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Edited Transcript of LMP.L earnings conference call or presentation 27-Nov-19 8:30am GMT

Half Year 2020 Londonmetric Property PLC Earnings Call

London Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Londonmetric Property PLC earnings conference call or presentation Wednesday, November 27, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Jones

LondonMetric Property Plc - CEO & Executive Director

* Martin Francis McGann

LondonMetric Property Plc - Finance Director & Executive Director

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Conference Call Participants

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* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Jing Xian Tan Bonnel

RBC Capital Markets, Research Division - Analyst

* Keith Crawford

Peel Hunt LLP, Research Division - Analyst

* Matthew Saperia

Peel Hunt LLP, Research Division - Analyst

* Miranda Sarah Cockburn

Panmure Gordon (UK) Limited, Research Division - Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property Analyst

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Presentation

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [1]

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Good morning, ladies and gentlemen. And welcome to LondonMetric's results for the 6-month period ending the 30th of September. Great to see so many of you here. Agenda follows the normal course of events. I'll give you a quick run-through on the highlights, remind you of our strategy, portfolio overview. Martin will take you through the financial review. I'll get back and go into the individual property sectors that we have within the portfolio before giving you my thoughts on the market outlook, which could take some time, and then opening the floor up to Q&A.

So the key highlights in the period, our portfolio value has increased to GBP 2.4 billion. That's up from GBP 1.8 billion in March of this year. And as you can see there, it's structurally aligned to our favored sectors, notably distribution, 71%, and our long income portfolio, which is now up at 22%.

Over the period, the highlight is probably the acquisition of the Mucklow portfolio, which has increased our urban logistics exposure. That now accounts for 35% of the enlarged portfolio, and that's up from 25% a year ago and 27% in March. Over the period, we also acquired GBP 109 million of additional property, and that was GBP 60 million into the logistics sector and an additional GBP 49 million into the long income sector, where we've secured income on lease lengths of over 17 years. I'm also pleased that we -- the period is also -- we delivered strong operational performance during the last 6 months. Our total property return is 3.5%, and that is an outperformance against the IPD All Property index of 270 basis points. I'll come on to talk about the makeup of that performance later in the presentation.

Our like-for-like income growth is 3% and that effectively has come from the 52 asset management initiatives that we've executed over the period, adding just over GBP 3 million to our rent roll.

You can see the bottom right there, total accounting return for the 6 months at 2.5%. If we hadn't incurred exorbitant investment banking fees on the acquisition of Mucklow, that total accounting return would have risen to 3.9%. You can't have everything.

So turning then to the numbers. Our contracted rent roll now is up at GBP 124.7 million following these portfolio acquisitions. Our net rental income for the period is up at GBP 54.9 million, an increase of 16.6%, which has helped generate a 13.9% increase in our earnings to GBP 35.2 million.

EPRA earnings per share is up 2.9% to 4.6p, which has driven a 5.3% increase in our dividend. We announced this morning the payment of the second quarterly dividend of 2p, bringing 4p -- a 4p interim dividend for the period, and that is covered by 114%.

Our NAV for the period is flat at 175p. I'll go into that in a bit more detail. Obviously, it would have been a bit higher had it not been for those corporate banking -- investment banking fees. The LTV at 37.9% is higher than it was in March and also higher than it was this time last year. And that is effectively for 2 reasons. One, because just before the financial year end in March, we sold GBP 67 million worth of assets. And just to remind you, that was the vacant 530,000 square foot warehouse that was formerly been let to Poundworld and a Marks & Spencer's warehouse in Sheffield that was due to be vacated, so that effectively artificially pulled our LTV down. But we still expect the 37.9% to drift down as we execute some more noncore sales out of predominantly the Mucklow portfolio, but also some of the assets that we've held within LMP for a longer period, and we'll talk about that in a little bit more detail later on.

So to remind you of our strategy, this continues to be determined by the macro trends that we're seeing outside of property but continue to impact real estate.

Distribution. Our continued move into distribution is because that this sector continues to underpin modern shopping habits, with urban and regional logistics delivering superior rental growth. Our investment in long income is supported by low interest rates, sub-1% bond yields and a continued global search for yield. And the demographic shifts will continue to intensify this search as people look for liability-matching investments for the commitments that they've already made. And our full shareholder alignment ensures that we continue to approach a disciplined and rational investment strategy, making sure that we deliver well-let, modern, fit-for-purpose buildings to our customers.

So just to give you a little bit of backdrop on the A&J Mucklow acquisition and a flavor of our early experiences. Just to remind you, this deal closed at the end of June, so we've only enjoyed 3 months of owning this particular vehicle. This acquisition was both strategic and opportunistic, and it certainly accelerated our conviction call to grow our urban logistics exposure. We've acquired a well-let, complementary real estate portfolio that gives us greater scale and improves our income granularity. We're already introducing a more intensive asset management focus, and we are proactively engaging with all our retailers. And whilst we've only owned this for 3 months, we're beginning to see some early fruits of our labor. We've done 14 deals in that period across the Mucklow portfolio, which has delivered GBP 500,000 of additional rent in the half year. And we have 25 deals that are either agreed or in solicitors' hands, which we expect to deliver another GBP 0.5 million of annualized income that will be executed during H2. We've already delivered annualized administrative cost savings of GBP 1.8 million. And just to put that in context, the G&A from Mucklow for the 12-month period was GBP 3.5 million, so we're talking about a 50% saving on the overall G&A.

And equally importantly is the fact that we have retained a highly focused team and integrated them into the wider LondonMetric structure. And that is extremely important, particularly when you're dealing with more assets. Some of the assets within the Mucklow portfolio are much more management-intensive than just the traditional 4 checks a year that we have in other parts of our portfolio, so that has been incredibly successful.

So then possibly the most important slide that you're going to see today is how the enlarged portfolio looks. As I've already said, our urban exposure has grown up to nearly 35% of our enlarged portfolio. That's up from 24.6% this time last year. Our regional portfolio has held relatively steady at just under 19%. Our mega exposure has fallen from 26.7% a year ago to just under 18% today. And we've made further investments into long income, which, as I said earlier, stands at about 22%.

Retail parks. Our 3 remaining wholly owned retail parks now account for 3.7% of the portfolio. And the offices that we acquired with Mucklow account for 2.6%. In residential, we sold 22 units over the period of our last remaining holding down in Moore House. We have 9 units left, one of which is under offer. And just to remind you, thankfully, we only own 40% of them. So again, as I always say, if anybody is interested, you can see me afterwards.

Our portfolio metrics. Occupancy, you can see that is up at 98.2%. That has helped improve our gross to net income ratios to 98.7%. And even with the enlarged portfolio, 52% of the income is subject to some form of fixed or contractual uplifts. 24% is fixed uplifts and 28% is subject predominantly to retail price inflation.

So looking at the numbers on the right-hand side. Our total property return for the period is 3.5%, as I said earlier, compared to IPD at 0.8%. The standout performers, which are of no surprise to us and probably not to you either, has been the performance of our urban and regional portfolio, our logistics portfolio, with total property returns of 4.3% and 7.5%, respectively. These 2 sectors now account for 53% of the enlarged portfolio.

Our mega shed investments and our long income delivered relatively flat capital growth over the period. But their strong income components allowed us to deliver a 3% and a 2.5% total return, respectively.

Our retail parks, 3 remaining retail parks, as I said, that we continue to own, saw a 35 basis point outward yield shift, which helped contribute to a 5.9% reduction in their capital value and a negative total return even after allowing for a relatively attractive income stream of minus 2.6%. No doubt take some questions on that later.

So just looking back over a slightly longer period of time. Not surprising, you can see the retail parks there delivering a total property return over the 3-year period of 9%. The LondonMetric portfolio in its entirety delivered a 36% return, with our long income and our mega trending the enlarged portfolio. The standout performances, as you can see, again, it won't surprise any of you, is our urban and regional assets, which delivered 61% and 58% returns, respectively.

And on that note, I will pass on to Martin, who will take you through the financial numbers.

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Martin Francis McGann, LondonMetric Property Plc - Finance Director & Executive Director [2]

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Good morning, everyone. I won't mention investment banking fees once. So our numbers this morning benefit from the continuing realignment of the portfolio into the structurally supported sectors, I think best demonstrated by our acquisition in the period of the Mucklow business and also from our significant asset management activity. These results include 3 months of the activity from the Mucklow portfolio. So I'm pleased to report that our net rental income is GBP 54.9 million. That's an increase of 16.6% over the same period last year. Although our administrative overhead for the half year was GBP 7.6 million, an increase of 10% over the same period last year, our cost ratio has actually reduced by 70 bps to 14.3%. And we've also taken action to close the existing Mucklow office and relocate the remaining 5 members of the team to a smaller space in central Birmingham.

Our finance cost is GBP 12.5 million, an increase of GBP 2.7 million over last year. This is due to the increase in the net debt during the period of over GBP 300 million. That includes the cash component of the Mucklow transaction of GBP 130 million and the higher-margin private placement debt that we've put in place.

Consequently, the EPRA profit is GBP 35.2 million, a 13.9% increase over the same period last year or 4.6p per share. And it's that which allows us to increase our dividend for the half year to 4p per share. That's an increase of 5.3%, for which we have 114% dividend cover.

We have reported a loss for the period of GBP 10.2 million, which is entirely due to the impairment of goodwill, the fair value adjustments and the acquisition costs of the Mucklow transaction, amounting to GBP 57.2 million in total. Adjusting for these items would have generated a profit of GBP 47 million for the period compared to GBP 79.3 million in the same period last year, that decrease arising primarily from a reduced valuation surplus, which for this period is GBP 17 million compared to GBP 51 million for the same period last year.

Turning to the balance sheet. The portfolio valuation is now GBP 2.4 billion, a significant increase over the year-end. That increase of GBP 555 million includes, obviously, the assets acquired from Mucklow of GBP 455 million and other acquisitions and developments in the period. As of the period end, we held GBP 52.7 million of cash, that's slightly higher than our normal level, pending a number of completions immediately after the period end and the payment of our dividend in the first few days of October. I'll come on to talk about the GBP 963 million of debt in a moment. And our net liability position at the period end is GBP 26.9 million, the major component of which is, as ever, the rents we receive in advance, and there's a small negative mark-to-market movement in our derivatives. So in summary, our net assets for the period end were GBP 1.465 billion or 175p per share, which is stable with the year-end, having taken account of the impairment of the Mucklow acquisition costs of 2.5p per share.

Then just looking at those movements on the balance sheet. The key movement is the surplus of 0.6p per share in respect of the surplus of our earnings of 4.6p per share over the dividend paid in the period of 4p per share. The major property movement in the portfolio is the revaluation surplus of GBP 17 million, which equates to 2.2p per share, the only other movement being costs of sale or small losses on the sale of our Moore House units. Excluding the impact of the Mucklow acquisition costs of 2.5p per share, the adjusted NAV would have been 177.4p, which would have been a 1.4% increase in the period. Net of these costs, obviously, the EPRA NAV is 174.9p.

Turning to the debt. The total debt on our balance sheet at the period end is now GBP 963 million, an increase of GBP 337 million compared to the year-end. This increase in the debt is due in part to that utilization of GBP 130 million of our RCF on the acquisition of Mucklow, a further GBP 20 million being the repayment of the Mucklow HSBC debt facility, which we didn't require, but also the incorporation onto our balance sheet of the Mucklow debt with Scottish Widows, which amounted to GBP 60 million.

We have drawn further debt in the period to fund our other acquisitions and to meet development expenditure, which has increased our LTV temporarily to 38%. But as Andrew said, it is our intention to reduce that LTV as we undertake further noncore sales back towards the mid-30s level.

Our key financial ratios remained strong with our average debt cost reducing to 3% at the end of September compared to 3.1% at the end of March. Our average debt maturity is 5.3 years. The increased utilization of our shorter-term RCF in the period has, in part, offset the positive impact of the SWIP debt acquired, which had 12 years to expiry, and the long-term private placement debt, which has over 9 years to expiry. As at the year-end, 72% of our exposure to interest rate fluctuations was hedged on a fully drawn basis, either by way of swaps or fixed interest coupons. And I think it's this visibility of the cost of our money through the length of the debt facilities which, when you take together with our growing rent roll, the strength of our income and our focus on cost control, gives us the confidence in our ability to continue to grow earnings and to progress our dividend. Andrew?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [3]

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Thanks, Martin. So just an overview of 2 key markets. Online adoption, as you know, continues to grow. 24% today of nonfood retail sales are executed online, and this is expected to grow to nearer 30% over the next 5 years. This shift is not only profound, but it is also permanent. Many will tell you that they think it's cyclical, we do not.

We call it the Amazon race, and it effectively is the challenge that retailers have got to meet the delivery expectations of the growing consumers' demand for instant gratification. That is leading to a logistics outperformance as occupiers continue to invest in their supply chain. Urban logistics, in particular, is enjoying those strong tailwinds with an almost perfect scenario of a rising demand and a flat or even falling supply in certain cities. And we obviously hope to continue to benefit from first-mover advantage in what is an incredibly fragmented ownership market.

Physical retail, the headwinds continue to strengthen. Further store closures are an almost guaranteed certainty. And the CVAs that we've seen over the course of 2019 and will continue to see during the course of 2020 will continue to prove that this is not a case of prime v. secondary. Retailers are continuing to rightsize not only their portfolios, but their rental liabilities. Leases are shortening, rents are declining, our incentives are increasing. And interestingly, the next phase we expect to see more visibly during 2020 is the fact that the strong survivors are inheriting almost unprecedented pricing power as they get opportunities to reset their rents at either expiry or indeed at break clause. Not surprisingly, the investment market in the retail space remains incredibly challenging, particularly for the larger retail lot sizes, where liquidity is tightening and yields continue to expand. And the same way that not all shops -- not all sheds are great, not all retail is bad. We're still seeing the convenience and the discount markets complementing the shift of online shopping patterns.

So looking at our own portfolio in that context. Our distribution portfolio in its entirety now extends to GBP 1.7 billion. As I mentioned previously, urban is the largest subsector of this. We now have 100 assets. This time last year, we had 54 of them. We have a rent roll of GBP 41 million, an average rent per square foot of GBP 6.40 a square foot. Our occupancy is 97%. That's up actually 2% from where it was this time last year.

And as I've already mentioned, we had a total property return from this segment of 4.3%, and that's largely driven by settling of rent reviews 16% ahead of previous passing rent. And post period end, we settled a further 4 rent reviews, and these have been settled at 33% above previous passing rent.

Our regional logistics portfolio now amounts to GBP 450 million and is characterized by 13 assets let with average lease terms of 14 years and average rents of GBP 6.20 a square foot. Occupancy is at 96%. Again, over the period, we settled only one rent review in this, which was settled at 14% above previous passing. But that, together with a particular asset management initiative that we executed on an acquisition in Bognor, allowed us a total property return of 7.5% in the period.

On our mega distribution portfolio, GBP 430 million, now consists of 5 assets, having sold 2 in the last 12 months. Our average rent is GBP 5.80. Net initial yields were flat over the period, but we continue to enjoy a very strong weighted average unexpired lease term of 15 years, full occupancy, and 100% of this portfolio has rents that are linked either to fixed uplifts or indexation.

Over the period, we settled 2 rent reviews, 9% above previous passing. And post period end, we settled a further rent review, 8% above previous passing.

So then turning to our long income portfolio. This amounts to just over GBP 530 million and is made up of 3 distinct subsectors. Worth pointing out that all of the assets in this sector -- these sectors are 100% occupied. We have no CVA exposure. They're let on average lease terms of 12.5 years, and in their entirety, delivered a total property return of 2.5% for the 6-month period. Our largest exposure to this sector is our convenience and leisure assets, and these are traditionally single-let assets to the likes of Aldi, Lidl, Marks & Spencer's Food, Costco and Booker, let on an average weighted unexpired lease term of 15 years. Over the period, we settled 9 rent reviews, delivering a total uplift of 14% against previous passing. That's an annualized return of about 2.6% per annum. And the total property return of 4% was generated by, obviously, the income that we derive from this portfolio, but also an increase in the capital value of 1.8%.

Our triple net retail, again, is largely single-let retail assets let to either the discounters, home furnishings and electrical retailer, Currys PC World. This portfolio is 100% occupied, as I said, let on an average weighted unexpired lease term of 10 years. Over the period, we settled 4 rent reviews at an average uplift of 2.2% per annum. The capital value for this portfolio fell by 1.9%, but the income return still allowed us to deliver a positive total property return of 1.8%.

And then our final subsector in this portfolio is our trade and DIY assets let to the likes of B&Q, Safestore, Selco, Jewson, Wickes. 17 assets let for 13 years. And over the period, we settled one rent review, 2.4% increase per annum. We saw a 2.1% reduction of capital value of these assets, which effectively contributed to a relatively flat total property return of 0.6%.

So just drilling down into the portfolio management over the period in a bit more detail. As I said earlier, 52 deals in the half year. It's 2 deals a week. So we signed 31 lettings and lease regears on average lease terms of 11 years and agreed 21 rent reviews, on average 12% ahead of previous passing or 2.5% average annual growth rate. Helped deliver a like-for-like increase in our rental income of 3%.

As you can see there from the numbers, most of the activity took place during the period in our distribution portfolio, with 23 lettings and regears delivering a GBP 2.4 million uplift in our rent and 6 rent reviews adding an additional GBP 400,000. Post period end, we've executed 24 lettings and regears delivering an uplift in rent of GBP 900,000 and also 5 rent reviews, again, contributing another GBP 500,000 to rent roll for the periods ahead. As I said earlier, 33% increase in our urban logistics against previous passing rent and 8% on our mega rent review.

In our long income, we did 7 lettings and regears. The rents were flat, but importantly, the leases that we signed at 14 years were a 6-year increase on the 8 years that we previously had. The 14 rent reviews delivered a GBP 200,000 increase or 16% increase on previous passing rent. And post period end, we've continued the momentum with another 8 transactions that will contribute another GBP 300,000 to our annual rent roll. Great to see a slide with no negative numbers on it.

So just to give you a flavor of a case study of one of the Mucklow assets that we've acquired and just how our asset management approach might have varied from the previous management. Wednesbury One is actually the third-largest asset that we acquired at Mucklow, capital value of just over GBP 17 million, located between Birmingham and Wolverhampton, a few miles from Junction 9 of the M6 and Junction 1 of the M5. Since acquisition, we've done 4 deals. One of our tenants actually exercised their break clause shortly after completing the transaction. Fortunately, we relet that quite quickly to Edmundson Electrical and got a 20% increase in the rent on a new 10-year lease. With another one of our customers, we've settled an outstanding rent review and removed a break clause and settled a further 2 rent reviews. Our rent reviews, by and large, settled at 10% above previous passing, which on average, together with the letting, has allowed us on those 4 transactions a 14% increase in like-for-like rent. But equally importantly, we've often said and Mark has said it in previous presentations, we are happy to trade rent for term where we think it makes sense. So equally importantly to us, it's not just the 14%, but the fact that our weighted average unexpired lease term to first break has increased by nearly 4 years.

We have a further 3 deals to do over the next year or 2, which will improve our running yield by 70 basis points. And I think that our experience at Wednesbury, which is pretty typical of some of the assets that we've acquired, certainly in the urban logistics part of the Mucklow portfolio, gives us great confidence of the rewards that are available to us from our more active asset management approach.

So briefly on the developments. Bedford is a slide that you've seen many times before. We've completed and practically completed Phase 1. Two of the units have already been let and are now occupied. And the third unit there, you can see at the bottom of that photograph, is currently under offer. And we will have delivered a yield on cost on that phase of the development of 6.4%.

Phase 2 has planning consent for 500,000 square feet, split between 2 units that you can see there whited out at the top of the photograph, a 340 -- 335,000 square foot unit at the top, which we will require a prelet on, and 165,000 square foot unit 2 where we are giving serious thought to commence and expect development early in the new year.

Tyseley is a slide that you probably haven't seen before, which was land that was acquired as part of the Mucklow transaction. Phase 1 has been completed. The last phase -- the last building was actually only practically completed about 2 weeks ago. We've let the building there, you can see on the right, to Decora Blinds. That accounts for about 45% of the income on Phase 1. We're in discussions with occupiers for the remaining space. And on Phase 2, that could accommodate up to 195,000 square feet. And we already have conversations going with potential occupiers and have signed an NDA with one particular occupier to take the entire space.

So looking at our thoughts on the market outlook. We expect the polarization across the real estate sector to continue. The structurally supported sectors will remain in demand. We refer, as others do in this room, to not only convenience, but also beds, sheds and meds. We think that they are undoubtedly enjoying a strong tailwind, and you see that obviously in the equity market valuations of those businesses.

Disruption continues to challenge some of the traditional sectors. Legacy retail is increasingly being disrupted. And as I mentioned earlier, the result is that liquidity is incredibly scarce for larger over-rented retail assets, and that will become apparent, I suspect, as we head towards the end of the year, assuming some of these transactions actually do print, which is open for debate.

But not only do we want to be in the right sectors, we also want to own the right assets. And for us, that means an increasing focus on geography, credit, lease lengths and the prospects for income growth. Call us old fashioned, but we actually do believe that yields should reflect the future trajectory, certainty and timing of cash flows. And it will be owning the right assets in the right sectors that will continue to determine the winners.

We strongly believe that income has taken center stage in a world where it's very hard to get yield. Income-compounding strategies, as a result, are likely to outperform hyperactive ones. As I said before, low interest rates, low bond yields drive the demand for income. And the demographic shifts that we're seeing, the liability matching requirements will continue to support demand for reliable, repetitive and growing income streams.

So before I open up the floor from the phone lines to Q&A, our thoughts on the look forward. The disruption will continue. We will continue to align our portfolio to the macro trends. And I think that our GBP 1.7 billion distribution portfolio puts us on the right side of some of those structural changes. Our urban logistics and long income portfolio is undoubtedly our conviction call because we think that those are the sectors that will continue to offer the superior income growth prospects. We continue to prioritize income and income growth with a continued focus on generating reliable, repetitive and growing rents.

And finally, that income-compounding strategy will allow us to continue not only to grow our earnings, but also to cover our progressive dividend which we expect over the current year and the years ahead. And after all, you continue to own the right buildings in the right sectors, time can do a fantastic job in creating wealth for our shareholders.

So thank you for your time, and we'd be delighted, myself, Martin, Mark and Valentine to take questions. Obviously, if they're very difficult, we'll pass them to [Nick] and [Andrew] in the front row. So who wants to go first?

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Questions and Answers

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [1]

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Terrific. Matt?

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Matthew Saperia, Peel Hunt LLP, Research Division - Analyst [2]

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It's Matt Saperia from Peel Hunt. I'm not going to ask about the investment banking fees, but what I will ask about is the recent acquisitions of the automotive assets, so be interested to know your thoughts around -- and attractions around that sector of the market. And I guess, more generally, capital recycling as well, please.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [3]

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Okay. Look, we think that we said we think convenience has a place to play in this disruptive market. We think consumer shopping patterns are changing. It certainly underpinned our investments a number of years ago into assets like Aldi, Lidl, Simply Food, and more recently, into convenience stores attached to petrol stations. The IMO transaction we announced yesterday is really the fact that we believe that even driverless cars or electric vehicles are going to need cleaning. And -- but importantly for us is that actually the underlying land that they occupy is highly desirable. They sit on very -- they sit on busy roads. They sit on busy junctions. And the fact of the matter is, we've looked at them with half an eye on whether or not they could be converted in the future into a drive-through Costa or a drive-through Subway or a drive-through Starbucks. So they're underpinned by that. So the transaction we bought, it was 18 assets, a blended initial yield of 6.3%, annual inflation rent increases. We've actually sold 6 of them off already. So 6 of the smaller assets we sold off, and some of those in what we might consider to be the poorer geographies. Didn't want to put that in our press release yesterday.

And in terms of capital recycling, look, every asset will have a number, but we are obviously increasingly conscious of our ability to reemploy that, but also the frictional costs that come with that divestment/reinvestment circle.

We have a number of strategies, disposal strategies in hand. Martin and I have already alluded to some office disposals, which we are already in solicitors on. And we also have -- we are looking at some of our regional assets, and we are reacting -- have reacted to an off-market approach for one of our mega sheds, which may or may not lead to a transaction, I don't know. But the same way that people don't marry the stock, we don't marry the assets. They all have a number. But for us, increasingly, in a world where yield shift has largely disappeared, you want to own assets that are not only going to give you that reliable, repetitive income, but you want growth. And I think that the growth that we're getting from some of the convenience assets as consumer shopping patterns continue to evolve is going to be superior to what you can get in other sectors. Chris? No, ladies first, Miranda.

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Miranda Sarah Cockburn, Panmure Gordon (UK) Limited, Research Division - Analyst [4]

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Miranda Cockburn from Panmure. Just one question actually up on the slide there, that you've got long income on the triple net retail. Looking at the initial yield, 6.6%, and the equivalent, 6.1%, implying that it's over-rented. Is that 1 or 2 properties? Or is it just -- everything is a little bit over rented in that zone?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [5]

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No. I think it's generally -- it's focused on the DFS portfolio that we acquired many years ago, if you remember, which we acquired for 9.3%. We acquired 27 assets in partnership with PIMCO. They were over-rented then and they're almost certainly over-rented now. We sold actually about 18 of those assets. So now we've got, I think, 5 shop retail units left and 2 logistics warehouses. So the over-rent will be predominantly on those, Miranda. That said, post period end, we have regeared 3 of them. So we brought the rents down, and we've traded that out for term. So we've gone from effectively a 10-year term on those 3 assets to a 16-year term. And in consideration, we've reduced their rent to make them less over-rented.

But look, retail rents are at best flat. I mean I'm not going to say what I said last time, but we did a lot of damage to rents in the 00's and some landlords and owners are realizing that now. Chris?

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [6]

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Chris Fremantle from Morgan Stanley. Just on the long income piece. Can you -- you've given a lot of detail about the period and the detail -- the numeric detail in the period. Can you just help us a little bit with quantifying the rental growth outlook in this? I appreciate there are different subsectors here, but -- and some of them are retail. But the bits that aren't retail that you just talked about, can you help to quantify what sort of rental growth you are really looking for here because...

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [7]

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RPI.

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [8]

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Just RPI?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [9]

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Yes. Yes. Generally. So if I look at the convenience and leisure, that is -- you've got there, 82% is subject to contractual uplift. That will all be RPI, okay? It might be CPI, I think, Mark, in the case of maybe Lidl. But generally, I'm going to say inflation, okay, wherever that is. And the 2 are slightly contracting -- conversing, sorry. And then -- and similarly, with trade at the far side there, Chris, you've got -- so most of the trade assets there and DIY would be RPI again.

So give you an example, the biggest asset in that sector is at B&Q. We have one B&Q in Leicester where we've done a regear with them. We've gone from a 4-year lease to a 12-year lease. We've taken the rent off by 10%, and we swapped it for a CPI rent review. So it's an income plus inflation. That would be our target. If we do better than that, terrific. If we do less than that, we have to question why it's in here.

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Martin Francis McGann, LondonMetric Property Plc - Finance Director & Executive Director [10]

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There's usually a floor as well within the leases, like RPI capped [and call it] between 1 and 3, 1 and 3.5, so you've got a floor as well.

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Keith Crawford, Peel Hunt LLP, Research Division - Analyst [11]

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Keith Crawford. You have commented on a lot of the property market. I didn't hear a comment though on the, I don't think, on the very large, oversized traditional, food-oriented supermarket sector. Do you have any thoughts on those? Now, you don't have any, so that's one of our thoughts.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [12]

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Yes. Very, very perceptive. No, look, I have deep experience at a personal level in the big-box food market. In my career, I've had joint ventures. I've had 4 with Tesco's, had 1 with Sainsbury's, I've had 1 with Asda and I've owned a Morrisons. So I think that they're oversized. I generally think they're oversized for today's shopping patterns, particularly because we think that more consumers are looking at top-up shopping. We also think that the inflationary compounding impact of those leases, which has been going on for many, many, many years, has meant that a number of them are also over rented. And you have terrific credit exposure and you still have some relatively long leases. But as the leases come down, and I normally talk about when they drop below 10, that over-renting comes back -- in some ways, it doesn't -- it applies to Miranda's comment about -- or my answer to Miranda's question on DFS. The pain shifts from the occupier and starts to shift to the landlord, and ultimately, the landlord will share all of it. And whilst we can talk about these bigger boxes being used for other things, I'm not sure your last-mile delivery Tesco wants to pay GBP 22 in Perth for their delivery space when they could probably take a stand-alone warehouse for GBP 4.50. So it's not somewhere I want. I mean it does a job, but it will do a job for a period of time.

But the reason why there is investment demand for that at the moment, and it's relatively healthy, to be fair, because there is a search for yield out there. And if you want to build a portfolio of that long-let exposure, it's very difficult to do it. An Aldi costs you GBP 6 million. You can buy a Sainsbury's for GBP 48 million. That's an awful lot of rifle shots in order to get your platform up.

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Keith Crawford, Peel Hunt LLP, Research Division - Analyst [13]

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So this company does act on its views. The leader companies give us their views, but they don't act on them. That's [cut]. Consequently, there's a disparity over share...

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [14]

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We have a terrific alignment of interest with our shareholders. Why would we want to do something that hurts our shareholders when we're such a big player in it?

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Jing Xian Tan Bonnel, RBC Capital Markets, Research Division - Analyst [15]

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Camille Bonnel from RBC. Just a follow-up question, similar to Miranda's, but on the mega sheds. I believe it's -- your ERV is around GBP 5.50 where the average rents are at GBP 5.80. Is it just 1 or 2 assets? Or could you provide some color on your thoughts about regearing the portfolio then?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [16]

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There's 2 assets. I'm not going tell you which ones they are. Not being -- I just -- yes, this is probably 2 assets that have probably been -- that have benefited, I think, from that -- that have seen compounding going on for a number of years that have taken it ahead. But look, to be honest with you, GBP 5.50 and GBP 5.80, I mean, it's an art, not a science. We're not talking -- this is not over-rent in the same scale that we're seeing in other subsectors. But we know which ones they are, and we're acutely aware of it. But you also have to remember that the rents for the occupiers in these mega sheds is just -- are irrelevant in many ways. I mean it doesn't stop them wanting to negotiate hard with you come lettings or lease expiries. But I think somebody produced a report last week that said rents on average will be less than 4% of the total throughput of the -- some of the turnover of some of these warehouses. It's just not an issue for them.

You talk about -- when you're making a decision on where you want to occupy your mega shed, you're thinking about transport costs, you're thinking about availability of power, you're thinking about the flexibility of the building in terms of putting in mezzanine floors. You're thinking about the availability of labor, the labor cost. We've often talked in the past, the labor costs in Bedford are 14% below the labor costs in Milton Keynes. So that's something that comes in whether or not it's 25p on the rent. I mean the mega shed market is a good market. It does a job for you. It gives you a terrific income for a long period of time, let to really good people with a level of indexation. I'd rather have mega market -- I'd much rather be in mega sheds than I would in supermarkets, if you want to make a comparison. Robbie?

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [17]

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Robbie at Numis. Just one for Martin, actually. I think the classic on the dividend, but covers around about 114%, I think. Could we see that cover come in a little bit? Or is that the sort of level you'd expect to maintain going forward, sort of 110% as a floor?

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Martin Francis McGann, LondonMetric Property Plc - Finance Director & Executive Director [18]

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No, no, not necessarily. I mean I think if you look at the last couple of years, we paid quarterly dividends. The first 3 quarters for this year is going to be 2, 2, 2, though last year it was 1.9, 1.9, 1.9. And then in the fourth quarter, we decide what overall dividend we would like. The final dividend has tended to be higher and it's tended to take the dividend cover down to about 107%, 108%, and I see no reason why it would be different this year.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [19]

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Must be a question for Mark and Valentine, please. Tricky one. I just thought -- I did print this out actually because I thought I might get this question, so you can get my answer anyway.

So we sold a lot of resi flats, okay, over the last few years. And obviously, the market is not quite as perky today as it was when we started. But on Moore House, which, as I said, we're down to 9, hopefully 8 by the close of this week, just to give you a flavor of it. We paid GBP 147 million for the building, or 40% of it was being our ownership. We spent some money, GBP 4 million. So far, we've had GBP 154 million of sales receipts. We're under offer on GBP 3.5 million. The remaining assets are valued at GBP 10 million. So our total value receipt is around about GBP 168 million, which would give us a profit of GBP 16.9 million before costs of obviously coming in and going out. So that, without a doubt, has been our worst-performing residential asset, but it's still been okay. And I think that puts it into context. We were lucky, as Keith said, lucky that we acted on our thoughts early on in the process and weren't looking to dump all 449 of them in this market. So it hasn't been a complete -- this one hasn't -- it's far from being a disaster. But like I said, we still have 8 to go. Is that all right? Are there any calls on -- are there any questions on the line?

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Operator [20]

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There are no questions over the phone.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [21]

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Okay. Well, that just leaves me to thank you very much for your time. And if you do -- if you have anything you want to take -- any questions you want to ask us individually, we'll be hanging around for the next 20 minutes or so. Thank you very much.