NewRiver REIT plc (NRR) Earnings Call Transcript & Summary

All right. Good morning, everyone, and welcome to our new offices here at 80 Charlotte Street. As usual, I'll take you through our half year highlights and then Will Hobman will take you through the financial results. And then I'll finish with a review of our resilient portfolio performance and the reassuring results from the scenario testing that we undertook across our portfolio, ahead of what is set to be a challenging year for the economy, consumers and our occupiers. We had a good first half, continuing to demonstrate operational performance and financial resilience, as evidenced by good leasing performance and normalization of rent collection, maintained high occupancy and sustained retention rates. These operational metrics contributed to a 77% increase in underlying funds from operations to GBP 13.6 million, allowing us to declare an interim fully covered dividend of 3.5p per share, which represents a 6% increase on our last declared dividend. Occupational markets have held up well in our first half where we have seen active demand for space, and we were pleased to deliver another period of leasing terms ahead of ERV. The wider capital markets have been impacted by the rapid increase in interest rates. That said, our portfolio valuation has been far more insulated as we have one of the highest yield spreads to the 10-year gilt. And it should be noted that in the preceding period to this economic downturn, retail suffered accelerated capital declines, whereas other sectors had accelerated capital growth. As a result, our portfolio valuation was broadly stable at just minus 1.3%, with 80% of the decline coming from our regeneration portfolio, which was impacted by higher development costs. Even with that modest valuation decline, our LTV ended the period lower at 33.8%, which provides us with significant investment capacity and optionality with an increased cash position of GBP 95 million. This means our balance sheet is in great shape as we have no drawn debt maturity to 2028, and all of our interest costs are fixed. And we're tracking well against our decarbonization targets, but key to that is having quality, governance and management. And this is an area that we do well in, as recognized by GRESB and EPRA. High inflation and rising interest rates have been impacting consumer spending and will continue to do so as we move into 2023. But for NewRiver, notwithstanding these challenges, we see reasons to be reassured about our market positioning. The recently announced tax increases and reductions in public spending means that consumers will have difficult choices to make. You can see this in the data on the chart where the growth rate of nonessential spending has been falling by contrast to essential spending, and we expect that trend to continue. And our essential spend-led portfolio is therefore well positioned to cater to and benefit from this. When evaluating the U.K. consumer, the following should be carefully considered: elevated U.K. consumer savings, rising wage growth, low unemployment and the government's energy support package, plus inflation-linked pension increases and universal credit. Much of the consumer's net worth is linked to the value of their house. And even though house prices could fall next year by around 10%, Savills' forecast that house prices for the period 2023 to 2027 will increase on average by 6.2%. Retailers are facing similar pressures. And you can see the impact of high inflation in the retail sales data, where sales by value have been increasing but volume is down. The significant increase in retail sales to the online channel during the COVID period has been unwinding as shoppers return to stores. In a high-cost environment, omnichannel retailers are better placed to control online costs by utilizing their physical store networks, which is why click & collect have been rapidly increasing and will continue to do so. By contrast, online retailers who are perhaps more vulnerable, are struggling to cope with rising costs, especially given their lower operating margins. And when evaluating retailers, over the last 3 to 4 years, we've seen significant restructuring and retailer failure. In addition, most retailers have been working hard to rightsize and reduce costs. So as we move into a challenging 2023, I would argue that store base and omnichannel retailers are generally fitter, leaner and more agile to navigate through what will be a difficult year. One of the expected tailwinds for retailers next year is reduced business rates. We were pleased that the government last week listened to the industry and announced the freezing of the UBR, and for those rate payers receiving a reduction in their business rates, the benefit will be received immediately unlike the old system where it was spread over time. In addition, the government announced new ratable values for all nondomestic properties, and you can see the real estate sector results here. For NewRiver, our current estimated reduction is 19%, which will be great news for our occupiers and will support the sustainability of our future rental cash flows. Within the wider capital markets, we've seen a decline in capital values, driven predominantly by the recalibration of property yields to the increase in gilt rates. For retail, where capital values have already been rebased over the last 3 to 4 years, the impact of yield expansion has been less pronounced as current retail yields provide a premium to the 10-year gilt. On the right-hand chart, you can clearly see how the higher rates of inflation that are driving higher interest rates has impacted the MSCI capital returns over the last 3 months compared to the last 12 months. The sectors with the largest decline in capital values from June to September are those sectors where the property yield relative to the 10-year gilt did not provide a sufficient risk premium. Forecasting future capital returns is always a challenge given the number of external variables and influences that impact the retail -- the real estate capital markets. That said, we believe that NewRiver's valuations should be more resilient in 2023 given that our current portfolio equivalent yield is 550 basis points higher than the 10-year gilt. We have consistently expressed our confidence in the underlying resilience of our portfolio. Even through the significant disruption of COVID across all operating metrics, our portfolio has been remarkably resilient. And the first half of FY '23 has been no exception. As an example of our resilience from April 2022 through September '22, we have undertaken long-term leasing transactions that secured GBP 13 million of annual rent, equating to just minus 0.2% compound annual growth rate over the weighted average lease term of those previous leases of 9.8 years. And given the extent of disruption within the retail sector over the last 5 years from the growth of online retailing and COVID, our leasing performance over the last 2.5 years really demonstrates the underlying resilience in our rental cash flows. Now we believe our portfolio positioning, focused on essential goods and services where a physical store is vital to our occupiers, is the reason that we have consistently delivered high occupancy, high retention and strong leasing performance over the last 2.5 years. Of course, it also helps that we have a market-leading asset management platform that has delivered excellent rent collection numbers and secured excellent leasing terms. Moving now to our valuation performance, which overall was broadly stable at just minus 1.3%. Our core shopping centers and retail parks delivered capital growth of 0.2% and 0.5%, respectively, reflecting stable like-for-like movements in both equivalent yield and ERVs. Reassuringly, we've now had 3 financial reporting periods of stable valuations in our core shopping centers and retail parks. The only part of our portfolio that has been impacted by high inflation and rising interest rates was in our Regeneration portfolio, which accounted for 80% of the modest GBP 8 million of total portfolio decline. This was a result of an increase in estimated construction costs, an increase in assumed development finance costs and a pullback in the residential forward funding market. Our Work Out portfolio, which only accounts for 14% of our total assets recorded minus 2.5% of capital decline, a material improvement from the first half of FY '22 and the second half of FY '22. We've always held the view that income returns over the long term are the key driver of total returns. And given our high portfolio yield of 8.7%, you can see the importance of that income return in our total return outperformance relative to the MSCI. Over the last 5 years, our retail parks have delivered a total return outperformance of 380 basis points; and our shopping centers, a massive 740 basis points. This consistent outperformance is due to our portfolio positioning and our laser focus on income returns. Now we will provide a detailed report on our ESG performance at our full year results. But in the first half of FY '23, we were pleased that our progress was recognized by GRESB with an improvement in our overall rating, which included a maximum rating for social and governance. The quality of our governance was also recognized by EPRA, where we retained our Gold Award status, which means that EPRA recognizes the excellence in the transparency and comparability of our environmental, social and governance disclosures. Achieving net zero within the retail sector very much relies upon mutual action by real estate owners and occupiers. The energy occupiers consumed in our assets accounts for almost 90% of total carbon emissions. These are emissions over which we have limited control, but we continue to develop our engagement activities to support alignment between our climate ambitions and those of our occupiers. And so we were pleased to report that 57% of our lettable area is occupied by retailers that have already set emission reduction targets. And with that, I will now hand over to Will, who will take you through the financials.

Thanks, Allan, and good morning, everyone. It's my pleasure to be taking you through our first half results today. Starting with the financial highlights. And we've made a strong start to the year delivering continued improvement in UFFO, which increased to GBP 13.6 billion during the first half from GBP 12.8 million in the second half of the prior year and GBP 7.7 million in the first half of the prior year, which is the retail comp, stripping out the contribution from Hawthorn prior to its disposal. Because our dividend policy is linked to UFFO, this has led to an improvement in our fully covered dividend, which has increased to 3.5p per share, up from 3.3p per share in the second half of last year. We've seen a resilient valuation performance despite disruption in the investment in credit markets leading to a stable NTA per share of 132p, which compares to 134p at the full year and 131p a year ago. This valuation performance, together with our fully covered dividend, means LTV now stands at 33.8% compared to 34.1% at the full year and 39.4% a year ago. Interest cover, which is another key debt metric, has also improved to 3.9x, trending upwards from 2.7x a year ago and 3.5x at the full year, benefiting from continued income recovery and a reduction in gross debt on which costs are fixed, which along with the fact that we have no refinancing requirement until 2028 and access to GBP 220 million of total liquidity, including GBP 95 million of cash in the bank, means that we ended the half as we started it, in a strong financial position. I'll have more on the balance sheet later on, but first, I'd like to look at UFFO. This time, alongside the usual UFFO statement, I have included a bridge from the first half of last year, which shows clearly that once adjusting for the contribution from the pubs in the prior year, retail UFFO has improved significantly half-on-half from GBP 7.7 million to GBP 13.6 million and that all component parts of UFFO have contributed to the increase. I'll have more on net property income, which has improved despite the disposals we completed in the second half of last year in a moment. But before that, I'd like to walk you through the other drivers of the UFFO improvement. Starting with other income, which you can see added GBP 1.4 million. This relates entirely to the settlement of an income disruption insurance claim relating to our car park income during the first COVID lockdown between March and June 2020. You can see that our work on cost reduction, both admin and finance costs, added GBP 4 million, with admin costs reflecting the impact of our cost-saving initiatives, not least the relocation of our head office, which we completed during the first half; and with finance costs benefiting from the debt restructuring exercise completed last year. Next, NPI, which has increased from GBP 25.2 million in the first half of last year to GBP 25.7 million this half. And that's despite a GBP 2.2 million reduction due to the GBP 70 million of disposals completed in the second half of last year. Like-for-like, income was up by GBP 0.6 million, a modest increase, but significant in representing return to growth after the declines we've seen in recent years. And importantly, like-for-like growth was strongest in our core shopping center and retail park assets, which we see as forming the backbone of our portfolio over the long term. Rent collection rates have improved, and we've continued to collect historical rental arrears, which means we've seen a period-on-period reduction in rent and service charge provisions for the second successive year post-COVID, adding GBP 1 million during the half. Lastly, car park and commercialization, which improved half-on-half last year and again in the first half of this year, recovering a further GBP 1.1 million of income and now back up to 80% of pre-pandemic levels. Next, I'd like to present a bridge which compares our retail NPI immediately prior to the pandemic, so the half year ended September 2019 with the first half we're reporting today. I've included this slide because I think it's useful to look at how our income has been impacted over the last few years, not least by COVID, and to highlight the resilience of our income and show how much of the disruption we've recovered so far. You can see that after adjusting for retail disposals over the last 3 years, we started in September 2019 with GBP 30.3 million of retail NPI. Next, the buckets we've labeled as HY '21 reduction. That's pre-COVID like-for-like decline of GBP 2.2 million and COVID NPI impact principally on rent collection and car park and commercialization income. Then recovery and regrowth in the 2 years that have followed, which encapsulates NPI recovery i.e., the progress we've made in recovering the impact shown in the previous 2 bars, the gradual return to normalized levels of rent and service charge provisioning versus the elevated levels seen during the pandemic. the gradual return of car park and commercialization income and like-for-like NRI, which is stable taking HY '22 and HY '23 together, but as I've just shown you on the previous slide, trended positively in HY '23. And lastly, the increase in our AM fees, which doesn't reflect the operating partner mandate we announced last week, which means that our asset management fee income will increase going forward. So in summary, our income was disrupted during FY '21, but we've made good progress in recovering that impact over the last 2 years and we feel that underlying income is not only resilient at this point but growing as we look forward. Lastly, before moving on to the dividend, I'd like to break UFFO per share down into its constituent elements to look at the status and direction of travel of each. Starting with income, which, as I've just shown, was rebased during COVID and which is now recovering; then admin costs, which have already reduced and where we've targeted further savings; and finally, finance costs, which have also reduced, and very importantly in this environment, are fixed for the next 5.5 years, all of which means our UFFO is rebuilding, which flows directly into our dividend. Under our dividend policy, we paid dividends twice per annum, announced within our half and full year results and based on 80% of the UFFO reported for the most recently completed 6-month period. So today, we've declared a first half dividend of 3.5p per share, which compares to the 4.1p declared during the first half of the prior year, half of which related to the pub business prior to its disposal. And more recently, the 3.3p declared at the full year, which was our first dividend as a retail-only business. Moving on to the balance sheet and starting with an overview of key balance sheet and debt metrics. I'll have more detail on individual metrics in the coming slides, but this slide shows clearly the strength of our position today and how that position has improved over the last 6 and 12 months following the sale of the pub business and subsequent debt reduction completed last year. This position is supported by our cost of debt, which is fixed at 3.5%. And given we have no maturity undrawn debt until 2028, that will remain the case for the next 5.5 years. All this and, very importantly, our balance sheet remains fully unsecured. Next, net assets. As you can see from the slide, NTA per share reduced modestly from 134p to 132p during the first half but remains ahead of the position a year ago of 131p, which is shown on the left-hand side of the slide. The key reasons for the movement in the first half were the UFFO we retained after the payment of dividends, which added 1.1p, offset by the modest 1.3% portfolio valuation decline. This translates to a total accounting return in the first half of 1% and a total accounting return of 6.4% since September 2021, i.e. in our first 12 months as a retail-only business. I've also included a memo below the NTA bridge, which shows how LTV has changed during the first half. And you can see it's reduced slightly from 34.1% to 33.8%, and the drivers are the same as NTA with a reduction due to retained UFFO offset by the impact of the modest valuation decline. Next, on to our financial policies which form a key part of our approach to financial risk management. You can see clearly here, we have material headroom across all of our policies and our position has improved during the first half, particularly interest cover, which has increased from 2.7x a year ago to 3.9x today. The key drivers of this improvement are the actions we completed during FY '22, which can be seen on the slide, being the disposal of the pubs and the subsequent debt reduction, alongside the continued recovery of our retail income. It's worth noting that our policy is set at 2x and the covenant on our drawn debt is set at 1.5x, meaning we have substantial and growing headroom against both of these benchmarks. And if we look at the 2 components of interest cover, we see this will continue to be an area of strength for us with income still recovering post COVID and our low interest cost on drawn debt fixed until 2028. Next, on to capital allocation. To remind you, at the full year, with LTV at 34%, we said that we would not rush to redeploy to our 40% guidance level but in the near term, we intended to keep some headroom and to operate with a higher cash holding given the uncertain macroeconomic outlook. Looking back at the events of the last 6 months, we believe that this was the right call. Revisiting this position now with an LTV at a similar level to the full year, while we feel confident in the strength of NewRiver's position and the resilience of our underlying cash flows in this environment, given the macro outlook is arguably even more uncertain today, we do not believe that now is the time to reduce headroom and we see no reason to change the near-term guidance we issued at the full year. We will continue to review this position as we make progress on our plant disposal program, which has been challenging in the first half due to the impact of disrupting the capital markets on liquidity, and as we learn more about the potential impact of market disruption on valuations. But right now, we want to keep maximum optionality and flexibility, so we intend to keep headroom to the 40% level in the near term. Lastly from me, I'd like to expand on the key areas we expect to contribute to UFFO growth looking ahead. You can see on the left-hand side of the slide that we take the GBP 13.6 million of UFFO we've reported today and adjust it to remove the GBP 1.4 million of COVID disruption insurance received in the first half, which related to FY '21. We then annualize this, giving us GBP 24.4 million as a start point, which compares to the annualized start point when we presented this slide 6 months ago of GBP 17.6 million, with the increase because we've been successful in crystallizing the growth from the right-hand side of the slide into our annualized start point, as you can see from the dash box in the middle of the slide, which shows the progress we've made in capturing this growth in the first half. We then added in the savings identified at our capital markets event in September 2021, which we've not yet unlocked, highlighted as #1 on the slide. That's principally the further admin cost savings we've targeted on top of the GBP 1 million of savings unlocked over the last year, which will be more challenging given the inflationary environment we're now in but which will remain an area of focus for us. Next, COVID impact, which is a measure of our success in recovering the income disruption we experienced during FY '21. We made good progress during FY '22 and this has continued in the first half of FY '23, which means that the remaining impact to recover now stands at GBP 4.2 million, down from GBP 6.6 million at the full year. And we're confident we can make further inroads as we look ahead. But where we can't recover all of the lost income, we are actively expanding other revenue streams such as our capital partnerships, where we've had success very recently in signing a new and exciting operational management agreement with a leading real estate investor. Finally, number three, surplus capital deployment. As I've just communicated, we will not rush to redeploy to the 40% LTV level in the near term. But we've included an illustrative GBP 64 million of acquisitions here at a 7% yield to give an indication of the optionality we have available to us. And in the meantime, we're making a return on our surplus capital by placing on deposit, and we're currently generating a blended interest rate of around 3%. Thank you all for listening. And I'd now like to hand you back to Allan.

Thanks, Will. I'm now going to take you through an update on progress across our resilient portfolio and our outlook for the short and medium term. So starting with core shopping centers. Our core shopping centers represent 34% of our portfolio. Given the current economic uncertainty, these assets located in the heart of their town centers continue to play an important role in providing essential goods and services to their local communities. Given the affordability of rents for our occupiers, our core shopping center portfolio has been highly resilient, as demonstrated in our operating metrics even during the highly disruptive COVID period. Over the last 2.5 years, our occupancy has been consistently high and retention rate for those leases subject to expiry or break clause has also been high and leasing terms versus ERV have been consistently positive. And this resilience is also reflected in our retail park portfolio, which represents 27% of our assets, which has had another good period of delivering strong operating metrics across our 15 conveniently located assets. We continue to see strong occupational demand for our retail parks, which demonstrates the attraction of these assets in terms of location, rental affordability, catchment, click & collect hubs and, in turn, retailer profitability. As a result, we are nearly fully let at 97% and reassuringly, our retention rate is very high, reflecting the strong occupational demand that has been increasing over the last few years. Our Regeneration portfolio is where we are seeking to deliver capital growth through redeveloping surplus retail space, principally for residential. Across our 3 projects, we are working on the delivery of 1,700 residential units, providing a mix of build-to-sell, build-to-rent and affordable units. Our recent Regeneration valuation has been impacted by a combination of higher construction costs and the increase in development cost financing and a recent pullback in the residential forward funding market. But these are not projects we would ever develop out ourselves. Instead, we can create value by securing planning consents and then we have a number of options, including selling to specialist residential developers such as we successfully did with our Regeneration assets in Cowley and in Penge in the previous financial year. Our 3 projects are at different stages in the development cycle with consent secured at Burgess Hill and where we are finalizing key anchor lettings prior to selling the residential site. At Grays, we are close to completing the preplanning process, which will then facilitate a major application in 2023. And then finally, in Bexleyheath, we are making good progress with our master plan with positive engagement with the council. And whilst we continue to progress our development plans for our Regeneration assets, we received an ongoing income return of circa 6%. Moving now to our Work Out portfolio, which represents only 14% of our assets and where we are seeking to exit through a combination of disposals and implementation of turnaround strategies to deliver long-term rental and capital sustainability. Whilst the recent disruption in the capital markets has impacted liquidity levels, we're currently under offer on GBP 20 million of assets with the remaining GBP 21.5 million to be sold in our next 5 year -- next financial year. We're well advanced with completing the turnaround strategies for 3 of our assets by the end of FY '23 with the remaining 2 assets to be completed in FY '24. And so our current estimate is that our Work Out portfolio will equate to around 8% of our total portfolio by the end of FY '23 and we will complete a full exit during the course of FY '24. In the meantime, we benefit from attractive income returns and capital values that have moved to a broadly stabilized position. Our capital partnerships allow us to leverage our market-leading asset management platform and enhance our returns in a capital-light way through asset management income as well as potential financial promotes. Post period end, we were appointed by a leading real estate investor to asset manage a retail portfolio comprising 16 retail parks and 1 shopping center for a term of 3 years, which is a really strong endorsement of our platform. Our capital partnership with Bravo is performing well. And given the recent disruption in the capital markets, this JV is well placed to capitalize on attractive opportunities that are likely to arise next year. We have a great relationship with Canterbury City Council, and we were pleased that our mandate was extended to include their new leisure development and our appointment as development manager for their planned city center redevelopment. Our strategic partnerships are a clear validation of our strong asset management capability and are likely to be an important source of new capital-light revenue in the coming years. Now the last time we disclosed our scenario testing was during the initial phase of the pandemic in 2020 as we wanted to evaluate the likely financial impact from the closure of nonessential stores and the rental moratorium. The results of that scenario testing showed that our balance sheet was capable of managing our way through COVID without requiring any additional capital from our shareholders. Ultimately, our assessment at that time was proven correct. Today, both the OBR and the Bank of England are forecasting a lengthy, albeit shallow recession. The resilience of NewRiver's rental cash flows is underpinned by affordable rents and low occupational costs. And given the downward pressure on retailers' margins as a result of material increases in cost and revenue pressures, we have assessed the rental affordability over the next 3 years. We've worked with independent retail research consultant, JDM Retail, to model a P&L for each occupier in our portfolio that forecast turnover and costs including cost of goods, staffing, utilities and business rates revaluation savings. Assuming the desired net margin, i.e., profitability of the occupier is to be maintained, the output is the total Affordable Occupational Cost Ratio, AOCR, on a unit-by-unit basis. This has been completed on a base downside and upside case with each scenario given a probability weighting and we have primarily weighted on the base and the downside for the analysis. So based on our current rents, the modeling implies that our portfolio is trading at an affordable level with significant headroom, therefore suggests occupiers could afford increased rents. However, our expectation is that future retailer costs peak in 2023 with the cost of living crisis having an impact on lower consumer spending. As expected, maintaining the retailers' existing net margin, the affordability falls 120 basis points below the current occupational cost ratio in 2023, but returns in 2024 with positive headroom building in 2025, supported by cost stabilization, the benefit of business rate reductions and some modest sales growth. We then focused on 2023 leasing events when retailers' margins will be under the most pressure. And the results show that even though affordability falls in 2023, for those retailers subject to lease renewal, their affordability is still higher than what they actually pay. What is also really encouraging is that by 2025, the headroom between what occupiers can pay versus what they actually pay widens to 240 basis points. And this should support the potential for us to deliver future rental growth. Now to assess the risk of our future rental cash flows, we engaged Income Analytics, part owned by MSCI and Savills, to quantify the probability and impact of tenant failure. In order to provide a more scientific measure of risk, Income Analytics has developed a set of proprietary risk metrics and analytics that allow users to look at the projected probability of failure for 1 to 10 years into the future. Now they do this by using 15 years of historic global company data from Dun & Bradstreet, whose database covers over 500 million companies across 200 countries. The output, which is weighted by rent shows that our retail portfolio has a projected probability of failure in the next 24 months of just 0.9%, which on a loss given default probability framework shows the potential impact of the portfolio value is just minus 0.6%. Over 5 years, which is broadly aligned with our weighted average lease expiry profile, the projected probability failure is just 2.1%. Now to put our income security into context, you can see on this slide, how our projected probability failure rate compares to MSCI offices and industrial. Although industrial and offices have a modestly lower failure rate, our higher equivalent yield more than compensates. So taking account of both rental affordability and our projected failure rate, the analysis indicates that our rental cash flows should be resilient. Whilst it's been a turbulent few months and the short-term outlook is clouded with uncertainty, we're very happy with how we are positioned today. We have a strong balance sheet, high levels of occupancy across both our retail parks and core shopping centers, and are making good progress in either exiting or repositioning our Work Out portfolio. Although the macroeconomic outlook is uncertain, our battle-hardened NewRiver team, together with our strengthened balance sheet and highly resilient portfolio, is well positioned for a recessionary environment, and indeed, we look to the future with confidence. Thank you. So I think we're now going to move to Q&A, and we'll start with questions from the floor, followed by webcast questions. There are going to be some roving microphones. And for the benefit of those that are dialing in, those in the room, could you please just introduce yourself before asking your question from the floor.

John Mozley from Liberum. I've got 3 questions for you, 2 on tenants and then 1 on capital values. On the tenants, I wanted to ask about business rates, looking at it from the tenant point of view as the savings that they would be making roughly in terms of their own P&Ls. My second question is, obviously, there was a story about 1 of your top 10 tenants in the press at the weekend. And I just wanted to check what your thoughts were about that. And then my final question is on the value falls are all in the Regen and Work Out parts of the business. And I just wanted to ask did you think that, that process has now pretty much finished? And had we got to capital values there where there was very little downside left?

Right. Let me just try and remember the first question.

Business rates.

Business rates, yes, I mean, well, look, I mean, I think business rates are really going to be helpful. It's something that the industry lobbied, both the British Retail Consortium and the British Property Federation. It was good that the government listened to end the cap on downward transitional relief. You saw the slide. There are clearly winners and losers, industrial, which is up 27%, retail as a whole is minus 10%. And our portfolio overall was about 19% reductions. And that's going to be very helpful and supportive for retailers because they're going to get the benefit of that immediately. On -- with regards to our tenants, I think you're referring to Wilkinson's? Yes, I mean, our team have a regular contact with Wilkinson's. We are obviously pleased to see that they raise a sufficient amount of capital through a sale and leaseback of GBP 48 million. What they're telling us is that they're not going to be doing a CVA. Clearly, it's a tough time for retailers as a whole. But that's one of the reasons why we're strong believers of not having an over exposure to any single tenant. I think our maximum exposure is B&M, which is probably around about 2.5% of rents. So we're very confident. And doing the rental affordability in our income security analysis is really telling us that we have a very resilient portfolio. And over the last 2.5 years, you can see that in our operating metrics. We know next year is going to be a tough year, but our research and data is telling us that our resilience should carry us through next year. With regards to valuations, as I mentioned, retail has been more insulated. It's a sector that has had very significant valuation decline over the last 3 to 4 years. I think the MSCI U.K. shopping center benchmark is down 45% over 3 years. We've not been completely immune to that, albeit we've massively outperformed. We think Work Out is almost at a stabilized position. If you think that -- the first half of the previous financial year was down 18% followed by an 8% write-down, and now it's about 2.5%. So we think we've reached that stabilized position. Of course, the rental cash flows in our Work Out portfolio will benefit because that part of our portfolio has seen the biggest reduction in business rates, around 30% reduction. So that's going to be helpful around sustainability of cash flows. And then in terms of our Regen portfolio, well, we have been impacted by high inflation, which is feeding through to higher construction costs. There are signs that the pressure around construction costs from supplies and labor is starting to ease. So there is an anticipation that costs could be lower in the future. And of course, we have that opportunity for some of that decline to be reversed. Of course, a lot of our development activity is around providing residential. The sector still has that structural imbalance between the demand for residential and the supply. That still remains. That's why Savills are saying that over the '23 period to 2027, house prices are set to go up about 6%. Rental values are set to increase in forecast over the same period of around 18%, and quite a significant part of our residential product is build-to-rent. So I think we're confident around that part of our portfolio as well, John.

Mike Prew from Jefferies. In your build-out of the UFFO, your bar chart, your ladder, could you give us sort of a range of sort of earnings dilution we should expect from forward sales? Obviously, you're active in capital recycling. And then as you move, hopefully, increase on to the front foot in terms of capital management, is there any scope of share buybacks in these discounts?

Well, I think in terms of capital allocation, our buyback is one of our options and it's something that we wanted to closely, as a management team and the Board, Mike, I think it's really just a question of -- really, for us, it's timing. We -- the full year, we felt that given the macroeconomic uncertainty, the right thing to do was to be operating with a higher cash holding. We still believe that is the right position. I think balance sheet strength and optionality are the 2 key things. The great thing is that our balance sheet is in great shape, and we have that optionality with given that we have GBP 95 million of cash on deposit. And of course, one of the benefits of rising interest rates is we're starting to earn a decent cash return on that cash, which is going to be helpful as well going forward. Will, do you want to add anything?

Well, I'd just say in terms of earnings dilution from disposals, I think what we're saying really is that we want to keep headroom to our LTV guidance of 40%. And by that, I mean that anything we sell from this point, effectively, we're in a position to redeploy. So I think the dilution would really be a timing dilution rather than a permanent dilution.

Andrew Saunders, Shore Capital. You talked about cost inflation in the Regeneration portfolio in the first half with construction and financing costs. Can you give us an idea of the sort of quantum of that, that's baked into the valuation assumptions? And what would be the expectations for the second half going forward? Have we seen the worst of it or more to come?

Well, we have got appropriate levels of construction cost inflation within our appraisals and, indeed, the current market rate in terms of development financing. With regards to the future, I mean, it's really always very challenging trying to predict the future. But we are really at the stage where we're trying to secure planning concerns, master planning. So we're not on site in any of our Regeneration projects and -- nor would we develop them at ourselves. So I think we're in a good place around that. But as I said, indications that we're receiving from the construction industry is that things are starting to ease up a little bit, and hopefully that will feed through and we can start to see a little bit of reversal of the decline we experienced in the first half. Okay. I think no more floors -- questions from the floor. Lizzie, do we have any questions on the webcast?

There are a couple of questions, but they've been asked on the floor already. So ones that haven't been asked really, so this is from [indiscernible]. Given your asset management platform, how much more capacity do you have for additional earnings on third-party asset management?

Yes. I mean, I think one of the big advantages we have in terms of U.K. retail real estate, there's -- I can't think of any platform quite like NewRiver, the capability we have, the quality of our team and the experience and our knowledge -- deep, deep knowledge of the market. And there's a lot of U.K. retail real estate that could be managed better, more efficiently, wiser. And I think it's a great opportunity for us. And we have a very successful joint venture with Bravo, and securing this new mandate, and I think, is a fantastic endorsement of our capability. So I think we believe that capital partnerships is going to be a very important component of our business going forward. And that will really add value to the platform, which obviously is currently not recognized given the sort of current market value of the business. But I'm sure that will come through in time.

And the target level of income that we gave out a couple of years ago was GBP 3 million to GBP 5 million, wasn't it of asset management fee income?

Yes, and we're ahead of that target. We're ahead in terms of achieving that 5-year target. But I think there's a lot more potential there for us. Any other questions, Lizzie?

There's one question in from [indiscernible]. Page -- Slide 7 shows equivalent yields but not initial yields. Initial yields for core and retail parks, please? Did the valuers use 10% fall in house prices, as you mentioned, in the value of the Regeneration assets?

So was Marcus' questions about -- did he want to know what the initial yields were?

Yes.

Yes. I mean, our net initial yield on our retail parks, I think was the question for Marcus. Is that right?

Yes.

It was 6.6%.

And I think on core shopping centers, Allan, it was 9.5%.

9.5%, yes.

Okay. I think that concludes the questions from the webcast.

Okay. Well, thank you. Well, so I think we're going to bring proceedings to a close, and thank you all of you for joining us this morning. Will and I are going to be around for a while so we can have some follow-up conversations. And if you haven't been to our offices, we're at the back of the building in the cheap seats on Whitfield Street, a lovely space. But do come in and have a look at our new flexible working space, which has been a huge success for us since we moved in June. So if you got some time, do come around and see our new office. So thank you very much.