Warehouse REIT plc (WHR) Earnings Call Transcript & Summary

Hello. Welcome to this morning's Warehouse REIT interim results call. Can I just remind you that this call is being recorded. [Operator Instructions]. I'm now delighted to hand you over to Warehouse REIT's Managing Director, Andrew Bird, who will begin the presentation.

Thank you very much. Good morning, everybody. Good morning, ladies and gentlemen. Andrew Bird, just as a point of good order, Managing Director of Tilstone Partners, the investment adviser to Warehouse REIT. I'm joined by Peter Greenslade, Finance Director; Paul Makin, Investment Director, who will both speak to different sections of today's presentation. Slide 3, please. It's been an unprecedented 6 months, and one which has tested every businesses core strategy. Inevitably, some have fared less well, but remarkably, many have thrived, especially those requiring warehouse space to facilitate their operating business. It's against this backdrop that there are 5 key highlights that I'd like to refer you to. Number one, our portfolio has proved to have a high degree of resilience to the pandemic. Collecting rents in the high-90s as a percentage of the amounts invoiced. Looking forward, the last quarter, the current quarter to December, being a particular case in point, where we've collected rent ahead of the cash flow experienced 12 moons ago. It bodes well for the balance of the year. And with sustainable income, we have paid or declared dividends of 3.1p per share in line with the financial year target of 6.2p. Secondly, the high receipts of rent is testimony to the thriving businesses occupying our space, which is further evidenced by the level of new leasing activity and occupier retention. Once again, we've outperformed the value of ERV by 8.5%, which I find particularly pleasing given the level of economic uncertainty in some areas of our economy. Thirdly, with strong rent collection and leasing activity, it's not surprising that the portfolio valuation has performed so well, rising 6.6% in the period, giving an EPRA NTA, net tangible asset value, of 118.4p per share. Six months earlier, CBRE, our valuer, had to sign off the valuation against the backdrop of lockdown. It was still in its early days. No one quite new what lay ahead, and the market was talking about valuation reports being qualified by material uncertainty clauses. That uncertainty has been unfounded in the warehouse sector. Fourthly, with strong valuation performance, it's very pleasing to be able to point to the total accounting return, 9.5% in the period, and even more pleasing, 10.5% per annum since the IPO back in September 2017. And the final highlight in the period was the issue of new equity, which completed on the third of July, raising GBP 153 million, from not only existing shareholders, but once again, we widened the ownership of the company, particularly amongst the institutional investors. Deployment of the proceeds has been a key objective during the period with GBP 93 million invested, and further pipeline transactions expected near term. Our investment strategy has remained unchanged, buying economically relevant locations, with multiple different purposes. And the near-term focus looks to enhance the quality of the income that feeds through to the earnings per share. We'll return to this point later in the presentation when we look at portfolio and construction. So the company has found itself operating in uncharted territory, systems have proved resilient, investment strategy robust and all the KPIs have been enhanced, which we'll see reflected in today's results. Next slide, please. We've all read about the news of how COVID-19 has accelerated change, none more so than the penetration of the online marketplace. Whether it's John Lewis partnership achieving sales of 80% of previous year's turnover, but without any physical stores open during lockdown, or Boots.com seeing online sales growth of 155%. There are many examples beyond the dramatic figures coming out of Amazon, and they all require warehouse space to serve the growth areas of their business model. Looking at the slide on the top right, The U.K. online sales growth for this year has been 40%. There has been unprecedented demand for warehouse space. And then looking at the slide on the bottom right, warehouse take-up, across the U.K., for the first 3 calendar -- sorry, first 3 quarters of this calendar year has already exceeded the whole of 2016, which was the previous record year and by an amount of 3.6%. So again, annual take-up is expected to set new record levels. There was a growing shortage of available space, especially in urban locations, where we expect to see competition from tenants continuing to drive rents and none more so from our low average base rent of less than GBP 5.50 per square foot. This contention is feeding through to the investment market, where there has been yield compression during the period, as demand amongst investors seeking sustainable and growing income streams is driving higher capital values, and perhaps evidenced by the recent announcement of the Prologis sale of the Platform Portfolio, achieving, we understand, GBP 473 million, reflecting 4.9% net initial yield, a whole 100 basis points sharper than our own portfolio evaluation. For the 10-year cost of money at unprecedented low levels, we expect to see the trend continue. But ours is not a perfect marketplace, so anomalies will continue to exist where value can be captured. And with that, I'd like to hand over to Peter on Slide 5.

Thank you very much, indeed, Andrew. If we go on to Slide 5. I don't propose going into great depth on the results, but I do want to pull out the salient numbers and ratios. If any of you have any specific questions, I'll be only too happy to answer them at the end. On Slide 5, you'll see that IFRS PBT increased to GBP 40.4 million, up from GBP 2.8 million in the 6 months to September 2019. The main driver was a GBP 32.7 million gain on the revaluation of the assets against a GBP 4.3 million reduction in the same period last year. At the adjusted EBIT and earnings level, profits were also higher than the comparative 6-month period at GBP 10.8 million and GBP 7.8 million, some 11% and 7% ahead. Earnings per share and EPRA earnings per share were both 2.6p for the period, a reduction of 0.4p on the comparative 6 months, reflecting the increased number of shares in issue following the share -- the July raise and the cash drag from any partial deployment of the funds. The revaluation increase together with assets acquired in the period then -- we have a portfolio valued at GBP 563.2 million at September. And EPRA NTA of 118.4p, up from 109.5p at the March year-end. Going on to the next Slide 6. Rental income was up GBP 2.1 million half year on half year to GBP 15.2 million. This reflected the full benefit of acquisitions made in the year to March 2020, together with like-for-like rental growth of some 1.9%. Property costs increased GBP 0.5 million. A large part of this is due to a very cautious provision for bad debts of 2%, which we consider to be a very prudent amount, especially when rent deposits are taken into account. I will talk about debt collection in more detail later. Cost ratio increased to 29.4%, up from 26.5% a year ago. This is purely a function of the cash drag and are expected to normalize by the full year. However, the ongoing charge ratio fell to 1.5% from 2% a year ago, as the REIT benefits from both size and scale. On Slide 7, the next slide, we'll see that the balance sheet is strong and has net assets of GBP 449 million, substantially up on the GBP 263.1 million of a year ago, and driven by both the raise in July and the revaluation surplus. You see that net borrowings are low at GBP 114 million. This represents our GBP 157 million term loan, offset by cash held pending deployments. Sorry, I'll carry on. LTV, 20.2% is low, and half of the 40.2% over a year ago. As cash is deployed, this will increase to approximately 35% as we intend to keep future LTV in the middle of the 30% to 40% range rather than towards the top as has been the case for the past 3 years since IPO. As I've already stated, EPRA NAV per share closed the half year substantially up at 118.4p, and total accounting return, as Andrew has already said, with an impressive 9.5% for the 6 months. On Slide 8, the next slide, this is the NAV bridge from the 109.5p at March to the 118.4p in September in more detail. In terms of outflows, there was a cost of raise together with the cost of acquiring the 3 assets bought in the period, that was 1.6p, and the first interim dividend paid in early July, which was 1p. Offsetting these outflows, there was 2.1p of adjusted earnings from -- and 9.4p of revaluation increase. We also sold 9 of our noncore assets in the half year as part of our ongoing house keeping. The proceeds of GBP 12 million almost exactly matched the March 2020 valuation, which was pleasing, since there was negligible impact on the NAV. On Slide 9, before I hand back to Paul, it's just worth looking and talking about rent collection since March, if we take it quarter-by-quarter, the April to June quarter is 97.4% collected in cash, and there is a further 0.4% due from deferred payment terms. We expect total collection to exceed 98% as the last remaining deferred rents are paid together with other small payments. The quarter July to September is 94.7% purchased in cash, with a further 2.4% expected from tenants who are on deferred payment terms. In addition, we expect a further 1% received in the coming weeks, the year-over-year result match the expected 98% outcome for the June -- for the April to June quarter. The current quarter, October to December, is already 88.2% effected in cash, with a further 4.4% due from tenants, who were either paying monthly or who have agreed to deferred terms. Again, we expect total receipts to be in the high 90s, and similar to the March and June quarters. Interestingly, The current quarter, October to December, after 30 days, is 9% cash collected ahead of the March quarter, and 12% as of the June quarter. In summary, I would say we have high rent collection, bank facilities in place for 2025 and covenants comfortably met and are well positioned to employ the balance of the July raise, whilst maintaining LTV to approximately 35% when fully invested. With that, I'll hand you back to Paul, who will take you into Slide 10.

Thank you, Peter. On Slide 10, we can see the various valuation statistics. The valuation of the portfolio has increased from GBP 450 million to GBP 563 million during the half year period. This is an increase of GBP 113 million. If we strip out the GBP 90 million of acquisitions and the GBP 12 million worth of sales and some CapEx, this is a like-for-like increase of GBP 30 million being a 6.6% increase. I'm also pleased that the new acquisitions have increased in value by an additional GBP 4.5 million, which is 5%. The value increase has been brought about by like-for-like rental growth of about 2%, and an element of ERV growth and yield compression, with the yield compression across the investment portfolio reducing from 6.4% to 5.9%. This is a combination of asset management and targeted acquisitions, we've also seen the walls increase from 5.2% to 5.8%, which is pleasing remembering that we will reduce by half year, each half year through the eruption of time. So this -- we're pleased with this increase from 5.2% to 5.8%. And the portfolio has now reached a total rent roll of GBP 34 million and covered 7 million square feet. As we look to expand the portfolio, we continue to assess how the portfolio is performing. We analyze each asset on an ongoing basis, and look at their respective risks, rewards and requirement for CapEx. So on Slide 11, if you could plan the slide, we've actually set out a summary of this analysis, demonstrating the risk we're reward line. And as you can see, we group the assets into 3 categories: core, value add and opportunistic, with 26% of our portfolio by value being in core; 64% being in value add; and 9.5% being an opportunistic This method of reviewing our portfolio construction drives our acquisition process, our targeted sales and our asset management budget for capital expenditure. For example, the Iron Mountain lease renewal has move with one of our larger assets from value add down into core, as you can see there being Warrington on the bottom left-hand corner, and the 2 acquisitions that we've recently made have increased the core proportion from 16% to 26.3%, if you include also that Iron Mountain transaction. So this is a useful analysis tool for us, and it's one that we will use again in future presentations as we see the portfolio develop. Turning to Slide 12. As I've said, the portfolio construction analysis on the previous page, this has driven our acquisition strategy. As we look to grow the dividends, the quality of that income is also important, and we took a strategic decision to increase the holding in very strong and e-commerce-focused income, increasing that core portion of our risk-reward curve. This prompted the inclusion of the Chesterfield in the investment pipeline as part of the capital raise earlier in the year, and we were pleased to have concluded the acquisition during the period. In summary, this asset is a modern, very well-specified unit. It's on the M1 main route of the transport spine of the U.K., and is let off a low rent. With 13 years to Amazon, it's one of only a few that Amazon took on a 15-year term, and Amazon have heavily invested in the building, providing 5 levels of -- to the building through mezzanine construction, which they've done at their cost, and we're also currently -- and we are only rentalized the ground floor at the moment, unlike some across the country where they -- all 5 floors have been rentalized. So we see this as a future potential. The market continues to see the value of this type of asset increase, with warehouse let on long leases Amazon starting to trade in the 3% yields. We were therefore very pleased that the new acquisition has increased in value by -- since acquisition. And as I say, all acquisitions as a whole have increased value by 5% in the last few months. We're delighted that Amazon is now our largest occupier, being just over 11% of our total rent roll, and as an occupier, we look forward to continue working closely with. At the same time, we've included a separate transaction, the potential value-add opportunity in let -- to Wincanton at midpoint, Middlewich. Again, this is a pipeline asset on the capital raise. The warehouse is adjacent to our 29-acre holding at Middlewich just off the M6 motorway, and this takes our total holding of this location to now 500,000 square feet. The buildings let to Wincanton Holdings Limited, who's today's largest third-party logistics operator, and has 3.5 years remaining off a low passing rent of GBP 5 per square foot, which compares favorably to the lettings that we're doing elsewhere on the estate. But this acquisition allows us to work with the largest logistics operator in the U.K., but also offers us the ability to be able to provide our current occupiers on this date, with some form of expansion potential without losing them off the estate, because Wincanton run this building as a multi-user facility, and we work closely with them. We continue to look to buy more assets close to our larger strategic holdings, as larger assets offer a greater range of options for occupiers and ability to asset manage and also drive value. And these larger estates attract premium prices in the market. So these 2 acquisitions blend and provided 9-year WAULT and a mezzanine yield of 5.4%. Turning on to Page -- Slide 13. Despite the lockdown, the occupation market has continued to experience strong demand for warehouse space, as Andrew set out earlier, and continues to benefit from the shortage of supply and limited new developments. We're, therefore, pleased to have continued our strong letting and lease renewal activity through this period. We continue to see the benefit of the targeted CapEx on vacant properties, securing a total of 23 new lettings, again, over 8% higher than the March 2020 value as ARB, taking our effective vacancy to only 3.4%. An additional indicator of our strong occupier relationships is our retention rate of 70% of lease expiry, and during the period, over 90% of our break clauses were not exercised. We've secured a total of 30 lease renewals, again, 28% ahead of the previous passing rent. 2 deals in my mind standouts during the half year, and the first of these is the Iron Mountain leasing, which I'll come back to in a second. And the -- our NHS relationship that we've developed in Leeds and Runcorn. The NHS had a short unexpired term on one of our states in Leeds, but we became aware of the need and actually because of the distribution for PPE in March, April. We quickly allowed them to occupy one of our units for free on the estate, along with another unit in Runcorn, which was just awaiting refurbishment. And as we develop this relationship, we started to understand their longer-term needs. And we were, therefore, very pleased to have agreed a new 5-year lease on that vacant space for the NHS. And we also agreed a new 5-year renewal on their existing space on the same estate. In each case, we secured the latest market rent, but for us, this was an increase in the term on the estate, seeing significant increase ahead of the value of ERV, actually 25% ahead. And a good way ahead of the previous passing rent on the estate. If we turn to Slide 14, we can continue to see the outperformance of our asset management team, and on the tables, that show the historic performance. From the top left table, you can see that the lease renewals in the half year, outperformed the value of ERV by the highest amount average since IPO. And the tables along the bottom show that the reducing vacancy and strong retention rates throughout the portfolio continue. There's a lot of statistics on this page, and I can come back to some questions later. This outperformance comes from working with our occupiers and understanding their needs. A good example of this is a letting that one of our regional directors literally completed this week, so it's not in the numbers, but I thought it'd be useful just to discuss it with you. This was on one of our estates in Tewkesbury. Since we acquired this state shortly after IPO, we've been carrying out a phase refurbishment program, returning the state to near 100% occupancy. However, we were aware that one of our larger occupiers were going to vacate as they've grown and they were looking to consolidate onto an estate that they owned elsewhere. And so on the 20th of October, this year, just gone, we had 22,000 square foot unit handed back. And yet, by the 31st of October, we are pleased to have signed a new 10-year lease on 3/4 of the space at a higher rent per square foot, not bad for a couple of week's work. But this shows how we work with our occupiers, and we understand their forthcoming needs and requirements. If we could just turn to Slide 15. Through a combination of strategic acquisitions and our targeted sales, we'll be focusing on those assets, which are the noncore or states with small and more granular units for those sales. We've managed to reduce the number of the estates actually from 95 to 89, and the number of tenants from 560 to 514. So whilst we've actually reduced the number of estates, and we've reduced the number of the occupiers, what we haven't done is diluted the diversified nature of the income stream because we've been focusing on improving the quality and the longevity of the income, purposely increasing our exposure to e-commerce. And as we've said, Amazon is now our largest occupier, and is followed by the online function of other retailers, as you can see from the logos, such as John Lewis, their online function; Boots, their online function; Laithwaite's, one of the largest wine distributors online; and also Victorian Plumbing. Turning to Slide 16. Through a combination -- and just before I turn back to Andrew, I just wanted to touch on this Iron Mountain letting that we've talked about. This is Iron Mountain. They occupied our asset in Warrington. And you may remember, we are spying this asset as part of the Echelon portfolio towards the end of last year. with the asset only having a very short unexpired term. In my mind, this is a key example of our aim of buying well-located, well-specified buildings, let to occupiers demonstrating strong inertia. We were, therefore, delighted to have secured the 10-year lease renewal on the building to Iron Mountain, securing the increasing the rent by 26%, and seeing the valuation increase this time by 33% to GBP 9 million to GBP 12 million. Andrew, I pass it back to you.

Thanks, Paul. Moving on to the next slide, 17. Over the past 6 months, the Board has had a significantly greater involvement. Weekly calls have ensured that they've understood the potential impact of the COVID on both our occupiers and the wider market. They've had clear visibility of the key metrics, such as rent collection, debt, voids and any termination of tenancies, so the governance has been most proactive. As the group has grown, an increasing number of stakeholders have a nonfinancial interest in our activities and performance. ESG is firmly on the agenda of the Board. And in our last annual meeting, show the progress we've made with our thinking. During the period, we focused on our future sustainability vision and the action plan. This is included completing a baseline review with consultants, JLL, and beginning to develop an appropriate sustainability strategy for the business, which lays out our direction of travel and overarching goals. We aim to continue to build responsible business foundations, creating a resilient portfolio and reducing our carbon footprint and supporting our occupiers. On a slightly different note, we're delighted to receive the EPRA Gold Award for the annual report and financial statement of 2020, which I hope everyone finds transparent and my thanks go to Peter and his team. Just moving to the next slide, 18. Paul has given us the details of how the assets are continuing to perform, which justifies our belief that the portfolio still has significant in-built performance that we can extract to feed both the earnings per share and the growth in the NTA value. If you look at the graph on the top right of this slide, there was an additional potential GBP 6.4 million of income, a 21% uplift available from a combination of: one, fixed one-off rent-free periods, which will largely expire within 12 months; two, leasing of vacant space, for which we have witnessed -- which we are witnessing unprecedented demand; and three, the portfolio reversion to the value of ERV, which we are consistently outperforming. We also expect to improve the portfolio KPIs as we continue, as Paul has already referenced. So still, there was further potential ahead. And to move to Slide 19, please. There's no doubt that our thanks go to both the Board for their additional commitment during this period, but also to the staff of Tilstone. We might all have been working remotely, but the team's in-depth knowledge of their occupiers has been tested yet proved to be a real value-add commodity ensuring high levels of rent collection, strong tenant retention and new lettings shrinking the vacancy to just 5.6%. Understanding the effort ratio of occupiers continues to enable the team to push tenants to pay higher rents over and above our existing average of less than GBP 5.50 per square foot, and it is evidenced by our ongoing 8.5% outperformance or the value as ERV. All of this performance has been recognized in the portfolio revaluation, as we have said, equating to 118.4p per share, as we continue to maintain the dividend target of 6.2p for the full year to March '21. And with that, I'd like to open up to questions from the floor. Thank you.

Thank you, Andrew. We will be taking questions in the webcast. [Operator Instructions] And our first question is from Julian Livingston-Booth from RBC.

3 questions, if that's all right. Would you want them one at a time? Or altogether?

Why not altogether, we're writing it down. Thanks, Julian.

Okay. The first is just on Slide 11, I thought very interesting, you shared the categories your portfolio can split between core, value add, opportunistic. Do you have any sort of guidance or do you have internal targets in terms of where you think that portfolio split should go over time? That's the first one. Second one, just in terms of the acquisitions, maybe you could comment on to what extent it's getting harder to make acquisitions? Are you having to pay higher prices than you might have 6 months ago? And then thirdly, just in terms of the P&L, it appears the gross rental income for the first half of the year is down half-on-half, if I've got that right, maybe you could provide a little bit more color around that trend?

Thanks, Julian. We perhaps will take those questions, Paul might answer the first one on -- turning back to Slide 11. I'm not sure whether we can continue to share that with you as an audience. I'll take the second one, and Peter might touch on the third. So are we able to show everyone Slide 11 again? Just looking at how we consider the targets going forward between core, value add and opportunistic. Paul, you've already mentioned that we've been strategic in increasing the core?

Yes, that's right. I think it's a useful exercise to be able to analyze the portfolio like this. And this is just a picture representation of the work that we do. But it does focus our mind that it does drive our strategy for the acquisitions, we haven't purposely been reducing the number of our assets But what we have been doing is looking to increase the quality of our assets, the quality of our income stream. But this picture representation allows us to look where on the opportunistic end, we've actually got some development opportunity. For example, at crew, with just this time put a planning application in for that 900,000 square foot of industrial space, and it's at that end of the line, because it will be capital intensive, but potentially large rewards. But before the Iron Mountain [indiscernible] and also before the last 2 acquisitions and the most recent capital raise, we're at about 16% in the core, which in buoyant markets, and in any market, is fine. But with Brexit -- sorry, with Brexits and with COVID, et cetera, we decided that we wanted to be a higher percentage in core and have some more longevity of income, hence, the Chesterfield acquisition. But with the Iron Mountain transition from being value add into the core, that released an ability for us to be able to then buy some value add, which was the Wincanton. So I wouldn't say there are any hard and fast rules, but this sort of spread feels about right, given [indiscernible] but it's something that we can flex as we see markets change.

I think, just to add, that we've also got questions coming in written format asking about these acquisitions going forward and referencing the larger 2 single lets that we have made during this period and is that a continuing trend. I think, with a core of 25% or just over, we feel very comfortable with that secure income. Our bread and butter continues to be the value add. And I would anticipate, expect the future deployment of cash to continue to focus on the value add, to continue to focus on multi-letter estates, not exclusively, but that will remain our focus. So nothing changes from that perspective in terms of what we buy and deploy where we deploy the capital. The second part of Julian's question was competition, is it harder to buy? What's happening to prices? We are seeing price tension, price competition, as retail and office sectors become, some would say, uninvestable, then more and more capital is turning to the industrial warehouse sector. So competition is probably as tight as we've ever seen it. But we have a pipeline that we referenced around the capital raise, it's still live. We're still working on it. And we expect some -- the ability to reference near-term transactions. So watch this space. But we're not complacent. Fortunately, our market is not perfect, screen-based every asset has a post code. Each one is different. And those anomalies allow us to find value, but we are stringent in our strategy, and weren't compromise that for the sake of a weak month or whatever it might be in terms of speed of deployment. The third question was just on the gross rents. Peter, did you just want to comment on that?

Yes. Thank you, Julian. Just looking at the -- I think the point we're making, and I'm quite happy to -- if you want to send me an email and would like an answer to the question off line, but a year ago, we had a one-off GBP 1 million surrender premium relating to [ Whitney ], if you remember, from the Fabulous Baking Boys, which would have distorted The revenue in the first half of last year disproportionately upwards. The other main difference half year on half year, is that our dilapidations receipts are GBP 0.5 million lower in this half year than it was in the half year to September 2019. So I think the main difference that you're referring to is in the region of GBP 1.5 million, GBP 1 million from the surrender premium and GBP 0.5 million from collaborations, half year on half year. I think if you adjust for that, you'll see the direction that, that I think you were talking about the business. If it's not that, please come back to me.