Categories Earnings Call Transcripts, Industrials

Warehouse REIT plc (WHR) Q4 2022 Earnings Call Transcript

WHR Earnings Call - Final Transcript

Warehouse REIT plc (LSE: WHR) Q4 2022 earnings call dated May. 24, 2022

Corporate Participants:

Andrew Bird — Managing Director, Tilstone Partners Limited

Paul Makin — Investment Director, Tilstone Partners Limited

Peter Greenslade — Finance Director, Tilstone Partners Limited

Analysts:

James Carswell — Peel Hunt — Analyst

Tom Yeadon — Jefferies — Analyst

Andrew — Private Investor — Analyst

Julian Livingston — RBC — Analyst

Presentation:

Andrew Bird — Managing Director, Tilstone Partners Limited

Good morning, ladies and gentlemen. Welcome to the Results Presentation for Warehouse REIT to the year ending March 2022. My name is Andrew Bird, I’m the Managing Director of Tilstone Partners, the investment advisor of Warehouse REIT, and I’m joined today by Paul Makin, Investment Director, who is going to explain the portfolio valuation and some of the asset management initiatives; and Peter Greenslade, who will take us through the numbers for the year-end. And then I’ll take back the agenda, wrap up, and then we’ll have some time for questions and answers.

First of all, I’d like to look at the highlights and the fundamentals of the market. We’ve just divided the presentation out with some slides. All these images are Warehouse REIT assets. It just gives you a wider flavor of our ownership. So the numbers speak for themselves. It’s been a really strong period for the U.K. warehouse sector and those are reflected in our results.

So the total accounting return came in at just over 33%, largely driven by the EPRA NTA per share, uplift of just over 28% coming in at GBP1.738 per share. The like-for-like property valuation was up almost 20% and the — I’m sorry, and the ERV growth came in at 6%. We will pay a final dividend, which will give a dividend for the year of GBP0.064 fully covered, and we continue to target a total return of 10% per annum.

On the operational side, we made six acquisitions during the year, deploying just under GBP44 million, including costs for a blended yield of GBP4.2 million. And we’ve had subsequent, post period end, two further acquisitions. We’ve also made great progress on the development aspects, which we’ll touch on later on in the presentation, but also great to have this morning’s news regarding the development agreement with Panattoni, which I’ll also come back to in a minute.

So looking at the market fundamentals, I mean, it’s a great set of results but clearly you all want to know what’s happening next year and on the forward radar. So I think a look at the fundamentals helps us understand what’s going on. The graph on the top left shows us the take-up for last year, coming in at record levels yet again. So you might think the uncertainty about pandemic fallout, a war in Europe, cost of living, comments from the CFO of Amazon about too much space, is that bringing an end to the warehouse U.K. growth story? We think not. We think the fundamental’s strong occupational demand continues to outstrip supply. E-commerce is continuing to be projected to be 35% of market share by 2025. Not only is it an e-commerce story but onshoring. We got diverse occupational demand from a number of different locations.

Interestingly, in a Savills recent survey, over 90% of occupiers still require more or the same amount of space over the next two years. Big box take-up in the first quarter of this year came in at over 13 million square feet and Amazon was just 3% of the take-up. So despite any slowdown from the market’s biggest, we still see record levels of take-up and Savills are tracking non-occupier requirements of 123 million square feet, up again on quarter four last year. So great strength of demand.

So what’s happening? Again the slide on bottom left, vacancy levels are at a record low year end. Lambert Smith Hampton estimated 2.9% vacancy. DTRE, since year-end, suggested it’s fallen further still to 2.3%. Interestingly, comment from CBRE just recently estimating that just 10 million square feet under construction, which isn’t pre-let. So real strengths of market and constrained supply.

So that feeds through to rental growth forecasts which for this year, according to IPF, stand at 5.5% and we think there could be further outperformance. Interesting, another stat that came out of research was if you take all U.K. warehouses, all size ranges, all grades of quality, the average rent achieved is GBP5.51 per square foot. Now I’d like to think that our portfolio is materially better than average. So really worth remembering that number, GBP7.51 per square foot when Paul talks about the valuation of the portfolio. And it’s also interesting to look at the logistics real estate continues to represent just 0.75% of total supply chain costs. So we come back to the effort ratio, this space is very affordable and very relevant for the occupiers.

I just want to touch on inflation, which we’ll do later on in the presentation because we understand it’s a question on lots of people’s minds. The other point I’d just like to touch on is the performance since IPO back in September 2017. We continue to generate 18% compound annual growth rate. So investors who came in IPO have just about had 100% return on their money, which is a very satisfying stat for us as a management team. The portfolio has grown, great milestone is now north of GBP1 billion, which I think is very relevant in the context of our stated intention to move to Main Market over the summer period.

Just one other point on this slide, it’s the look at the contracted rent compared to the ERV on the slide on the bottom left. So GBP7.5 million reversion and we’ll touch on that in terms of the asset management, how quickly that comes through and that’s to the value as ERV which we have a track record of outperforming. And we just like to pick up points of differences, where can the Warehouse REIT portfolio be a point of difference compared to others? And one of our focuses is the Oxford Cambridge Arc. It doesn’t really matter what statistics you use, whether it’s household income, GDP per capita, startup capital, business formation, they are all really strong characteristics and focused on the centers of excellence around Oxford and Cambridge and the wider arc between.

So at year-end, just over 16% of the portfolio deployed in this area. Post year-end acquisitions, it’s approaching 25% and given the acute shortage of warehouse space, which will serve this economically-vibrant location, we think these assets will outperform the wider market. So expect more in this particular geography.

And I’ll just hand over to Paul to talk us through the property.

Paul Makin — Investment Director, Tilstone Partners Limited

Thank you, Andrew. Turning to Slide 12 for those who are following it online. And this slide has got a lot of stats on it and I would just like to pick out a few key statistics. The valuation as at 31st of March 2021 was GBP793 million, that’s now increased, as Andrew had said, to just north of GBP1 billion. That’s a 27% increase and on a like-for-like, 19.4%, which is something I’d like to come back to in a minute. It’s also — I’d also like to note, in the middle of the slide, you can see that the average rent per square foot, our average rent is still only GBP5.60 and with the regional distribution and last mile of GBP5.10, we consider this has plenty of potential for further growth. And as interesting, Andrew mentioned earlier that the average rent across the market as a whole is GBP7.51, it shows that we’ve got the potential to grow.

The valuer’s ERV is currently GBP6.20 per square foot and saw a net 6% valuation increase to that level, but again we feel that is comfortable. And that leaves us to the net initial yield of 4.5%, which is currently being received from the property portfolio with a near time reversion of 5.3% and we consider this to be conservative. Not only do we continue to outperform valuer’s ERV, but we see good prospects for future rental growth. Our rents are affordable and considering the effort ratio that we’ve talked about, again, we consider that there’s future potential growth.

We’ve seen a record valuation surplus this year of GBP163.7 million being the 19.4% that we’ve talked about. As you can see, the best performing sectors have been in these, the Southern and the Midlands, where we’ve seen particularly strong occupational growth. It’s also interesting to note that the multi-lets have seen a strong growth as you can see on the right hand side. And yet, we still see future potential from here because these yields are still higher than the single-let portfolio. What is quite clear is that a lot of the performance has actually come from development and the land, which has increased by 80% and considering this accounted for 25% of the valuation uplift from only 10% of the portfolio, we consider this to be a good performance. And in a large part, this has come from the active management from the team where we’ve secured planning and we’ve engendered occupier interest, but we still see significant future performance coming from our development land as further planning applications come through.

We continue to review the risk return from the portfolio. And this graph is a pictorial representation of that, which we showed to the market at this time last year. As we can see, the classification of 30% in core, 57% in value-add and 11% in opportunistic is a very similar spread to last year. But what this graph allows us to do is to explore and analyze the asset management that has been carried out. And if we look at those different bandings, if we exclude those properties, which the classification has changed, being the ones which are in the darkled colors, we’ve actually seen a 70% increase in the opportunistic. A large part of that has come from the development land. But if you take the average between core and value-add, that — they’ve increased by 16%. But then if you look at the ones with the darkled effect, those are the ones which have actually changed category. These assets, you’ve seen a 27% increase in value, demonstrating the asset management that’s been undertaken.

And to give a couple of examples, on the left-hand, bottom left, in our core category, you can see Nottingham. This is where we carried out some refurbishment and have agreed a letting with DFS, who’ve taken occupation and we’ve agreed in Whitney, a refurbishment and letting to Travis Perkins in Plymouth, where we’ve agreed a new 10-year lease, and I’ll come back to it as a case study.

Turning to the next slide. Not only have we seen the benefit of active asset management in the development sites, but we’ve also completed a 116 lease events this year, again that’s more than two a week, the team have been busy. And we’re securing GBP6.8 million worth of income on 0.9 million square feet across the country with a like-for-like rental growth of 3%. As you can see on the graph on the top left, we’ve increased rents on lease — at lease renewals by a record 22% during the year. And what’s quite interesting, this is actually an 8.5% increase on valuer’s ERV. And considering the lease renewal process is much more akin to the valuation process, we think this is an impressive performance from the team.

Looking at the new lettings, we’ve outperformed valuer’s ERV by 3%. But as you can see from the extension on the graph, this actually goes to 5.3% if you include those leases where we’ve signed agreement for leases, and actually goes to 9%, new lettings being 9% above valuer’s ERV if you just — if you take out the letting that we did in Harlow, where we let it on non-refurbish basis, which saw a north of a 16% valuation increase because of that letting. And that asset has gone up in value by 38%. So very much worth taking that reduced rents in order to get that increased value by doing such a quick letting.

And turning to the top right, you can see that our vacancy has increased to 4.2% on over and above what’s under offer or under refurbishment. You’ll note that this is higher than last year, but this is because we’ve actually been actively taking some assets back and we’ve actually been doing some refurbishment but actually that 4.2%, about 75% of that is in four assets, majority of which have only become vacant in the last six months and once they let, then there is the potential to increase the income by GBP1.6 million. And even if we just hit the valuer’s ERV, we predict those will be 10% above the previous rent and we have a very strong track record in outperforming.

So just to touch on a quick case study. This is one which we talked earlier, which has changed classification. This, as you can see from the graph, the pictures, I think it’s pretty clear, which is the before and after and it also shows the benefits of judicial capital expenditure. So we acquired this asset back in 2017 for GBP4.3 million, yielding 7.4%. But the real thing we spotted here was that the market was absolutely starved of stock. We’ve carried out and then — and are undertaking a comprehensive refurbishment for GBP1.6 million and we’re delighted that the majority of this, about GBP0.9 million has actually come from the occupier through dilapidations and we’ve signed an agreement for lease before completion of the works for a 10-year lease to a national operator. It will increase the value by 66%, and that’s been shown in the latest valuation. And also sustainability is something that’s entrenched right the way across our modus operandi and we’ve increased the EPC from a C to an A during the refurbishment. And this will now stand us in at 7.4% yield on cost — total cost including all of those capital expenditure works. And we should see this increase further, once the unit is open for trading.

We continue to benefit from diversified occupier base. We have 91 estates, 541 occupiers and only six occupiers account for more than 2% of our total rent roll each. And just quickly the last slide before I pass back to Andrew. We’ve talked about the reversionary potential within the portfolio and we’ve tried to demonstrate that in this slide. The like-for-like rental growth of 3% masks the opportunities that are coming through from the agreement for lease that are signed, the vacancy and the lease renewals. And you can see that, last year, we had a 4.1% — GBP4.1 million potential reversion this year, that’s now GBP7.5 million. And on the right hand side, you can see that actually GBP4.5 million of that potentially could come through this financial year.

And to give you an example, the two pictures at the bottom, our two assets. One’s in the Midlands and one’s in Bristol. Both of these have a passing rent below GBP4 per square foot. Coming back to that GBP7.51 across the entire market, the average letting, we see lots of potential coming through and we — therefore we see a lot of potential still coming through for the performance of the portfolio and it will be coming through from active asset management rental growth with less reliance on yield compression.

Andrew Bird — Managing Director, Tilstone Partners Limited

Thanks, Paul. Just briefly to pick up on the development aspects, which we see as complementing the core investment function. We referred in the past to lazy acres, land that we’ve acquired as part of multi-let estates where we have increased our focus on bringing forward planning permission, looking for pre-lets and targeting returns accretive to investors. The valuation ascribed GBP89 million to the development aspects. It’s 150 acres, over 125 acres now have either a planning permission or are subject to a planning application. Eight acres are subject to an agreement for lease where we expect to be breaking ground this year. Now whilst the development strategy is exciting, it’s important to emphasize, this will be at a scale, which is well within our investment policy of less than 15% of gross asset value. So it’s accretive to shareholder value as opposed to any material change in the strategy.

I said earlier on that I just want to touch on inflation later on and this is an apt moment. We had one particular anecdotal story, which I think gives you an indication of what’s happening. We were in negotiations with an occupier on an agreement for lease. It was actually for open storage land and we decided to get a tender return back before we signed the agreement for lease. Probably not a surprise, but concrete prices, subject to inflation, came back above our business plan in terms of the costings. So we went back to the occupier and — complete open book, and showed him where the pricings were and we’ve been able to pass a 100% of that additional cost on to the occupier by way of a renegotiated lease rental deal. Now the takeaway is that he knew, we knew, he had no alternatives. There is no supply, it’s a really tight, tight market. And we knew from the affordability that he probably would take our revised deal. So it is a live example but it gives us the confidence that developers will continue to be able to pass on inflationary cost pressures to occupiers by way of higher rents, especially when you’ve got such a shortage of space in the market.

The standout large development opportunity for the REIT is the crew opportunity. Just by way of recap, we now control just over 100 acres, just 1.5 miles from Junction 16 of the M6 motorway. As always, we look at risk management and we build that through, whether it’s pre-let or whether it’s deferred consideration on the land assembly costs. So we’re now partway through the planning strategy, consent granted last year for 800,000 square feet and we are live with Phase 2, a further 1 million square feet, which is before the local planning authority at the moment, and we hope we’ll be able to update the market during this first half year period in terms of progression.

But I think the exciting thing for us is this morning’s press release that we have now entered into a development agreement with Panattoni. For those of you who don’t know, Panattoni is the world’s largest private logistics developer, 44 offices worldwide built over 500 million square feet, 120 million in the U.K. — sorry, not in the U.K., in Europe. So our expectation is that we will piggyback off their occupier relationships and we will bring certainty for shareholders around the cost base when we move to the construction phases. The scheme will be put forward in phases, such that it’s accretive to shareholder value. So further progress, which we’ll keep you updated on.

And with that, I’ll hand over to Peter for the numbers.

Peter Greenslade — Finance Director, Tilstone Partners Limited

Thank you, Andrew. I don’t propose going into great detail on the results but aim to pull out the salient numbers and ratios. But if you do have any specific questions, we’ll be only too happy to answer them at the end.

On Slide 22, what you’ll see is that IFRS profit before tax increased to GBP191 million, up from GBP123 million in the year. The main drivers are twofold. We had net earnings of GBP27 million combining with GBP164 million gain on revaluation of the REIT’s assets during the period. Andrew and Paul have already talked to the drivers, but it’s approximately 50% driven by yield compression. Our adjusted earnings before interest were GBP35 million and our earnings were GBP27 million. These results were 43% and 46% ahead of last year. Adjusted earnings per share were about GBP0.064 up from GBP0.053 from the previous year, reflecting growth in earnings for the like-for-like portfolio, together with acquisitions made over the last year. We also increased our dividend to GBP0.064 for the year to March 2022, which is above our target level of at least GBP0.062. The full year dividend is fully covered, and we expect to declare a dividend of at least GBP0.064 for the year to March 2023.

The strong revaluation increase together with assets acquired in the period meant that we had a portfolio valued at GBP1.12 billion, not quite sure how you say that number, but it’s a big one and at March 2022 and an EPRA NTA of GBP1.738, up from GBP1.351, March, a year ago. Andrew has already referred to the 33.2% total accounting return and since IPO, this has been an average return of 18%. Our loan to value was 25.1% at the year end, remaining at the March ’21 level despite drawing a further GBP49 million of debt in the year, and maintained at last year’s level by the large revaluation gain. But what I would remind you is that this is below our self-imposed cap of 35%, providing scope for future acquisitions and development buildout.

Gross property income was up year-on-year by GBP12 million to GBP47.2 million. This reflected the full year benefit of acquisitions in 2020, acquisitions in 2021 and like-for-like acquired [Phonetic] rental growth of 3.9%. Our property costs decreased GBP100,000, a small part of it is due to lower vacancy costs together with a decrease in the bad debt provision. I’ll talk about debt collection a little later. Our net finance costs were up 25.7% year-on-year and this was principally caused by debt associated with acquisitions, together with the weighted average cost which has increased from 2.1% to 2.6%. The EPRA cost ratio decreased to 27.1%, down 2.4% and the ongoing charge ratio at 1.2% is lower than the 1.5% of a year ago as the REIT benefits from its size and scale.

The balance sheet is strong and has net assets of GBP739 million, substantially up on the GBP574 million reported a year ago and is driven predominantly by the GBP164 million revaluation surplus. Our net borrowings are GBP254 million and this represents GBP182 million term loan and the drawn RCF of GBP89 million, offset by cash held. Other net liabilities are down from the previous year end and the balance sheet is largely represented by deferred acquisition costs for lands acquired for developments.

If you just track our NTA, the bridge here shows GBP1.35 going to GBP1.738. As I’ve already said, dividends paid during the year were fully covered by earnings and contributed GBP0.002 to the NTA. But the GBP164 million or GBP0.385 net revaluation surplus drove the increase.

Before I hand back to Andrew, it’s just worth looking at rent collection data for the last two years. Top right graph, you’ll see that we’ve exceeded 98% in every single quarter since COVID. For the year to March 2022, we’ve collected more than 98.7% of rents in cash, and that number will increase slightly as we move through this year. The current quarter, which is what we built in March for April, May, June, i.e., for the new financial year, is on track with previous quarters. We’ve already collected 96% and that we are certain we’ll go above the 98% in coming weeks. The high collection rates also demonstrates our continued diligence on new tenant covenants and robust rent collection procedures across our 540 occupiers.

Before I hand back to Andrew, it’s just worth saying that we have good rent collection, we have no debt maturities until January 2025, we have an option to extend for further two years and we have recently agreed to facility extension for further GBP25 million of debt. We have a low weighted cost of debt at 2.6 based on current SONIA rates and our interest cover is close to 6 times, and we are well within our banking covenants. We also have low LTV at present with our self-imposed 35% cap, that gives us scope for further acquisitions or development funding.

And in summary, we believe our balance sheet is strong and positions us well for the future. Andrew?

Andrew Bird — Managing Director, Tilstone Partners Limited

Thank you, Peter. Just two more items, please, for me. Sustainability, it is something that we now thread through all of our business activities and we’ve seen a couple of case studies where we’ve been moving very average EP historic ratings up to A grade, which is all part of the standard refurbishment process. So I want to make two points really. One, we do not have any stranded assets. So we expect that all of our assets will be EPC rating C or better by 2027, B or better by 2030, which is obviously the legal requirement. And more importantly, we expect to be able to get that within the 0.75% of gross asset value that we continue to budget in terms of annual capex on the portfolio. The other piece of — I mean there’s a number of workstreams going on around sustainability, but the other one, just to update everybody on is the net zero carbon strategy, where we are making great progress in terms of working out how exactly we get there. And by the end of the half year, we would expect to be able to provide a date of our end games [Indecipherable]. So great progress on that front as well.

So really just to wrap up with a few themes to leave you with before any questions. We are very confident that the global supply chain disruption creates more demand, not less demand, for U.K. warehouse space. The new U.K. newbuild pipeline is simply not keeping pace with demand. Rents will continue to grow and we believe inflationary costs will be passed on to occupiers. Performance will come from a combination of rental growth and development activity. And therefore we will continue to have a progressive dividend policy as Peter has referenced. As ever, we have an attractive pipeline of opportunities and we continue to target this 10% total return. Management holds 6.6% of the REIT, so you have no better alignment, we continue to believe, in the performance of the business. And finally the move to Main Market announced this morning will happen over the summer and with the portfolio standing in excess of GBP1 billion, we think the timing is appropriate and relevant for shareholders.

Thank you very much. We’d be delighted to take any questions from the floor in the first instance. James, go for it.

Questions and Answers:

James Carswell — Peel Hunt — Analyst

Morning, this is James Carswell from Peel Hunt. Maybe, Paul has touched a bit on the last mile and potentially it has a reversionary set — the reversionary gain in the last mile portfolio, and also the occupancy of that last mile is also a bit lower than across the other parts. I mean is that one or two assets, is that assets under refurbishment and yeah, how quickly do you expect that, the 83.5%, to potentially rise?

Andrew Bird — Managing Director, Tilstone Partners Limited

Paul, would you like to…

Paul Makin — Investment Director, Tilstone Partners Limited

Yeah. Thank you, thank you. Hopefully you can hear me. If we just turn back to — I think it is — if we go back to Page 15 where the comment was made. I think this gives two examples of why the last mile is probably showing as a vacancy because these two assets fall within the last mile category and the one on the bottom left is in Rugby. We took this building back and had that carried out to refurbishment again with some dilapidations receipts from the occupier and again through the sustainability threaded through the business, we’ve taken that from a C to an A and that has literally just been launched on the market. And we’ve got proposals out to two occupiers at the moment. And on the right — bottom right-hand side, again this is just off Junction 12 of the M4, again dilapidations receipt being spent on the building and this is in prime terms valley [Phonetic] industrial, very shortage of supply. So again, I think it’s points in time, is the answer to your question. And we’re very confident in getting these two let and actually quite excited by the opportunity that these might bring to rental growth.

And again, I mentioned earlier, in terms of lease renewals, the lease renewal process is actually quite especially if it’s protected tenancy that are actually inside the [Indecipherable]. That’s quite a valuation process and therefore it’s slightly backward looking in terms of the comparable that you can use. New lettings is down to what we produce and what we can get from the market. So we’re quite excited about the potential from these.

James Carswell — Peel Hunt — Analyst

All right. And then just one on the split between the core portfolio and the value-add developments, and obviously, developments is less than 15%. But when you think about the core versus the value-add, I mean, is that, broadly speaking, the split you would like to keep? And I guess as we see some more assets go from value-add into core, is that then a good time to maybe rotate some of that capital back into value-add opportunities?

Andrew Bird — Managing Director, Tilstone Partners Limited

I think — can I start, Paul? Yeah, we think that spread between the core, value-add and opportunistic is roughly something we’d like to maintain long term. And when we are, if anything, under-geared with our LTV in the mid-20s, it seems inappropriate to be making short-term sales, clearly very easy to achieve in this market. So we continue to focus on what we term the bottom 5% of the portfolio. Why is it bottom 5%? Well, it’s all about expected performance whether that’s through rental growth through EPC capex then more likely to look at sales from those and perhaps multi units in the short term, but ultimately there will be a rotation of capital as we progress.

James Carswell — Peel Hunt — Analyst

Thanks.

Andrew Bird — Managing Director, Tilstone Partners Limited

Tom?

Tom Yeadon — Jefferies — Analyst

Morning, guys. Thank you for that presentation. Just wanting to get a sense of sort of yield on cost between the — I think it’s the forward funded developments, multi-let developments in the Oxford area — Oxford Cambridge Arc. And then also just sort of looking forward to the Radway developments and potentially that differential in the yield on cost that you might have there, just to get a good sense, please.

Paul Makin — Investment Director, Tilstone Partners Limited

[Speech Overlap] Yeah, thank you. I think I also referenced, to add one more, the Plymouth example that we’ve put the case study, and that yield on cost there is a true 7.4% and with the GBP1.6 million which we’re spending on that asset in order to improve that. We’re much better spending that on our existing assets, because there is no supply where we are in control of what we are refurbishing, and that’s a new roof and looking through the EPCs. So you then look at Thame, which we bought off a yield on cost, which should show at least 4.6%. That is a significant discount yield and if we are actually going to buy an up-and-let asset in the market, I’m delighted to drive past after watching the frames going up daily and great excitement around the lettings there already. There is a pent-up demand, so that — we do see that still has some reversionary potential.

And then over to — on the Radway development?

Andrew Bird — Managing Director, Tilstone Partners Limited

So we are targeting return on cost of 200 bps over and above the valuation for an equivalent asset and that will thread through all of our development activity and as we sit here today, then that looks very achievable having a mindset to where construction costs are going and equally where rents again, but we don’t inflate forward prediction on rents in terms of our business plan appraisals.

Tom Yeadon — Jefferies — Analyst

Sure. Okay. Thanks very much again.

Andrew Bird — Managing Director, Tilstone Partners Limited

Andrew?

Andrew — Private Investor — Analyst

As a shareholder, first of all, my congratulations and gratitude, another splendid set of results. You’ve averaged, as you say, 18% total accounting return since you did your IPO. In the last couple of years, you’ve zoomed up way beyond that. I tell myself this can’t go on forever. At some stage, there has to be a correction from an 18% average. What is the change in the market that you will be looking out for most to give a sense that things may not carry on just as they are?

Andrew Bird — Managing Director, Tilstone Partners Limited

Very good question, Andrew. I think our assumption, first of all, in terms of acquisitions, continues to be that 10% target — 10% per annum return. It’s what we said at IPO. And it’s — every acquisition, our business plan has to achieve those returns in order to satisfy the investment committee. And the valuation is a point in time, it is a prediction about further rental growth, obviously, around which we have no control. But the element we do have control over is where we buy what we buy and the pricing of the underlying rents. So our control will be around the stock selection. When does it change? Well, we — looking at global markets’ cost of capital, if we get to a point where demand-supply imbalance moves the other way, those will be the early indicators. But we can’t see that happening for a two, three-year horizon, given the very tight constraints around new supply. I didn’t think I could be more specific than that but that’s kind of forming our thinking.

Andrew — Private Investor — Analyst

As a follow-up…

Andrew Bird — Managing Director, Tilstone Partners Limited

Yeah, please do.

Andrew — Private Investor — Analyst

That tight supply is the key, obviously, and I just wondered if you could explore — expand that a little bit. Is it about — I mean there’s plenty of land in this country, agricultural land, that’s obviously not it. Planning permission for warehouses, is that it? Or is it that the potential builders just haven’t realized the opportunity? What’s behind that?

Andrew Bird — Managing Director, Tilstone Partners Limited

So housing has very much been on the political agenda, the government trying to build 300,000 new units per year. Employment land does not feature on the political agenda at the moment. So land supply has, for many years, been dwindling as a result largely of the housing market taking potential opportunities and as the old industrial buildings fall out of the system, we’ve had decades of that land supply going to alternative uses. So we have two things, therefore probably an under-supply in terms of the planning strategy and local plans typically plan for a 10 to 15-year horizon and might get updated every five years. So first and foremost, there is a lack of allocation in the market. The planning system itself, tragically, is archaic in terms of speed of reaction and timing, under-resourced and it’s a real drag on economic development and it’s a shame that it cannot seemingly be fixed because it’s holding back economic activity. So that probably gives you a drag factor of two to three years. So from identifying a need to buying a site to securing, planning and starting is a two to three-year horizon. So those are your base constraints.

And then, of course, as you drive up and down the motorways, you see a lot of development has happened already. So kind of the easy wins, the low hanging fruit is done and therefore available land probably has issues, easements, flooding, whatever the physical constraints might be to overcome. And especially if you want to build larger warehouses, you need large pieces of flat land. So lots of constraints. Anything to add?

Paul Makin — Investment Director, Tilstone Partners Limited

Yeah, I think that’s absolutely right and I agree with that. I think the difference is also at the, what can be built? You’ll have seen up and down the motorway there’s generally the big boxes that are being built. There’s the economies of scale and that has continued even though land value has been driven up by yield compression and rental growth to still make further development viable. The land that we have and we can bring forward, we’ve owned for quite a long time, hence is our lazy acres strategy. But otherwise, in order to build the sort of small and mid-box, it’s very hard to make it economical when it’s still on the current rents. And so the rents are going to have to keep moving before that development can happen. And then we’ve still got to be able to find a piece of land, which can compete with residential. And so they constrain suppliers across the piece.

Andrew — Private Investor — Analyst

Thank you.

Andrew Bird — Managing Director, Tilstone Partners Limited

Any other questions in the room? Do we have any questions on the conference line?

Operator

[Operator Instructions] We do have a question from Julian Livingston from RBC.

Julian Livingston — RBC — Analyst

Yeah, good morning everyone. Hope you can hear me. Could you just talk about how the changes in the interest rate environment sort of impacted how you think about the hedging of your debt and maybe a bit — little bit more specifically what you’re thinking in terms of the caps when they expire? Thanks.

Andrew Bird — Managing Director, Tilstone Partners Limited

Thank you. Julian, I’m going to pass this one to Peter.

Peter Greenslade — Finance Director, Tilstone Partners Limited

Yes. Hi there, Julian. At the moment, we’re in the throes of a debt restructuring. We’ve appointed some advisors to help us and it’s something that we’ve — we started a month or two back and we hope to complete by the summer or the middle of the summer. And what we want to do is end up with an enlarged facility. We’ll end up with elongated term and we’re looking to be approximately two-thirds fixed and we’re talking to a number of banks and a number of other institutions. We’re looking at opportunities in terms of the exact mix of that. But you’re absolutely right. At the moment, we are relatively lowly hedged. But we’re looking to move that to a two-thirds fixed position and the cost that we’re looking at, at the moment, is margins of approximately 2% plus the prevailing rates.

Julian Livingston — RBC — Analyst

Okay. And would that become sort of effective before the end of the calendar year, potentially?

Peter Greenslade — Finance Director, Tilstone Partners Limited

Absolutely.

Julian Livingston — RBC — Analyst

Okay, thank you.

Andrew Bird — Managing Director, Tilstone Partners Limited

Any other questions?

Operator

There are no further questions over the phone.

Andrew Bird — Managing Director, Tilstone Partners Limited

Any questions on the web link? One question coming?

Unidentified Speaker —

Yeah. Justin, Numis, has asked two questions on the MLI assets. Firstly, how do you expect your multi-let portfolio to perform if we go through a recession? He says, any likely increase invoice [Phonetic] or bad debts or is the breadth of occupier demand strong enough to fill any holes? And do you want to take that one and then I’ll do the second one?

Andrew Bird — Managing Director, Tilstone Partners Limited

Yeah, so I’ll start perhaps and then — so the — first of all, if we look at the rent collection today, not only is it strong in terms of overall quantity, but it’s strong in terms of timing, speed of payment and that’s back to when we walk around and talk to our tenants on the multi-let estates, these are not businesses replete with debt, far from it. In the past recession, the overdraft was withdrawn, those who couldn’t sustain their business are no longer with us, but these are generally cash generative businesses who, as I said earlier, this space is very relevant to them and it’s affordable. So we have a good relationship with these occupiers. And we don’t expect to see a material issue around tenant failure. And I don’t know, Paul, would you want to add anything in terms of…

Paul Makin — Investment Director, Tilstone Partners Limited

I think as a policy, we’ve been looking to dispose off our very small assets and our small average unit sizes. We’re now getting close to, if not, just over 10,000 square foot is our average unit size. Occupier relationships, as Andrew said, is absolutely key and also the — if we do lose the odd occupier, we’ve got quite a few up in the wings waiting to come in. The space that we have, as Andrew said, is relevant and is available for a variety of different uses and we saw this during the recession. Of the very few that we did lose, as the occupiers moved on, they — it was often very different types of businesses which were coming in, and I think that’s — it’s the flexibility of the units and the fit-for-purpose in the right locations that we focus on to minimize the impact.

Andrew Bird — Managing Director, Tilstone Partners Limited

And I think there’s one other point that Peter touched on is that when we take a new occupier into the portfolio, there is a scrutiny around their accounts, their track record and if we have any doubts, then we look for rent deposits and that gives us a degree of certainty as well around the income stream. Next question?

Unidentified Speaker —

Yeah. Justin’s second question is, given higher construction costs for multi-let industrial versus single-lets and potentially higher valuation yields, what is the rationale for developments in this space? Are you presumably expecting to get higher rents than for a single-let?

Andrew Bird — Managing Director, Tilstone Partners Limited

So when we looked at the layout of Radway, the configuration, most of the units are north of 100,000 square feet. Why is that? It’s the dynamic between construction costs and prevailing rents. So we could be building much smaller boxes on this site but the financial viability is that much harder to achieve and ultimately we are about maximizing shareholder returns. So given its location, proximity to the motorway, it lends itself to the strategic piece which also dovetails into maximizing the development appraisal. So we are building or proposing to build elsewhere but we are not building a significant amount of small medium box 5000 square feet, 10,000 square feet because, as we note, it is challenging. I mean in this slide, Knowsley [Phonetic] — the top one multi-let industrial, the smallest unit is 20,000 square feet, so — and it’s pre-let. So we’ve got certainty around the direction of travel, but it is tough. And do you want to add anything, Paul?

Paul Makin — Investment Director, Tilstone Partners Limited

Yeah. And where we have chosen, we’ve taken a forward commitment to buy an estate on Thame on the outskirts of Oxfordshire. The rents and the rental growth is very strong in that location and we’re already seeing occupier interest ahead of the business plan rents which will help bring that through.

Andrew Bird — Managing Director, Tilstone Partners Limited

And those rents are a long way ahead of our average GBP5.60, Thame being Oxford overspill.

Unidentified Speaker —

Okay. And one from Henry Bamford [Phonetic]. You report that the dividend is 100% covered from revenue. Can you say how much revenue reserve you hold as a ratio to the current declared dividend?

Andrew Bird — Managing Director, Tilstone Partners Limited

Peter, would you like to take that one?

Peter Greenslade — Finance Director, Tilstone Partners Limited

In terms of our reserves, they are — and I’d have to check the exact number, but we have hundreds of millions in distributable reserves in our balance sheet. When we IPOed, we created a reserve of GBP160-something million and ever since then, we’ve covered our dividends. So in terms of distributable reserves, I could send Henry the exact number. We have a lot.

Unidentified Speaker —

That’s all the questions.

Andrew Bird — Managing Director, Tilstone Partners Limited

So unless there’s any other questions in the room, may I thank you all for coming and for your attendance today, and we look forward to seeing you again in the future. Thanks a lot.

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