Half Year 2012/2013 Land Securities Group plc Earnings Conference Call
Nov 08, 2012 AM EST
LAND.L - Land Securities Group PLC
Half Year 2012/2013 Land Securities Group plc Earnings Conference Call
Nov 08, 2012 / 09:00AM GMT
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Corporate Participants
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* Robert Noel
Land Securities Group PLC - Chief Executive
* Martin Greenslade
Land Securities Group PLC - CFO
* Richard Akers
Land Securities Group PLC - Executive Director
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Conference Call Participants
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* Christopher Fremantle
Morgan Stanley - Analyst
* Nick Webb
Exane BNP Paribas - Analyst
* Remco Simon
BofA Merrill Lynch - Analyst
* Hemant Kotak
Green Street Advisors - Analyst
* Harm Meijer
JPMorgan Cazenove - Analyst
* Ryan Palacek
Kempen & Co - Analyst
* Keith Crawford
Peel Hunt - Analyst
* Martin Allen
Deutsche Bank - Analyst
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Transcript
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Editor [1]
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(Audio in progress)
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Robert Noel, Land Securities Group PLC - Chief Executive [2]
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... also to those of you that are watching on the Internet.
Like May, we've divided the presentation into three sections. Martin will take you through the numbers in detail, Richard will then cover our Retail activity, and I will follow up with an update on progress in London.
Now, as you know, since 2009, Land Securities has been working to a clear plan. We have a clear plan for the business, operating in our two core markets of London and Retail. A clear plan for each of these markets, which have very different dynamics, and a clear plan for each asset, all based upon a realistic outlook and developing where we see supply/demand in balance; risk aware but not risk adverse.
Now, in challenging market conditions, our teams have maintained momentum. Voids are lower. Investment lettings are being done ahead of the RV, except in a few pre-development properties, where we're keeping income aligned. And development lettings are ahead of plan in terms of timing, rent levels and incentive levels. So we're right on track.
We've reported numbers that reflect the actions we have taken to strengthen the business. Our revenue profit for the first half was GBP143.7 million; down 9.8% on the same period last year.
We signaled in May that we were happy to have sold ahead of acquisitions. The short-term effect of these sales, along with moving some of the properties into redevelopment, has been a negative impact on earnings. Adjusted diluted earnings per share were up to 18.4p; down 10.2% on the corresponding period last year.
The valuation was down a smidgen, with adjusted diluted NAV per share up 1p to 864p.
So turning briefly to the valuation, the makeup of it, the movement of the various parts of the portfolio are shown here in the colored bars. And you can see that it is our development program, in green, that stands out; up 8.2% over the first half. That's because we are letting ahead of valuers' previous estimates, as you will hear this morning.
And for those of you that hanker for our performance against IPD, we continue to outperform the index; this time by 1.6% over six months, with sector outperformance in each of the business units. And you will find more detail on all of this within the appendix to your packs, and we'll be around later to answer your questions.
Now, as I've said, we continue to operate in challenging market conditions, but we know our market inside out. Our actions so far this year have reflected that knowledge and experience. And we remain confident that we will benefit from the discipline we have shown in strengthening the business.
So now I'll hand you over to Martin to cover the financial numbers in more detail.
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Martin Greenslade, Land Securities Group PLC - CFO [3]
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Thank you, Rob. Good morning, everyone. Now Rob's taken you through our headline results. What I'd like to do is to take you behind those numbers. I'd like to explain the connection between our actions and the numbers. And I'd like to remind you of the strength of our financial position. But let's start by looking at revenue profit in a little more detail.
So this slide sets out the main components of our revenue profit. And it includes our proportionate share of joint ventures.
Now, as Rob said, revenue profit for the six months was GBP143.7 million. That's down GBP15.6 million, or 9.8%, on last year. But it is ahead of our internal expectations.
Now, the main culprit for the decline was net rental income. And that was down GBP23.6 million, which I'll cover now before coming back to this slide.
So here we have net rental income, and that's broken down into various categories and it's compared against the first half last year. There is a more detailed split between London and Retail in the appendix, but this slide brings out the main points.
Now, as Rob has just reminded you, we chose to let sales run ahead of acquisitions last year. And that's resulted in the GBP21.7 million fall in net rental income in that category.
Our sales included Eland House, 50% of Victoria Circle, Arundel Great Court, St Johns Liverpool and Corby town center. And, let me tell you, we're just as happy with those sales today as we were the day we made them. And that's despite the impact on net rental income.
Now, net rental income on the like-for-like portfolio was up slightly in both London and Retail, with a surrender received at Cardinal Place and increased income at Piccadilly Lights and 40 Strand, putting us a little ahead of last year's first half, despite that period having a GBP4.8 million surrender receipt.
Now, as expected, income from our proposed developments declined. That was mainly at Victoria Circle, as the site is prepared for development.
The development program saw a GBP5 million reduction in net rental income. And that's largely due to demolition of Kingsgate House, which generated GBP4.6 million of net rental income in the prior period.
Completed developments saw net rental income increase by GBP1.8 million and that reflects lettings at One New Change.
And although small, acquisitions contributed GBP1.8 million in increased net rental income, and that was mainly due to The Cornerhouse in Nottingham.
So let's go back to that revenue profit slide. I've covered the reduction in net rental income. But partly offsetting that decline is a GBP3.3 million reduction in admin costs, which is these two lines shown here taken together, and there was also a GBP4.7 million reduction in interest costs.
Admin costs are down. They're down on the back of lower staff costs and professional fees, while interest costs were down largely due to higher capitalized interest, and that's because we invested in our development program.
Right, let's move to adjusted diluted net assets. We started the period with adjusted NAV per share of 863p, and, as Rob said, we ended it 1p higher. And what this slide shows you is the main movements.
So adjusted earnings were GBP143.4 million, then comes the valuation deficit of GBP10.9 million. And the next two items are small profits on sales; first there's GBP1.8 million from investment properties and then GBP1 million from trading properties.
Please note, though, that the sale of the flats at Wellington House has not yet been recognized in our results, and that's a GBP20 million treat for the second half of the year.
The next two items up here relate to our dividend. Cash dividends were GBP90.8 million, but we also spent GBP23.8 million buying back our shares, and almost all of that relates to buying back the shares we issued under the scrip dividend.
If you recall, as I explained in May, we did this to preserve choice for shareholders as to the form of the dividends they receive, but also to minimize dilution.
Now, with other reserve movements of GBP5.4 million, our adjusted diluted NAV per share ended the year at 864p.
Now, if you need any reminding that interest rates continued to decline over the six months, then you can see it in our adjusted diluted triple net assets per share. They ended the period down 31p at 777p.
Okay, let's move on to cash flow. Set out on this slide are the major components of our statutory cash flow, so that's IFRS debt, which excludes our joint ventures.
So we began the period with net debt of GBP3.18 billion. Operating cash inflow after interest was GBP66.6 million. And some of you will have immediately cast your eyes right to compare this figure with the dividends paid of GBP90.9 million, and you're wondering why the cash inflow is lower. And there were two main reasons for that.
The first is that cash inflow ignores the cash received from our joint ventures, and the second is due to the timing of quarter days. Now, rather inconveniently, September 29 fell on a Saturday, which meant that less rent was collected than normal by the end of September, and that's compounded by the fact that, coming into the six-month period, most of the March rent, which was due on March 25, had been collected by the start of the year.
So, after dividends come three items related to capital transactions. That's acquisitions, capital expenditure and disposals.
Acquisitions totaled GBP73.7 million, largely made up of The Cornerhouse in Nottingham. We spent GBP142.4 million on capital expenditure. And, although we did not make any sizeable disposals during the six months, we received GBP396.6 million from sales recognized in the prior period.
And when you take these three together, there's a net cash inflow of GBP180.5 million. But it's actually a little lower, at GBP116.5 million, if you were to deduct our share of the investments made by our joint ventures, which fall into the Other category.
So, on the subject of Other, the GBP110.5 million other cash outflow that you see here, that was largely the result of investment in our joint ventures, and, in particular, it was development funding for 20 Fenchurch Street, and we also made a partner loan to Scottish Retail, which they used to repay external debt.
So, overall, IFRS debt was down by GBP25.8 million. But because, as I've just said, we used Group resources to repay external debt in Scottish Retail, our adjusted diluted net debt, including joint ventures, was actually down by GBP90.5 million.
Now, let's turn to financing. With values broadly flat, our LTV fell to 36.2% during the six months. That's largely because of the proceeds from last year's sales which we received this period, and those sales' proceeds, they exceeded our investment in new acquisitions and our development program.
Following repayment of the Scottish Retail external loan, and due to the reduction in the amount of debt that's drawn on our short-term cheap revolving credit facilities, our weighted average maturity of debt stayed constant at 10.9 years, but our weighted average cost of debt increased slightly to 5.1%.
And, at September 30, we had GBP1.2 billion of cash and undrawn facilities. And we'll deploy that firepower if and when suitable opportunities present themselves.
So let me summarize. Our asset strategy is clear. We're going to continue to recycle capital. We're going to invest it in the right places for future returns, and the strength of our balance sheet, and our financing structure, are ready and able to support that strategy.
Right. Now let me hand you over to Richard for news on the Retail portfolio.
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Richard Akers, Land Securities Group PLC - Executive Director [4]
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Thank you very much, Martin. This morning I'd like to give you our insights into what is changing in the Retail property market. Our response to these changes will have a familiar theme; high levels of activity.
When your environment's changing quickly, you have to adapt quickly, and that is why, over recent weeks and through 2013, we will open 1.4 million square feet of new retail floor space in major stores and new developments. And this represents around 10% of our existing shopping center and retail warehouse portfolio space.
We believe that shopping and leisure go hand in hand, so I'll be talking about our increasing exposure to the leisure sector, both within our shopping centers and in standalone schemes.
I'll outline our strong operational performance in Retail sales and void management and in leasing, and lastly I'll give you a few examples under Rob's familiar theme of every asset having a plan.
There are three key trends that I'd like to outline. They're rooted in the long term, and are dominating the current environment. First, people are shopping less frequently, but staying longer and spending more. Second, the consumer is voting for convenience. And, thirdly, the fast adoption of multi-channel, or omni-channel, by retailers.
The National Travel Survey of 2010 observed that the number of shopping trips per person fell by 18% between 1997 and 2009.
This long-term trend is completely consistent with our short-term operational performance in our shopping centers. Footfall is down slightly. Like-for-like sales are up slightly. Same-center sales, which includes changes in retailers and new lettings, are up more significantly. And our food and beverage sales are up even more, reflecting the longer dwell times in our major centers.
This strong performance from leisure and food and beverage also stands out in the ONS data shown on this graph, clearly indicating that, over the last four years, spend growth on restaurants, cafes and leisure services has outstripped non-food goods.
Now, over the long term, consumers have always searched for more convenient ways to shop. CBRE's National Survey of Local Shopping Patterns calculates that, since 1998, the market share of out-of-town retail has increased by 53%.
Even more compelling is the actual demand we're seeing for out-of-town floor space. Every single one of these retailers across supermarkets, major stores and fashion, all the way through to food and beverage, has active requirements for out-of-town floor space.
And the shift to multi-channel. Successful retailers are exploiting every channel to market that is available to them. And, to us, it is clear that, for most retailers, this involves utilizing their property assets.
CBRE's research on the impact of the Internet on shop expansion observes that its immediate impact has been to capture existing mail order, sales of downloadable material and services. And this has resulted in a big fall in the number of service outlets on the High Street, and the many vacancies that we see.
But shopping centers are mainly selling goods. And so, rather than the growth of Internet shopping, maybe it's the growth of home delivery which gives the better guide to the impact on the kind of retail property that we hold.
This bar chart from Verdict, plotting Internet sales growth against home delivery growth, illustrates the point. Home delivery is expensive. So it's not surprising that retailers are pushing click and collect. In a recent report, Accenture state that 10% of retail sales in the UK are now accounted for by click and collect, and growing fast.
So, what is our strategic response? Well, to address changing shopping patterns, we're increasing leisure and food and beverage in all of our shopping centers. And we're investing in standalone assets, such as The Cornerhouse, which we acquired in May, and The Printworks in Manchester, a prime city-center leisure scheme, which was acquired last week.
We're opening our schemes in Leeds and Glasgow in March. And we have more prime city-center opportunities in the pipeline in Oxford and at Buchanan Galleries in Glasgow.
To respond to shoppers' desire for convenience, we're progressing with our supermarket-anchored scheme in Crawley, and our retail park in Taplow; respectively 94% and 68% pre-let or in solicitors' hands. And we've added a further 650,000 square feet to our retail warehouse pipeline, which is detailed in the appendix.
To respond to multi-channel, we've produced new formats for both John Lewis and Debenhams. In Exeter, John Lewis have used technology to provide visibility of their entire range in a store half the size of their normal full-line department store. At Chesterfield, Debenhams have opened an out-of-town-style department store, the first of its kind. These stores are both trading beyond expectations.
Our Google local products search initiative, which I talked about in May, has now been extended to our other shopping centers, and will include other landlords and more retailers. And we'll be introducing more technology initiatives at our Trinity Leeds scheme, including interactive screens, giving retailers the ability to project their image and product outside of their actual stores.
So, we're responding to the changing market. This slide gives a very simple outline of how these changes lead to the type and level of activity that we describe in our updates to you; more leisure, more retail warehousing and more development.
But in such a challenging market, our focus has had to be firmly on our operational performance.
Here we can report that voids are down, units in administration are significantly reduced and our occupancy has improved to 97%, from 96.3% in March.
We have the impact of the JJB failure in these numbers. And the impact of the post-September administrations of Comet and Optical Express still leave us in a better position than in March, even before taking into account any lettings that we may have concluded since the half year.
Our footfall, retailer sales and occupancy cost ratios are, as usual, detailed in the appendix.
Our progress on lettings has been good. Our investment lettings were at 2.9% above ERV. We're now over 99% let, or in solicitors' hands, at Buchanan Street in Glasgow, and 84% at Trinity Leeds. So our plans for these developments are on track. I can also announce that Victoria's Secret have chosen Trinity Leeds for one of their first stores outside London.
Our asset plans are also coming together. In Northampton, we've restructured and renewed leases. We've extended the average lease term from 3.5 years to over 8 years. At Chesterfield, we're building on the success of the new Debenhams store to add a further 27,000 square feet, pre-let to Hobbycraft and Asda Living.
In shopping centers, we're under construction with six outward-facing units at Southside in Wandsworth; three of which have been pre-let to restaurant operators. And we've just entered into an agreement for lease with Debenhams to provide a new 82,000 square foot department store at the center.
At O2, we're bringing in new retailers and restaurants. And we've obtained planning permission for improvements to the facade shown here.
In summary, you can expect more development creating the right space and, importantly, at the right price for retailers. You can expect us to invest in more leisure, both within our shopping center portfolio and in standalone assets. And you can expect us to continue nurturing the very strong relationships that we have with retailers, so that we can accurately predict the pace of change. And you'll see high levels of activity in reshaping the portfolio.
Thank you. Now I'd like to hand back to Rob.
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Robert Noel, Land Securities Group PLC - Chief Executive [5]
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Thank you, Richard. Now, as you can see, there is plenty of activity in our Retail business. It's almost fully occupied, and the proceeds of last year's sales are being recycled into great developments and acquisitions set to benefit from changing trends. And these themes are common in London. And I'd like to turn to that now.
In May 2010, we set out our clear plan to exploit a significant amount of opportunities that lay within the portfolio, rather than compete in the investment market. And, since we started, we've been busy building, selling and recycling capital back into the program, bringing forward more schemes.
We've always said that our plan is not predicated on economic growth, rather that we would build more efficient buildings and strike the construction cost curve at the low point to keep breakeven rents low.
Now, the continued scarcity of development finance means that our window for development has become longer than we thought it might be when we restarted development in 2010. And the success we've had with Park House, Cannon Street, Wellington House, the excellent progress we're making at 123 Victoria Street, 62 Buckingham Gate and 20 Fenchurch Street, which I'll talk about in a minute, have given us the confidence to commit to more.
I would just like to illustrate the occupational cost point.
On the left-hand side of this chart, you can see the typical cost per square foot of occupying a building built in the 1980s or 1990s, having been through at least one rent review cycle, made up of rent in blue, rates in green, and service charges and hard and soft facilities management costs in brown; probably around GBP118 per square foot all in, based on a rent of GBP55 per square foot.
Today, at 20 Fenchurch Street, for example, assuming a headline rent of GBP65 per square foot, an all-in cost could well be nudging GBP127 per square foot; an increase of around 7%.
But if we then take into account building efficiency, a different story emerges. In the 1980s and 1990s buildings, even at an occupancy of 1 person to 10 square meters, hammering the hell out of a building that was probably designed for 1 person to 12 square meters, or more, the occupancy cost per workstation is around GBP12,750 per year, now shown on the right-hand scale.
At 20 Fenchurch Street, at an occupational occupancy of 1 person per 8 square meters, the total occupancy cost per workstation is actually lower. And that's at a rent of GBP65 per square foot. As you know, we were targeting an average of GBP60 per square foot.
Add that to the fact that you may be in a legacy lease which may be too big for you, or a number of leases, because you have outgrown your original space, and you may be in two buildings or more, and that you need something that will be fit for purpose for the next stage in your business plan, which is not becoming more and more expensive to run, and the story starts to become very compelling.
Now, in my introduction, I mentioned the construction cost curve. Many of you saw a version of this slide when Colette put it up at our Investor Day in July, to illustrate the advantage of buying construction now as contractors are fiercely competitive.
But, as capacity in the construction industry naturally falls in leaner times, it doesn't take make of a pickup in orders for those same contractors to be less keen for the work. When this happens, as we've all seen before, the rising costs will not be gentle. At 20 Fenchurch Street, for example, 10% on raw construction costs would have added just over 5% to the breakeven rent.
So, to update you on our current and schemes, and starting in the City at 20 Fenchurch Street, we said at the outset that our breakeven rent is just under GBP50 a square foot and our target rent would be just under GBP60 a square foot, on average.
Today we have 23% pre-let to Markel, Kiln and Ascot at an average rent of GBP62 per square foot, a weighted average lease term certain of 17.8 years and a weighted average rent-free period of 31 months. That's 8.7 months for every five years. And we have a further 11% in solicitors' hands. All this activity covers floors 5, 6, 7, 8, 9, 14, 15, 16, 17, 26, 27 and 33; a whole range.
They are all also ahead of plan in terms of timing, rent and incentives and we have good interest in a significant amount of further space, with practical completion to shell and core not due for another 18 months.
In the West End, at 123 Victoria Street we achieved practical completion in August within budget. The retail space is fully let. The office space, and this is now a photo, not a CGI, is 42% let and we have a further 25% in solicitors' hand. Rents are ahead of plan and we're delighted with our progress.
Over the road, at 62 Buckingham Gate, we're due to complete 275,000 square feet next may and, again, this is a photo, not a CGI. We are within budget slightly ahead of schedule and we have strong interest.
Before talking about our next pipeline of schemes, I'd like to put our whole program in context.
Of the four due to complete this year, Park House, Cannon Street and Wellington House have all been sold prior to completion, and 123 Victoria Street is 73% let or in solicitors' hands. Next year we have 62 Buckingham Gate, followed by 20 Fenchurch Street in 2014 and the Zig Zag Building in Kings Gate in 2015.
Now, as I said in May, development is about timing. If the current level of tenant inquiries remains as it is, we are more likely than not to start New Ludgate in the spring of next year for completion in 2015. And the site is ready to go with a building contract tendered.
Demolition has started at Victoria Circle and we get vacant possession of 1 New Street Square at the end of December and have agreed terms for a lease re-gear with the freeholder to enable redevelopment.
At Portland House, we're on track to submit our application by March. This will be tied to provide affordable residential space at Castle Lane. At Eastbourne Terrace and Oxford House we're working on revised plans to deliver schemes right on the Crossrail nodes.
So on to the next schemes, and last month we announced that we committed to push on with the redevelopment of Kings Gate House and here you can see the cleared site.
That redevelopment will comprise two buildings. The Zig Zag Building, shown on the left here, an office building of 188,000 square feet on 12 floors with floor plates ranging from 5,500 square feet at the top, to 23,000 square feet at the bottom; all divisible, all good West End stuff.
There will also be 45,000 square feet of retail space and this includes the space below the second building, Kings Gate, shown on the right; a 14-story residential apartment building of 108,000 square feet comprising 100 private residential apartments. And there will be significant improvements to the surrounding public realm.
We estimate a total development costs of GBP343 million and completion is due in January 2015. Now, you'll see the development is now included in the table of committed developments with our usual disclosure.
At Victoria Circle, we secured vacant possession from around 170 leasehold interests, as planned, by September 30 and below budget. Demolition has started and will take 12 months and, while this is going on, we're progressing with detailed design and tendering.
The scheme is due to be built in three phases. Phase 1 will comprise 732,000 square feet and forms the bulk of the scheme, including 175,000 square feet, or 170 private residential apartments, in two linked buildings; 479,000 square feet of office space in another two buildings; all with 78,000 square feet of retail space at ground level.
Many of you will have seen the CGIs and models of the Victoria marketing suite during our Investor Day in July. If you've not had a tour, please see Ed or Mel and they will be delighted to arrange one for you.
Now, I talked a lot in May about the pace in asset management. Apart from the highly efficient securing of vacant possession at Victoria Circle, I haven't yet mentioned the asset management team. This team remains flat out.
One New Change is now 95% let, with two high profile retail re-letting deals well ahead of ERV. At Cardinal Place, the Ruffer deal completed and we've set a new rental tone with KPI Oil at GBP65 per square foot.
At Oriana, in Oxford Street, Primark have opened their 149,000 square foot store where they have over 1,400 staff on the payroll. We've submitted a planning application for the next phase; more flagship retail space and 18 residential apartments.
At Mark Lane, we're now fully let with income lengthened and strengthened and we've filled Oxford House right up to our VP date of 2014, maximizing income from this pre-development property.
And so the blood is still up. Having successfully sold the early schemes and Arundel Great Court, the remainder are letting up ahead of plan. We've added the Zig Zag Building and Kings Gate and we hope to add New Ludgate and Victoria Circle shortly; risk aware but not risk averse.
We are securing construction contracts at the right point in the cost curve, and the development program is backed up by a great portfolio being worked on by a best-in-class team.
So, you've heard about our activity in London and you've heard from Richard on the changes going on in the Retail markets and how we've been positioning ourselves to work with the Retail winners. And you've heard from Martin about how the finances are set up to support all of this activity. So, now let's look forward.
Well, unless you're an undertaker or a tax collector, it's a bit choppy out there and, for all of us, business continues to operate in a changing and uncertain environment.
But we can only tell you what's going on in this business, and there is an awful lot, as you have seen, going on in Land Securities. We're working to a very clear and focused plan in both our core areas of expertise and with each asset playing its part and with the finances required to deliver the plan.
In the Retail markets, we continue to position our assets for tomorrow's consumers and retailers. That means providing space for the Retail winners as I've said, and, as you've heard from Richard this morning, we're delivering on our planned increased emphasis on leisure.
In London, the market is beginning to recognize our efficiency argument. Our schemes are leasing up ahead of plan with our activity set to lock us into higher yields and create value. And, as we've said we would in both our core markets, we're continuing to commit to development where we consider the supply-demand dynamic to be balanced in our favor, but with our usual rigor when it comes to risk and reward.
And, as Martin said, as expected, having made some conviction sales last year and putting more capital to work in development, our earnings are down. But let's be crystal clear; we prefer to maintain a strong balance sheet and the flexibility to invest in the right opportunity rather than buy turnover.
There is a palpable sense of momentum running right through the business with everybody crystal clear on their priorities. It's business as usual with plenty of pace.
Thank you. That concludes the presentation. We've had a slightly shorter presentation than usual but lots of activity going on, as you can see. We've got plenty of time for questions. There should be some microphones being passed around. I would be very grateful if you could state your name and your business so that those people listening in can hear and we've got a record of it as well. Thank you.
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Questions and Answers
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Operator [1]
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Thank you. (Operator Instructions).
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Christopher Fremantle, Morgan Stanley - Analyst [2]
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Christopher Fremantle from Morgan Stanley. First, just a question on retail. I think I'm right in saying that you, relative to your peers, you have a relatively long tail of shopping centers that are below 500,000 square feet, low unit size -- sorry, low number of units in your centers.
Can you be a bit more specific about whether those centers have suffered more in the valuation, rather than the larger centers? Has there been any -- is there any variance in terms of size that you can identify there?
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Richard Akers, Land Securities Group PLC - Executive Director [3]
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Yes. Well, let me start with the fact that, in May, we showed a diagram which illustrated that around 5% of our portfolio we would put in that secondary category. Yet clearly, secondary shopping centers have suffered more than more prime shopping centers over the recent past.
And that trend hasn't changed in the last six months. But it's a very small part of our portfolio. And I think that's really all I can say.
We will continue to -- we had an enormous amount of change in our portfolio over the recent past. We've sold 10 shopping centers over the last -- well, since 2009; we've sold 15 since 2007 and 18 retail parks. So there's been an enormous amount of change, which reflects the change that we've seen in the retail market.
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Christopher Fremantle, Morgan Stanley - Analyst [4]
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Can I just push you just slightly? How big is the variance, in terms of the big and the small, in terms of how values have changed? Or are you --?
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Richard Akers, Land Securities Group PLC - Executive Director [5]
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Well, I think what I would say is that I think the approach of valuers has been that retail has gone down generally. So it's less differentiated between prime and secondary than perhaps it has been in the recent past.
I think, generally, you'll see that our rental values have gone down in shopping centers by 2.5%. And that's what's driven the valuation deficit on shopping centers. And I think that's just a general feeling, rather than any specifics.
Our specifics are strong. Our lettings are 2.9% ahead of ERV, our voids are down, our sales are up in our shopping centers. So I think that it's just a very general feeling, which we all read about in the press, that rent should be slightly lower across the board in Retail.
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Christopher Fremantle, Morgan Stanley - Analyst [6]
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Can I just ask one question to Martin, or really to Robert? If I look at the second half of the year, it's been characterized by very sharply falling corporate bond yields. Has -- does that change your behavior at all in terms of your appetite for risk? Or do you perceive it changing the wider market behavior, in terms of appetite for risk?
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Robert Noel, Land Securities Group PLC - Chief Executive [7]
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I think we've been pretty clear on our appetite for risk. One of the things that you've seen us do is bring our financial gearing down. Our operational leverage is actually quite high.
We know our markets inside out, as I said. We are absolutely as convinced as we can be that our developments are going to fill. And that is coming through. And it's been the root of our presentation this morning.
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Christopher Fremantle, Morgan Stanley - Analyst [8]
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Do you think -- I suppose the wider question is, do you think it influences the outlook for values more widely? Are you seeing the investment market pick up at all?
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Robert Noel, Land Securities Group PLC - Chief Executive [9]
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No, I think the investment market has been pretty solid in London. In Retail, the values have come down. We are seeing evidence of clearing prices being reached. And we are now seeing opportunities. You saw we bought The Printworks in Manchester last week. We did that deal very quickly. We knew exactly what we wanted, and we went in and we smashed it.
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Christopher Fremantle, Morgan Stanley - Analyst [10]
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Thank you.
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Nick Webb, Exane BNP Paribas - Analyst [11]
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Nick Webb, Exane PNB Paribas. I've just got two quick questions. Firstly, given the amount of requirements you're seeing in out-of-town retail, would you expect a return to meaningful levels of rental growth in retail warehousing any time soon?
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Richard Akers, Land Securities Group PLC - Executive Director [12]
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I think it has to be balanced with the fact that we've seen some insolvencies there. Obviously the Comet failure puts quite a bit more space into the market.
And so -- but we do see that demand, and that's the important thing. And, as the retailers the customers are not interested in disappear, and we bring in retailers that they are interested in, obviously it improves the assets.
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Nick Webb, Exane BNP Paribas - Analyst [13]
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Thanks. And secondly, very quickly on Trinity Leeds. I think you said it was letting up in line with expectations. Would you expect it to open full in March next year?
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Richard Akers, Land Securities Group PLC - Executive Director [14]
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We're 84% letter in solicitors' hands. If it opened now with that level, I'd be happy. If we carry on at the rate we've gone in the last six months, we'll be over 95% let when we complete. And if we're full for next Christmas, we'll be absolutely delighted.
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Nick Webb, Exane BNP Paribas - Analyst [15]
------------------------------
Thanks.
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Operator [16]
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(Operator Instructions).
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Remco Simon, BofA Merrill Lynch - Analyst [17]
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Remco Simon, Merrill Lynch. A few questions. First of all, maybe on Ludgate. If I recall correctly, previously you mentioned that the idea was to wait for a pre-let, not specifically because it was a reflection of confidence in the market, but also the design of the building, keeping the flexibility to change it to tenant demands.
Are you comfortable that the current design reflects tenant demands, and therefore it should go ahead speculatively?
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Robert Noel, Land Securities Group PLC - Chief Executive [18]
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Yes, we didn't actually say we were waiting for a pre-let. What we said, Remco, is that we would make the decision as to whether to go or not at the end of this calendar year. So that's another, whatever it is, six, seven weeks.
What we said was that, whilst we were waiting, we were talking to potential pre-let tenants. And we didn't want to start now because A, it would be early, but also, as soon as you get a tenant, they want changes made to the building. So we allowed ourselves to use that period.
What I said this morning is that activity levels in the market have picked up. I said that in the statement. If those activity levels continue, we are very likely just to crack on in the early part of next year. And that's where we are.
We're very comfortable with the design of the building. We've been working on it over the summer. It's looking very good.
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Remco Simon, BofA Merrill Lynch - Analyst [19]
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Okay, excellent. Maybe a question for Martin. Loan to value 36%. You've got guys to the left and to the right of you going ahead with development. Are you confident to let that loan to value go up a little bit? Or are you going to give them a little push to actually sell some assets, to not let it decrease too much?
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Martin Greenslade, Land Securities Group PLC - CFO [20]
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Sorry, what you did just say? What was going up?
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Remco Simon, BofA Merrill Lynch - Analyst [21]
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The loan to value, if you -- 36%, if you take into account development spends. Are you confident to let that tick up a little bit? Or are you going to look for some asset sales to actually keep it more or less around these levels?
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Robert Noel, Land Securities Group PLC - Chief Executive [22]
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Yes, they do tend to spend it as quickly as we make it from sales. (laughter) It's a natural feature.
Well, first of all, we've got GBP71 million still to come in out of those pro-forma sales at March. We've got the sales on Wellington House to come in.
But the key point is, we haven't really changed our stance, which is, over the medium term, is to run the net debt neutral, so to -- people to recycle capital. Because, actually, people are good at making decisions between what they like and what they don't like. If the capital is on tap, then you make poorer decisions.
So I'm very confident that what we're investing in the development pipeline will be much better than the sales that we've made, so in terms of quality of the product we've sold.
So I would expect there to be periods like this one, where we invest more in development than sales we actually make. But I would expect it to balance out, because that is the challenge to the team.
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Remco Simon, BofA Merrill Lynch - Analyst [23]
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Clear. Last question, maybe for Richard. How big do you see standalone leisure, like Nottingham or like Manchester? How big a part of the portfolio do expect it to be going forward?
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Richard Akers, Land Securities Group PLC - Executive Director [24]
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I think it's obviously a much smaller sector than Retail. We only want to be in the best schemes. So I think probably the capacity is less than GBP1 billion in the leisure sector. That's for us.
So that probably answers the question more specifically than you expected. But it is a smaller sector, and we would only be interested in investing in the best schemes, like The Printworks, which is right in the center of Manchester.
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Remco Simon, BofA Merrill Lynch - Analyst [25]
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Thanks.
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Hemant Kotak, Green Street Advisors - Analyst [26]
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Hemant Kotak from Green Street. Just following on from that, what was the yield on Printworks? Did you ever mention that?
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Richard Akers, Land Securities Group PLC - Executive Director [27]
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I think we did in a press release, but the initial yield was 6.25%.
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Hemant Kotak, Green Street Advisors - Analyst [28]
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Okay, great. And then I think you've laid out the rationale for investment in leisure quite well, so that's clear. But can you make some statement about the economics of investing in leisure, so with regards to rental growth prospects over and above shopping centers and retail parks, and then total returns as well?
And then also occupancy cost ratios; are they more favorable?
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Richard Akers, Land Securities Group PLC - Executive Director [29]
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Okay, the dynamics, from our perspective, look like the returns are slightly more weighted to income, which is a positive. The lease lengths are longer. We're seeing a trend for shortening lease lengths in Retail; lease lengths are longer in the leisure sector. So that's an interesting foil, if you like, to the Retail portfolio.
We do see rental growth potential, particularly in the food and beverage sector. Not so much in the big leisure boxes, but in the food and beverage which goes with them, we're seen very strong demand, and potential for growth in those schemes.
So the dynamics, we think, are good; lower risk, better gross-to-net ratios, and some growth potential as well.
------------------------------
Hemant Kotak, Green Street Advisors - Analyst [30]
------------------------------
And, just a last bit of that, total return prospects; do you think they're a bit better than shopping centers and retail parks? Or is it not so much that but just better risk-adjusted returns?
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Richard Akers, Land Securities Group PLC - Executive Director [31]
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I think the better risk-adjusted returns, that would be our approach. In terms of total return, we'll invest our money where we see the best total returns, whether it be Retail, leisure, London offices, or whatever.
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Hemant Kotak, Green Street Advisors - Analyst [32]
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Okay. And then just sticking with Retail for a second, with respect to your Central London Retail holding, you've obviously got a substantial holding there; I think it's just under GBP1 billion. How do the return prospects for that over the long term -- how do you think they differ relative to shopping centers and retail parks?
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Robert Noel, Land Securities Group PLC - Chief Executive [33]
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Shall I take that one? There are two things you need to know about our Central London shops. Mostly, they form part of office buildings, so you can't separate them out. We give you the use, but we can't separate them out, and you can't buy them on their own.
Secondly, quite a large contingent of it is the Piccadilly Lights block, which is lumped into our Retail category. And it's the Piccadilly Lights which has driven the rental value down in Central London this year because the valuers are telling us that the rental value of the Lights themselves are lower now the Olympics are over. But we'll see how that goes. We don't agree.
So I think that you can't really look at Central London Retail as its own thing when it comes to our portfolio. But the only thing I can say is that we are completely full; we have no voids. The last two lettings we've done at One New Change are way ahead of rental value, and so we're pretty chipper about it.
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Richard Akers, Land Securities Group PLC - Executive Director [34]
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I would say that having the Central London Retail portfolio is a big advantage for us, because all the retailers that are coming to the UK, and Victoria's Secret is a good example, they come to talk to us about our London Retail first, and then we get to talking about everything else we're doing as well.
------------------------------
Hemant Kotak, Green Street Advisors - Analyst [35]
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That's great. And then just one more on offices, please. There's a relatively strong demand from the TMT sector. How do you think Land is positioned to best capture that demand?
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Robert Noel, Land Securities Group PLC - Chief Executive [36]
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Again, our portfolio is full. TMT is one sector. If they go somewhere else, then that other person's going to have to come to us, and we look at London as one amorphous market. We think we are absolutely in the right locations.
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Harm Meijer, JPMorgan Cazenove - Analyst [37]
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Harm Meijer, JPMorgan Cazenove. A couple of questions, please. First of all just on the pipeline. We have read in the property press potential lettings at Buckingham Gate and 20 Fenchurch Street. Maybe you can give a bit of color on that.
Secondly also, just on Trinity. The asset value, was it actually flat over the last six months, yes or no? And just a bit of color on that.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [38]
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Why don't I take on the London stuff, and Richard, if you can answer the Trinity question in a sec?
Land Securities is quite quirky in the way we announce our deals. We will tell you, twice a year, what we have in solicitors' hands, and we don't identify those people with whom we have deals in solicitors' hands. And we will only tell you that they're in solicitors' hands when the heads of terms are all agreed and signed, and the thing's been handed over to the lawyers to close.
So you've got those figures today. We won't give any more than that. We are very, very happy with the interest we have in our schemes.
------------------------------
Harm Meijer, JPMorgan Cazenove - Analyst [39]
------------------------------
Good. Got it.
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Richard Akers, Land Securities Group PLC - Executive Director [40]
------------------------------
On Trinity Leeds, you'll see from the development table in the statement that we've added around GBP15 million to our anticipated development costs there. That is additional space that we have decided to develop for a food service concept, which we're calling Trinity Kitchen. And that produces a small amount of additional rent, but it really improves the scheme. And I've banged on a lot about food and beverage, and the importance to shopping, so it shouldn't be a surprise that we're doing this.
What it does is it increases the amount of food and beverage we have in the center. It also extends the range of type of food and beverage that we have. There are other benefits. It's improving one of the entrances, and it's anchoring the west end of the upper level, which will improve rental levels.
None of that's been reflected in the valuation, so our valuation is -- the performance is flat over the six months. The valuers still have significant profit and contingencies and, hopefully, adjustments to the yield to make as we let up and complete.
------------------------------
Harm Meijer, JPMorgan Cazenove - Analyst [41]
------------------------------
Got it. Valuations, actually, on your side were down by 2.5%. Operation is actually going quite okay, I would say; probably a bit better than expected. What did your faces look like when you got the valuations in? Do you actually think that those were the right ones, or do you say, come on guys, we are coming to an end, and are you sure what you're doing? (laughter)
------------------------------
Richard Akers, Land Securities Group PLC - Executive Director [42]
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We're always happy with what Knight Frank are saying. (laughter) I think I said it a little bit earlier, that there's been a general attitude, I suppose, from valuers that retail rental values have come back.
And in retail warehousing, larger assets are less liquid, and there's been a bit of yield shift there. And those are the two effects which have brought values down in both of those sectors.
That's a view that the valuers have. As you very astutely noticed, it's not really supported by our operational matrix over the six months and obviously we would hope to continue that performance and move values back up again.
------------------------------
Harm Meijer, JPMorgan Cazenove - Analyst [43]
------------------------------
Right, maybe just a last one. Are you currently bidding on any assets, actively bidding on something?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [44]
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We are always bidding on assets. When our expectation is matched with the vendors we end up buying them, as we did The Printworks. (laughter)
------------------------------
Harm Meijer, JPMorgan Cazenove - Analyst [45]
------------------------------
Thank you very much.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [46]
------------------------------
We have one question, I don't know what it is, we have one question from the conference call from Ryan Palacek at Kempen, if we can hear him.
------------------------------
Ryan Palacek, Kempen & Co - Analyst [47]
------------------------------
I was just wondering if you could just discuss on the valuation side a little bit, valuations on the like-for-like portfolio of the London offices. It seems to have been quite flat relative to where indices had fallen. If you could talk a little bit about what's going on there.
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Robert Noel, Land Securities Group PLC - Chief Executive [48]
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I think, and as we have stated, we are operating in a flat market and this business has been positioned to take as much advantage or position to create value through development, which we see as one of the very few ways of making progress at the moment, which is why we're doing it.
The investment market is robust. The occupational market has been subdued, which is why rental values are not moving forwards, and it's only by creating new space and capturing the demand that's out there that we can get rents going forward. So it's not surprising that the market is absolutely, as you say, flat.
------------------------------
Ryan Palacek, Kempen & Co - Analyst [49]
------------------------------
And if I could just follow that up with just one other question concerning asset sizes that you'd be interested in for acquisition. Can you give us some kind of wherewithal about how far outside of the box you think about acquisitions in terms of asset style as well as size?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [50]
------------------------------
We like to think we think outside the box all of the time. And the deals we've done this year range from GBP50 million to GBP100 million. Have we looked at deals a lot bigger than that? Yes, we have. Have we looked at deals smaller than that? No, we haven't. It's all about opportunity and it's all about what adds to what our shareholders already have.
------------------------------
Ryan Palacek, Kempen & Co - Analyst [51]
------------------------------
Okay, thank you.
------------------------------
Keith Crawford, Peel Hunt - Analyst [52]
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Keith Crawford from Peel Hunt. Just one or two things. First of all, thank you very much for slide 18, which is these 24 retailers who wish to go out of town and I imagine they expect they may actually make money by doing so. It is amusing, however, to reflect that Tesco, which was once the greatest star in the firmament, is not in that list, as far as I can see; now a 9p stock.
So whilst this group is very encouraging out of town, the metrics are good, may I say that? Whereas that we might go elsewhere and be a little less sure that some of these retailers in the in-town situation, which was the staple of commercial property markets for 50 years. Are we as sure now as we were before?
I mean, will you be taking a different view of these shopping centers? They're very good cash flow profiles but you've sold offices in London and schemes in London and some of these could potentially be for sale in the future?
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Robert Noel, Land Securities Group PLC - Chief Executive [53]
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Everything is for sale at the right price. I think you know that from us now. We are -- this is not about expanding the universe.
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Keith Crawford, Peel Hunt - Analyst [54]
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And do you have a substantial shopping center scheme following Trinity and Buchanan which were excellent for A1s, but have you got any more after that at the moment on the slot?
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Robert Noel, Land Securities Group PLC - Chief Executive [55]
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We have two schemes in the pipeline. One is in Oxford, where we are in joint venture with Crown, and the other one is at Buchanan Galleries in Glasgow, a scheme we already own with Henderson, and they're both -- and that's where we're building on free land.
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Keith Crawford, Peel Hunt - Analyst [56]
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This Zig Zag, I'm sorry to be lazy here, I can work this through, but this is pound for pound going to be more profitable than the schemes that you've done so far, isn't it, in Victoria?
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Robert Noel, Land Securities Group PLC - Chief Executive [57]
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We're pretty excited about it.
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Keith Crawford, Peel Hunt - Analyst [58]
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Can be very profitable that, yes. Will you perhaps keep some of these residential properties in Central London? The demand for residential is at least twice the population of the London area, isn't it?
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Robert Noel, Land Securities Group PLC - Chief Executive [59]
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The demand for residential is very, very strong. This is a very deep and liquid market. People are talking about a bubble. We absolutely do not see it as a bubble. London's population is growing and more and more people want to live in rather than live out.
It is very hard for us to own apartments once they have been built. Primarily because the net yield from a completed flat is very, very low single digit. Doing the activity is outside the REIT ring fence, so it is a taxable activity for us.
Now, if you imagine that you have got a completed flat and your net income yield is in the very low single digit, that means that you require capital growth guaranteed going forwards in order for the thing to behave ahead of your weighted average cost per capital.
If you think that is the case, you should be developing, not owning. If you don't think it's the case, you shouldn't be owning. So in both cases, you shouldn't be owning.
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Keith Crawford, Peel Hunt - Analyst [60]
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Can you get change of use for sites and/or buy in London to do further residential?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [61]
------------------------------
Well, we've got a pipeline at the moment between now and 2018 of around 500 apartments and that is at Kings Gate, which we've committed to in the last month, which is 100 apartments. We've got about 200 at Victoria Circle. And then Portland House, our plan is to build 300 apartments there. We've got some minor residential schemes on Oxford Street and Eastbourne Terrace in Paddington.
But this is a 900,000 square foot program over the next five years. It's quite substantial and it's all in the right locations.
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Keith Crawford, Peel Hunt - Analyst [62]
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Would you potentially, I'm just following a further question, look to expand at Victoria? It is an extremely promising, delivering right now on this, to expand your interests in Victoria further.
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Robert Noel, Land Securities Group PLC - Chief Executive [63]
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We'll do anything at the right price, Keith. We've got --
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Keith Crawford, Peel Hunt - Analyst [64]
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I suppose I've asked. Okay. And now finally the EC2, EC4business where nothing happens, is this because it's too embarrassing to sign the lease (inaudible)?
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Robert Noel, Land Securities Group PLC - Chief Executive [65]
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Sorry, can you repeat the question?
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Keith Crawford, Peel Hunt - Analyst [66]
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Well, you know how there's no lettings in EC2 or EC4 since -- actually since you last did them, there's damn-all in the market. Is this due to embarrassment? Is that the reason, that's it's just too embarrassing to sign a lease at the moment.
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Robert Noel, Land Securities Group PLC - Chief Executive [67]
------------------------------
No, no, not at all. As we said in the statement this morning, we think interest has picked up enormously since June. So the active demand is really quite substantial at the moment and we are engaged in some (multiple speakers) --
------------------------------
Keith Crawford, Peel Hunt - Analyst [68]
------------------------------
So we may actually see from financials outside insurance doing some (multiple speakers) --
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Robert Noel, Land Securities Group PLC - Chief Executive [69]
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We may well, yes. I don't think we'll see large investment banks taking football pitch-sized trading floors, but there is quite a lot of activity out there.
------------------------------
Martin Allen, Deutsche Bank - Analyst [70]
------------------------------
Martin Allen at Deutsche Bank. What are your plans for Ebbsfleet?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [71]
------------------------------
Good question. Ebbsfleet, as we have been saying for a while now, is something that will be built up by house builders. We are not a house builder.
We spent the last two years re-scheduling the Section 106 agreement so that we can get the land broken down into its constituent parts. We have achieved that.
We are now putting in some small cost infrastructure to divide the thing up into blocks and we have started selling blocks, or we've started the process of selling blocks to house builders. We have agreed our first deal. As soon as we've got any color on that we'll let you know.
I think that pretty well -- there are no questions on the web, which is great, no more hands up, so I think that concludes the morning; 10 o'clock, on the dot. Thank you very much indeed and we're around for another hour or so if you want to ask questions.
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Operator [72]
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That does conclude the conference for today. Thank you for participating. You may all disconnect.
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