LondonMetric Property Plc (LMP) Earnings Call Transcript & Summary

So welcome to LondonMetric's full year results for the period ending 31st of March 2024. As usual, I'll start with a couple of slides highlights over the period. I'll pass over to Martin and give you a run through the financial review, going into numbers that I haven't covered in more detail. I'll then come back and talk about the portfolio, its evolution opportunities and also then talk about the outlook of how we see the period ahead, both from a market perspective and also from a company perspective. I thought I'd start actually by -- I read something last night that obviously caught my attention, which I thought summed up my thoughts about the last 12 months. And actually, it was a quote from the Real Madrid manager following Saturday's, I always like to bring this back to football, by the way, following Saturday's win in the Champions League. We suffered a bit in the first half, but in the second, we were better. And overall, we ended up as the winners, and we are happy. Some of it applies to us, but it grabbed my attention. So overview of what's happened for us over the last 12 months. It's been a transformational year following our various M&A transactions with both LXi and CTPT deals. And that has helped us create what we think we have today is a wonderful company with a portfolio of, as you can see there, of around about GBP 6 billion. And so whilst the company has got bigger, I should just mention that we still think that our approach will remain the same. And that is to pivot the portfolio to the strongest thematics, and that will be something we'll touch on regularly throughout this presentation. Our focus is on triple net and growing our income stream, both contractually and organically on the basis that we believe that income and income growth is the bedrock of all successful investments. Therefore, we are pleased to announce this morning that over the period, our like-for-like income growth at 5.5% would be in the upper end of what our expectations would have been for the period, and I'll come on to talk about how that was made up through the various sectors' exposures, but also through rent reviews and leasing activity. Also pleased to see our ERV again growing 5.7% over the period, and that has helped offset a 26 basis point outward yield expansion that the portfolio experienced over the year. Valuations were largely flat and therefore total property return of 4.7%, which is a 570 basis point outperformance against the MSCI or property indexed. And again, in line with our thematics, we -- the portfolio enjoys an embedded reversion where we will see around about GBP 23 million worth of further rental growth being captured over the next 2 years through a combination of rent reviews, asset management, and leasing activity. Our ownership culture ensures a disciplined and rational approach to capital allocation. So on top of the M&A activity, we've also made further disposals in the year and a further GBP 75 million that's been sold post period end. We announced some sales last week and again a few more this morning and that will be a theme over the coming weeks. As we look to prune the portfolio, this business and this portfolio is never run about growing -- simply about growing assets under management. So a quick view of the financial highlights before Martin dives into these in greater detail. EPRA earnings are up 20%, GBP 121.6 million. That's helped drive our EPRA earnings per share up to 10.9p, an increase of 5.4% on this time last year. And we announced this morning a Q4 dividend of 3p a share to give a final dividend for the year of 10.2p. That is up 7.4% on a year ago and is our ninth year of dividend progression. We also announced this morning our intention to pay a Q1 '25 dividend of 2.85p and that is an increase of 18.8% on where we were a year ago with a targeted full-year dividend for FY '25 of 12p a share. Turning down to the balance sheet, portfolio valuation, I've already touched on at GBP 6 billion, relatively flat 0.3% drop in values and I'll come on to talk about that. Again, outward yield shift offsetted -- offset by ERV growth. Our EPRA NTA at 191.7p per share is down 3.6%, but as we announced this morning, that's largely due to the costs incurred in the various M&A activity over the period, an awful lot of investment banking fees, I'm afraid to say and so to a lot of people in this room. So on that note, if I just pass it over to Martin and he can take you through some of those numbers in a little bit -- in a little bit more detail. Thanks.

Thanks, Andrew. Good morning. So when Andrew was worrying about the football last night, I was doing a note to myself saying, do not do a merger that doubles your size 3 weeks before the end of the financial year. Well, that was probably a note from my team actually, who just put in a phenomenal effort to get us here today. So as Andrew said, we've delivered significant earnings growth and dividend progression helped by the transformational merger with LXi. I'm pleased to report that our net rental income is GBP 177.1 million, an increase of 20.6% over last year and is again supported by extraordinarily strong rent collection statistics in the year. We've collected 99.9% of rents during the year, that's up from last year where it was only 99.8%. Our gross-to-net income leakage has fallen again this year to only 1%. Our administrative overhead for the year has increased to GBP 19.7 million, but our EPRA cost ratio has reduced in the year to 11.6%, which is one of the leading performances in the sector. We expect that EPRA cost ratio to fall significantly next year to around 8%, driven by the cost synergies that will arise out of the LXi and CTPT mergers. Our net finance costs are GBP 36.8 million this year, an increase of GBP 6.9 million over last year. We've held higher average debt balances in the year and there's a small average interest rate increase, but also the proceeds of asset disposals have reduced our drawn debt balances. Therefore, our commitment fees have increased and we've capitalized less interest into our development of forward funding programs. Despite these increases in financing costs, our focus on cost control on top of our rental income growth has driven our EPRA profit to GBP 121.6 million or 10.9p per share. This supports the increase to our dividend for the year to 10.2p, providing very strong 107% dividend cover. Dividend cover would have been higher, but for a mismatch in accounting. We account for a full fourth quarter of dividend to the LXi shareholders, but it's only matched by having 3 weeks worth of earnings from LXi being the date of the merger to the year-end, so there's a slight mismatch. The trade influence has been strong and the portfolio valuations have fallen by only GBP 11.1 million in the year, allowing us to report IFRS profits of GBP 118.7 million compared with an IFRS loss of GBP 506.3 million last year. Turning to the balance sheet. The net value of the portfolio has increased significantly in the year with the addition of GBP 285 million of assets from the CTPT acquisition and GBP 2.9 billion of assets from the merger with LXi. The valuation is now GBP 6 billion. Gross debt is GBP 2.09 billion, incorporating GBP 90 million of CTPT debt, but GBP 1.1 billion of LXi debt. The net liability position at the year-end is GBP 121.2 million. Rents paid in advance account for GBP 72.5 million of that amount. In summary, therefore, our EPRA net tangible assets for the year at the year-end were GBP 3.91 billion or 191.7p per share. The fall in EPRA NTA is driven by the reduction in the value of the property portfolio, but more materially by merger transaction costs of GBP 30 million and the cost of the buyout of the LXi management contract of GBP 27 million. In the light of the continued volatility in financial markets during the year, where elevated interest rates and higher borrowing costs have persisted for longer than expected, we have sought to ensure that our debt provides long-term certainty with flexibility in that our exposure to elevated interest rates is mitigated. Our gross debt balance is GBP 2.09 billion, up from GBP 1 billion last year and this year has been one of intense activity in our debt arrangements. The LXi merger added GBP 1.1 billion of debt to our balance sheet. This additional debt was shorter-dated and more expensive than the existing LMP debt, but more significantly, the debt stack was wholly secured. As a result, immediately post-acquisition, we canceled GBP 625 million of LXi's secured debt and replaced it with GBP 700 million of new unsecured arrangements, which were both cheaper and longer than the debt being replaced. We are very pleased that the refinance introduced a new Tier 1 lender to our banking group. We have ensured through the merger that the enlarged group, as was previously the case for LMP, is not subject to any material refinancing ahead of FY '26. It's also important to recognize that debt maturity will not necessarily be met through refinancing, but may be dealt with through a mixture of available headroom of almost GBP 800 million, further non-core sales, or even new equity. Also, we lengthened the maturity by 1 year on GBP 675 million of our debt facilities. We further mitigated our exposure to interest rate movements during the year by retaining all of LXi's hedging and fixed rate arrangements. We continued our non-core asset disposal program in the year, GBP 185 million of disposals helped to reduce our LTV and to eliminate our exposure to floating rate debt. In total, all of our drawn debt at the year end was hedged. Our debt maturity now stands at 5.4 years, down from 6 years impacted by the passing of one year and -- but shorter date debt acquired through our corporate acquisitions in the year. Our LTV is broadly the same this year at 33.2% compared to 32.8% last year. Our current cost of debt is 3.9% compared to 3.4% last year. LXi's cost of debt was 5.3%, but the GBP 700 million refinancing at lower rates than the GBP 625 million that it replaced helped. Looking forward, we will continue to manage our debt arrangements to ensure that refinancing risk is mitigated and that we are able to take advantage of our increased scale to diversify our funding sources. We will consider whether a strong investment-grade credit rating will enhance our ability to access well-priced debt. Our contracted rent roll is now GBP 340 million following the merger with LXi, which added GBP 194 million of rent to the contracted rent roll. Alongside the CTPT acquisition, which added GBP 17.7 million of rent to the rent roll, we have also added GBP 11.4 million through a combination of new lettings and rent reviews and regears, which Andrew will talk about later. Outside of our corporate acquisitions, we have been a net seller with a loss of income on disposals being largely offset by asset management upside. The Travelodge sale completed immediately prior to the merger eliminated GBP 16.5 million of rent from the rent roll. Looking forward, there is an embedded reversion within the portfolio of GBP 22.5 million, a combination of open market and contractual rent reviews, which will increase the rent roll over the period to March 2026. By this time the rent roll will have increased, taking the forecast position to over GBP 360 million. This will generate significant earnings growth and that supports our confidence that we will continue to be able to grow our dividend, which has increased by 7.4% this year and we expect to increase to 12p, a 17.6% increase in the financial year '25. And finally, a brief look back, which puts the increase in rent roll into context and clearly demonstrates that in the year since our merger in 2013, we have been able to increase our earnings per share by 2.5x and we are in the ninth year of dividend progression. Our total property return and our total shareholder return, driven both by share price appreciation, but significantly by dividends equates to a compound annual growth rate in excess of 10%. And on that note, I will hand back to Andrew.

So a quick look at the investment activity over the period. I mean, some of these points we've already touched on already has obviously been dominated by the M&A activity, which has added a GBP 3 billion of net assets post the disposals thereof GBP 185 million. As well as the M&A, we've also acquired organically GBP 31 million worth of assets in our chosen sectors and come on to talk about that in a minute. And also with GBP 51 million post-period end. And in turn, we think that our activity over the period has helped us create the UK's leading triple net REIT. With the right structure, we are internally managed. We have strong shareholder alignment. And this new scale gives us opportunities to both in terms of running the enlarged portfolio harder, but also access to bigger opportunities, a bigger pool of opportunities that otherwise might have been outside of our reach. And actually, that's part of the excitement of this transformation. The fact of the matter is we are seeing opportunities coming through and again into the market as a result of whether or not it's fund wind-ups, whether or not it's debt refinancing, redemptions, sale and leasebacks. And obviously, it wouldn't be right if I didn't talk about whether or not about some of the possibility obviously further M&A activity if those opportunities arise. So looking at the portfolio, so this has obviously changed dramatically from when I stood up here even 6 months ago. It's -- it continues to be dominated by our investments in logistics and for good reason. Now accounts as of today, just over 43.5% of the overall portfolio and our target would be to exceed 50% over the coming 12 months. We've obviously added new sectorial exposures, these will undoubtedly change over time. There will be some pruning in some of those areas, but we feel very comfortable with our investments in healthcare, entertainment, convenience in particular. And again, I'll come on to talk about those in more detail. The strength of the portfolio metrics on the right-hand side here, we have very, very long leases, that's great. But full occupancy, which for a triple net REIT is absolutely paramount. We have very efficient gross-to-net income ratio, as Martin says, we've only got leakage of 1%. And importantly, we have the certainty of growth. We have 79% with contractual uplifts, but the open-market reviews are also in sectors that are growing. And again, I'll come on to talk about our activity in the rent review and regearing later on in the presentation. LXi introduced into the portfolio a big -- a much larger exposure to annual rent reviews. Whilst we capture uplifts on a five-yearly basis, the great thing about the annual review is it gives us more control over the timing of asset recycling. We don't have to wait for maybe three, four or five years till the next review. It allows us just much tighter pricing tension. And there's a pie chart there that shows how arguably -- I mean, virtual equally our exposures to open market, fixed uplift, CPIs, and RPIs across the portfolio. So the investment strategy, we want to own key operating assets in the winning sectors that are important to our customers. And they're important because they're -- either they're mission-critical or they're incredibly profitable. That is the aim. If you have a happy tenant, they want to stay longer, they invest more money in your building and over time you have more chance of extracting higher rents from them. It's relatively basic. So our strategy will focus on the triple net thematics in the structurally supported sectors and robust assets with high occupier contentment. That is what will deliver us not only security of income but income growth. As I've already said and Martin mentioned it already as well, logistics remains our leading sector and our strongest conviction call, where we enjoy the highest exposure to organic rental growth. Entertainment and leisure is supported by consumer preferences for experience with mission-critical assets offering guaranteed income growth. The convenience sector, we have been invested in this for a number of years now and we believe that convenience, essentials and value will continue to win out over discretion and experience. And our healthcare investments are delivering fit-for-purpose modern let real estate with annual rental growth. And whilst we undoubtedly will trim some of this exposure -- portfolio exposure, we don't believe it requires any major surgery. So a bit further breakdown into those 4 key areas. Logistics, 168 assets delivering GBP 126 million worth of rent per annum. Average rent of [ GBP 7.60 ] but with an ERV 25% higher at GBP 9.50. I come on to -- we'll talk about the rent reviews in a minute. But as you can see there, ERV growth of 6%, which has helped absorb the 20 or so basis points of yield expansion. It is very much the sector that keeps on giving. Our entertainment and leisure 130 assets, GBP 83 million worth of rent and let on incredibly long leases. I mean, an average lease length of 36 years, I mean, that is -- I mean, you can't find that anywhere else in the real estate sector in the United Kingdom. It enjoys an attractive net initial yield of over 6%, which has helped generate a total property return of [ 7.75% ] in the period. In convenience, we're very -- we remain highly attracted to this sector. As I said, UK consumers continue their pivoting on spending on essentials. But it is a sector that we actively manage and there will be sales from the sales and there will be reinvestments over the course of the 12 months. And indeed, we expect to announce some activity in that space shortly. ERV growth of 5% again absorbed the 20 basis points of yield expansion. And finally, the healthcare, this is a new exposure for us, but these are very well let, as I said, mission-critical assets with annual rental growth, they sit incredibly well within our triple net compounding model. Asset management activity is added across not nearly 100 rent reviews, nearly GBP 5 million of the income. And it's interesting there the spread between the contractual uplifts, which give you the certainty, the sleep at night and the open market review. So 17% average uplift across contractual reviews, which works out at just over 3% per annum. Open market reviews are doing double that at 6% per annum. And obviously, the standout performer has been the open market reviews across our urban logistics assets, which delivered average uplifts of 40% over the 5-year period. Mark and his team successfully relet and regeared 53 assets, delivering an additional GBP 2.7 million worth of income. Our regears on urban logistics, you see, saw average rental growth, then again rise by nearly 40%. And we expect as I touched on my first presentation -- my first slide, we expect further rental growth over the coming few years with a minimum of GBP 23 million to be captured through a combination of asset management, contractual rent reviews and open markets. There's a breakdown there on that slide on the bottom right corner. Asset management remains very much part of our DNA and so we're always continually looking to improve the quality and efficiency of our buildings to ensure that they remain fit for purpose. So in the year, we've added 4 megawatts of power through PV installations with a further 3 megawatts in the pipeline. We've also improved amenities on some of our locations, added 25 ultra rapid EV charging facilities in partnership with both MFG and InstaVolt. We've added new catering and F&B amenities in Birmingham, Bedford and Ipswich. And again, that's all part of keeping our customers longer in our locations. The longer the customer spends in some of your building, the more money they will get rid of. We've continued to improve our EPC ratings as, you can see there. Obviously the [ LMP A-C ] 91% compared to where we were last year at 90% but we've also absorbed the LXi and we'll make some further progress on that in the coming periods. And we've seen our GRESB rating improve again to a company high of 76. So before I open up the call -- the line and the room to Q&A, just a couple of slides on the outlook. We believe that the challenging macro investment environment is settling, but debt costs are still too high and certainly for sectors and assets without organic rental growth. The UK consumer remains incredibly resilient with full employment, albeit there are some signs of discretionary spending is beginning to weak a little. The good news is inflation rates are falling and that is hopefully creating an inflection point for interest rates. But the property market will require swap rates to fall much closer to 300 basis points than the 420 that they are today for full liquidity to come back into the investment market. But this market uncertainty creates opportunities. As I said, we've touched on the -- I touched on the 4 key areas for us, whether or not it's fund wind-up, whether or not it's debt refinancing, whether or not it's sale and leasebacks or whether or not it's redemptions. And that is a key focus for us. And those are not just areas I picked out, those are -- we have real life examples in each of those. I would say debt refinancing would be the skinniest simply because there's just not a lot of debt issue problems in the structural winning sectors. And obviously, if we wanted to buy some offices in, then the debt refinance opportunities are plentiful. And our triple net approach will only focus on the sectors with these strong fundamentals. Consumer behavior will define real estate winners and losers, income, income growth continue to deliver the attractive compounding returns, which is the bedrock of successful investing. And as Martin has already touched on, our balance sheet will give us not only strength, but future optionality for the bigger deals that we previously had to shy away from. And our dividend is on track for 10th year of progression. We hope we will be standing here in 12 months' time claiming the title of dividend achiever. Looking forward, the work in hand is to reshape and simplify the portfolio. The pruning is already underway. We will always pivot towards the strongest thematics with operationally strong assets in the very best geographies. We will continue to prioritize income and income growth to drive the earnings and collect that embedded reversion of GBP 23 million that we think is there over the next couple of years. And our triple net focus will allow us to deliver income led returns with a progressive and covered dividend. And our confidence in that is obviously underpinned by our intention to announce a Q1 dividend for the FY '25, up nearly 19% to 2.85p a share. My former Chairman will be delighted with that. I know that for a fact. As I suspect, we want to buy new non-executive directors. So on that note, thank you very much for your time this morning. We can open up the room to some Q&A and then and then anybody who might be on the phone. Vanessa?

Vanessa Guy from JPMorgan. You touched upon debt reduction via disposals and equity raisings, I guess, an equity raise. Could you give a bit more color on that and what the target is for the year on disposals and where you want to reach your LTV?

I think the point we're trying to get across is, don't assume because we've got refinancings coming at us that will be met by another refinancing. They'll find if it's the right thing to do and rates are in the right place. But if it's not, we have other levers to pull. And we have significant headroom, we would raise more equity. I think in terms of having a target of sales, well, that's above my pay grade.

Yes. I think my view of it is, we are always pregnant with sales, right? It's part of our DNA again. So therefore, when we come up for refinancing, if we don't like the terms, if we think that the banks are being too greedy, or the swap rates or the swears, David and he's hiding. Or the swap rates are too high, then we will look at other things. But we're always -- because we're always looking at recycling assets. We can sometimes reallocate some of those receipts into the debt refi rather than into reinvestment into assets. If debt is costing you 6.5%, you know what, it's not all deals are going to get through me.

We've got a private placement tranche that matures at the end of September for GBP 40 million. They will just use headroom and non-core sales proceeds to deal with that. We would always [indiscernible] with somewhere between GBP 50 million and GBP 100 million at disposals. It's just the way we are.

Andrew Saunders from Shore Capital. I've got 2 questions. First one is on asset allocation. Obviously, you've got some new exposure to new sectors, which is obviously not a new thing given the backstory with London & Stamford and Metric, obviously. But I wonder if there's any asset categories there where you've been surprised on the upside and you might look to increase exposure. And the second question would be on development. Obviously, construction costs stabilizing and rents are accelerating. So some of your peers are stepping up development. You've got the balance sheet to do it. What's your standpoint on that?

Right, I'll take the first. I mean, I think of some of the new sectors that we've got exposure to entertainment theme parks, I feel very comfortable with it. I mean, it's difficult not to be when you think about consumer behavior, but you also think about credit, you think about replacement costs, you think about 30 odd years of lease expiry and annual kickers. I mean, it's just a wonderful asset that you want to own for a long time. Trying to extend that is more difficult. I mean, there's not a huge amount of these opportunities that come around. So that would be tricky. I mean, retail parks, we've -- it's an area that we have deep experience in. Mark and I spent a lot of time in that space in our careers. We're seeing the occupational picture improve dramatically. Still it's easier to do a letting in retail parks than a rent review, to be frank. The new tenants who want representation will pay up. The existing tenants want to fight like cats and dogs to give you an -- to avoid giving you an extra penny and they -- and but that will come. But so that's a market we keep wide eyed on. I think that, so that would fall into our convenience category. The hospital piece, we don't know enough about it, to be honest with you at the moment, Andrew. I mean, we like it. We like the fact that people are more health conscious these days. We obviously we have an NHS that struggles a little. But we will be conscious about credit exposures. We have a credit exposure. Our largest tenant will be Ramsay and we'll think about that. It wasn't that long ago that people were questioning our 12% exposure to Primark. Primark today is probably 2.5% or something, so quite lower than that actually. So look, we're wide eyed about this. I don't think anybody could accuse us being afraid to pivot into sectors, where the opportunity might have been missed by others. We're certainly not anchored to legacy sectors. Second, development, I mean, development is, I mean, it's -- construction costs are moderating, but they're not falling. People got this thing about inflation's down. It doesn't mean prices fall, they just don't rise as fast. And we have got some situations whereby the only way we will build this is if you pay us 20% more rent. And we have a -- we're doing a live example of one. The ERV might be GBP 9, but it didn't make sense to build it. We found somebody who said they'll pay GBP 11, we'll build it. I mean, GBP 11 will be 20% higher than the record ever done in that particular locality. [indiscernible] you've got anything to add?

Yeah, we've never been huge fans of speculative development, and to be frank, you need a proper arbitrage between the opportunity to buy an interesting investment asset and buying a piece of land which either doesn't have planning or doesn't have a pre-let. So land is still relatively expensive. But I think picking up on one of Andrew's points, I mean, I think our relationship with a lot of key occupiers remains, and we're working with a couple of key occupiers where they will take a substantial pre-let and then we just make sure that the development works because the land is at the right price. And I think land is still resetting --

[indiscernible] rents have to go up. And I do think in logistics, they're going to have to go up in small and mid boxes, they're going to have to go up, otherwise nothing gets built.

And also the other area of that we're active in, and always have been, is funding developers. So that's a quick in and out. You fund a developer on a pre-let, and you get a coupon on it as well, which is great for our income. Tying our money up in land isn't exactly accretive to paying dividend without a pre-let and without a developer and a coupon on it.

But you're going to see rental growth in some of these sectors. I think you're going to see it in logistics -- small and mid-box logistics. I mean, you're going to -- otherwise nothing can get built.

Miranda Cockburn from Berenberg. Couple of questions for Martin. Firstly, just cash EPS, can you give us that? And going forward, will you provide both cash and EPRA? Because obviously there's going to be a greater difference between the 2 going forward. And then the second question was just a brief one, just on Page 10, your contracted income progression. Does that and will that include that income strip that you've got? Does that -- I think it's 10 million or whatever the number is. Is that in that?

So, first question first, we'll absolutely include new cash earnings going forward. No, we didn't particularly include it this year. It wasn't particularly relevant. We have roughly the same cash covered that we've always had. We're a little below 100%, but not by very much. I think if we project forward to next year, it depends on the sales program and if we've got a dividend at [ 12p ] and we continue to sell material amounts, that will be a strain. But we'll be transparent about what our EPRA earnings are and what our cash earnings are. And on the income strip, we include the gross in our rent and then we take off through the finance cost, the pay away and we do exactly the same in the portfolio. So 6 is net -- GBP 6 billion is net of the income strip. With the income strip, it would be nearer GBP 6.3 billion.

I think, at a time as we increase the amount of organic exposure to -- exposure to organic reviews, the gap between your ERPA and your cash will be such, I mean, I can't think of many other companies that are reporting both those numbers are there.

Eleanor Frew from Barclays. So we've heard some comments from some of your peers about the position that we're in the property cycle. So just wondering what your thoughts are on this. What do you expect from the year ahead? Will you expect to see more competition, perhaps?

Look, I think that, I think I was quoted recently, we're past the point of maximum pessimism and that must be right. Swap rates in January-February were around about 3.50. Today they're over 4, which is disappointing in some ways, could argue it creates more opportunities. But I think that debt costs still for some certain sectors look expensive, particularly if you're in a sector where you're not sure about rental growth or you have to invest for rental growth. You have to upgrade the quality of your building in order to secure higher rents. I think that is tough for them. So I think we are seeing opportunities coming out of those 4 key areas that I talked about. I would certainly expect to see swap rates lower by the end of the year. And I think we could start to see on growth assets, some yields coming in a little bit. So we're feeling pretty good. I think some of the successes that the investment team have been able to deliver over the year in a market that's been pretty tight is terrific, it's not easy out there. It really isn't. I mean, we're getting hit all over the top all the time. It's taking longer to get a deal over the line, but we've done some really good sales, we've got some really good prices. I think we've been helped by that. Our average lot size is quite small relative to some of our larger peers. Our average lot size is about GBP 12 million. So there is more liquidity at the smaller end, but the range of people that we're talking to, it's unbelievable. I mean, it's truly unbelievable. I mean, some of these people, the vast majority we've never heard of owner occupiers in --

Glasgow and Dundee, which we've just sold, was -- well, we sold to a French institution but you're talking about Kuwaitis, people from Dubai, private family offices, it's just names you wouldn't have heard of. In fact I hadn't heard of remake until they came up, but they're very popular in the UK now.

So liquidity is still tough and I think until you start to see that swap rate back down, but closer to 300, it's going to remain so, what's another part of the question? I can't remember.

This is Edoardo Gili from Green Street. My question is around the pruning of the portfolio. How do you think about prioritizing it? Is it underlying fundamentals in different sectors? Is it the type of reviews or the periodicity of the reviews or sort of tenant concentration? How do you think about prioritizing these factors?

Yeah, by the way, it's a great question. I mean, some of it in a market where we are today, some of it is reactive. So, for example, we've done more transactions in the last 12 months with owner occupiers than I can remember in my career. So therefore you react and have an easy negotiation with the occupier if they want to buy your building. So therefore that will take priority. After that there's a number of factors that come into it, it's a sector. I mean, my thoughts on offices are relatively well known and my thoughts on certain geographies are well known. The great thing about even the assets we're looking to prune is they're all well let for long periods of time with guaranteed growth. There are no melting ice cubes here. And so therefore really then it is a competition for where you are on the yield stack and then where you are on the -- there are differences. For example, some of our -- one of the offices we sold today had a fixed rent review at 1.5%. It's more attractive maybe to sell that than one that might be linked to an RPI or something that's capped out at 4%. So it's a combination of things. It's the sector, it's the lease structure, and it could be the geography too. So we think that your thematic needs to have 3 dimensions rather than one. So it's not setting out a long lease strategy just on long leases. You get tripped up.

Max Nimmo, Deutsche Numis. Maybe just kind of following up a little bit on that question and then just thinking about the long income parts of the portfolio and how you think about asset management opportunities in some of that. I know you said it's great income, you can sleep well at night, but you also said, well, we know inflation is coming down a bit. Discretionary spend may come off a little bit, which obviously you're hedged a little bit on your convenience side, but just how you think about adding value, as it were, in some of those long income pieces.

Yeah, I mean, look, the investment market is their idea of long income and my idea of long income might be 2 different things. And in certain sectors it has different values too. A lot of people think that 15 years is a long income, I'm not sure it is, if I'm being honest with you, I think it's a difficult period. And if you look at our convenience portfolio, it's got an average lease length, 14 years. If we took that out to 20, we would get probably 50 basis points, maybe 50 basis points on it, certainly somewhere between 25 and 50 anyway. And one of the other things for us, Max, is in retail, where if at least, if the rents are over rented or the rent is too high, we will trade rent for term, because what we might lose on the income will pick up on the cap rate and therefore we look to sell it. At the moment, I would say the biggest opportunity for asset management, if you look at, for example, that we got the healthcare education, there'll be some opportunities within that portfolio for at least 3 years. And also in our Travelodge hotel portfolio, there's an opportunity there to take third-party income out of -- for example, if you look at a roadside opportunity, it might have drive-thrus at the front. At the moment, that's not part of our -- that's not part of our income. So look, there's some stones that need to be unturned and we feel the great thing about actually having the exposure that we've got is that, like I said, we're not in a sector that we really holding assets in sectors that we really need to get out of quickly. Sometimes we just have to be a bit more patient.

James Carswell from Peel Hunt. And one of the best of being a much bigger company is your access to potentially bigger deals. I think you've talked about it some of the previous meetings. I think you touched on some of the places where they might arise from in terms of some of the stress. I mean, in terms of the timing, you starting to see any of those opportunities coming across your desk in terms of big portfolios. And do you expect this to be much competition for those kind of deals? I mean, is there much other kind of capital out there chasing those kind of deals?

I mean, I'll start and Valentine can finish. Look, there was a GBP 700 million portfolio that came to the market a few weeks ago. Private Irish family wanted to sell out their holdings in Leicestershire. We had a look at it, we signed the NDA, we had a good look at it. We decided it wasn't for us. I mean, it will be interesting to see who buys it. I think that there is more money chasing specific thematics than blended portfolios. And then it's all about the aspirations and the pressures that the vendor might be under as to whether or not they want to do a wholesale deal or whether or not they're happy to chop it up. I think there's more competition in single thematics than there is in balanced.

Yes, no, I'd agree with that. I mean, the deals so far this year tended to be the smaller ones. And actually 65% of the deals in logistics in Q1 this year were under [ GBP 150 million ]. There are -- we are looking at some portfolios. They are beginning to come, but so far, it's been -- they've been pretty rare.

Yeah, I'd say even in the last week or so, I've -- we've looked at 2 portfolios.

Yes, they're just beginning to come. And there is competitor -- will be competition out there. I mean, the USP is still, they can bid keener yields than perhaps we can because they can take a bigger view on vacancy, et cetera. And competition in the smaller deals tend to come from local authority, pension fund, managed vehicles, DTZIM, KFIM, CBR, EGI. But volumes have been down so far this year.

Definitely. If you look at the 5 areas that you think the opportunities come out of, okay. So sale and leasebacks, yes, we're doing that. You look at redemptions, yes, we took a next warehouse in Doncaster at Christmas. The vendor needed money relatively quickly, so we were there for that. Fund wind-ups, we're looking at a portfolio at the moment coming out of one of the occupational pension funds. One of UK's largest retailers looking to come out of direct real estate, so they've decided to split it up. So we're looking at that. Refis not so much at the moment in our sector, for reasons I said. And then the fifth reason is obviously M&A and we've been pretty active in that. We thought that the market -- we think the market needs some consolidation. There are far too many small caps out there. And that's what we started that back in, well, probably this time last year, wasn't it? April last year with CT. And there's been quite a lot of activity and I think that will continue. I still think that there are a number of names out there. It would help if some of the managers thought that that was a good idea too, like turkeys voting for Christmas.

Hi, [ Sam Nott ] from [indiscernible]. Just on the cost ratio of 8% that you've guided to, is that sort of a long-term target or do you think you could improve that from there? And then obviously that's being driven by the benefits of scale. Would you be looking at further modes? I mean, you've just said you think there can be some consolidation.

I think if we get to 8%, we'll be pretty happy later. i think that's quite low. I think we'll get there because of the cost synergies that will come out of the CTPT and LXi acquisitions and mergers. I think they're -- we took out GBP 4 million of CTPT costs straight away. No one came over. There was no cost coming over. On LXi, it's slightly different. We've taken out the manager cost and that gets replaced by the salaries of the people who've come over. And it'll take a little bit of time to work some of the costs out of the system. So I think the savings there would be an annualized saving, but 8% is a target for FY '25.

I mean, it would help if the rest of the people in the sector were as focused on this as we are.

I was going to say it is a big increase, a big improvement, obviously, from the merger. When you're looking at further mergers, is there a sort of target size that you would aim for in terms of doing further mergers and consolidation, or is it just opportunistic?

I think the biggest barrier to more M&A tends to be the incumbent, either the board or the manager I'm afraid. At the end of day, I think cost savings is just one of the metrics we'll look at. I mean, ultimately we start with the assets. Do we like enough of their assets to want to do this. And then it helps when there's a board that's focused on what's right for shareholders as opposed to other considerations.

If there are no further questions in the room, we will now go to conference call questions. Over to you, [ Saska ].

[Operator Instructions] I see there are no questions coming through, I would like to hand it back to Andrew Jones for webcast questions. Over to you.

Okay, great. I have got some that have come through on this, on this iPad, quite smart. So I'll just read out a few of these quickly from Tony at Beckett Asset Management. LTV has increased slightly from the previous year to 33%. What is the maximum limit you're prepared to tolerate? I'm going to start. We have different views. Look, it depends on the opportunity we're not looking to, I mean, I think 33% is a good number. I think 31% is a good number, too. But if there was an opportunity out there to James' questions about, then it took it up to 35% or 36% that wouldn't bother me either, because it's moving all the time. If we'd had these results last -- this time last week, it would have been a higher LTV because Valentine wouldn't have done his sales. So we're in the sweet spot. I think for us it's important, though, not just to look at the number, but to triangulate it in terms of what's it secured against. Is it the right assets? What's happening to those values? How well is the lease length? What's happening to your income? What about your hedging? So 33% feels like a good number. Some [indiscernible] following 2 mergers, how much reshaping, repositioning is there to be done? What are the characteristics, the assets that you may look to dispose? Look, they're all very long assets. We're not -- I don't get emotionally attached, by the way, to any asset we own. Every single one of them has a number. Okay. It could be a big box, it could be a small box, and maybe anything has a number. All right, we're coin operated. So the fact of the matter is we don't have a target. But there are sectors that we feel more comfortable operating in where we have expertise, where we have critical mass, where we have an edge over some of our competitors. And there are some sectors that we're involved in where we are subscale and we're unlikely to be the price setter that we might be in other areas. So that's what we -- those we will look to deal with. It's about -- I think we've already answered this about the opportunity that the size of the opportunity in future M&A. There's a lot of -- would you deal with smaller M&A? Is it worth the effort sort of thing? Again, we'll just react to the opportunities that are out there. Like I said, it's not always that simple. And then there's a bit about rationalizing the combined portfolios with the sale of smaller assets. The great thing about triple net is actually there's no operational involvement for us. Okay. I'd actually say today that our average lot size at 12 helps Will and Valentine, it's harder to sell a GBP 100 million asset today than it is to sell GBP 10 million asset. Without a doubt, because the suite of buyers that we can appeal to is so much wider. And I would say guys, with the deals that we've done, I can't remember the last deal that we've -- where we've sold an asset that required debt.

Even if they are potentially debt buyers, they'll buy with equity, with a view to gearing up further down the line when interest rates hopefully have come down a little.

I think we saw the high street shop to a South African investor who might have got some debt, but that's about it. So that's the attraction of having some small assets. It gives you that liquidity when the market's tight. Right. We've taken enough of your morning up, so thank you. Obviously those on the phone as well for the last hour or so of your time. And obviously we'll hang around if there's any further questions that you were too embarrassed to ask in front of everyone else. So thank you.