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

Good day, and welcome to the Tritax Trading Update Conference Call. At this time, I would like to turn the conference over to Ian Brown, Head of Investor Relations. Please go ahead.

Good morning, everyone. As Jess mentioned, I'm Ian Brown, Head of IR for Tritax. And I'm joined this morning by Colin Godfrey, and Frankie Whitehead, the CEO and CFO for Tritax Big Box and current Tritax trading update this morning, we are hosting a call for investors and analysts. Colin and Frankie will run you through some of the highlights from the announcement, and then we'll open up the phone lines for Q&A. For the Q&A, I would note that this is a trading update, and we will be more limited in our ability to discuss some of the details at this stage, but we will, of course, be publishing our audited full year results on the 2nd of March with our normal disclosures. And with that, I will hand over to Colin.

Well, good morning, everyone. Colin Godfrey, CEO. I'd like to start by saying how very pleased I am with the performance of the business given the challenging macroeconomic backdrop that's impacted our market. The quality of our real estate portfolio, resilience of our income backed by a diverse array of high-caliber customers point to this resilience. And this, of course, is the bedrock on which our business plan is taking effect. The continued implementation of our strategies now are clearly delivering as we take advantage of strong market fundamentals with increased development activity, producing new prime investments that enhance our investment portfolio and grow our income. Starting then with the market. Well, lettings remained strong at 38 million square feet, the third highest on record. And that level was constrained by available supply with vacancy remaining at near record low levels of only 2%, reminding you that most of the near-term deliverable land is carefully controlled by investor developers, not trader developers. At the end of June, market high in terms of investment values. But of course, the increased cost of capital driven by interest rates responding to the hike in inflation produced a significant outward movement in yields. And that resulted in market slowdown in investment transaction volumes in the second half, which has been well reported. So prime yields now stand at around 5% to 15-year income. With inflation coming under control and then the 10-year Gilt rates softening, it does feel as though most of the correction is behind us, noting that there is significant dry powder waiting to invest into the sector. And so whilst we don't have a crystal ball, the mood music on the Street does point to more optimism toward the second half of this year. Turning then to our operational performance and more particularly, how we've successfully captured the strong operational market opportunity through [development] activity. I'm really pleased to report that we've delivered an additional 23.3 million square feet of extra contracted rent to 3.1 million square feet of development lettings secured in 2022, and all of which has remained within our guidance range of 6% to 8% yield on cost. The development yields we're achieving remain attractive against the prime investment yield and are improving now that construction cost prices have stabilized, and we continue to capture that strong rental growth that we're seeing in the market. It's worth reminding you that the option structure through which we control most of our land is capital efficient and allows us to benefit from buying in land at softer land prices in the current market after securing consent. We made 2.9 million square feet of development start in 2022, of which 82% has already been let. And there's the potential to deliver further income growth of around GBP 5 million from the circa 400,000 square feet of developments currently underway and available to let. We also completed the development of an 83,000 square feet small unit scheme at Littlebrook into the period. And in terms of asset management, we continue to generate value and grow income with GBP 5.1 million added to our rent from rent reviews and one lease review conducted during the period and noting that of the 34% of our portfolio is subject to lease events, we achieved a 7.6% increase in passing rent. And benefiting from underlying strong rental growth, which I mentioned earlier, our portfolio ERV grew 9.1% during 2022 resulting in an increased reversion of over 19% at the year-end. And we also exchanged contracts on the sale of the new developed small unit scheme, I mentioned earlier, at Littlebrook in line with the year-end valuation level, and we're continuing to pursue investment sales in support of our development CapEx requirements, and this is in line with guidance, and you should, therefore, expect to see further activity in the first half of 2023. With that, I'll now hand over to Frankie, who will provide more detail about our capital performance, balance sheet strength and income characteristics, Frankie?

Good morning, everyone. So moving on from the strong operational performance. I will run through some of the information published on our portfolio valuation and balance sheet this morning. And in some ways, the characteristics of our portfolio has been designed for the more turbulence of economic periods. Colin has spoken to the growth in contracted income being driven by our operational activity with our development performance, especially justifying the increase through our development delivery targets for 2022. Overall, when bringing together the asset management and development lettings, our contracted rental income has risen by just under 15% across the year, now standing at GBP 224 million and its net income growth that would be supported of our future earnings growth. The resilient nature of that income and our customer base has allowed us to continue to collect 100% of our rents, and we have no customers or any sort of payment plan. Now turning to the portfolio. Given the level of interest from the market, we have included a high-level update on our portfolio valuation as at 31 December 2022 within today's trading update. We will be providing greater detail in line with our usual disclosures made for our full year results in March. So in terms of the overall portfolio performance, we have seen a like-for-like reduction in investment asset values of approximately 15% across the 12 months which included a like-for-like reduction of 20% across the second half. For context, this compares to some of the key market indices demonstrating annual folds of between 18% and 21% across 2022 with our performance primarily reflective of the high-quality nature of our assets, along with a significant rental reversion inherent within the portfolio. This takes the overall portfolio value to GBP 5.1 billion at December '22 compared to GBP 5.5 billion at December '21. Rental growth and development gains have both had a mitigating effect against the yield expansion experienced of approximately 120 basis points over the 12 months, taking our equivalent yield on the portfolio to 5.3% at December '22. As a result, we expect the EPRA NTA of the company to be in line with that consensus which is currently a little over 180p per share. With the volatility of the second half, preserving the balance sheet strength was a real focus, which included a more cautious approach to capital allocation. Consequently, we moderated our speculative development activity in Q3 and Q4 of last year. And therefore, we're likely to deliver just under the GBP 350 million to GBP 400 million target in terms of deployment into development for 2022. A combination of our balance sheet positioning, combined with this moderation in CapEx means that even with this adjustment to asset values, we closed the year with an LTV position of 31%, which is the lower end of our medium-term target range of 30% to 35%. In addition, we opted to increase our liquidity levels during the second half by GBP 200 million top-up to our revolving credit facilities. As such, we closed the year with total available liquidity in excess of GBP 500 million. The increase in RCF was executed only the same terms of our existing facilities, leaving the overall debt book in a position with approximately 5.5 years average term to maturity, 99% of drawn debt either fixed or hedged and with an average cost of debt of 2.6%. So to conclude through the combination of the high-quality nature of our portfolio, and the strength of our balance sheet, we are effectively weathering the volatility in the investment market and maintaining our ability to deliver value to shareholders through the implementation of our strategy. I'll now hand you back to Ian.

Thanks, Frankie. So we'll now open up the lines to Q&A. So Jess, can you be kind enough to do that. It would be just great if you could just announce your name and the institution you're calling from when asking question.

[Operator Instructions] This question comes from the line of Allison Sun from Bank of America.

I just have one question on the statement when you said you see encouragingly early signs of stabilization in the investment market. Can you give me a bit more color. I think what kind of signs you are seeing exactly to feel more comfortable in the coming 12 months? Thank you.

So is that -- when you're asking about stabilization, are you talking about cost price stabilization or...

No. It's just on the first page of CEO comment, there is a very general line in the second paragraph. You said, we are seeing encouragingly early signs of stabilization in the investment market.

So I think, obviously, we saw some of the biggest yield shift ever experienced in the second half of last year. It's been very acute. And I think one of the encouraging thing is the fact that the valuers have moved very fast, unlike during GFC when it was a very long drawn out fair and the general feeling was at the value is behind the curve. So whilst there was limited evidence in the second half, the value until they reach sufficient evidence such that they're not having to put material uncertainty clauses on valuation. But we have seen, I think, increased by interest, there are more transactions happening, and we are seeing more buyers running the rule over opportunities. We know there's quite a lot of dry powder in the market waiting to get deployed into industrial logistics. So whilst we're not calling the bottom of the market at this point in time. And look, there could be some further falls to come. I would kind of describe it as brackish water we're in right now, and we may see some contradictory evidence on the upside and the downside for a while, it does appear that values are stabilizing and that the expectation of buyers and sellers are coming closer together, which is why I talked to the general feeling in the market that the second half of this year is likely to be one of a greater degree of optimism, again, probably a bit more uncertainty in the first half.

The next question comes from the line of Hemant Kotak from Kolytics.

Thank you for the trading update. Just a couple of questions from me, please. Just to start with, in terms of the development pipeline, you've given guidance of 6% to 8% on cost. Can you just tell us just looking back what that 23.3 million equates to on a weighted basis, please? And then looking forward, what do you expect the next year to be on a weighted basis because 6% to 8% is obviously a pretty wide range. And obviously, 6% on 5% is not too much of a development profit on cost whereas 8% is.