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Article Excerpt
OPERATOR: Good morning and welcome to Brixton plc's interim management statement conference call for the period from August 19 through to November 11. On the call today are Brixton's Chief Executive, Tim Wheeler and the Company's Deputy Chief Executive, Steven Owen. I will now hand over to Tim Wheeler for an overview of the IMS, which will be followed by a question and answer session.
TIM WHEELER, CHIEF EXECUTIVE, BRIXTON PLC: Good morning everyone and welcome to what's Brixton's first conference call on an IMS. There have been plenty of announcements this week so hopefully nobody's suffering from too much fatigue of the written word. We wanted today really to go into some detail on our operations and our finance so, as has just been said in the introduction, I'll run through the statement itself, which is quite detailed and then hand over for questions and answers, which Steve and I will deal with.
So just starting off, this IMS is for the period from our half year results announcement in the middle of August until November 11 earlier this week. The key points are really that we continue to show a transactional rental growth outperformance of 3.7% year-to-date. We've also increased or created new annualized income of GBP3.4 million on the year so far, and that compares with GBP1.2 million for the whole of last year.
The overall vacancy rate by income has dropped 50 basis points, and that's due to our new development lettings, but there are some higher insolvencies. The rate of insolvency is still less than 2% of the total rent roll. And as we'd predicted, there has been a slowdown in the actual quantum of lettings taking place.
We do have a financial strength with undrawn committed facilities, a low cost of debt and no onerous banking covenants or need for early refinancing, and I'll elaborate on that further.
So what's happened? Much has actually changed in the financial world, as we all know, but Brixton's business model continues to perform well. Many of you will recall, you probably couldn't miss it really, the imagery we used of the Four Horsemen of the Apocalypse, and Bob Dylan's lyrics about none of them knowing what any of it is worth.
In fact, and despite the unprecedented events that we've seen since mid-August, and we weren't predicting wide scale meltdown, what we were saying, and what we're still saying is that well-funded businesses operating in distinct markets with focused and experienced management should still be able to outperform. The point was to highlight the valuation conundrum.
Now more property has been brought to the market since the half-year stage, but it is very secondary and there's still a dearth of prime evidence in West London industrial. In fact, since the half-year, with the exception of two or three small owner occupation sales, there have been two investment deals in the whole of West London, both actually at Heathrow; one a small deal of GBP7 million and a significant one in September where Scottish Widows purchased a GBP35 million purchase. I will elaborate on this because it's one of the issues that's confusing the market.
This purchase nets back to an initial yield of 4.5% and an equivalent yield of 5.1%, but there is only two years worth of income; the income all falls away by the end of 2010. And it reverts to a site, which on the price paid of GBP35 million, is GBP3.4 million an acre.
Now there is a little -- this is the land at the back of this estate, which if you allow that some value, which we don't, but if you thought you could develop part of the car park, then the initial yield on the property would rise from 4.5% to 4.8% and the equivalent yield from 5.1% to 5.4%. It doesn't really matter. Not a single piece of our property was valued as keenly as that back at the half year stage.
So what we're saying is that for particular examples of prime stock, and that's the only thing that's come to the market, and you could argue that it's not prime, because of its impending development impetus, there still seems to be those special purchases out there.
We don't hesitate for one second to suggest that property values won't fall further, and there should be caution exercised over looking at balance sheet valuations.
So let's just turn to the key operational update. As I've already said, the actual rental growth outperformance, that's from lettings, rent reviews and lease renewals, stands at 3.7% year-to-date. And that compares with an average over the last three calendar years of 4.6% and more particularly, compares with the valuer's estimate at the half year stage of 0.9% and IPD's monthly index, which is -- we've got until the end of September so far, of 0.1% for the whole year.
More significantly perhaps, more real, is the annualized increase of new income year-to-date of GBP3.4 million from those activities we've talked about. We'd done GBP2 million by the half-year stage this year, but it compares to GBP1.2 million for the whole of 2007. And in fact, it's more than we've achieved in any of the last six years.
Now the volume of lettings has slowed as we were predicting, and new lettings year-to-date stand at 700,000 square feet, with about 0.25 million square feet let since June. The rate since June stands at about 80% on a monthly basis compared to the monthly rate for the first six months. And we reckon for the year end we'll probably be pitching at about two-thirds of the total lettings that we did last year, which is GBP1.15 million.
Now I have said the income position is positive, but if you just look at lettings alone, the contribution there is GBP2.3 million annualized year-to-date. That compares with no increase last year because, frankly, we had as much space back as we managed to let. And in fact, that GBP2.3 million is more than 2.5 times the highest figure we've achieved as a net increase in lettings in any of those last six years.
Now the overall income void has fallen by 50 basis points to 18.2% which, to the real world, who use area voids, is just under 16%. And if you were to strip out the development effect, it's around about 11% by either area or income. And you remember we've concluded our development program in its entirety as of April this year. Now we were forecasting at this stage a 19.5% income void and by the year end, 20%. So we're doing slightly better than that at 18.2%.
There have been three key let leasing deals. The Royal Mail, our largest tenant, has taken 57,000 feet on a 20 year lease with a 15 year break on a rent that hasn't been disclosed at their choice, but it beats the valuer's estimates from June and it's in the range of GBP11.75 to GBP12, which is what we set on similar length of leases on that estate earlier this year.
Now Premier Park is an interesting example of one of the successes from our development program. Overall it's about 90% occupied. Phase III, which we finished last November, a year ago, is now 85% let. It's interesting to look back at the track record though. We completed our first development there in October 2005 and from the first letting on that, rents have now increased by nearly 30% in those three years. We bought the estate with Phase I having been completed back in 1999, and comparing the highest rent we've got now with the highest rent that had been set then, the increase over those nine years is 60%, which is still quite impressive.
Up at Radlett, a tenant has taken space, 21,000 feet of space, at GBP8.25, which is showing an enhancement on the June rental estimates by the valuers of about 3%.
And last week, or earlier this week in fact, another tenant of ours, Jack Wills, has taken space at Greenford Park, our new development which was completed earlier this year. That's 57,000 feet again at GBP11.50. It's a more flexible lease. Retailers are going for that sort of thing now as you'll recall with H&M as well, on the 86,000 feet that they took earlier this year. But the flexibility is priced in, because we've actually got 5% enhancement over the valuer's estimates for the standard term at June.
Now not surprisingly, tenants on credit watch have increased, and there has been a tick-up in the rate of insolvencies to GBP1.9 million year-to-date, but this is out of a rent roll of over GBP104 million. You will recall that the half-year loss was GBP1.2 million, but encouragingly, we're still getting a good recovery of the rental with 94% of the September quarter day income due being received within 14 days.
Now I just want to touch on one thing, which is key to what we do, and it's a myth that we hear thrown back at us a few times in the market, and that is that we look to sacrifice income cash flow. And therefore, have higher than average vacancies in order to get ultimately higher rents and therefore establish ever-increasing NAVs.
In reality, it's always been our stated position not to actually be too concerned about the sentiment driven capital valuations. We've always been focusing on income generation as the more important part to us of total property return.
If you look at our underlying voids, and accepting the fact that we chose deliberately to do some development, the underlying rate is exactly the same as our competitors or, indeed, the market as a whole. We're patently actively lessors of property. The fact of the matter is that due to this locational focus, the customer-led approach, the quality of the buildings, we still have competition. That's why we get rental growth. It's as simple as that.
Now the other fact it's important is that occupiers -- our occupiers, are locationally sensitive; certainly those in London are. The majority need to be around the Capital and they need to be in the places where we're the dominant owner; Park Royal, Heathrow being the obvious examples. It's a truism that you can lower rents in those locations and you won't get greater volumes of lettings. There's little free float amongst the tenant base and we rarely, if ever, lose deals to competitors solely on rent alone.
Now the reality, of course, is that we are looking at lower activity levels and it's no surprise that tenants are taking longer in their decision-making process. The key will...
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