Tritax Big Box REIT plc (BBOX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Tritax Big Box REIT Call. My name is Darius, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Colin Godfrey, the CEO of Fund Management. Please begin.

Good morning, everybody. It's Colin. On the call, I'm joined by James Dunlop and Frankie Whitehead this morning. I really appreciate your time. We're thrilled to be making this announcement this morning in relation to the planning and pre-letting at Littlebrook. It's a highly significant transaction for us because it demonstrates delivery against our strategy and validates our decision to acquire the development land, which we did now back in 2017, approximately 3 years ago, applying our expertise through a [ past ] forward funded development. In the development process, we've been able to deliver success here at the same time as reducing risk by applying our knowledge of the market needs, leveraging the strong relationships we have with customers buying well. And you see shortly that we've acquired this site at a very, very attractive price and also applying a largely pre-let driven model to reduce that risk. And that's involved patience, and that has now, I think, paid off in dividends. We acquired the site for GBP 65 million. And when one adds on the cost of demolition and clearance of the site, the all-in cost is under GBP 1 million per acre. And that compares with increasing land values in London over the last few years with recent comparables, including early this year at approximately GBP 7 million per acre, albeit for smaller lots and in perhaps slightly more densely populated locations. But nonetheless, I think it demonstrates the Gulf. And this site sits in our book, in our view, at a very, very sensible level against recent comparables, so offering a significant opportunity for upside. So putting Littlebrook into context. Well, to remind you, we underwrite this site project on the basis of 1.7 million square feet total delivery across the 114 acres of gross land. And of course, this particular letting on its own is 2.3 million square feet and, therefore, exceeds our total target in terms of the square footage. It will be the largest logistics facility of its type in Europe for a single building ever created. Therefore, it's a landmark deal, and we're very, very proud about that. And obviously, that translates into what is, in our view, also a market-leading lot size. The ground floor area of the building is 604,000 square feet. And you'll be able to work out, therefore, from that, that the building has a number of mezzanine floors. There is a ground floor level plus 3 structural mezzanine floors. Now the rent is confidential, but you'll be able to work out the rental tone from the numbers in the press release. And we believe that this rental tone, which is essentially a net effective rent to the occupier, provides good opportunity for rental growth given that it's below our original underwrite for the site. And we originally targeted a rent range of between GBP 8.50 and GBP 9.75 a foot. It's in a super prime location, in our view, inside the M25, next to the QE2 Bridge and the River Thames, highly prominent site with excellent transport infrastructure links. But it's also a critical significance to our customer and probably one of the most important buildings in Europe, both in terms of the Southeast presence, their fulfillment, both to other buildings and also potentially directly to the doorstep of consumers. It also anchors the overall Littlebrook development, both financially and reputationally as the preeminent logistics hub in the region. The customer, who must remain confidential at this stage, is well-known to us. It is an existing customer on our tenant roster. And that customer is going from strength to strength as a consequence of the continuing shift on online but is also benefiting from an acceleration as a consequence of COVID. And we expect that to have a profound effect on our market in moving the drive for online adoption ever more quickly. We've signed a 20-year lease with them, which is annual upward only index-linked rent review subject to the Consumer Pricing Index covered at 1% per annum and capped at 3% per annum, which provides us with increases in rent each year. We will also receive rent -- effective rent by way of a development license fee during the construction period estimated to be around 13 months and so, therefore, providing over 21 years of income. And due to the preparations that have already been taken place on site, we expect the vertical build of the building to construct almost immediately. So you'll see, if you drive past, that there will be activity on the site very, very shortly within the course of the next week or so. The total development cost for delivery, including land and demolition is around GBP 205 million, of which GBP 164 million remains to completion. And you'll, therefore, be able to work out that our profit and cost is around 30%. The yield on cost is in line with our previously stated development target for the entire site, which you recall is 6% plus noting, of course, that, that was based on an assumption for 10-year leases. And of course, this is significantly longer lease and to a higher caliber covenant than we originally would have expected. And in this one transaction, we're expecting to deliver all of our original expectations for profit on development of the entire site. So a very significant benefit to our shareholders and a fantastic site for the operation for our occupier. And just to break down the rent credentials for you. You'll be able to note that there is a ground floor plus mezzanine -- structural mezzanine floors. Traditionally, the valuers apply a 50% rate to the mezzanine floors. So whilst we can't state the rate right now, we believe that this rental tone for the type of building it is with structural mezzanines to be in line with our expectations. And as I said earlier, we think it will offer a good growth opportunity moving forward. The last thing I'd like to just mention is that the building has high sustainability credentials. It's going to have one of the largest photovoltaic roofs in Europe. And this is linking in with a number of charging points at the facility. The building will be home to around 2,000 staff and, therefore, charging points and that being powered by photovoltaic is very important. And as a consequence of that, it will be, as far as we are aware, the first building of its type in Europe that will not require a gas supply in heating the building. So we're very proud of the green credentials of the facility of this mega shed in a last-mile location. Hopefully, this covered some of the primary points. We're now going to open the floor to questions. So if you haven't already, if you please be kind enough to make your desire to ask a question, and then hopefully we can answer the questions in turn.

[Operator Instructions]

Just while we're waiting, I think I might -- I'll just add that this customer was originally interested in Phase 1, and their requirement was too large and, therefore, we moved them on to Phase 2. But of course, that didn't have planning consent. So that required a new planning application. And to remind our people joining us on the call this morning that we have already in place planning on Phase 1 for 450,000 square foot building. That is a ground floor only number. The building has a capability under the 20-meter e-site planning consent, again, similar to this one to have several structural mezzanine floors and so could, therefore, be capable of delivering over 1.5 million square feet overall. In addition to the 450,000 square foot facility we have -- planning we have on Phase 1, we've estimated that the remaining part of Phase 3 and also Phase 4 would be capable of delivering approximately 300,000 square feet on the ground floor area basis and, again, subject to planning potentially to utilize volume for further structural mezzanine floors, so at least potentially 750,000 square feet on a ground floor basis to come after this existing facility. And with that, do we have any questions?

Yes. We got a question from Green Street from Peter Papadakos. Guys, do you mind unmuting Peter's line, please?

Just a couple ones. One is just on the scheme itself. So I had nothing better to do than see the -- on each of the decision by the local authority, they're giving planning last week. And one of the things highlighted there was just the axis and two, from the side of the brand and the delivery vehicles. Has that high restriction limited essentially the ability that you were thinking in terms of what rent you charge the operator for that in terms of just the efficiency of the operations of the operator? Is that partly one reason why...

No.

No? Okay.

No. The short answer is absolutely not -- no. The terms of the transaction were agreed prior to planning, but all of the parties have collectively worked to reach an agreement, which we're delighted with. The planning authority provided a unanimous approval for this transaction. And in fact, the chair of the committee said that it was the highest caliber submission and team, including developer and the funder, the council had ever had submitted, so they were highly complementary. I think it's important to note that the operator, the occupier of the site, will be typically using the building outside of peak hours for traffic movers, and that includes movement of shift pattern work for employees in and out of the building. And it is subject to restrictions during peak hour flow movement, which they were expecting, which we understood right from the start. And we work within those parameters to ensure that the facility is fully operational and yet limits the impact during peak travel periods. There has also been a contribution as part of the planning process in terms of Section 278 and Section 106 to provide significant capital contribution to the local authority, which we understand they're going to be using to improve traffic management in their own junction 1 area, the M25, to improve traffic flow.

Yes. And then just more generally if you can, Colin, comment on just across the rest of the portfolio, how are collection rates going. Anything maybe you can just comment on performance would be helpful.

Specifically about rent collection?

Yes. Exactly. Exactly.

Yes. Okay. So perhaps on rent collection, Frankie, our FD, can take up that point. I would say this is a general tone when you say how things are going. I think as the COVID dust starts to settle, we have seen a significant uptick in occupational interest across our db Symmetry band platform we're feeling coming through anecdotally from the market, including an uptick in investment interest as well. There have already been some quite strong transactions taking place earlier this year, which we talked through the prime end of the market being particularly robust in terms of pricing point. We have seen a bit of a polarization. I think we're seeing where the SME market has suffered a lower level of rent collection. And that's manifest probably in a slight weakening in the yields of what I described as fringe prime, secondary and certainly tertiary investments. So we're particularly well insulated at the prime end of the spectrum. But generally speaking, we are seeing an uptick, and I think that, that bodes well for our developments and the occupation market more generally, particularly reflecting on the fact that at the end of last year, there was over 10 million square feet of logistics space. It was under offer. And really, that can have been kicked down the road during much of 2019 due to Brexit and the general election. We were expecting 2020 to be a particularly strong year for logistics. And of course, some of that -- a large part of that was held in the bank as a consequence of COVID. So there's a real pent-up pressure now. And indeed, I think we're going to see more of that as a consequence of the acceleration to online. And if you look at the online operators in food, home delivery, you look at the DIY and home wares and, indeed, all of that filtering over into the third-party logistic space as well. Those are the sectors that are really seeing an uptick in activity right now in terms of customer demand. And with -- and we believe that, that will give rise to significant increase in occupational requirements moving forward during the remaining part of this year and certainly, into 2021 and onwards. And that increase in online adoption is likely to mean that there are going to be a lot more logistics buildings in the U.K. in the near term. Perhaps at this point, I'll ask Frankie to step in and just talk about rent collection stats in terms of what we've announced so far to our shareholders and to the market.

Thank you, Colin. Good morning. Hopefully, everyone can hear me on the line. If we take the financial year 2020, just taking a step back, the Q1 rents, which were receivable last December, we collected 100% rent due. The Q2 rents, which were due a combination of 25th of March and 1 April, we made an announcement to the market on the 8th of April of having received 86% of rents as at that date and with an expectation of the rent collection stats increasing to 96% by the end of May. And we can confirm that we have received 96% of those rents in respect to Q2. There were 4% that we were negotiating with and trying to assist with our cash flows. We have had a commitment to the reprofiling of some of that rent and remain in negotiations with -- for certain tenants on the balance, which is obviously a very strong performance in the context of logistics and wider commercial property. Looking forward to Q3, I think it would be unwise to make any predictions. We clearly remain cautious around the remainder of the year. There's a lot of uncertainty to play out. But I think we will see tenants seeking to move to monthly rents from quarterly rents in advance, certainly for this quarter, but it's unwise to predict where we'll end up with the rent collection data around the corner. So that's where we are in respect of that.

We'll move on to the next question.

[Operator Instructions] We currently have a question from [ Shakista, Blue Dolphin ].

I got 2 separate questions, but they're all related to this new announcement. Can you please talk about how this development will be financed, when the completion is scheduled for? Also, if you can share the sort of the details of the forward funding in terms of how much you will be putting aside to finance that, what's the coupon on forward funding would be? And the second one -- and also, one more, sorry. And also, is the valuation uplift from this transaction is already reflected in the NAV? And the separate sort of question is can you also comment on average rents in that area? I know there's other logistics units around, so it would be sort of good to get a perspective.

Okay. Well, done [ Shakista ] because I count that as 5 questions. I'll start with the last one, if I may, and then I'll hand over to Frankie. Look, average rental tone on the eastern side of the M25 is around between GBP 10 and GBP 11 a foot for prime logistics assets, but it does depend upon the exact location, proximity to the motorway and also, obviously, the size of the plot and the size of the building and the modernity. So all of those factors come in to question. If -- and obviously, this building is a different type of building in that it is a very, very tall building. It has structural mezzanine floors, and those buildings are typically rentalized in a different way, as I alluded to earlier, with -- I mean the value was typically apply 50% rate to the structural mezzanine floors. And then from the overall rental tone, you can bring back the ground floor equivalent. And so this ground floor equivalent rent here is lower than you would see on a single height production facility around the M25, but that's to be expected. And I think we'll see more of this moving forward. We are expecting to see -- we are an island. We're densely populated. They're not making any more land. And particularly in around major city centers, I think we can see -- we expect to see increasing utilization of height and more mezzanine floors. If you look at someone like [ Toki ] by the way, for example, they have much taller buildings and many more floors. And that's the direction of travel we expect the market to move in, in the future. I'll hand over to Frankie, and Frankie will touch on with you how we're going to finance this periods of completion, the license fee amount and the valuation outlook at this point in relation to the NAV. But just to sort of pick up on point #2 there, we are expecting the construction period to be around 13 months. And we are expecting to commence construction of the building almost immediately, potentially this or next week, and then that will be formalized. So we're not wasting any time. So you should see steel going up in the not-too-distant future if you gaze across when driving over the QE2 Bridge. Frankie, over to you.

Thanks, [ Shakista ]. So in respect to the NAV position, this is a new transaction for us, obviously. So it wasn't previously taken into account in respect of any valuation. The profit on cost expectations that Colin talked about, we do expect to capture the vast majority of that within our next valuation point, which is the 30th of June at our half year date. So that's the NAV point. In respect to financing, we do have significant headroom within our credit facilities. We have committed to this deal through those existing credit facilities. As Colin said, the cash flows will effectively flow out from this week for 13 months, not to the expected date of practical completion. On a pro forma LTV basis, if we factor into -- at all of our existing developments, which are taking place at Durham, at Raunds, at Biggleswade and now at Littlebrook, the pro forma LTV, all other things being equal, is around 36% in Q3 2021, would go from Q3 2021. Having said that, that is with the context of some target asset sales that we mentioned at the time of our annual results and a disposal program that is underway. I think that's your question, that the license fee, that's the equivalent to the rent that we will be receiving during the 13-month construction period. And that's equivalent to the annual rent that the tenant will be paying once take-up of the lease.

And the lease in excess of 10 years, you said?

It's for 20 years.

20 years. Yes.

Frankly, the valuation uplift, obviously, is not currently incorporated from this transaction. It's is not currently incorporated within the last reported NAV. Yes. Correct. Does that answer your questions, [ Shakista ]?

Yes.

Thank you for your questions. Perhaps we can move on to the next question, if there's any.

We have a question from Sebastian Isola from Peel Hunt.

Sebastian from Peel Hunt. I have 3 questions, if I may. I mean the first one is this, obviously, is been worked on for a while. And I'm just wondering whether the occupier was spurred on by what they've seen in COVID as an increasing adoption of e-commerce or whether this was just a normal course of play and it's going to happen now anyway? And then another question on whether the Tritax Symmetry team were a fundamental part of this or whether it was largely a team in place and [ market ]? And then the third question is just on the availability of Big Boxes sort of more in the Midlands, obviously, than London, but whether you've seen any sort of good absorption of the supply that was available before COVID and whether that sort of leads you to have more confidence on the db Symmetry pipeline?

Yes. Thanks, Sebastian. Good questions. So the first question, yes, the transaction has been under consideration. We're working with that for approximately 18 months that involved the planning but also the specification of the building, which is quite sophisticated and negotiating with the occupier. And so -- now this deal was already essentially struck for all intents and purpose prior to COVID. But as I alluded to earlier, we do expect a general increase in demand for online as a consequence of COVID. I mean the logistics sector has really kept the U.K. economy going to some large degree when it was still in lockdown. So I think everyone's -- the population generally is now recognizing the importance of these buildings and the role that they have to play. The next question, this particular transaction has not involved Tritax Symmetry, albeit that a large part of the knowledge base that we have across the market and what's going on is sort of shared resource within our business. So much of the same principles are applying here in what we're seeing as to what we're seeing on the Symmetry platform. And indeed, we're in great shape on that. There's been an uptick in occupational activity. Obviously, I can't mention anything specific to you. But we do have a number of buildings under offer that we -- that were speculatively constructed prior to the acquisition of the Symmetry platform, which we inherited. And we've seen an uptick in occupational interest more generally in terms of pre-lets across the platform. And then, of course, there, we've also benefited from a number of planning consents recently, which we won on the Symmetry land asset. So -- and of course, you can't deliver a pre-let without planning. So that's the first piece of the piece of the jigsaw. We're ahead of schedule on the planning for those buildings as well. Coming on to your third point in terms of availability. Well, I think if we look back at last year, I think the first point to note is there has been, I think, some misunderstanding in the market regarding general chat about an increase in speculative supply of Big Box logistics. And in fact, I think the language is at fault here because what we've seen is an increase in supply in the smaller scale buildings, particularly in 100,000 to 250,000 square foot category where we've released data previously. But if you look at the larger scale buildings of over 500,000 square feet, actually, we saw a 50% reduction in speculative activity last year. And that involved only 2 buildings, one of which was let during the course of the year. So in fact, there's an acute supply side control mechanism in the larger scale building category. This is partly as a consequence of developers not willing to speculate the cost of a building without a pre-let. And that goes in hand-in-hand with the fact we typically tend to see the larger buildings on, what we call, the design-and-build basis, but also, I think, talked to the planning process, which is a lot more difficult and takes a lot longer converting an agricultural land parcel into achieving planned consent for the [ 8 ] logistics use class. So that gives us a very warm feeling in terms of supply and demand dynamics, which we believe would, therefore, give us very good long-term rental growth prospects above inflation but at a level which we believe is sustainable, and that's the important thing. For instance, in the -- yes, we intend to deliver all building sites across the logistics platform from smaller to larger scale but, of course, our average is 8.5 million square feet, and that is likely to remain the case. But of course, Littlebrook is a big box in a last-mile location. And we do expect the -- I mean if you look in the last-mile location, for instance, in London, it saw double-digit rental growth in recent times. And that's come off very, very significantly, even in the last few months, actually, if you look at the reports that come out from some of the major agencies. So I think much -- to a much more normalized and supportable long-term level because clearly, with the backdrop of underlying inflation in very, very low single digit, just over 1% per annum and with a prospect now of a fairly deep recession is clearly unviable for SMEs in the smaller buildings in and around the capital to continue to pay double-digit rental growth. They can't afford to do it. So we think that the market's come back to much more sensible normalized levels in relation to rental growth but still at an attractive level. And in a sector, which has remained incredibly defensive into the face of COVID, I think it's proven its credentials. If you look at the automation, by way of example, those buildings, which have been significantly automated have essentially already had social distancing embedded within them. And therefore, those occupiers, by way of example, Ocado, have been able to not only continue operations almost unabated but significantly increase output. I think we're going to see a lot of other occupiers looking to that example as being a way of future proofing their businesses because clearly, some businesses can't afford to take a mega hit like this again as a consequence of another potential virus coming around the corner. And what we're hoping is a 100-year event, clearly, which has been talked about. But nonetheless, we've had MERS and SARS and now COVID, and we could see more of this. So I think generally, the industry has got to become a lot more street-wise and plan for these sorts of eventualities in the future. And automation is going to be a key part of that resilience. If there's anyone with further questions, please let the coordinator know. We can move on to the next one.

We have a question from [ Peter from Kepler ].

Could you tell me whether the signed lease price is in line with the expectations you had back in 2017 or what the difference is and also taking into account the mezzanine floors?

Good question, Peter. Well, we did not announce back in 2017, or more recently, our expectations on -- for a rental tone in relation to an overall rent because we didn't want to count our chickens and we didn't -- and we wanted to, to all intents and purpose, under promise and over deliver, which is why we've been very, very cautious in the information we provide to the market. But that said, I think that this rental tone is at least in line with and probably slightly ahead of where we expected the rental tone to be. But of course, that was back in 2017, and land prices have moved on since that time as have rents. So we're very, very pleased with the level of this transaction. But it is also at a level which we think offers great value for the occupier and those at which I had mentioned earlier, we believe will give a good opportunity for rental growth of the current rental tone.

Okay. Including the mezzanine floors..

That's correct.

The total rent is higher than expected back then?

The way that -- of course, the total rent is significantly higher than the rent, which we originally forecast on the ground-floor-only basis because we underwrote 1.7 million square feet across the whole site. This one building alone is 2.3 million square feet, so that talks to itself. So clearly, there is an element of discount for the overall square footage you're going to receive in -- sorry, the overall rental tone you're going to receive as a consequence of a multi-day building. But nonetheless, the rental -- the total rental receipt from this building is very much higher than we originally had underwritten because we originally were only underwriting ground-floor-only area basis. Perhaps we can move on to the next question.

We currently have no further questions.

Thank you, moderator. Well, ladies and gentlemen, thank you so much for taking the time to join us this morning and what is a really groundbreaking landmark day for the company, and we're absolutely delighted that our vision has paid off all of our shareholders and all of our stakeholders. And thank you for your time and your support, and enjoy the rest of your day. Thank you for joining us. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.