2013 Half Year Results Company: LondonMetric Property Plc - - PDF document

2013 Half Year Results Page | 1 Ref 9716682 28 November 2013

Company: LondonMetric Property Plc Conference Title: 2013 Half Year Results Presenter: Patrick Vaughan, Andrew Jones, Valentine Beresford, Martin McGann Date: Thursday 28th November 2013 Patrick Vaughan: Ladies and gentlemen, good morning and welcome to the half year results of

• LondonMetric. The highlights first, which is the bit I’m allowed to do. The merger of

LondonMetric has been a great success in my view. It’s been a tremendous effort by all concerned since the merger. We have generated turnover of £813 million in purchase and sales towards rebalancing the portfolio, as we have stated. The profit was £50.9 million against 12.5 at March 13th, an improvement of 307%. Valuation gains contributed £35.6 million of that total compared to £3.4 million last March. Contracted rental income today is £67.4 million against 62.5 and that is despite the huge turnover, and obviously when you're making large sales you are losing the income. And so it’s been a balancing act, sale and purchase. There is a gap but we’ve still managed to drive the total rental receipts forward. Sales in the period were £384 million and post the period, a further £44 million. So actually in the half year and since, total sales have been £428 million, which I am sure you all realise is pretty hard work. I think Andrew is going to get a knighthood for the stamp duty that we’ve been dealing with. Purchases were £135 million in that period and post the period end, a further £93 million which you will have read about, mostly with Odeon, and that's a total of £228 million. Today, the annualised run rate

• f secure long-term income to cover our dividend represents 86% of the cover of the 7p

dividend and is on track to achieve or to exceed full cover by the end of the coming year, which we said would be our first target. Our LTV in the period was 30%. It has now risen to 40% since the acquisition of Odeon, and given the added business achieved we find that quite satisfactory. We’ve also been able to extend the loan maturity from what we said at the last year end, a little tight at 3 years, to 4.1 years which is a 36% improvement. We promised at the merger that we would seek overhead savings of £2.5 million and we are on track to deliver £3 million of savings in the cost of the combined Group. I’d take this opportunity, if I may, to thank the LondonMetric team for a great effort for the half year and also to thank our advisors who helped us with the merger, our financiers who have

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helped us with the volume of our business and the customers, most importantly, who occupy

• ur space for all that they have contributed to the success of the first half. And now, if I may, I

will hand over to Andrew Jones. Andrew Jones: Thanks, Patrick, good morning. Just giving you a bit more colour on the operational highlights over the last six months, as Patrick said, it’s been a very active period with £135 million acquisitions during that period and then a subsequent £92 million post period end. I think the important numbers there are probably the average entry yields, as you can see, averaging roughly 7.75%. Disposals exceeded acquisitions, which is obviously a metric that we expect to reverse in the second half, but interestingly the exit yields have been significantly

• lower. You're looking at 310 basis points during the period and even more post period end,

particularly as we look to exit the vast majority of our wholly owned residential assets, more of which I’ll come on to talk about in a minute. Mark and his team have been active in terms of leasing up our vacant space, surrenders and re-lettings: 15 new lettings, £4.3 million of additional income and importantly, off average weighted lease terms of over 16 years, and that compares to an IPD average lease length index of just under 6 years today. I think it dropped below 6 years a couple of months ago. And the capital recycling within our wholly owned portfolio gives us a further £200 million to invest, absent any further sales that we may execute

• ver the next six months. Then looking at the portfolio metrics, valuation up, as Patrick said, £35

million and outperforming the IPD for property return by just under 200 basis points. I’ll come in to talk about the breakdown of that further on in the presentation. Topped up initial yield has risen over the period despite 25 basis point inward yield compression at the September valuation, and again I’ll come on to go through that in a bit more detail later; and occupancy now up at 99% and the gain following on from an earlier theme, a weighted average unexpired lease term of over 12 years, which must be one of the best in the sector. Like-for-like rental growth underscoring the occupier desirability of our buildings at 1.6% for the six-month period. Just to give you an update on the strategy, we set this out at the time we announced our full year results post merger, very much focused around the out-of-town retail and the retail distribution markets where we think we have competitive advantages as a result of our strong retailer and occupier relationships. So that portfolio reposition is going on. As Patrick said, £812 million of activity and what you see there in the two boxes that we've highlighted is the yield

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arbitrage between the acquisitions and the disposals but importantly, that hasn’t been at the expense of the weighted average lease length which, as you can see, having increased. We continue to extract synergies from the merger. Patrick touched on the cost savings; that's one side of it. I think the really exciting part of the synergy is very much being able to use our

• ccupier relationships both obviously in our retail business but also now in our distribution

business, to be able to execute asset management initiatives with them. And again, I’ll touch on

• ne or two examples later. And the emphasis is obviously on delivering recurring income that

covers the dividend but as you can see, at 86%, we’re well on the way to doing that. And what that does is it gives us much greater flexibility and freedom to look at other assets, assets where we can deliver real alpha and NAV progression. So this, just to remind you of the investment strategy, we tend to look at real estate through these three lenses: income, asset management, short cycle development and quite frankly, all of

• ur acquisitions need to sit in one of those columns otherwise we’re going to struggle to justify

why we might be buying something. And we’ve been active in all three of those over the last six months: long let income which came with the Odeon portfolio, asset management opportunities that come both in terms of our retail park portfolio but also in the distribution space like WHSmith’s distribution centre there in Birmingham, we’ve bought it with 11 years weighted average unexpired lease term and simultaneously on acquisition extended that to 21 years and we are hopeful of doing something similar on the Argos distribution centre in Bedford. And in London, we continue to be opportunistic. Marlow we’re going through a major lease re-gear with our main tenant. Carter Lane is well on the way to complete its refurbishment by the end

• f March next year. We’re 58% pre-let and we’ve now agreed to let the lower ground floor,

which will give us another 11%, and continue negotiations on the ground and the first. So that's progressing well and we’ve just, in line I suppose with what the Qataris are doing down at Chelsea Barracks, we’ve just started to release a handful of flats at Moore House and we’ll look to accelerate that disposals as we see more activity on site down at Chelsea Barracks as we hopefully close the gap between our valuation and no doubt their appraisal. Just looking at what that investment strategy has done to our rental income, Martin will take you through what it means to the dividend but just looking at it from a rental income perspective, you know, not surprisingly when you're active in disposals as well as purchases,

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your income line takes a hit and we took that very early on the half year with the sale of the Piccolo portfolio to Prologis and Norges. We’ve recovered that, as you can see, with £17.4 million of the rent secured over the period and then also picking up then the new lettings that have been signed during the last six months. So the rent roll today is £67.4 million and then that will increase as a result of leasing up the remaining development space, talk about the 42% in Carter Lane that we expect to lease up by the end of March and also income that we have in solicitors’ hands either through acquisitions or through leasing. So that will take us up on current run rates to just under £75 million, and then what you see there is a hat on top of that

• f what we would expect to deliver as we look to redeploy our firepower into our chosen two

sectors. And on that note I will hand over to Valentine, who will talk you through the investment activity. Valentine Beresford: Good morning. Andrew and Patrick have already touched on how we are actively repositioning our portfolio currently. So in respect of out-of-town retail, we’ve acquired £132 million worth of investments, £48 million in the period and £84 million since the period

• end. The latter has been greatly dominated by our recently announced portfolio of ten out-of-

town Odeon Multiplexes which we acquired for £81 million at net initial yields of 7.2%, a weighted unexpired lease term of near as dammit 25 years, and annual payable RPI uplifts collared between 1% and 5%. So an investment like this is highly accretive to our dividend policy as well as offering some real value add opportunities going forward, pods in car parks, etc. Therefore, the acquisition focus has been one of buying 7%+ investments which provide not

• nly attractive income but also yield compression through asset management-induced
• initiatives. This trend is going to continue as we continue to recycle some of our assets, and I’ll

come onto some of those which we’ve been doing recently and in fact we do have two investments in solicitors’ hands already for our MIPP joint venture which I hope to be able to announce before the end of this calendar year. A key investment objective since the merger has been to grow our exposure to the distribution warehouse market, particularly following the £138.4 million portfolio sale of 11 distribution centres for 5.6% with a weighted unexpired 9.2 years. So since then, we have been very active and we’ve completed the acquisition of 4 distribution centres for £85 million, representing a

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blended yield of 7.2%. I think an important factor is, as you can see from the names on that schedule, that these are all occupied predominantly by retailers with whom we have extremely strong relationships. And since the period end, we’ve actually gone and acquired a Travis Perkins unit in Brackmills and as you know, Travis Perkins own Wickes, and we acquired that for nearly 9% but with a lease expiry next year. Given that this is a prime unit, intel told us that the

• ccupier very much valued the unit and intended to stay there for a longer term, so we’re

already in detailed heads of terms stage to extend that to by about 10 years on the lease. So we acquired that at 9% and therefore, following the re-gear, we anticipate significant yield compression. We intend to remain very active in this sector and we have another similar number of similar

• pportunities which we are circling at the moment and indeed have in solicitors’ hands again

which we hope to be able to announce some details shortly. We have maintained an active disposal programme both in commercial and residential over the

• period. The summer highlight has to be the sale of our office investment in 1 Fleet Place where

there was significant investor appetite from overseas money and following a frenzied round of best bids, we achieved an above book price of £112.5 million which represented a net initial yield of 5.1% and significantly above our 2009 acquisition price of £74 million. We have announced this morning the sale of our DFS in Sheffield and Currys Megastore in Mansfield for £12.9 million to Henderson. This reflects a net initial yield of just over 6.7%, an ungeared total return of 14% per annum over the whole period, equated to a blended geared IRR of 31%. In late September, we acquired a Wickes in Oxford as part of a larger portfolio for our MIPP/USS joint venture; simultaneously at point of acquisition re-gearing the lease from 10 years to 20 years at a yield on cost of 6.5%, and we again have announced today its almost immediate

• nward sale to Lothbury at 5.3% (£12.5 million), delivering an ungeared total return of nearly

14% and a net profit of £1.7 million in less than a month. Both of these are classic examples of us buying non-institutional product, asset managing, institutionalizing and recycling to deliver superior returns. Andrew touched on residential disposals but just to quickly recap, during the period we have sold £93.3 million of residential units, releasing £73 million worth of equity. We have completely

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sold out of our holdings in Clerkenwell Quarter, which delivered a 28% return on cost over our 12 months of ownership. Since the period end, we have sold or agreed to sell another £57.4 million worth in 115 units and there is another £26 million worth of further equity to be released in our wholly owned blocks in Stockwell, Highbury and Battersea as sales continue going forward. On our joint venture in Moore House, as Andrew mentioned, we have just embarked on the early stages of a patient sales process to piggyback on the progress of the adjoining Chelsea Barracks development which has just started onsite. In fact, what he didn’t mention is that we’ve already agreed to sell seven assets above our September valuation. Market outlook: as far as this is concerned, investor appetite across the UK has significantly strengthened over the last three months as evidenced by the number of sales we have executed at or close to the 5% mark. London and the South East continue to be a sought-out investment proposition from overseas investors. This was illustrated by the depth and variety of demand that we had on Fleet Place. None of the people looking at Fleet Place were UK institutions; they all were Middle East or Far East type buyers and we continue to get similar approaches on other areas of our South East portfolio from those types of purchasers. Activity is growing by UK pension funds, who are now looking to grow their portfolio across the UK outside of their historical South East bias, in search of long and strong income at more attractive yields. This focus on income is also forcing them to acquire good secondary assets and the potential for yield compression in this sector will, in our view, see it outperforming prime over the next six months and leaving tertiary firmly behind, the latter where income tends to be shorter, weaker and chronically over-rented. We are continuing to successfully secure interesting opportunities at attractive yields caused by motivated vendors, fund expiries and bank deleveraging and as a result, these assets that we are acquiring are starved of capex and thus we are capable of institutionalising them and deliver yield compression through asset management, whether it’s via lease re-gears, additional developments, unit extensions and new lettings. And on that theme I’m going to hand it back over to Andrew who can talk you through our asset management highlights and then our valuations.

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Andrew Jones: Thanks, Valentine. Right, asset management progress over the period, 22 occupier transactions, a combination of new lettings and importantly, re-gears. Re-gears have become much more important I think from a valuation perspective, one, as leases across the UK have got much shorter and also as UK institutions seek out long, well-let real estate on solid incomes. And as you can see from the sale that we made this morning – or announced this morning – in Oxford, 25 years to Wickes in Oxford at 5.3%, if you compare that to our average acquisitions

• ver the period at 7.25% with weighted average lease lengths of just around just over 10 years,

you can actually see that I’m not suggesting we travel from 7.25% to 5.3% on every single deal where we re-gear, but that is a long journey. And even though we have to share some of those economics obviously with the tenant, long let leases particularly, which is prevalent in the out-

• f-town market more than any other market, is becoming a very sought after commodity. And

as a result, as you can see, there are two numbers here: lettings at 16 years I touched on earlier, re-gears at 19 years. That is very, very important to our cap rate. And I’ll come on to talk about the outlook for the retail market in a minute but new lettings in solicitors’ hands again significantly ahead of valuer’s ERV. We are beginning to see a scenario in the UK today where landlords’ positions are beginning to harden for certain types of retail stock. Like-for-like rental growth over six months of 1.6 and then the residential, that portfolio, a lot of occupier transactions, both lettings and renewals. As you can see, 2% rental growth there over the six- month period, and that is a challenge obviously, keeping assets fully let whilst you're obviously trying to sell them down, and I think that the residential team have done that very, very successfully over the period. We now have 25%, which is rising post period end to 31% of our income on fixed uplifts, and that will be a combination of fixed uplifts, RPI, some with open market resets every five years as well. So again, rental growth or income growth for us on those assets is very much baked in, and that again is something that institutions find increasingly desirable. The repositioning of the portfolio, when we stood up here six months ago we had just over 50%

• f the assets in what we would call our core distribution, retail and development space. Today

that's increased as a result of the material activity. We've now increased our retailer distribution up from 6% to 19% and distribution overall now accounts for 20% of the portfolio. Out-of-town is at 44%, some further recycling will probably see that fluctuate around the mid-40 level over the next six months, and you've seen a substantial reduction in our residential exposure as

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we've sold down the vast majority of the wholly owned portfolio. And the reduction in offices is predominantly obviously as a result of the sale of Fleet Place. Carter Lane sits in our development piece at this moment in time. The makeup of the valuation surplus, a total as I said of 25 basis points, but what is important of that is its makeup. We think half of it, roughly half of it came from market movements and as Valentine has already touched on, we expect that to continue over the next few months. And then the other half came from what we call asset management actions, whether or not it was lettings, letting up the vacant space, whether or not just creating new space through extensions and planning consents or whether or not it was re-gearing short leases to longer leases which allowed the valuer – persuaded the valuer to bring the cap rate in to reflect the additional longevity of that income stream. And that's important to us. I mean the market will be the

• market. It’s very difficult to influence that. But what we can do is influence the length and the

strength and the quantum of our income. The performance numbers relative to IPD, as I touched on earlier, 190 basis point

• utperformance at the total return level; not surprisingly the capital return was significantly

ahead of the IPD index and the income return is slightly below, and that's predominantly down to the low-yielding nature of the residential investments. I think overall it was a strong performance across the board relative to the various IPD benchmarks. On the development activity, I touched on Carter Lane, as I say, 58% and a bit pre-let. The 11% in detailed negotiations, we’ve now agreed that and we remain in conversations with other operators,

• ccupiers for the remaining two floors, so remain very confident that that will be let by the time

we PC and also anticipated doing so ahead of our own appraisals. Berkhamsted we’re on site building a new Marks & Spencer’s. The remaining space is under offer now to Costa and Wagamama’s and so that will become an attractive investment over the next six or seven

• months. And similarly, we are on site up in Bishop Auckland building an extension to our retail

part and have just agreed terms on the last 10,000 square foot unit to TKMaxx so that's good. Leeds, we’ll start Leeds in May next year when we get vacant possession back from BHS and again we anticipate by that time that we will be over 60%, probably nearer 70%, pre-let. And St Austell, which is our large retail park development, is due to go to planning at the beginning of next year. Planning for out-of-town, as you know, is challenging which is why it creates barriers

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to entry, but we remain confident we’ll get it. It’s a terrific product and as well as signing up M&S, we’ve signed obviously Sainsbury’s and we’re in detailed discussions with Primark. Martin will take us now through the financial numbers. Martin McGann: I’m not too sure whether any of you will leave me any numbers to talk about. Just

• ne or two. I think the numbers this time round are hopefully a little easier to understand. We

actually have a full period of the enlarged group, so the combination of London & Stamford and

• Metric. Clearly the comparative numbers, the statutory comparative at 30th September 2012 is

not hugely helpful because that is only London & Stamford. So what I’ve done is I’ve put the middle column in which is the six months actually to March of 2013, which is a little more helpful because at least it’s got two months of the enlarged group in and just really trying to show that there is an evolution to the combination. Clearly the highlight number is the profit which, as Patrick said, has gone up 307% to £50.9 million, predicated hugely on the revaluation surplus of £35.6 million, but notwithstanding that, there has been a significant 28% increase in EPRA earnings predicated on both an increase in net income – the rental line has benefited from a full six months of the impact of the Saturn portfolio which we bought immediately following the merger, it benefits from a full six months of contribution of the Metric assets as well, and clearly we lose some income on the sales, the Piccolo sale, and we’ve had no income in the period arising out of Carter Lane. So there are a lot of moving parts to it but net it’s gone up. Administrative costs I think, as Patrick said, we were aiming for £2.5 million of synergistic cost savings from the merger. We had a combined cost of £15.5-£15.6 million from the two pre- merged firms. That will be, well it’s £6.4 million now, that's going to be something twice that at the full year. Net finance costs have gone up. We have had the full impact of Metric debt, we’ve had the full impact of Primark debt, we’ve had the full impact of Saturn debt, which has more than offset the repayments of debt on the disposals we’ve made. Our overall cost of borrowing has slightly gone up. We’re at 4.2%. That’s primarily because of the usage of the revolving credit facilities which haven’t been fully utilised in the six months. If we did fully utilise those, our cost

• f debt would actually fall to 3.8%. We essentially keep the revolvers available for when

Valentine needs to move quite quickly and we’d rather do it without a bank credit approval.

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In terms of dividend cover, which Andrew touched on, this bridge really takes us from where we were last time I stood up here where we had about £28 million of annualised sustainable recurring profits, which is the first column on the left. Clearly, having said dividend cover was very important for us, the dividend tail doesn’t wag the dog and the first thing we did was to tell the distribution portfolio. That, on top of the Fleet sale, has cost us £7 million of earnings but we’ve more than replaced that with the income from the acquisitions that Valentine’s delivered in the period. That, together with the lease up of Carter Lane and Mark’s asset management initiatives, gets us to the 86% annualised cover that the guys have referred to. In terms of getting to our 44% cover, which is this line here, the 1.9% and the 2.9% are things that are effectively in solicitors’ hands. We think we can get there very comfortably by the year end and that leaves us only a million and a half of recurring earnings to get to before we can say we’ve got the 100% dividend cover. And then in terms of what's then left on the balance sheet in terms of cash, we think there is about £198 million of firepower. The reinvestment of that will take us well past the £44 million, past £50 million and into the realms of talking about an increased dividend at some point. In terms of the balance sheet, the portfolio has fallen because of the churn that Andrew and Valentine have spoken about, not only on the wholly owned portfolio but also in terms of our joint venture arrangements where we’ve sold the distribution portfolio that was held joint venture with Green Park. So the £84 million joint venture, the carrying value of the joint venture now represents primarily Moore House, the joint venture with Green Park and also with PSP, the Canadian pension fund. It also includes our MIPP joint venture and it includes the Tesco warehouse at Harlow which we still hold joint account with Green Park. Our cash balance at the end of the year was 73.6. Taking that number – and there have been various refinancings since the period end and various acquisitions and disposals. Taking all that into account, we get to a position now where we have about £90 million of cash and gearing that up at 50%-55% gets us up towards the £200 million that Andrew was alluding to. Bank debt has fallen in the period, primarily because of the churn of the portfolio and the other net asset number, the £47 million, includes a £50 million completion accrual for our warehouse, the Argos warehouse at Bedford, which was completed post the period end.

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Just in terms of the movement of the NAV, we started the period out at 109p NAV and we finished at 112p, and the bridge is just trying to show where, how that progression has come. Our EPRA earnings were 1.9p and from that, we have paid out the 3.5p dividend so that is still

• ver-distributing, and we had various either non-recurring or exceptional items which took a

further 1.6p off the NAV. The disposal issue was essentially swap rate cost on the disposal of the distribution portfolio and the exceptionals, which I am delighted to say it’s the last time that we’ll have an exceptional write-off in respect of the share-based payment from the London & Stamford internalisation. And then coming the other way, the valuation surplus was weighted to 5.6p per share to give us 112p EPRA NAV at the end of the period. In terms of the debt position, we now have, including our joint venture debt, £400 million of debt which has risen post period end with most particularly the acquisition of the Odeon cinemas against which we put £44 million of Lloyds Bank debt, up to 496. Clearly, when we sold Fleet Place, we were required to repay the debt both on Fleet Place and also Carter Lane; the two assets were cross-collateralised with Santander and Deka. The consequence of that is that Carter Lane is effective unencumbered now and so in looking at how much firepower we have, we can contemplate putting some debt against Carter Lane if we wish. And our net gearing at the end of the period had dropped to 30. It’s now back up at 40 as a consequence of the post period end transactions. I mentioned earlier the cost of debt, 4.2, but will drop when we fully utilise our revolvers, which we will do. Some significant refinancings in the period which got, I think, the end of the year our maturity had fallen to three years which we were uncomfortable

• with. We did £140 million refinancing with RBS on the retail portfolio and we have done £120

refinancing with Helaba on our distribution portfolio. So we have two substantial new term facilities covering the key sectors of the portfolio. And within those facilities, we have quite a lot

• f flexibility that as and when the guys decide that those assets, or assets within that portfolio

have done their job, we can move those out and bring new ones in without incurring awful penalties from RBS, who I see sitting in the audience. Our joint venture commitments at the moment are a combination of Green Park and PSP, which gives us £295 million of equity which we are seeking to invest on their behalf.

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Andrew Jones: Right. Now for the fun bit. So I was just going to touch through my thoughts on the market, both the recent market, how that evolving, and also how that ties into our strategy to further invest into the distribution sector. As I alluded to earlier, I think that the occupation market is getting better. We may actually be at a turning point for some retail assets where we start to talk about that single core rental growth, and that's as a result of a number of things. Generally the economy is getting stronger. Job outlook, as you can see there, is as healthy as it has been. We’re also seeing less opportunities for retailers looking to grow. Quite a lot of the low-hanging fruit that was available as a result of the enormous amount of retail failures during ’08, ’09 and ’10, quite a lot of that space has been taken up. So retailers who are on an acquisition path have got less options, and deliverability for them is becoming much more important, particularly if they are on a growth path. Successful retailers still see new store

• penings as a major driver of growth, they really do. We all talk about most retailers having too

much space. They do; they do have too many units. They don’t necessarily have too much square footage and that is evolving. So therefore, if you have got the right accommodation in the right place, and it is properly assessed in terms of from a rental perspective, you will get better demand today. You will get better terms today than you would have got a year ago. And there's nothing like a couple of retail IPOs to stoke up the occupier demand. There’s no retailer going to IPO on a story that says they're going to take less space and as a result, we read in the press about impending retailer IPOs and we see that again as a potential driver of demand over the coming years or so. And as a result of that, I think landlords’ positions are beginning to harden a bit and whether or not that's on rent or whether or not that's on length of the term or the packages that they're happy to give away. But not all boats will rise on the tide. Shopping patterns are continuing to polarise, as you've heard me talk about before. And you've just got to make sure that you put your money to work in the right places, and understanding what those right places are or where they are essentially comes from being close to your customer which is, as you know, part of our own DNA. And as a result of that, we continue to believe that lease expiries remain the chief risk to property valuations rather than future retail failures. Fortunately our portfolio is very young. We have very few legacy retail assets as a result of

• bviously – I think the oldest asset we’ve got is probably only two and a half years old so we

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don’t have that problem but we do see that there are some assets that in the retail market will suffer some material rental falls as those leases come up for renewal and tenants look to renegotiate at lower rentals. The change in retailing is dynamic. It’s enormous. I mean we see it every day. Here we've got online retailing at roughly 12% give or take. I suspect there's nobody in this room that's going to put up a strong argument that says that that's not going to hit 20%

• ver the next five to ten years and that will have a dramatic effect obviously on the physical

space that retailers look to take. And as you can see there with some of the numbers that we’ve put in front of you, this is all about adopting a multi-channel strategy. All successful retailers have got a multi-channel strategy and that will undoubtedly affect the size and the shape of the physical portfolio that you occupy, not only in terms of the unit shops that you have but also your distribution infrastructure which essentially, for most retailers, with the exception of a handful, was designed with a B2B strategy and now has to adapt to take account of a B2C. Retailers undoubtedly have got to compete with an ever-demanding consumer, and if we take

• ur cue from what's going on in America, consumers are, they do require increasingly instant
• gratification. They are looking for free delivery; they are looking for next day or same day or 24-

hour delivery. You have to put in place a B2C infrastructure capable of doing that, and that's not just necessarily just the big boxes, the million square feet Amazons that we all read about; it’s also some of the smaller, last-mile distribution centres that are going to be key. And we think that that, we see the structural shifts benefiting the whole market. We think that our own retailer relationships give us that competitive edge, which is why we continue to allocate significant sums of our reinvestment towards it. And as a sector, I think it’s probably one of the most exciting in the whole of the real estate market as we sit here today. The winners are going to have to be able to compete with the likes of Amazon: speed and efficiency and deliverability are going to be absolutely key. And as you can see, retailers account for somewhere between 50% and 60% – it depends on what report you want to read – of occupier take-up today in the distribution market. Their demand for space, 50 million square feet over the next five years. That's a 21% increase on where it was five years ago and that compares today to an availability

• f prime grade A distribution space of 7 million. So you've got a very, very favourable

demand/supply imbalance and we don’t see that changing. There’s not a huge amount of development going on, certainly not if you move outside the M25, there's not a lot of development going on in anything. So again, it’s got that favourable macro demand/supply

• imbalance. That could lead to rental growth. It will certainly lead to better terms. As I said,

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picking up on the theme from retailers, to better terms in terms of lease lengths, in terms of less rent freeze and that has to be good. That has to be good for the owners. And so before we move on to Q&A, just a brief catch-up summary on where we are and where we’re heading. As you've heard, we’ve made great progress in terms of covering our dividend on an annualised basis for the next financial year. We’ve rebalanced the portfolio. We’ve increased

• ur lease lengths. We’ve moved quite a lot of our non-core, low-income assets have either left

the departure lounge or are in it. We’ve capitalised on a very positive yield arbitrage between what we’re paying to buy and what we’re achieving on sales, and that activity we see continuing

• ver the course of the second half as well. And opportunities are out there. It isn’t quite as it

was two years ago. There is more money. As Valentine’s just touched on, there's more money coming from UK institutions, there's more money coming from US private equity investors – a lot more money. But for us, our opportunities are by and large predicated around our occupier. You've heard me talk about it in the past, occupier contentment for us is absolutely key. Working with our partners will allow us to deliver those increases in our valuations which in turn feed through to our progression in our NAV, and we are in undoubtedly a much better place today than I felt that we were six months ago because of what we’ve achieved, albeit we’ve still got quite a bit to do. So on that note, if I can just open up to take any Q&As.