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Aug 19 2003
Tim Wheeler, Chief Executive
BRIXTON - Interim results 2003
Performance
Q.
Some of your key indicators are up. Some down slightly. For example, net rental income is up 1.4 per cent but if you look at net asset value, earnings per share and investment profits, they are down slightly. So what kind of a six months has it been?
A.
It’s steady as it goes really, it’s a follow on from what we did during 2002. It’s been a lower growth environment. It’s something we predicted. So really the results are, again, a reflection of that. There are a couple of positives. In fact the rental income side has grown by 3.2 per cent, like-for-like, which is important to us. And the dividend has increased again by 2.6 per cent, which continues this 35 year plus progressive rate of dividend growth. So it’s certainly not all on the down side.
Q.
But it’s a bit of a mixed bag overall. Do you have a worry that it is actually undermining your chosen strategy?
A.
No, I think we can get a little bit too hung up about spot figures on valuation, as one of the things particularly. What we’ve seen in our portfolio again in this six months, is that there’s been a slight decline in capital value, about 0.5 per cent. A slight decline in rental value, about 0.3 per cent. Now that stands fairly square with what the general market indices have been doing over the last six months. But interestingly, it’s similar to where we were last year; but the market generally was doing better. So we’ve actually, I think, plateaued out, whereas you could argue that the market generally has actually come off a little bit. And our core area of greater London still outperforms. It’s still showing a positive on the capital side and on the rental side it’s still showing something like 19 per cent compound growth over the last three and a half years, which is quite good.
Q.
And what are you continuing to do with the portfolio to mitigate the negatives that you’ve just told me about?
A.
Well, the things we did really to mitigate the sort of advance warning of what we saw was going to happen two and a half years ago continued to a degree. But I will come on to say how we are actually possibly taking a more proactive and positive approach going forward. But, generally speaking, we’ve stopped developing. So at the half year stage, for the first time in a long time, we weren’t building anything at all. We’re only buying in our absolute core locations. And again, in this six months, apart from for our joint venture fund, Equiton, we haven’t brought anything. We’ve continued to sell because the investment market has been strong. So we’re continuing to divest of some of the things that are more peripheral to us and where we could take advantage of that. And finally it’s B Serv. It’s the customer services company that we set up just over two years ago... sorry just under two year ago. And that is a way of getting closer to the tenants. And, again, very difficult to tangibly prove, but I think when we go through how the results have performed, you will see that actually the tenant liaison thing is working.
Q.
And where do you go from here, for example?
A.
We are still in those core locations which we think are the prime locations. We’re still intensively managing. It’s all about the continuation of income generation, of managing that vacancy level. And getting the industrials to perform, it’s nearly 90 per cent of our portfolio, it’s just under 10 per cent reversionary, so there’s locked in value there. And ultimately we think the philosophy of the company is right and the value will out in the areas that we operate in.
Voids, rental growth and letting activity
Q.
Voids remain an issue. The trend is coming down, but aren’t they still worryingly high?
A.
Well, in fact, the trend’s been upward. In 2002 the voids increased. At the year end they were at 7.8 per cent and at the half year stage, they had gone up to 9.1 per cent. But interestingly they have now dropped back down to 7.9 per cent - almost the same position that they were at Christmas time - which we think is very encouraging indeed, particularly when you look at it compared to the forecast for the half year stage, which was 11.6 per cent. And the worst case scenario that we were predicting ….. or not predicting, but the worst case - if every tenant left at the end of his lease, if every tenant broke when they could, and no letting took place - would have been 14.3 per cent. So really 7.9 per cent is quite an encouraging level at this stage in the cycle. It also bares good comparison with some of the other peer group, which people always want to compare us with. At the year end, last year when we were at 7.8 per cent, Slough, for example, were more than 10 per cent and Ashtenne at more than 16 per cent. That’s not so relevant. What’s relevant to Brixton really is the fact that we’re on this improving trend.
Q.
Overall rental growth in South East industrials has slowed in the last six months. And you seem to be generating more income. So how have you managed to do that?
A.
Again, the easy answer is just to say it’s the focus, it’s the specialisation. And I think there’s a huge element of truth in that. Giving you some examples though, in actual fact rental growth has gone from being about flat at Christmas time to being marginally negative, about 0.3 per cent down. But we’ve seen record levels of rent set in locations such as Brentford, Park Royal, Oxford, Basingstoke and most recently up at Radlett. So built in to our portfolio now is about 9.4 per cent reversionary on the industrial, about 6.2 per cent overall. So there’s some latent growth still there to come through. And the other thing that we have continued to do, and we’ve tracked this now on the charts over the last five years or so, is every period we seem to be able to outperform the valuers’ estimated rental values on both lettings and on rent reviews.
Q.
So how would you characterise your view of the lettings market right now? Is it too soon to call a turn?
A.
Well we’ve certainly seen a vast improvement. In the year-to-date we’ve actually created 117 per cent more lettings in terms of square footage this year than we did in the last year. And we’re actually back now on a proportionate basis to the level of lettings we were achieving in 2001. That’s really quite an improvement. The agents that we’re closest to as well, particularly King Sturge, have done some research for us. And they’ve estimated that the level of enquiries first half of this year compared to first half of last year, have gone up by 17 per cent in the area that we most concentrate on - that’s industrial and warehousing in the West London patch inside the M25. So a 17 per cent improvement there. On the offices side, Knight Frank, who probably issue the definitive report on the M25 market, estimate that between the first and second quarter this year, there was a 7 per cent increase in named enquiries for offices. And they think the vacancy ratio on their side of the business will peak before the year end at sub 10 per cent.
So it’s all looking reasonably good. From enquiry levels and, as I say, our own experiences, the levels are markedly up on where they’ve been over the last year or two.
Q.
But speaking generally, a higher than average amount of space is actually being returned at the moment, isn’t it?
A.
It is indeed, and that’s what makes the figures that we’ve produced even more impressive. I mean we had 80 per cent of the total 2002 “space come back” figure, back to us in the first half of this year. So we are really quite pleased by the positive signs that we’ve got from overall income levels, given that factor.
Income generation
Q.
You say you are focussing on income generation at the moment. Could you give me some examples of what you are doing?
A.
Yes, we are trying to get closer to the tenants. It’s not just a touchy, feely thing. It’s genuinely there to actually make sure that we derive benefit from getting more letting deals through from them. And it’s begun to happen. I don’t think it can be a coincidence that with the advent of B Serv a couple of years ago, that this year most of the significant deals we’ve done have had an existing tenant connotation to them. We moved Bankers Automated Clearing Services into a 40,000 sq ft office building earlier this year where we had a tenant vacate by going bust at the end of last year. BACS were already an occupier of ours on a different location. On the distribution side, we’ve moved tenants into West Cross Industrial Park at Brentford and to Kingsland Business Park. They’ve stayed where they were. In one example they’ve moved down to Basingstoke and they’ve actually set record rents on those two estates for us.
Other initiatives have taken place. We had a major office tenant wanted to break a lease at the tail end of last year. We’ve renegotiated a position whereby we’ve got equivalent to four year’s income cover for them to leave that building, which is really quite a positive sign for us.
And finally, and perhaps most importantly in terms of immediate relevancy, is we’ve just announced a major letting of 160,000 ft of space up at Radlett to B&Q. Now B&Q were actually operating out of about half this space previously, but as an occupier under the banner of a logistics company who had the lease from us. The logistics company broke its lease. The next-door occupier - it’s an adjoining semi-detached building - had also left at the end of their lease. And we’ve managed now to do a rolling refurbishment of this building allowing B&Q to stay in the half they were in on effectively a sub-let basis. We will refurbish the other half. They will move into that and they will end up occupying, as I say, 160,000 ft on a 10 year lease at £6.50 a foot. It’s a very big letting for us.
Q.
This is a big letting. But how significant is it to Brixton?
A.
It will put B&Q in the top 20 tenants, probably about fifteenth in place. Ironically it’s probably the biggest square footage letting that Brixton has ever done. It’s not on the industrial side, it’s not the biggest property we own by a long, long way, because we’ve bought a lot of bigger investments and it’s certainly not the biggest by income, but in terms of actual physical quantum of space, it’s as large as we’ve done so far.
West London market
Q.
Let me turn to the West London market, particularly Heathrow and Park Royal. At what point in the cycle do you believe that your numbers will improve relative to the property companies with a more diversified approach. And whereabouts do you think the growth prospects are going to appear to come from therefore?
A.
Well, I think we’re probably close to re-establishing a base from which to grow and actually outperform the more diversified companies. I say, our early reaction to this slight improvement in the market is probably the start of that process. I mean I think that where the growth in going to come from, it’s a couple of things. It’s knowing your market, it’s knowing your customers and it’s positioning yourself to take advantage. Now, it’s the market we specialise in. It’s all that we do. We know the customer base better through B Serv and we, I think, have positioned ourselves reasonably well. I mean we’ve called the market. We’ve said that occupational demand would fall away two and a half years ago. A lot of people criticised us for saying that. But I think what we did as a result of our expectation of that has meant that we are ready to go forward again now with great gusto.
Q.
You talked about your sources as having an expertise. Well, that seems to play into Heathrow for 40 per cent of your portfolio. What do you think is going to happen in Heathrow?
A.
Well, …. the Heathrow story we have rehearsed once or twice now. But it’s a pretty simple one about the growth in cargo and the growth in passenger numbers that’s coming about because of T5. T5 is being built. It will be completed in 2008 and it will potentially increase the passenger throughput by about 50 per cent and in turn will allow cargo to grow. It’s already the most dominant cargo airport in the country. Now this is happening at a time when there’s increasing pressure on the green belt land. We’re also looking very closely at what the Government’s going to do with its consultations and deliberations over a third runway. But, whatever happens, we aim to capitalise on our position of being the most dominant owner now in that area. We have about 40 per cent of our portfolio there.
Q.
What about further acquisitions both in Heathrow and beyond?
A.
Well the investment world’s still pretty pricey. So we’ve deliberately been staying away from that. It’s more likely that we’ll actually start to do more development. We have a development programme that’s really been on ice. The trick in our game is to get planning consent. It doesn’t take long to put up industrial buildings but it takes a long in the South East to get planning - which is its uniqueness - and that’s one of the barriers to entry frankly that you don’t get around the rest of the country. So we have this 1.7m sq ft development programme, primed and ready to go. And we anticipate starting about 300,000 ft in the next six to 12 months. And that’s broadly 200,000 ft of Premier Park and Greenford Park in our joint venture, and about 100,000 ft at an estate called Great Cambridge in Enfield.
Q.
You’ve talked me through 300,000 sq ft. Is there any more to come within the next six to 12 months, do you think?
A.
There can be. I mean it’s sitting there ready to go. I mean some of the bigger schemes are more likely to be taken on a pre-let basis, they’re more bespoke commodities. So we will stay and wait for the tenants to come along for those, and if our ideas are right, that the generation of interest is increasing, then we would hope that we will be doing some pre-lettings. I would guess the pre-letting market will come back towards the end of next year.
Market/Company outlook
Q.
And how would you sum up the prospects for South East industrials? Not Brixton specifically, but the market as a whole?
A.
I still think it’s quite mixed. As I say, we can flag some improvement in the last couple of months. But I think it’s been quite a mixed bag over the last 12 months or so. There is still some over-supply, that’s undoubted. A result of, I think, some late cycle developers getting into the South East market because it has been so good and perhaps developing in what were less prime locations. Opportunistic, but perhaps not the thing to be doing as the market was turning down. The King Sturge floor space figures are always quoted heavily. They’re quite interesting. They are now four months out of date, even though they just came out a week or two back. And what’s interesting, and the scare factor, is that in England and Wales as a whole, availability is back up to where it was in the highest point last cycle, in ’93. Interestingly, in the South East, it’s only up to about 80 per cent of where it was. And in greater London, which is where we have most of our portfolio, it’s only up to about two-thirds of where it was in August ’93, which was the peak of the last over-supply if you like. So I think it’s patchy. It will improve, but there will be an overhang in the less prime locations.
Q.
And with Brixton’s chosen focus in Greater London, how do you see the next six months? Are you fairly encouraged?
A.
Well, I think we could see the return to some proper rental growth. There’s been isolated examples of it, and we’ve exceeded the ERVs, which is all very positive. But what we really want to see is really driving that income line even further forward. We want to control the vacancies. It’s on a downward trend at the moment. We always thought it could get as bad as double digits. That was the prediction, in fact into double digits. It’s quite possible that vacancies could just track up a little bit again. But we think it will be on a downward slope within the next six to 12 months. So we keep a very close eye on that. And a cautious return to development because we are seeing enough activity, enough increase in enquiries, to actually push the button in a limited way, to take advantage of that next step in the cycle.
Q.
And if you had to sum up the next six to 12 months for me, what would you say?
A.
Well, it’s going to be a lower growth environment, that’s for sure. But we’re seeing the corporates strengthening. We’re interested by the sort of economic prognosis from the States. That certainly seems to be now getting back on track after a couple of hiccups. We have about a quarter of our portfolio rented to American companies, so it will be interesting to see whether any of that perceived growth translates into activity back here. We did sort of predict where we would be. This time last year at the interim stage, we said we could see the occupational market coming back in 12-24 months. Well, we’re here now and we’re still saying it’s coming back; there’s evidence of it. And we think the next 12 could be exactly as we have predicted, which would play into the business plan. We think there is a market advantage with the business model that we have developed. It’s about repeat business. B Serv seems to be fulfilling that function, so that we are starting to do that. And overall, it’s just about us strengthening this income base. And that’s what will drive our business forward.
FORWARD LOOKING STATEMENT
This interview contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of the Brixton plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Nothing in this announcement should be construed as a profit forecast.
Past share performance cannot be relied on as a guide to future performance.
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