Release Date: September 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong operational performance with accretive acquisitions in the UK and France.
- Net rental income increased by 13% year on year to GBP107.2 million.
- Portfolio valued independently at GBP1.8 billion with a loan to value of 37%.
- Sector-leading metrics on occupancy, rent collection, and gross to net margin.
- Sustainability strategy aligned with UN Sustainable Development Goals and significant progress in ESG initiatives.
Negative Points
- EPRA NTA per share decreased by 6% from June '23.
- Higher interest rate expectations impacted property values, leading to a GBP54 million decline in the first half.
- Loan to value ratio at the upper end of the target range, limiting further leverage for acquisitions.
- Potential need to amend investment policy to pursue opportunities in France and continental Europe.
- Challenges in proving market evidence for rental growth to valuers, impacting valuations.
Q & A Highlights
Q: With a 37% loan to value, where would you feel comfortable taking that to for acquisitions?
A: Rob Abraham, Managing Director, Fund Management: Our long-term target has always been 30% to 40%. In the near term, we'd be comfortable going up to the upper range of that, which would be around GBP100 million to GBP150 million of acquisitions. It's about being selective and targeting earnings accretion while maintaining asset quality.
Q: Are you seeing more opportunities in France rather than the UK at the moment?
A: Ben Green, Principal: The UK opportunity set is likely to be smaller going forward. We see a lot of relative value in France and continental Europe. We need to talk to shareholders to ensure everyone is on board with this direction, as we may need to amend the investment policy.
Q: Can you remind us when the key hedges run off over the next year or so?
A: Mike Perkins, Finance Director: Our debt is 100% fixed at the moment. The first hedge rolls off in January 2026. We don't anticipate any negative impact from interest rate movements in the coming year, and we expect future earnings growth as interest rates potentially come down.
Q: How far can you go with reducing the EPRA cost ratio?
A: Mike Perkins, Finance Director: At 14.7%, we already have one of the lowest cost ratios in the sector. We will continue to target further cost reductions and aim to have the lowest EPRA cost ratio among externally managed listed REITs.
Q: What does the supermarket ownership landscape look like in France compared to the UK?
A: Rob Abraham, Managing Director, Fund Management: In France, many stores still sit on operator balance sheets, presenting sale and leaseback opportunities that don't exist as much in the UK. We see a scale opportunity in France and other strong European jurisdictions, which we will discuss with shareholders.
Q: How confident are you in achieving earnings growth and hitting a higher dividend target given the headwinds from debt costs?
A: Rob Abraham, Managing Director, Fund Management: We are confident. The first hedge rolls off in January 2026, and we have contractual rental uplifts on 80% of the portfolio, which is inflation-linked. We also have opportunities for earnings-accretive acquisitions, which should offset the increase in debt costs.
Q: Might we expect to see some disposal activity on longer-leased assets with low yields?
A: Ben Green, Principal: We are actively looking at capital recycling across the portfolio where we see value. While longer-leased assets add to the quality and total returns of the portfolio, they are not as accretive to earnings at the front end.
Q: Are there any examples where you might outperform on a regear versus what the valuers have assumed?
A: Ben Green, Principal: We have done regears through acquisitions where we've hit 4% rent to turnover, but these are not counted as evidence by valuers. We are confident that when we regear our stores, they will be well ahead of the valuers' ERVs.
Q: Are you looking to diversify the covenant in France or grow with Carrefour?
A: Ben Green, Principal: Long term, we'd like to diversify. Short term, we wouldn't be averse to another transaction with Carrefour. Concentration on strong covenants like Tesco and Sainsbury's has benefited us, but diversification could help in areas like credit ratings.
Q: Are you targeting cost efficiencies with non-manager fee costs?
A: Mike Perkins, Finance Director: We will review all third-party supplier contracts to make cost efficiencies where applicable. This approach has already resulted in an 80 basis point improvement in our EPRA cost ratio, and we expect further improvements with rental income growth and cost savings.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
