same day. And so that's part of it. But it's also framed by -- I saw the leading retailer yesterday in the convenience grocery sector, and they were saying to me, "We can't get any new developments to stack. We can't get them to work." And actually, our store opening program for next year will all be on taking existing buildings from failed retailers and refitting them for their purpose. And like I said, I mean, we're struggling to get someone to work. I mean, we actually can get that one to work, providing they show a little bit of flexibility on a few of the terms. But that's what they say. None of the 9 that we hope to open next year, none of them will be new build.

Second was that do you -- the answer might be no, but do you have a view in terms of the percentage point gap today between buyer and seller price expectations in the investment market? 15 percentage points?

It's very, very different. And I'll try and give you a 3-dimensional answer rather than us just this one number. the buyers out -- there are ambulance chases and there are people looking for blood on the street, right? They're that buyer. And the people -- they will probably trade with the motivated vendor which, at the moment, I think, is largely confined to the open-ended retail funds. I don't think there's too much leverage in the system outside of those. But what you will -- where you are seeing a much tighter pricing tension between buyers and sellers aspirations is whether or not you're talking about very long-term investors. This is a quality asset that I'd want to get hold on for a long time, and this is the market where I can get it, owner-occupiers, special purchases and the automational buyer. So it's a broad church. And in fact, we get approaches all the time. You hear, yes, it's interesting. What's that? Oh, that's 5% below what we think it's worth. Okay, fine with that one. Well, that's 15% below what we think it's worth. So it's a broad church. I can't give you one number.

Fine. Then just 2 final ones. You and your competitors talking so far this calendar year out. Obviously, the fact your occupier market remains very, very strong, and that's reflected in your leasing versus previous passing, et cetera. Are you seeing today, post-period end any slowdown in occupied demand yet? And if not, are you expecting it? And do you expect this to then drive a slowing of the rate of positive rental growth?

So I mean, we don't have much vacancy, and I've tried to highlight the activity that's happened post period end to give you that -- to try and answer that question for you. We don't have a lot of empty buildings. We're getting -- we're capturing some pretty good uplifts as I've tried to demonstrate. We're not seeing too many cracks. My suggestion, we don't have a vacant 300,000-square-foot building. We don't have a vacant 400,000 of it. What I would say is, I think to take a big box is a bigger decision, okay? It's not really a rental decision. It's actually a business decision. It's an employee decision. It has wide implications. And is it reasons to think that those big decisions might be kicked down the street by another 6 months or 12 months? Yes, it's reasonable to suggest that. Does that mean there's no demand for medium box big box? Absolutely not. I don't think the market has ever been dominated. Amazon have been an important player in it, but they're not the biggest -- they're not the only player in it. I just think in urban, it's just the granularity of occupiers that we trade with, and we deal with, and I tried to highlight that in the presentation. It's just incredibly wide. So do I think it will come off a bit? It's highly possible. Are we seeing at the moment? No. And if somebody goes, if we take back possession, we will refurbish the building, and we're pretty confident that in the right locations, we'll let it at a high number.

And then just a final one for Martin. You obviously got GBP 300 million RCF. When look forward to your debt maturity profile, implicity that means that you've got liquidity at least to fund both the refinance of, I think, it's '24 and '25 and indeed, clearly, '23, which is relatively small for the second half of this current financial year. But in reality, do we really utilization of RCF facilities. My understanding is it's not as simple as an individual overdraft? You can't just draw it down with ease. And ultimately, if I'm an RCF silica bank or indeed an individual lender, I really would like to see a scenario where you're drawing on that RCF, but then you're refinancing in the relative near term with debt that's not RCF facilities. So maybe if you can give a bit of color on that, how you think about those, that refinance, albeit it's not massively material for you specifically over the next couple of financial years.

I'm not sure whether it's constrained in the use of as you described, but Look, I think it's quite interesting. We've been having this conversation 6 months ago at the year-end. I would probably say, I don't worry about FY '25, and I wouldn't even worry about FY '24. We'll probably do a bond issue. We're going to do a USBP. All of a sudden, circumstances have changed, and so we felt we needed to have cover to deal with those -- that refinancing risk. And the Chairman is really strong on this yesterday. The issue is it may be when we get to FY '25, that those markets will be open again, and we'll refinance that debt with some other form of debt, and we'll use the firepower we've created week for opportunistic new acquisitions, and we can hit the acquisition trailer when there's blood on the street. So I think what we're saying today is look it from a risk mitigation point of view, we have no refinancing risk. When we get to that, we will be using the RCF to do that, I don't know.

Max?

Max Nimmo from Numis. Just to kind of follow up, you talked about not that many motivated sellers other than the open-ended funds and actually, it might be the refis that come through over the next 12, 18 months. Just how much kind of visibility do you have over that in order to kind of target that? Obviously, you said do you think over the next 12 months, there will be more opportunity.

Well, it's a little bit like commentators writing about the mortgage market. We can say that 75% of the residential mortgage market is fixed, yes, but guess what, it comes off. And that when you're going back into the debt markets today, you're going to find out that you're dealing with a number that's a lot higher than when you set out your strategy. And for some of these assets, they're going to find that deficit finance a bit. And does that work? Is that what the equity investor wants? Or does it actually just say, you know what? I'll take my money back. So we don't have visibility of when that comes up. We can only play with the board, the game in front of us at the moment. It doesn't appear on the screen. We're not seeing too many refinancing opportunities coming through, but we are seeing quite a bit coming out of the retail open-ended funds at the moment. It's just a natural view that there will -- debt expires.

That's great. And maybe just a follow-up on one point on the EPCs. I think it was at 86% to A to C and 47% to A to C. The ability to take those Cs up to Bs, how difficult is that? And an ambition to do it, I guess, as well.

I mean it requires an engagement with the occupier, and a lot of it actually is in their hands. We can -- I could be really flipping and say, well, we just have to change the light bulbs in most of these buildings to any Cs. But it doesn't quite -- it requires an engagement with them. And when you've got long leases, you don't necessarily get those buildings back as quickly as you might like. I think the -- what I tried to -- I suppose, to get across is that there is a desire and an intent to do it. We think it's -- it gives us a decent capital return as well. Exactly when it happens, Max, is not strictly in our control. But without -- these are relatively simple buildings. I mean I don't want to down the sector. But this is not a shopping center. It isn't a hotel. It isn't an office building with high fit-out costs. It's 4 walls and a roof as far as I'm concerned. What else goes on in is a lot of it is down to the occupier. And there is getting -- we are getting better occupier engagement, but it is not as good as you might imagine it to be from big name companies.

It's Sander from Barclays. A couple of questions for me as well. The first one is, you mentioned, I think, in your opening remarks that swap rates are an important yardstick, and they're up 200 basis points. And we've seen yields moving 50 basis points in the first half. Does that mean that you think there's another 150 basis points to go?

Well, apart from the fact that the swap rate is flat and the gilt -- the 10-year gilt is flat return. And I think that yields should -- as I said also, that yields should reflect the trajectory and certainty of what's going to happen to your income profile. I think my -- actually the first answer to that first part of my actually think spot rates still come in. I still think they'll come in at 3.8 this morning. I do believe there's a correlation with a 10-year gilt, I could see them coming back down to much closer to 3 within the next months. I don't want to give you a date, but I just think it will. And I think that, that makes real estate investing more compelling, because at 3 plus your margin, 150 basis points, you end at 4.5, If you were to buy an asset that was the cap rate of 4, but it had 3% rental growth and it will work for you. So yes, I'm not predicting what happens to yields certainly across other sectors that I have very little knowledge of. But I think swap rates will probably still continue to traject down. I mean we're 160 basis points off where we were at the Mini budget. Now Martin referred to March or February, March, April is what we referred to in the office is a period of maximum optimism. I refer to the Mini budget as a period of maximum pessimism. I think we're off that. I think we're 160 million of it. The trajectory of the curve looks positive, although it's never a straight line as my colleagues know because I ask them, at least 4 times a day where the hell does 5-year swap pits, which means gone out. They can't go up. My thesis is based on it going down. So I think there will be yield expansion. I mean I think certain sectors have got illiquidity. They've got no price discovery. I touched on shopping centers, seems hopeful.

But maybe the very low yielding stuff as well.

The low yielding, you could argue that's why it's moved so quickly. The low-yielding bits move so quickly. But that will come to an end. What I don't see in answer to Rob's question earlier is necessarily an immediate end to the rental growth that we're expecting everything comes to an end. I just -- I'd love to give you some anecdotes or he pulled out of this deal or they didn't do that deal or whatever. And you will get them from me. But yes, without a doubt, the reason why the cap rate, I think British announced 60 basis points also across their logistics warehousing unit, they're low yielding, they've got to come up quicker. But once it settles, you're then looking at where that yield needs to be relative to where the trajectory and security, longevity of your income is. I mean that's what a yield, an equivalent yield is.

Great. Second question I had was on the business rates. I mean, obviously, there have been changes in the last -- what is it, last week's announcement, you know that? And obviously, maybe not necessarily as much in favor of logistics occupiers. Do you have a sense of how that may impact your tenant base?

No.

I mean in terms of profitability. Well, in terms of how much does it have.

A lot of the businesses we're dealing with here. The accommodation that they occupy is their business, okay? They've got to have it. It's not like retail where you get, oh, you know what, do we need 2 shops on Oxford Street? Or do we need 2 stores on this -- in this out-of-town retail location? So we'll close one of them because it doesn't work for us. The fact of the matter is this is their business. They have -- they're absorbing that cost. They will try and mitigate it with other cost savings and maybe putting in some price increases through, maybe getting rid of a member of staff or something. It's critical. Without that warehouse, that yoga studio doesn't operate, that coffee brewers doesn't work. So they will absorb it. There is transition relief on the way up as you will have read as opposed to them way down. I think they've done a brilliant job, by the way. The rating do that exactly what I thought it should do. And that was get rid of the transit position relief on the way down because it was too slow, but keep it on the way up. And the fact of is there's nothing wrong with the rating system, if that was -- if the mechanisms were correct, which I think they've done that. And the fact of the matter is when they were put in, in the first place, nobody actually thought that retail rent in particular, would fall. They created, and that hasn't been reflected.

Okay. And the very last question I had is actually on the dividend. I mean, I saw that you increased it, obviously, again. There's obviously strong top line income progression, but this is roughly EUR 8 million over the next 18 months and then that. At the same time, we're also facing an environment with higher financing cost and marginal financing rates. You just mentioned out 0.5%. So that is going to evolve further as well. Like why not keep the dividend flat for the time being?

Look, we believe that we've got an income stream. We talk about our portfolio being all weather. We think that it is fully occupied. We run in a very efficient ship in terms of admin costs and whatever else. We think that the business and the portfolio has got that movement. We've also got high swap or high swap rates high hedging.

High hedging. It's going to be flat. I think we will continue to progress on our earnings because I think our top line will grow. I think we've got -- we've now got control of where the finance cost is going to go a reasonable yard stick. And we're very tight on our admin costs. So I think whilst earnings we think we can progress, then the dividend should progress to.

We have set out our ambition to be a dividend aristocrats under -- let's not forget that. I don't want to break that now. We've got another 17 years to go.

Bjorn Zietsman from Liberum Capital. Just a follow-on question around your tenant base and the strength of your tenant base. I mean going into a recession, it is likely that we are going to see a spike in CBAs. How closely do you monitor the liquidity and solvency of your tenants? And what percentage of your tenant base would you think is under pressure?

We're obsessed with credit, right? We have individually in the business, and that's what the main job is, to assess the credit worthiness of our tenants. You look at our rent collection, I mean we collect GBP 150 million a year. We've got GBP 37,000 of outstanding arrears, okay? We've navigated a Brexit environment. We've navigated lockdown of the global economy pretty well without having to give -- lose income. We've rescheduled payments. Undoubtedly, we will lose some businesses. But if you've brought the right assets, you will relet them, okay? One of the businesses that caused us some unease in COVID was a transport business down in Court Eagle Howells Transport. When we were allowed, we decided that it was right to peaceably reenter the premises, 25,000 square feet. We did a light touch refurb on it. Howells are paying us GBP 10 a foot. We've relet it to the Ironmongery business I touched on earlier at GBP 12.50. So yes, we will deal with it. But one of the attractions is the granularity of income. I think that does exhibit some defensive characteristics. But ultimately, it comes back down to the owning desirable real estate that alternative occupiers would like to be in at the right rent. So we monitor it. I mean I get in a real statement at least every Friday, if not more often, immediately post. So we're on it. You can't -- we can't give you those metrics on rent collection, not beyond it.

Hemant Kotak from Kolytics. So clearly, your team has been around a long time. You've got a lot of experience on.

Not long.

I see a couple of grey hairs there.

They give me a lifetime achievement for being here.

How is this different to prior cycles? And it's a 3-part question. In that context as well, I think you just alluded to maybe a full yield with 3% growth, 7% return. How sort of appropriate is that as the funding rate has changed? So maybe that's the second part. And then some of the REITs in your position are in a good position because they've got low LTVs, good cover in terms of interest. They're talking about firepower. We haven't heard that from you today. Can I ask why do you not feel that's the case?

Let's let start with the first part of the question. How is this different? We're going into a situation today without a job full economy, with savings ratios 20% higher than they were pre-COVID. 50% of the population doesn't have a mortgage, the 50% that do, 75% of them are on fixes, wage inflation. This is very different from when we went into the GFC, we had higher unemployment. We had unbelievable borrowing. The banks were throwing money at us indiscriminately. And I would highly recommend the big short, if you're not quite sure how what went on. And so I think it is very, very different. And I think -- so this is not a consumer-led downturn. This is a supply constraint courtesy of whether or not you want to blame the geopolitical issues in Ukraine, but actually it's the reopening of the global economy. And China is not firing on -- probably not even firing at cylinders at the moment. So I think it is very, very different. I mean I think it's we analyze it, it looks a million miles away from the GFC. I was frightened in the GFC. Cash points are not going to work, talked about -- and again not the film I'd recommend is too big to fail. So I do think it's very different. I think consumer has been pretty well behaved. They saved some money. We have -- they're all in employment. They're all getting pay rises. So I think it is very, very different. Yes, they've got challenges in certain parts of their expenditure, whether or not it's food, whether or not it's energy, okay? But they'll just have to pivot. I was studying the Barclaycard data on Friday, restaurant bookings were down 11%. Takeaway turnover was up 12%. And the catch of the gone was people are swapping the big night in -- the big night out for the cozy night in. It's a great line. We did all the time. I mean, maybe for different reasons. So I think it is different. And that's why I don't expect it to be somebody trying to tell me, I thought it was going to be a V. I didn't. I just thought it might be a bit shallow than that. I think peak inflation -- so core inflation has peaked. I don't think we're in the same space as -- quite in the same place as the Americas or American are at the moment, but we'll get there.

The second question. And the second part was the 7% return, that might have been appropriate 6 months ago. What is it now based there?

It's higher. It's higher. And I think it will -- again, it will depend upon -- the 4 that I talked about is actually -- a flat 4 is not acceptable anymore. People want a higher number. But at 4, people will print us 4 today, if they know they're going up to maybe a 5.5 or 6 in a relatively short period of time. So I think the 4 today is at least a mid-5s -- a 4 yesterday might be a mid-5s today. But it does depend upon when you get there.

That's the yield, right?

Yes. And what was the other question?

I think the last one is on firepower, yes. So on my debt metrics slide, I put a headroom in new, and that doesn't include certain sales proceeds that we received since then. And I think in answer to Rob's question, that headroom and firepower could be used for debt refinancing, but it could also be used to go on the offensive. So I think we consider -- we do have firepower and able to determine how best to use it depending on circumstances.

Yes. And just to clarify one point on that, is that because -- I mean a lot of companies are saying that. Is that because -- I won't ask you to speak for the others, but let you feel that this exact case where it's shallow? The repricing, whatever it is, it's not like the GFC and therefore, there's an underlying assumption that I'm trying to draw out.

I mean I think, look, I did say we know it settle. We just don't know when, right? We're in a period of great uncertainty. We still are. I think it's a bit better today than it has been. We will remain alert, wide eyed for new opportunities, but we're not in a hurry. And I think if we do execute, you would expect us to be in the market if we do decide to execute, it's because we will see an opportunity to acquire quality that really would become available in a normalized market.

[indiscernible] And I think Q1 next year will be quite interesting from a debt point of view. Now there was an article in the FT this morning talking about the banks retreating. And I slightly agree with that, but they're also polarizing. So they will continue to lend to credits that they are comfortable with. I think the lending will get more expensive for everybody. And there will be some people who will find that, therefore, really difficult to refinance them, and I think that will create opportunity.

Miranda Cockburn from Panmure. Just a couple of questions. Martin, just on the debt, what's the margin on the RCF? And of your 85% -- on the 85%, which is fixed or hedged, how much is fixed and how much is hedged?

So if you refer to the gentleman sitting next to you, I think if I answer the first question, his colleagues will kill me. And Andrew wanted me to put it in this. I said, I can't. They don't want me to put it in. Andrew has allowed it to slip out 1.5%, which is not a million miles off. But it is consistent with our existing RCF, which I was really pleased about.

Yes. Okay. And then just the I was just going to ask, in terms of the bigger picture in your strategy, I mean, you've got the luxury of going in and out of any sectors you want to. And obviously, historically, you move from retail into industrial at the right time. And it sounds as if you're very confident about being industrial. Are there any other areas of the market that you think may be interesting? Another way of putting it is if you had a clean use of paper today, where would you like your portfolio to be? Or is it where it is?

It's never exactly where the way you want to be, to be honest with you because you're always trying to improve it. I feel absolutely comfortable likely to be in urban logistics. I just know I couldn't do it from a clean piece of paper today, although some people have more recently, thinking they could, which is interesting timing anyway. I think for me, it comes back to macro trends. Consumer evolve, behavior evolution courtesy of technology to a large extent. I'm very into the extension of the convenience market. I'm very in the road side. I think the driving market for those has been quite well written articles. The evolution of EV, that will change behavior as well. I think that's great. Very difficult to get scale, if I'm being honest with you on it. I think convenience groceries is terrific. I think the days when we spend 1.5 hours going around of Tesco supermarket is time that my children just not going to commit to, just not going to happen. It's time you never get back. And anybody says it's an experience, they've got bigger issues. So for me, it's about top-up shopping convenience over experience, certainly in groceries. And the problem with -- in GM, built too much stuff. A friend of mine said the other day, 25% too much shopping center space. Totally agree. Great. Well, that's it in the room. I don't know if we've got any call or questions online -- so on the phones.

[Operator Instructions] We will take the question from Oliver Lee with [indiscernible].

Can you hear me?

Yes, we can hear you.

So I'm new to the company. So apologies if I've missed something. I have 2 questions on business rates. So the first one is I don't think you mentioned business rates and the revaluation at all in the main presentation. Kind of back of the envelope suggests the change in business rates could be greater than the portfolio reversion that you quote. So I mean, to me, it hits the materiality threshold. So just wanted to check why it wasn't mentioned. And then the second question was just more broadly, how you think about looking into next year, the combination of the business rate revaluation and occupancy cost increase and recessionary pressures on tenants in light of often low-margin businesses for sort of several parts of your occupier base.

Well, I mean, I touched on the business rate a little bit earlier. I mean the fact of the matter is, it's going to be a cost of doing business for occupiers, as indeed it should be. I think that they don't have the luxury that maybe occupiers in other sectors have in just simply saying, well, we don't want to be in this location anymore. I think that they will -- some of these businesses are possibly more resilient than you were implying in terms of their ability, either to absorb the costs or whether or not it's their ability to pass those through making other efficiencies, and I referred to maybe head count is there. But the business rates is up there. Will it have an impact on rental growth going forward? Yes, it's possible, it's possible. But I don't think it eradicates the reversions that we expect to collect. I mean the fact of the matter is the reversions that we've touched on this morning are actually historic reversions. They're not -- we haven't forecast that we're going to still get another 3%, 4%, 5% rental growth going forward in order to collect that GBP 10 million that Martin talked about over the next 18 months. So we'll see how it plays out. I mean it's also worth mentioning that the business rate increases are phased over a period. So it's not a cliff that they face in many -- in ways they may face with, say, other costs such as energy or indeed staffing. So we'll see how it plays out. We don't have great -- we don't have perfect clarity on it at the moment. But it is a cost that our tenants will have to absorb. How resilient they are, we'll find out. And if the tenants are not resilient, we'll find out how good an asset allocation job we've done in terms of picking buildings that have alternative occupier appeal. They'll be judged, I suspect, over the next few years.

And there are no further questions, so I will turn the call back to Andrew Jones for closing remark.

Thank you very much for making the effort, horrible day out there. I hope you don't get too wet, but do appreciate your interest and engagement. Thank you. Have a great day.