Tritax Big Box Reit PLC

LSE:BBOX

Earnings Call Transcript 2022-Q2

[Ian Brown, Head of Investor Relations]

Good morning, and welcome to Tritax Big Box's H1 2022 Results Presentation. I am Ian Brown, Head of Investor Relations. Before we begin a few points to note. Firstly, this morning's presentation is being recorded and a replay and transcript will be made available on the investor section of the Tritax Big Box website. A PDF of the presentation itself is also available to download.

And secondly, after the presentation, there'll be a Q&A session for analysts and investors. To ask a question through the webcast, please type and submit your question in the question box. If you've joined by phone, please follow the instructions from the operator. In the interest of time, we will aggregate similar questions we receive from the webcast. And with that, I will hand over to Colin.

[Colin Godfrey, Chief Executive Officer]

Thanks Ian, and Good morning everyone. I'm pleased to present the 2022 first half results for Tritax Big Box and to provide you with an update on the further strong progress that we're making. My name is Colin Godfrey, CEO at Tritax Big Box and I'm joined, as usual, by Frankie Whitehead, our Chief Financial Officer and Ian Brown, our Head of Investor Relations. I'll kick off with a brief introduction. Frankie will run through our financial results for the first half together with a view on our outlook.

And I will conclude the presentation with a strategic update. Ian will then coordinate Q&A. In March this year, we reported record results for 2021 and expressed continued confidence about the outlook for our business. And my key message today is that we remain confident despite a changing external environment. Now this view is supported by our first half results and I want to start by highlighting 5 key factors.

Firstly, we're delivering against our strategy. We achieved a record level of new letting activity in the first half of the year. This will add GBP 17.8 million of annual rent to our business. It would underpin future earnings growth in 2023 and 2024, and it supports our decision to accelerate construction starts. Secondly, the powerful structural drivers to our market continue.

Supply chains have never been more important, and there is a clear desire to increase operational reliability, efficiency and resilience. Against this strong demand, there remains a lengthy planning process and a scarcity of consented sites in the U.K., which continues to constrain supply, together underpinning attractive levels of rental growth. And we're very well placed to help our customers achieve these ambitions, both through our investment portfolio and our large development portfolio, which includes a significant amount of planning consented land available for near-term delivery of logistics warehousing.

Thirdly, this attractive combination of delivering our strategy and the strength of the market continues to support our performance. We're very excited about the range of opportunities that we have to create fantastic and sustainable buildings for our customers and enduring an attractive income and capital growth, both from our investment and development activities.

Additionally, and this is the fourth factor, we founded this business on the principle of providing our shareholders with resilient and growing income through the economic cycle, and we remain true to that principle nearly 9 years later. Resilience is built into our business on several levels. There's been a deliberate decision to focus on the best logistics assets that are long leases to strong customers, and this is evidenced by a 100% rent collection rate during COVID and continued 100% occupancy of our investment portfolio.

Now this resilience is being strengthened by the significant work that we're undertaking on ESG and how we're embedding ESG into all aspects of our operations and our thinking. And to the final factor, we complement this resilience in our capital structure with a prudent approach to risk, demonstrated by a very strong balance sheet, low leverage, significant liquidity and no near-term refinancing requirements, plus an attractive cost of debt secured through fixed or capped instruments.

This financial strength positions us well to weather a more challenging geopolitical and macroeconomic backdrop and to continue taking advantage of the strong growth opportunities embedded within our business and our market. And on that note, I'll now hand you over to Frankie to talk through our financial performance. Frankie?

[Frankie Whitehead, Chief Financial Officer]

Thank you, Colin, and Good morning, everyone. This morning I will be walking you through the strong results we have posted for the first half of 2022. And in doing so, I also want to emphasize that the excellent operational progress made in the period, particularly with regards to new construction and letting activity is something that will further benefit our earnings through 2023 and 2024. And as Colin has said, we are conscious of the current macro environment, and I'll set out why we are well placed to perform strongly as we move forwards. Turning to our first half 2022 key financial highlights.

Our adjusted EPS, excluding additional DMA income, has risen by 1.1% to 3.73p, with development completions and like-for-like rental growth more than offsetting the impact from the increased share count in the period. We have increased our dividend by 4.7% to 3.35p per share for the 6 months. And once again, our portfolio has performed strongly, which has helped us to deliver a 9.1% increase in EPRA NTA to 242.9p. All elements of our strategy are performing well, leading to a total accounting return of 10.7% over the 6-month period. And finally, and this is a key message from today's presentation.

Future income growth is now truly embedded within our development pipeline and wider portfolio. As you can see from the chart here, the rents now secured within our development pipeline means that our contracted position rests 9% above today's passing rent. And with the added rental reversion within the portfolio, the ERV sits a further 15% ahead of today's contracted rental position, indicating the attractive prospects for our future earnings growth. Further strong progress has been made in terms of delivering growth in net rental income, and this supports the underlying growth in our dividend. The group net rental income increased by 16.1%.

Once again, this was predominantly driven by development completions over the last 12 months. The total contracted annual rent has increased to GBP 216 million, with 86% of the growth since December generated from the development component of our strategy. Our EPRA cost ratio has increased, albeit temporarily to 15.2%. We expect this ratio to return to the level seen in previous periods as further contracted rent translates into passing rent. And we also have the positive impact to come from the recent change in management fee structure, which becomes effective from July 1, 2022, and further details can be found on Slide 28 of the presentation.

Our headline adjusted earnings per share fell by 7%, reflecting the fact that there was no exceptional DMA income received in the period. Hence, therefore, there being no difference between this and our adjusted earnings, excluding exceptional DMA for this first half at 3.73p. And it is this which we consider to be our recurring earnings metric. This has increased by 1.1% despite the average share count growing by nearly 9%. We have increased our dividend per share for this first half to 3.35p and we sit comfortably with a payout ratio of 90%, providing us with future flexibility as we continue to target sustainable dividend progression over the long-term.

Slide 8 highlights the level of underlying earnings growth in absolute terms, driven by our development activity. Starting with last year's headline adjusted earnings figure on the left-hand side and removing the exceptional DMA income of GBP 6.3 million, which was received in half 1 2021, getting us to the recurring earnings position of GBP 63.1 million for the first half of last year. You can see that top line growth in net rental income is the significant driver to this growth in recurring earnings. The like-for-like rental growth of 3.3% has added GBP 2.2 million to current period earnings alongside a further GBP 1.1 million contribution from last year's investment activity, which is now being held for the full period. Development completions are by far the biggest contributor to net rental income growth, with GBP 10.8 million attached to new lease completions.

This is offset by an unwind of approximately GBP 6 million from license fee income in relation to one building at Littlebrook. This has now reached practical completion. Finally, net of the other admin and finance costs, this gets us to the adjusted earnings for this period of GBP 69.7 million, which is a 10.5% increase on a like-for-like basis over the same period last year. And just to recap, this is shown here in absolute terms. On a pence per share basis, this growth is 1.1% when factoring in the dilution from our 2021 equity issue.

Our income performance has been coupled with an even stronger delivery of capital growth across the period. Another milestone was reached with the portfolio value crossing GBP 6 billion at the half year point. The valuation surplus recorded was 7% across the half. We have invested approximately GBP 150 million of capital during the period into our attractive development pipeline. We expect this to accelerate in the second half and therefore retain our guidance of GBP 350 million to GBP 400 million of development CapEx this financial year.

Our EPRA NTA increases to over GBP 4.5 billion, which equates to 242.9p share. And with an LTV relatively unchanged at below 24%, this provides us with the balance sheet capacity to commit to near-term opportunities, both from within our existing pipeline and externally should those opportunities arise. This financial performance culminates in another strong 6 months, with a total accounting return, as I said before, of 10.7%. Turning to the detail behind our strong capital growth. The equivalent yield on our portfolio has remained stable at 4.1%.

The ERV growth itself has continued to progress at attractive levels, increasing by 5.8% this half. This investment portfolio performance has, therefore, added 15.6p to NAV. Whilst our development pipeline is a key driver to income growth, the development profit realized is also becoming a bigger feature of NAV growth. A further 5p has been added to performance through increasing levels of development activity. When noting the impact of the operating profit and dividends paid in the period, this takes us to the closing EPRA NTA of 243p per share or plus 9.1% over the 6 months.

So the first half has been another period of compelling financial results. And more importantly, our strong operational performance has led to our near-term outlook for income growth looking even more attractive. This rental income bridge illustrates the potential we have to grow today's passing rent from GBP 198 million shown on the left-hand side by approximately 2.5x to an estimated GBP 510 million, as shown on the right. This includes GBP 80 million of rent, which is contracted and sits within our current development pipeline. This is all targeted for delivery by Q3 2023 and will add 9% to passing rent.

We have a further GBP 15 million of potential rent within the current development pipeline, which is currently unlet, although 1/3 of this is under offer. And we have GBP 4 million of potential rent attached to planned development starts during the second half of this year. Further ERV growth has led to an improved mark-to-market rental position. This rental reversion now stands at 15% or GBP 32 million of further opportunity to grow our income. Taking all of this into account, this gets us to the green bar totaling GBP 267 million.

So including our current development pipeline, the targeted development starts from the second half of the year and the rental reversion, we have the opportunity to grow passing rent by GBP 69 million or 35% over the near-term, which from a timing perspective, we would expect to translate into an acceleration in our earnings growth from mid-2023 onwards.

Moving further out, we continue to benefit from our near-term and future pipeline, which is unique and has significant embedded value. And to remind you, there is no future rental income growth factored into this chart. And it is important to remember, our land pipeline is largely held under option. This provides us with significant flexibility over the long-term, allowing us to alter the pace of development to suit prevailing market conditions.

Slide 12 is a reminder that the strength of our balance sheet provides further resilience across our business, which is particularly important noting today's macro environment. At the half year, our loan-to-value ratio stood at 23.7%, and we had GBP 475 million of available liquidity. As you can see, our debt book remains diversely funded, with a laddered maturity profile averaging 6.2 years. Our earliest refinancing event does not fall due until December 2024. With the last few months seeing us move into a new interest rate environment, our work on the capital structure over the last few years stands us in good stead.

Approximately 70% of our debt is fixed rate, and our remaining drawn balance is fully hedged. Our average cost of debt remains attractive at 2.5% at the end of the period. And finally, I want to finish by reaffirming the guidance set out at the time of our 2021 annual results in March. Our high-quality investment portfolio underpins our core income return, and we are confident that we will continue to deliver low-risk and sustainable income growth, including through the significant portfolio reversion. We will continue to maintain our financial strength by managing our balance sheet efficiently.

And as I said, our fixed term and hedged position means that we are less exposed to higher interest rates when taking a medium term view. We have plans to recycle capital this year, but we are mindful of managing investment disposal timings with the delivery of income from our developments. And with investors likely to be pausing for breath over the summer months, any disposals are therefore likely to fall towards the latter part of the year. Our longer term guidance on disposals remains at GBP 100 million to GBP 200 million per annum. We intend to continue investing for growth, ensuring that we continue to maintain strict financial discipline around our deployment of capital.

We maintain our development CapEx target for 2022 of GBP 350 million to GBP 400 million this year. From a yield on cost perspective, we maintain our target at the lower end of our 6% to 8% range in the near-term, with rental growth continuing to act as a key mitigant to cost pressures. I've set out how a large part of the expected acceleration in earnings growth for 2023 and 2024 has already been secured and therefore is significantly derisked. And with the strategy founded on income quality, alongside a highly flexible growth engine through development, we expect this to translate into attractive returns over the longer term. So that concludes the financial review, and I shall now hand you back to Colin.

[Colin Godfrey, Chief Executive Officer]

Thanks, Frankie. Our confidence in delivering the numbers that Frankie talked to is based on our strategy, combined with the continuing strength of our market, and that is what I want to update you on here. As shown top left, a record level of lettings at 22.6 million square feet was recorded in the first half of 2022, 10% up on the first half of 2021. This deep demand has come from a broad range of occupier types. The level of new supply and construction has increased slightly to 33 million square feet as at 30 June.

Much of the supply has been either pre-let or let during construction. Across the market as a whole, 19 million square feet was under offer at the end of the first half, leaving an estimated 5 million square feet of the future development pipeline currently available. Now against this, the level of unsatisfied demand remains exceptionally strong, equivalent to around 2 years of recent average annual take-up. As shown top right, demand and constrained occupational supply have driven down vacancy to a record low of only 1.2%, representing around 5.7 million square feet against a total U.K. stock of around 484 million square feet.

Turning to the bottom left chart, this acute supply and demand imbalance continues to drive rental growth across all 6 regions of the U.K. with investor forecasts strengthening, and we've got plenty of opportunities to capture this. And bottom right, strong investment demand for logistics warehousing has continued. Whilst we saw a slowing of volumes in Q2, the first half of 2022 recorded GBP 4.2 billion of transactions, significantly ahead of the 5-year first half average of GBP 2.7 billion. We believe that there remains a wall of unsatisfied capital seeking investment into logistics real estate given the attractive medium-term attributes offered.

Now as you can see, the long-term structural drivers of our market remain unchanged, with significant tension between occupational supply and demand supporting enduring rental growth. Now against that market backdrop, I wanted to spend some time highlighting the first key element of our strategy, the strength of our investment portfolio, which makes up 91% of our GAV.

Since we launched Tritax Big Box in 2013, we've been disciplined and focused with our aim of creating the highest quality logistics portfolio possible. By doing so, we attract high-quality customers on long leases, providing greater security of income, which we know is very important to many of our shareholders. Nearly 9 years on, our investment portfolio benefits from an increasingly broad range of large, well-known and financially strong customers, as shown here on the left, from a wide range of business sectors that are often market leaders in their field, noting that to ensure resilience through the economic cycle, we've deliberately limited our exposure to SMEs.

Geographically diverse assets, which are well located, modern and highly sustainable, and assets that are crucial to our customers in supporting their complex supply chains. Now ESG is increasingly important in both protecting and enhancing investment value with 95% of our assets rated A to C. We've got limited CapEx requirements estimated at only GBP 4.2 million to ensure that our portfolio meets the minimum EPC rating of B by 2030 as legislated by the U.K. government. Along with the high-quality and modernity of our investment assets, our development activities allow us to integrate ESG performance through the lifecycle of a building, from design to construction and with the objective of reducing embedded carbon and delivering buildings, which are net zero in construction.

We are also working with our customers to reduce carbon emissions from their operations. And our contractors now source most building materials from within the U.K., further reducing the environmental impact and supply chain risk and helping us deliver buildings on time. All our new developments are targeting a minimum standard of EPC Grade A and BREEAM Very Good. We're increasing renewable power and producing biodiversity net gains, and our focus on social impact is supporting communities through job creation and charity partnerships. And this leads me neatly to Slide 17 and the second key element of our strategy, active asset management, which we employ to continually enhance and improve this high-quality investment portfolio.

Activity in the first half has been in line with our expectations, having completed 8 rent reviews relating to 15% of our rent roll and the lease renewal, which have together secured an additional GBP 2.7 million in annual rent. EPRA like-for-like rental growth was 3.3%, noting that most rent reviews are 5 yearly and backward looking. So we expect our rent review performance to improve as we capture recent stronger levels of rental growth and higher inflation. And we have an attractive blend of upward-only rent review types, as shown here on the left pie chart. Over half of our investments are subject to inflation-linked rent reviews.

And thanks to our development pipeline, we've increased potential exposure to open market rent reviews from 36% to 40% of rents over the last 6 months. As the timing, 20% of our rents are subject to annual rent reviews with the remainder reviewed 5 yearly as shown on the right pie chart. The opportunity for income growth comprises several components. As shown here top right, the growth in market rents is embedding within our portfolio with rental reversion up from 6% just a few years ago to 15% as at 30 June. We have plenty of opportunity to capture this reversion as shown bottom bright.

In any given year, we have around 1/3 of the portfolio subject to rent review. In addition, around 18% of our portfolio is subject to lease expiry over the next 5 years. And in the intervening period, we expect rents to continue growing, supporting an increasingly attractive rental reversion. And our development pipeline provides a third way to capture rental growth. Now this is important because our development lettings also create positive evidence that we can use to produce growth from our investment portfolio rent reviews.

So through active management of our high-quality investment portfolio, we're driving both attractive income and capital growth. And here's a case study that brings this to life. It's a great example of our investment activity and active management strategy in action and demonstrates the understanding we have of the U.K.'s logistics market and our ability to capture the increasing reversion within our portfolio. Located in Southampton and let to Tesco, we purchased this reversionary asset at the end of 2020. It was an off-market transaction as we had identified an institutional owner who needed liquidity quickly.

This enabled us to achieve advantageous pricing for a rare cold storage asset in a great location where supply is acutely tight. The lease only had 3 months left until expiry, but our knowledge of the customer and the market meant that we were confident that Tesco would want to stay, but also that there will be strong alternative market demand if Tesco vacated. And I'm pleased to say that the combination of our due diligence, detailed customer supply chain analysis and working in partnership with Tesco has resulted in our securing a new 10-year lease to Tesco earlier this year.

In addition to which, we've increased the passing rent by 23%, thereby creating additional value for our shareholders, both through income and capital growth. So while much of our emphasis is on our development activities, we continue to create opportunities to enhance our investment portfolio through active asset management and in turn, support the ambitions of our customers.

Turning then to Slide 19 and the third key element of our strategy, our significant

development program. Now this slide outlines the scale and indicative timings of our development pipeline. Now I won't dwell here on it as we've covered this before. So please refer to the replay of our development focus seminar, which is available on the Investor Relations section of the Tritax Big Box website. I will, however, reiterate that this is the U.K.'s largest logistics land portfolio, and it gives us the ability to support our customers by creating modern, highly sustainable and well-located assets in a range of sizes and locations.

Now we've guided to a long-term aim of delivering 2 million to 3 million square feet of development starts per annum over the course of the next 10 years. And last year, we announced that we would accelerate this in 2022 in the face of exceptionally strong occupier demand. As to activity so far in 2022, I'm pleased to report excellent progress and strong performance. Actually, the numbers speak for themselves. So let's start with lettings.

So far this year, we've secured around 2.4 million square feet of lettings. Some of these buildings are being constructed now and are reported in our current development pipeline, and some have yet to start construction and feature in our near-term development pipeline. These lettings secured an additional GBP 17.8 million of contracted annual rent, a record first half for us, which, as Frankie, highlighted, will begin contributing to earnings by mid-2023, with the full effect felt in our 2024 earnings as these buildings reach practical completion. Now this strong letting activity significantly derisks our future earnings growth. Turning then to our current development pipeline, shown in the green section on this chart.

Now that captures buildings currently in construction. And here, we're making excellent progress with 2.2 million square feet commencing in the first half of the year, a significant majority of which has been let already. So we are more than halfway to achieving our accelerated target for 2022 of 3 million to 4 million square feet. When adding this to the 1.2 million square feet of construction already underway at the start of the year, we now have 3.4 million square feet in our current development pipeline, noting that 1.8 million square feet is let and will contribute GBP 12.7 million of annual rent. This leaves 1.6 million square feet under construction and available to let, which has the potential to add a further GBP 14.9 million to our rent roll in the near-term.

And looking further out to our near-term development pipeline at the bottom here related to construction, which we anticipate starting within 36 months from now, this has the potential to produce nearly 9 million square feet. And we're making good progress here also having already achieved planning for and pre-let 0.6 million square feet that is set to commence construction in the second half of this year. Critically, we've been able to offset much of the inflationary pressures that we're seeing with higher rents, thanks to the strong market fundamentals that I've already mentioned.

Now as Frankie stated, this means that our projects remain within the lower end of our targeted 6% to 8% yield on cost range supporting attractive returns and our decision to accelerate development activity in 2022. So our development program is making excellent progress, on track with our delivery expectations and we are optimistic about the potential opportunities looking forward.

So to summarize and reiterate what I said at the start. We remain as confident and excited today as we did in March. As these results show, we're delivering on our strategy. The occupational market remains exceptionally strong, supported by long-term structural drivers. Our rental reversion and new development lettings are embedding continued high-quality growth in our business, which further reinforces the resilience of our portfolio assets and recurring earnings.

And we have the financial strength to continue to deliver our strategy and take advantage of opportunities in our market. Thank you for listening. Ian will now open the call for your questions.

[Ian Brown, Head of Investor Relations]

Great. Thanks so much. So there are 2 ways to ask questions. You can put your question through on the webcast. There should be a text box where you can type the question.

[Operator Instructions]

We'll begin with the webcast, just want to wait for some questions coming through on the phone. First question on the webcast relates to yields. Question is with risk-free rates rising, what are your views on the future path of logistics yields?

[Colin Godfrey, Chief Executive Officer]

Okay. It's Colin speaking. Well, look, I think like a lot of markets, we think investors are pausing their activity to see where things settle at the moment. In the last few weeks investment activity has reduced. Buyers have been pausing for breath with owners sitting on their hands.

And it's difficult there form a very real clear view on current pricing given the limited evidence that we have in the marketplace, let alone trying to speculate on future pricing. However, I think at the moment, we're not seeing any signs of distress in our market or forced selling. That's the first thing to say. We are aware of some transactions that haven't progressed because the buyers and sellers haven't been able to agree terms and there has been some sort of price chipping potential. But just to counter that, last week, by way of example, we are aware of the completion of investment transaction.

And if you sold a portfolio of 7 assets, from memory, I had a 10-year vault with a mix of review types of credit qualities. And that was a 3.5% net initial yield, which is very strong and, I think, sort of underpins the sort of levels that we were seeing in the first half. Overall, of course, much of this is going to depend upon the cost of capital. And obviously that's increased significantly over the last 6 months. But I think the key point here is the quality of our own portfolio.

We think that our assets are highly liquid and will be very resilient. And of course, one's got to have a mind to the structural driver is that if our market is supporting occupational demand and rental growth, and they're still exceptionally strong. And these fundamentals are really likely to continue to attract investment interest, I would say. We are aware that there's still a lot of uninvested capital destined for logistics real estate. So I think the outlook remains, in the medium to long-term, remains very positive.

But I think taking a pause in the near-term, hopefully, that sort of covers that point.

[Ian Brown, Head of Investor Relations]

Great. The next question is, if all the caps were met, what would your cost of debt rise to you?

[Frankie Whitehead, Chief Financial Officer]

Yes. So the average cost of debt as at 30 June was 2.5%. On the interest rate cap side, the strike rates, it's just outside of where we were at balance sheet date. So they all kick-in in the short-term and the average cost of debt would move to around 2.6%, so not significantly above where we were trending at 30 June.

[Ian Brown, Head of Investor Relations]

Okay. Great. Next question relates to expectations for development activity. Question is, what are your expectations for development activity in 2023? Will you maintain the current accelerated levels?

[Frankie Whitehead, Chief Financial Officer]

Thanks, Ian. So heading into 2022, we obviously saw an increased level of occupier demand for our space. And with our portfolio well-positioned, we increased our expectations for this year to 3 million to 4 million square feet. I think we've demonstrated this morning that we're on track to meet that. Our longer term guidance remains at 2 million to 3 million square feet per annum, although we continue to position our portfolio to allow us to accelerate that should the occupation demand be there.

So the flexibility we have in the land pipeline will remain driven from the bottom up, and we will react to any occupational demand in order to increase that should that be there.

[Ian Brown, Head of Investor Relations]

Great. Next question. Congratulations on a great set of results. What is the average length of your fixed debt? How confident are you, you can achieve your rental increases in this uncertain macro environment?

[Colin Godfrey, Chief Executive Officer]

Okay. It's Colin. Should we maybe take that in reverse order? Should I start, Frankie?

[Frankie Whitehead, Chief Financial Officer]

Sure.

[Colin Godfrey, Chief Executive Officer]

So probably the first way to sort of think about this is to talk to our like-for-like rental growth. Look, I think looking at the composition of our portfolio, we've got a really good balance of rent reviews in the portfolio, 40% linked to open market and 50% of our rents are inflation-linked. Now the open market reviews are uncapped. It's typically 5 yearly rents, and most of our inflation-linked leases do have a cap and collar arrangement, of course. We've delivered, as I said in the presentation, like-for-like rental growth of 3.3% in the period.

And just to remind you, that is a 5-year backward-looking process. And over that 5-year period, the average underlying CPI inflation rate was 3.1%. So to that effect, we're sort of on track. But probably more importantly is the way that we think about the current capture, and it's almost a case of sort of catching up with and this labor timing point in relation to how we're capturing what is happening in the market right now. So we think about that in the context of our ERV growth, which has been progressing very well at 6% for the last 6 months, up 14% over the last 12 months.

And I talked about embedded reversion in our business at 15%, which, of course, to some degree, embeds the ability to capture future growth in our business without reliance on further growth in the market. So it's very much a timing point between underlying market growth and the path to us securing that reversion. In addition to which, we do have opportunity to capture 18% of our portfolio with lease expiries during the course of the next 5 years. So I think our investment portfolio delivers strong high-quality income growth potential given the relatively low-risk and high-quality of sort of foundation of our assets. And I think probably the most important factor is the underlying income growth potential of the business, which, of course, includes asset management and the good work we're doing in development and the ability to drive those rates through in terms of rental and development.

And just probably to mention that again, to give you a bit of a feel again the last 6 months against our target rental tone that we set ourselves, and particularly, say, for our speculative developments, which we've leased in the intervening period, the rental term we've been achieving is sort of 10% to 20% ahead of target levels. So you can see the sort of, if you like, a growing curve of opportunity from the current like-for-like level we're achieving as we sort of -- as we captured the growing levels of rental growth that we're seeing in the market.

[Frankie Whitehead, Chief Financial Officer]

And just on that first part of that question, the average length of the fixed component of our debt book, which minus 70%, it's 7.5 years, including the full debt book, the average maturity is 6.2 years.

[Ian Brown, Head of Investor Relations]

Perhaps continuing with the question around the current all-in marginal cost of debt with color on different types of debt would be appreciated. Was the rate on the GBP 250 million RCF maturing in 2024? And what are your thoughts on replacing us? And what rate would you get on that today?

[Frankie Whitehead, Chief Financial Officer]

There's a few elements there. I think just to reiterate what we said in the presentation, I think we're well set. The work that we've undertaken on the capital structure and the debt book, particularly over the last few years, puts us in a good position. 6.2-year average maturity, 70% is fixed, and the balance is hedged at the moment. So a long duration on that.

Speaking to the space 2 components of the debt side there, debt capital markets first, clearly, underlying interest rates have moved out as our bond spreads. We aren't immune to that. That will affect us on any new debt that we look to execute. I would say that for medium to long-term debt today, we would be pricing in the very high 3s, low 4% since that is a move up from where we were 6 months or so ago. I think the other point is the more flexible debt that's so the traditional corporate banking side.

I would say that the cost there has been a lot more stable. So we will continue to look to fund our strategy through a blend of those forms of debt, debt capital markets and traditional corporate banking. On the banking side in terms of the refi in 2024, to remind you that we had a positive move in terms of the outlook of our corporate credit rating, which will all feature in this. I would say where we stand today that the margin will be very similar to when we originally agreed that a few years ago when it comes to refinancing, that's how we're currently seeing that.

[Ian Brown, Head of Investor Relations]

Okay. Look, I think I'll have one more question from the webcast, and we'll go over to the time we've got a few questions waiting there. A couple of questions. I'll aggregate them here. But could you give more color on tenant demand by sector?

And do you think that demand is more same now given the greater breadth of tenants looking to take space. And a couple of questions around the reliance of just on e-commerce and how do you plan to reduce such dependency as was visible with Amazon led stock price decline over the last few months. So 2 questions there.

[Colin Godfrey, Chief Executive Officer]

We'll give it a day. So in the -- it's really interesting this -- in the first half, take-up by sector, the largest component was the third-party logistics sector at 28% of take-up. Interestingly, online retail only comprise 14% of take-up. And I think that probably talks to the Amazon point we can come back to that in a moment. The other retail was 9%. Food was 13%. Manufacturing was 20%, construction 3%, and there are a number of others in there that comprise the remainder, which is 14%.

It's really interesting. I think when we reflect on sort of the effect of Amazon's comments, it's important to remember that we do have the largest logistics-focused land portfolio in the U.K., which is geographically diverse and in strong locations. And it does provide us with really good real-time insight into what we're seeing in the occupier market. And if we were to sort of measure the occupational demand of our -- for our assets, I think Hamid at Prologis said, 12 out of 10 moving to -- 10 out of 10 or something. But I would probably say it's sort of been an exceptional market at 10 out of 10 for the last 12 months, and we're probably now just edged at very slightly sort of 9 out of 10, but it's still very, very strong.

If you look at the composition of that interest that we are seeing at the coal face, it's very deep, it's very broad. There are -- I think we're seeing the effect of Brexit coming in there a little bit reassuring you can perhaps touch on that a bit later. But there are strong structural reasons why we're seeing a broad range of occupier types. And that, I think, is really quite gratifying. And it stepped up really as a consequence of -- as we come out of lockdown and COVID and companies looking to invest for the longer term.

So I think a healthy sort of broad range. And if we think about the sort of the timing of that take-up, we are leasing our buildings, particularly quickly. Now if you think about the speculative development program by way of example, I think Savills reported the negative 2 months which is the sort of first time that negative number has been reported in history for spec lettings. And that means that the average speculatively developed building has been letting up 3 months prior to practical completion. Well, for our own activity in the first 6 months of this year, that equivalent numbers have ranged from negative 6 months to negative 12 months.

In other words, we're letting our buildings up incredibly quickly. So I think it talks to not only the breadth, but also the strength and depth of the market, absent perhaps Amazon's reduced level of activity in the marketplace.

[Ian Brown, Head of Investor Relations]

Excellent. Well, I think we'll turn to the phones now. I think we've got a number of questions there. But first I think is from Neil Green at JPMorgan. [Operator Instructions] Neil, can you hear us?

[Operator]

Neil Green, Your line is now unmuted.

[Neil Green, JPMorgan]

Just one question really. Obviously, with the rental growth and the uplift on renewals you're seeing. I'm just wondering if any tenants are talking about the affordability of rents, especially given the uncertain economic outlook, please?

[Colin Godfrey, Chief Executive Officer]

Yes. To be honest, Neil, no, not really. I mean we have really high-quality buildings. Typically, they're led to large scale, robust occupiers that are recognizing the importance and need for these buildings in producing solutions to supply chain issues that they have. It is worth mentioning that we've done some in assets on this.

And if you look at the rental tone, by the way of example, for a retailer that it can sort of amount to something like 1% or even less of their total operational cost. So the much bigger component part of their cost is, for instance, in transportation and labor and those sorts of things. So if their rent goes up by 10%, sort of potentially 10 bps on the bottom line. It's a relative -- we're talking about relatively small increase in costs here. And in the context of that, it's much more important that they can solve sort of key things that they need to sell for in their business to optimize their business operations to capture those economies of scale, tent cost savings, the flexibility that these buildings provide.

And as I said, the solutions to supply chain issues. So we're not seeing much of that. And it's an interesting question because obviously, that's in the context of quite significant inflation that we've seen coming through to cost/price inflation and particularly in the U.K., I think, on top of the European scenario in labor.

And more recently, and there has been a bit of a delayed reaction to this because, of course, there's been an educational component to it that our customers do recognize that we are simply looking to pass on to them, the cost increases that we are seeing. And I would say, if you look at the stats and the level of demand we're seeing and the conversations we're having, they are fully appreciative of that, and they're recognizing that this is just part of the backdrop of the economic environment.

So short answer is no, we're not seeing much pushback on that at all.

[Operator]

The next question comes in from the line of Paul May calling from Barclays.

[Paul May, Barclays]

Just a couple for me sort of probably a number of questions, but focus on the average cost of debt. I appreciate you said sort of on the bond market, probably looking at high 3s, low 4s. On the bank market, you mentioned I think margins flat, but I assume cost is up sort of 170 basis points relative to where we were back in the last year, just looking at the move in LIBOR. Is that sort of what you're seeing as well in terms of conversations? And then also on your margins, we're hearing from some banks that they are looking to basically expand margins.

I imagine margins have got compressed because of the low cost of the corporate bond market. That's obviously got significantly higher margins now. So we're hearing from some banks that are looking to expand that. And then finally, on the cost of debt, I think if you look at your first half financing costs and all the various bits and pieces that go in there, you annualize that, your debt book hasn't really changed sort of from year-end to the first half. So dividing those 3, we get to more like a sort of 2.7, 2.68 cost of debt on the proven finance side.

Is the average cost you mentioned net of capitalized interest? Or sort of what's it sort of excluding, I suppose, to get down to sort of the 2.5%? Start with those on the debt side and then I've got a couple of questions on the development side.

[Frankie Whitehead, Chief Financial Officer]

Trying to pick those up in order, Paul. On the banking side, I would say margins at the moment seem to be relatively stable, so versus the sort of 4% that I quoted for the longer term tenure. We've been in around the 2% on the floating rate side, obviously, caps in place on that. So a blend of those different sources going forward, looking to finance our strategy. Cost of debt, I think we noted in the statement, the cost of debt that we quote is based on all debt commitments rather than drawn debt.

So that will be the difference between your 2.7 and the 2.5.

[Paul May, Barclays]

Cool. Perfect. And on that -- sorry, on the floater the 2%. So your margin -- I mean, you're looking at LIBOR is going 1.9-ish I think, something around there, 3-month LIBOR. Is that sort of margins are basically 0 effectively in -- on bank debt?

Or should we be thinking sort of 100 basis points or so margin on top of the 1.9 plus a little bit on the fee side, all-in cost?

[Frankie Whitehead, Chief Financial Officer]

Sure. So the margins are in around the 100 basis point mark you mentioned. We're borrowing over 3 months on the flowing.

[Paul May, Barclays]

Okay. Okay. Cool. And then on the development side of things, just trying to get a sense of, I suppose, timing of income, and I appreciate you gave quite a bit of information, I think, on Slide 11, as some sort of indication as to when that's likely to come through. But just to get a sense of where your top line could be growing sort of through 2023 effectively.

And I appreciate a lot of it is probably second half loaded. I think it's probably fair to say in terms of that coming through. But just to get probably some millions of pounds around the sort of numbers would be much appreciated.

[Frankie Whitehead, Chief Financial Officer]

So that's something to some as well. So looking at Slide 11, Paul, there, obviously passing rent and just stepping through the slide, passing rent, GBP 198 million at June, the GBP 13 million, and GBP 5 million and the GBP 18 million that secured under construction or should commence should all be passing by Q3 2023. So passing rent Q3 2023 in and around the GBP 216 million from development, actually, there are rent reset things between now and then as well. The GBP 15 million that, again, currently under construction that's unlet. Those buildings -- again, there's a bit of a range.

But again, by summer of next year, those should all have reached -- factual completions, but subject to letting activity on that between now and then, some of that or all of that could also be passing. And then the GBP 4 million that we are due to start in the second half of this year, that's more like an end of 2023 completion attached to that. So hopefully, that gives you a feel. But broadly speaking, a large part of that income, you can see on the early phase of that chart there should be flowing by Q3 '23.

[Paul May, Barclays]

Perfect. And in terms of the reversion potential of GBP 30-odd million, I mean simple over the next 5 years, you'd expect to capture the majority of that? Or is there any -- I appreciate you've obviously got the timing of sort of rent reviews and various things coming through, but is a broad sort of GBP 5 million to GBP 6 million a year of reversion, not a bad starting point.

[Frankie Whitehead, Chief Financial Officer]

Yes. I think that's probably fair, Paul. The only thing I would say to balance that a little bit that obviously, the reversion fits within specific assets. So -- and if you're sitting so francs with an inflation in rent review and subject to a cap, you may not be able to capture the full amount of the reversion appertaining to that property within that 5-year time frame. It could take a little bit longer.

So it may not all be absolutely delivered within the time here -- 5-year time horizon. I mean you've got the slide there, which shows the timing of our rent reviews with 20% in '23, 32%, '24%, 27%, '25% and 43% of our rents in '26. The -- I suppose the biggest composition of that is RPI-linked growth in that time frame. But on top of that, we've got lease expiries, roughly ranging sort of between 3.5% and 4% of our rent roll in each of those years as well. So it does range between sort of 25% and 47% overall in each of those years.

Hopefully, it gives you a bit more of a feel for the capture. But broadly, I think that's a sensible assumption, yes.

[Paul May, Barclays]

Yes. No, exactly. It's sort of the -- it's trying to tally and reconcile the various numbers because as you say, we don't get obviously the exposure to the lease-by-lease item. So just sort of that headline movements are usually quite a useful start point. So much appreciate it.

[Operator]

The next question comes in from the line of Colm Lauder calling from Goodbody.

[Colm Lauder, Goodbody]

I have a couple which actually follow on from Paul's just on the inflation-linked reviews and how that might be evolving or changing. So firstly, and you can link 2 questions together. Firstly, what's your average cap across that 52.5% chunk of the portfolio, which is on inflation in leases? And then for new releases that you are agreeing, are you seeing any changes or tweaking to those cap and collar ranges given obviously higher at rates of current inflation?

[Frankie Whitehead, Chief Financial Officer]

Yes. So the average cap is 3.4%. But that is expected to and will grow. Our partly through our development activity. I mean, you've seen that during the 6-month period to 30 June, we increased our exposure to open market rent reviews from 36% of our rents to 40% of our rents.

That was a conscious decision. If we think about the way that we are conducting rent review negotiations right now, on our developments. There is a hierarchy of preference, which is really responding to the way we think about the market. So in the first instance, our preference is a hybrid rent review, essentially the higher of open market, which is uncapped or inflation-linked, which will be subject to cap and collar. If we can't achieve that, then we're typically reverting to an unrestrained open market review profile.

And if we can't achieve that, and if we're desiring of capturing the occupier and we're prepared to let that building on an inflation-linked lease, then the cap and collar arrangements will be much higher. And just to give you a feel, we are -- and we're not on our own here. We've seen these sort of numbers move up to cap-let 5, collar-let 2, cap-let 6, collar-let 3, this sort of thing. I think in recognition of where inflation has been running despite the fact that -- I think this is a general expectation that inflation will soften off again. So those sorts of bandings, I think our expectation is that they will be fit for purpose in underpinning quite attractive rental growth for the medium to longer term.

[Colm Lauder, Goodbody]

Okay. Useful. And again, a similar question, just looking at the yield profile then in terms of your credit at CBRE might be giving you for the various types of yield structures. Is that anything you can guide us in terms of sort of the divergence in yields? Or has there been any increased divergence in yields between the open market rent reviewed, book versus the inflation-linked book?

[Frankie Whitehead, Chief Financial Officer]

I can't give you specifics on that breakdown, but I can give you a sort of sentiment-driven answer, Colm. So if we sort of go back 24 months or so and more, the market typically was -- I think the crude is a possible way paying a bit more for inflation-linked reviews. I mean, we were obviously in a market where inflation was very low and inflation it reviews typically provide a high level of transparency and clarity of delivery because you capture that review real-time year-on-year during the 5-year time horizon. Now that compares to open market rent reviews, which can take some time to negotiate and agree with the customer. And in absence of agreeing it, it can go to arbitration or independent expert.

Now you get back rent and you get late payment interest and all of those sorts of things, but the transparency and timing of delivery of that growth can be delayed on like market revenues. We've moved obviously to a new market dynamic. And I think in this new world, the market is paying more attention to and paying more for the ability to capture the stronger rental growth that it's seeing evident in the market right now, preferring that to some degree to the constrained profiling of inflation-linked rent reviews because, obviously, rental growth has been running very fast, partly driven by the underlying inflationary pressures that we talked about, particularly cost/price inflation, which has been feeding into the rents that developments have been creating. And of course that is creating probably the best new and real-time evidence for the rent reviews to take for comparable events in that review process.

[Operator]

The next question comes in from the line of Pieter Runneboom calling from Kempen.

[Pieter Runneboom, Kempen]

Quick one from my side. You already briefly touched upon speculative part of your pipeline. This currently leads to around 50% pre-let. Is it fair to assume that all of this will be leased out upon completion?

[Colin Godfrey, Chief Executive Officer]

Yes. Of course, Pieter, I mean, our expectation is that -- I mean, I think we don't have a crystal ball, but we approach speculative development with very conservatively. And on an information-based approach -- so I think the first point of reference is, as I mentioned earlier, the speed at which the lettings that we have achieved on our speculative development program have been very, very fast, minus 6 months to minus 12 months from the target data practice completion. That is almost unheard of. Some of the buildings being let up almost instantaneously when we break ground.

Of course, we've still got further spec coming out of the ground. In some instances, we are seeking to hold back on negotiations, preferring to capture the stronger rental growth during the course of the construction progress. And of course, one of the things that we can benefit from here is locking into a fixed price building contract at the start of speculative development and then benefiting from the upward rise in rental growth we're seeing in the market subsequently compared to build to suit scenarios where we're pre-letting the building, we're essentially back to back the pre-let lease with the fixed price building contract and therefore, know exactly what our profit is on day 1. But the other thing I think to mention about the spec program is that we don't just put up a building in the hope that a tenant is going to come along and lease that in the future. We will only make a speculative starts.

And -- but by the way, the spec buildings are typically the smaller buildings in our program. There is a geographically diverse range. So there's a risk profiling geographically across our portfolio. And finally, we don't start structure and speculative buildings unless we have line of sight on at least 2 occupiers who we know have a requirement for that size of building approximately in that location, and we've got very, very clear understanding of any other sites that we might be in competition with or whether we're the only show in town to intends and purpose, the timing requirement of those occupiers wanting that building. And our view on the success rate of achieving letting to one or more of those occupiers.

Now obviously, if you've got competitive tension, that helps in terms of your -- the rental tone as well. So this is a highly informed process that we embark upon in our spec program. So we don't really view it in the way that much of the market considers spec, it's not really spec in that -- it's highly educated development. Hopefully that gives you a good feel and some comfort.

[Operator]

The next question comes in from the line of Rob Virdee calling from Green Street.

[Rob Virdee, Green Street]

Question is on online retailers and not just Amazon, but are you seeing any reduced requirements for space for them. And the context of that question is really how the second derivative of e-commerce penetration in the U.K. is slowing and all that we read about inventories for some of these retailers being overstocked. That's the first question.

[Colin Godfrey, Chief Executive Officer]

Yes. So would you like us to answer that one now and then?

[Rob Virdee, Green Street]

Yes, please, yes, if you can just review a couple.

[Colin Godfrey, Chief Executive Officer]

Yes. Look, I think let's sort of -- let's paint a picture of time. Pre-COVID online sales were 19% of total retail sales. It spiked at around 42%, depending on which metric you look at during lockdown. And they came back down to sort of the low 30s.

Now whilst the rate of growth has naturally slowed, as one would expect, there is still a continued trend to growth on online, and we expect that trend to continue with the continued shrinkage of the High Street. All of our major customers that we're talking to who were already occupied in our portfolio. And I mean just to give you a feel by the way of example, of those customers that we're currently talking to on our development program, it's pretty well 50-50 between the buildings that we're talking to existing customers on and the buildings and sites that we're talking to potentially new customers on. So we have a really good cross read as to how the market is -- what the market is thinking right the way across all the sectors, including online. And there's still quite a lot of expansion being planned.

And partly, this is to do with some of the things I mentioned earlier about efficiencies, cost savings, economies of scale, need flexibility, the move to increase levels of automation to enhance the speed and reliability that these companies are offering their customers. So the large-scale big box logistics buildings are very, very important in delivering that component part here, the hub in the supply chain framework. And of course, supply chain is becoming increasingly complex. So I think you will see online continuing as a very important component part of ongoing take-up in this market. But as I said earlier, there's not an overreliance on it because it only comprised of around 14% of total take-up in the first half of this year.

So I think we've got a really good balance. Coupled with some of the other points I mentioned earlier, such as Brexit, et cetera, and sort of the concept of the sort of the deglobalization, to some degree, accelerated by Brexit. And the fact that, of course, because of Brexit, we now have an exacerbation of labor supply issues in the U.K., which again are playing to these larger buildings and automation even more so than they were before. So in some respects, this is like a real-time imperative for automation to supplement the low labor availability levels that we are seeing. And of course, the increase in the cost of labor being a significant component part of that cost/price inflation I mentioned earlier.

So it will continue to be an important part, but there's not an overreliance on it. So hopefully, that gives you a bit of a feel for how we see that section of the market.

[Rob Virdee, Green Street]

Now just moving a little bit on to the general market and expectations for spec supply for everybody else. I was just wondering, given all the macro challenges that you've talked about, do you see expect development for others coming down?

[Colin Godfrey, Chief Executive Officer]

Look, I think the same is a market -- I would describe the market has been really quite disciplined. And I think we've seen that in the recent past. Firstly, if you look back into the face of and through the last GFC, number one, the level of debt that was supporting developers in the market was much higher than it is today. Secondly, the number of trader developers has reduced dramatically. Some of those have been subsumed into larger investment businesses.

Our own business is a prime example of that, when we acquired the Symmetry portfolio in February 2019. And there's a much more transparent level of data available now in the marketplace. So developers are pretty -- been quite cautious. But -- and the other thing, of course, is that they haven't built up huge land banks. And of the land that was acquired into the face of this sort of explosive growth in occupier demand, quite a lot of that has been developed out already.

Now any developer out there is not going to want to run that well dry. You need a geographically diverse pipeline of opportunity that you can offer the market. No one wants to sit. They're paying their development team without a planning consented bucket to draw from. But that bucket has been eaten up very, very quickly because of the rates of lettings that we've seen in the marketplace in recent times.

So we are seeing quite a lot of sensible activity from developers. And if you look at the stats, we've not seen an explosive level of supply. And indeed, we're not expecting to see that. And to some degree, that's sort of embedded in the way that we think the barriers to entry in the market and the way that the planning system works, and it's very, very crude. It kind of pops out the similar levels of planning consent every year.

And of course, that is the sort of the starting point to the ability of the market to produce supply in the first place. So the short answer is no. We're not expecting to see that.

[Rob Virdee, Green Street]

And then just finally, just wondering about any conversations you're having at the moment with tenants on rising energy costs. And I'm thinking here because you brought it up cold storage. And are you seeing any signs of -- any distress from some of these tenants or deteriorating occupier health there.

[Colin Godfrey, Chief Executive Officer]

Not so much distress. I think it's more a case of a recognition of the challenges that they face in a number of areas and power -- and the increased cost of power being one of them. And of course, the positive element there is that we -- as an owner of modern, very large buildings with large REIT status can help provide a solution to that. Now there's 2 components to this. Firstly, the way we're doing in terms of the way we think about ESG, and this is once more competitive part of that.

And there's a lot of things that can go into that, such as LED lighting, rainwater harvesting, et cetera, et cetera. But the big win really and the relatively easy win is solar. So we've made certain proposals for every single one of our occupiers on every single building, is a rollout program, is really good and increased take-up. Obviously this provides occupiers with cheaper power. It also meets the areas of the objectives significantly.

So that's a really positive attribute that sort of helps to deal with that problem. The other thing that we are doing is that we've employed a power guru I'd like to call him, in Tim O'Reilly, who we poached from the National Grid. He was their Head of Strategy, a new product development. He brought in the interconnector from Norway. And he's helping us unlock sites, bring improved power delivery for our customers and open up sites that currently don't have power capability.

We think that power is going to be an increasingly important feature of occupational thinking in the future, particularly as we see a reliance on fossil fuels reducing and an increase in EV both for cars, for staff, but also for vans and HGVs coming to these buildings. And that will be a very, very significant draw on electricity. And meeting that challenge, which the government has made very clear, it needs to be provided by the private sector significantly given that it's going to say many, many, many years for the new focus on nuclear to kick-in, and that's assuming that it doesn't reverse gear in relation to the political agenda. So we do need to be thinking about and putting in solutions for our customers for the long-term. And that is something we're working very hard in terms of that intelligence-driven program and all that we're doing in other parts of our business in understanding about battery technology.

So I won't bore you now, but happy to have a coffee with you at another time to explore that test.

[Rob Virdee, Green Street]

Yes. Definitely, I think thinks more into it, but thank you.

[Ian Brown, Head of Investor Relations]

Look, on that note, I think that concludes the Q&A session. That's all the questions from the phone. I'll just remind everyone that this session is being recorded. There will be a replay on the website and a transcript made available afterwards. And if you do have any further questions, please do drop us an e-mail.

I'll just hand back to Colin for quick closing remarks.

[Colin Godfrey, Chief Executive Officer]

Yes. Look, thank you very much, everyone, for taking the time to join us this morning. We really appreciate your continued support for the company and your interest and for your excellent questions, and wish you a good rest of the day. Hope to see you soon. Bye-bye.