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

Good afternoon, and thank you for joining us. With me are Aubrey Adams, the Chairman of Tritax Big Box and Colin Godfrey and Frankie Whitehead, the CEO and CFO. We are very pleased to be announcing our results for the full year ended 31st of December 2024. I'll now hand you over to Aubrey to begin this morning's presentation.

As we outlined in our announcement this morning, 2024 was a transformational year for Tritax Big Box. We delivered significant strategic progress and in parallel, excellent operational and financial performance. As Colin and Frankie will outline in more detail, the integration of the assets we acquired through UKCM has proceeded well, and we're working quickly to capture the value it creates. Operationally, development and active management have driven strong earnings growth, supporting attractive dividend progression, and there is much more to come that is embedded within our business. In addition to logistics, we now have a pipeline of data center opportunities, thanks to the manager's power-first approach with the potential to deliver exceptional returns for our shareholders. As a Board, we have been very engaged with the manager in evaluating these opportunities over the course of the year. I would also like to thank our shareholders for their ongoing support. I will now hand over to Colin for today's presentation.

Thank you, Aubrey. I'll begin by making a few key points on today's results, and then I'll hand you over to Frankie to run you through the detail, after which I will then provide a strategic update on our progress before opening up to your questions. As Aubrey mentioned in his introduction, we've driven excellent financial and operational performance this year. And at the same time, we've delivered a significant strategic transformation. We've increased rental income, actively managed our quality portfolio to produce strong levels of ERV growth, creating a record rental reversion and delivered materially improved total returns. In parallel, we've successfully integrated the UKCM assets and are making great progress at maximizing their value. Our disposal program, particularly the nonstrategic element of UKCM is ahead of schedule. So we delivered against the targets we set. And we have also launched our innovative power-first approach to data centers. Benefiting from the long-term structural support to our market and a strong and flexible balance sheet, we're very well placed to propel growth through 3 clear and powerful drivers: capturing our record rental reversion, continuing to develop out our attractive logistics pipeline and delivering exceptional returns through our power-first data center opportunities. Taking this together, we're excited about the future and very well positioned to continue driving multiyear growth as we capture the inherent opportunities to increase income across the business. More on this later. But first, I'll hand over to Frankie to run through our performance in more detail. Frankie?

Thank you, Colin, and good morning. As Colin says, 2024 was a busy year for Tritax Big Box, the most significant event being the acquisition of UKCM's GBP 1.2 billion portfolio last May. Our active approach to managing the portfolio has delivered another strong year in terms of both financial and operational performance. And we have very attractive options moving forward with regards to how we allocate our capital to continue to drive growth. Turning to the key financial highlights for the year, which demonstrate how the implementation of our strategy continues to deliver very attractive performance for our shareholders. Our headline adjusted EPS is 8.91p and adjusted EPS, excluding the additional DMA income is 8.05p. These earnings measures having risen by 15% and just under 4%, respectively. We have declared dividends equaling 7.66p per share, a 4.9% increase over the year. And with income growth driving capital performance, we report good growth in our EPRA NTA, increasing by 4.7% to 185.6p per share. This performance comes together to deliver our strongest total accounting return since 2021. Turning to look at income and earnings in more detail. The addition of the UKCM portfolio has contributed to the majority of the increase in net rental income, which has grown to over GBP 275 million this year. And as the right-hand chart shows, there is plenty of future income growth embedded within the business. The contracted rents secured within our development pipeline, along with the portfolio rental reversion means that our current portfolio ERVs sit a combined 33% ahead of today's passing rent. And looking at our operational cost base on the bottom right. When excluding vacancy costs, the benefits of further scale, along with the synergies from the UKCM transaction demonstrate an improvement in our EPRA cost ratio, reducing to 12.6% from 13.1%. We continue to maintain one of the lowest EPRA cost ratios in the sector. Now turning to our balance sheet, which remains in great shape and which also illustrates that we have been able to deploy capital into some really attractive opportunities this year. In terms of key metrics, on the top left, our overall portfolio value has grown to over GBP 6.5 billion. Looking at investment made during the year, we have delivered the midpoint of our guidance with GBP 222 million deployed into development CapEx. We purchased one standing asset for GBP 48 million and of course, added GBP 1.2 billion through the acquisition of UKCM. All of this investment will be accretive to earnings over the short-term. And as you see on the bottom right, we have also successfully sold or exchanged to sell GBP 306 million of investment assets at a premium to book values, which includes nearly 40% of the UKCM nonstrategic assets. Looking back on the left, our loan-to-value has fallen to 28.8%, with the reduction due to the lower leverage of the UKCM balance sheet at take-on, plus some appreciation to our asset values through 2024. And it's that valuation growth, which is behind the positive movement in net asset value. As I noted earlier, this has increased by 4.7% to 185.6p per share. And now let's take a look in more detail at what makes up our 9% total accounting return. As the chart highlights, we are back into positive territory when it comes to valuation growth. A GBP 244 million gain has been recognized across the portfolio following the inflection point we saw in values through early 2023. Total portfolio growth was therefore 3.7% over the year, of which the net gain booked on the acquisition of UKCM represents just -- of which the net gain booked on the acquisition of UKCM represents just under 1% on the right-hand side, and in terms of the constituent parts of our total accounting return. Our earnings yield is attractive at nearly 5%, and the capitalized income and ERV growth have contributed 2.8% across our investment portfolio. And our development gains have added a further 1.3%. Therefore, all parts of our strategy have contributed to our accounting return for the year. And it's worth noting that this is prior to any returns coming from our data center strategy or any potential yield compression, both of which would be additive to our future total returns. Turning to the strong operational performance we have delivered in the year, and we start with our asset management activity. GBP 11.9 million has been added in new headline rent from rent reviews and lease events, where we have increased passing rent on average by 12.5% across these leases. This has led to an increase in our EPRA like-for-like rental growth to 3.9% year-on-year. And the right-hand side provides some color on our movement in vacancy levels. We opened the year with a 2.5% vacancy rate. Given the nature of the UKCM portfolio, upon acquiring, this added a further 1.2% to vacancy. We have since made good progress with the letting of this space, and therefore, our closing vacancy across the underlying portfolio sits at 3.3%. We also completed 3 development assets in late November and December last year, which added 2.4% to the overall vacancy at the year-end. With positive conversations ongoing across all 3 units, it does provide us with an immediate opportunity to capture the GBP 9 million of rent attached to the letting of these brand-new best-in-class assets. Looking forward, with a combination of a more active smaller asset portfolio and an ongoing level of selective speculative development, we expect vacancy to run at a rate in the low to mid-single digits. Turning to development, where we've had another strong year and delivered in line with our guidance with over GBP 11 million of rent contracted in the period at an attractive yield on cost. Across all of our development KPIs, we have seen an improvement on 2023, including 1.9 million square feet of development starts, 79% of which has been either pre-let or presold under a DMA contract. 1 million square feet of lettings, which has secured GBP 11.1 million of contracted rent. This letting activity will deliver a yield on cost to us of 7.1%. We have also contractually agreed a further freehold sale and DMA contract over a 0.3 million square foot unit, which we will start in Q1 2025. We, therefore, expect to recognize GBP 10 million of DMA income in the current financial year. And so to conclude on our operating performance. We continue to drive our top-line rental income growth through good progress across both our active management and development program. And turning now to ESG, which is fully integrated across our business and helps to enhance our long-term performance. At a corporate level, our EPCs have improved. We now have 98% of the portfolio weighted EPC C or above. On our development portfolio, we've reduced the average embodied carbon intensity of our developments to 287 kilograms of CO2 per square meter, which is a 20% reduction on average across our new development year-on-year. And in May 2024, we unveiled our 5-year strategy to positively impact 250,000 young people by providing platforms for education and opportunity. It's really important that we connect with the communities within which we work. And this year, we've impacted over 23,000 young people, and we are excited to be working with Schoolreaders, The King's Trust and education and employers to help us deliver upon this strategy. Turning now to our balance sheet, which remains strong, provides us with financial flexibility and insulates us from some of the volatility we've seen in the capital markets. Let's start top left, where our debt maturity profile is well diversified by both source and by maturity. Noting that we have options to extend 2 of our loan facilities currently maturing in 2026 and 2029 as highlighted. And moving along the bottom, our loan-to-value has fallen to 28.8%. Our available liquidity remains in excess of GBP 550 million. Our average cost of debt remains attractive at 3.1%, of which 93% of drawn amounts are either fixed or hedged. And finally, we've shown in the right-hand chart that our reversion capture over time, shown here in blue, will far exceed the likely increase in finance costs as we refinance our facilities shown here in gold. This provides confidence in our ability to continue to grow the company's earnings attractively as we gradually refinance our maturing debt facilities. I've illustrated here the very attractive options we have to deploy capital. As you know, our logistics pipeline offers an attractive 6% to 8% yield on cost from new developments. In fact, for 2025 development starts, we are targeting a delivery within the 7% to 8% range. And now complementary to this is our data centers, where at Manor Farm, we are targeting a yield on cost of 9.3%. We will be looking to deliver data centers on a powered shell basis, which we believe offers shareholders the most attractive risk-return combination. Now some final thoughts from me before handing you back to Colin. We have delivered another strong set of financial results and operational performance for 2024. We have lots of embedded value within the business across our development pipeline and the 28% rental reversion across our portfolio. This underpins the confidence we have in delivering attractive earnings growth over the medium term. Our continued financial discipline means our balance sheet remains in a great position with lots of attractive optionality to redeploy our capital. And stepping back, given the opportunities we have within the business, we expect to deliver strong total returns for shareholders over the short, medium and long term. Taking all of this into account, we are optimally positioned for the future. Now back to Colin.

Thank you, Frankie. The strong financial and operational performance that Frankie talked through has been delivered by the talented team at Tritax Management, enabling Tritax Big Box to develop and deliver its strategy. Tritax Management has deep sector knowledge, all of the necessary in-house capabilities to deliver success and prides itself on having an agile and entrepreneurial culture. This underpins the strong operating performance and has delivered attractive new opportunities such as our U.K. leading development platform and power-first data centers. Investments in this team has resulted in the headcount growing by over 70% since 2019, and we have improved the already high levels of engagement from our employee satisfaction survey. And all the while, these quality services have been delivered cost effectively to Tritax Big Box with one of the lowest EPRA cost ratios for a fully integrated investor developer and with the declining effective fee now at 58 basis points, of which 25% is reinvested in Tritax Big Box shares. This reinvestment has been complemented by additional share purchases by the manager since IPO. So the unique characteristics of the management team alongside the Board has been key to the strong operational performance and strategic transformation and positions us well to deliver continued success for shareholders. Turning now to our market, which continues to provide a favorable backdrop to operations. Starting with demand on the left chart. In the U.K., we saw 21.3 million square feet of take-up from a diverse range of occupiers in 2024, consistent with 2023 levels. Whilst macroeconomic and global geopolitical uncertainty has caused some businesses to delay long-term commitments, leading companies continue to invest in the evolution of their logistics networks. Turning to supply. The gold bars show that U.K. development completions reduced to 14.7 million square feet, down from 30.3 million square feet in 2023. And national vacancy was 5.6% at the year-end, flat across the second half. Looking forward, supply is stable and occupational demand remains healthy with the potential to increase. And from this, we expect further attractive levels of rental growth. Turning to the right-hand side chart and capital markets, investment activity increased through 2024 with competitive bidding on the best opportunities. And the prime headline yield for U.K. logistics asset remained stable at 5.25% with the expectation for reducing interest rates providing opportunity for yield-induced value growth this year. I'll return to explain our data center activity later, but you will not be surprised to hear me say that the market environment is very positive. The left chart shows how an increasingly digital world is creating the need to store and process exponential volumes of data. AI is just one important component of this. Turning to the right chart, demand is very high, but take-up in London has been significantly constrained, primarily due to very low levels of near-term power availability and the sheer cost of building a fully fitted data center. U.K. rental rates have moved higher in 2024, and we expect to see further growth in 2025 and beyond with demand from hyperscalers leading the way. So our markets are in really good shape. And here on the left, a quick reminder of how our strategy is designed to capture the opportunities in our markets, providing a combination of resilient income and attractive growth. Our high-quality assets in critical locations deliver rental income from a diverse range of superb clients and sustainability-led hands-on active management is supporting the objectives of our clients whilst adding value for our shareholders. All the while, we remain disciplined when it comes to capital allocation, effectively rotating capital to fund high-returning opportunities through the development of new best-in-class logistics and power first data center assets. It is our strategic choices that have embedded 3 clear growth drivers within our business, as shown on the right, capturing record rental reversion from our investment portfolio, rolling out our attractive logistics development pipeline and developing high-returning power first opportunities in data centers. Let's now look at these 3 growth drivers in turn. The first driver is growing our rental income through rental reversion capture and active management. As Frankie mentioned, our active approach to asset management has delivered excellent results in 2024. Outlined on the right are some of the highlights that we've achieved across both the Big Box and UKCM portfolios with significant uplifts in rent, in some instances, setting new record levels for their locations. As shown top left, we ended the year with the logistics rental reversion at a record 28% or GBP 79 million. We expect to capture nearly 80% of this within the next 3 years, as shown bottom left. And this gives us the scope and confidence to continue growing our rental income. One of our biggest strategic achievements in 2024 was the acquisition of UKCM. As we outlined at the time, UKCM complements our existing portfolio by adding a range of high-quality and predominantly urban logistics assets. It increases our range of small units and our exposure to open market rent reviews. At the time of acquiring UKCM, we stated our objective of selling GBP 475 million of nonstrategic assets that we inherited as part of the transaction. And I'm pleased to say that we're making excellent progress as shown top left, having now exchanged or completed on GBP 181 million of disposals. So we're on track against the 2-year disposal period guidance that we provided. Critically, we've sold these nonstrategic assets ahead of their market value at the time of acquisition, reflecting a 2.8% premium and implying a 6.2% net initial yield. And we have a further GBP 177 million of UKCM assets under offer. So together with the additional sales from our investment portfolio, disposals for the last 14 months totaled over GBP 306 million, reflecting a 3.3% premium as shown bottom left. And we're accretively rotating the proceeds from these disposals into higher returning opportunities. The second growth driver in our business is our attractive logistics development pipeline. As you can see on the left, this has the capability to deliver over GBP 323 million of additional rental income, more than doubling our current passing rent. Over the long term, we're targeting a 6% to 8% yield on cost. And as Frankie noted, we expect to be at the top end of that range for our 2025 development starts. The third growth driver in our business is the development of data centers. These have the potential to deliver exceptional returns given accelerating occupier demand and acute constraints on new supply. Delivery of power in the near to medium term in core locations is critical to capturing significant lettings with major data center operators. And in some of the core locations within the U.K., the waiting time for power delivery is over 10 years. So we have adopted an innovative power-first approach, a crucial differentiator that gives us an advantage. This power-first approach enables us to deliver data centers faster, securing higher returns in the near term by developing powered shells on a pre-let basis only, delivering a very attractive target yield on cost of between 8% and 10%. And the opportunity that we have is significant. With a first right of refusal over a potential 1-gigawatt pipeline of critical grid connections for further data center development. The first such site is at Manor Farm Heathrow, which demonstrates both the scale of the opportunity, but also the speed at which we can capture it. At 147 megawatts, Manor Farm at Heathrow has the potential to be one of the largest and most important data center developments in the U.K. Uniquely, Phase 1 can be delivered within a vastly accelerated time frame, subject to planning. We're targeting an attractive yield on cost of 9.3% net of all costs, including deferred land consideration and performance fees for a powered shell and pre-let development. Utilizing pre-existing grid connections secured via our JV partner, Phase 1 of Manor Farm could be completed and income producing as early as the second half of 2027. Bringing all of this together, the sum of our 3 growth drivers give us the opportunity to grow our current GBP 297 million of rental income to potentially more than GBP 730 million. Critically, as shown on the left side of the chart, we have visibility on an incremental GBP 56 million in the nearer term, being the combination of rental reversion, vacancy and our current development pipelines. And in the medium term, we have the potential to add a further GBP 117 million. And here, we are only factoring a small component of the potential data center opportunity. So over the short and medium term, there is opportunity to grow our income by almost 60%. And these numbers don't factor any future rental growth, the full extent of our data center pipeline or any of the other opportunities as set out at the bottom here. So there's further upside not presented on this slide. So to conclude, we've delivered excellent financial and operational performance in 2024, whilst also securing a significant strategic transformation for the company. This has strengthened our position as a leader in U.K. logistics, and we look forward to the future with confidence. Our markets continue to exhibit attractive characteristics and compelling levels of rental growth. We have a strong balance sheet supporting execution of our strategy, and we have 3 clear powerful and organic growth drivers. As a result of these factors, we're exceptionally well positioned to continue delivering multiyear income and value growth. Thank you for listening. Ian will now start the Q&A session.

Good afternoon, everyone, and welcome to the live part of our presentation to take your questions and hope to provide you with some answers as well. I should begin by just saying thank you very much indeed for joining us, and it's a real pleasure to do our first retail investor-focused Q&A session as well. So I hope it's a useful session for you. We've had a lot of questions come through from the webcast. We'll try and go through as many as we can. We've got about 30 minutes, and we'll dive straight in with a question around the current dividend policy for the company.

Good afternoon, everyone. So there's been no change in the dividend policy over the course of the last 12 months. We are effectively targeting a growing and sustainable dividend, and that is based off of our earnings measure, adjusted EPS, excluding additional DMA and we seek to pay out at least 90% of that earnings measure on an annual ongoing basis.

Great. Next question relates to data centers. And sorry, I don't have your name for you submitted the question, but thank you for the question. Why are data centers on a powered shell basis?

Okay. Should I take that one? Thanks for the question. The reason for that is that there's a lot of similarity between larger modern data centers and the sophisticated larger scale multi-deck logistics buildings that we are very accomplished at developing. And we've done that for a number of very sophisticated and demanding clients over the years. But the other reason is that we're not experts in operating data centers. We're not experts in the racks and the servers that go in them. And we believe that they have potentially quite significant obsolescence given the speed at which that market is moving right now, and we've all seen the DeepSeek announcement, et cetera, et cetera. So we'd rather that someone else took that risk, notwithstanding the fact that the levels of return that we're aiming to deliver on a power shell basis are really equivalent to the levels that others are achieving in the DC market by taking full operational risk. So we think this is a low-risk, high-return strategy that we're pursuing with the powered shell.

Great. Next question. We mentioned the reduction in costs to 12.6%. This is the EPRA cost ratio, excluding vacant buildings, but choose not to comment on the similar increases in costs when including vacancies. Please explain why that figure has increased?

Okay. So I think we're looking at Page 7 here. We've got the 12.6% ratio versus the 13.6% ratio. I did comment on the fact that our vacancy had nudged up during the course of the 12 months. So that is an obvious feature as to why that has moved upward slightly. I think the one point I would note here is that around 2/3 of that vacancy cost that's been borne in the year currently rests with the assets that we're looking to dispose of. So the nonstrategic component part of the portfolio. So all things being well, if we're in keeping with our 24-month time horizon for the full exit of those assets, that vacancy cost should come down to around about 1/3 in terms of what it was for the financial year FY '24. So those 2 numbers should be closer together as we move forward.

Great. I really like this question. All very positive. But what keeps you as a management team awake at night?

Well, I sleep quite well. But I think, look, we're not complacent as a team. We're continuing to challenge ourselves and part of that is thinking -- looking over your shoulder and thinking about where the risks might lie. What I would say right now is on the one side of the coin, I think our market is in pretty good shape, and our business is in great shape. But the market has come back to a sensible position. I think the biggest concern that I have is further macroeconomic risk and geopolitical risk weighing on the macroeconomics. There are factors outside of our control, but we have to plan for them to ensure that our business is robust. And I think to that end, we've got the U.K.'s largest logistics focused portfolio, but it's not just the scale of it, it is the quality of it that's really crucial that I suppose, mitigate some of that risk in the quality of our income, the really high-caliber customers that we've got long leases, best-in-class buildings. And that's what delivered a 10-year track record of 100% rent collection and no voids in our portfolio up until that point. So that cornerstone investment income is really crucial to underpinning our dividend and for you as investors, the continuation of your dividend income.

Great. We sort of touched upon this when talking about the cost ratio, but a question about the vacancy rate. And how do you think this -- how do you think that will change given the current uncertain economic climate?

Well, part of the vacancy is a deliberate move on our part as a consequence of the development activity that we have and some of it is due to timing. As Frankie talked to in the presentation, there were 3 buildings that we completed the construction of just prior to the year-end in 2024. Had they finished -- had they completed in January, they wouldn't be on that data point. But the underlying vacancy position is much, much lower. As Frankie talked to -- do you want to just sort of talk to [indiscernible] part of that Frankie?

So our underlying vacancy level at the year-end was 3.3%. At the half year, it was 3.8%. So actual fact it has come down over the course of the last 6 months. The level of market vacancy is around 5.6%, I believe. So we are substantially below market level when we're looking at the underlying portfolio. And of course, this creates opportunity. As long as it's an evolving vacancy rate, we're letting buildings, we're driving rents on, we see that as opportunity.

You need vacancy to capture the reversion through asset management initiatives, drive the rent forward, as Frankie said. And obviously, that's additional potential income to drive our rental growth.

Great. You have disposed of a number of UKCM assets. How is this money being reinvested?

So in line with the guidance that we gave this morning, our CapEx program for 2025, the guidance around that looks a little like GBP 200 million to GBP 250 million going into logistics development. We are targeting a yield on cost of 7% to 8% for that investment. We are deploying the first parts of our CapEx into the Manor Farm data center scheme. Just to remind you, that was a 9.3% yield on cost that we're targeting there. So a further GBP 100 million is what we've guided to for that. And of course, we continue to act opportunistically when it comes to the investment market and investment purchases. And we have indeed acquired an asset in the year-to-date purchased GBP 75 million Sainsbury's Big Box at a 6% day 1 running yield with a yield that could move to 7% in about 3 years' time. So all manner of investment, but with a focus on development.

Great. Next question is interest rates look as if they will stay higher for longer. What impact does this have on Big Box?

Thanks for the question. I think the current interest rate situation is baked into yields in the investment marketplace today. And indeed, as a consequence of that, the development yield that one would need to achieve as a sensible margin. As for the position on our balance sheet and debt servicing, Frankie, do you want to touch on that?

Yes. No, I think we're well insulated from what has been going on in the broader debt financial markets given the strength of the balance sheet and the debt profile that we have built and created over the last 3, 4, 5 years. We're 93% fixed or hedged, and we've got a staggered debt maturity profile. So we're not facing any big cliff edges when it comes to refinancing risk. I did set out on Page 13 this morning, the impact between how we envisage ourselves capturing the rental income growth through the reversion capture and how our net finance costs may increase over time as and when we come up to those refinancing events. And that's a 3-year time horizon that I set out there. So looking at the finance cost component, if we were to mark-to-market those loans at today's interest rates, in effect, we're setting out that net finance cost would increase by around GBP 16 million. But at the same time, we believe our net rental income will increase by about GBP 62 million to that reversion capture. So the drop-down or the fall-through of that margin there of GBP 45 million is still going to provide shareholders with a very healthy level of EPS growth in that intervening period.

I suppose just in summary there, whilst we are hoping for some interest rate cuts, we're planning for the current situation to remain as is. So it's a prudent approach.

And maybe a follow-on question to that, and you have sort of touched upon this in some of your answer, Frankie, but how do you manage -- how do you plan to manage the debt refinancing and ensure you have financial flexibility in the coming years?

I mean, of course, we -- as I said, back to the strength and the current position of the balance sheet, low leverage, low net debt-to-EBITDA ratios. We actually received a credit rating outlook upgrade during the course of the year. So in terms of lenders viewing us as a corporate, I think our caliber has improved in the course of the last 12 months. So that will only strengthen any ongoing financing requirements. We have many different avenues within which we've raised debt in the past. So that is through our revolving credit facilities, that is through U.S. private placements, that is through private secured debt, that is through public bonds. So we have all manner of options available to us in terms of how we choose to refinance those as and when they come through. And again, we continue to maintain a large level of liquidity to provide us with flexibility currently company in excess of GBP 550 million.

Great. Next question. How have the logistics assets in the UKCM portfolio performed relative to expectations? And what factors are driving this performance?

They have performed very slightly ahead of the Big Box portfolio in terms of ERV growth. We actually asked this question this morning of our team. I'm trying to look up the e-mail that was sent. Forgive me, it was from...

Looking up, I think overall, we've been extremely pleased with the performance of the assets in the 8 months since the completion of the acquisition. So... Yes.

So the UKCM portfolio essentially has contributed to the second half performance data because we acquired the portfolio in late May. And just to give you a feel for that, the whole portfolio delivered a 3.3% ERV growth in the 6-month period. And the core UKCM assets, logistics delivered a 3.5% ERV growth in the 6-month period. So slightly ahead of the underlying growth, ERV growth in our portfolio more generally.

Yes. Just for everyone's benefit, ERV stands for estimated rental value. So that is what the valuers think the market rent would be on those assets. And actually, when we're talking about rental reversion, what we mean by that is the difference in effect between the current contracted rental income that we have on our assets and the market rent that we could achieve if we were to relet the entire portfolio today. So the spread between those 2 numbers, which is about 28% in effect, is the future opportunity that we've got to capture that rental income over the next 3 or 4 years. So it's an important number in our business, a number that we follow very, very closely. We did say no jargon at the beginning of this call. But moving on to the next question. What are the key opportunities you see in the newly acquired 74-acre Manor Farm site at Heathrow? And how does its location in the Slough Availability Zone fit into your broader growth strategy?

Okay. Well, thanks very much for the question. So the first thing is that the Slough Availability Zone is a name which is applied to a critical area where there's significant data lines passing for high-speed Internet access and the delivery of data, but also significant power availability. And it's growing to be the most important hub in the U.K. So it is the most prime location that one could contemplate for a data center. And whilst we are looking at targeting sort of double-digit yield on cost for some of our other data center pipeline opportunities, this one is 9.3%, I think befitting the quality, noting that the underlying yield for a stabilized data center of that nature would be in the low 5s. So we're looking at arbitraging around 400 basis points there. The opportunity is, in the first instance, to construct a data center on a pre-let basis, subject to planning. We're hoping that we would be in a position to have a fully functional building by late 2027, which is when the majority of the first phase of the power becomes available, 107 megawatts delivered late '27. There's a second phase of power, 40 megawatts that's deliverable in 2029. It's a multi-deck building that will be one of the most important data centers in the U.K. And we would -- following the construction of that building, have the remainder of the site available to us. It is in the green belt, but this is a location where we believe that in the fullness of time, that there will be greater pressure on and the need for more data centers. And indeed, you've probably heard the government rhetoric on this. The government has stated that data centers are now national critical infrastructure and there's significant push from the government in encouraging the further development of data centers and the location close to Heathrow and the surrounding environments, I think, would give us a very good opportunity to pursue that in the medium to longer term for a greater scale campus type environment.

Excellent. And just as a follow-on question to that. Can you elaborate on the sort of additional infrastructure that is needed for data centers? I suppose what makes them different from logistics assets?

Yes, it's really power. I mean, obviously, the design of the building is different, and there are cooling and efficiency aspects to the construction of data centers. But the primary difference is power. I mean, obviously, they didn't require as much car parking. You haven't got lots of staff to cater for in terms of multi-deck car parks, et cetera. You haven't got the same vehicular access requirements for HGVs and those sorts of things. So they tend to have a relatively large footprint. There are location specifics that are required, typically not on the flight paths, disaster avoidance, et cetera, et cetera. So not next to flood planes and that type of thing. But generally speaking, the main difference is power. They require very, very significant power. And it's about getting the power to the site. Typically, data center operators will require a significant level of date – of power resilience. And that is taking the power from different locations, typically running the power in at least 2 separate lines so that if one of them severed the power continues. And then the final level of protection is usually an on-site generator that can kick in, in the unlikely event that both of those power connections drop.

Great. And maybe following on a planning-related question. With the labor party now in power, what impact will that have on the planning process?

It's a difficult one to predict this. I mean, there's been quite a lot of talk over many decades about reforming the planning system. And it's never happened. Planning is devolved from central to local government. There is obviously a local plan process, and that's on a 5-year time horizon, and that will set out a land available that's allocated for employment uses and then subsequently allocated specifically for different uses such as B8 industrial logistics. The labor party has said that it intends to speed up the process for delivery of critical national infrastructure items, as I've just mentioned. It has also said that it intends to modernize the planning system. There's talk of 300 new planning offices. They would need to be trained before they can effectively be employed within the local authorities. There are about 300 or so local authorities in the U.K. that's sort of 1 person per local authority. I can't imagine it's going to make a huge difference. And it's likely that those people will be focused on residential. That's typically the focus that the government tends to take when it's talking about planning and not so much commercial property. So I'm not expecting it to have a profound effect on our market. And we do have barriers to entry in terms of supply side in our markets already, and that's a very positive thing in terms of maintaining supply-demand balance that's giving us that really attractive rental growth. So, I'm not expecting that to change anytime soon.

Just changing [ tax ] slightly. What initiatives are you pursuing to enhance the sustainability of your portfolio and reduce its environmental footprint?

I covered some of that this morning. But obviously, needless to say that sustainability is ingrained within all of what we do. Some of the key deliverables during the course of the year, we have upgraded our EPCs so that we've got now got 98% of the portfolio with a C rating or better. In actual fact, we've got 80% of the portfolio with a B rating or better. So we stand very well there against our peers. All of the buildings that we've delivered from a development standpoint have been delivered at the BREEAM Excellent. So again, some good work there. And one of the key things was the embodied carbon levels in those developments. So we've driven that down by about 20% year-on-year. So again, some good progress. And from a social impact perspective, we did launch a new strategy this year, a 5-year strategy to target 250,000 young people. So within the communities within which we're working, we've actually impacted around 23,000 of those. So well on our way to meeting that target. So some good initiatives conducted by the whole team during the course of the year.

And every one of our sort of larger scale buildings other than the smaller UKCM portfolio, the occupiers have had a proposal for solar on the roof of the building. We're looking to maximize that as much as we can. When there's a lease in place, we can't force the position there, but we can implement it at the end of the lease term. But obviously, that's something we're putting on all of our newly developed buildings. And it's a really important initiative to reduce carbon.

And also deliver very attractive returns. So the returns we make on, say, the solar PVs that are on the roof are particularly compelling. So there's a sound sort of economic and return-driven angle to this as well, which is why we think it's also very important. And the other point I'd just add is that in terms of the modernity of our portfolio, these assets are new. We regard them as being best-in-class. And relative to other sectors of commercial real estate, they are relatively easy and cost-effective to upgrade if we need to in the future to enhance the ESG performance further. So we think that there's a real sort of virtuous circle between enhancing the sustainability performance of our assets and the financial performance to our shareholders and the attractiveness to our clients. So I think we're in a good position.

That goes hand-in-hand as well with the risk component because other sectors are carrying very significant obsolescence issues and CapEx requirements that I don't think is being fully factored in right now, whereas logistics buildings are actually very pretty simple in terms of their construction, and they suffer very, very low levels of obsolescence or CapEx requirements. And we've proved that over the last decade or so.

Right. We've got about 5 minutes left. So I think time for 1 or 2 more questions. We are trying to work our way through them all here. So I forget my is going up. UKCM was a transformative transaction. Do you believe there are other opportunities out there? So I think that probably means future M&A.

Well, look, I think if you'd ask that question a few years back, we may have answered quite differently. I think we've added the U.K.'s largest development platform to our business in 2019. And the acquisition of UKCM has given us a significant opportunity in last mile urban logistics. So I think we have everything, and having added data center now, I think we have everything within the business that we would want to have. So we're not lacking anything. We think the business is in great shape and offers us a huge amount of potential in the future. But of course, we will be open-minded to opportunities. We continue to appraise opportunities in the market from time to time with our brokers and with the Board. And if we feel that there is something that's compelling for the business and offers significant returns that's complementary, then of course, we would give it due consideration.

Great. Next question. How concrete is your pipeline of opportunities?

Does this relate to development?

I think it relates to everything actually, probably development pipeline for logistics and our data center power pipeline as well.

So, let's start with logistics. So we have about 26 sites in the U.K. They're not all live at the same time. They're being progressively advanced through the planning framework. That's what you want. You don't want everything coming to fruition at the same time. That gives us up to a 10-year runway of development opportunity and our run rate of developing 2 million to 3 million square feet per annum. And the portfolio has the capacity to deliver over 40 million square feet. So we have sites that we own. We have sites that we own with planning consent. We have sites that we have -- the majority of the land is held under option agreements. Now that is highly capital efficient because we only draw down that land and pay for that land when we get planning permission. And the contracts on development options give us a 15% to 20% in-built discount, but there's further discounts that we can acquire through the landowner paying for the infrastructure and the fees and costs of achieving planning consent. So that underpins part of the significant return that we achieve from development. We monitor the program, and that's pretty clear in terms of the way we set out. I won't go into it now, the way we set out the timelines and the sites that are active and when we're investing in infrastructure and when we're vertically building. And again, there's a relationship between the amount of spec development that we do -- speculative development, i.e., built without a tenant pre-let and the pre-let activity. And we're pretty high on the pre-let activity. Last year, by way of example, I think it was 80% of what we developed was let or pre-let or let during the course of the year. So a very clear path in terms of activity there. Do you want to take the DCs one, Frankie?

Sure. So on the data center side, as we set out in our January announcements, obviously, Big Box has now acquired the Manor Farm site. So that now owns that data center opportunity. There are further data center opportunities that are being pulled together by the manager. And Big Box has a first right of refusal over those opportunities. So, once the power and the land come together in effect to create a tangible DC opportunity, Big Box would have the right to acquire that from the manager. And we indicated a pipeline totaling 1 gigawatt as things stand.

Brilliant. Look, thank you very much for your questions. We really received an awful lot. We tried to get through as many as we can in the time available. There's lots more information on our website. All of our previous results presentations are on there, including videos with the Q&A sections as well. And if you have any specific questions, you can e-mail the team, details are on the website. But thank you very much again for joining us, and we'll try and do this again for our next set of results.

Thank you.

Thank you very much for joining us today. That is all we have time for. So that concludes the Tritax Big Box investor presentation. Please take a moment to complete a short survey following this event. I hope you enjoyed today's webinar.