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Edited Transcript of LMP.L earnings conference call or presentation 23-May-19 9:30am GMT

Full Year 2019 Londonmetric Property PLC Earnings and Recommended Acquisition of A & J Mucklow Group P L C Call

London Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Londonmetric Property PLC earnings conference call or presentation Thursday, May 23, 2019 at 9:30:00am 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

* James Ashley

Liberum Capital Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Okay. Good morning, ladies and gentlemen, and welcome to LondonMetric's full year results for period ending 31st of March, and also welcome to Rupert Mucklow here, Chairman of A&J Mucklow plc who, as you know, we announced this morning an agreed transaction for LondonMetric to acquire the shares in Mucklow. So any difficult questions on that transaction can be pointed to Rupert. So it's, obviously, a slightly -- we should do this last minute, I think, more often, we get great turnout, don't we?

So a slight change to the normal agenda. I'll touch on the first 2 pages through our highlights for the year just passed. I'll then go through in a little bit more detail on the transaction that we've announced this morning, before Martin takes us very quickly through the numbers, and then I'll come back to talk about the property review and our outlook for not only the sector but also for -- more importantly, for us as an enlarged business going forward. I won't point you out Chris.

So very -- so just to quickly get -- hit the key highlights for us, as you'll see as we go through the presentation, we continue to align the portfolio to the structure of our favored subsectors, which we believe continue to enjoy structural support. Our distribution exposures is up there, as you can see, at 72.5%, up from 69% 12 months ago. And we've continued to maintain our exposure to long income and convenience at 22%.

Our retail warehouse exposure continues to fall generally through asset sales rather than valuation -- downward valuations, and now it's down at 4.7%. And again, I'll go into a bit more detail on that later.

Asset selection at this stage of the market, of the cycle we think is increasingly important with GBP 400 million of investment activity over the period, and actually, that's down from the GBP 637 million that we did in the previous year. And again, our increased focus on long-let income is evidenced by the fact that our weighted average unexpired lease term is actually up to 12.5 years despite, obviously, the passage of another 12 months.

We continue to focus on sustainable and growing income, and that's the theme that you'll hear, obviously, through my presentation but also as part of the transaction details that I'd go into later.

Our net rental income is up 3.5% to GBP 94 million aided by like-for-like income, as you can see there, up 5.7%. If we can take out the one-off surrendered premiums, it's just under 3%.

63% of our income now benefits from some form of contractual uplift, increasingly that's RPI, there's some fixed increases in there as well and a little bit of CPI. And I think that our asset management and also our disciplined portfolio management have helped us deliver a total property return over the period at 9%, which, as you can see, is a material outperformance to the IPD All Property index.

So looking at the numbers, full year financial highlights. As I said, the net rental income is up GBP 93.8 million, the EPRA earnings is up 3.2% and on a per share basis is up 3.5% to 8.8p.

Our dividend, increasingly importantly, is up to 8.2p. We announced this morning the payment of a final dividend of 2.5p that brings you the 8.2p for the year just gone, which is a 3.8% increase.

And revaluation surplus at GBP 64 million has helped us deliver a NAV increase to GBP 1.75, which is a 5.9% increase and a total accounting return for the year of 10.7%.

So looking now at the transaction. As you've no doubt read, we announced this morning the recommended GBP 415 million offer A&J Mucklow plc, which equates to $6.55 a share. It's a NAV-for-NAV approach. We will issue 2.19 new metric -- LondonMetric shares and GBP 2.45 in cash. So about GBP 130 million in consideration. It's a NAV-for-NAV, but obviously, LondonMetric shares trade at a premium, and so the London -- the Mucklow shareholders will, obviously, benefit from that. So therefore, the GBP 6.55 is effectively an 11% premium to their adjusted -- the Mucklow's adjusted NAV. We have unanimous support from both companies, and we have just over 39% of irrevocable and letters of intent that have been received from the Mucklow shareholders, and we've had a terrific, terrific response so far.

We think that the transaction, the merger of the 2 companies create compelling strategic and also portfolio rationale, and it is absolutely consistent with the strategy that we set out over a year ago to increase our urban logistics platform. And we actually believe that urban logistics is probably the fastest growing -- offers the fastest-growing rental growth in -- across the sector. And I don't just mean the logistics sector, but there are very few other sectors out there that are delivering rental growth as quickly as that, possibly student accommodation and maybe self-storage. And we create one of the U.K.'s largest logistics and distribution platforms.

Operationally, we believe that we have a bigger and, obviously, more resilient portfolio with greater income diversification. But I think the attraction for us at a portfolio level is the intensive asset management that we will bring to it. We'll deliver -- and we'll capture and deliver -- capture reversions and deliver further rental growth. And that's not necessarily a qualitative assessment, it's purely a quantitative assessment. I mean Mucklow has 1 asset manager and we have a much deeper pool of people and talent, and we think that Mark and his team will be able to extract further benefits from that.

There are financial benefits as well. This transaction is immediately earnings accretive through -- obviously, through cost synergies and economies of scale. I can't give you a number, I'm not allowed to despite wanting to. And as a result, we think that capturing the reversions would also deliver further financial benefits.

The transaction has been structured, I'll going into it in a minute, to make sure that we -- this doesn't -- we're not accompanying the transaction with an equity raise, and therefore, the cash is coming out of existing resources following the sell down of some of our assets over the last 9 months or so. But we maintain a conservative approach to loan-to-value. Our loan-to-value post the transaction would be 35%.

And as investment bankers continue to tell me, the bigger the scale, the improved liquidity you get, both in new equity shares and also a greater optionality that we would hope to see in the debt markets. Albeit we don't see any need to do any debt refinancing for the immediate future, but we have that optionality, obviously, that comes with greater scale.

So those of you who don't know Mucklow, so just a brief update. As many of you know in the room will know Rupert and his business, 350 -- GBP 347 million market capitalization. It's a business founded back in the '30s, floated in the '60s and converted to a REIT in 2007. The extended family, and boy, is it an extended family, own roughly 1/3 of the shares. And like us, they have a long-term focus on growth and value creation, and that's been part of the attraction of this transaction for both of us. We believe that it is a well-located, a well-run real estate portfolio that has -- we believe that in a structurally supported subsector, but with a increased asset management can do even better. The transaction brings an additional GBP 26 million of rent. And as you can see there, there's -- according to the value, there's an inbuilt reversion, which we would hope to capture over the next few years.

The committed development pipeline. Mucklow are building out 135,000 square feet in Birmingham, of which 43% has been prelet, and that would generate another circa GBP 1 million worth of rent, and then there's options over and option to bring forward up to 400,000 square feet of further development pipeline.

The pie chart on the right shows the geographical focus. It is predominately, as you can see there, Midlands based, and I'll just come on to talk about that.

As you can see, this is our split of the portfolio, GBP 450 million worth. And Birmingham has enjoyed -- I mean it's just behind London and the southeast in terms of rental growth over the last few years. As you can see there, rents have grown circa 27% over the last 6 years, which is just behind London at just over 30%.

The split of the portfolio. As you can see, we split it into the distribution. The multi-let industrial, we -- LondonMetric doesn't any multi-let estates, so that will be a -- certainly a learning curve for us. That accounts for 15%. So together, that's 69% exposure. As you'll see on the next slide, it's very similar to our existing.

Offices at 15% and then long income at 14%. And that's dominated by the Costco that you can see there. It's the largest asset at just over GBP 30 million in Coventry, which is an 18-year lease to Costco with preagreed our precontracted rental kickers in it.

Crawley, the second biggest asset, similar size, that was like -- is adjoining an industrial ownership of -- distribution ownership that we already have within LondonMetric.

So looking at the 2 portfolios side by side, I'll come on to talk about ours in a bit more detail later on, but the -- we've put this -- we set this out to actually just to try to highlight and picture the synergies that we see between putting the 2 portfolios together. And obviously, you can see there on the right, the far right, what the enlarged portfolio of GBP 2.3 billion will look like. Our urban logistics will increase. If you include the multi-let, it increases from 27% up to 35%, or 31% if you strip it out. Long income holds relatively firm. We see offices and our remaining flats, so more house, those who want one, so there are a few left, diluted down to 4%. And the sell down of retail parks, we'll touch on it in a moment going forward.

We also see the geographical exposure. We see just under 80% of our assets exposed to the southeast and the Midlands, and that greatly improves our geography. But that's something we've been doing anyway. Over the last 6 months, you've seen us sell out of an awful lot of assets in Yorkshire and shorter-let assets in poorer geographies, and that's a strategy that we would've executed with or without this transaction.

And I talked -- touched on earlier the -- increasing the income diversification and the tenant granularity. Our top 10 tenants, therefore, dropped from just over 50% to just under 40%. And the merger of the 2 portfolios still allows us to maintain one of the sector's longest average unexpired lease terms and a relatively full occupancy.

I have no intention of taking you through all of these numbers, most of the people in the room are probably more numerate than me. But just picking up -- not anymore? Just picking up -- sorry, just picking up a few of the highlights for us. I said our rent roll will increase by 29%. The reversionary nature of the Mucklow portfolio is attractive to us in delivering future growth and earnings growth and dividend growth going forward into the future. Our dividend cover is constant at 107%. As I said, our WAULT is over 11 years. Our occupancy is pretty full. And as you can see there, the debt metrics, which Martin will touch on some of those later, pretty standard -- pretty consistent between both portfolios with a blended average cost of debt at 3.1% and a marginal cost of debt of about 2%.

So just looking at the transactional structure and timetable, again, I don't intend to read out all of this. I've touched on the consideration. It is a mix and match scheme. We've already had, as I said, irrevocables and letters of intent of just over 39%. The combined group will see -- will be owned 30 -- 83.5% by LondonMetric shareholders and 16.5% by Mucklow. There's some -- there are a number of common shareholders in both companies, who -- most of whom we've already seen. And we will be paying the cash element of GBP 130 million out of our existing facilities, again, aided enormously by not only the sales that we've made over the last 7 or 8 months but also the GBP 150 million private placement that we took out in -- at the end of December.

The dividends. Mucklow shareholders will be -- will get their Q2 dividend, which will be paid at the end of June. It's brought forward. It's normally July, but it's been brought forward for the transaction. And LondonMetric shareholders will get their final 2.5p dividend at the beginning of -- well, middle of the July. And then both shares -- groups of shareholders then would benefit from our Q1 dividend payment, which we normally make in October.

We've announced -- we've issued the Rule 2.7 announcement today, and we are anticipating a completion probably sometime around the end of June.

All right. So on that note, we're going to just go back -- dive back into the LondonMetric numbers so that we can update you on those. And then, obviously, we'll -- I'll come back and then open it up to -- I want to finish that to Q&A. So Martin, if we can get through this?

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

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Morning. I sometimes wonder why I bothered getting him and Rupert out of the Bar at The Ned at 10:30 last night. I should've just left them there. They'd probably still be in there, actually.

So I'm very pleased to report that our net rental income, as Andrew just said I think twice, is at GBP 93.8 million. So that's an increase of GBP 3.5 million over last year. What just happened? Resume the slides.

Our administrative overhead for the year is GBP 13.7 million. So that's actually a decrease of 1.4% over last year, which has caused our cost ratios actually to reduce by about 0.3%. It's all in the rounding, so it's still quoted at 15%, but it's a slight reduction. Our finance costs are GBP 20.2 million, that's an increase of GBP 1.7 million over last year. So although net debt has fallen at the year-end due to the sales of the logistic warehouses at Sheffield and Poundworld, the Poundworld disposal immediately prior to the year-end, our average borrowings over the year were actually higher than in 2018, and that results in a higher interest cost.

In summary, our EPRA profit is GBP 61 million for the year, that's a 3.2% increase or 8.8p per share. And that supports the increase in the dividend to 8.2p per share, and that's an increase of 3.8%. And importantly, it provides us with 107% dividend cover.

So the reported profit for the year is GBP 119.7 million. That's a decrease on the reported profit last year of GBP 66 million, and the decrease really is due to the fall in the revaluation surplus for the year, which is GBP 64.4 million this year and it was a GBP 121.6 million last year. So that accounts for the shift in the reported profit.

Turning to the balance sheet. The portfolio valuation is broadly consistent with last year at GBP 1.85 billion. I think the change is a combination of the increase in the value of the portfolio of GBP 64.4 million over the year, but that's offset by the surplus of our disposal program in the year over the sum total of our acquisitions and our developments and our CapEx. So it's broadly the same.

We have GBP 24.1 million of cash on the balance sheet and GBP 626 million of debt, which I'll talk about more in a moment. The net liability position at the year-end is GBP 25.4 million. The major component of that, as it is every year, is rents received in advance, and that's just a very small mark-to-market negative on our derivative portfolio. And in summary, the EPRA net assets for the year were GBP 1.219 billion. So that's 174.9p per share, and that's an increase in the NAV of 5.9% over last year's 165.2p.

This slide has become increasingly dull actually, over the years. I think there are only 2 real key movements. We have a surplus of 0.8p per share being the surplus of our earnings over the dividend we paid in the year, which was 8p per share. So that's distinct from the 8.2% -- 8.2p per share that we've either paid or declared in the year. And the other major movement, I think, is the property revaluations, over GBP 64.4 million equates to 9.3p per share. And there are really no other major movements to the EPRA NAV.

That disposal program, as I mentioned, in the year was essentially undertaken ahead of book, the cost of sale and losses on the sale of the Moore House asset, which were the only sales we made where we saw below book in the year, give us a small loss overall. And so the closing EPRA NAV, as I said, is around 175p per share.

So turning to the debt. So a little over GBP 626 million of debt on the balance sheet is an GBP 83 million reduction compared to GBP 709 million last year. It's actually been quite a busy year on the debt front.

In July, we entered into a new unsecured debt facility with Wells Fargo for GBP 75 million, which was around a 7-year facility, on terms that are consistent with our existing RCF. So for us, it was a terrific new facility. But then in December, we went further and we raised a private placement for GBP 150 million with 5 institutional investors, U.K. or U.S., and that's on an average of 12 years at a blended rate of 3.5%., and we drew down those funds just before the year-end. So I think the effect of those refinancings has been to lengthen the debt maturity, which was 4.8 years this time last year. So without doing anything, it would've been 3.8 now, but we've taken it up to 6.4 years. And having used the new financings to pay down the RCF, that's given us significant firepower at the end of the year. Our firepower stood at GBP 353.8 million. And I think as Andrew said, we deployed GBP 130 million of that firepower in the transaction.

Our average cost of debt is now 3.1%. So that's an increase in the cost of debt from the 2.8% we had last year, but essentially, that reflects the cost of pushing our maturity out.

The marginal cost of our debt now stands at 2% on the revolver. So when we draw down that headroom, our cost of debt will fall and our earnings will be enhanced by the use of that debt and our already strong interest cover ratios will all be maintained.

As at the year-end, we had 73% of our exposure to interest rate fluctuations on a fully drawn basis hedged, mainly by way of swaps or actually fixed interest coupons on the PP, and that's pretty consistent with last year.

So it gives the whole -- it gives us good visibility on the cost of our money throughout the length of our debt facilities. And then when you take that together with the length of our income that Andrew has referred to, it gives us confidence that we have the ability to continue to grow our dividend.

And then finally, just following the sales at the year-end, our LTV is 32%. That's down from last year, and our intention -- you'll see the debt metric or the LTV metric on the combined group, which is back at 35%, and it'll be our intention to keep it around there.

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

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Thanks, Martin. So if I look at the property review, it's obviously -- I won't talk about too much on the pie chart, but just quickly on the direction of travel over the last 12 months. So urban logistics is up from 20% to 27%, regional exposure is flat, and the sale of a number of our mega warehouses over the years has dropped that down from 27% a year ago to 23% today. And as I touched on, our retail park exposure continues to fall.

Looking at the return numbers there on the right, the standout performances were total property returns from our urban and regional portfolios at 16% and 12%, respectively. And then our mega and long income very long-let delivered 8% and 5%, respectively, with retail parks falling 8% to deliver a total property return of minus 3. I think that our -- this is quite a good indication of the different speeds that some of the subsectors in U.K. real estate are moving. Without a doubt, urban and regional is the fastest-growing part of the logistics market as is evidenced not by these numbers but some of the numbers that I'll touch on later in the presentation.

There is still support for long income and that -- the very long leases and the high exposure to RPI that we have within the long income part of the portfolio has certainly insulated it against the worst of the retail valuation falls that you've seen -- that we've -- we are seeing, but also what you're seeing, I suspect, during this reporting season.

We have 3 wholly owned retail parks left. And as you can see there, a minus 8% fall in value there. But the income is, obviously, that we've had found them has mitigated that, and our parks continue to be a 100% occupied.

This is not in your slide, but it was a chart that I -- was passed to me the other day, which are just thoughts, we just have a quick look back at how our pivot into the logistics has been financed. And as you can see there, 5 years ago, we had 24 multi-let wholly owned parks representing nearly 27% of our portfolio. And so you've seen a gradual sell down over the period as we've pivoted that money into the logistics sector, initially into the mega and regional space, but obviously, over the last 2 years, into the urban. And this is a trend, which, I suppose, is supported by some of the valuation metrics that you're now seeing. There's an increasing polarization between the winners and the losers.

Briefly, therefore, looking at some of the key metrics across the core portfolio. Okay. Mega and regional, you can see that occupancy at 98%. The mega is 100% occupancy, and all of our 7 mega warehouses benefit from some form of contractual rental uplift now. As you know, over the period, we sold our big warehouses in Wakefield, which was the former Poundworld unit, and we sold a soon-to-be -- now vacant M&S warehouse in Sheffield. So the remaining 7 mega warehouses all benefit from some form of contractual uplift. And a lot of that will support, as you can see there, the rent reviews 8% above previous passing.

Not surprisingly in -- the statistic, I suppose, that supports the total property return that we got out of urban in the year is the fact that we've settled some rent reviews at 28% ahead of passing. I mean that is a stellar performance and supports, I suppose, the strategic move for the transaction that we announced this morning.

And our long income and convenience portfolio. As you can see, it's still 100% let, benefits half -- over half of it benefits from contractual uplifts. And again, as I said -- touched on earlier, that's what would have protected it from the headwinds that a vast majority of the retail property market is facing. A lot of you will hear that this is -- we're beginning to see the bottom, there are some shoots down there. I mean this is not -- we think this is the end of the beginning, not the beginning of the end. We will stand up here for a long time to come talking about retail rental values falling.

And you can see there that the protection that you get by having an exposure to RPI even if our rent reviews and our long income will settle at 15% ahead of previous passing. I suspect that very few of those would have been open market settlements. I might be wrong, but I'm happy to have a bet on that.

Investment activity. I said we've done a little bit less investment. I said we would do that. We remain actively patient with our activity just over GBP 400 million. Sort of sell more than we bought. We sold, as I touched on, the vacant Poundworld unit in Wakefield and the empty M&S shed in Sheffield. We also sold 2 more retail parks in Ipswich and Launceston. But we also sold in weaker geographies. We did sell some urban logistics in weaker geographies that were let on shorter leases and where we believe that the investment market was pricing expectations of income growth way ahead of what we thought was going to be deliverable. And we sold that into a receptive market, and our team deserves enormous thanks and gratitude for doing that.

We reinvested that money primarily into urban logistics but also into our convenience and long-let portfolio. And I think what we also did is we reinvested it into much better geographies, Milton Keynes, Cambridgeshire, Orpington, Hemel Hempstead, but also much longer leases. 14 years buying, selling at 8.8. But the difference between the geographies, and apologies for those who hail from Yorkshire, but it's just not an area we want to deploy a huge amount of money.

Looking then at the asset management and development activity over the period with 50 transactions, lettings and rent reviews that delivered GBP 3.2 million of extra income. And as I said before, that is if you -- it's 5.7% like-for-like or just under 3% if you strip off the one-off gains. And again, you can see there the breakdown on the left, in the left box. Urban logistics I touched on, delivering 28% uplifts; regional, 11%; 7% in mega; and long income at 18%. So those are really good performances, particularly in a world that feels -- where rental growth across the piece is at best tranquil and in some sectors materially negative.

It's difficult to do too many lettings when you're so well let, but we did do lease regears, as you can see there. The highlight probably was the regear of the Argos mega distribution warehouse in Bedford where we swapped a 4-year remaining lease for a 15-year lease and we converted the rent review structure from open market to RPI. And I think we did that before -- I will get this question, so I might as well answer it now. We did that for about -- I think about a 14-month rent-free period.

Whilst on the subject of Bedford, we announced last week the preletting of 2 of the buildings that you see there, the middle one and the one above it. 138,000 square feet, and they are -- those tenants are now taking occupation as -- literally as I stand here. And we are in discussions on the remaining 50,000 square feet, which is the bottom building. And we're keen to push ahead with phase 2, but we will want a comfortable level, a more comfortable level of occupier commitment than I currently have. I am not going to spec, there's too many other people specking big boxes. I'm only one at the moment for us to build out the big box there at 320,000 square feet. We're a bit more wide-eyed maybe about the other box, but we want some greater occupier commitment before we press the button on those.

So my thoughts on the market. I mean this is relatively consistent with what I've been saying for at least 12 month, if not 18. We think that there is a polarization taking place between the winners and the losers. We think that the structurally supported sectors and beds, sheds and matches a number of the smarter people in this room have written about, is where you want to be. We think that disruption is challenging a number of the traditional sectors. I tend not to opine on offices. I don't know much about them, but I think that not a day goes past, do we hear about another liquidation, administration or CVA within the retail space, and that definitionally has to have an impact, obviously, on income, but more importantly, our valuations as yields start to adjust to reflect the downward trajectory of future rents.

We think that we're in a space today whereby you want to be in the winning sectors, but I think, increasingly, you want to own the right assets. And for us, that is the full test for us along the right-hand side there in that box. The geography is increasingly important, the credit strength, the lease lengths and the trajectory of your future income has to be reflected in the cap rate that you apply to these assets. And that is behind our decision, as I said, to sell out of some smaller, older warehouses on shorter leases in Yorkshire and to reinvest the money on longer leases in the southeast. We absolutely believe that income-compounding strategies will outperform. We are in a world where low interest rates and where reliable, repetitive and growing income streams will become increasingly attractive in the absence of, there is no yield anywhere else and also bearing in mind that we have an increasingly aging population, which will continue to drive demand for income.

So before opening up to Q&A, we say this, a, you want to be aligned to the structural trends that are seen. We think that the structural calls will define -- continue to define the winners and the losers. B, we continue to build what we consider to be an all-weather portfolio focused around a leading distribution platform. C, we will continue to compound our income. We continue to believe that this strategy will outperform, and that will allow us to continue to deliver a progressive dividend in a world -- both in general equity world but also in the real estate where dividend growth is going to be hard to find.

And we are excited about the deal that we announced this morning. As I said, we think it has compelling strategic and rationale -- and portfolio rationales. It will bring strong operational benefits and economies of scale to the benefit of our shareholders and our intent -- more intensive asset management program will continue to deliver further income and capital growth for the coming period. And the financial benefits that flow from that will allow us to continue our policy of a progressive dividend with even greater confidence that we had before the deal.

So on that note, thank you very much for your time. Thank you for coming at such short notice, and I'd be delighted alongside my colleagues and my new friend sitting in the front row to take some questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [2]

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Whilst we're waiting for that, I should just say there will be some questions I cannot give answers, I just cannot give you, okay? I am under -- apparently, I got people sitting here telling me -- going no, no, no, okay, because of the 2.7, the rules in the 2.7. So if it is difficult, I am going to sorry, I can't answer that.

So are you going to first?

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Unidentified Analyst, [3]

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Congratulations on the deal announced this morning. So my question, I'm just looking at Slide 10 on the presentation just to maybe help set the scene. So obviously, acquiring the Mucklow portfolio, getting a greater exposure to the urban logistics aspect. Can you just give us some understanding for those that don't know the Mucklow portfolio very well, what's the difference that you see -- or similarities and differences that you see between your urban logistics that you have now and that of the Mucklow portfolio? Because the presentation on Slide 11, I think, refers to the average net initial yield, which is 5.4%, but maybe also alluding to the specifics of that urban logistics portfolio, please?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [4]

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Yes. I mean I'll start and maybe Valentine or Mark might want to chip in. I think we've -- most of our logistics has been -- we've tried to focus it down more closer to southeast, and we've had some terrific results on rent reviews. And as you can see, obviously, the Mucklow portfolio is focused around the Midlands. It's had -- there has been some good rental growth and great occupancy. We think it's got further to go, and I think that a more intensive asset management program, I think, will deliver that stronger rental growth.

I mean in terms of the yields, I mean, I suppose beauty is in the eye of the beholder. At the end of the day, we think that there is some value to be taken out of the -- some of the Mucklow assets with a bit of hard work, and that's not to take anything away from the Mucklow team and what they've been doing. But I think certainly the single-let assets that make up, I think, 54% of the portfolio, I've seen every single one of them and they build up neatly into our existing portfolio, albeit in a different geographical area. We have very little at the moment in the Midlands.

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Unidentified Analyst, [5]

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Okay. So just maybe if I can just push you a little bit more on that, in terms of -- you've clearly highlighted the fact that you think that this good rental growth prospects are over and above where current ARV are. Do you feel like taking the sort of more Midlands focus that -- and coupling it with the point of asset management that you talked about, that there's good prospects or equally as good prospects for that side of the urban logistics portfolio as your London, bearing in mind that they're different geographies?

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [6]

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Yes. But at the end of the day, you get a different yield. You don't expect -- when you start with a high yield, you don't expect -- you don't need to be quite as pregnant as it might be when you start with a lower yield, and we'll find out. I mean I think that when we look at it, those numbers look fair and we're comfortable with it. But knowing that this is -- we think this is a very, very sensible valuation. We think it's a sensible NAV, and that is rare to find in our industry at the moment, and there's no doubt you'll have heard from companies over the reporting period. We're very comfortable, and if we weren't, we wouldn't be standing here talking about it.

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Unidentified Analyst, [7]

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And then one last big-picture question, please. So again, just sticking with the same slide and also referring to the asset rotations that you've mentioned, you did that at a time where you were smaller and more nimble. As you grow, there's obviously benefits associated with that, but it makes you inherently less nimble, therefore, you really have to be sure about the nature of the industrial market.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [8]

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Yes. No, I think it's bigger than that, actually, to be honest. I think one of the things you've got to remember today in the environment that we're operating in at a macro level is that I've talked about yield tranquility for a number of reporting sessions. You've got to think about frictional costs. The buying and selling is a killer, to be honest with you, and Rupert has reminded me this on a number of occasions. If we were to buy this portfolio at a property level, we would spend about GBP 30 million in fees. And so to rotate assets going forward, to buy and sell is just becoming incredibly -- it's an 8.6% round trip. You can't afford to do that in a yield-tranquil environment, unless there are extenuating circumstances. So I see less activity, I do. I mean we've -- I've taken these questions from Robbie in the past. The fact of the matter is we want to be actively patient, and we're doing our best to do less. But sometimes, we just can't help it. And we're down to GBP 400 million. I mean that's a good number. Hopefully, next year, it will be less as well. There's some assets that we will inherit in the transaction that we probably won't love as much as maybe the current owners do, but absent that, we actually are getting to a stage where we're pretty comfortable with what we've got. I don't think we're in a market today that we were 6 years ago when we merged -- when we did the London, Stamford, Metric merger where we did a massive switch out of London with 48% in London resi and offices. We had a lot of retail -- 27% in retail parks. We couldn't do that switch today. There's not enough liquidity. We couldn't afford to pay just a [chancel] of that amount of money.

Chris?

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [9]

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Chris Fremantle from Morgan Stanley. Just want to ask about long income. You mentioned it a little bit. I don't think people own your shares necessarily for that part of your portfolio, but you boast about it a little bit. I just wonder, is that going to be dilutive to the rest of your returns in the future as it has been in the last year? Are you going to do the same with it as you have done with your retail parks? Just a little bit more about the value upside and why it is enhancing for your portfolio, would be very helpful, please.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [10]

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Okay. Good question. The long income is -- the majority of the assets will be stand-alone retail assets let to maybe B&Q or Wickes or DFS, but it also includes things like our Aldis, our Lidls, our Marks & Spencer, Simply Foods, our remaining cinema -- 5 remaining cinema investments. But it's increasing -- the granularity of that portfolio will continue to stretch. Whether or not it's a long-let hotel to Premier Inn, whether or not it's a car dealership in Cheltenham or a Costco in Coventry. And I think that, yes, it's been dilutive, but we have to remember that it's not -- the logistics market won't go on forever, and it does give us a little bit more optionality. But at the end of the day, we've had a flat capital value. I mean it says minus 1 on the slide, but that's actually the frictional costs that we incurred in buying some more convenient investments. And I think the power of compounding that out based on capital -- based on RPI rent reviews in the environment that I see going forward will be increasingly attractive.

Would we -- would I like to reduce the direct -- some of the direct retail exposure within it and replace it with greater granularity in other spaces? Yes, I probably would. And we'll do it. I mean we sold a little Wickes unit the other day because we didn't think that there was going to be enough rental growth to justify it happening. But if you're getting an income return of 5 and you're going to get an RPI of close to 3, I mean, that's not so bad. So interestingly, the return that I put for the long income, which was effectively flat capital value and a 5 initial, the spread to get to 0 would have suggested weaknesses in the direct retail exposure and strength in the longer-let RPI exposure. But I wouldn't want to signal a disposal as some companies seem to do.

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James Ashley, Liberum Capital Limited, Research Division - Research Analyst [11]

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James Ashley, Liberum. Just on the back of Chris' question, it's great that you're getting the RPI-linked rent reviews in this kind of environment, but what gives you the confidence going forward that your retailers, say, a DFS or Wickes will be able to afford that and, say, 1, 2, 5 years down the line, we aren't seeing the CVAs from those kind of retailers just opportunistically more than anything else, I suppose?

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

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Yes. Look, I mean, the credit strength of our occupiers is paramount. Obviously, DFS has a market capitalization of just under GBP 500 million this morning, and Wickes, obviously, whilst it's part of the Travis Perkins Group has a bigger, and I think it's probably in that GBP 2.5 million -- GBP 2.5 billion. We're conscious of the compounding impact that RPI can have in taking asset over rented, which is why you see us churn out so that we avoid that.

Look, I mean, I have a very firm view of retailers' sustainability. Let's be clear, we didn't have any home bases, we didn't have any Dagenhams or House of Frasers or Toys "R" Us or Maplins, I mean, we have a pretty clear view of who we think is going to win out in this and who isn't. And let's be clear, there's no correlation between a Wickes and an Arcadia brand. I mean they are completely different. To call them retail is -- just disguises the polarization that's occurring in consumer shopping patterns. Wickes is closer to a trade retailer than -- whereas Arcadia is getting much more disrupted by internet competition that's coming through. So there's no correlations. I mean we have 1 Arcadia. I suspect we'll see a little bit of a haircut on it. But that will be the only CVA exposure that we've had. I mean either we've been incredibly lucky to avoid all of these bear traps or we've had some insight into what the direction of which retailing is going.

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

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Just to follow up on that, but you don't have to be directly exposed, I don't think, to those tenants. Tenants are kind of gaining more power. Do you have any reason to think...

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

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You got to really -- the people that are getting more power are in sectors where they took rents up to what we consider to be unaffordable levels. The fact -- we drank a lot of -- in a previous life, I drank a lot of cool aid, okay? I took rents up to nuts levels, okay? And those rents are coming all the way back down again, okay? We didn't see that so much in the DIY market, because it's very difficult to -- you couldn't asset manage a stand-alone DIY unit in the same way that I could asset manage a shopping center or a fashion park. We did some terrible things, terrible, terrible things to rent. And fortunately, somebody else is now paying for it. And -- but we -- but that stand-alone marker, we didn't asset manage it to the some extent. There was no cool aid on offer. But if there was, we would've done that as well.

[Branda]?

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Unidentified Analyst, [15]

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[Branda Dakota] from [Premier]. Just one question. You haven't got a rent bridge graph at all. Where is your ERV at the moment versus your current contracted rent?

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Unidentified Company Representative, [16]

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It's about 3% high, yes, overall.

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Andrew M. Jones, LondonMetric Property Plc - CEO & Executive Director [17]

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Maybe you should've given...

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Unidentified Company Representative, [18]

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Yes, [Branda], but also on the metrics for the deal, we have only listed our annual contracted rent. So I won't (inaudible) on that, but -- and it's less than GBP 90 million now. And that doesn't build maybe some of the increments. But it's (inaudible) sold some assets just before the year-end. (inaudible)

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

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Any difficult questions for Rupert? Anybody else? Anything on the line?

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Operator [20]

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There are no questions on the line at the moment.

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

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Okay. Well, so thank you very much for your time and your commitment, and we'll hang around here if there's any other questions that you have that you'd rather ask in private. So thank you very much.