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As we transitioned the business, we deliberately kept the debt expiry profiles short on those assets we were planning on selling. With regards to our MLI portfolio, we currently have three separate bilateral debt facilities with expiry dates ranging from 2–6 years (averaging 4.5 years as at September 2021). In late 2020, we signed a new seven-year £67m debt facility with Agfe/Reassure on a fixed rate of 1.66%. Over the coming years, we intend to refinance the remaining facilities and new acquisitions to manage our loan expiry profile and build both capacity and flexibility into our borrowing strategy.
Our policy is to hedge no less than 75% of our debt.
We are targeting no more than 40% loan-to-value across the MLI portfolio.
All our landlord utility supplies are already sourced from green energy. We have also installed solar panels on a number of our sites, and are working hard to reduce energy usage through the installation of LED lighting and improved insulation across our portfolio.
As at April 2021, 4% of our MLI units are rated F or G, whilst a further 5% are yet to receive an EPC rating. All of the units that are rated F or G are currently let, and we are unable to undertake improvements to increase their EPC ratings at this time. Of our remaining units, 45% of our units are rated A–C, whilst 46% are D–E. We are continuously investing in our properties to result in improved EPC scores, such as through the installation of LED lighting, the removal of thermally inefficient heaters and the enhancement of existing insulation.
Our board includes five independent directors and four non-independent directors.
We have already installed solar panels on a number of our sites and continue to review further opportunities to add more.
We have an extensive ESG policy in place, which addresses sustainability concerns across our entire business. We have already implemented a number of strategies, and are currently working hard to improve the measurement of our sustainability to help guide our targets/ambitions.
It is a good question as it looks anomalous on the face of it. In reality, the data can be skewed by specific facts around individual lettings within a quarter. For example, if a unit has been vacant for a long time and is let, the increase can be significant compared with a base of zero for previous passing rent. This can also have a distorting impact at a quarterly level. We can, however, confirm that the underlying passing rents (rent being billed) in the portfolio are increasing on a like-for-like basis at around 3.6% to 3.8% on an annual basis and possibly trending higher. Sometimes, we catch a big part of that in one quarter but then it evens out in the following quarter. But that is the underlying trend.
Nearly all Smart Leases include 3% per annum fixed increases to rent, maintenance charges and insurance costs.
The EPRA cost ration is currently relatively high as we have built a highly scalable platform, which is capable of running materially more assets at a marginally reduced cost. Through a combination of revenue growth and efficiency savings, we believe we can reduce our EPRA cost ratio to below 35% over the next three years.
The PID (Property Income Distribution) proportion of the dividend is related to income generated from the UK property rental business and is exempt from tax in the REIT. The non-PID element of the dividend is derived from the residual business, which includes activities such as non-UK property rentals and management fee income.
We’ve seen a moderate increase in pricing during the course of 2020 - maybe a 25-50 bps hardening in yields in addition to the 10% less rent being collected due to Covid-arrears, which means you are effectively paying more. However, this is largely offset by the lower cost of borrowing, so we haven’t needed to adjust our return expectations in order to acquire new properties, despite tempering some of our growth expectations on the back of economic disruption from Covid and Brexit. So far pricing in 2021 seems unchanged to that in 2020 on individual assets, and is largely untested in the portfolio market, although the latter is where I expect to see the weight of capital chasing sheds have an impact first.
Around 50% of our assets adjoin existing residential sites, and most could be described as being situated in urban areas.
As at September 2021 we have a healthy investment pipeline. The pipeline is highly seasonal and subject to market forces, but 2021 to date is fairly typical with regards to the volume of MLI transactions to date.
At present we haven’t got any intention to rebalance the portfolio as we are still recycling assets into MLI from non-MLI. Once this is complete we may recycle out of lower performing assets and/or raise further capital to continue scaling up our MLI portfolio in the UK.
During the financial year to March 2022 we intend to sell all of our non-MLI assets (with the exception of our Urban Logistics assets). This comprises an office building in Guernsey, a care homes portfolio in Germany and a leisure asset in Switzerland.
In the middle of 2020 we saw a number of open-ended property funds seeking to dispose of assets due to liquidity issues. Since then market conditions have been more normal, with a wide range of sellers ranging from private vendors and properties companies to UK institutional landlords and private equity.
Our ambition is to hold 100% MLI and urban logistics by March 2022.
Over the last 3 years we have witnessed and increase in the average cost psf for acquisitions of around 15%. This has been driven by higher rents but also greater investor demand for MLI estates. We have been able to continue to acquiring estates which meet our target returns throughout this period.
The MLI market in the UK is highly fragmented. As a result, there are no clear themes on the vendors of MLI property. Some are selling to capitalise on rising values over recent years, whilst others have struggled to manage the high volume of tenant activity and are seeking to recycle their capital into less management intensive asset classes.
We are focused on owning MLI estates which are in densely populated areas with strong economic activity. This typically leads us to major UK towns and cities in areas with extensive residential communities which provide a ready customer and labour market for our customers.
We are looking for both fully let and partially let opportunities. Our Industrials Hive platform is very efficient as leasing up vacant space, whilst our class leading customer service and Smart Lease offer enables us to improve the rental tone on fully let estates.
We estimate that the MLI market in the UK is around £60bn, of which we own around £500m, so we are less than 1% of the overall market. This is not unusual as the market is highly fragmented, with even the largest owners not holding more than 5% of the stock.
We target to acquire a combination of individual asset purchases with larger portfolio acquisitions.
We typically target a net property income return of 7-7.5% on committed equity (off a 40% LTV) for all new acquisitions. When combined NAV growth from valuation increases this allows us to target a total shareholder return of 10%+ per annum.
We’ve seen 25-50bps over the past 12 months in the MLI market, so there has been some, but not to the extent we’ve witnesses in the big box market. I put that down to the relative inaccessibility of the MLI market – both in terms of lot sizes available and management hassle, which means that the big money more naturally flows towards the big boxes. Overall competitive in the market for MLI assets isn’t much different in 2021 vs 2020, although I suspect that the portfolio market will be the most competitive and hence see the most potential for further yield shift.
At present, the cost of developing MLI is prohibitive in most UK locations. In time, this might change if rents grow sufficiently and build cost inflation slows down. In the meantime, this is one of the principal reasons why supply is so inelastic in the market, and what makes acquiring MLI property at below replacement cost such an attractive investment proposition.
If market conditions allow, our aspirations are to double the size of the portfolio by March 2026. This will bring significant scale benefits to the business, which in turn will generate additional earnings.
The average unit size for the whole portfolio is currently 3,776 sq ft. We’re very happy with this size, and the intention is to continue to focus on units of 1-10k sq ft, with an average somewhere between 3-5k sq ft. We find that the smaller the unit sizes appeal more to SME businesses where our Industrials Hive platform can add the greatest value.
Around 12% of gross rents.
Our smaller units often appeals to start-up businesses and entrepreneurs. We regularly see these businesses growing, and often relocate them into larger units as their businesses take off and need more space. However, we also see larger companies taking small MLI units where they need to be located very close to their customers, such as last mile delivery businesses or trade counter operators.
Over recent years we have seen an increase in the number of businesses which are driven by eCommerce demand. Such businesses are often serving customers around the UK (or even further afield), and hence differ from our traditional occupier base who largely services the local population. For example, we have recently seen an increase in lettings to last-mile food and grocery delivery businesses, but also online retailers who sell goods via the internet to a national clientele.
We believe that in most UK markets rents need to exceed £8 psf for new supply to be economically viable. This reflects a c. 40-50% increase from prevailing market rents in most markets, and so rents need to rise substantially to justify development. Furthermore, build cost inflation is currently higher than rental growth, meaning that the point at which development is widely feasible is moving further away.
The first phase of the Hive Operating platform will involve an investment of around £5m. This will deliver an end-to-end digital architecture which manages our customer journey from marketing and initial enquiry through the leasing transaction, ease management and ultimately re-letting.
Yes, where customers need flexibility we are able to accommodate this at a competitive price point. Our online leasing platform reduces the cost of completing short term lettings, making them more viable for all parties. However, the vast majority of customers are not looking for short term space, with an average lease term of 4 years (or 3 years to first break option).
At present we are unable to determine whether calls come from boards or our website. However, we do know that approximately half of all enquiries we receive direct from customers (i.e. not via a letting agent) come from boards and our website, whilst the other half come from online portals such as Rightmove or Zoopla.
The Hive operating platform is highly scalable. It has been built to manage a portfolio many multiples of the size of the current MLI business, with the ability to also manage additional products and services across multiple jurisdictions.
Yes, the Hive is able to manage both owned and 3rd party assets if required.
Yes, we believe that by reducing the time it takes to complete a lease, and by providing class leading customer service, we can reduce the number of customers who leave at lease expiry and re-let vacant properties faster. This will result in a long term reduction is vacancy across the portfolio, helping to reduce costs and drive rental growth.
The average size of our units is c.3,500 sq ft.
There is a considerable weight of capital chasing industrial property investments, so we expect continued downward pressure on yields. In addition, the sector is delivering strong rental growth, which we expect to be reflected in valuations. Therefore, we anticipate valuation growth of at least the equivalent to rental growth, and perhaps more if yield compress due to the weight of capital.
With regards to the difference between what we would charge for a unit and what a self-storage operator would charge for space, clearly the units are of a very different magnitude (ours average 3,500 sq ft, whilst a self-storage unit is more like 200 sq ft). However, I'd expect a self-storage operator in regional UK to collect around £20 per sq ft revenue, with around 85% occupancy. That compares to us at around £5.50 per sq ft, with 93% occupancy for MLI.