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Edited Transcript of BBOX.L earnings conference call or presentation 8-Aug-19 9:30am GMT

Half Year 2019 Tritax Big Box Reit PLC Earnings Presentation

London Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Tritax Big Box REIT PLC earnings conference call or presentation Thursday, August 8, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bjorn Hobart

Tritax Group - Partner

* Colin Godfrey

Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP

* Frankie Whitehead

Tritax Big Box REIT plc - Head of Finance - Tritax Management LLP

* Richard Wilson Jewson

Tritax Big Box REIT plc - Independent Chairman of Tritax Management LLP

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Conference Call Participants

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* James Ashley

Liberum Capital Limited, Research Division - Research Analyst

* Sander Bunck

Barclays Bank PLC, Research Division - VP of Real Estate Equity Research

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Presentation

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Richard Wilson Jewson, Tritax Big Box REIT plc - Independent Chairman of Tritax Management LLP [1]

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Well, good morning, ladies and gentlemen. A very warm welcome to all. Very nice of you to come here, we have another set of solid numbers.

Most of you have been here before and you know the process. There will be plenty of time for questions after the presentations.

So over to Colin. Colin?

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [2]

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Thank you, Richard. Good morning, ladies and gentlemen. Thanks for taking the time to join us this morning as we present our results for the 6 months ended 30 June.

I will be taking you through the highlights of the first half of 2019 and provide information about our portfolio and our market. Frankie will then explain the financial results in greater detail. And then I will briefly comment on how we see the outlook for the market and our company before we can take questions.

So looking at our financial highlights for the year. We paid a fully covered dividend of 3.425p for the first half, and we're on track to deliver a dividend of 6.85p for the full year, representing a 2.2% increase over that paid in 2018. This was supported by our contracted rental income, which grew GBP 5.7 million over the period to GBP 166.8 million as at 30th of June.

On the 20th of February, we raised GBP 250 million of equity through a substantially oversubscribed equity raise for new shares for a primary purpose of acquiring controlling interest in db Symmetry. And at the half year, our LTV stood at 29%. But as Frankie will explain later, the look-through is closer to 35%.

Since the 31st of December, the value of our portfolio has grown by GBP 430 million to GBP 3.85 billion, largely due to the newly acquired Symmetry assets and associated capital investment, plus growth in the value of our underlying investment assets. As at the half year, our EPRA NAV was down by 2.75p to 150.08p per share, primarily due to the issue of additional shares at a discount to NAV, i.e., exceptional costs and costs relating to the Symmetry transaction, which Frankie will cover in greater detail later.

Yield for prime U.K. Big Box logistics property have been flat since the turn of the year, and this contributed to a suppression in our total return, which married to the cost I mentioned earlier, meant that our total return was just 0.42% for the 6 months to June 30. And again, Frankie will take you through that in greater detail.

So turning to our operational highlights, where there were no investment purchases or sales in the first half, other than the acquisition of db Symmetry, the rationale being that db Symmetry will be our primary focus in the near term. So I'll remind you of the headline features of the db Symmetry transaction, which was covered in our annual report as a post-period-end event.

So in February, we acquired an 87% economic interest in db Symmetry for approximately GBP 320 million and independent valuation supported the 100% enterprise value of GBP 370 million. The transaction was a unique opportunity to acquire one of the U.K.'s largest geographically diverse land portfolios. The portfolio comprises over 2,500 acres across the U.K. of controlled land. We don't own it all, and I'll touch on that a bit later. And it's capable of delivering up to 38 million square feet of logistics property over a 10-year business plan period.

We've retained exclusive services of the full Symmetry management team of over 30 people for a minimum of 8 years, which we feel is particularly attractive feature of the transaction. There is alignment with the Symmetry management team, who've retained a 13% holding in the company, and therefore, the underlying assets, the release of which is subject to performance hurdles over 8 years and succession planning by virtue of up to 4% of the 13% being available to senior staff within db Symmetry.

Upon completion of and letting of a building, we have the option to acquire 100% economic interest from the management team. The Symmetry portfolio is targeting a yield on cost of 7% to 8%, and note that this is distinct from our target yield on cost for Littlebrook at Dartford, which is between 6% and 8%.

So please don't get that confused.

The transaction, we believe, is very efficient, and we control a very large land bank, the timing of its delivery and we've not had to pay for a fully consented land bank because the majority of that land is controlled under option agreements. And this reduces cash drag. It provides flexibility to us in terms of timing, et cetera. It improves efficiency, and consequently, increases, what I call, the punching power from that land bank and the longer-term opportunity.

But it also doesn't change our fundamental DNA. 90% of our business continues to have high-quality long-term income underpinning our dividend aspirations. And of course, we can acquire additional land or options over there to supplement these existing holdings through the expertise, and the relationships and knowledge we have into the market through the db Symmetry team.

So briefly looking and turning to our market, very high level. Well, take-up was down compared to the run rate in 2018, but remained very healthy at 12.9 million square feet in the first half, and this is for buildings of over 100,000 square feet in size. This was also in line with the 5-year average, indicating a robust occupier demand. And to put that in perspective, the highest level on record last year was 31.8 million square feet. So very, very close to half year run rate.

Speculative supply increased with 2 buildings of over 0.5 million square feet completed and 3 commenced, one of which is expected to complete by the year-end. And so in aggregate, this represents approximately 2.3 months worth of supply when compared to the 13.8 million square feet of Big Box take up that took effect last year.

Rental growth was recorded by CBRE at 3.2% for the 12 months to the 30th of June but does appear to be slowing. The run rate late last year was higher than in the first half of this year. And we think that the effect of Brexit and tenants just applying a bit of caution or waiting will start to filter through into a slight slowdown in rental growth.

However, CBRE does report that prime yields are unchanged at 4.5% for a 15-year term for prime logistics assets.

So moving to our company, giving you some overview on the company. Our portfolio now comprises 58 investment assets, shown in color turquoise on the map. There are the foundation assets. You've also got the green and brown assets, providing value-add and growth covenants, respectively. And the dark blue assets being the development sites shown there, comprising the Symmetry land and also our site at Dartford inside the M25.

These provide good geographic spread across England. And of particular note I think, are the Symmetry sites in the Midlands and the South of the country, particularly, on the M40 corridor, which are quite rare, and we think will deliver strong value in the longer term.

The investment assets, which we've acquired over the last 5.5 years at an average yield of 5.5% and were valued as at the end of June at an average initial yield of 4.5%. We've maintained the sector-leading weighted average unexpired lease term of 14.3 years, which provides long-term rental income commitment from our customers, and our development assets comprise planning consented land, land without planning consent, options over land, and development management agreements and other economic interests in land, so a quite diverse mix of opportunity.

Together, Littlebrook and the Symmetry land have the potential to deliver approximately 41 million square feet of logistics assets over a 10-year business plan.

So looking at some quality and diversification. I think it's important to remember that we set this business up to be high quality, long term in its focus to be able to ride out storms and changes in the economic circumstances. This isn't a company that's just been created for an upturn in the cycle, albeit, we've benefited significantly from that.

So we remain focused on Big Boxes. Yes, we are also speculatively developing and doing some smaller scale buildings, but the majority of our portfolio, are Big Boxes. So we are a true Big Box, only 8% of our buildings are smaller than 300,000 square feet and larger buildings tend to attract higher-caliber tenants, longer leases and higher levels of automation. And to that point, you can see that over half of our buildings are automated, some significantly so. And this tenant customer investment in the buildings means that they're more likely to want to renew the lease upon expiry.

Our buildings are very modern. That's important for resilience as well. Only 8% of our buildings were built prior to the year 2000, and half have been built since 2010, so very, very modern stock. And again, modern buildings typically attract the best tenants and the longest leases, further resilience.

In terms of income focus, you can see the foundation assets continue to provide an overwhelming element of our income with land comprising only 10% of our GAV. As I mentioned earlier, by rent review type, we've got a good balance of open market, 39%, and inflation linked, 47% income. Notably, however, 51% of our rental income benefits from a minimum level of uplift, and that's an important feature in terms of us planning for minimum level of income growth into the future.

The customer base is an interesting one. This is something we've worked on quite deliberately over the last few years, particularly, given what's going on in the retail space, and we've worked very hard to provide a balance of tenant types. It's worth noting that whilst we've been leveraging on our existing tenant relationships, we've also been looking to diversify this -- the range of tenants.

The largest segment of our income from online customers, mainly from Amazon. And then we look to food at 18%, which we feel is very resilient in terms of staples. And our exposure to traditional retail is comparatively small, with fashion at 7% and other retail at 8%. And in fact, there are only really about 2 retailers in there that are sort of really pure high street focused. In addition to that, you got Argos, who's largely transitioned its business as well online. So I think we feel we're in a pretty good place in relation to what's happening on the high street.

This slide demonstrates the diversification and quality of our customers, many of which are international brands and will be well-known to you. Amazon is currently considered by many institutions to be one of the most valuable covenants in the world right now. We are of the same view, and which is why they figure some way clear at the top of our customer table by rental income of 13.2%. It's a considerable change over the position a couple of years ago.

Morrisons is at 6.8%, and Howdens Joinery, another high-quality covenant, is at 5.2%. All the others, notably, are below 5%. And I think that demonstrates the high level of diversification.

Providing further comfort regarding financial risk, it's also worth noting that 75% of our income is from companies that are in the [3,100], [3,250] or equivalent exchanges internationally.

Creating and protecting further value, a few asset management points here. There were 3 properties with rent reviews that fell due and were concluded in the period. All have annually reviewable rent. So there were no 5 yearly rent reviews in the period, i.e., we haven't had a position where we've been able to capture 5 years of growth at one point in time.

So each of these are annual rent reviews. The first one was Morrisons, Sittingbourne, which was a retail prices index review capped at 2%; Argos, Burton, which was a fixed rent review at 3%; and Morrisons, Dordon, which is reviewed to the consumer prices index, which was measured at 1.8%.

Combined, these comprised 9.3% of portfolio rents and delivered a 2.2% average uplift over the period.

You'll notice the ERV growth over 12 months being 1.34% and our reversion on our portfolio now according to CBRE is over 7% and growing. So there's opportunity to capture that as the reviews come through.

We continue to pursue a number of ESG initiatives. And this performance will be reported through our participation with -- with whom we have submitted to the 2019 gross index.

Following the year-end, we completed on the regear of the Sainsbury's asset at Leeds. And in doing so, the 7-year unexpired lease term was extended to 25 years without break, demonstrating Sainsbury's long-term commitment to the asset. In addition, we implemented the 5-year -- we amended the 5-year rent review basis from open market to consumer prices index-linked, collared at 2% and capped at 4%. It gives us this guaranteed level of rental growth at least 2% per annum, which is not something we had before. And that's a pretty attractive feature.

The former passing rent was also over rented, and this was something we looked to also to amend. So as part of the transaction, the rent was rebased at the current market level, and therefore, provides opportunity for us to grow a future rental reversion in that asset as well.

Development highlights. Well, 1.2 million square feet of developments reached practical completion during the period. There are currently a 6.7 million square feet of developments underway. 96% of current developments are pre-let, and that's an important feature of the balance that I mentioned to you earlier in terms of derisking the process. And there are 7 pre-lets, which I will cover in the next slide.

There are 5 speculative developments on Symmetry land, totaling just over 560,000 square feet, of which 83,000 square feet was recently let to Global Infusion Group.

In May, we obtained detailed planning consent for the Co-op development at Biggleswade and our outline planning consent to develop up to 2.3 million square feet of logistics space at Symmetry Park, Kettering. So our first wins on the planning side, they're exciting feature, given how early it is in the life of the company.

In June, we sub-sold a 220-acre site at Lutterworth, in which we retained an ongoing economic interest, and I can't go into that too much further due to confidentiality issues. That's a very exciting long-term proposition in which we are not having to inject any additional capital, and we think, it will be very lucrative for the company.

There was also good occupational interest for the first phase of 450,000 square feet at Littlebrook, Dartford, for which we gained planning consent last December, and we're in advanced discussions, subject to planning with the potential occupy regarding Phase 2, which will be a larger scale building than we can accommodate on Phase 1.

Looking briefly at pre-let development. I'll skip through this. Since our IPO in December '13, we have embarked upon 17 pre-let developments. 10 of these have been completed, providing 5.4 million square feet of new assets at an attractive yield of 5.4% for nearly 22 years of weighted average income and delivering a value uplift of over 23% on the aggregate acquisition prices. At the period end, there were 7 developments underway, all of which are on budget. Amazon, Haydock reached practical completion after the period end, and Amazon, Darlington is due to achieve practical completion within the course of the next month.

Co-op, Biggleswade, you'll see at the bottom there has yet to start on the vertical build, but ground works are underway.

And then just mentioning before I hand over to Frankie, a couple of points on the Symmetry portfolio. As you are well aware, we can't provide forecasts, but what we can do is give you a feel. So this slide simply demonstrates the opportunity offered by the Symmetry portfolio.

There's potential to increase our portfolio area by approximately 2/3 and nearly double both our rental income and portfolio as a consequence of the transaction. And applying our 7% to 8% yield target on cost of the Symmetry portfolio, there's also the possibility of increasing our aggregate yield, which in turn, could substantially increase our earnings. And that's what we're playing for really in the context of that transaction.

I'll now hand you over to Frankie, who'll talk you through the financial results. And then I will briefly wrap up with an outlook a bit later.

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Frankie Whitehead, Tritax Big Box REIT plc - Head of Finance - Tritax Management LLP [3]

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Thank you, Colin, and good morning to everyone.

So since the completion of the db Symmetry acquisition, we have spent time fully integrating the Symmetry team, and we have set our near-term strategic objectives, which includes the setting of our detailed business plans for the first 12 months. I think it's fair to say how pleased we all are to be working with such a high-caliber team in db Symmetry.

The db Symmetry Group is fully consolidated into our financial statements this year. And some of our headlines include an increase in the dividend paid of 2.2%. Our EPRA NAV stands at 150.08p per share, which digests the 3.8p of one-off financing and transaction costs associated with the Symmetry deal. And we've continued to strengthen the balance sheet after the drawing of a new GBP 400 million long-term debt commitment.

So if I start with the income statement. Our net rental income has increased by 4.7% to GBP 69.2 million. We have one development completion in the period, adding an additional GBP 1.8 million to our first half gross rent. An additional GBP 5.7 million of rent was secured, predominantly relating to 750,000 square feet of pre-let development, taking our total contracted income at the period end to GBP 167 million.

As the top right-hand chart shows, the portfolio does have a rental reversion of 7% when compared to the ERV. Our admin costs have increased to GBP 10.5 million for the period. This is driven by a combination of the investment fee payable, and this has increased by GBP 1.2 million, but also due to the expensed portion of the fee payable to the Symmetry management company, which was GBP 300,000 of cost that wasn't present in the prior year.

As we disclosed at the time of the transaction, the Symmetry team were transferred into a separate management company with their services secured under an exclusive development management agreement. The annual fee payable to the Symmetry team to cover their cost base was set at GBP 4.8 million per annum. And of this, 85% of the fee relates to direct development costs and is therefore being capitalized with the balancing 15% being expensed.

This has resulted in our -- an increase in the EPRA cost ratio to 15.3%, which, whilst is still comparatively low, is an increase against last year's 13.7%. This increase is, however, only expected for the short term as we have the benefit of 6.5 million square feet of pre-let assets coming under development, which will add approximately GBP 32 million per annum to our top line once built out. But we expect a minimal corresponding increase in the operational overheads, and following which, we expect the cost ratio to return to normalized levels.

The GBP 4.1 million of acquisition-related cost relates to the purchase of db Symmetry. The transaction has been treated as a business combination under IFRS, and therefore, these costs are recognized through the P&L. And the acquisition accounting has also resulted in negative goodwill of just over GBP 7 million, also released to the P&L with immediate effect and is included within the other income line. Both of these items are considered one-off and therefore have been removed from our adjusted earnings.

The changes in the revaluation of the investment property portfolio has generated a gain of GBP 26 million across the first 6 months. The like-for-like increase in capital values across the portfolio was 0.8% for the period. And with a relatively subdued investment market, the portfolio valuation yield has remained static at 4.5%. So this growth, it really is as a result of the rental growth realized being applied to a steady-state cap rate along with some appreciation on some of the development land that we hold.

Our net finance expense has increased to GBP 15.9 million, up from GBP 11.5 million in the prior year. The increase is a function of the level of average debt drawn throughout the period, which was used to finance our development project costs. Our cost of debt has remained broadly stable with 2018.

We're on to our sixth consecutive year of dividend growth. We have declared dividends totaling 3.425p per share for the first half, which is a 2.2% uplift on 2018. And therefore, we're halfway towards meeting our annual dividend target of 6.85p. Our dividend is supported by our adjusted earnings per share, which grew to 3.41p. In the short term, following the GBP 250 million of new equity issued in February to finance the Symmetry transaction, we have compressed the earnings headroom that we would otherwise have been enjoying at this point. But ultimately, we have acquired a land portfolio that has the potential to deliver significant upside in both NAV terms and earnings terms. And ultimately, this gives us greater confidence in being able to deliver a dividend that can continue to grow over the long term.

On to the balance sheet. So the top right-hand chart shows that the portfolio value has increased to GBP 3.85 billion, which is a 12.6% growth on December last year, largely driven by the acquiring of the Symmetry portfolio. The portfolio now includes GBP 237 million of land options and other property assets. The land options will be held on the balance sheet at cost and will not be revalued moving forward until they convert into land, at which point, they will be fair-valued.

As part of the transaction, we have also acquired 2 separate joint venture holdings. These are equity accounted for, and our share, as you can see, totals GBP 30 million as at June.

So the level of drawn debt has increased to just under GBP 1.1 billion at the period end. This follows the delayed drawing of the GBP 400 million U.S. private placement proceeds that were arranged at the end of 2018. The 3-month delayed-draw mechanism meant that the proceeds were received in February of this year, and we immediately repaid our revolving credit lines. The group had a loan-to-value ratio of 29% as of the balance sheet date.

The Symmetry management team has retained 13% economic interest in the portfolio via a separate share class being a B and C share class. This 13% is accounted for as a liability rather than minority interest. The B and C shareholding is included within the other liabilities line of the balance sheet, and that shareholding will be fair-valued at each reporting date.

The group NAV position grew to over GBP 2.5 billion following the issue of the equity. This translates into an EPRA NAV per share of 150.08p as at the same date. As we noted at the time of the annual results, this has been impacted by the one-off cost of the db Symmetry deal, which totaled 3.8p. The 3.8p includes all transaction costs, the cost of raising equity and the fact that the equity was issued at a discount. When removing these costs, however, the underlying business has performed positively, and we have identified a number of early opportunities that will more than compensate for this.

The consequential effect on a NAV perspective into our total accounting return, which, when including dividends paid, totaled 0.42% for the 6 months. Again, if you remove the one-off 3.8p of costs, the comparable total accounting term will be just under 3% for the period.

So on to the EPRA NAV bridge. What we've tried to do here is rebase the opening EPRA NAV position, taking into account those 3.8p of one-off costs. So we arrive at a rebased position of 149p. As you can see, following this, there has been positive growth in the underlying business, recording NAV growth of 0.7% for the first half. And the growth of around 1p is attributable to a combination of the property revaluation surplus and the impact of the negative goodwill.

Moving on to the debt platform. This has remained stable and is principally financed on an unsecured basis. We continue to focus on maintaining our attractive cost of debt and diversifying our sources of debt finance. As I previously mentioned, the GBP 400 million private placement was fully drawn down in February, and there were 2 tranches that were priced last November at a blended coupon of 2.9% for 10-year money.

We also arranged a new GBP 200 million unsecured revolving credit facility in June. And I'd like to thank our key relationship banks once again for their continued support. The facility is for a minimum 5-year term and has 2 separate 1-year extension options, taking the average maturity across our debt to 7.8 years as at the period end, which would increase to 8.3 years if we exercise all of our available extension options.

Our capped cost of debt remained stable at 2.68%, and the current running cost of debt has fallen slightly to 2.26%. Approximately 2/3 of the debt book is held under fixed-term loan arrangements, with the remaining debt drawn currently around 99% hedged.

So the actual loan to value at the balance sheet date was 29%. However, we continue to operate with an amount of committed capital expenditure. We have 6.7 million square feet of assets currently under development, which, along with certain operational liabilities, totaled approximately GBP 300 million of contractual commitments due for payment across the next 18 months. So our forward guidance on the LTV, factoring in these cash flows, shows that this moves to just under 35% in early 2021, all other things being equal.

Briefly on to our debt maturity profile. We continue to operate with a broad range of debt maturities and, in recent times, a greater diversification in terms of the sources of our debt finance. We hold a healthy refinancing position, with our earliest meaningful refinance not due for another 4.5 years in December 2023. Our 2 revolving credit facilities will provide us with the firepower to commit to certain opportunities that we're currently working on and that we are hopeful of securing in the near term. Taking into account that level of capital commitment I just mentioned, we have approximately GBP 300 million of firepower available to us.

And this is a slide that we first shared with you in March. It shows you the potential we have to organically grow our rental income via the land and development holdings that we have. So if we start on the left-hand side, just to talk through this, our contracted income of GBP 167 million, which includes the pre-let developments. We have the ability to add a further GBP 12 million through the letting of vacant space, we have 2 vacant units at present, and the capturing of the portfolio rental reversion. On top of this, we overlay a potential for GBP 7 million of rent captured from our current landholdings, which have consent. And this includes the Phase 1 at Littlebrook, and then on top of that, a further GBP 13 million from the unconsented part of the Littlebrook land.

And finally, the end column there, the reason for acquiring the Symmetry portfolio, a substantial GBP 182 million of opportunity from the schemes held under current option agreements, overall taking our total rental income potential to GBP 380 million approximately.

Now whilst the slide is meant for illustrative purposes and doesn't take into account any disposals that we may wish to make from our investment stable or any future embedded rental growth, it does present the scale of the opportunity in front of us, which we have an 8- to 10-year business plan attached.

Just a bit deeper on to the GBP 202 million of potential rent, shown in purple, there are a few key points to note. Firstly, we own or control all of this. And therefore, in what is currently a tough investment market, our focus is just more onto organic growth and less external reliance. Secondly and to a large extent, we control the timing of when this product is delivered. We will only develop this out as and when it's right to do so, taking into account the levels of occupational demand, how much supply is coming through at a particular moment in time as well as the wider macroeconomic landscape. And finally, as Colin mentioned, we believe that we can deliver this an attractive -- at an attractive yield on cost, targeting between 6% to 8% but, on the Symmetry portfolio, 7% to 8%, which will have a very powerful impact on the future returns for the company.

I think that sets it back to Colin for the outlook.

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [4]

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Thank you, Frankie. So I think we can categorize outlook into macro and micro factors. The first is full of uncertainties, and they will be familiar to you. But it's important to remain cognizant of them because awareness and being prepared can improve our resilience. And I'm sure that all of our shareholders will want us to be constantly thinking about these matters and how it might affect our business moving forward.

So let's just take some of the macro points in turn. While on the macro level, one must first look to the global economy. And we are part of a global economy now that's, without doubt, and concerns over a global slowdown that's been well reported in the press. And politically, we also keep a watchful eye on relations between the EU, Russia, China, the U.S.A., et cetera, which have again all been on the front pages of the newspapers. And of course, the dreaded B word, Brexit looms large over the U.K. with the increased threat of a hard exit and concerns over the political -- the potential, sorry, for a domestic recession. We are skirting quite closely right now technically. And one hopes it doesn't happen, but we need to be mindful of it.

Not unique to the U.K., traditional retail is suffering. And this is expected to continue. The cost price inflation on imports due to the weakening of sterling has proved a double whammy, hitting U.K. retailers at the same time as the high street is shrinking. And these factors may affect business confidence and weaken the financial strength of some companies. So we have a strong system of analysis in place, internally reporting and vigilant on tenant customers in our portfolio and the market more generally.

Turning to the micro picture. Well, that's rather more positive. Our sector continues to benefit from a profound structural change in consumer habits, with e-commerce and the desire to improve efficiencies underpinning demand for logistics property. Although rental growth is softening amid the uncertainties of Brexit, the level remains above the underlying rate of inflation. And take-up continues to be strong, demonstrating continued occupational demand for logistics properties.

Looking at investment. Yields for prime logistics properties are broadly on pause. We expect values to remain resilient with a weight of capital looking to enter the sector, both from U.K. institutions seeking to reweight portfolios and overseas capital waiting for a resolution to Brexit but viewing the U.K. property market as attractive given the weakening of sterling.

Whilst deals are unlikely to sharpen until there is improved clarity over Brexit, logistics property continues to offer a positive yield gap over gilts and over interest rates. And downward pressure could apply on yields as the market frees up in 2020. We don't expect significant change in the position on yields at the end of this year because Brexit is going to be resolved. To the extent that it is resolved, really too late in the calendar to have any meaningful effect.

In uncertain times, the unrivaled quality of our buildings and quality of the tenant customers underpinning our income provide confidence in our near-term dividend. And looking further out, we believe that our internal development platform has the potential to deliver organic growth, as Frankie has mentioned, with attractive long-term returns, which, combined with capital recycling from our investment portfolio, can materially enhance our longer-term earnings. And that's what this period in the evolution of the life of our company is about. It's about planning and delivering for the long term.

Well, that concludes our presentation. I'm going to invite my partners, Bjorn and Petrina, to join us on the top table. We'll now take questions from the floor where a microphone will be handed around, and then we'll subsequently take questions from those joining us by audio link. Please, when you're given the microphone, if you put up your hand, we'll invite you to ask your question. Please wait for the microphone, and then once you have it, announce with gusto your name and the organization that you work for before asking your question. Thank you very much.

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Questions and Answers

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [1]

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Who's first off who's going to give us a [start at 10]? Sander?

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [2]

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Sander Bunck, Barclays. Three questions from me, please, two more technical and one a bit more bigger picture. The first one is on the financing costs, which is -- which have obviously gone up quite a lot post-drawdown of additional debt. What do you expect these levels to be going forward? Do you expect these to remain steady?

And secondly, on the more technical side, can you just yet again explain the difference exactly between the B and C shares and the normal share class and what is -- what exactly the difference is between those 2?

And then slightly more bigger picture. Can you give me -- give us kind of an update on the current pipeline from the db Symmetry acquisition? And can you give us some indication how you expect to progress on that land within the next 6 to 18 months? Obviously, the last 6 months were a bit more quieter just because you've been quite busy with existing developments but also given the fact that there's, at the moment, availability especially in the Midlands that's got you picking up quite materially. So how do you see that evolving? And how confident are you to execute on that with material speed?

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [3]

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Yes. Frankie, would you like to go first?

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Frankie Whitehead, Tritax Big Box REIT plc - Head of Finance - Tritax Management LLP [4]

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So on a more technical point, Sander, the B and C shares, the way they work, they've got an economic right to the development profit, the capital profit that comes out of the Symmetry portfolio. So what they don't have rights to are dividends and therefore income. They also have no voting rights. They're the principal differences. So what will happen is the 13% will benefit from any development profit on a particular asset. Once we reach PC of a building, we will effectively acquire the remaining 13% from db Symmetry management shareholders, and then we will have full ownership and rights to that asset going forward, inclusive of the income and any capital upside or downside from there onwards.

On the financing cost, yes, the impact from the GBP 400 million in the U.S. PP, we went out for GBP 250 million last November. There was a lot of money on the table, 2.9% for 10-year money. Over 10 years, that's pretty good value. So we decided to take it, not knowing the exact amount of equity that would raise for db Symmetry. So we took that, agreed to forward drawdown date of February going forward. So that will be relatively stable and our drawings will come to be through the RCFs that we've got.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [5]

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Just very quickly on B and C. Other than that they have no voting rights and just an economic interest, are they for the rest exactly the same as the normal Tritax shares or different?

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Frankie Whitehead, Tritax Big Box REIT plc - Head of Finance - Tritax Management LLP [6]

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They have no legal rights either, so they have no legal ownership of the assets. They have the economic benefit.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [7]

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Okay.

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [8]

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I think Bjorn is going to tackle the DBS current pipeline question.

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Bjorn Hobart, Tritax Group - Partner [9]

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Yes. I can answer that now. So you'll have seen from the presentation that 2.3 million square foot at Kettering received planning, which is obviously something that we'll focus on moving forward into 2019, which is a very exciting opportunity. And it's got the ability to accommodate a 1 million square foot unit, which is unique in that location. In addition, there's 560,000 square foot of speculative development that we acquired, which was at Doncaster and Bicester, and then the 3 units to Aston Clinton. You'll see from the presentation as well the 83,000 square foot unit at Aston Clinton was let during construction, which is very positive. And at the remaining sites, we've -- we're engaged with a number of occupiers and hoping to be able to announce something at one of those schemes in the next 6 months.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [10]

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And just on that -- on the fact that the availability of space has gone up quite materially over the last couple of months, how do you see that? How do you compare that to what you're looking to do? And has that proven to be a challenge or not?

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Bjorn Hobart, Tritax Group - Partner [11]

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So the availability and speculative development has really been focused in the 100 to 300 size band. There's very few speculative schemes which are being developed in excess of 500,000 square foot. And I think they total 5 individual schemes. So it's very measured. We've obviously got the planning. We'll look to secure pre-lets on that land before we make that commitment as opposed to speculatively develop.

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [12]

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This is certainly not -- we're not seeing -- I mean obviously, there will be micro profits. But by and large, we're not seeing a circumstance whereby there's an oversupply coming into the market that we're concerned about or we think will give rise to rents being suppressed or static -- sitting static. I mean the whole context of rental growth against supply is a really interesting one. There's a lot that we can talk about there in the context of what's been happening in recent times. I think it's important to reflect on what's been driving rental growth. In urban environments, it's often been a case that there's been residential expansion, which is eating up industrial logistics land. So you've got alternative use values, which have held up and supported industrial logistics land in those environments. And that's seen very strong rental growth.

Out-of-town seeing lower rental growth, but we think longer term, it's quite resilient. We've not seen really any change in the planning system, which is going to give rise to certainly a significant increase in supply for larger-scale buildings. When we start thinking about rental growth in the out-of-urban environment, it's been a -- really been a feature of the fact that developers typically have development profit on cost targets. And it's about the elements that go to make that up.

Now they've been buoyed to some degree, i.e., they've been able to hit their targets rather more easily due to several factors. Number one, despite the softening of the pound and cost price inflation of raw materials, for instance, contractors have been sort of cutting each other's throats really in competition, and you've seen some go out of business. I'm not sure that they necessarily need to see that certainly in our market because we haven't really seen any significant increase in construction costs [at the cold phase] in terms of pounds per square foot buildout. Now that could start changing over time.

The other factor that's important to recognize is, obviously, land values have been increasing. Developers have been building out off the back of land that they acquired that was relatively cheap, and they won't be able to continue to do that into the long term. And also, they've been developing sites on the back of the significant yield compression in the market. And as a consequence, they haven't had to work really too hard to deliver on those profit on cost ambitions. Now that means, in turn, they haven't had to leverage too hard against tenants to really push to hit those profit ambitions by virtue of pushing rents. I think we might start to see that changing because of those factors coming into the market that I mentioned in terms of potential cost growth, high land values and the fact that yield compression is certainly slowing, if not, it could be plateauing for a while. So those elements will not contribute to making the job easier for developers.

And as a consequence, I think you're going to have to see rents increase. We are blessed with our portfolio. We bought the majority of a platform of options, which is a very, very efficient way of doing it. And we've got an -- in those option [rooms], we've got an embedded profit of 15% to 20% on each one of them and durations of 6 to 16 years. So we think we've -- we're in a great place. But I think that those factors are really quite important when you're thinking about long-term rental growth coming through in the marketplace.

Can we move to another question, please?

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James Ashley, Liberum Capital Limited, Research Division - Research Analyst [13]

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James Ashley at Liberum. Just on the Biggleswade asset, I know previously, your forward-funded pre-let developments earn income while you construct the asset. Is it safe to assume that from now on, the assets pre-let within the db Symmetry portfolio will not receive the income? Or have you managed to kind of...

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [14]

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Correct. Yes. That's the quickest answer I think I've ever given.

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James Ashley, Liberum Capital Limited, Research Division - Research Analyst [15]

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[I'll throw at you] another question. Just on the speculative development as a percentage of GAAP, you acquired the 1% maximum. But clearly, we've seen -- you've kind of changed your land maximum as a percentage of GAAP. I mean if you believe market conditions will change in the future, I mean will that move as well? Or is that an absolute hard stop, it will never go higher, lower?

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Colin Godfrey, Tritax Big Box REIT plc - Partner & Fund Manager of Tritax Management LLP [16]

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So our investment policy is a maximum of 5% of GAAP. And obviously, that's something we'll keep under review. It's -- I think it's very much a micro location question as well. One has to look at the micro market, the supply that's available, what else we see coming through in the pipeline in terms of competitive product and the depth of occupier interest.

It's true to say that the intelligent route to development isn't blind development. It's about identifying the market and building into that, sometimes to put a site on the map as well. So you'll often have tenants in mind when you're expected to be constructing a building. But also, you want to able to demonstrate the quality of what you're producing to -- really to kick-start and put a site on the map certainly where you've got the opportunity to create larger-scale buildings as well and to show the quality of what you're producing, open up the site, bring in the infrastructure and that sort of thing.

So it will be measured. It will be carefully considered in context of what we -- the throughput of them all we can see coming through in the market. So you're not going to see it racing away. And we have put those limits in place for that specific reason to give confidence to our shareholders that it's not going to get out of hand.

Any more questions? Deathly silence. Well, if you're embarrassed to ask a question openly, then you're more than welcome to ask us a question privately over another cup of coffee.

So thank you so much for taking the time to join us this morning. I really appreciate your support, and enjoy the rest of the day.