LondonMetric Property - Andrew Jones

Great thanks, morning, yeah, still morning. And thank you for having me on. Just a quick slide here on the backdrop. I mean, a lot of this data will be familiar to most of you listening this morning. At a macro level, we continue to live in a rather turbulent environment, a combination of various black swan events that seem to be taking place at an increasing frequency these days. We've got a huge amount of central bank intervention taking place across various jurisdictions at the current time, as the central banks try to get the inflationary pressures under control. This affects obviously real estate as you might expect. The biggest impact is actually the five-year swap curve, because that's what most real estate debt is based off. And whilst there are a lot of equity investors in real estate, certainly the larger ticket items and the big investors in real estate are all using debt to try and turbo their returns. So elevated five-year swap curves make that very, very difficult, and as a result, it has a massive impact on pricing and obviously liquidity. That said, the glass is always half full. I think there are a lot of positives out there. We think that inflation pressures are moderating. This week's print suggested that, and our views from the various research that we read is that we could be at 5% inflation, could be down at five-ish percent by the end of the current year, and then hopefully traveling through to four and hopefully lower as we travel through 2024. Cost of living: there's a lot of chat in the press around cost of living crisis, the impact of higher mortgage rates. Good news is that energy costs have been coming off a bit, food inflation has been moderating, and the fact of the matter is we have a full job economy. People are in work, record low unemployment, we've got relatively full wage growth, which is helping to avert any cost of living crisis. The mortgage bit: mortgage costs are obviously going to impact as people come off fixed rate mortgages. I think it's around about 800,000 people a year are going to come off fixed rate mortgages, but you've also got 500,000 people who are repaying their mortgages every single year. So we've got a turbulent macro environment, and then what we've got going in our favor is structural change, structural evolution accelerated through technological advancements, which have an impact on how we work, live, socialize, and obviously that has an impact on various real estate sectors: which are winning, which are losing, and which are coming under pressure. I'll come on to talk about that in a bit more detail later. And then together with continual urbanization, the lack of residential accommodation almost across the United Kingdom is seeing an awful lot of commercial buildings being replaced by residential, and increasingly in real estate today is sustainability and making sure that we are improving the energy efficiency of our buildings. That has massive implications, particularly for some of the sectors: offices spring to mind, shopping malls, etc. And that's going to affect liquidity and pricing over the next number of years.

So on the next slide, you take all that in and not surprisingly we're seeing a verification of performances and a polarization of sector performances across the traditional real estate sectors. We find it very difficult to look outside sheds, beds, and breads, to be frank, as winning sectors that are delivering not only income but income growth. And it's that growth bit that I think is increasingly sought after, particularly with bond yields and borrowing costs so elevated. You need rental growth for real estate to really have a place in your investment portfolio, and that growth is missing in large parts of the office sector and also the retail sector. I'll come on to talk about the logistics, warehouse, industrial sector in a minute because it is the backbone of our own portfolio. But you are also seeing good growth in student and PRS. Numbers that come out from Grainger and Unite in that space support that. And groceries: I mean, the flippant comment is everybody's got to eat, but the convenience grocery market is still in pretty rude health. What I would say is that we've seen a number of new entrants over the last decade or so that extend now well beyond what was traditionally called the big four. Now we have alternatives to the big four in terms of meeting our grocery needs, whether that's online with people like Ocado, or convenience groceries with Aldi and Lidl, or M&S Simply Food, Waitrose, Co-op, Food Warehouse, Iceland. There are a number of new players now. The days when our grocery demands were met by an hour and a half visit to your big Tesco or your big Sainsbury's, Asda, Morrison's is no longer the case. And as you can see there, I've shown the NIT stats for one and five-year shareholder returns across those various sectors.

Looking at LondonMetric, we increasingly look at the structural shifts and that helps frame how we allocate capital and the makeup of our own portfolio. You'll see in a moment how the portfolio has evolved over the last 10 years or so to focus around the logistics market. Quite frankly, looking at where we can best get a return, our objective is to allocate capital into sectors where the money will be looked after and over time it will grow, and in the meantime we will deliver an income and a progressive dividend. We'll come on to talk about that in a little bit more detail. I think we are in our eighth year of dividend progression, and obviously we hope that will continue for many more years. Obviously the macro backdrop has changed an awful lot over the last 12 months. I think it must be coming up to the anniversary of the Truss quasi-budget, but it was changing well before that anyway. The fact about the market is that heat was coming out of the real estate market, and as a result, for the last year we've undertaken a disciplined disposal of a number of our non-core assets to make sure that we have our loan-to-value cuts under control in the event of downward pressure on valuations, but more importantly to make sure that if there is refinancing, we actually have equity to be able to repay it. If we've got floating rate debt, we would look to reduce our exposure to that because it's become extremely expensive. And then finally, the last bit was something that a lot of shareholders forget to ask me when I see them face to face is the alignment of interest. We are an internally managed business, we are not an external manager. We do not get paid more the bigger we get. The remuneration here is not about AUM, it's actually more around TSR. And the fact of the matter is that the management team are large material shareholders in the business, and we enjoy dividend progression as much as the next person. I can assure you it's an important day four times a year in the Jones household. Just looking at the portfolio, I touched on the evolution of the last 10 years of our portfolio. As you can see there on the right pie chart, the navy coloring shows our exposure to the distribution market. It's just under three quarters of our portfolio today, across urban, regional, and mega warehouses. Then we have nearly the remainder made up of our long-income grocery investments, let to the likes of Aldi, Lidl, Costco, M&S, Waitrose, etc., as well as some of the other brands that you see down there. That evolution has obviously involved a huge amount of liquidity in the property market, but we have an ownership culture. We want to invest in the best buildings, we'll hopefully pay a fair price for them, but making sure that we have long leases, full occupancy, and income growth, whether that is through open market negotiations or through indexation. I'm not that bothered really, I just want growth. And that growth in our sectors is coming through without us having to buy it or necessarily invest heavily in our buildings like you're having to do in some of the shopping center and office sectors. That's important to us. We try and operate to the best of our ability on what we call a triple net model, that strips out real estate costs and they are recoverables, because it means that after paying our interest cost and our staff, all of our rent flows through as efficiently as possible to our shareholders via the quarterly dividends. Then, just as Richard suggested, we've been busy recently. We closed earlier in the summer on an all-share acquisition of CT Property Trust, which was a close on a £200 million offer, 100% share-based offer. The attraction for us is that this is a company trading at a big discount to its NTA, but it gave us access to the two areas of the real estate market that we cover the most: urban logistics and long-income retail and convenience. That was the driving opportunity for us. The non-core retail and offices will be disposed of over the coming months. We thought there was strategic rationale for both sets of shareholders: more efficient management structure because we go from an external manager to an internal one, that obviously saved management fees. We haven't had to take on any additional employees; the 34 assets have been absorbed into the existing platform that we have here at LondonMetric. It was marginally NTA accretive, it was EPS accretive, it was LTV accretive. We were buying it at an initial yield that was slightly higher than what the existing G metric yield was delivering, so arguably it was income accretive as well. The economies of scale are such that we will deliver greater income granularity, and we've taken a lot of costs out which will allow us to progress earnings over the current year. We have a more intensive management approach as internal owners of the business as opposed to external managers. The fact of the matter is it's all gone relatively well so far. We've started to make our first divestments; we've sold some high street retail properties and we will announce some further disposals shortly. I've already touched on real estate not only delivering a coupon but also delivering growth, and that's quite important to us. That comes essentially through rent reviews and lettings for us. That's why we allocate our capital into the winning sectors. For us, that is beds, sheds, and breads. We've been seeing some good income growth. I think outside of maybe the PRS and the student sector, we're probably delivering superior rental growth. These sectors are delivering better rental growth than anything else in the UK property market today. We will continue to capture these reversions as they come up over the coming periods. We have at least £11 million of embedded reversion to collect over the next couple of years, and that's all part of delivering this progressive dividend policy. That will see us take some money off the table in some sectors and reallocate it into those where the money will be treated best. Lettings: we have very low vacancy rates as I touched on before, so open market lettings are less relevant for us except for asset management initiatives where we look to capture reversions through taking back a surrender of a building. We took back a warehouse in Uxbridge that was previously let to John Lewis. We agreed to take a surrender from John Lewis, they paid us some money for doing it, we relet it immediately at a higher rent to another business, and that helps us with earnings and rental progression. Then on the environmental bit, we are very plugged into this. 90% of our assets are classified as EPC A or B, that's a material uplift on where we were a few years ago, and we've still got further work to do. We are constantly looking at new initiatives, still installing new solar PVs in partnership with our occupiers to improve the energy efficiency of our buildings. That also now extends to EV charging, which is going in all the time. We have a partnership particularly with InstaVolt but also with MFG to put in EV charges across our portfolio. I think we would have added at least £100,000 worth of income from EV charges over the last nine months or so. That's important not just for income generation but for attracting more customers to our locations and improving the energy efficiency of our tenants. So that's something that we're pretty much plugged into and it's high on our agenda.

So look, the outlook: I've probably gone past five minutes, I'm afraid Richard, but it remains challenging. Fundamentals in the preferred real estate sectors remain strong, and I think that market uncertainty will continue to create opportunities, particularly as debt refinancing becomes challenging for some people and some investors. So I won't go any further than that, and we can cover some of those topics in the Q&A.