Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong performance in new rent signings and an excellent uplift in like-for-like net rental income.
- Disciplined approach to capital allocation, including profitable development programs and strategic asset acquisitions.
- Strengthened balance sheet with a low loan-to-value ratio of 30%, providing significant liquidity for future investments.
- Continued focus on operational excellence and asset management initiatives driving rental growth.
- Positive market dynamics with increasing demand for industrial and logistics space, particularly in urban areas.
Negative Points
- Slower pre-leasing demand, particularly for data centers and large logistics projects.
- Small decline in NAV per share due to the impact of the equity raise and FX movements.
- Continued pressure on rental levels in certain markets like Poland and Madrid due to increased speculative development.
- Lower volume of pre-let development signings as occupiers take longer to commit to significant capital projects.
- Potential challenges in capturing the remaining reversionary potential in the portfolio, which stands at GBP133 million.
Q & A Highlights
Q: You just mentioned around the pre-leasing demand slowing. Could you give us a little more color on that and whether that's something of concern, please?
A: Yes. When I think about pre-lets, particularly things like data centers and the big logistics pre-lets. They tend to be a bit lumpy, and they tend to come a bit like buses. So there are two things I see. One is we know that market take-up was lower during 2023. It started poorly in the first quarter of this year, but has certainly been picking up. A lot of the projects we're talking about, customers are working on them for years. They're not an isolated building. They're usually part of a much bigger integrated strategic logistics program. And it's not surprising in the last 12 or 18 months, a number of occupiers have been -- I wouldn't say been putting the foot on the brake, but they've certainly not been pushing the accelerator in concluding some of those discussions as roughly as they were doing, for example, during the pandemic when there was a particular scramble. So overall, I'd say the market environment is fine. It looks like it's picking up again. If we look at -- I mean, we obviously shared data in terms of what we've actually signed up and we talk about what's in the near-term pipeline. But what we don't give a lot of data on because it's so fluid is the book of inquiries and the negotiations that we have ongoing. What I can say is we have an absolutely fantastic book of opportunities that we are working on currently. It doesn't mean to say they're all going to come through or they're all going to come through this year. But if you look at the scale and the size of the things we're working on now relative to where we were, say, a year ago, it looks really encouraging. But these things are a little bit like buses, they come in twos and threes and then you have a bit of a gap. But overall, I think if you look at the overall plan and look at what's happening to the macro, I think it's looking pretty promising going forward. Thanks, Ben.
Q: Just looking at how fast you're able to grow the company during the last cycle through the external growth strategy and the rise of e-commerce and then comparing that where we are today, potentially heading into a new cycle, which you mentioned with different driving forces, so data and the adoption of AI. How much appetite do you have to grow the data center portion of your business above what you've already stated, whether that's through M&A, acquisition of campuses, or anything else?
A: Yes, that's a good question. I mean, more broadly, we're not here to grow the company per se; we're here to deliver returns. So it's all about can we deploy capital profitably and deliver attractive returns for investors. Particularly within the data center space, we've got this amazing book of opportunities, and there's no doubt there's a huge amount of demand. And what we've been doing over the last couple of years, in particular, is using our knowledge and understanding of that space that we gained in Slough and our customer relationships to do a really thorough audit of all our existing sites across Europe, but also looking for sites that we can acquire preferably as industrial sites for industrial land values and then convert them to data centers. So we've got this big book of opportunity, a lot of development activity to do there. And I'm sure they will come through because it's such a strong sector. That's probably enough for us for now to focus on. We will continue to look for other sites, and we continue to look for other opportunities. But I think if you look at the book of opportunities ahead of us, that's going to keep us really busy and engaged and productive for quite a while to come.
Q: Just one question on leasing. New rents signed up GBP48 million during the period, which I appreciate is a very strong result, but implies a bit of a slowdown in Q2. Should we read anything into that? Or is that just a function of the expiry profile?
A: Well, I, for a long time, regretted having to report quarterly data for a business that is incredibly long term. I was talking about some of the trends and how particularly pre-lets come in a lumpy fashion. So no. I mean, actually, what I would say is what we're reporting on the ground, what we're seeing and what agents are reporting more generally is actually Q2 is stronger and is picking up. So I think the first quarter generally was slower and tougher to get people to put their names on a signature apart from a couple of pre-lets, where they've been working on them for quite a long time with us. The general occupier market feels like it's better in Q2 and better in June and July than it was at the beginning of the quarter. So let's hope that continues to strengthen as the year goes by. And if the macro is more positive and particularly in the UK with a, as I said earlier, pro-growth new government, that may be a bit of a stimulus for people that have been waiting to put pen to paper. But we've seen good levels of inquiries, good leases being signed throughout the period, but particularly towards the end of the quarter.
Q: A question on ERV growth. So for the UK, I think you came in at 1.5% for the first half of the year. That compares to 2.6% for Southeast Industrial and 2% for distribution warehouses on the MSCI monthly. Can you just touch on maybe why you think you came in a little bit below that? And there's a little follow-on -- and then just going forward, obviously, annualized that would put you at 2.8%. That's sort of right at the bottom end of your guidance. Do you see this as sort of the trough for this year and next year will be stronger for ERV growth? Or are we in sort of a period of more like sort of 2% to 3% growth rather than 3% to 5%?
A: I mean if you -- first thing to comment on MSCI monthly. We've never felt that it's a really good data set because it tends to have a lot more secondary and regional stuff where we don't think it represents the same long-term opportunity. But in a short-term period, it can have points of outperformance, particularly I think a lot of those rents are coming from a very low base. So I wouldn't read too much into that. What we said about the rental growth is that we had an amazing run, '21, '22 and even '23 was pretty good. The average ERV growth across our whole portfolio for the five years leading up to 2020 was 2.95%. And we've been very consistent with what we think the long-term sustainable rental growth is for our type of portfolio. We say 2% to 4% for logistics, 3% to 6% for urban, and we see no reason to change that. So as Soumen said in his part of
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
