MLI Trading Update Q2 FY23
28/10/2022 07:00
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RNS Number : 4024E Industrials REIT Limited 28 October 2022
INDUSTRIALS REIT LIMITED
(Registered in Guernsey)
(Registration number 64865)
LSE share code: MLI JSE share code: MLI
ISIN: GG00BFWMR296
("Industrials REIT" or the "Company")
28 October 2022
MLI trading update Q2 FY 2023
Strong tenant demand and efficiencies from Industrials Hive
Industrials REIT, the UK multi-let industrial ("MLI") property company, today
publishes a trading update(1) for the period 1 July 2022 to 30 September
2022 and up-to-date information on transactions and rent collection across the
Company's whole portfolio.
Commenting on the trading update Paul Arenson, CEO of Industrials REIT,
said:
"Tenant demand has continued to be strong, with the average uplift in rent
upon lease renewal or new letting rising to a new high of 30% and allowing us
to deliver our eighth successive quarter of over 20% growth in this key KPI.
We have also benefitted from the growing efficiency of our Industrials Hive
platform which has enabled us to complete 20% more lettings in this quarter
than any before, helping to capture and capitalise on this demand.
"This underlying strength in occupier demand gave us full conviction to take
our planned proactive steps to actively forfeit and replace nonperforming
tenancies that had been protected by the pandemic moratorium for the two years
ended 31 March 2022. As a result of this replacement programme taking place in
the quarter, our occupancy and like for like passing rent levels decreased
marginally by 0.7%. We are confident, given the strength of occupier demand
and the levels of interest already received, that this will reverse once the
vacated space has been relet to new customers paying higher rents and with
more sustainable business models.
"Notwithstanding this, underlying annual growth in like for like passing rent
continues at approximately 4.0% per annum, after adjusting for a single large
outstanding rent free on a renewal which was recently completed.
"Investment activity has largely been put on hold whilst we see how capital
values react to the changes in interest rates, higher inflation and recession
risk. We continue to watch the market carefully and believe that attractive
and accretive acquisition opportunities will emerge once the market has gone
through a period of repricing.
"Demand for MLI remains robust and we can continue to lease space at
attractive rents with minimal incentives. We anticipate that the trading
environment will become more difficult over the next 12 months, but to date we
have not seen any evidence of this in our portfolio and, with our strong
balance sheet, feel well placed to weather the challenges that may lie ahead."
Key metrics
Quarter Ended
Key metrics Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23
Occupancy 93.1% 93.7% 94.7% 93.9% 93.8% 93.8% 93.5% 92.8%
Change in passing rent 3.6% 5.6% 8.0% 5.0% 4.8% 4.4% 3.2% 2.7%
(L4L over 12 months)
Change in ERV 3.8% 5.5% 5.5% 5.1% 8.0% 4.3% 11.4% 12.3%
(L4L over 12 months)
Average uplift in rent on letting or renewal 25.0% 20.0% 21.0% 21.0% 21.6% 22.3% 27.3% 30.4%
Demand for MLI space continues to outstrip supply
· The average passing rent increased by 30% on the aggregate of all new
lettings and lease renewals, the highest growth rate achieved to date and
surpassing the previous record, achieved last quarter, of 27%. The growth
was driven by average uplifts of 30% and 31% for renewals and new lettings,
respectively (previous quarter: 30% on renewals, 23% on new lettings). This is
the eighth successive quarter of +20% average uplifts and is driven by a
combination of the strong reversionary potential within the portfolio, with
average passing rents lagging estimated market rental values on leased units
by 19.6%, and the continued occupier demand for good quality MLI space
(previous quarter: 19.0%).
· We also grew the number of letting transactions, with 108 completed
during the quarter for a combined rent roll of £2.6 million (previous
quarter: 89 lettings and £2.1 million). This comprised 71 lease renewals
and 37 new lettings across a total of 383,704 sq ft (previous quarter: 62
renewals and 27 new lettings across 307,226 sq ft). A further 10 lettings
exchanged during the quarter across 26,000 sq ft (previous quarter: 11
lettings across 19,350 sq ft), taking the total number of leases exchanged or
completed during the quarter to 406,000 sq ft (previous quarter: 327,000 sq
ft).
· Like-for-like ERV growth across the portfolio was 1.1% over the
quarter and 12.3% over the last year (previous quarter: 6.4% for the quarter
and 11.4% over the year). ERVs on our MLI units remain highly affordable at
an average of £6.87 psf, compared to an average passing rent of just £5.74
psf (previous quarter: £6.76 psf(2) and £5.72 psf(2) respectively), with the
cost of the average new lease signed this quarter equating to just £2,000 per
month in rent for a 3,550 sq ft unit.
· At 30 September 2022, there were 321,000 sq ft of lettings under
offer across 59 transactions (previous quarter: 388,000 sq ft across 81
transactions), of which 160,000 sq ft related to new lettings and 161,000 sq
ft to existing customer renewals (previous quarter: 148,000 sq ft of new
lettings and 240,000 sq ft of lease renewals).
· The average lease signed during the quarter was for 4.4 years with a
tenant break option after 3.3 years, whilst the average leasing incentive
fell to a new low of 19 days' rent free on average (previous quarter: 4.6
years, 3.4 years and 28 days, respectively).
· 68% of completed leases were contracted through Industrials REIT's
short-form digital 'Smart Leases' (previous quarter: 62%).
· 79% of leases signed included at least a 3% annual uplift in rent
throughout the term of the lease (previous quarter: 76% of leases signed).
Occupancy down 0.7% as we actively replace non-performing tenancies that were
previously protected by the pandemic moratorium.
· Occupancy across the MLI portfolio (adjusted to exclude yard areas) was
92.8% at 30 September (previous quarter: 93.5%(2)). Following two years
where we have been unable to forfeit leases for non-payment of rent, this
quarter we executed our previously stated plan to proactively take back space.
This comprised a programme of forfeitures across 54,000 sq ft of space
(equivalent to 0.75% of total floor area) involving those customers whom we
have been unable to find solutions with and who were either no longer in
occupation or were unable or unwilling to meet their future rental
liabilities. With strong underlying demand for MLI space, we are confident
of reletting these units over the course of the coming months, with the
benefit of collecting higher rents from new customers with more sustainable
business models.
· Like-for-like passing rent over 12 months was +2.7% (previous
quarter: 3.2%). During the past six months, we have let or renewed several
of our biggest units (see Asset Management Highlight below), meaning that on
30 September we had several large units enjoying rent free periods.
Like-for-like passing rents over 12 months were up 4.0% when adjusted for our
largest rent free, in Ashby-de-la-Zouch, which expires in November this year
(previous quarter: +4.5% when adjusted for Ashby-de-la-Zouch).
Notwithstanding this, due to the decrease in occupancy, the quarterly
like-for-like passing rent fell 0.7% (previous quarter: +1.5%).
Improving leasing efficiency from Industrials Hive
· Industrials.co.uk website users reached a new high this quarter, up
19% vs the previous quarter, and up 9.0% on a 12-month rolling basis. The
growth in visitor numbers is down to continuous improvements to our customer
facing industrials.co.uk website, including more targeted advertising through
social media, optimised search terms and enhanced user experience when
navigating the site.
· Enquiry-to-lead qualification conversion rates continue to improve to
12%, whilst 83% of qualified leads going on to take a viewing on a rolling
12-month basis (previous quarter: 10% and 84% respectively).
· Total viewing/building tour numbers were 179, the best period to
date, with 26% of viewings resulting in a new letting on a rolling 12-month
basis (previous quarter: 172 viewings with a 27% conversion rate to
letting).
Asset management highlight
We completed the letting of the largest vacant space in our portfolio at
Huyton Business Centre in Huyton, Liverpool.
The space extends to just over 57,000 sq ft and was vacated at lease expiry in
September 2021. Following a full internal and external refurbishment, the unit
was let to a cash'n'carry business in August 2022 on a new five-year lease
with tenant only break option after two years. The new rent is in line with
ERV and reflects an uplift of over 49% to the previous passing rent.
In aggregate, we have renewed or relet three of our five largest units so far
in 2022, totaling 317,000 sq ft and £2.3 million of annual rent
(representing 4.4% by area and 6.0% by rent of the total MLI portfolio).
These deals delivered an average uplift from the previous passing rent of 21%
and new lease terms of 6.3 years (3.2 years to first break).
Rent collections returning to normalised level
· 88% of rents due in the quarter ended 30 September 2022 had been
collected by 26 October 2022 (previous quarter: 87% of rents collects at the
same point after the quarter day).
· 96% of rents due for the financial year ended 31 March 2022 had been
collected by 26 October 2022.
· Anticipated rent collections for the financial year to 31 March 2023
are expected to be normalised at pre-Covid levels of 98%+.
Limited investment activity
Two new MLI acquisitions were completed during the quarter, totalling £5.2
million. Both transactions involved the acquisition of units adjacent to
existing holdings, hence consolidating and expanding our ownership in these
locations which will help deliver greater operational efficiency in the
future. The acquisitions completed were:
1. An additional two terraces at Mandale Business Park in Durham. The
new additions provide a further 10 units across two terraces comprising 37,218
sq ft. The recently developed terraces are fully let and generate £257,582 of
income. This acquisition further consolidates ownership which began in
November 2020, with the estate now comprising 256,000 sq ft and generating a
passing rent of £1.3 million p.a.
2. A single let industrial unit of 13,600 sq ft adjacent to an existing
holding, Davey Close Trade Park, Colchester. The unit, which is let to a
single occupier on a new five-year lease with a passing rent of £66,000 pa,
allows for future sub-division and potential incorporation into our existing
estate. The addition complements the existing 54,000 sq ft at Davey Close
Trade Park, which was originally acquired in June 2017, and now comprises 29
units totalling 68,000 sq ft and generating a passing rent of £445,000 p.a.
Beyond these acquisitions, we have largely ceased investment activity whilst
the commercial property investment market in the UK adjusts downward due to
rising interest rates, high inflation and an increasing risk of recession.
In the meantime, we are preserving capital, keeping our leverage low and
waiting for an appropriate time to re-enter the market when values stabilise.
Low leverage with significant covenant headroom
As at close of business on 30 September 2022, Industrials REIT's loan-to-value
ratio (LTV) was 29% on drawn facilities, and approximately 25% when allowing
for unrestricted cash(3). The average cost of debt is 2.5% (based on SONIA at
2.2%). With 90% interest hedging against drawn debt, a 1% rise in SONIA
increases the weighted average cost of debt by 0.10%. The average maturity
of drawn debt is 3.5 years, with strong headroom across our debt covenants
(please see our recent Capital Markets Day presentation for further
information on our debt book and covenant headroom).
Notes
The financial information on which this trading update is based has not been
reviewed or reported on by the Company's external auditors.
(1) Trading update refers to the Company's MLI portfolio while rent
collection figures include the Company's legacy interest in a Care Homes
portfolio in Germany which comprises 6.46% of the rent roll.
(2)Adjusted from previous quarter to exclude all non-built areas e.g. yards,
car parking spaces, covered storage etc.
(3) Calculated as gross borrowing less unrestricted cash, divided by gross
asset value based on our 31 March 2022 valuations adjusted for subsequent
acquisitions and disposals and changes in foreign exchange rates.
Unrestricted cash is cash and cash equivalents after deducting amounts for
service charge, tenant deposits and cash held in debt service accounts.
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For further information:
Industrials REIT Limited +44(0)20 3918 6600
Paul Arenson (paul.arenson@industrials.co.uk)
Julian Carey (julian.carey@industrials.co.uk)
James Beaumont (james.beaumont@industrials.co.uk)
Numis Securities Limited (Financial Adviser) +44(0)20 7260 1000
Hugh Jonathan
Vicki Paine
FTI Consulting (PR Adviser) +44(0)20 3727 1000
Richard Sunderland
Richard Gotla
Neel Bose
industrialsreit@fticonsulting.com (mailto:industrialsreit@fticonsulting.com)
Java Capital +27 (0)11 722 3050
(JSE Sponsor)
About Industrials REIT:
Industrials REIT is a UK REIT with a primary listing on the London Stock
Exchange and a secondary listing on the Johannesburg Stock Exchange. The
objective of the Company is to deliver a combination of sustainable growing
income and growth in value to its investors. Industrials REIT focuses on
owning and operating a diversified portfolio of UK purpose built multi-let
industrial (MLI) estates across the UK. The Company aspires to be the leading
MLI business in the UK. For further information, go to www.industrialsreit.com
(https://gbr01.safelinks.protection.outlook.com/?url=http%3A%2F%2Fwww.industrialsreit.com%2F&data=05%7C01%7Cpaul.arenson%40industrials.co.uk%7C09332dea598e4763bed408da4926f823%7C6fb781f2ad03404abb480cfecbc14518%7C0%7C0%7C637902728959059306%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=q9FKY5hYFZ0CA3i4GSLfo2VUmiIOM4xdSQluAbCSFxc%3D&reserved=0)
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