SEGRO Plc (SGRO) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to our 2020 half year results presentation. This is the first time that we've done this virtually, and it's a real shame not to get to see many of you in person today. But hopefully, it won't be too long before we are or able to be in the same room again. The first half of 2020 has been quite extraordinary. And the sheer level of disruption caused across the globe and across all industries as a result of the COVID-19 pandemic is unprecedented. Clearly, it's been a public health crisis like no other, and it's been a personal tragedy for many families. Our thoughts and sympathy go out to anyone affected. But it has also tested and challenged many companies and their business models. Being a purpose-led organization with a strong, responsible and caring culture meant that at the start of lockdown, when many businesses might have been struggling to know how to react, it was relatively straightforward and natural for us at SEGRO to work out what to do and which priorities to focus on. Keeping our staff safe and connected was our #1 priority in the early days, enabling them to operate and support our customers without missing a beat. Fortunately, we already had great technology in place to facilitate remote working, but we also went to great lengths to stay in touch with all of our colleagues to communicate regularly with them and to ensure that they -- to ensure they were supported both physically and emotionally. And for me, one of the highlights of the last 6 months was our online remote celebration of SEGRO's 100-year anniversary, something that involved almost every member of our staff across our 8 countries and 15 offices. Our second key priority was to stay close to and support our customers through this challenging period. For some of them, that meant making sure that we and our construction partners were able to progress developments in a safe manner so that our customers have the space they needed on time. For a small minority who were temporarily and badly impacted by the lockdown measures, we were pleased to be able to assist them by providing financial support in the form of deferments and a small amount of rent holidays to help ensure they can make it through to the other side. We're very conscious of the critical role many of our customers played in keeping things moving during the crisis, whether it's the online retailers and their delivery partners, the grocers or the SMEs and local businesses, many of whom who had to adapt their businesses in the crisis. Our customers really do make extraordinary things happen, and we're proud to support them. And our third priority was to step up and support disadvantaged members of the communities in which we operate, many of whom were particularly badly impacted by the effects of the pandemic. We've long had a strong ethos of community engagement at SEGRO, and we had already planned to launch a major new initiative this year, the GBP 10 million SEGRO Centenary Fund, with its primary focus being to help disadvantaged people gain skills and confidence needed to secure meaningful employment, often in SEGRO-developed buildings. But COVID-19 created a new set of challenges because for many of these people, lack of employment was no longer their primary concern. They had much more basic needs just to survive. So we accelerated the launch of the fund, and we redirected its initial activities towards providing emergency relief where it was needed most. We've already made cash grants to 63 projects that will benefit over 45,000 people across our areas of operation. And we provided rent-free space to charities such as City Harvest, London's last-mile food redistribution charity, which can now deliver 170,000 meals a week to over 300 other community programs. I'm very proud that through the rapid efforts of the SEGRO team, we've already been able to provide targeted support worth over GBP 1 million. Moving now to Slide 4. I'm also proud that due to the hard work in recent years that has created such a strong business, and thanks to the dedication of our teams during this challenging period, our portfolio has continued to perform well, and we've delivered further growth in NAV and earnings. And whilst the pandemic is far from over and its impact on economic growth over the near to medium term are uncertain, one thing that seems clear is that the structural trends, which have supported our growth in recent years, look to be accelerating. That's why we're continuing to invest for growth. It's the reason why we secured over GBP 1 billion of additional funding since the 1st of January, and it's why we're confident about our prospects for the second half and beyond. I'll talk more about all of this shortly. But in the meantime, let me hand you over to Soumen to talk through the financials.

Thank you, David, and good morning, everybody. Starting on Slide 6, as David has highlighted, the business has proven to be resilient despite the pandemic, and that's reflected in the numbers for the first half with growth in all of our key metrics, which you can see here on this table. Adjusted profit before tax is up 6.5% to GBP 140 million. Adjusted EPS is up 2.5% to 12.5p, the lower growth rate reflecting the additional shares in issue. The interim dividend has been set at 6.9p. When you recall, our usual approach is set the interim dividend at 1/3 of the level of last year's full payout, hence, the growth rate of 9.5%. The portfolio value was up to GBP 11.2 billion. NAV per share is up 2.6% to 718p, and the balance sheet in great shape with loan-to-value at just 22%. Turning now to Slide 7 on net rental income. This slide shows the growth in net rental income, which is the key driver of our growth in earnings. Net rent grew by GBP 13 million to GBP 188 million, an increase of 7%. Rents from standing portfolio grew GBP 2.7 million, a like-for-like increase of 2%, with a positive performance in the U.K. and in Europe as we continue to capture rental growth in our passing rent. We provided GBP 3 million for potential bad debts in respect to rent billed but unpaid. Let's put that into context as 1.5% of the build rent roll. We've collected about 85% in cash of our Q2 and our Q3 rents, and almost all the rest has been re-profiled over the coming months, and our customers are sticking to their payment plans. And a very small proportion of our rents remain uncollected without agreement. In Q2, that's GBP 900,000. That's less than 1% of the rent that remains outstanding. Moving on to the next bar in the graph. The big increase in rental income has again come from developments, which -- and completion has added GBP 17 million, reflecting scale and success of our development program. This was offset by investment activity, a net negative GBP 3 million, as we've sold more income-producing assets in the last year than we've bought. Looking ahead, we expect rental income to continue to grow strongly through our development program. Turning now to the income statement on Page 8. So this slide shows the components that make up adjusted earnings. The increase in the top line rental income, which we've just discussed, was the key driver in bottom line earnings growth. Adjusted profit after tax grew 6% to GBP 139 million. Our cost ratio has reduced slightly to 21.2%, and excluding the share schemes, is 18.6%. Just a reminder on the bottom box on the right that following the equity raise in June, we have a higher number of shares in issue, which will affect the per-share metrics for the full year. Turning now to NAV on Slide 7 (sic) [ Slide 9 ]. So at the start of this year, EPRA introduced a series of new NAV metrics. And as a result, we'll be reporting adjusted NAV, which is exactly in line with EPRA's net tangible assets. The main difference between the old and new definition is the incorporation of 50% of the deferred tax, which you'd imagine is small given that we're a REIT. We've restated the 31 December number that you can see on the left-hand side of this slide to 700p from 708p. Using the new definition, adjusted NAV per share rose 18p to 718p over the 6-month period. The bar in the middle shows you that the valuation gains increased NAV by 6p, mainly from the development program. Turning now to the valuation metrics. The portfolio valuation is up 0.7% to GBP 11.2 billion as at 30 June. As you can see, the values have kept yield broadly flat where you typically look to current transactional evidence, and that was still thin on the ground a month ago. It's worth saying that the investment market for the industrial and logistics sector has reopened strongly in recent weeks. And that's the key reason why the values removed the COVID uncertainty clause from industrial assets fairly early on. It remains only for our nonindustrial assets, which make up only 2% to serve our portfolio. On rents, the values have moved ERVs up in most of our markets and reflect the rental uplifts that we've achieved. So looking at the uplift in more detail on the next slide. So with minimal movements in the market assumptions, the valuation moves are really down to the individual asset management initiatives and the development projects that our teams have been working on over the last few months. The valuation gain totaled GBP 80 million, a 0.7% gain. The held throughout portfolio grew 0.3%, as you can see on the bottom left, just under the graph; whilst the whole portfolio, which includes acquisitions and developments, added a further 0.4%. There was unusually a significant amount of transaction costs in the period, mainly in the U.K. totaling GBP 20 million, resulting from the acquisition of Perivale in June and 2 flagship land sites in the Midlands at the beginning of the year. Turning now to our financing activity on Slide 12. It's been a very busy 6 months of 2020 on the financing side with GBP 1 billion of new financing to support our growth of our business. The boxes on the right highlight this activity. You'll be aware of our equity raising in June, which raised GBP 680 million. And since the period end, we've raised EUR 450 million of new debt through the U.S. Private Placement market, and we give a notice of repaying small amount on 2 legacy high-coupon SEGRO bonds. As we all thought of that activity, we've got a very high -- very liquid balance sheet with GBP 1.5 billion of cash and available facilities. We have significant headroom to our financial covenants, and we have no material debt maturities before 2027. Turning now to Slide 13. Our robust and our liquid balance sheet provides a great platform to allow us to continue to invest. Loan-to-value is 22%. Pro forma of the recent debt transactions, the cost of debt is just 1.6%, and the average debt maturity is 10.7 years. We expect to spend over GBP 800 million in 2020 on development CapEx and on land purchases. Much of this has been spent in the first half already with the large land purchases, but there's considerable CapEx to come, as David will discuss in a moment. So moving to the final slide from me. And to sum up on the financial side, I'm very pleased to report continued growth in earnings and in NAV, a low-leverage balance sheet with lots of liquidity to support growth and an interim dividend increase of 9.5%. And with that, I'll hand you back to David.

Thanks, Soumen. Okay. I'm now on Slide 15. It's pleasing indeed that we've continued to deliver positive financial results during this period of unprecedented disruption whilst also being able to strengthen the balance sheet. And what underpins all of that is the exceptional quality of our property portfolio and the resilient operating results we've been able to achieve. On Slide 16, you'll see the usual set of operating charts, and you might, in fact, say, it looks very much like business as usual. You can see that our retention rate remains very high, just below 90%, whilst vacancy has increased by 120 basis points since the year-end to 5.2%. That increase was expected due mainly to speculatively developed space in urban markets that we completed in the first 6 months and with the 50 basis point increase due to net take-backs. Take-backs were higher than in the first half of 2019 but are in line with our own budget expectations. Having a reasonable amount of space coming back to us is a good thing, particularly if it's in a strong market like London where it offers a chance to set a new level of rent or to capture reversionary potential. And in that regard, you can see we've secured a healthy 10.4% average uplift in rent reviews and lease renewals in the period. And we've signed leases worth GBP 34 million of new annual rent, the second highest half year for us on record. Within that, we secured 17 new pre-lets to feed the development pipeline equal to almost GBP 19 million of new rent. Occupier demand across all the geographies we're operating in appears to be strong, with new records being set for some take-up in a number of -- for take-up in a number of those markets. And whilst some of that represents short-term leasing to support an immediate response to the pandemic by governments and health agencies, most of it is long term in nature with e-commerce-related demand being particularly strong. Moving now to Slide 17. Meeting the demand for new space requires development, and it's fair to say this has been a challenging period for construction management. In particular, we had to deal with a complete shutdown of activities in Italy, Spain and France. Construction was temporarily halted on most U.K. sites, and additional constraints and challenges in sourcing key materials applied in most of our markets. But our teams worked diligently in close collaboration with our construction partners to establish safe, socially distant working practices and, ultimately, to ensure our customers gain the use of their new facilities with little, if any, delays so far. In total, we completed 24 projects in the period, producing over 350,000 square meters of new space. In line with our science-based 2025 sustainability targets, we have either received or expect to receive BREEAM Excellent or Very Good or equivalent local certification on all of the eligible space we completed in the first half of the year. 16 of the projects delivered were pre-lets, including the first warehouse at our U.K. logistics park in Kettering. There were 2 further data centers in Slough and buildings on the Continent for Amazon, Alliance Healthcare, GEFCO and for Porsche for their e-mobility division. Roughly 1/3 of the space was delivered speculatively, covering 8 projects in London, Düsseldorf, Frankfurt, Amsterdam and Paris. Inquiry levels for the spec space are generally encouraging. We have a number of deals under negotiation, all the subject of early occupier interest. So in summary, it was a robust and resilient performance in the first half. But the reason we are even more confident in the future is that we believe the structural trends, which have underpinned that performance, are being strengthened and accelerated by the pandemic. The most obvious area is the rapid growth of e-commerce, which has been widely documented in the media. There are a number of quite staggering stats, which the graphs on this Slide 19 help to illustrate. And I won't go through them in detail, but there is one clear fact: e-commerce jumped across all markets with penetration levels achieving in a matter of 5 weeks what might previously have been expected to take 5 years to achieve. Now the big question is, to what extent will that reverse if and when consumers can return to physical shopping unconstrained by social distancing measures? And of course, the answer is nobody knows. The percentage share taken by online is bound to come off those COVID peaks as physical shopping gradually comes back. But many consumers have come to appreciate the convenience and the vast range of choice available online. And if you also assume a greater element of homeworking is going to become the norm in the future, it's easy to see why elevated levels of e-commerce are here to stay. All forecasters are rushing to update their predictions as to how far and how fast e-comm's penetration will go. But what I would say is the evidence on the ground from the conversations with our customers and from the market-wide takeup data is that Internet retailers and their delivery partners are indeed investing in anticipation of further sustained growth, so, too, are many traditional retailers that have to rapidly create capability to pick e-commerce orders in-store and who recognize that they will need to build out their e-commerce fulfillment capabilities in order to compete effectively and serve their customers in the future. On Slide 20, we've collected some quotes from just a few of our customers. I won't go through them, but I was inside one of these customers' central sorting hubs recently, and it was truly staggering the volume of activity being undertaken. Essentially, they were processing the equivalent of Black Friday volumes of parcels every single day and they have been doing so more or less since lockdown measures came into force. And they clearly have ambitious plans to build more capacity to enhance their network and to improve the customer experience yet further. Moving on to Slide 21. The other key structural trends, which are favorable for us and which are likely to be accelerated by the pandemic, are supply chain optimization, greater warehouse automation and the growth of digital data. On supply chain optimization and resilience, there cannot be anywhere in the developed world who hasn't become acutely aware of the need for resilient supply chains, whether it's for PPE, virus testing kits or the supply of everyday essentials. Some supply chains were found wanting during the pandemic, and we are seeing a renewed focus on this by governments and businesses alike. We're likely to see more localization or onshoring of production and also more inventory being held locally to provide resilience against supply chain disruption. Brexit and global trade wars will only add to these pressures, and that means more warehousing demand in the future. Increased warehouse automation is also partly about supply chain resilience, but it's also being driven by a shortage of labor and the need for efficiency gains to meet consumer demand and drive down unit costs. But if you think back to the pandemic, the only warehouses that didn't work effectively were the ones unable to operate with appropriate social distancing measures. Some even had to shut down for a period. So the answer we're sure is more investment in automation, further demand for large-scale, sustainable and well-connected fulfillment centers and almost certainly longer leases. And finally, there's also been a surge in the generation and processing of digital data during the crisis to facilitate homeworking, the use of video streaming, increased social media activity and the downloading of content for home entertainment. And if you factor in the ongoing trend of businesses moving their IT functionality to the cloud, it all translates to a very positive outlook for the data center market, with some estimates suggesting it could grow by 15% a year between now and 2024. The state's gazette reported only this week that planning applications for new data centers in the U.K. during the 3-month lockdown period exploded and have already surpassed the figures for the entirety of 2019. These favorable drivers of demand are already being borne out by many conversations we're having with our customers, and they explain why we have good momentum going into the second half and why we're continuing to invest for growth. On Slide 23, you can see that during the first half, we invested a net GBP 631 million of capital. We continue to be very selective about acquisitions of income-producing properties given where pricing levels are. But we are in a position to be able to offer speed and certainty to vendors, and that can be a competitive advantage at a time like this. We were, therefore, very pleased to have secured the purchase of Perivale Park, a rare and superb located urban warehouse estate in West London that offers an opportunity to drive value from the existing buildings alongside medium-term development potential. As in the last few years, however, the major focus of our investment activities continues to be development, both CapEx for the construction program, which continues apace, but also to secure new land to provide further development opportunities. Particularly notable in this period was our acquisition of 2 fantastic sites for what will become flagship SEGRO Logistics Parks in Coventry and Northampton. Both of these were originally option sites secured via the Roxhill partnership and are now fully consented with the ability to deliver over 8 million square feet of space on a multiyear and multiphase development program. And finally, on sales. Having completed most of our originally planned 2020 divestments in the latter part of 2019, disposal will be lower this year. That said, we will remain disciplined about our portfolio shape and quality, so we will continue to trim around the edges where it makes sense. And that included, in the first half, exiting the Austrian market where, having enjoyed a successful entry on the back of a customer request a few years back, we saw little potential to grow that into a scale position. And so we've chosen to exit the market altogether. In terms of momentum, our active on-site development program is summarized on Slide 24. You can see it comprises 34 different projects, representing 809,000 square meters of space and GBP 45 million of rent. That's equivalent to 10% of our existing headline rent, went up and let. Interestingly, 85% of this pipeline is repeat pre-leased business with existing customers. 8 of the projects are in the U.K., and they include urban schemes in East and West London as well as our largest-ever London pre-let, which is for Ocado and which is due to complete later this year. In the 10 filing, we're building another data center, and we have 3 further urban developments underway. And since the half year, we've completed a pre-let at East Midlands Gateway to Games Workshop, our fifth warehouse on this site. The remaining 26 projects are all in Continental Europe, and they include big boxes for Amazon, Leroy Merlin and Metro as well as for new customers, Garmin and [ Clustier ]. And we have urban projects under development in Paris, Amsterdam, Warsaw, Barcelona and Milan. Again, we're targeting a high BREEAM or equivalent local certification on most of these schemes. Now turning to Slide 25. Those active on-site development projects form the first line of the table on the right-hand side of this slide. On the second line of the table, we have our near-term pipeline, which predominantly consists of pre-lets at advanced stages of negotiation. The near-term pipeline represents a further 450,000 square meters of space and GBP 33 million of potential income, which is roughly double the size of the near-term pipeline a year ago. The third line in the table represents the remaining projects we are planning on our additional owned land, 2.3 million square meters of space and GBP 129 million of rent. That element of the pipeline has grown substantially in the period as a result of those 2 large previously optioned U.K. logistics sites, which have now moved into our owned land bank. And that then leaves optioned land as the final piece with the potential to generate a further GBP 69 million of rent. Overall, the development program, both active and potential on our owned and controlled land bank, represents a fantastic store of further growth opportunity. And with average development yields between 6% and 7%, it's also a highly profitable one. And so putting it all together and moving on to Slide 26, here is the usual bridge of income that we present every 6 months. You can see that without allowing for any further rental growth or indeed factoring in any further disposals, we have the capability to almost double our cash passing rents to GBP 794 million. Following the equity raise and the debt raise earlier this year, our balance sheet is well positioned to support this investment plan with a low cost of debt, modest financial gearing and GBP 1.5 billion of cash and credit lines. And we also have a fully staffed group of in-house local expertise on the ground in all of our key markets to deliver this growth. Before I conclude then, let me give you a quick update on how the portfolio stands as at the 30th of June 2020, which is summarized here on Slide 27. It's a portfolio that is in fantastic shape as a result of the work that we've carried out over the past decade and which has paid off in terms of its resilience to the effects of COVID-19 and its ability to continue growing in value despite all of the recent disruption. Assets under management, including the assets we manage as part of our SELP joint venture, are now GBP 13.3 billion, an increase of over GBP 1 billion since the last year-end. The portfolio remains predominantly weighted towards urban warehouses, but with a meaningful and complementary exposure to big-box logistics assets. Over half of the portfolio is in the U.K., which remains a very attractive market. Our business on the Continent is also expanding at pace as e-commerce penetration gains traction and logistics supply chains continue to modernize. Since the last year-end, our businesses in both Italy and Poland have joined France and Germany in having over GBP 1 billion of assets under management, whilst good progress has been made in the smaller markets, particularly in Spain and the Netherlands. It's a portfolio which is second to none, and it's one that I remain confident will continue to be a source of sustainable income growth in the future. So moving now to Slide 28. We're going into the second half of 2020 in great shape and as confident as ever about our prospects for further growth, notwithstanding the uncertainties caused by the coronavirus pandemic. We do have a fantastic portfolio of assets and a great team to manage it. We have a superb, mostly on-balance sheet land bank to support further profitable development. And the structural drivers that have been benefiting our business over the past years are being accelerated by the COVID-19 pandemic, which all bodes well for occupier demand and investment market pricing as we go into the second half of the year and beyond. So thank you for your attention, and we'll now move to questions. You can ask questions either through the web platform or over the telephone. We'll take questions from the telephone first. So Roberto, can you please open up those lines for questions. And I'm sure Soumen and also Andy Gulliford, our COO, will be keen to help answer those.

[Operator Instructions] We have one question from the line of Osmaan Malik from UBS.

Just a couple of questions here. Firstly, the Coventry and Northampton land acquisitions look interesting and large. But what I want to ask you is that do you expect to develop that through a decade? I thought one of the points of the option agreements was that you can draw land down without you working on or going to be developed over the next 5 years or so. So I was just wondering about -- potentially it's -- because it's such a big development. [indiscernible] Can you just give a bit more detail on that?

Os, I don't know if it's a fan of yours or Soumen here. I -- it's really a bad line. I couldn't actually quite make out your question. Maybe try one more time. If it doesn't work, perhaps, let's take it on the web platform.

Let me try on -- is this clearer?

Oh, that's quite clear.

Yes.

Apologies for that. Okay. Yes, just the question was one of the things you mentioned it's going to take a decade to build out the land that you bought at Coventry and Northampton. And I'm wondering about that relative to, I guess, the previous strategy, which was really not to draw a land down unless you could develop it over the next 5 years. Could you just elaborate a little bit, maybe just the sheer scale of these developments, but why it takes so long? And what the IRR would be over a 10-year period?

Yes. No, it's a great question. You're absolutely right. If you -- and you have a good memory. If you go back to 2011 when we launched the strategy, we said at that time, we have too much land and some of it was in the wrong place. But we said we were going to be very disciplined around controlling the land bank. And that's because most of our strategy was focused around urban schemes and getting some exposure to big-box logistics. But we've never really undertaken the kind of scale of development of big flagship logistics parks that we're now talking about. And that was a strategy that started to change when we entered the Roxhill partnership, which we concluded was the best way of getting access to really good-quality sites. And as we've talked about in previous presentations, by developing these very large, ring-fenced logistics parks, you've got much more capability to provide a holistic, sustainable offering, including all the things around the park environment, around the ecology and the diversity and tree planting around the facilities and all that you can offer the occupiers. We think those parks are much more sustainable. Now it's really hard to get land and to get opportunities to do them of that scale. That's why we went into the Roxhill arrangement a few years ago now because it was the best way of getting access to those. But it did mean that for part of our portfolio, some of the land was going to be much more longer term in nature. I have to say, if you look at the -- and the first of these, of course, was East Midlands Gateway. If you look at the first one, East Midlands Gateway has been a phenomenal success, and we're well ahead of where we expect it to be in that program. As I said earlier, our fifth development is just completed, and there's more on the way. So we think these are fantastic sites. They're really rare beasts, but they will take a little bit longer. Ultimately, there's some work to do in terms of infrastructure and getting them ready for development. So it will be a year or 2 before they're ready to start marketing. But we have every confidence that they will be brilliant additions, and the occupier demand will be there for the reasons we've already talked about. In terms of returns, I mean, we take a similar sort of approach. We have an IRR target, high single-digit IRR target, unlevered on most things we do in development. And we make sure that we build in plenty of sensitivity and contingency into our assumptions to ensure that we can do that.

Great. Interesting. Just one other question, completely differently. So I was wondering if you could talk us through a bit more on the opportunity you see in data centers. I believe it's about 6% of your headline rent and I think it's mostly in the U.K. So what's -- I mean how core to your business is this? How will you pursue it? I guess, considering the amount of competition there is from global players, the planning applications data point you mentioned, so how core is it to your business? How much -- how do you pursue this opportunity? How do you, I guess, shift the expertise that you have in the U.K. out to Continental Europe?

Yes. It's a great question. And I'll maybe let Andy give you some thoughts on that because it is a great question. And we've got a fantastic position in the U.K., still lots of new opportunities coming through. The question is, how do we do it in Continental Europe and elsewhere? And how do we access those opportunities? So Andy?

Thanks, David. Yes, as you say, Osmaan, a fantastic opportunity. I mean the trading estate is actually the second largest global cluster of data centers, the largest being in the States, but quite a major feather in our cap when we're talking to the data center market and the data center world. And we're clearly very strong there, have a lot of expertise, knowledge and most significantly, a lot of customer contact. We're branching that out now and are looking at sort of London data centers, which we actually purchased our first data center over in Croydon. And we're actually looking at some data center development in West London just at the moment. So that expertise and knowledge is starting to pan out in the Southeast. On the Continent, we are extremely well placed because the Tier 1 sites of Frankfurt, Paris and Amsterdam are very much in our collective focus. And what we're trying to do is get our expertise and customer knowledge across onto the Continent. So we've actually got some resource that we've placed purely into a data center group and activity that is working on a group-wide basis. And we're looking for opportunities, particularly in those Tier 1 markets, but also, in fact, in Warsaw and Madrid, which are pretty strong, too; Marseille coming through as well, actually, with a link to the African continent. So very conscious of it, want to push on, putting resource into it and largely exporting our customer relationships to move around the Continent with the main players.

We have last question from the line of Colm Lauder.

I just want a bit more on some of the detailed points, just looking down in terms of sort of rent collection and expected trends feeding through here. And obviously, just looking at the adjusted figure to the end of July, you have 99% of the GBP 92 million collected that was for Q2, although with GBP 10 million re-profiled and GBP 3 million or so written off, and that re-profile then rises to GBP 12 million. Could you perhaps clarify in a bit more detail what is this -- the extent of the re-profiling? Is it mostly perhaps U.K. tenants who are paying quarterly have moved to monthly? Is there a degree of rental reductions? What is the timing horizon on this? I know you gave a number of points saying that's going to be paid in the second half of 2020. Is that consistent? I know it's a small point in the bigger scheme of things, but this is quite interesting to understand how tenants have reacted to this and what the overall referral filing comment means.

Sure. Soumen, why don't you take that one?

Yes, of course. Colm, so we've got a slide in the back, Slide 40, which gives some more detail on the rent collection numbers, both by U.K. and by Continental Europe and by Q2 and Q3. So yes, we've collected 99% of what we expected to collect in Q2 and 95% of what we expect to collect in Q3 after taking into account that re-profile rent. And the re-profiling takes the form of, as you say, rate mainly moved from quarterly rents to monthly rents, which we expect to be paid over the next few months. If you take the Q2 numbers, which are probably the ones that are sort of the best analyzed because obviously, we have the most time to sort of -- to analyze them, look, we've collected 89% in cash terms of what we will do. The remaining -- as we're sitting at the 31st of July, 10% of that is re-profiled and only 1%, as I said in my remarks earlier, GBP 900,000 only remains outstanding. If you look at the way the collection has started to evolve, because we put a number of updates in the recent months, that 89% today compares to 85% at the 8th of July, it compares to 82% on the 31st of May and it compares to 72% to the beginning of April. So you can see that re-profiling is absolutely genuine. You can see that every month, we're collecting 3% to 4% of that rent, which is why we're taking a view that actually very little of that will remain uncollected. Q3 is frankly tracking ahead of Q2. So we've reached 82% after 1 month of the quarter, whereas it took us 2 months to do that in Q2. So we can feel -- it's certainly talking to our customer base that people are doing what they said they were going to do there. They're sticking to the plans that we've agreed with them. And hence, we've only felt that they need to recognize GBP 3 million of a provision against the rent, which, as I said in the call, is only 1.5% of what we've built.

Yes. And that's a good point. Just to make, Colm, on your comment, we haven't written off GBP 3 million. We've made a provision for GBP 3 million. We will see in the fullest of time whether that provision is too much or too little. But it's only a provision. We haven't written anything off yet. Or if we have it, we've given some very tiny rent-free concessions to people who are very, very small businesses, providing the amenity on some of the estates. We've had another similar question on the web from Lucie at Green Street. And I think probably we've covered that. But also, the question was, is the minus 0.2% change in like-for-like net rental income after other mostly due to a lower collection rate in Continental Europe than in the U.K.? And if so, in which countries, asset types are most affected? So the like-for-like question, Soumen, do you want to pick that one up?

Yes, happy to. Lucie, so that's referring to the net rental income table in the press release on Page 17. So prior to the provision that we just talked about, the net rental income like-for-like is up 2%. We've taken a GBP 3 million provision in the first half against the rent that's not been billed. And then the other is mainly, as you've seen in the notes on that table, relates to corporate center type costs. These are overhead charges, but really, we take at the -- in the center, and therefore, don't really relate to the evolution of net rental income at the business unit level. If you then take all those items to account, you get -- you take a 2% positive change to a minus 0.2% negative.

Okay. Operator, any more questions on the line? I think probably not, otherwise, we might have heard from you. So we've got a question from Fabien at Heitman. On the back of COVID-19, we've seen that the main weakness of SEGRO seems to be the exposure to cargo and airport tenants. Is there any action plan moving towards to mitigate that risk? Let me make a couple of comments and Soumen or Andy can jump in as well if they want to. I mean the actual cargo volumes were clearly hammered in the early part of COVID because there were no flights. I think volumes fell 62% between April 2019 and April 2020, if you compare those metrics, which actually wasn't anywhere near as bad as the passenger numbers, which were down something like 95%. What's happened is that cargo activity has gradually recovered. And the way that's happened has been that a number of dedicated cargo flights that previously wouldn't be economic to run through Heathrow because of the relatively more profitable passenger landing and takeoff slots, a number of slots were opened up for cargo and they were taken up. And so cargo started to recover. And now in June, they're down 32% compared to the previous year's June. So it was a difficult time in the early part of lockdown, but it's definitely got better. And I'd say now a lot of the cargo activities and cargo handlers are much more active. In terms of our own positioning, clearly, it's something we have to watch and monitor. But we're very comfortable with our Heathrow exposure. We do think that as and when we do come out of lockdown measures completely, that having a really key hub airport in the form of Heathrow is going to be vital for the U.K.'s recovery. And we think it will prove to be well worth making a major investment in, as we already have. The other point to make about Heathrow and particularly our portfolio, although we call it London Airport as part of that portfolio, a very large part of the Heathrow market is not specifically air-related. It's, of course, in a fantastic location in West London. So a lot of the occupiers around Heathrow are air-related, but also a very large chunk of them are serving the broader West London market. And that remains a very attractive proposition from our perspective. So of course, we continue to monitor the shape and the performance of the portfolio, but we don't have any plans to do anything drastic in that regard in terms of Heathrow, not at this stage anyway. Anything to add, Andy, on that?

Just -- I think you've covered it, David, but just one small point. Even on airport, the integrators, so it's the cargo handlers who've had the toughest time, the integrators, so DHL, FedEx, UPS in tune with the kind of online expansion, parcels, delivery, et cetera, have done very well through the pandemic. So it's quite a narrow band of folks who have struggled.

Good. Thanks, Andy. And thanks, Fabien. So that's really for the questions, and it doesn't look like there are. There's just one final part of this morning's presentation, which will only work for those of you watching on the web. As part of our centenary celebrations, we created what is known as a kinetic sculpture. It lasts for about 3 minutes. It features only products appearing in our buildings. It has been shot inside one of our warehouses in a single continuous take. And if you're into video art, this apparently is quite something. For those of you not online, it is available on our website. But I hope you enjoy it. And at this point, we will bid you farewell. And thank you, again, for joining us this morning.