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

Good morning, and welcome to Tritax Big Box's results presentation for the financial year ended 31st December 2021. I am Ian Brown, the Head of Investor Relations for Tritax. Before I hand over to Aubrey, our Chairman, I will quickly run through some housekeeping points. Firstly, today's presentation is being recorded and a replay and transcript will be available on our website. And secondly, there will be an opportunity for investors and analysts to put questions to the team at the end of the presentation. To submit a question, please use the text box in the webcast sphere to type your question. I'll now hand over to Aubrey to kick off proceedings. Thank you.

Good morning, everyone, and welcome to Tritax Big Box REIT's results presentation for the year ended 31 December 2021, and what a year it was. We are today reporting an outstanding set of results, which demonstrate that our strategy is working. Long-term shifts and behavioral patterns resulting from the COVID pandemic and exacerbated by Brexit have increased the importance of logistics and quality supply chains. Being in the right location with the right infrastructure in place is now mission-critical for businesses. With demand set to continue to outstrip supply, we have a clear vision for the future, which will enable us to further capitalize on this huge opportunity available to us. We are accelerating the development of our existing substantial land platform, the biggest in the U.K. for logistics. To address this demand, we target starting 3 million to 4 million square feet of development in the year ahead, and we have the potential to accelerate this development program further. This will also create further asset management opportunities as we continue to focus on delivering strong, attractive and sustainable total returns for our shareholders from our complementary development and investment portfolio. There have been some changes to the Board over the year. I'm delighted to be here today for the first time as Chair of the Board, having previously acted as a senior independent director. Alastair Hughes has replaced me in this role. We're also pleased to welcome 2 hugely experienced nonexecutive directors, Wu Gang and Elizabeth Brown, who we will look to introduce to you during the year ahead. Richard Jewson and Susanne Given have stepped down from the Board. I want to personally thank for their huge contribution and wish them every success for the future. It just leaves me to thank you, our shareholders and the wider Tritax team for your support during the year. We're excited about the opportunity ahead in logistics and have the team, the strategy and the appetite and supportive market fundamentals for future delivery. Thank you again for joining us today. I will now hand over to Colin and Frankie for the formal part of the results presentation.

Thank you, Aubrey, and good morning, everyone. I'm really pleased to be presenting the 2021 full year results for Tritax Big Box and to provide you with an update on the further excellent progress that we're making. My name is Colin Godfrey, and I am CEO to Tritax Big Box. I'm pleased to be joined in the presentation today by Frankie Whitehead, Chief Financial Officer. I'll kick off the presentation with a brief introduction. Frankie will then run through our financial results, and I'll return with a strategic update. Ian will then coordinate Q&A. In 2021, we delivered the strongest performance in our history. Looking forward today, we remain very excited about the outlook for our market and the ability of our business to deliver attractive returns because we're implementing a clear strategy that anticipated the market conditions that we are experiencing today. This combines the resilient income from our high-quality investment portfolio, together with the ability to produce attractive returns from development, which is delivering sustainable investments in-house. And there's a terrific runway of opportunity embedded within our land portfolio, the U.K.'s largest, with the potential to deliver over 40 million square feet of logistics facilities. And this is all captured in the key messages from today's presentation: a set of record results in terms of earnings growth; NAV growth and total returns; a clear and compelling strategy that's delivering now, but is also positioned to take advantage of the market dynamics to deliver into the longer term; powerful fundamentals noting a highly favorable occupier supply and demand imbalance; barriers to entry and a strong investment market; and finally, the combination of our investment and development portfolios of producing excellent returns, not just now but also offering the opportunity to capture strengthening income growth and accelerate development activity to enhance capital growth. Put simply, we've never been more excited than we are today about the long-term prospects for our business. Critically, the strong performance we've announced this morning has been underpinned by delivery. We're consistently doing what we said we would do. Looking at the left-hand column. We said that we would produce 2 million to 3 million square feet of developments, grow rents, improve our leading ESG credentials and deliver attractive performance. Turning to the middle column. In 2021, we exceeded expectations, having delivered 3.7 million square feet of development starts, growing our income at a faster rate, achieved improved ratings across all major ESG indices and delivered record total returns. And on the right-hand column, looking forward, we see even more to come, with significant opportunity to enhance sustainability, accelerate our development activity and CapEx and capture strengthening market rental growth, all supported by a market which we believe will underpin attractive returns into the longer term. And as I said, this is possible because of our strategy and how we position the business to take advantage. We return to the theme of delivering our strategy in a few minutes. But first, I'll hand over to Frankie to run you through the financial results. Frankie?

Thank you, Colin, and good morning, everyone. 2021 really has been an outstanding year for the company in terms of its financial performance. I'm pleased to be presenting our strongest set of results ever, and we are confident that our strategy of combining high-quality investment assets with our significant development pipeline is one that will continue to deliver attractive returns to shareholders, both over the short and longer term. And you can see this outstanding performance from our headline figures here. The adjusted EPS is up nearly 15% to 8.23p, driven by development completions, rental growth across the investment portfolio and higher levels of DMA profit recorded in the year. You will hear from Colin in a moment that our market fundamentals are exceptionally strong, which has helped us deliver a record 27% increase in NAV to 222.6p. And that has resulted in a total accounting return of 30.5% for the year, again, another record for the company. And finally, our balance sheet remains extremely well positioned to support and finance our near-term development and value-add opportunities. In January of this year, due to the increased levels of visibility on our near-term development pipeline, we increased our development CapEx target for 2022, and we expect that to translate into further attractive growth for shareholders this coming year. On this slide, we can see that our delivery of net rental income growth, along with our efficient cost base is leading to strong underlying earnings growth. The group net rental income increased by 14.3%. As expected, this was predominantly driven by in-year development completions, which added GBP 24 million to annual passing rent. The total contracted annual rent grew to over GBP 195 million as at the end of December. Our operating costs have again shown further improvement on a relative basis. The operational benefits of further scale have been seen through our EPRA cost ratio reducing to 13.9%, which remains one of the lowest within the REIT sector. The adjusted earnings per share has increased by nearly 15% to 8.23p, which is inclusive of the full amount of development management income recognized during the year. As in previous periods, we also look through to our adjusted earnings, which we consider to be recurring. This is by stripping out the exceptional element of the DMA income. On this basis, adjusted EPS has risen to 7.38p, which is an increase of just under 7%. And in terms of the dividend per share, we have declared a 1.9p dividend this morning for Q4, taking the total dividend to 6.7p, an increase of just under 5%. This translates into a dividend payout ratio of 91% as we look to deliver attractive and sustainable dividend progression over the long term. When we look at the 2021 earnings bridge, it clearly sets out the drivers to our strong underlying EPS growth. It also sets out the scale of the development management income received in the year. A key driver of income growth is through our development activity. As expected, it's the 3.7 million square feet of development completions this year, which has had the biggest effect on underlying earnings with 0.9p added from our development activity. The like-for-like rental growth across the portfolio was 3.3%, and this has added a further 0.3p to current year earnings. Elsewhere, the impact of our disposal activity in 2020 outweighs our investment activity during the course of this year. We also note the reduction in license fee income, and this has now converted into rental income as those buildings have reached their practical completions. And these items get us the majority of the way to the adjusted earnings, excluding exceptional D&A of 7.38p, which is growth of just under 7%. It's worth pointing out that both the 6.9p starting position and the 7.38p includes GBP 4 million of DMA income, which is the midpoint of our medium-term guidance range. In terms of the development management income for 2021, we have recognized an additional GBP 15 million of profit this year. This has principally come from one contract, which has now been fully delivered, and for this reason, is considered nonrecurring. We, therefore, base our dividend assessment against the 7.38p and the surplus DMA income is effectively reinvested into opportunities to create recurring earnings growth into the future. The strong income performance is mirrored in our delivery of capital growth, where we have delivered improvement across all key balance sheet performance metrics. The total portfolio value grew to approximately GBP 5.5 billion at December. The valuation surplus recorded across the portfolio totaled 19.1%, which contributed GBP 840 million to NAV growth. We have deployed GBP 372 million of capital during the period. And as targeted, the majority of this has been channeled towards our attractive development pipeline. Our EPRA NTA increases to over GBP 4 billion, which equates to 222.6p. This is an increase of 27% over the 12 months. With an LTV positioned at 23.5%, this allows us to approach our near-term opportunities with conviction. Having secured new financing in the year to support us with its delivery, the balance sheet position now allows us to focus heavily on execution whilst also being reactive to other opportunities as they present themselves. Put simply, we have had a fantastic year with the financial performance culminating in a record total accounting return for the company of over 30%. Turning to the detail behind our strong NAV growth. The continuing strength and weight of capital in the investment market has caused yields to tighten by approximately 45 basis points across our portfolio. Now with an equivalent yield position at 4.1%, we still feel there is opportunity for further value growth to come. The portfolio ERV growth has also accelerated in the second half, increasing by 7.5% across the year. This investment portfolio performance has allowed us to add 39p to our NAV. Our development assets have added a further 6p to performance, and we're expecting to be able to improve on this component as our development activity increases. When noting the impact of the operating profit and dividends paid in the period, this takes us to the closing EPRA NTA of 223p per share. So we've had a year of compelling financial performance. But the really exciting thing for us is the huge opportunity ahead and the ability to significantly accelerate our income growth. This rental income bridge illustrates the potential we have to grow today's passing rent from GBP 195 million, as shown on the left-hand side, by approximately 2.5x, up to an estimated GBP 480 million. So moving from left to right, the current year ERV growth has increased our portfolio rental reversion to an attractive 11% or GBP 21 million. As set out at the recent investor seminar, the increase in occupational demand has led to an acceleration in activity within our near-term pipeline. And you can see this coming through within the green bars on the chart. Starting with those items in green. We can add GBP 10 million of potential rent from our current development pipeline, GBP 2.5 million of which has been secured. Q1 2022 has already started well with over 1.8 million square feet of construction having already commenced. These assets have the potential to add a further GBP 13 million to passing rent, of which approximately half has been pre-let. And looking at the final green bar, a further potential GBP 14 million could be added from the remainder of our targeted 2022 development starts. Taking all of this into account, this gets us to the bar totaling GBP 253 million. So including our current development pipeline, the targeted 2022 development starts and the rental reversion, we have the opportunity to grow passing rent by GBP 58 million or 30% over the near term, which from a timing perspective, we would expect to translate into acceleration in our earnings growth from 2023 onwards. The scale of our medium and longer-term future pipeline is unique to us and unique to the U.K. and without factoring in any future rental income growth into these figures, the land portfolio has significant embedded potential, which means we have confidence in the shorter and longer term over our delivery of future income growth. Moving on, and our balance sheet also really is in great shape. Noting the increase in visibility we now have over the near-term pipeline, as I have just walked you through, we took the decision to remove the associated near-term financing risk. Last September, we issued GBP 300 million of new equity in what was a significantly oversubscribed issuance, reflecting the confidence we have in the deployment of this into attractive opportunities. We are now extremely well positioned with a loan to value at 24% and over GBP 600 million of available liquidity. This means that we can run hard and focus on the execution across that near-term pipeline, while still providing flexibility within our capital structure to run even harder should further opportunities present themselves beyond what we anticipate today. I just want to finish by providing some guidance and set out how I see our positive long-term outlook. The investment portfolio provides our core income return, and we are confident that it will deliver sustainable earnings growth. This includes over 50% of our rent roll, which is subject to review over the next 2 years, alongside an ability to capture the significant rental reversion. We have plans to recycle capital this year, but it's about optimizing the performance of the portfolio and managing investment disposal timings with the delivery of income from our developments. Our longer-term guidance on disposals is GBP 100 million to GBP 200 million per annum. We will continue to manage our balance sheet efficiently, ensuring we maintain financial discipline as we have done during 2021. Investment purchases will be looked at in an opportunistic manner, but these will have to meet our strict returns criteria. We intend to continue investing for growth. We have increased our development CapEx guidance for 2022, targeting GBP 350 million to GBP 400 million of CapEx into development this year. From a yield on cost perspective, we continue to manage cost price pressures well internally. Both rental growth and yield compression are mitigating a lot of this from feeding through into performance, but there has been some downward pressure on our yield on cost compared to 12 months ago. We remain within the 6% to 8% range across the portfolio and expect to deliver between 6% and 7% on the near-term pipeline, noting that there is still a very attractive arbitrage here between this and prime investment yields. And we expect to deliver attractive future accounting returns. From an earnings perspective, I've set out how we expect to grow our income through our near-term development pipeline, remembering that the timing of income delivery will be linked to construction time lines, and therefore, earnings growth is likely to steepen as we move into 2023 and 2024. And finally, we expect that to translate into sustainable, attractive dividend growth for shareholders with a policy of paying out at least 90% of our recurring adjusted earnings. So that concludes the financial review, where we are looking to build upon a very strong set of results, capitalizing on an extremely favorable market backdrop with a development portfolio that provides us with a real competitive advantage to drive returns. And I should now hand you back to Colin.

Thanks, Frankie. So Frankie has described our record performance in 2021, the momentum we have taking us forward and why we are financially well positioned for the future. I'll now explain the market dynamics, demonstrate our strategy in action, look at the growth opportunity and consider why we're well positioned to deliver a consistent, strong performance into the long term. Essentially, as you've heard us say before, it's about the enduring strength of our market and how our strategy and our expertise are aligned to take advantage. 3 of the key drivers to occupational demand are continued growth in e-commerce, increasingly complex supply chains, which need to be resilient in the face of continued disruption and occupiers seeking operational efficiencies through consolidation into larger, modern and more efficient facilities. And with that backdrop, let's look at the themes that we're seeing in the market that are contributing to the success of our business. In the top left chart, we see 2021 was another very strong year for lettings at 42.4 million square feet, broadly on par with the previous year. But that was undoubtedly suppressed by constrained supply. You'll see also depicted by the terracotta bar that unsatisfied demand is equivalent to around 4 years of average take-up, which bodes very well given the supply of new buildings remains constrained. It also explains our confidence because the structural changes we're seeing are still in our infancy, underpinning the significant scale and duration of the opportunity, which is very positive for our future. Turning to the top right chart. As just mentioned, supply has significantly lagged demand, producing the lowest vacancy rate ever reported of only 1.6%. And there are now only 2 buildings available to let that are over 0.5 million square feet, one of which is in the course of speculative development, and the other is older secondhand space. Bottom left, we see that the increasingly acute supply/demand imbalance continues to drive rental growth and agency forecasts have strengthened for the next few years. And this is reflected in our own development portfolio where we've witnessed strong double-digit rental growth in some locations, well ahead of our original expectations. And bottom right, strengthening and resilient rental growth has encouraged increased investment demand with 2021 producing the highest level of investment activity recorded for industrial and logistics property. There remains a wall of unsatisfied capital, and we do expect to see further yield induced value gains in 2022. That will be good news for our investment assets, our land and the assets that we're developing. So for us, this slide demonstrates the growing and long-term need for high-quality logistics space, which is capable of helping our customers respond to these dynamics. And these drivers are part of the ongoing market backdrop, which support our strong performance. It's worth reminding you that we designed our strategy in anticipation of these long-term trends in our market. And again, you'll be familiar with our strategy by now, but I'll just highlight the key points. In essence, there are 3 key components. You can see at the top of the triangle that we've deliberately built a portfolio of high-quality assets, attracting great customers. We've also built the capabilities to add value to these assets through direct and active management. And we apply our skills, insights and innovation gained from being the U.K.'s largest investor in logistics to develop our land portfolio at a very attractive yield on cost. And I really want to emphasize the point at the bottom here. This strategy is underpinned by a very disciplined approach to capital allocation with sustainability being embedded right across the portfolio. Now this case study is a really great example of our strategy in action. High-quality customers, proactive management and development working together to create opportunities for growth. Now B&Q is an existing customer of ours at Worksop in Nottinghamshire. And over several years, we've built a strong relationship with B&Q, and we've grown our understanding of their operations. As part of this, we undertook an in-depth analysis of their supply chain network, and we shared our findings with the senior team at B&Q. This highlighted a requirement for additional space in the Yorkshire area to support their growing leisure business. Our geographically diverse land portfolio included the site at Doncaster that fulfilled the brief for a large cross-dock facility. We already secured detailed planning consent. So this enabled us to offer a swift delivery of the building. B&Q felt this met their requirements in terms of location, scale and timing and subsequently committed to a new 15-year pre-let of 430,000 square feet, the development of which has already started and practical completion is targeted for December this year. The building will be constructed to BREEAM Very Good, and an EPC rating of A. It will have 20% solar PV panels and will be net-0 carbon in construction. So you can see that this encapsulates the full journey of our strategy from investment through active and direct asset management to development and producing new high-quality and sustainable investment. This brings me on to how we are leading in ESG across our business. ESG is a key strategic priority for our business. And here, I want to provide an update on our strong sustainability position and the progress that we continue to make. We've handpicked and built a modern and sustainable portfolio and its modern buildings that occupiers are demanding. 95% of our floor space has an EPC rating of A to C. Also, approximately half of total floor space is certified to BREEAM Very Good or Excellent, well above the industry average. And this is reflected in our leading ESG position. This is a critical factor because our portfolio modernity means that we don't face significant future CapEx requirements to enhance environmental performance and meet government targets. This reduces the risk of brown discounts to capital value and ensures that our buildings are fit for future occupiers and purchases. Our development activities allow us to integrate ESG performance throughout the life cycle of a building from design to construction to asset management. Our net-0 carbon pathway targets are set to reduce embedded carbon and deliver new buildings, which are net-0 in construction, the new building at Doncaster being a good example. Our focus on social impact is to support local communities through job creation and local charity partnerships. And in tandem, we're working hard to implement initiatives which produce biodiversity net gains on our sites and in the local area. We're implementing increased levels of renewable power. And in 2021, we generated 903 megawatts of solar PV power for our customers, avoiding over 208 tonnes of carbon emissions. Now every year, we poll our occupiers and what's important to them. And we've seen a notable increase in ESG as a factor within their decision-making with nearly 70% saying it was very important to them, and that's up from 50% 4 years ago. This activity is being recognized within our ESG scores with improvements in our ratings from every major agency. And as mentioned, our portfolio already screens well, but we will continue to improve these ESG credentials, both for our investment properties and for our developments. As I said earlier, the first key element of our strategy is our modern long-let investment portfolio, but we don't just sit back, we actively manage our portfolio to optimize its performance, the second key element of our strategy. All of our investment assets are regularly reviewed for opportunities and threats. Our objective is to maximize total returns whilst optimizing our income growth and ensuring that we maintain a balanced portfolio with low underlying risk. We will seek to dispose of assets, which we believe have maximized value in our hands and acquire investments that we believe will be accretive to the portfolio performance. Investment sales will also help fund the opportunity in our development portfolio, which is accelerating. Turning to income composition and timing. The first thing to say is that all of our lease rent reviews are upwards only. And you can see here on the pie graphs that we've created an attractive blend of rent review types. About half of our investments are subject to inflation-linked rent reviews, which have cap and floor arrangements with around 1/3 being open market linked and the remainder, fixed or hybrid. As to timing, 20% of our rents are subject to annual rent reviews, providing attractive and regular compounded growth, with the remainder reviewed 5 yearly. And the recent growth in market rents is embedding within our portfolio. And this is demonstrated by the growing rental reversion, up from 6% in 2020 to 11% in 2021, which I'll come back to in a moment. So let's look at how we're putting this into practice. This slide captures the way that we are complementing rental growth with active management. During the period, we negotiated the lengthening of 2 leases, one by 2 years and the other by 10 years. Of the 37% of our rents up for review in 2021, we concluded 32%. This delivered a GBP 5 million per annum increase in passing rent and reflected like-for-like rental growth of 3.3% annualized. We expect further progress as we conclude the remaining reviews this year with the 5% carried over from last year added to the 35% due for review in 2022, as shown on the chart. So this positive active management momentum is going to be yet another driver of both income and capital growth in our investment portfolio, but also for our development activities and our land assets. Now to update you on the great progress that we've been making in the third key element of our strategy, development. In January, we held an investor seminar focused on the detail of our development activities, and this can be viewed on our website. At the year-end, our investment portfolio comprised around 92% of GAV and the development portfolio approximately 8%. This balance has been a conscious decision so that our development activities are supported by high-quality and robust income from our investment assets. So let's now look at what we're seeing on the ground. While we're seeing significant and accelerating demand for a range of building sizes and locations, we're pleased to our strength because we've got a geographically diverse portfolio and flexibility within our sites. But of particular value is the ability to offer larger format buildings, which competitor sites often cannot. And this is paying off because you'll see on the left-hand pie chart that most inquiries received have been for buildings of over 300,000 square feet in size. Equally positive for us is a broad range of occupier types, as shown by the middle pie chart, with online inquiries remaining strong at nearly half of the total, but also store retail and third-party logistics operators being particularly active. Now Savills recently reported that over the last 2 years, 257 companies had leased new space, indicating a significant breadth to the occupational market demand. Strong relationships with existing customers are creating repeat business for our development activities. But we're also expanding our customer diversity with a healthy list of high-caliber new inquiries. And in 2021, we added DPD, HarperCollins, IKEA and even Apple as new customers. This all translates into unprecedented inquiry levels. At the year-end, we had over 26 million square feet of live inquiries. Now this breaks down into over 16 million square feet of high-level discussions and over 10 million square feet of negotiations in final stages, which includes deals where terms are agreed or which are in solicitor's hands. So how can we fulfill this demand? Here, we've presented our development pipeline, which is matching up market demand with our available land. Now you've heard me say before that there are barriers to entry, and it can take many years to achieve planning consent. Our own portfolio has taken over 10 years to assemble and to finesse to get to a position where it can fulfill the levels of demand that we see. Our team is highly experienced, has excellent relationships with the local authorities and landowners, built up over many years, and a tremendous success record on planning. Our land portfolio is constantly evolving as sites and projects move through the planning and development process from allocation to planning consents. The goal of this dynamic model is to create a rolling program of consented land, which runs off the planning conveyor belt, ultimately producing a continuous flow of buildings under construction and development. Now to help provide a bit more granularity, this chart breaks down the development pipeline into 3 buckets that you'll be familiar with from previous reporting. The current development pipeline, including projects under construction, the near-term pipeline, which we've now split into anticipated development starts over the next 12 months and start over the following 24 months. And then finally, the future development pipeline, which comprises the strategic land portfolio that is further back in the planning process. Now as you can see, in addition to the 1.3 million square feet already under construction and in response to the greater visibility of occupier demand, we expect to accelerate development starts in 2022 to around 3.7 million square feet. In the following 2 years of the near-term pipeline, we expect activity to revert more in line with the long-run average of around 2 million to 3 million square feet per annum. We will, however, be looking to bring forward planning consents where possible and also consider enlarging the quantum of land drawdowns, where this flexibility exists and if occupier demand remains strong. In other words, we will seek to maximize the opportunity that's in front of us now whilst also carefully managing the risk, and as you'll see at the bottom of this chart, the potential additional income generation at each stage. Key here is that we have sites at all stages of the evolutionary process. That is a really optimal position in our view. So that's the time line. Now let's look at how we're going to capture the opportunity. So what are we capable of achieving from our development land portfolio? Well, as you can see on the left, we have all of the attributes for long-term success. And I'm pleased to report that we're making very good progress, consistent with our guidance. This is now showing through in both what we've achieved and increased confidence in our near-term delivery. 2021 was the year that our development activities really came of age. We delivered 3.7 million square feet of lease completions, added GBP 24 million to our rent roll, commenced construction of 1.3 million square feet and secured a further 3 million square feet of further planning consents. Now turning to 2022. We've made a really terrific start. We've already commenced 1.8 million square feet of development. And because of the heightened level of demand and our ability to respond, we are messaging an acceleration from 2 million to 3 million square feet of development starts up to a level of 3 million to 4 million square feet this year. The 1.3 million square feet of developments under construction will complete in 2022, which when added to the 3.7 million square feet of lease completions in 2021, provide visibility on GBP 36 million of potential additional rent. So to close on development, I just want to say that we are in a unique position, and we will look to exploit the development opportunity within our business to take advantage of our expertise and market dynamics, whilst employing a risk-controlled approach to our activities. So to sum up and before we get to Q&A, I just want to emphasize the hugely positive key points from today. We have a strong balance sheet, a number of funding options and the financial discipline to deliver attractive and sustainable performance. Our clear strategy is now delivering, both for investment and development assets, and we expect enhanced activity in both areas of our business in 2022, taking advantage of the very favorable market conditions. Structural change is and will continue to benefit our market with inelastic supply and unprecedented occupier demand, driving strong rental growth and attracting increased inflows from world capital. And we control the U.K.'s largest logistics-focused land portfolio capable of delivering over 40 million square feet at very attractive yields with the objective of enhanced earnings growth and the creation of new, high-quality investments. So our excitement and our enthusiasm stem from being at the right place at the right time with the right strategy and the right product with the right team to unlock value, and we're doing so right now. Thank you for listening. That concludes today's presentation. I will now hand over to Ian, who will coordinate the audio Q&A session.

Thank you, Colin. That concludes our presentation, and we will now turn to Q&A. As a reminder, to submit your question, please use the text box within the webcast sphere to type your question. Thank you very much. Great. So we've had a couple of questions come in through the webcast through the course of the presentation. The number relating to rental growth. The first being, could you expand upon the prospects for future rental growth from the portfolio?

Sure. First, I mentioned in the presentation, 32% of our portfolio was reviewed in 2021, delivering a like-for-like rental growth of 3.3%. Now this is obviously backward looking over a 5-year time horizon, typically, which incorporated a period with lower inflation and lower market rental growth. Obviously, rental growth has been increasing in the intervening period of time. And I think that's evidence, as I've mentioned in our strong ERV growth in the portfolio, up 7.5%. Just noting how we can access that and the 11% reversion that we now have in our portfolio. Firstly, we've got a good balance of rent reviews, index-linked reviews. Broadly half of our portfolio providing a natural hedge. And of course, open market rent reviews, which together with the hybrids, which is the higher of, around about 40% enable us to capture that true market rental tone. In addition to that, of course, we do have our development pipeline, which enables us to capture market-leading rents at the co phase on brand new buildings. And there's a cross read from that, of course, against our investment portfolio, which further allows us to drive income growth. And that's part of the power of the development portfolio. And of course, the very low occupancy levels that we're seeing across the market are allowing us to beat the levels which we've embedded into our development appraisals. So that's very positive. And finally, just to mention that around 19% of our income expires within the next 5 years. And again, this will enable us to capture that rental reversion in the near term on new lettings for some of our existing stock. Hopefully, that covers the point.

The next question relates to inflation and sort of the experience we have within cost inflation within the development pipeline.

Thank you, Ian. So yes, we have been experiencing certain cost price pressures with regards to material down to labor. I would say we're seeing some stabilization in that of late in the last few months. But we continue to monitor that closely. We're mitigating where we can, and that includes the entry of fixed-price build contracts on all of our developments. Also rental growth and new shift continues to prevent a large part of that from impacting on our performance metrics. So as reiterated today, we're still confident in delivering within that 6% to 8% yield on cost range for future developments and note that we expect to be in the lower half of that range for our near-term portfolio.

Next question is from [ Hassan Sami ] Bank of America, who asks if we have any exposure to Eastern European tenants.

The short answer is, no, we don't. Obviously, we are concerned about events in Ukraine, and our thoughts are very much with the people that are being impacted. And it's clearly a very uncertain situation. It's moving day by day, and we're monitoring it closely. But we don't have any Eastern European exposure. And we're not seeing any significant impact on our business operations because we're fortunate enough to have a highly resilient portfolio. I think I just demonstrated during COVID, where we've had 100% rent collection. And I think that's because our buildings are obviously U.K. only, but they're intrinsically important to our customers.

The next question from [ Shannon Winter ]. He asks, is the conversion of license fee to rent, recognized in the adjusted earnings? And does the impact net of the loss of license income?

Thank you, Shan. Yes. The answer is yes. The license fee reduction in the year is essentially netted off the adjusted earnings figure. So yes, it's always all reflected.

Next question from Paul May at Barclays. How up-to-date you feel your valuations are? While the ERV growth of 7.5%, 45 basis points yield compression and valuation growth was strong, they appear conservative relative to the underlying market moves, especially the 4.1% equivalent yield.

Thanks, Paul. It's a good question. Look, the CBRE prime yield at the year-end was 3.5% for 15-year income. Valuation is backward-looking exercise picking up comparable evidence. We were, for instance, at the year-end, we're very close to the year-end, there was a deal done for an Amazon 15-year lease for a new building at Peterborough. From memory, it was done around about 3.2% mark. We are aware of assets and the portfolios which are currently being marked and/or are under off market. And there are at tone, I mean assuming that they progressed to completion, they're at tones which would demonstrate further yield compression even in the first 2 months of this year. So we do feel that the positive momentum that we've seen in Q4 of 2021 has been carried forward into 2022, and this talks to the relative confidence we have in further yield compression being evidenced in 2022. So of our current 4.1% equivalent yield, yes, we feel pretty positive about the prospects of further capital appreciation during the course of this year.

Great. I've had a couple of questions around disposal, so just sort of thematically, I think the question is around sort of why disposals during 2021 and sort of prospects for disposes moving into 2022?

Thank you. And so yes, it's great. No disposal in 2021. I think that's reflective of our view of market conditions. Given the level of your compression we experienced, we believe that holding on to those assets is the right thing to do and enhance our performance in respect of 2021. Going forward, clearly, asset recycling is a good investment discipline, and we'll look to do that in order to optimize the performance of our portfolio. We have provided some guidance this morning in terms of both the near- and longer-term disposal targets of GBP 100 million to GBP 200 million per annum. So we see that as a trimming of the portfolio, looking to optimize performance of the portfolio, and we look to recycle that capital into more accretive opportunities.

A question from Tom Musson at Liberum, asks: if the demand in the market is currently 4 years of average take up, why not commit to 3 million to 4 million square feet of development starts more than just the next 12 months? How much is the business operationally able to commit to in any given year?

Yes. Thanks for that, Tom. Well, look, I think it's fair to say that during the last 6 months or so, we've gained increased visibility on rising interest, particularly in relation to our near-term pipeline. And as you quite rightly say, we've increased our guidance up from 2 million to 3 million square feet in 2021 to 3 to 4 million square feet in 2022. Now whilst we're giving longer-term guidance of 3 million square feet, there's nothing to prevent us from maintaining a 3 million to 4 million square feet level into the medium term, subject to the demand being there. We're just being relatively prudent. We don't have that crystal ball. And you're absolutely right. The backdrop of the market is very positive, and it could well be that we continue to travel at that level. I think it's important to recognize, however, that we continue to bring land through the planning process and 3 million square feet consented last year. Also implementing infrastructure works at a given rate and mindful of the rate at which we can bring through continued new planning. And we want to continue to be able to replenish that planning consented bucket, so we don't run out of planning consent is space. I mean that's important to continue to attract occupier interest right away across our sites across the U.K. And indeed, I think there are some developers that are probably a little bit concerned about the run rate at which they're burning up their planning, consented sites, bearing in mind that there are natural barriers to entry within the planning system, which are going to control the supply side. And I think that that will keep us deploy the money in balance, very, very healthy, but it doesn't mean that one's got to manage that process. I don't think we're worried about the potential for upscaling even to sort of 5 million plus square feet in the context of our ManCo capabilities within the business. And the last thing I think just to mention is that, one's got to think about the context of that total in terms of number of buildings and the size of those buildings and the type of those buildings. So for instance, if you get a multi-deck building led to a major online retailer by way of example, and it could be 2 million square feet in one building. So that's a very different proposition than creating 10 buildings of 200,000 square feet each by way of example. So there needs to be a bit of understanding about that component part as well. Hopefully, that sort of give you a bit of a feel for how we see the future guidance.

Great. A couple of questions along a similar theme here around inflation more generally. How is your appetite for inflation-linked leases evolving, especially for new developments? What is your preferred rent revenue clause for new leases now? And similarly, are we likely to see more or less open market review clauses given open market rent revenue gains are higher than inflation currently? And the second part of this question on the inflation in reviews. Most of these are capped and colored with your average range of 1.5% to 3.4%. [indiscernible] being stretched given current rate of inflation. And are tenants willing to agree higher inflation linked caps?

Okay. There's quite a few components in there. You might have to remind us a bit as we go through. Should I start Frankie, and then we can sort of tag team here? So I sort of touched on -- I mean, look, I think the first thing to say is that I think we're very well positioned to mitigate most of the downside risks and capture the upside. But as I said earlier, 50% of our leases are inflation-linked. That act as a cap. Open market reviews are uncapped typically. I mean, it's very, very rare to see an uncapped inflation-linked rent review. So the uncapped components typically through open market. And certainly, in the current market, we are seeing stronger growth in terms of open market rents, I think, than we've seen ever before. They're kind of catching. I mean, obviously, inflation is particularly high at the moment. But I think in the medium term, we should see probably stronger growth from market rents. There is potential to capture a higher proportion of market rents through our development platform. Occupier is certainly the largest scale corporates. They do like the relative certainty of knowing that their rents are moving in tandem with underlying inflation. However, of course, this is a landlord's market in many respects. We do have strength and depth of interest on most of our sites. And that enables us to negotiate from a position of strength in relation to the type of rent review that we would like to see. And clearly, if an occupier is going to be resistant to the potential for open market rent reviews, then they may well lose that opportunity and find themselves struggling to meet that requirement, having to move to a location, which is less favorable for them and not securing that building when they need it. So typically, we're seeing sensible conversations being had. We are now seeing more conversations along the lines of the best of both worlds, the higher of open market or inflation as well. But -- so I think we're seeing sort of a trend in that direction, which is positive news for us. Frankie, can you sort of pickup generally on the sort of interest rate point? Is there anything more to say on that? Or we've covered it off? Was there anything else in that question?

I think it's covered. That's good.

Just looking at next question coming from [ Lichman Hamid at 91 ]. He asks, what are the likely effects of substantial cost pressures on your tenants' ability to absorb substantial rental increases? And he also asks, are labor issues limiting tenants' ability to roll out new warehouse locations?

Okay. That's a great question. The first thing to say is that property costs -- from the analysis that we've undertaken, property costs safe for an average retailer typically sits at around or less than 1% of total operational costs. So if your rent goes up by 10%, it's sort of 10 bps on your total operational costs. I mean it's a relatively small amount of money. It's much, much more. I mean what occupiers are telling us is it's much, much more important for them. I mean clearly, they don't want to pay more than they need to, but they have to be in the right place at the right time to fulfill the requirements of their customers. And that's much more important when we are facing structural change and ever more complex supply chains if customers demanding products more quickly, more reliably. So I think that's the primary focus for them. We're not seeing much in the way of cross-price resistance to escalation in rent. Clearly, there is a consideration in terms of affordability ultimately and ever was it the case. But it's more about the space race for getting the right buildings and the right locations right now. In terms of -- I think the last point you mentioned, was it labor, labor costs?

Labor availability.

Yes. That's a very, very good point. And I think the old adage of location, location, location has sort of changed a little bit to, I would say, sort of location, power and labor. And with power becoming an increasingly important component part of occupier thinking, particularly with increased levels of automation. But the labor is very important as well. And what you don't want to do as an occupier to sort of cut your own throats in competition with a competitor next door because there just isn't the right labor pool. So most occupiers do lots of work on this. Now this is something we saw really when we set up our business back in 2013. And we recognized what I would describe as the sort of devolution of the distribution network in the U.K., emanating away from the central focus of the Golden Triangle. And that has continued. So you see lots of major occupiers now moving out into locations where the motorway networks is less congested, where they can more readily capture labor appropriately, skilled labor. And by the way, lots of these buildings now are providing labor for highly skilled workforces at appropriate pricing points where they can retain that labor and invest into that labor with training, and obviously retain that labor in the longer term. So it's a really, really important point. And that's one of the reasons why we're seeing the emergence of new parks and new locations, but we need it because there's so much demand in the market. We need the emergence of new locations in the U.K.

Next question is from Mike Prew, Jefferies. He's asking, are you holding back marketing developments to capture the rising rents through the construction phase? Or is there still a pre-letting requirement for breaking ground?

Thank you, Mike. So with regards to the development strategy, this really is about the balance between pre-let and speculative activity. So I think that good demonstration of that is in the year-to-date activity, we've commenced 1.8 million square feet, of which around 56% has been pre-let, demonstrating that balance. So typically, on the larger-format buildings, we look to secure a pre-let de-risking, that aspect of the strategy on the smaller, speculative assets. We're willing to obviously break ground there, commence construction, pull back the rents, potentially quoting a range, looking to capture the live level of rental growth and the live sort of market perspective in terms of securing those rents. So answer is, it's a combination of both.

Next, I think this is probably going to be our last question given time. A question from Hassan Sami from Bank of America. You mentioned the CBRE prime yield is 3.5% as at year-end and reported net initial yield was 3.56%. So should we interpret this as not lagging the CBRE data? Or am I looking at the data incorrectly?

The short answer is it's an incorrect interpretation. So the way to think about this is that the CBRE yield is for a rack-rented building. And in that circumstance, your initial equivalent and reversion yields are all the same, so i.e., 3.5%. The 3.56% you referred to as an initial yield, is not taking into account the intrinsic benefit of the reversion, which is inherent within our business. And that's why we point to the 4.1% equivalent yield, which is the number that one should view as comparable with the 3.5% figure that I mentioned from CBRE. So that's the point of comparison. It's 4.1% versus 3.5%. And when one looks at the quality of our assets, the length of our leases, et cetera, we do believe that there's further room for value growth in our portfolio during the course of this year. But one has to be cognizant of the backdrop of macroeconomic instability and the effect that that could have on market. So whilst the investment market is currently very strong, we still obviously have the remaining part of 2022 to play out.

Great. I think that's it for questions.

Splendid. Well, thank you very much, everybody, for supporting the business during the course of last year. I've taken the time to join us today and provide us with your questions. We really appreciate the continued interest, and we wish you splendid rest of the day. Thanks very much. Bye-bye.

Thank you.