Preliminary 2012/2013 Land Securities Group PLC Earnings Conference Call
May 15, 2013 AM EDT
LAND.L - Land Securities Group PLC
Preliminary 2012/2013 Land Securities Group PLC Earnings Conference Call
May 15, 2013 / 08:00AM 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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* Miranda Cockburn
Oriel Securities - Analyst
* Hemant Kotak
Green Street Advisors - Analyst
* Harm Meijer
JPMorgan Cazenove - Analyst
* Martin Allen
Deutsche Bank Research - Analyst
* Nick Webb
Exane BNP Paribas - Analyst
* Kristian Bandy
UBS - Analyst
* John Cahill
Investec Bank (UK) Plc - Analyst
* Harry Stokes
UBS - Analyst
* Keith Crawford
Peel Hunt - Analyst
* Ryan Palecek
Kempen & Co - Analyst
* Marc Mozzi
Societe Generale - Analyst
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Presentation
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Operator [1]
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Thank you for standing by, and welcome to the Land Securities annual results presentation.
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Robert Noel, Land Securities Group Plc - Chief Executive [2]
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Good morning, everyone. Welcome; nice to see you.
Against a difficult macroeconomic environment, particularly retail outside London, we've produced a great set of results this year, and we've delivered strong operational performance. Our strategy is influenced by two key factors.
One, occupier requirements are constantly changing. This means winning buildings have to be able to adapt. With offices, not only our businesses and their employees looking for great environments, but they've also got to have highly efficient and technically resilient space.
In retail, consumer habits have already changed beyond what the market originally estimated, and habits will continue to change. And as Richard said last year, that will have a profound effect on anything that's not very convenient, or dominant in its catchment, or both.
Two, markets are cyclical; and time and time again, developers, investors and their financiers have reacted too late to emerging trends. In turn, that has amplified the cycle.
Winners have to read these factors and then act, and that is exactly what we do, and so this will be a constant theme today.
We are a total return business. We recycle capital because income doesn't last forever, particularly with rapidly changing trends.
As you know, since coming out of 2009, we've been positioning the portfolio to focus on assets best suited for tomorrow's market, funding our investment and development activity from sales of assets that are ill equipped for change. Think Stratford, Corby, Worcester, Liverpool, and even Eland House. We're then opportunistic about crystallizing and recycling of development profits. Think Park House and Cannon Street.
Now what we set out to do this year was to reinvest the proceeds from sales we made last year, in total over GBP900 million of disposals, and we did exactly that, with GBP420 million invested in development and refurbishment and GBP529 million in acquisitions, primarily in leisure, about which more from Richard later.
We started development in 2010 because we saw supply constrained markets, and because we were able to lock into low construction costs with our strong balance sheet giving us competitive advantage.
This year we set out to make demonstrable progress in our development program so we could get on with the next wave while the window is still open for development.
The GBP31.7 million of development lettings executed across the Group underlines great progress. We completed 1.5 million square feet of developments during the year. They were 92% sold or less by the year end. And those developments produced a surplus to date of 36%, or GBP307 million since commitment.
Today we have 2.3 million square feet on site across the Group as our window for development remains open. And across the business, we have plenty more opportunity.
We manage our assets aggressively to lengthen and strengthen income streams and to keep our voids down. Our asset management teams remain flat out with a plan for each and every asset. We executed GBP26.4 million of investment leasing deals during the year, excluding predevelopment properties, 3.1% ahead of ERV; and our voids were reduced from 2.8% to 2%.
And finally, we're disciplined when it comes to our balance sheet. We have followed a broadly neutral stance on net debt since we came out of 2009 because we wanted to reduce our financial leverage as we move through the cycle. Our LTV is now 36.9%, and we have over GBP1 billion of cash and undrawn facilities.
With fast moving trends and cyclical markets, we see this recycling activity as absolutely crucial. It would be easy to expand our business, but we exercise this discipline, because it's right for our shareholders, at a time when the most accretive activity on an overall return basis comes from opportunity we've created within our development portfolio, as you will see from these results. And this will continue for the time being.
Growing the listed sector is not our mission. Our mission is to maximize the returns for Land Securities' shareholders. And we're delivering. Our total property return, and this excludes surplus from sales in the trading portfolio, was 7.8%, outperforming the IPD quarterly universe by 440 basis points, and with significant outperformance from our development program.
Our total business return, dividend plus growth and adjusted diluted NAV per share was 8%. So as you will hear this morning, Land Securities is delivering today, and is well positioned to deliver in the future.
So this is the running order. Martin will now give you more detail on our financial performance before we move on to talk about Retail, and then London.
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Martin Greenslade, Land Securities Group Plc - CFO [3]
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Thank you, Rob. Good morning, everyone. What I'd like to do is start by summarizing our headline results, and then take you behind those numbers and show you the impact of our strong operational performance.
Our profit before tax was GBP533.0 million, and that's driven by our revenue profit, our valuation surplus of GBP217.5 million and some GBP38 million of trading property profits. Now of that GBP38 million, GBP20.7 million relates to the completion of Wellington House, where all the units had been pre-sold. We also recognized GBP15.4 million in trading profits, and that was in relation to an overage entitlement that we had on some land at Bankside which we'd sold in 2005 for residential development.
Now adjusted diluted NAV per share was 903p. That's an increase of 4.6% over last year, and that was mainly driven by the valuation surplus and the trading property profits. Now there is a breakdown in the appendix of the key movements and adjusted NAV, but I'm not covering it any further in my presentation today because I've got a different treat for you.
Now as anticipated, revenue profit was lower this year, but at GBP290.7 million it was down only 2.9%. And that was ahead of our expectations, and we'll come onto why on the next slide.
Adjusted diluted earnings per share were down 4.4% to 36.8p, with a slightly greater decline than revenue profit, largely due to take-up under our scrip dividend scheme increasing the number of shares in issue.
Now as I indicated last year, we will buy back that scrip dividend if the shares are issued at a material discount to underlying net assets. And during the year that's just passed, we bought back around 70% of shares issued as dividends.
And on the subject of dividends, we're today announcing a recommended final dividend of 7.6p, and that brings the total to 29.8p for the financial year, up 2.8%. It's in line with our aim of progressing the dividend in a sustainable manner, smoothing out the earnings bumps that come with development.
Now let's look at revenue profit in some more detail. What this slide does is it sets out the main components of our revenue profit, and it includes our proportionate share of joint ventures. Now for the first year, it also includes our proportionate share of X-Leisure, which under IFRS is accounted for as a subsidiary. So our revenue profit for the year was GBP290.7 million. That's GBP8.7 million lower than last year.
And as you can see, the main reason for that decline was that net rental income fell by GBP25 million, partly offset by cost savings and lower net interest.
Now before we look at net rental income in more detail, what I need to remind you about is that last year, we had around GBP10 million of non-recurring items, and those were largely surrender premia and dilapidation provisions.
So let's move to net rental income. Net rental income on the like-for-like portfolio was up by GBP7.8 million, with London up GBP9.3 million, and Retail down GBP1.5 million.
And in London, we benefited from income on the refurbishment at 40 Strand, there was increased income at Piccadilly Lights, and we had a surrender and re-let at Cardinal Place. Retail was slightly lower during the year due to the impact of retailer administrations.
Now the reduction in net rental income on proposed developments and the development program all relates to London, where we saw income cease on Victoria Circle; that's down GBP2.8 million on last year; 1 New Street Square, down GBP1 million; and the largest of them all, Kingsgate House, down GBP8.6 million; while completed developments were up GBP5.9 million, and that's largely due to lettings at One New Change.
Now as you know, we chose to let sales run ahead of acquisitions last year, which has resulted in a GBP35.2 million fall in net rental income. And we only partly offset that with income from the leisure assets we acquired.
So let's go back to the revenue profit slide, and before I leave revenue profit, I'd like to spend a little time talking about costs.
Now cost control always matters, but in a low growth environment, its impact is larger. So what I want to do now is to show you what makes up our total costs.
So let's start with the figures from the revenue profit slide. Here are our costs, all of them, other than interest and ground rents. What I've done is I've split them between direct property costs and indirect expenses. But what we shouldn't do is to get too exercised about the difference. Some income, like service charge fees, development management fees, they net off against the direct property costs, while the costs of the people providing the services you'll find in indirect expenses.
Now our total cost ratio as a percentage of gross rental income before ground rents was 19.7%. Last year's costs were at a similar level, but with lower direct costs and higher indirect expenses. And last year's cost ratio benefited from higher rental income. But what I'd like to do now is take you behind the cost ratio, because one thing's for sure, not all costs are the same.
So the first component of our costs is managed operations. And what these are are largely the costs associated with running some of our own car parks, and the associated income for this cost is in rent. And so if we outsourced all of our car parks, these costs would disappear, but our rental income would be lower. So that's 1.6% of our cost ratio; different business model, different cost ratio.
Now next is the cost of tenant default at GBP8.3 million, and this largely relates to writing off bad debts and tenant incentives to retailers who've gone into administration. Void costs represent 2.1% of our total -- of our cost base, with other direct property costs accounting for 1.6%.
Next come the costs associated with delivering developments, and that's net of the fees we receive from joint venture partners or third parties.
Development expenditure may not be good for our total cost ratio, but it's absolutely essential to deliver the superior returns we've seen from our development portfolio.
And finally, we have the remaining costs, which are largely head office and staff related.
And this is how it compares to last year. And the larger differences are the increase in tenant default costs this year; that's a cost we don't control. But lower void related costs, and that's thanks to the focus of our letting team on letting up empty space.
And other direct property costs are up. But remember, they're only up because of some GBP5.8 million of dilapidation provision releases last year.
And there was a significant reduction in asset management and admin costs, of which GBP2.7 million related to Brand Empire, with the balance being lower staff costs and other expenditure, some of which has been deferred into the coming year.
So hopefully, this gives you a better insight into our costs. And now let's move on to cash flow.
Now with the acquisition of a majority interest in X-Leisure, our statutory debt, IFRS debt, now includes 100% of the debt in that business, but it still doesn't include any of the debt in our joint ventures.
Now I've, therefore, changed this slide from previous presentations to reflect our proportionate ownership and the movement in our adjusted net debt over the year. Now you'll find almost none of these figures in our statutory results, but fans of our IFRS cash flow disclosure, and I can spot a few of you, you'll find all of that information in the appendices.
So we began the year with adjusted net debt of GBP3.98 billion. Operating cash inflow after interest, was GBP212.3 million, and we paid GBP178.3 million in cash dividend.
And then come four items that relate to capital expenditure. That's -- or capital transactions in total. That's acquisitions, capital expenditure, disposals, and then the business combination which relates to X-Leisure and represents our share of their underlying assets.
And when you take these four together, there's a net investment over the year of GBP313.4 million. Now, as you know, our broad aim over time is for property disposals to match capital outflows on acquisitions and capital expenditure, but as we've said before, we don't expect to do it perfectly every year. And we don't need it to be perfect every year.
We've got a strong balance sheet; it gives us flexibility to respond to opportunities as they arise. And we did precisely that this year with our leisure acquisitions. And in contrast, last year, we sold ahead of buying, as we identified very few attractively priced acquisition opportunities. And that may be the same again this year. We'll just wait and see.
Now overall, adjusted net debt ended the year at GBP4.29 billion, up GBP309 million over the year, but only up GBP104 million over the last two years.
So let's move on to financing. Now despite the GBP300 million increase in our adjusted net debt, all of our gearing measures are broadly flat or down compared with last year as a result of the increase in the value of our assets. Now this is absolutely in line with our strategy at this stage in the property cycle.
Our main gearing measure that we use internally is Group LTV, including joint ventures and subsidiaries on a proportionate basis. And this measure came in at 36.9%, and that's down from 38% last year.
Now the weighted average maturity of the Group's debt is 9.7 years, with a weighted average cost of 4.9%.
So let me conclude. As anticipated, revenue profit was lower this year, but it was ahead of our internal expectations thanks to a strong operational performance and cost reductions.
Our performance in the coming year will largely be determined by the speed at which we let completed buildings, and the balance between disposals and net investment.
We remain well placed to respond to the market conditions. We have plenty of firepower, and our balance show remains absolutely robust.
So on that note, let me now 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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Good morning. As Rob said at the start, Retail is changing fast and it's far from dead. In fact, it's pretty clear that big new shopping centers are as popular as ever. And as if to prove that point, Trinity Leeds has attracted over 80,000 people a day since our opening on March 21.
Our retailers are buzzing, and our restaurants are flowing, and it's clear that most major store groups see physical shops as an important part of their strategy. And so during the year, we have built or started building the right space in the right place for all of these retailers.
And people want to have fun, so leisure is more important than ever. We've recognized this importance and increased our exposure to leisure properties, with over GBP400 million of acquisitions in the year, and that takes our leisure & hotels category to some 18% of our Retail portfolio.
And clearly, the environment has also been very challenging. All of these retailers have fallen into administration. But despite that, Ashley and Dominic's teams have reduced our like-for-like voids and administrations over the year from 5.6% to 5.2%. We're pleased with that reduction, and we've given you details by sector, and our letting statistics, in the appendix slides.
Unsurprisingly, in a year of very little good news for the consumer, our valuations have been under pressure. But valuations of our prime centers have bounced back in the second half of the year, based on strong evidence in the market.
And you can also see that our developments have made a significant contribution, leaving shopping centers pretty flat for the year, but 3% ahead of the IPD shopping center benchmark.
Retailing warehousing was also ahead of its benchmark by 0.6%, but has lost ground, due to occupational market headwinds and insolvencies, and with some outward yield shift on some of the larger lot sizes. But that hasn't affected the leisure & hotels sector which clearly has fared better.
Now at the interims last November, I talked about how we saw customer behavior changing and the actions that we've taken to respond to that very real change in people's whole approach to shopping. Now today, I'd like to outline our plans for each of our sub-sectors so that you can see our specific strategy in each area and how our portfolio's changing.
This is the broad split between shopping centers, retail warehousing and leisure & hotels. But if we look at it by use, then we've increased our exposure to the leisure sector to some 25% of our overall Retail portfolio rental value.
Now looking at shopping centers, we have three distinct categories. And the bulk of the prime category is represented by our six largest schemes; Glasgow, the two Leeds schemes, Cardiff, Bristol and Gunwharf Quays.
The definition of prime has been tightening so we have a larger category of secondary, which includes our schemes in Livingston, Dundee and Sunderland, which I'll come on to later.
Prime shopping centers are growing their market share of Retail sales, and we're growing our investment in them through development and asset management actions.
Let's take a look at Trinity Leeds, where we've seen a GBP93 million valuation surplus so far since commencement in 2010. It's trading well, and it will get another boost in the autumn with the openings of Victoria's Secret, Primark and Trinity Kitchen.
24% of the units at Trinity are leisure and food & beverage, and we've stretched the quality of our food offer at the high end, with two great concepts from D&D restaurants. That's Conran, Angelica, which is shown here, and Crafthouse; and two from Living Ventures, the Alchemist and the Botanist.
And at the fast food end of the spectrum, Trinity Kitchen is our street food concept. We'll have seven fixed pods and five authentic street food vans, which will change on a monthly basis.
Now let's turn to digital. We've taken our offer forward here based on two key principles; firstly, providing the right environment for shoppers. And free Wi-Fi for some of our customers is a basic human right; a new app, Google product search, the customer service lounge, and 31 digital screens around the center.
The second of our digital principles is to enable our retailers to connect efficiently with their customers. Here, our CRM system lets our retailers connect directly with the people who have indicated an interest in their brand or their sector.
All of this is delivered through an ever-changing environment at the center, on our website, on our app, with new films at the cinema, changing advertising on the screens, events, pop-up shops, and of course street food vans.
So with this continuous changing environment, Trinity's opportunity to connect through social media is exceptional, and we've already collected 85,000 Facebook fans.
Our other opening in March was Buchanan Street which has been one of our most profitable projects. Lester's team have delivered 49 apartments and GBP4.7 million per annum of rental income, a profit of GBP35 million for a cost of GBP60 million. And just as importantly, it moved the prime pitch on Buchanan Street towards Buchanan Galleries, where we also have plans for expansion.
We've secured tax increment financing, and we have achieved outline planning permission for a revised scheme which links into Queen Street Station. Plus, we have signed Marks & Spencer for the new anchor store, and we're now progressing with further pre-lettings.
At Oxford, we've also made great progress. Yesterday we entered into a development agreement with Oxford City Council, and we signed John Lewis for the anchor store. We're now progressing with our design and planning application.
These developments will build on experience we've gained at Trinity Leeds in developing modern shopping environments which are digitally enabled and full of entertainment and leisure. And this is exactly the way that we intend to expand our prime shopping center portfolio.
Now as we've been saying for the last two years or so, we're executing a specific plan for every asset. For example, at Cardiff, we've agreed a back-to-back surrender from BHS and a sale to Primark. They'll be producing a flagship store in the St David's center.
At Gunwharf Quays, we're grown our income with 14 new lettings. And at White Rose, we've submitted a planning application for the expansion of Debenhams and Primark, a cinema and some restaurants. Set in 76 acres, White Rose is the only out-of-town shopping center in West Yorkshire.
A number of other retailers there also want more space, not least because with its free car parking, it's ideally set up for multi-channel retailing.
Some of our shopping center investment is in suburban London schemes, and here, with a stronger economic backdrop and growing population, we've got some great opportunities for development for alternative uses. So that will mean adding hotels and residential, as well as new retailers, leisure and food and beverage.
At O2, we've acquired the freehold from Aviva. That will open up new development angles for us. At West12, we're investigating the expansion of the supermarket and further hotel development. And at Southside, we've secured Debenhams as the new anchor store for the center, plus we're adding more externally-facing shops and restaurants.
And we've also been busy selling our more secondary centers. In 2011/'12, Corby town centre and St Johns, Liverpool, last year Cathedral Plaza in Worcester, and since the year end, Clayton Square in Liverpool.
And we talked about some retail locations dying, but Sunderland, Dundee, and Livingston are not dying locations. Sunderland is a city of nearly 300,000 people who all need to eat, wear clothes and shoes. The Bridges is the shopping center.
For Dundee, the nearest largest competition is Aberdeen, which is 66 miles away, and Livingston provides an accessible alternative to shopping in Edinburgh, which is hard to get into. With higher income yields and affordable rents, good secondary centers which are dominant in their catchments, are now seeing yields stabilize, investors seeking to buy, and banks a little more willing to lend.
Now historically, retail parks have been low risk, highly liquid, and principally held by institutions with low cost of capital. We need higher returns. So over recent years, we've taken the opportunity to sell 16 of our older retail parks, and retained only the assets that have development or asset management potential, and where retailers want to trade.
Alongside that, we've got a substantial development pipeline targeted at food and fashion retailers, where there's still strong demand. During the year, we started building a retail park in Taplow, and food store-based schemes in Crawley and Chadwell Heath. These will show high returns, and will all be completed this year.
And we're building up a pipeline of future schemes, and these are detailed in the appendix slides. But for example, at Selly Oak, we've agreed to sell part of the site to Birmingham City Council for a life sciences campus, which enables us to pursue a smaller scheme. It's 39% pre-let to Sainsbury, with excellent planning prospects.
In Maidstone, we have an agreement with the land owner, we've signed Waitrose for 42,000 square feet, and we have another 77,000 square feet under offer.
So lastly, our strategies for leisure and hotels. The Accor hotel portfolio, of 29 hotels produces an income yield of 6.7%. Now Accor have a break clause on each asset in 2019, where they have to give three years' notice. So on the leases they break, we will have three years to find an alternative use or occupier; and on those that don't break we will have 15 years certain from 2016.
On current trading performance, we're not expecting a material number of breaks to be exercised. But that will help us execute an orderly exit from this portfolio, which as we've said before, is not core to our business.
So why are we investing in leisure? Well, the initial yield on our investments in leisure in the last year has been 6.3%, and we believe our total return will be built up from this level, with some fixed uplifts from some of the bigger leisure space, rental value growth on the food and beverage, plus value uplift from asset management initiatives. And the upshot is that we believe this will generate ungeared returns of 8% to 9% or above, and this will come from leases which average over 12 years unexpired; and, as we've said before, you can't eat out on the Internet.
During the year, our leisure and hotel investments have outperformed IPD Retail by 7.1%.
So in short, we've extended our depth of relationships and skills in the Retail sector to the leisure sector, with our acquisition of X-Leisure Management. We've changed our portfolio, but don't expect us to change our focus strategy, which is appropriate and in line with the trends we observe in the market.
We have a plan for each asset, we will continue to recycle capital, and we will drive returns through development and asset management.
And naturally, we look forward to updating you on our plans as we're going along, and at our Retail Investor Day which we're holding this year on September 20.
In the meantime, I'll hand back to Rob. Thank you.
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Robert Noel, Land Securities Group Plc - Chief Executive [5]
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Thank you, Richard. Turning now to London, and just to remind you, in May 2010, we set out our strategy to exploit a significant amount of opportunity within the portfolio rather than compete in the investment market. Since we started, we've been busy building, selling, recycling capital back into the program, and bringing forward more schemes.
And remember, we've always said that our plan is not predicated on economic growth; rather that we would build more efficient buildings, striking the construction cost curve at the low point to keep total occupational costs attractive in their market.
Last year, we said that continued scarcity of development finance meant that our window for development had become longer than we thought it might be when we restarted development in 2010. So in November, we had the confidence to announce commitment to Kings Gate and the Zig Zag Building in Victoria.
Today we build on that confidence by announcing a commitment to build out over 700,000 square feet at Victoria Circle. This will be a speculative mixed-use scheme, and the latest part of our transformation of this West End hub.
I'd like to focus today on how our development program looks, but before that, can we just run through the valuation?
The portfolio, excluding the development program, increased in value by 0.5% in the first half, in green, and 3.0% in the second half, in red. That's 3.5% in total. But over the year, as you can see in the middle section, our development program increased in value by 18.2%, which means that the combined portfolio increased in value by 5.4% over the year. You can see why the development opportunities we have within our business are important to us.
On to developments then headed by Colette, and starting with the schemes we completed during the year.
Park House completed in November, and our final payment was received, crystallizing a 34% profit on cost.
We finished Wellington House in October, and all of the apartment sales completed, as we'd expected; a highly successful scheme for us, producing a pre-tax profit on cost of 47%.
123 Victoria Street completed in August. The building is 78% let, and we have active interest in all of the remaining space.
So moving on to the committed schemes and starting in the West End.
62 Buckingham Gate completes this week. This building is 10% pre-let at a rent of GBP70 per square foot, and we have active interest in other floors.
At Kings Gate, we've made very good progress on sales, with 59 out of the 100 apartments pre-sold already at an average price of nearly GBP1,700 per square foot. The retail element has been pre-let to Jamie Oliver, bringing another exciting brand to Victoria. Construction only started in November, and completion is due in January 2015.
Next door at the Zig Zag Building, we have strong interest in the retail element as well. We're not yet marketing the offices. Again, practical completion is not due until January 2015.
Turning to Victoria Circle, here you can see the 5.5 acre site where demolition started in October, and as you can see, things are moving at quite a pace. Victoria Circle forms three separate phases.
Phase 1, which we have committed to, is highlighted in red, and will comprise 727,000 square feet of residential, retail and office space.
Phases 2 and 3, in blue and green, can follow one we get the land back from TFL. This will be after completion of the Victoria Line station upgrade, and Crossrail 2 future-proofing, which is under construction at the moment. And we're not due to get this land back until mid-2016.
Fronting Buckingham Palace Road, we'll be building 170 private residential apartments totaling 167,000 square feet. In addition, there will be two office buildings. Floorplates will be from 10,000 square feet to 30,000 square feet, technically resilient for occupation at one person per 8 square meters; and, as ever for the West End, all sub-divisible without loss of floor area.
Beneath the offices and residential apartments will be two new retail streets which will eventually link through to Cardinal Place and Victoria Street; 80,000 square feet, extending the retail and food and beverage offer for Victoria.
Now if you haven't been on a tour of Victoria yet, you are, I'm afraid, well behind the curve. So do please speak to Ed or Mel, and we will be delighted to show you round.
Let's move on to the City. At 20 Fenchurch Street, we have 354,000 square feet, or 51% by rental value, pre-let; six tenants. The average rent is GBP61.40 per square foot, a weighted average lease term certain of 16 years, and a weighted average rent-free period of 26 months. That's eight months for every five years; ahead of expectations. And we have another 5% in solicitors' hands at the moment.
Practical completion to shell and core is right on our original target for next April and within budget.
Elsewhere in the City our two proposed developments set to benefit from the Crossrail/Thames link interchange. First, New Ludgate, where we are still to commit to development, but because we are fully planned, fully designed and fully tendered, practical completion will be 23 months from the moment we commit. This flexible strategy is important. Development is about timing.
Second, 1 New Street Square, where we achieved vacant possession in December. We've completed our head lease negotiations with the freeholder and demolition has started. And we expect to have a clear site ready to go by April next year. Earliest delivery of this scheme is July 2016, and behind the scenes, detailed design is underway.
We set out in the appendix to your pack our usual disclosure on all of these development properties and the retail ones totaling 2.7 million square feet in London, and an estimated total development cost of GBP1.6 billion. That's our share.
Looking further forward, we submitted planning applications at Portland House and Oxford House during the year, and are finalizing our revised plans for Eastbourne Terrace. And we will update you on these plans in November.
Scott's team remains very busy. Voids have been kept to a minimum, and as with the Retail business, smart lease re-gearing activity has softened the impact on revenue profit from sales. One New Change is now fully let, with rental growth emerging in the retail element.
We proved rental uplifts at Cardinal Place during the year after taking space back from 3i and re-letting it, and increasing [Ruffer's] space take and lease length.
And Oriana on Oxford Street, our JV with Frogmore, a property swap and planning consent for the next phase, along with very strong retailer interest, has led to good performance.
At Piccadilly Lights, we've moved the advertising rent on again. And following our purchase to complete the island block last summer, and where we've let virtually all of the space on temporary leases, we are in discussions to reconfigure the main flagship retail stores, restructure the leases and increase the rents.
At Southwark Bridge Road following a surrender from the head tenant and a simultaneous removal of a break in the under-lease, we've crystallized a resulting 18.5% uplift in value through sale.
At Red Lion Court, we've re-geared a two-year lease into a seven-year lease with Lloyds Bank as we look to the long-term options on this important riverside site. And so it goes on day in, day out.
We ended the year with a void rate of just 1% and a weighted average unexpired lease term in our offices of 9.5 years. Three years ago, it was 6.2 years.
So we're delivering on our strategy for London that we laid out in 2010. Having successfully sold the early schemes, our developments are performing well, with 537,000 square feet of lettings in London during the year.
We've added GBP726 million to the program, or over 1 million square feet at the Zig Zag Building, Kings Gate and Victoria Circle. So we have over 2 million square feet in the program, and we expect to add New Ludgate shortly.
As you know, we've been securing the construction contracts at the right point in the cost curve, with all of the committed schemes and New Ludgate fully tendered. And our development program is backed up by a first class investment portfolio and both are being worked on by a great team delivering results.
So you've heard about me from London, and you've heard about from Richard of the depth of activity in Retail and how our portfolio has been re-shaped and re-focused over the last few years, and Martin has explained the numbers. So what next?
Well, politicians, central bankers and economists all continue to scratch their heads. We have a corrugated economy and a fairly flat real estate market. And while this lack of direction continues, speculative development finance will remain scarce. That means our window for development remains open for the time being. The market is beginning to recognize the new buildings we develop are significantly more efficient than existing stock, and that is why we are letting our schemes.
We can pick and choose our acquisitions as we have created plenty of organic opportunity. In Retail, our emphasis is on providing space for retail winners. Lester and his team completely nailed Leeds and Glasgow. That's 900,000 square feet. And as Richard has said, we have a lot more to come. Much of it supported by pre-lettings to retail winners.
We've made great strides over the last few years to position our assets for tomorrow's customers and consumers. It's about environment, as Richard said, and connection. And we're delivering on our plan to put more emphasis on dominant centers, convenient shopping and leisure. Tomorrow's customers and consumers will continue to change, and we will respond to what they want.
As we expected, last year's sales, and putting more capital to work in development, is holding revenue profit back for the moment. But as we are demonstrating, development is the right activity for us at this point in the cycle. We have every confidence that despite the economic conditions, our committed schemes will let. We're confident, because we're building the right space.
We will continue to manage our balance sheet with discipline where there is competition for capital internally so our teams are forced to make choices because it's right for our shareholders.
If we're out-bid externally because our organic opportunity sets our return requirement too high, that's fine with me. Markets are changing, and we need to manage each part of the cycle appropriately. So we like to have the flexibility to invest in the right opportunity at the right time, rather than grow for the sake of growing.
We're in great shape; a total return business totally focused on our shareholders. And as you can see, there is plenty to play for.
Thank you.
So on that note, we're very happy to take your questions. There will be some microphones floating around. If I could ask, please, that you state your name and company so we have a record, as we will be putting all these questions and the text on the website later on.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Miranda Cockburn, Oriel.
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Miranda Cockburn, Oriel Securities - Analyst [2]
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Just one question on the London development pipeline. You've obviously started development of Victoria Circle, which suggests that you're confident in the West End outlook, but not at Ludgate. Does that mean that you're slightly more cautious on the City versus the West End?
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Robert Noel, Land Securities Group Plc - Chief Executive [3]
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No, we're not at all, Amanda It's a great question. And as you say, this is the second time we've delayed committing to New Ludgate.
As we've always said development is about timing and you have to think about the product you're producing. If I take you back to where we were in 2010 and when we started 20 Fenchurch Street, what we said was that the likely space-takers there would be 50,000 to 80,000 square feet. Those guys only look 12 to 18 months out before they move. And we had a build program of three years. So there is a disconnect there.
We had to crack on. We chose the moment for completion, and that would be when we would be delivering in supply constrained markets.
It's the same principle for New Ludgate. This is a 400,000 square foot scheme in two buildings. The likely tenants are going to be 100,000 square foot. Those guys look to move two years before the buildings are completed. We have a construction program now nailed to 23 months.
So as soon as we see the tick-up in that behavior, our bargaining position changes and that's when we'll commit. I think it's going to be very soon, but it ain't today.
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Hemant Kotak, Green Street Advisors - Analyst [4]
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Hemant Kotak, Green Street. Land Securities has exposure to many sub-sectors and, indeed, geographies. Your every-asset-has-a-plan is suggestive of a bottom-up approach. What's your top-down approach, please? Which sub-sectors and geographies are you most keen on for the medium term?
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Robert Noel, Land Securities Group Plc - Chief Executive [5]
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We have stated for three years pretty consistently that we're concentrating on the two key markets in the UK. We're not interested in working outside the UK. Top two markets in the UK; Central London and around and the retail market. They're the biggest and they're the most dominant markets.
Both those markets change, and within those markets, our emphasis will change. London is probably the most cyclical market on the planet. So the change there depends on the development phase, and then a de-gearing phase. The retail market broadly follows GDP growth, and it's flat. So we have to look for opportunity.
I think the top down approach is, as we stated three years ago, completely unchanged. As we look to move through the cycle, we bring our financial leverage down as our operational leverage goes up, so that at the end of the cycle, we're able to -- we're not left making choices on the back foot. Doesn't change.
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Hemant Kotak, Green Street Advisors - Analyst [6]
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Thank you. Do you have a preference for London and the South East, as British Land has suggested yesterday that's what their preference is?
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Robert Noel, Land Securities Group Plc - Chief Executive [7]
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Well, I think pretty well 70% of our portfolio by value is in London and the South East anyway, so that probably answers your question.
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Hemant Kotak, Green Street Advisors - Analyst [8]
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Okay, thank you. And just with regards to the residential, there's clearly strong demand in that market. Is there any plans to look for additional opportunities to what you already have within your portfolio? And I realize the opportunities within your portfolio are quite extensive already.
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Robert Noel, Land Securities Group Plc - Chief Executive [9]
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Yes, Hemant, we've been quite clear on that as well, and consistent. Our residential development by value, the vast majority of it, is in SW1. This is between Eaton Square and St. James's Park. There is no other place really that we want to be at the moment because we are -- we control that market and it's prime and it's very attractive.
Moving on to the scale of it, if you add in what we have on site, GBP200 million; what we are going to be doing in Victoria Circle, GBP300 million; and what we're going to be doing at Portland House, getting on for GBP1 billion; that's plenty.
So we've got plenty of exposure, we're in absolutely the right location. As we've demonstrated with all the pre-sales we did at Wellington House, with 59% of 100 units already sold; we're not even completing for another 18 months at Kings Gate. So I think we'll stick with that for the time being.
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Hemant Kotak, Green Street Advisors - Analyst [10]
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Thank you. That's great.
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Harm Meijer, JPMorgan Cazenove - Analyst [11]
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Harm Meijer, JPMorgan Cazenove. Martin, on the cost ratio, do we have a target on that?
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Martin Greenslade, Land Securities Group Plc - CFO [12]
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Well, I think it's difficult to give an absolute target, because you're dividing it by gross rental income. And that will vary according to whether or not you're making sales or making acquisitions. I'd be disappointed if that went materially above 20%, I have to say.
So we don't have it as a fixed target. As I've demonstrated, some of those costs are investments into the developments, and we shouldn't be holding back just because of the target on a cost ratio. But broadly, I've given you my idea of where I see it sitting.
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Harm Meijer, JPMorgan Cazenove - Analyst [13]
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Perfect. And just on Trinity, if I calculated right, the yield is still 6.2%. Okay, I know that is an ERV-based yield, but it still looks high. Is that fair? There must be much more, right, to come in terms of profits?
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Martin Greenslade, Land Securities Group Plc - CFO [14]
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Well, I think in Trinity, we've opened the scheme. We still have more to come. As I said in the presentation, we're opening Trinity Kitchen and the Primark store, Victoria's Secret, in the autumn. We have some more lettings to do.
So hopefully, there is a little bit more to come, and we still have GBP30 million/GBP40 million more to spend on the scheme. So there's still some risk left in that; and, yes, we've still got some work to do.
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Harm Meijer, JPMorgan Cazenove - Analyst [15]
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Just a last one. Rob, you actually ended saying that the market is pretty flattish. Do you see actually some more tension building recently in terms of pricing, given what's happening in the world at this moment with central banks, etc? Do you see any evidence in certain sub-segments there's some momentum building recently?
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Robert Noel, Land Securities Group Plc - Chief Executive [16]
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I think, Harm, by flat market, you look at the underlying real estate market in the UK, total property return over the last 12 months has been 3.2%. That's pretty flat; whereas ours is 7.8%, and that is driven by the actions we're taking.
So if you look at where we think the tension is, it's in the supply of new buildings. We're in an under-supplied market. There is not enough of the right space coming through. That's why we're building. That's why our developments in London produced 18% return this year, and I think they'll continue to do so.
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Harm Meijer, JPMorgan Cazenove - Analyst [17]
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But just on your own assets, just on your standing assets, where do you see the biggest price tension going forward? Upwards?
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Robert Noel, Land Securities Group Plc - Chief Executive [18]
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I think, inevitably, if we're right in our cycle call, and there isn't enough space being built, rents will climb, and that will wash through in other assets. And so the key is to make sure that you have assets which are also able to adapt with that market and keep up with requirements of the market. So unless you're -- if your assets are capable of housing people the way they want to be housed, they're going to perform quite well.
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Harm Meijer, JPMorgan Cazenove - Analyst [19]
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Thank you very much.
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Martin Allen, Deutsche Bank Research - Analyst [20]
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Martin Allen, Deutsche Bank. What average ERV did your valuers attribute to the spaces you've yet to let on 20 Fenchurch Street at the end of the year?
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Robert Noel, Land Securities Group Plc - Chief Executive [21]
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Ouch. It's in the table in your pack. The development program, if you divide the ERV by the area, you'll get it.
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Martin Allen, Deutsche Bank Research - Analyst [22]
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Great. Thanks.
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Nick Webb, Exane BNP Paribas - Analyst [23]
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Nick Webb, Exane BNP Paribas. I've got two questions, actually, one on Retail, please, which is most people reporting numbers, we're seeing flat ERVs but falling occupancy. With you, we're seeing slight declines in ERVs but improvements in occupancy. Could you just explain the rationale behind your Retail leasing strategy there?
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Martin Greenslade, Land Securities Group Plc - CFO [24]
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Yes, there are probably two forces at play here. One is some -- based on evidence in the market, investors looking at retail assets are forensically looking at ERVs, but they're prepared to pay lower yields for assets that have growth potential or have sustainable rental levels. So that's a feature of the market, and I think that's been reflected by our valuers.
But secondly, and you've picked on the point, our approach is to let up space and keep our centers occupied. And if that results in a fall in ERV, and that's just reflecting the market, then so be it.
We think it's better for the long term to have high levels of occupancy, and our occupancy levels have moved up in shopping centers from 96.3% to 97.3% over the year.
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Nick Webb, Exane BNP Paribas - Analyst [25]
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Thank you. And just my second question quickly, Rob, you mentioned the widening of the development window in London. I just wondered what are signals that you would be looking for, if you -- to suggest that that window is actually going to close. Is it literally just other people's cranes?
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Robert Noel, Land Securities Group Plc - Chief Executive [26]
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I think that has something to do with it yes. For us, we've been quite keen to state over the last -- consistently over the last three years, what makes a real difference to us is knowing these construction costs at the bottom of the curve. And actually, I think it was November that we put up a chart showing where we were nailing our tender numbers.
When you have a prolonged period of lack of development, relative lack of development, which we had, the capacity in the construction industry actually reduces. And if people turn round and start building all of a sudden, the price inflation in construction tender can bounce really very quickly. We have seen it happen three times in my career, and it will happen again.
And there are two things at play. What happens is people overpay for sites because they think rental [rev] is going to keep going and they think that yields are going to keep falling, and they don't take into account that buildings get too expensive to build.
So we're not nearly at that stage yet, but it's going to come, and hopefully we'll have stopped by then.
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Nick Webb, Exane BNP Paribas - Analyst [27]
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Okay, perfect. Thanks.
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Kristian Bandy, UBS - Analyst [28]
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Kristian Bandy, UBS. Rob, just a question for you on the development rent. You haven't made quite as much progress on the letting at 123 Victoria Street and 62 Buckingham Gate, as I might have expected. Can you just tell me a little bit about where the tenants which are likely to occupy this space are at in their thinking? And what potentially the hold-up might be?
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Robert Noel, Land Securities Group Plc - Chief Executive [29]
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Sure. If you go back through time, you will know that the West End market is not really a pre-leasing market. The average space take-up in the West End is below 10,000 square feet. And if you're a 10,000 square foot occupier, you generally go on the road, you see what's available, and you -- once the space is completed, you'll look at eight buildings in one day, and you'll say, I'll have that one.
The City doesn't work like that. You generally have much bigger space takers. The average is over 20,000 square feet; they generally have real estate teams. They can look at buildings off plan. They know what's coming, and they don't need to look at the finished product. So the West End market has never been predicated on pre-lettings.
123 Victoria Street we completed five months ago. It's 78% let. That's great. 62 Buckingham Gate, I said in the statement today, I would have liked to have seen it filled a little bit more than we have, but the reason I said that is because all our other buildings are filling and that one's been slightly slower.
But just remember what we're doing. We have created a princess in the middle of a building zone at the moment, so we've created -- it's the first-mover disadvantage, as someone coined the phrase this morning.
We have every confidence that we will fill this building. It is stunning. It is highly efficient. It's in great location. It's at a discount to the core. We signed our first tenant up, GBP70 a foot, no problem. Three years ago, people thought we were mad looking for GBP62.50.
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John Cahill, Investec Bank (UK) Plc - Analyst [30]
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John Cahill, Investec. Just wanted to pick up on you said right at the outset that you are a total return business, and I noticed that the comparisons with the IPD indices were almost not in the presentation, which is very welcome. But if your surpluses are now coming from the development program, which obviously you have set as a finite life, and your leverage is low, given that you are total return, does that mean that when those surpluses stop and the cycle you see as moving against you, you will sell assets and retire equity?
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Robert Noel, Land Securities Group Plc - Chief Executive [31]
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I think that is a question for when the cycle does stop, and please don't take any signals from me that the cycle is stopping any time soon. We are -- I say the market's flat, but actually, we've got really great operations for a business like ours at the moment, pregnant with opportunity.
Don't forget that when the cycle does stop, that is precisely the time that everyone starts panicking, and precisely the time that we should probably be refilling our boots. So actually, it will be important to maintain firepower at that point.
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John Cahill, Investec Bank (UK) Plc - Analyst [32]
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Refill your boots with assets or with equity (laughter)?
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Robert Noel, Land Securities Group Plc - Chief Executive [33]
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Assets.
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John Cahill, Investec Bank (UK) Plc - Analyst [34]
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You said the Q&A was recorded, right?
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Robert Noel, Land Securities Group Plc - Chief Executive [35]
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Those that know me well know that I'm very, very protective of shareholder equity.
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John Cahill, Investec Bank (UK) Plc - Analyst [36]
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Thanks.
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Harry Stokes, UBS - Analyst [37]
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Harry Stokes, UBS; just a couple of quick questions. Just on the other office portfolio, the Moorgate Halls and the like, just a quick update on that. And just anything on Ebbsfleet as well.
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Robert Noel, Land Securities Group Plc - Chief Executive [38]
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Sure. Let's look at Ebbsfleet first. Ebbsfleet is, as I think I referred to it in 2010, as a lunar landscape in Kent, at the time when residential values were absolutely on the floor. What we said was that this is not core activity for us at all. We will wait for the right time to work out of it, and the most likely scenario would be putting some infrastructure in and breaking it up and enabling house builders to build plots. That's exactly what we're doing.
We've done our first deal in the last couple of months with Ward Homes, so we're taking on a plot to build 250 houses. We expect to -- for that to lead on to more deals, and we'll work out of that site over time.
Don't forget this is a GBP50 million patch of land. It's neither here nor there in the context of things, but we weren't going to throw the baby out with the bathwater. Rather, we're doing the right thing by the asset. Every asset has a plan.
What's happening to things like Moorgate Hall, you're probably referring to the stuff that we talked about getting on for a year ago where there was a lot of asset management activity going in and we were restructuring the leases; 40 Strand, Moorgate Hall, all that sort of stuff; great question.
There's still plenty to come in Moorgate Hall. We did a lease re-gear with Mace. We've got plenty of plans. It's right on the Crossrail nodes. There's the opportunity to add quite a lot more space there, and we're working with Mace on that. So that's a whole --
Where these things are, on the whole, they go. So I've just this morning told you about some at Bridge Road where we had a head tenant that had a break clause -- sorry, they wanted to leave; they had a lease expiry coming up. We took that lease expiry off them early; we took a big check off them for dilapidations. That was on the right hand.
And on the left hand, Scott was on the phone to the sub-tenant taking out the break clause. That was done simultaneously. We've got an 18.5% uplift in value. Nothing further to [get] for us. Out she went.
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Keith Crawford, Peel Hunt - Analyst [39]
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Keith Crawford, Peel Hunt. Richard, a very detailed, edgy, full and interesting presentation on the Retail, etc., there. You're up against this GBP70 in Victoria, 34% to 47% returns on schemes in London. And the main thrust between Eaton Square and St. James's Park, I'll try and remember that; that's kind of interesting. You don't even have to go to the Far East to market that.
So it's a bit tough isn't it? It's not really fair. Those sort of returns not so easy on a retail property with that elephant in the corner and it's getting bigger all the time.
I just wanted to ask you in that context whether the realization of very effectively created modern schemes, if the price is high enough, if the yield is tight enough, is that in -- under active consideration? Because returns of 7%/8%, perfectly adequate in a company today, but we have got this other side showing super profit really. So does this promote the idea of trading more on retail, traditional retail, than before?
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Richard Akers, Land Securities Group Plc - Executive Director [40]
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Yes. Well, first of all, you say is this fair, and Philip Green once told me that fairness was for children, so perhaps it isn't. But we look at all of our assets and development prospects in the round and we pursue the projects and the acquisitions and the assets that we think will show us the highest return and be best for the business in the longer term.
So we're not looking at one sector at a time, we're looking across the whole business. And some of the retail investments that we've made, and Trinity Leeds is every bit as profitable and as good as anything that we've done in London, and Buchanan Street in Glasgow has shot the lights out as well. So there are opportunities out there and we will continue to be active across our core sectors of Retail and Central London.
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Robert Noel, Land Securities Group Plc - Chief Executive [41]
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Before we move on to Marc, we've got one question come in from the Internet. So hopefully, Ryan is there at Kempen on the line.
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Ryan Palecek, Kempen & Co - Analyst [42]
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I was wondering on the development gains, could you give us any more contours on what the drivers were of the development gains? I think it's fair to say that it beat expectations. You gave us some color on Wellington and on Bankside. To what extent is it driven by higher assumptions, or is it timing factors? And how can we think about the assumptions going forward?
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Robert Noel, Land Securities Group Plc - Chief Executive [43]
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There are two things there. The two that you've mentioned, Wellington and Bankside, are trading profits which have been crystallized. And they are not development gains; they are sales that are recognized.
On the development gains, we actually give the information that I think you probably need in our development tables within the statement. What we give you is the current valuation of the asset, the rental value put on it by the valuers, the amount we have spent to date, and the amount still to be spent. So from that, you can work out, if you put a yield on, at the end of the day you can work out what you think the profit's going to be.
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Ryan Palecek, Kempen & Co - Analyst [44]
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And are there any broad stroke conclusions that you can give us from that?
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Robert Noel, Land Securities Group Plc - Chief Executive [45]
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Well, I can tell you that the developments we have started and completed by March 31, 2013, that we've started in this cycle, have produced us a 30% profit on cost. How does that do?
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Ryan Palecek, Kempen & Co - Analyst [46]
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Okay. Listen, I'm just wondering -- thank you very much, by the way. On Cardinal Place, could you expand a little bit more on the letting evidence? And within that same vein, in West End offices, how did West End offices do if you strip out Portland House?
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Robert Noel, Land Securities Group Plc - Chief Executive [47]
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Portland House is stripped out. Sorry, it's not stripped out. It's stripped out of the letting against ERV. Portland House is what we call a predevelopment property. That is a property that is being managed short term to keep the income as full as we can, but pending a possible predevelopment.
All our leases in Portland are aligned for June 2015, so as you can imagine, we can't let at market rents there because no tenant will take -- move and take a lease for two years. It is full, by the way.
So when we report against our performance against ERV, we exclude those predevelopment properties. I think there are three of them in London.
And our lettings against ERV in London this year have been 6%. But don't read too much into that, because don't forget, our voids are only about 2.5%; 2% at the beginning of the year. So we haven't actually done that many of them.
Sorry, Ryan, the other part of your question I've forgotten in the pressure of the lights.
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Ryan Palecek, Kempen & Co - Analyst [48]
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I'm sorry. Cardinal Place, if you can expand any more on the letting evidence.
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Robert Noel, Land Securities Group Plc - Chief Executive [49]
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Yes. This is just closing off something we talked about last year. If you remember, we said we did a deal with 3i. They had, I think it was three and a bit floors. We took back one floor off them, and in return, they took a longer lease on the other two floors, lengthening and strengthening our income.
They were previously paying -- Scott, how much were they paying originally? In the mid 50s. We took the space back and we've re-let that space at GBP62-something -- GBP67.50, sorry. So we've taken that space back, put it in the market, re-let it at a higher rent, proving that ERV.
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Ryan Palecek, Kempen & Co - Analyst [50]
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All right, great. Thank you very much; appreciate it.
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Marc Mozzi, Societe Generale - Analyst [51]
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Marc Mozzi, Societe Generale. Just one question on your liability side. Do you see any opportunity to restructure your debt, or to invest in the restructuring of your debt at the current time? Because if I'm right, you've got nearly GBP1 billion of debt to refinance in the next four years. Anything you can give color on?
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Martin Greenslade, Land Securities Group Plc - CFO [52]
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Well, it's a question -- it's a good question we get asked quite a bit, is there any way of reducing our average cost of debt. And broadly, the answer is that our cost of debt will adjust as facilities mature.
In addition to that, where we have joint venture facilities and they mature, our preference is to fund those from our Group balance sheet because our marginal cost of debt is well below 2% at the moment. So that is our strategy there.
In terms of is there any big bang, is there anything that we can do to go out into the market to buy back our debt which is trading at a nice premium and then re-issue new debt, that process is not NPV positive. And so, therefore, if we do it, what we're doing is we're taking away money today from shareholders and we're giving them back less in the form of increased earnings over the period. I wouldn't do that with my own money, and so we're unlikely to do it with shareholders' money. So broadly, that process is not one that we'll follow.
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Robert Noel, Land Securities Group Plc - Chief Executive [53]
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Well, guys, we've run over a bit. I'm terribly sorry about that. Thank you very much for coming. We're around all day if you want to ask us any further questions. And we look forward to seeing you in November.
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