MLI Trading Update Q3 FY 2023
27/01/2023 07:00
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RNS Number : 0108O Industrials REIT Limited 27 January 2023
INDUSTRIALS REIT LIMITED
(Registered in Guernsey)
(Registration number 64865)
LSE share code: MLI JSE share code: MLI
ISIN: GG00BFWMR296
("Industrials REIT" or the "Company")
27 January 2023
MLI trading update Q3 FY 2023
Strong tenant demand continues to drive rental growth
Industrials REIT , the UK multi-let industrial ("MLI") property company, today
publishes a trading update on its MLI portfolio for the period
1 October 2022 to 31 December 2022 and up-to-date rent collection across the
Company's whole portfolio.
Commenting on the trading update Paul Arenson, CEO of Industrials REIT,
said:
"The MLI market finished 2022 on a strong footing, with high demand, limited
supply and the affordability of our high-quality space translating into a 31%
average uplift in rent at renewal or reletting. New lettings were
particularly strong this quarter, with average rental uplifts of 36% compared
to that paid by the previous tenant, whilst lease terms and incentives remain
unchanged. This helped push like-for-like passing rents for the total
portfolio up 5.0% over the last 12 months, during which time Estimated Rental
Values ("ERVs") have grown 10.5%, creating potential for strong rental uplifts
between letting or renewal in future. Whilst occupancy fell 0.4% during the
quarter, we believe that the continued strength of tenant demand and rental
growth in the quarter means this is not an indicator of a trend at this stage.
"We also enter the first quarter of 2023 with a strong pipeline of lettings
under offer on the back of another busy period of enquiries and viewings.
Our Industrials Hive platform continues to generate demand via our
industrials.co.uk website (visitors +15.4% year on year), whilst our dedicated
sales team has continued to convert enquiries into viewings and lettings with
increased efficiency.
"Investment activity in the last quarter of 2022 remained muted when compared
to previous years, with DTRE reporting total MLI transaction volumes down 23%
when compared with the same period last year. Despite this, there remains
plenty of capital seeking MLI investment opportunities at a repriced level and
increasing evidence of vendors adjusting their expectations. We continue to
watch the market carefully and believe that attractive and accretive
acquisition opportunities will emerge as we move through the first half of
2023.
"Overall, customer demand for MLI remains strong and we continue to lease
space at attractive rents with minimal incentives. We remain cautious that
the trading environment may become more difficult as we progress through 2023,
but to date we have seen limited evidence of this in our portfolio."
Key metrics
Quarter Ended
Key metrics Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Q1 FY23 Q2 FY23 Q3 FY23
Occupancy 93.1% 93.7% 94.7% 93.9% 93.8% 93.8% 93.7% 92.8% 92.4%
Change in rent 3.6% 5.6% 8.0% 5.0% 4.8% 4.4% 3.2% 2.7% 5.0%
(L4L over 12 months)
Change in ERV 3.8% 5.5% 5.5% 5.1% 8.0% 4.3% 11.4% 12.2% 10.5%
(L4L over 12 months)
Average uplift in rent 25.0% 20.0% 21.0% 21.0% 21.6% 22.3% 27.3% 30.4% 31.0%
on letting or renewal
31% average uplift in rent at reletting or renewal
· The average passing rent increased by 31% on the aggregate of all new lettings
and lease renewals, the highest growth rate achieved to date and surpassing
the previous record last quarter (previous quarter: 30%). The growth was
driven by average uplifts of 28% and 36% for renewals and new lettings
respectively (previous quarter: 30% on renewals, 31% on new lettings). This
is the ninth successive quarter of +20% average uplifts and is driven by
unlocking the strong reversionary potential within the portfolio, with average
passing rents lagging estimated market rental values on leased MLI units by
17.5% (previous quarter: 19.6%).
· We completed 84 letting transactions this quarter with a combined rent roll of
£2.2 million, which is in line with expectations following exceptionally
strong quarters in terms of the value of leases signed in March and September
2022 (previous quarter: 108 lettings and £2.6 million). This comprised 50
lease renewals and 34 new lettings across a total of 280,376 sq ft (previous
quarter: 71 renewals and 37 new lettings across 383,704 sq ft). A further
seven lettings exchanged across 23,000 sq ft which will complete in the next
quarter (previous quarter: 10 lettings across 26,000 sq ft), taking the total
area of leases exchanged or completed during the quarter to 303,000 sq ft
(previous quarter: 406,000 sq ft).
· Good leasing momentum continues, and as at 31 December 2022 there were 343,000
sq ft of lettings under offer across 43 transactions (previous quarter:
321,000 sq ft across 59 transactions), of which 185,000 sq ft related to new
lettings and 158,000 sq ft to existing customer renewals (previous quarter:
160,000 sq ft of new lettings and 161,000 sq ft of lease renewals).
· Lease terms remain stable, with the average lease signed during the quarter
for 4.5 years with a tenant break option after 3.3 years and 0.9 months' rent
free (previous quarter: 4.4 years, 3.3 years and 0.6 months respectively).
· 73% of completed leases were contracted through Industrials REIT's short-form
digital 'Smart Leases' (previous quarter: 68%).
· 70% of leases signed included at least a 3% annual uplift in rent throughout
the term of the lease (previous quarter: 79% of leases signed).
5% p.a. growth in passing rents
· Like-for-like passing rent over 12 months grew +5.0% on the back of strong
releasing activity and the expiry of a significant rental incentive in
Ashby-de-la-Zouch (previous quarter: +2.7%, rising to 4.0% when excluding
Ashby de la Zouch). Over the quarter like-for-like passing rents grew 3.1%
(previous quarter: -0.7%).
· Like-for-like ERV growth across the portfolio was 1.8% over the quarter and
10.5% over the last year (previous quarter: 1.1% for the quarter and 12.3%
over the year). ERVs on our MLI units remain highly affordable at an average
of £6.99 psf, compared to an average passing rent of £5.94 psf (previous
quarter: £6.87 psf and £5.74 psf respectively), with the average rent on
each new lease signed this quarter equating to £2,160 per month for a 3,338
sq ft unit (previous quarter: £2,040 per month for a 3,550 sq ft unit).
· Occupancy across the MLI portfolio (adjusted to exclude yard areas) was
marginally lower at 92.4% (previous quarter: 92.8%).
Strong customer demand via Industrials Hive
· Industrials.co.uk website users were down -6.0% vs the previous quarter, as is
expected over the Christmas period, but up +15.4% year on year (previous
quarter: +18.5% vs previous quarter and +9.0% year on year). Continued
efficiency improvements with enquiry-to-lead qualification conversion rates up
to 13%, with 92% of leads going on to take a viewing on a rolling 12-month
basis (previous quarter: 12% and 83% respectively).
· Lead volumes were up +27% year on year, reflecting the depth and quality of
leasing enquiries being generated by the Industrials Hive platform and the
desirability of space in our portfolio (previous quarter: +24%).
· Total viewing/building tour numbers were 207, the best period to date, with
22% of viewings resulting in a new letting on a rolling 12-month basis
(previous quarter: 179 viewings with a 26% conversion rate to letting).
Asset management highlight
Imex Business Centre comprises 46,786 sq ft of purpose built MLI and office
space in Loanhead, six miles south of Edinburgh. The estate was acquired in
2017 and has benefited from strong demand from a diverse range of commercial
users attracted by the strategic and well-connected location just south of the
city.
An opportunity was identified to enhance rental growth via a full external
refurbishment and redecoration of the estate. The works include a roof
overclad, the installation of new roof lights, and full external redecoration
of 39 units across three terraces. The project has a planned capital
expenditure of £608,000 equating to approximately £13.00 psf. The
expectation was that the works would increase estimated rental values by just
over 25%.
Whilst practical completion is targeted for March 2023, we had already
completed 16 new leasing transactions by 31 December 2022 and have a further
six units under offer, combining to generate an additional £64,500 per annum
in recurring revenue compared to the previous passing rent. These new
lettings generate a yield on cost of approximately 10.6% for the scheme, and
once all the units have been relet or renewed, we anticipate a total uplift in
recurring revenue of c. £108,000 per annum, reflecting a yield on cost of
approximately 17.7%.
Once the refurbishment works are completed, we expect the average EPC ratings
across the asset to improve from a Grade C to a Grade B, in line with our
broader strategy of continually upgrading the environmental credentials of our
portfolio through active asset management.
Rent collections continue to improve
· 90% of rents due in the quarter ended 31 December 2022 had been collected by
25 January 2023 (previous quarter: 87% of rents collects at the same point
after the quarter day)
· 97% of rents due for the financial year ended 31 March 2022 had been collected
by 25 January 2023
Disciplined capital allocation with limited investment activity until repriced
opportunities emerge
No new MLI acquisitions were completed during the quarter. The MLI
investment market was subdued in the last quarter of the year, with
transaction volumes 23% down when compared to the same period last year
(Source: DTRE). We continue to monitor the market for attractive
opportunities to selectively deploy capital on an accretive basis.
Low leverage with significant covenant headroom
As at close of business on 31 December 2022, Industrials REIT's loan-to-value
ratio was 30% on drawn facilities, and approximately 27% when allowing for
unrestricted cash(1). The average cost of debt is 2.6% (based on SONIA at
3.4%). 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 3.2 years (rising to 4.4 years assuming loan extension
options are exercised), with strong headroom across all debt covenants.
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) Calculated as gross borrowing less unrestricted cash, divided by gross
asset value based on our 30 September 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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