Grainger plc (GRI) Earnings Call Transcript

Good morning, everyone, and welcome to Grainger's full year results. In a year when many businesses have experienced challenges, I'm pleased to say that we at Grainger have delivered a strong set of results and have accelerated the growth of our business. We have real momentum in the business. We have grown our net rental income, we have boosted our pipeline, and we are ahead of our plan in a sector that has evidenced its fundamentals during this time. The format for this morning is that I will take you through the highlights. And in particular, I will cover the growth in our income, the growth in our pipeline, our strong sales performance and importantly, the reason for our outperformance of the sector as a whole. Vanessa, our CFO, will take you through a financial review and provide more detail on the resilience of our rental income and the strength of our balance sheet. I'll then update you on the market, the market fundamentals of our sector and Grainger's approach to it, particularly looking at the growth areas we have identified and have committed to during this year and our imminent new openings. We'll then have an opportunity for Q&A. And Andrew Saunderson, our Director of Investments; and Mike Keaveney, our Director of Land and Developments, will join Vanessa and me in answering your questions. I'm pleased to tell you the company has continued to grow through challenging times because people have needed and valued quality homes and good customer service. We have grown our net rental income by 16%, our like-for-like rental growth is 3%. And on average, we've collected 97% of our rents on time and in recent months, that's grown to 99%. This is a good performance. And in a moment, I'm going to explain how Grainger as a business has differentiated itself from the competition, both through our mid-market offer and through our operational model. But firstly, it has been an extraordinary year. This time last year, we were contemplating a Corbyn government and the implications of Brexit. Following the change of government and the removal of some uncertainty around our sector, we realized very quickly the importance of the government's leveling up agenda and the growing importance of the regions, and that is why in February, we raised equity to invest further in the regions, which our shareholders were supportive of. This equity raise has enabled us to continue with those plans during the COVID-19 period and to continue to invest for future growth in rents and shareholder returns. We've also been successfully continuing our sales, usually the balance is 40% in the first half of the year and 60% in the second half. However, this year, despite COVID, the balance was 30-70, reflecting the uncertainty last autumn around the general election, but importantly, continuing sales momentum throughout the first national COVID lockdown. And so for the highlights. This year is another year of strong performance. Our net rental income is up 16% to GBP 73.6 million. Our like-for-like rental growth is 3%. Our adjusted earnings are in a similar place to last year at GBP 81.8 million. Our profit before tax is GBP 110.8 million, which is behind last year, but reflects the lower level in valuation growth. Our total property return was 5.4%. Our acquisitions continued with 6 new schemes and that's a further 1,475 homes. And as I've just mentioned, we have had a strong sales performance. Our equity raise in February for GBP 187 million was followed in the summer with a GBP 350 million bond issue. We had a very clear strategy in response to COVID. We were determined to emerge stronger and had 3 key limbs to our strategy: to innovate, to communicate and to improve. No staff were furloughed. We took no government support, our dividend policy was maintained, and we have grown our dividend. Our customer service levels were maintained. And overall, our momentum was maintained. During this time, we also pushed forward with our agenda to improve the sustainability of our portfolio in our ambition to be net 0 carbon in our operations by 2030. And we integrated ESG into all our decision-making. Now more than ever, Grainger's approach to delivering positive social value is essential. The business has examined our approach in detail. We have created bespoke community engagement plans, which we have started to put in place to deliver not only for Grainger residents but for the wider community and all stakeholders and shareholders. As we grow, we've committed to grow our workforce to be more reflective of society and more diverse and inclusive through our diversity and inclusion program. In short, not only a strong year of financial performance and future growth, but one in which Grainger has emerged stronger and more resilient as a business, with momentum maintained. Our approach to COVID-19, I outlined at the half year. Our strategy to innovate, to communicate and to improve. The clear strategy we put in place in the first week of the pandemic has been instrumental to how we have navigated the challenges of COVID and how we have continued our momentum. So in our innovations, we implemented COVID-secure sales and lettings at a time when agents had furloughed their employees. This resulted in 67% of our sales profit in H2. We doubled Internet bandwidth for our customers free of charge. In our communications, we communicated more with our customers, and we set up a buddy system to support people if they were in difficulty. And we continued our investment, improving our business through training our people and in our CONNECT technology platform. And because we were interacting with government, we were able to understand what they were looking to achieve. That meant our return-to-office planning started in April on the basis that we knew it took a few days to set up remote working, but we were sure it was going to take months to get everyone back in the office. And as a result of that work, most of the Grainger team have had the value of interacting in person with their colleagues for almost 4 months prior to the second lockdown. The strength of those interactions and our in-house operating platform has delivered significant value during COVID-19. It has meant we have relied less on third parties. We've been able to deliver in accordance with our values and to improve our health and safety, balancing customer support with business risk. I mentioned earlier that we have a key competitive advantage, and that is our scalable in-house model. And during this time, this model has proven it enables us to outperform. It was virtually impossible for those competitors that had outsourced to third parties who had, in turn, furloughed their employees, to operate in the same way as Grainger employees. This meant that our rental growth was better. We had quicker leasing, and we could continue to serve our customers. With our in-house development and investment teams, we continued to obtain planning consents. We encouraged our contractors safely back on site, [ quicker ] minimizing delays in our pipeline and we could continue to source our pipeline for growth. We have grown and refined our operational platform to be ready for the schemes which we will launch next year, 5 in total. We have designed our platform for scale, so additional units will not materially increase the central overhead. The platform itself has real value as it provides our unrelenting focus on operational excellence, leading to higher occupancy, higher rent collection, better customer satisfaction and differentiates us from not only the buy-to-let landlords but most PRS operators. During this financial year, we've invested further through our resident service training, our Grainger Academy, our resident support program and our technology, and all of this is underpinned by a refresh of our values of every home matters, people at the heart, leading the way and exceeding expectations. Moving to our pipeline. We have a significant growth momentum, our PRS portfolio is almost GBP 1.7 billion, our regulated portfolio is over GBP 1 billion, but our pipeline for growth is GBP 2.1 billion and over GBP 1 billion of that is secured and in most instances on site. We have a further GBP 429 million in planning and legals, which excludes our GBP 600 million potential investment, which is our share of the TfL partnership. We have secured 6 new schemes, delivering 1,475 new homes representing over GBP 400 million of additional pipeline investment. This is a significantly enhanced pipeline. And whilst people might have assumed that planning consents would slow during this time, in addition to our Waterloo scheme, which was secured just before lockdown, we've secured a further 784 homes via virtual planning meetings at Lewisham and Southall [ that is ] planning consents achieved of almost 1,000 homes in total. During the time, we also managed to launch Millet Place at Pontoon Dock and Solstice Apartments in Milton Keynes, and lease-up [ plays ] in Sheffield. Many people's perception was that the U.K. development industry was closed for business, but for us, we have been able to focus on ensuring that we've been able to do business as usual, and this has maintained our momentum and continued our growth, leading to an exciting pipeline of projects for the future. 2020 has tested every business, but we have performed well. Our in-house model of development investment in operations has delivered outperformance during these challenging times, and our long-term PRS strategy has proven to be resilient. Our strategy to invest in areas of high demand and our strategy to invest in homes that are focused on the mid-market has led to lower risk in our business as there was a greater ability for our customers to continue to pay their rent. Our growth momentum has been maintained. And with that, I will now hand over to Vanessa to go through our financial results in detail.

Thank you, Helen, and good morning. This morning, I will update you on our performance for the financial year and our strong balance sheet position to continue our PRS growth strategy. I am pleased to report that we have delivered a good performance over the year. And our business has proven resilient, benefiting from our in-house operational platform, which has enabled us to continue to operate as normal during the COVID period. Overall, we achieved 3% like-for-like rental growth, and our net rental income increased by 16% as a result of our investment activity and rental growth. Our adjusted earnings at GBP 81.8 million are 1% behind the prior year. And our profit before tax is 16% behind last year, and this reflects the lower level of valuation growth on our investment assets. In line with our policy to distribute 50% of our net rental income, the proposed full year dividend will increase to 5.47p per share. Our balance sheet is in a strong position, and we have further improved this through the successful equity raise in February and the bond issue this summer, which have both provided further investment capacity into our PRS pipeline. Our EPRA net tangible asset value has increased by 3% to 285p per share. And our LTV has reduced to 33.4%, which reflects the proceeds from the equity placing and valuation growth, and our average cost of debt has reduced further to 3.1%. The composition of our earnings has continued to improve with growth in our recurring net rental income. This transition is a key component of our strategy and it will grow further as our PRS pipeline continues to deliver. Net rents have delivered over 54% of our income this year, and we have continued to effectively manage our cost base to improve our returns. Our operating efficiency improved further with our stabilized portfolio gross to net now at 25%. And taking account of our recent launches, our overall gross-to-net operating cost ratio is 25.9%, which reflects the higher cost ratios for our new PRS assets during the early lease-up and stabilization period. We have continued to sell well through the year, reflecting the resilience of the properties in our regulated portfolio. The actions that we took in March to enable the sales process to continue during the lockdown period has supported our performance, with 67% of our sales profits delivered in the second half, and we have achieved strong sales prices at 2% above the vacant property values. Our adjusted earnings have remained robust throughout the period at GBP 81.8 million. And our EPRA earnings adjusted sales performance to profits over the market valuation and are GBP 2.7 million behind the prior year due to the higher proportion of tenanted asset sales this year. As our PRS pipeline continues to deliver, our EPRA earnings growth will be aligned to our growth in net rental income. We have continued to see significant growth in our net rental income. Our net rental income increased by 16% despite our asset recycling and regulated property sales, which have reduced net rental income by GBP 3.4 million over the year. Our investment and development activity has added GBP 12 million and our rental growth contributed GBP 1.5 million. Our like-for-like rental growth of 3% has again outperformed the market average of 1.5%. We achieved an average of 4.6% annualized growth on our regulated portfolio and 2.5% like-for-like rental growth across our PRS portfolio, which I will expand upon next. Our rental income has proven resilient over the recent months, and this is testament to the strength of our in-house operations and our mid-market positioning. We have delivered rental growth of 3% over the year. Our PRS rental growth was 2.5%. And in the second half, rental growth on new lets and renewals have aligned, and we have seen similar levels of growth across all of the regions in which we operate. In May, June and July this year, we experienced a higher level of renewal activity. Our March renewals do not necessarily drive higher like-for-like rental growth. They are more valuable to our business as they reduce the cost of churn. We have seen a distortion in the usual letting cycle this year with higher levels of void in some parts of London, which has led to an occupancy level of 91% at the end of September. We see this as a temporary situation as we saw a pickup in leasing activity in September and October, which hasn't stalled with the second lockdown. All other regions have remained in line with the normal trends. And over the year, we maintained average occupancy at 95%. We have also maintained high levels of rent collections, with 99% of our rents collected on time in September and again in October, which highlights the benefit of having an in-house operational team that have strong relationships with our customers and are able to respond effectively to the changes in the economy and regulation. And the resilience of our income also translates into our balance sheet, as rental growth is a key driver of our asset valuations, with around 60% of our portfolio valuations now aligned to rental growth. So moving to our net asset values. This slide provides the components of our EPRA NAV measures. Our EPRA net tangible asset value has increased by 3% to 285p per share. As a reminder, this measure excludes intangible assets. And our intangibles are largely investments in technology. Whilst this adjustment reduces EPRA NTA by 3p per share, as an operating business, we are seeing real value from our investment in technology to further enhance our operating platform. And the reversionary surplus in our portfolio is also excluded from all of our NAV metrics, and it stands at GBP 301 million, which equates to an additional 45p per share before tax. This chart shows the movement in our net tangible asset value over the year. And our rental income and valuation gains continue to deliver NAV growth. Our rental income after overheads have contributed 8p per share, and our property valuations added 10p. The valuation of our stabilized portfolio has increased by 3.1%, and our stabilized PRS assets increasing by 2.5% and the regulated portfolio increasing by 4%. During the year, we realized GBP 12 million of value from the assets that we have completed and stabilized during the year. The valuation of our pipeline in progress has remained broadly flat, as our valuers are taking a more cautious approach and only realizing the valuation after stabilization. And they have also assumed no rental growth over the next 12 months. If rental growth had been applied, we would have seen around GBP 10 million of further value uplift this year on our pipeline schemes in progress. As our PRS portfolio grows, our valuation will have greater alignment to rental growth, further enhancing the strength of our balance sheet. Our business model continues to generate strong cash flow, which supports our growth strategy and reinvestment into our high-yielding PRS pipeline. Our net debt has reduced by GBP 65 million as a result of the equity placing in February, which provided net proceeds of GBP 183 million, and our operations delivered cash of GBP 104 million, providing capital to accelerate our PRS investment pipeline. During the year, we completed GBP 67 million of asset recycling and invested GBP 212 million into our PRS portfolio and GBP 12 million into our CONNECT operating platform. And in the coming year, we plan to invest around GBP 225 million into our secured pipeline. Our balance sheet is in the strongest position that it has been in for a number of years. And during the year, we have raised 10% of additional equity at a premium to net asset value and we issued a GBP 350 million bond for a 10-year term. These actions have accelerated our investments into our PRS pipeline and have further supported our funding strategy. Our LTV is now below 34%, and we have significant cash headroom to fund our growth. Our average cost of debt is 3.1% with our incremental cost of debt at 1.6%. Our fully drawn position is 2.8%. Following the refinancing of our near-term maturities, our average debt maturity is 6.6 years and our next maturity is GBP 50 million in November '22. As our PRS portfolio grows, we will continue our funding strategy to secure longer-term debt and further align our debt structure with the growth of our investment assets. We currently have GBP 650 million of headroom available to fund our investment pipeline. And we have committed CapEx of GBP 550 million planned over the coming years with the phasing outlined on the bottom of this slide. Our investment plan is phased to manage LTV with a target range of 40% to 45%. And we expect to remain below this range over the near term. It is also worth noting that our reported LTV calculation excludes the reversionary surplus, which provides additional comfort. And if included, it would reduce our LTV to 30.5%. Our updated funding capacity position has also been included in the appendix of this pack, and it illustrates that we should have around GBP 250 million of further investment capacity in the coming year. So turning to our net rental income progression, which reflects the updated position on our pipeline and the revised timings as a result of COVID-19. As a reminder, this slide is based upon passing net rental income. And our reported net rental income reflects the buildup of income over the asset stabilization and therefore, tends to lag the passing net rent by around 6 months. Our passing net rental income stands at GBP 74 million. And we expect this to increase by GBP 8 million next year and GBP 12 million in financial year '22 as a result of our development scheme completions. This phasing also reflects the expected delays in developments from the impact of the COVID lockdown. As we advised in September, we experienced delays on site with 4 schemes, and we have also chosen to postpone the start on-site of 3 schemes to avoid commencing at the heart of the COVID lockdown. This resulted in GBP 1 million of passing net rental income moving from financial year '20 to '21 and GBP 4 million of passing net rental income from financial year '21 to '22 and then catches up in the later years. And for reference, we have included the scheme detail in the appendix of the packs. While secured net rental income now stands at GBP 132 million, when our pipeline has completed and stabilized, and we continue to make good progress for securing the schemes in our outer pipeline. The schemes in the planning and legal process and our share of the TfL partnership illustrates the potential for our net rental income to more than double to GBP 176 million. And this acceleration will be aligned with our dividend progression as our policy is to distribute 50% of our net rental income as a dividend. We have delivered a strong performance and made good progress in a challenging year. Our in-house model, our mid-market position and the resilience of our sector have all contributed to the strength of our performance. We maintained our momentum during COVID in terms of our operational cash flow, securing a higher level of rent collections and sales ahead of the market, and therefore maintain strong operational cash flows. We had strengthened our balance sheet prior to the COVID crisis, and we issued a bond in the summer, which has enabled us to deliver our strategic growth plans. We have proven resilience and this business is well positioned for growth. Thank you. I'll hand back to Helen.

Thank you, Vanessa. I'll now update you on our market. The investment case for this sector remains strong and experience over the last year has only reinforced it for delivering long-term compelling returns. It is underpinned by the structural undersupply of good rental homes and with recent changes to both the fiscal and regulatory environment, the number of buy-to-let landlords is reducing. The market was further supported during the year with the government declaration of their opposition to rent controls. Grainger continues to lead the sector not only with the scale of our existing pipeline but also our pipeline to follow. We continue to invest in technology to improve our customer service and in our research to guide our investment decisions. We continue to be seen as a trusted partner, and we have a strong balance sheet to continue our growth. And so [ to ] some of the statistics that will explain why our sector is attracting interest and experiencing growth. It is underpinned by the lack of high-quality housing in this country. Private landlords historically have dominated the market 5 years ago, but are now becoming a smaller share of the market, as shown by the chart here on acquisitions by private landlords. As outlined in our half year results, the Secretary of State wrote to Sadiq Khan, the Mayor of London, in March to advise him he would need the support of the government to introduce rent controls and that he would not get that support. This has recently been reiterated by the Housing Minister, Chris Pincher, clearly showing that this government strongly feels that rent controls do not work in increasing the quality and supply of rental homes. The market continues to grow with strong growth coming from all age groups, with the over 35, seeing the biggest growth in the last 10 years, which is not surprising as the ownership affordability remains stretched. On average, it's 8.4 years to save for a deposit for a typical first-time buyer in the U.K., and this goes up to 15 years in London. And over the last 15 years, PRS rentals have shown low volatility and better growth than all property rents, and Grainger has continued to outperform the market on a like-for-like rental growth. We have proven we can outperform the sector. This year, we strengthened our research team, and we revisited our city strategy, particularly in the light of the government's stated agenda on leveling up and investment in the regions. Whilst London continues to outperform all regions in terms of high levels of demand and shortage of supply, we've analyzed 378 local authorities and ranked 62 cities by success factors, and we continue to target the top 22 cities for rental growth in the U.K. Our research-led investment strategy is also underpinned by our asset clustering to develop operational efficiencies. And since our equity raise to support further investment in the regions, we immediately committed to schemes in Cardiff, Nottingham, Gilford and Birmingham as well as further adding to our Argo apartments at Canning Town. During the year, we have engaged with a new team at the Ministry of Housing, Communities & Local Government, including the new Secretary of State and the Housing Minister, to ensure that in a political party that supports home ownership, there was a deep understanding of the private rented sector and the differentiated position of the professional institutional landlord and the benefits we can bring in investing in homes through the cycle and in improving standards in design, safety and management. We engaged with the ministerial team during the pandemic, and with the GLA Taskforce on housing as well as the industry safety standard board, and organized several property tours. Concerns about housing safety have been high on the government's agenda. Grainger continues to invest in this area, particularly in our in-house health and safety program Live.Safe 2.0 and in our technology to support it. During the COVID pandemic, we have been able to evidence to customers greater support, cleaning and safety regimes. And of course, fire safety remains our top priority, embedded in our design and management across our business. At Grainger, we say we do not build houses. We build homes and communities. And this year, we have invested in supporting our residents, our workforce and the wider vision of the communities we engage with. A foundation to this is our resident service team training. The scheme you can see pictured here in the background, is Solstice Apartments in Milton Keynes. In addition to regular communications and our buddy system at Solstice Apartments, we accommodated quite a few doctors and NHS staff at the start of the pandemic, and our resident services team played a key role in supporting them, including offering to do their shopping as they worked long hours during the pandemic. We have introduced several initiatives to help our workforce during this time, including employee assistance with mental and physical health initiatives, and we joined Carers U.K. to support colleagues with caring responsibilities. As a long-term investor, our engagement in the local community usually starts at the design stage. But this year, we have delivered a blueprint to ensure that relationships that start at the beginning of our investment process endure, to enable our residents to engage with the local community. And this is known as our best practice community engagement plan. Not only do we think that this will add positive social value, but will also ensure that our buildings remain resilient and our residents put down roots and stay longer. The building that you see behind this slide is our first building where each individual apartment is heated by [ air source ] heat pumps. And this brings me to the commitments we have made this year to achieve net 0 carbon by 2030 for our operational buildings. We also became a signature (sic) [ signator ] to the World Green Building Council's net 0 carbon buildings commitment. Our approach is to be lean, clean and green, to enhance the energy efficiency of our assets, to invest in low-carbon energy systems and to procure 100% renewable energy. We have some way to go. But the enthusiasm and commitment within the business to address the improved standards and the impact that improving our homes within the U.K. can have, is a goal that is energizing our business. As we look forward to 2021, we have 5 new openings. Apex Gardens at Seven Sisters London; the Filaments, Gore Street, Manchester; the Gatehouse, East Street, Southhampton; Windlass Apartments, Tottenham Hale, London; and at the end of the year, The Headline in Central Leeds. This is an exciting new phase of our pipeline, which will lead to further growth in net rental income and in our regional and London portfolios. So in summary, we have delivered a strong performance, and we have continued to grow despite the challenges of this year. Our strategy, our platform and our business model have delivered. Growth momentum has been maintained, and our commitment to operational excellence has proven itself. Looking ahead, there is a lot more value to come. We are in a growth market and demand for good rental homes is set to grow. We are the market leader, and we've doubled our income. And with our pipeline, we have the potential to double it again. Thank you. I now invite you to ask questions, and I'll be joined by Vanessa Simms, our CFO; Andrew Saunderson, our Director of Investments; and Mike Keaveney, our Director of Land and developments. And I should say that this is Vanessa's last set of results with Grainger. She joined just after we launched the strategy, and I want to thank her for her focus and friendship, but do feel free to ask her any challenging questions you like.

[Operator Instructions] We will take the first question from Kieran Lee from Berenberg.

Just a couple of questions from me. First is on the let-up periods on new developments and re-leasing in light of the sort of lockdown and restrictions. Are you seeing any difference in either let-up period time or regional variation? And the second one is on asset clustering. How many units do you need to get together? And how far away do they need to be to actually get those sort of scale and operating efficiencies which you mentioned?

Thanks, Kieran. Great question. The -- in terms of the lease-up period in our underwriting, depending on the scale of our projects, we usually allow a minimum of a year to lease-up. We normally outperform that significantly. And an example of that would be Argo Apartments, which was in 3 to 4 months. However, the -- over the COVID period, we have seen a longer lease-up in some areas and particularly in our new scheme in East London, which is taking longer to lease-up. But in the regions, we fully leased our Brook Place scheme in Sheffield well within the underwriting period. So that's an answer to your first question. And then your second question was about the asset clustering. And on that one, in terms of our investment in technology, it's more about the physically are people based within a region. So we have targets for each of our regional cities. And we prefer in terms of unit size between 250 and 500 units and a minimum cluster in an area would be about 500 units.

We will now take the next question from Sander Bunck from Barclays.

Two questions from my side. The first one is on your NRI bridge on Page 20. I was just wondering if that's GBP 74 million of passing rent, does that -- is that based -- on what kind of occupancy rate is that based? Is that on the current 90? Or is it on the stabilized number?

Okay. Sander, I'm going to hand that one over to Vanessa to answer.

Sander. So the GBP 74 million includes the portfolio of the current level of vacancy so as at the end of September. And then what it also includes is the new build to rent assets that we have launched in the current financial year, and that assumes that they stabilize at an average vacancy level, which is 95%.

Okay. So if we -- so basically, on top of that GBP 74 million, we should assume another 5% to 6% from occupancy increases over the next 12 months. Is that fair to assume?

It'd be fair to assume a level of occupancy recovery depending on how the market trends in the -- during the course of the next financial year.

Okay. That is understood. And the second question I had and slightly following on from that. Can you give some guidance in terms of the building blocks for EPRA earnings for next year? Obviously, you provided very helpfully the NRI bridge and you gave some color now on occupancy changes. But just a bit more color on some of the other items that you're looking at, including fees, contribution from JPs, financing costs, et cetera. Just kind of to give a rough indication what we should be factoring into our numbers.

So in terms of net rental income progression, we outlined that on Slide 20 in the presentation, which shows an uplift in passing net rental income of GBP 8 million. What I do suggest is we look at that in terms of its phasing, because it's a part of passing net rental income. So that's phased over the year. And I usually -- suggest we allow about 6 months' lease-up time to enable that phasing to come through into the reported net rental income. And our financing costs -- average cost of debt is at 3.1%, so it should trend in a similar level. And just taking into account as we release new properties, we launch new properties. Of course, there is then the cost of debt is no longer capitalized, but it will go through the income statement. And then also in terms of overheads, I always suggest that we allow inflationary increases because the majority of those costs relate to compensation for the team. So a lot of payroll costs and other aspects are also inflationary related. In terms of joint ventures, there's only 2 joint ventures now that we receive income from. One is the Vesta joint venture, which is Pontoon Dock that we're leasing up now. And the second, which is relatively small levels of our share of that joint venture aspect. But in terms of the TfL, that will be the next joint venture. And so in the coming year -- over the next 2 to 3 years, of course, we'll be going through the planning and development phases. So in the next year, there won't be income from that joint venture.

Yes. Okay. Fine. So a relatively maybe modest uplift in NRI growth and the rest broadly, financing costs might be up because of some noncapitalized interest expenses and the rest following broadly in line with indexation or lease-up assumptions. So probably like up mid-single digits. Is that fair to assume?

Yes. That would be fair to assume.

[Operator Instructions] We'll now take our next question from Matthew Saperia from Peel Hunt.

Two questions from me. First one concerns occupancy. I think you said that it hit 91% at the end of September, but you'd seen a good recovery since. So wondering if you could give us some more information on that recovery. And I'd also be interested to know whether there's any regional variations in that occupancy number. And the second question is about the TfL joint venture. I was just wondering if there's any update on your interactions with TfL and potentially how those assets, once planning is achieved, is brought forwards.

Thanks, Matt. I'll take the first one, and then I'll come to Mike to answer the second one on the TfL joint venture. So what we saw this year is a shift in our normal leasing pattern across the year. As the country was in lockdown, we saw people deferring moves that they would ordinarily make. And so we normally have quite a high level of churn in June, July, that was pushed back really into August and September. And so the September void number that we announced at our Capital Markets Day, we were saying that we had occupancy at that time of around 91% occupancy. We did see a pickup of -- in October for November reservations, that was prior to the lockdown. And we expect that, that will come back towards the average occupancy level of 95% as we get towards the end of the year. So that's what we're currently seeing in market. And then your second question was really about the TfL joint venture partnership. And I'll hand over to Mike Keaveney, who represents us in that partnership.

Thank you, Helen. In terms of the TfL partnership, it's going really well. Helen mentioned earlier that we've got planning consent [ the resolution has gone in on ] Southall. We have other planned applications in, 2 of which we hope to get to committee this year. It's fair to say that it's a pretty innovative joint venture, where they're working very, very closely with TfL and both of us remain committed and hard-working to deliver as much of that [ seed ] pipeline as soon as possible as we can.

Yes. And I think -- I suppose the one thing I should say is that the TfL have received funding to continue with this partnership and part of TfL's funding solution has an expectation on them that they will continue to maximize their commercial and land assets, including delivering more housing. So we're seeing no waning in commitment from them on this joint venture. Matt, does that answer your question?

Yes.

We will now take the next question from Max Nimmo from Kempen.

Just 2 quick ones from me. You mentioned the cost of churn and the difference between renewals and new lets. I'm just wondering if you could give a bit more color on that. And how much lower like-for-like rental growth you would kind of factor in for renewals versus new lets to kind of compensate? And then secondly, just on the LTV, you say you're comfortable where you are today. On the current run rate, when do you kind of expect to get towards that target, 40%, 45%? And do you expect that target to stay as it is?

Thanks, Max. I'm going to hand those over to Vanessa, as she covered them in part in her presentation.

So in terms of the cost of churn question, Max, what we generally work to is around a 50 basis points variance benefit in terms of renewals versus new lets. And that's the -- we see that value benefit really coming from the fact that we don't have to incur letting costs. We don't necessarily go through the full refresh and we don't have a void period, which is probably the most important one of those 3 areas. So generally, that's how we work. We have seen that new lets and renewals have aligned closer in terms of their rates in the second half of this year. So actually, we generate more value from those renewals. And in terms of the LTV question, in terms of where we are, we have a target range of 40% to 45% LTV. And we use that target range as our benchmark in terms of our commitment into our CapEx investments over the coming years. So as that CapEx is phased over the next 3 to 4 years, we would expect our LTV to remain just slightly on the lower level of that target range, move into that sort of range in around the next 2 years -- 18 months to 2 years. But again, there's a number of factors that obviously influence that, which is largely around valuations and the level of investment that we make and our operational cash flow. So it's just a guide.