Interim 2013/2014 Land Securities Group PLC Earnings Conference Call

LAND.L - Land Securities Group PLC
Interim 2013/2014 Land Securities Group PLC Earnings Conference Call
Nov 12, 2013 / 09:00AM GMT 

==============================
Corporate Participants
==============================
   *  Robert Noel
      Land Securities Group Plc - Chief Executive
   *  Martin Greenslade
      Land Securities Group Plc - CFO
   *  Richard Akers
      Land Securities Group Plc - Executive Director

==============================
Conference Call Participants
==============================
   *  Harm Meijer
      JPMorgan Cazenove - Analyst
   *  Remco Simon
      Kempen & Co - Analyst
   *  Kristian Bandy
      UBS - Analyst
   *  Jon Stewart
      Liberum - Analyst
   *  Nick Webb
      Exane BNP Paribas - Analyst
   *  Hemant Kotak
      Green Street Advisors - Analyst

==============================
Presentation
------------------------------
Operator   [1]
------------------------------
 Welcome to the Land Securities half yearly results presentation. (Operator Instructions). I must advise you the call is being recorded today, Tuesday, November 12, 2013.

 Your first speaker today will be [Noel Roberts].

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [2]
------------------------------
 Good morning, everybody. Welcome to Land Securities' half yearly results. The Company is in good health, performing well and we're delivering to plan, so there should be no surprises in what we're giving you today. And I make no apology for returning to themes we've aired before.

 Land Securities is a total return business. We run it on property fundamentals, understanding occupiers' changing needs, and delivering space that commands a premium. Those changing needs provide opportunity.

 Changes in what occupiers are looking for also demand active property management and capital recycling, not passive rent collection. Three years ago, we set out our strategy to be an early cycle developer. Ever since, we've focused on planning, constructing and leasing our developments.

 That focus is unrelenting, and it's now delivering results. We've made strong progress on lettings, where we're ahead of plan, and we're set to benefit from increased occupier activity because our schemes are well located, great quality, highly efficient and technically resilient.

 In retail, we've also been recycling our capital. We've quietly transformed our asset base. Trinity Leeds symbolizes that change, and it's proving very popular with retailers and shoppers. We're working on plans for further developments in Glasgow, Oxford and, potentially, Guildford, which match this blueprint. And we're putting our skills to work on our out-of-town program to drive additional returns.

 Having been alive to the shift in consumer trends towards experiences early, we've increased our exposure to the leisure sector, including gaining control of X-Leisure, without paying a premium, by acting quickly and decisively.

 We remain focused and disciplined when it comes to our balance sheet. We've been maintaining a broadly neutral stance on net debt, since we came out of the downturn, because we want to reduce our financial leverage, as we move through the cycle. And you'll hear more from Martin on this in a minute.

 Now none of this should be new to you; it's about delivering against these familiar themes. And as I said before, every asset has a plan, and we're focused on delivering it.

 So here's the running order this morning. First, Martin will take you through the numbers, before we move on to activity in retail, from Richard, and then London, from me. Martin?

------------------------------
 Martin Greenslade,  Land Securities Group Plc - CFO   [3]
------------------------------
 Thank you, Rob. Morning, everyone. First, I'm going to take you through our headline results and then, what I'll do is, I'll take you behind those numbers. I'm going to show you the impact of another period of strong operational performance.

 Our profit before tax was GBP397.9 million, and that includes our valuation surplus of GBP209.8 million, and GBP24.9 million of disposal profits.

 Adjusted diluted NAV per share was 937p; that's an increase of 3.8% or 34p since March. And I'll explain the movement in adjusted diluted NAV per share in more detail, in a moment.

 Revenue profit for the six months was GBP156.5 million, up GBP12.8 million, or 8.9% on the same period last year.

 Similarly, adjusted diluted earnings per share were up 8.2%. That's a slightly lower growth than revenue profit, as our popular scrip dividend scheme increased the number of shares in issue.

 On dividend, we've today confirmed a second interim dividend of 7.6p, and that brings the total to 15.2p for the six months, up 2.7%.

 These results have translated into a total property return of 4.7% and a total business return of 5.4%, for the six month period.

 So let's now look at revenue profit in some more detail. This slide sets out the main components of our revenue profit, and it includes our proportionate share of joint ventures. And just to remind you, it also includes our proportionate share of X-Leisure which, under IFRS, is accounted for as a subsidiary.

 As you can see, the major driver of the growth in revenue profit was a GBP25.3 million increase in net rental income, and I'm going to break that down for you in more detail on the next slide.

 Compared with the prior period, our net indirect expenses, they were up GBP3.8 million and that was on the back of the acquisition of the X-Leisure management company, and an increasing accounting charge for share-based payments, reflecting our strong performance over the last three years.

 Now, since six months is a very short period over which to judge costs, our detailed disclosure on costs will make a re-appearance at the year end.

 The other major element explaining the movement in revenue profit was an GBP8.7 million increase in the net interest costs of the Group and joint ventures. And it's absolutely right to consider these balances together as we've been reducing our debt in joint ventures wherever possible and we've been using our Group facilities instead.

 The increased costs were partly due to our higher average debt balances, but also reflects the end of capitalized interest on completed developments such as Trinity Leeds and 62 Buckingham Gate.

 Now, let's look at that GBP25.3 million increase in net rental income. Here, we have net rental income broken down into its various categories and compared against the first half last year. There's a more detailed split between London and retail in the appendix, but this slide brings out the main points.

 Net rental income on the like-for-like portfolio was down slightly, but what might surprise you is that it was down in London but it was up in retail. Retail was up by GBP2.6 million.

 That's primarily due to improved rental income at Gunwharf Quays, but also lower bad debts, while London was down GBP4.3 million. But the main reason for that was that, in the prior period, we benefited from a GBP3.9 million surrender receipt at Cardinal Place.

 The GBP1.2 million reduction in income from our proposed developments was entirely due to the vacating of 1 New Street Square, and that is just as well because it's currently being demolished.

 The development program saw net rental income increase by GBP12.3 million, and that was mainly due to Trinity Leeds, while the increase in rental income from completed developments of GBP3.8 million, well, that was largely down to 185-221 Buchanan Street in Glasgow, which opened fully let in March this year.

 Acquisitions contributed a GBP15.7 million increase in net rental income, and that was mainly down to X-Leisure and The Printworks in Manchester.

 And, finally, disposals. Disposals resulted in a loss of GBP5.3 million of net rental income, and the main impact there was from Empress State, the St Johns Centre and Clayton Square in Liverpool, and the Designer Outlet center in Livingston.

 Now let's go on to look at adjusted net assets. We started the period with adjusted NAV per share of 903p. Adjusted earnings were GBP156.2 million, and then comes our valuation surplus of GBP209.8 million. This is followed by two items that relate to profits on sale.

 First, you have GBP20.6 million from investment properties and that was largely down to Oxford House, and then there's GBP4.3 million from joint ventures. Our dividend in the period was GBP86.6 million but, remember, this ignores the element which is taken up as a scrip dividend.

 And, finally, we spent GBP9.4 million buying shares for the EBT and, with other reserve movements of GBP10.1 million, our adjusted diluted NAV per share ended the period at 937p.

 Let's move on to cash flow. Set out on this slide are the major components of the cash flow movements which affected our adjusted net debt. So that is our net debt on a proportionately consolidated basis. And since IFRS takes a completely different approach, you'll find almost none of these figures in our statutory results, but there is plenty more disclosure in the appendices and elsewhere for fans of IFRS cash flows.

 Let's begin with adjusted net debt of GBP4.29 billion at March 31. Operating cash inflow was GBP77.3 million and that's a little lower than one might expect.

 The main reason for that is that we had GBP40 million of interest payments that were due on March 29, 30 and 31. We knew those dates as Easter weekend and, as it happened, the payments then all fell to be made on April 1, so into this financial year.

 Acquisitions almost entirely relates to X-Leisure, and that includes the increased share of its underlying debt. We spent GBP186.1 million on development and refurbishment CapEx, and that includes our joint ventures at Nova, Victoria and 20 Fenchurch Street.

 On to disposals, where we received consideration of GBP294.4 million, and that includes the debt at Empress State. Then after some sundry items, we ended the period with adjusted net debt of GBP4.42 billion; that is up GBP131 million.

 Now let's look at financing. The increase in our adjusted net debt has led to a small 0.1% rise in our LTV to 37%. The increase in the value of our properties wasn't quite enough to offset the higher net debt.

 The weighted average maturity of our debt is 9.1 years. We have a weighted average cost of debt of 4.8%. That's down a little as we increased the borrowing on our cheaper revolving credit facilities.

 During the period we agreed two new bilateral facilities, and those totaled GBP350 million. And we ended the period with GBP1.1 billion of undrawn facilities and available cash.

 Just before I summarize, what I'd like to do is just explain the relationship between our results and the level of adjusted net debt.

 What I've done on this slide is I've compared how our adjusted net debt has evolved over the last six months, and that's shown in blue, to the progression last year shown in pink. And the differences between these two lines over their respective six-month periods, shown here as shaded, that amounts to an average higher net debt of just under GBP300 million. And that GBP300 million broadly represents the higher net investment we have had over the six-month period.

 Now, our marginal cost of debt is around 1.5%, while the yield on our leisure portfolio is around 6.5%, so you've got a difference of approximately 5%. So that GBP300 million of additional investment, broadly therefore, translates into around GBP15 million per annum of additional income, or GBP7.5 million in this period compared to the last one.

 What this slide is it's just simply a depiction of what I've said before, and that is that our revenue profit performance is closely linked to our level of net investment. Over time, if we maintain our net debt neutral strategy this will balance out, but over discrete accounting periods there will be some volatility. So just in case our strong first half performance has you penciling in large earnings upgrades for the year, what I'd like you to do is to consider what happens to this graph in the second half.

 Given that we have recently exchanged, since September 30, we've exchanged on over GBP400 million of sales, what I'd expect is that these two lines on the graph cross over, so leading to a lower revenue profit in the second half. And please bear this slide in mind whenever you hear announcements from us on sales and acquisitions.

 So let me summarize. We've had a good financial performance over the six months. That's partly driven by net investment, but it's also down to a strong operational performance, low voids, new lettings and successful developments generating additional rental income. Our balance sheet is robust and it's sufficiently flexible to support the business for whatever opportunities lie ahead.

 So now let me pass you over to Richard.

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [4]
------------------------------
 Thanks, Martin. Good morning. A lot of you came along to our Investor Day on September 20, so you're very up to date with our news and aware of our strategy. Our clear plan for retail is to improve the portfolio in the face of structural change we see in the sector; make sure we deliver operational excellence in all of our asset management and development activities; take action to increase resilience in a consumer economy which may remain tough; and gain exposure to the growth opportunities that we've identified.

 I'm now going to take you quickly through some of this activity. We've continued to sell our weaker assets where we see limited growth potential but, once again, we've been net investors, with the acquisition of a further 35.6% stake in X-Leisure representing over GBP208 million of gross assets. That means we've grown our leisure and hotels portfolio to over GBP1.2 billion. It now represents 21.6% of our retail portfolio and, if you include the leisure embedded in our retail assets, then 31% of our rental value is now from leisure.

 Our asset management has been intense as we execute plans for each asset. As an example, we've expanded the scope of our additional development at Southside, Wandsworth to include four more stores to the Debenhams' development as well as an advertising screen.

 At White Rose, the strong leasing performance ahead of ERV has taken the center to 99.8% occupancy. And we also have a significant demand for additional space, which we'll provide if we get our planning application approved when it's heard later this month.

 At Buchanan Gardens, the residential element of our highly profitable Buchanan Street development, we have all but 3 of the 49 apartments reserved and 16 of these have exchanged with completion due in December.

 At Trinity Leeds, we completed and opened Trinity Kitchen on October 17. This street food themed fast food concept is unique and it provides a cool edge to the exceptional catering offer we have at Trinity Leeds. In its first few weeks, it's been extremely successful for the operators and it's causing the center to trend very strongly on social media. Our number of Facebook fans has increased by about 15% to just under 100,000.

 In retail warehousing, we've started the development of a 48,000 square foot Asda store at the Greyhound Retail Park in Chester. And we've completed the new Marks & Spencer store at Bexhill Retail Park.

 In leisure, we've completed a small redevelopment in Milton Keynes to provide an Aspers Casino, two new restaurants and a bowling complex. And we've let the largest void in the leisure portfolio at Lockmeadow, Maidstone to Hollywood Bowl.

 Once again, we've demonstrated the resilience of our portfolio. In this period, it is material that our quantum of new lettings is over 40% up on the same period last year. We're ahead of ERV; our voids in administrations in the like-for-like portfolio have fallen from 5.1% to 4.1%; and our occupancy has risen from 97.3% to 97.8%. You can see the normal vacancy chart at the bottom of this slide and all the other detail on voids and administrations is in the appendix slides.

 These results clearly represent an excellent performance from our leasing teams, but they also show that conditions are improving in our occupational markets. We're full and at a number of our assets, we're now looking to grow rents. We have very good exposure to this upside that we see in the retail sector through our development program.

 In city centers, we aim to build on the successful retail and leisure mix that we've created at Trinity Leeds. At Buchanan Galleries, we've signed Marks & Spencer, and at Oxford we have signed John Lewis and, on September 20, we submitted our planning application.

 We've been appointed as the developer for the North Street redevelopment area by Guildford Borough Council, and have also entered into a development agreement and submitted a planning application for a leisure and residential scheme called Ealing Filmworks.

 At out-of-town we've signed up with Debenhams for our proposed development at Junction 7 of the M20 near Maidstone, taking our pre-letting to over 37.5% of the income, and we've now submitted a planning application. And on October 17, we achieved the resolution to a grant decision from Birmingham City Council for our 363,000 square foot Selly Oak scheme.

 At the same time, we've agreed terms of 53% of the income for a development near Worcester and are preparing a planning application. At Preston, a scheme we didn't identify specifically at our Investor Day, we've signed a conditional land purchase agreement for a 50 acre site identified for development, which could accommodate a significant retail and distribution scheme.

 Whilst conditions on the ground are improving, this is not showing up in our valuation performance. Values are flat overall, down a little in retail warehouses although up in leisure and hotels. Rental values have continued to decline in some areas, but at a much slower rate than we've seen in previous periods. That has been balanced by more assets generating growth in rent.

 So the conditions are more stable for our retail portfolio than they've been, and we see some upside in the macroeconomic outlook. The structural changes affecting retail are still playing out, but we have a clear strategy and an approach to execution, which has seen our exposure to leisure increase, our portfolio continuing to become more prime and some great opportunities for growth coming through development.

 Thank you, and now I'll hand back over to Rob.

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [5]
------------------------------
 Thank you, Richard. Now I'd like to turn back to London and just to remind you, our strategy is to exploit a significant amount of opportunity that sits within our existing portfolio, rather than compete in the investment market. Since we started, we've been busy building, selling and recycling capital back into the program and bringing forward more schemes. And remember, we have always said that our plan is not predicated on economic growth, rather that we would build more efficient and technically resilient workspace striking the construction cost at the low point.

 Last year, we said that the continuing scarcity of development finance had meant that construction starts had remained relatively limited. In turn, that meant that our window for development had become longer than we thought it might be when we restarted development back in 2010.

 So in May, we announced our commitment to Nova, Victoria, and in August, we started building in New Ludgate, and in our Oriana joint venture with Frogmore we've committed to phase 2 of our Oxford Street scheme. That's nearly GBP700 million of total development cost; that's our share in the first half.

 But before I focus on how our development program looks today, I'd just like to cover the valuation of London and give you some market context. Rental value growth in our like-for-like portfolio was positive, but modest, at 0.5%. But there are two things you need to note; first, our like-for-like portfolio is, to all intents and purposes, full, so it's pretty difficult to get hold of the space and prove new rents. Second, 30% of our London portfolio is not in like-for-like because we're doing things to it. And that's where the action is, which I'll come on to in a minute.

 The London portfolio, including non-like-for-like properties, but excluding the development program, increased in value by 2.8% in the first half, with our development program increasing in value by 7.6%, giving a combined surplus of 3.7% for the six months. There's a more detailed breakdown in the back of your packs when we finish today.

 Now as to market context, I'd like to take you back to a slide that I've shown you before. The green bars in this slide show the historic run of development completions in Central London. The four bars on the right-hand side show what is set to be delivered over the next few years. White is pre-let; red is speculative; the dotted bars are possible but yet to be committed, and many of those will slip, as we've seen before.

 Up to December 2015, we believe there is very little that can be bought on-stream to change the supply landscape. And you can see, in a historical context, that development completions remain relatively modest. These bars include new schemes and Grade A refurbished accommodation.

 If we add the vacancy line, the vacancy rate, now shown in the red line on the right-hand scale, you can see how different the dynamic of this cycle is. The vacancy rate in 2009 was much lower than in previous vacancy peaks in 1992 and 2003. Now if we look at Grade A take-up, now shown in the blue line, you can see that it never died and is picking up fast.

 In May, we talked about increased occupier activity on the horizon. We believe there is simply not enough new efficient and technically resilient space being developed between now and mid-2016. Occupiers are running out of choice. And if we zoom in on 2014, 2015, and 2016 and look at our schemes, this slide shows the 2 million square feet of offices alone that we are delivering into this stage in the cycle, so that you can see we are well positioned.

 So on to our developments then, and let me skip through these as all of our usual disclosure is included in your packs. But to update you, since we saw you in May we've committed to two new schemes. At New Ludgate we're delivering two independent buildings totaling 378,000 square feet, just at a time when the Farringdon/Midtown market is starved of new space.

 Construction is well underway; practical completion to shell and core is due in April 2015. The level of interest in both buildings is encouraging and, with our appraisal rent averaging GBP57 per square foot for the office space, we expect the risk to be on the upside.

 At the east end of Oxford Street demolition has started and we will develop 71,000 square feet of retail space and 18 private residential apartments in July 2016. We've pre-let 65% of the retail space to Schuh and Primark, for whom we'll be building a 40,000 square foot extension to their existing 148,000 square foot store. We'll be marketing the two other flagship retail stores when we start construction next summer.

 Moving on to schemes you already know about and, in order of practical completion, good momentum is being maintained at 20 Fenchurch Street. We are now 76% let or in solicitors' hands. Average rents, lease terms and incentives are comfortably ahead of original estimates, and we're confident of further progress with interest from more potential occupiers than we have space for in the building.

 Now I know you won't let me escape without updating you on the solar reflection issue. Despite specialist modeling prior to construction, now that the building is built we have an issue that, without rectification, may manifest itself at certain times in the year. We've worked extensively to find the right solution and are confident this will be settled very shortly.

 Now although not finalized, the cost will sit comfortably within our unutilized scheme contingency. So the total development cost will remain within our previous estimates and disclosure. The solution is expected to be external and will be applied externally, and will be installed during the office fit-out period. So overall, 20 Fenchurch Street will be ready for occupier fit-out to commence in April, as planned, with the Sky Garden due to complete in June.

 Over to the West End then, at Kings Gate, our residential scheme. This is now due to complete in February 2015. This is due to an eight week extension of time agreed with the contractor following delays to the construction of a UK power network substation.

 72 out of the 100 apartments have been pre-sold at an average price of GBP1,650 per square foot. We expect a few further sales between now and completion, but the majority of the remaining flats are the higher value upper floor and penthouse space, and we expect more of this space to be sold post PC. The retail space is pre-let to Jamie Oliver.

 Next door, at the Zig Zag Building, we're now out of the ground and the UK PN substation, important to both this scheme and Nova, is being installed. This building comprises 231,000 square feet of office and retail space and we're very encouraged by the level of interest we're already receiving.

 Like Kings Gate next door, the delay to the substation has added eight weeks to the program, so PC is now scheduled for March of 2015. Our appraisal rents for the offices average GBP70 per square foot.

 Up the road at Nova, those of you that have had a tour recently will have seen that the site is a hive of activity. Demolition is complete; the secant perimeter piling is virtually complete; half of the load-bearing piles have been installed and we're on program for delivery in April 2016. And the marketing of the first phase of residential units at the Nova building will start just after the New Year.

 At our two completed developments, 123 Victoria Street is now 86% let, and we hope that the emerging competition for the remaining space will improve rents further.

 At 62 Buckingham Gate, we've made good progress. At March 31, 10% of this building was in solicitors' hands and, in May, we said we were slightly disappointed that we had not let more space prior to completion. Today, 57% of the building is let and we have a further 10% in solicitors' hands. Note the average rent we've achieved here is already ahead of our appraisal rents for the Zig Zag Building.

 So looking forward to schemes where we are yet to commit, it is more likely than not that we will commit to 1 New Street Square. Demolition of the existing building is well underway, and in order for us to deliver a building for July 2016, our earliest completion date, we have to take a decision to commit to crack on by the end of January.

 We will complete the tender process this month and expect our total development cost for this scheme will be around GBP180 million with a net rental value, its leasehold, in the order of GBP15 million.

 At Eastbourne Terrace, right outside the entrance to Crossrail, we're due to get vacant possession in January for completion in Q1 2016. The total development cost here is likely to be in the region of GBP65 million with a rental value of just over GBP5 million. That's at a rent of GBP54 per square foot.

 During the period, we achieved two significant planning consents. The first was Portland House where we now have consent to remodel this 1960s tower into 206 apartments. Part of the affordable element will be included at Castle Lane, which you will recall we bought last year to give us optionality for our Victoria transformation.

 This consent, therefore, gives us great optionality for this building. It's virtually fully occupied at the moment with all the leases due to expire, or containing a landlord break, in March 2015. And we're currently working out a detailed approach to design and construction and will report back next time.

 We also achieved a consent for the redevelopment of Oxford House. This is a mix of retail and residential, but we've subsequently sold it. And on that subject, we made three sales in the first half. The first was 38-48 Southwark Bridge Road, post the lease re-gearing activity we spoke about last time; our share of Empress State building to our JV partner, Capco; and Oxford House, post-planning consent, to GPE.

 These last two purchases were special purchases. No asset is sacrosanct; each one had specific reasons for sale at the price we sold. Since September 30, we've sold Bankside to M&G. At Bankside, we've seen the yield move down from 7% in 2009 to just over 5% today. For a single tenant leasehold it is a large lot size, so we've taken advantage of the current liquidity in the market to sell it, and we leave this part of Bankside totally transformed.

 On to asset management briefly, and Scott's team remains very busy. Voids have been kept to a minimum, as with the retail business, and smart lease re-gearing activity has strengthened our income.

 At Cardinal Place, for example, since March 31 leases over 113,000 square feet with a GBP6.6 million of rent roll to Experian and Wellington have been extended from a weighted average 5.2 years to 11.3 years.

 At Piccadilly Lights, we agreed deals with three retail tenants to reconfigure their units. That was made possible by the purchase we made next door last year. Now not only are we transforming the retail space for the occupiers, but these deals have freed up space for a new advertising screen, shown here in green, for which we got planning consent and is currently being installed.

 Taken together, the rental values of these units have increased by GBP2.4 million or 46%. Our like-for-like void remains exceptionally low at under 1%, and our weighted average unexpired lease term in our offices is almost 10 years.

 We are delivering on our strategy. In retail, it's about moving our assets up the retail hierarchy, providing space for retail winners and increasing our exposure to leisure. We have been doing exactly that. As you've seen, Trinity Leeds is an exemplar, and we have more to come both in and out of town, and securing control of X-Leisure was well executed.

 In London, the market is behaving broadly as we expected and our developments are letting up well. We've added more to our well-timed program, just as we said we would, and the asset management team remains on top of its game.

 As I've said before, we have made great strides over the last few years to position our assets for tomorrow's customers and consumers. As the boundaries between work, home, and play become more blurred, it's about fabulous workspace, environment, and connection. As I've also said before, we will continue to manage our balance sheet with discipline, even at the short-term expense of marginal earnings in this current low interest rate environment.

 Markets are ever more transparent and quick to react, so we've got to manage each part of the cycle appropriately because that is absolutely right for our shareholders.

 With that, we'll hand over to you for questions. There should be some microphones floating around; we'd be very grateful if you could provide your name and company so we've got it for the record because this will be going out later on today.



==============================
Questions and Answers
------------------------------
 Harm Meijer,  JPMorgan Cazenove - Analyst   [1]
------------------------------
 Harm Meijer, JPMorgan Cazenove. Can I just jump on the lease terms for a moment for retail and offices? How have they changed in terms of [extra for] tenants, and basically also a little bit on the outlook in terms of mainly, I guess, office rents?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [2]
------------------------------
 Sure, well let me tackle offices first, Harm, if you don't mind, then I'll pass over to Richard to talk about lease terms in retail.

 We have given the stats, in our slides today, of all the deals we've agreed on our office lettings in London. Broadly, lease terms are getting longer, so in 20 Fenchurch Street, for example, our weighted average lease length is now 17 years. Our incentives are getting shorter, so 12 months ago, 24 months ago, one would be expecting to have 12 months of incentives for every 5 years term certain. We're now down to eight months at 20 Fenchurch Street; we're still nine months in the West End.

 The incentives are shortening. As for forward guidance for that, I don't expect those incentives to come in any shorter. The market is fairly well established in that occupiers can never time moving from one building into another building exactly. Trying to swage that double overhead is really quite important to most people; that's always been the case, and that will remain the case. For offices, we don't expect it to come in much further.

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [3]
------------------------------
 On the retail side, we had 93 investment lettings at 2.3% above ERV. I think probably, and Martin will always say, that you've got to look behind those numbers, the incentives. Our incentives were higher on the lettings we completed in this period than the previous year. The previous year, they averaged 9.1 months; in this 6 months, 14.4 months.

 Now, what we also have to look at is the term of those leases, and we have signed longer term leases this time around, so on average, 14 years in length as opposed to 10.6 years for the previous year.

------------------------------
 Harm Meijer,  JPMorgan Cazenove - Analyst   [4]
------------------------------
 Perfect. And then just one other one. Your LTV is currently 37%; what would this number be at the top of the cycle?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [5]
------------------------------
 Well, we've given previous guidance as to our gearing levels, and we've been pretty consistent in this. And that is to say that, in a normal operating environment, we'd expect to operate between a gearing level of 35% to 45% LTV. And, at the extremes of the markets, we'd expect that to move out to 25% to 55%.

 Now, I see no reason to give you any further guidance than that. Where we stand today, we're at 37%. We're running a net debt neutral position, as we've said. So as the V goes up, the L will go -- or the L will stay the same but the V will go up. So I expect that LTV level to continue its march down. It was 53% three years ago and it's 37% today. The trajectory is down, and that will continue.

------------------------------
 Harm Meijer,  JPMorgan Cazenove - Analyst   [6]
------------------------------
 That's great. Thank you very much.

------------------------------
 Remco Simon,  Kempen & Co - Analyst   [7]
------------------------------
 Remco Simon, Kempen. Richard, if I can ask you on retail? You mentioned that you intend to make the portfolio more prime. I wouldn't want to ask you how much of the portfolio is not prime, but we're currently seeing quite a bit of interest in more secondary retail, if you can believe the property press. How much of an opportunity do you see this as to recycle more capital and to be selling more assets, going forward?

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [8]
------------------------------
 I think, first of all, we have been continually recycling capital over the years, and we have sold many of our non-prime assets, so this is a continuation of a process, really. And we will continue to recycle capital within the retail portfolio and across the Group. So how much of an opportunity is there? Well, I think you're right. There does seem to be more confidence from investors in a wider range of retail assets. And if there's good demand for assets that we wish to sell then that would be very good news for us, yes.

------------------------------
 Remco Simon,  Kempen & Co - Analyst   [9]
------------------------------
 But do you see it significantly picking up from the, I think it was GBP66 million for the first half year, in the second half?

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [10]
------------------------------
 I think it's difficult to give guidance on a quantum, but GBP66 million was made up of a number of small assets, and so yes, I think it's likely that, if we make sales in the second half, it will be a greater quantum than that, yes.

------------------------------
 Remco Simon,  Kempen & Co - Analyst   [11]
------------------------------
 And maybe on the operating environment; you sounded a bit more positive about the retail market outlook, cautiously more positive, perhaps. Does that translate into you being a little more going up the risk curve in terms of potential new developments? Can you accelerate things like Oxford or Guildford or Glasgow, given the fact that you're more positive on the market?

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [12]
------------------------------
 I think we're a little more positive, and the figures for the six months bear that out. But we also are cautious because we look at the life of your average consumer in the UK and disposable incomes are not rising. So we've seen in the headlines today another item about energy costs rising, and also we hear news that two retailers have gone into administration. So we have to be tempered by that caution as well.

 But yes, we do have an exposure to the upside through our development program. Can we accelerate that? Probably not. The big schemes in Oxford and Glasgow, and potentially Guildford, are on a path which we're moving them forward as fast as we can. I think accelerating those is difficult. What we will do is get as much exposure as we can to the out-of-town development market, and you've heard some news on that as well.

------------------------------
 Remco Simon,  Kempen & Co - Analyst   [13]
------------------------------
 Okay. Thanks.

------------------------------
 Kristian Bandy,  UBS - Analyst   [14]
------------------------------
 Kristian Bandy from UBS. I just wonder if you can give a bit more detail on why the retail parks portfolio and the food stores have underperformed IPD. Certainly CBRE and others suggested that this potentially had actually been undergoing evaluation recovery, but you've had some difficulty here. Can you give me some color?

------------------------------
 Richard Akers,  Land Securities Group Plc - Executive Director   [15]
------------------------------
 All I can talk about is our portfolio and the valuation of our portfolio. I can't really talk about IPD. But our valuers have said to us that the values in retail warehousing have come down, partly because rental values have come down, but also partly because they're quite cautious about rental values, going forward, and forthcoming lease expiries, and the capital incentive requirements that will be needed to deal with those lease expiries. So those have been built in to our valuation and, of course, the small decline that we've seen in this period.

 The other impact, which we've talked about, is the illiquidity in very large lot sizes. And we have a couple of very large retail parks that our valuers feel that the market would be quite thin, in terms of number of potential investors, and that's made them cautious on those assets.

 That's what we see happening in the retail warehouse sector. I can't really comment on where other valuers or where other portfolios have gone in this period, as we haven't seen all of those results yet.

------------------------------
 Kristian Bandy,  UBS - Analyst   [16]
------------------------------
 Great. And maybe one for Rob. Do you think potentially the capital gains tax changes being purported in the press could change the potential demand for the Victoria residential?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [17]
------------------------------
 Yes, it's a good question. As you say, they are potential. Our early intelligence is that, actually, they won't make much difference. In fact, we think they'll make less difference than the rise in the stamp duty that was talked about. I think most people's attitude is, well, if I do make a profit then I'm happy to pay some tax.

 But don't forget that, in Victoria, we are developing, all up, 500 apartments over the next five years if we do Portland House, which overlooks the back garden of Buckingham Palace. We are pretty confident about our location in an area we are completely transforming. We're not developing elsewhere.

------------------------------
 Jon Stewart,  Liberum - Analyst   [18]
------------------------------
 Jon Stewart, Liberum. Just one question in terms of construction costs. Have you seen any pickup in construction cost inflation yet and, if so, how much?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [19]
------------------------------
 Yes, it's a good question, Jon, and one of the leading indicators for us. If you remember, we spoke about last time, for an uptick in construction starts, would be a pickup in construction costs. We are beginning to notice a pickup. The tender returns on 1 New Street Square would suggest a slight pickup. It's not coming through strongly yet, though. We still expect it to, at some stage in the near future, and it won't be a gentle curve.

------------------------------
 Nick Webb,  Exane BNP Paribas - Analyst   [20]
------------------------------
 Nick Webb from Exane BNP Paribas. I just want to ask about the valuation of developments. The development pipeline yields look quite cautious with 6.9% in total and specifically on something like Trinity Leeds, which has been up and running for longer than six months now, still valued on a yield of 6.3%. When can we expect to see that approach what most people would regard as more of a market yield and you take the valuation gains there?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [21]
------------------------------
 Sure. Well, the first thing I should say is we don't value our portfolio. That is valued independently by Knight Frank. And one of the reasons that we have extended, in the last couple of years, the guidance that we give, the disclosure we give in our development table, is so that you guys can really work out for yourselves what is still to come.

 So if you go into the two development tables, one for the London portfolio, one for the retail portfolio, what we set out is the ERV as given by Knight Frank. We give the valuation added to the amount of development CapEx we still have to spend on the scheme. So you can work out from that what our development yield is.

 We also give you, in the appendix to your pack, the difference between the headline rent and the SIC15 rent, so with those figures, you should be able to work out that, actually, there is still quite some margin.

 Now, at what stage Knight Frank give us the benefit of those profits is completely up to them, but I think we're pretty well set for a robust second half.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [22]
------------------------------
 Hemant Kotak from Green Street. A question for Rob, please. With respect to the London market, you're net sellers, in terms of acquisitions and disposals. Is it your opinion that the market's now getting fully priced? Is that one reason why you're a net seller?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [23]
------------------------------
 No, we have always said that we are -- all of our acquisition activity across the business and also, our development activity, will be funded through sales.

 Now, we've always said that no asset is sacrosanct. We were not net sellers in the first half at Land Securities; we probably will be net sellers in the second half. That's led by the sale of Bankside. As I said earlier, this is a single let, leasehold GBP315 million lot size, and windows for liquidity are quite narrow.

 So you may or may not get the right time, but when you do see that liquidity and as I said, we've seen the yield come in from 7% two years ago to just over 5% today, we've just said, you know what the balance is, let's hit the bid, and that's what we've done.

 So that's GBP300 million, so it makes quite a bit of difference. Would we do the same thing again? Absolutely. Will we sell more assets if we think it's the right price? Absolutely.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [24]
------------------------------
 Okay. And a further question on London. In your statement, you refer to the fact that there simply isn't enough, I think, good quality space for occupiers.

 Deloitte published their Crane Survey and they're talking about 28 new schemes coming online in the last 6 months, I think it is, and about GBP6 million is unlet. Obviously, you've put your own chart up, which I think tells us the story that you're telling, but there's the added story about Schroders taking the space at London Wall and how schemes can be bought online if there is demand.

 Do you worry about players like Canary Wharf or other players bringing on space and that actually changing quite quickly?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [25]
------------------------------
 Well, one of the things that we look at is the ability for people to change the scene over a set period of time. We can just about look out 2.5 years. Beyond that, we can't, because, as you say, if people decide to turn the tap on, then they can generally start building in large scale in a three-year period.

 What we do know is that between now and July 2016, so 2.5 years out from now, what we've said is we just don't think there is much that people can do to upset that balance because although, yes, people can start building, can you actually deliver a new building of scale from a standing start in that time period? The answer is it's very difficult, which gives us the comfort that we have.

 So that's why we're saying we think, over the next 24 to 48 months, the balance of power will be in the -- or the negotiating power will be in the favor of the landlord, and that's why we're able to achieve the longer leases that we've been achieving and the rental rises that we've been achieving at 20 Fenchurch Street, say.

 If an occupier comes to you and says, we only want to sign a 10-year lease, and we say, well, we'd like you to sign a 15-year lease, they say, no, and they go away and they look for the other space and they realize they can't find any space that is as efficient and they come back to us and then we have a conversation.

 That is why development is about timing, and that's why we're an early-cycle developer as we've said because I think we get a better negotiating stance, and then we also get liquidity through the end of our program.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [26]
------------------------------
 Okay. And one last question on London. 1 New Street Square, you said you'll probably start that. What does your decision rely on? What do you factor in?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [27]
------------------------------
 Well, I've said it's more likely than not that we will start it, which is pretty good guidance. In my view, we don't have to commit until January. If we commit now, it makes no difference to the timing for delivery because our critical path is July 2016. We haven't finished demolishing the building yet. So in my book, why make the decision if you don't have to, if it's not going to affect the delivery time.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [28]
------------------------------
 Sorry, that wasn't my question. My question was what factors will be based on your decision process, whether or not you will start it?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [29]
------------------------------
 Well, I think it's more likely what factors will be based on our decision if we don't do it, which is we would probably see more space coming through in the market over the next two years than we were previously thinking.

 But as I say, I think it's more likely than not that we will proceed with the development, but this is a decision for our Board to take when I've presented the argument to them.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [30]
------------------------------
 Okay. And you won't wait for -- you don't necessarily need a pre-let on that scheme?

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [31]
------------------------------
 No, I think that our track record shows that when we think it's time to build, we'll build.

------------------------------
 Hemant Kotak,  Green Street Advisors - Analyst   [32]
------------------------------
 Thank you.

------------------------------
 Robert Noel,  Land Securities Group Plc - Chief Executive   [33]
------------------------------
 Well, I think if there are no more questions, there are none on the web either. Kempen aren't online this year; they're here. (laughter)

 Thank you very much, and we'll see you in May.

------------------------------
Operator   [34]
------------------------------
 Thank you very much. That does conclude the conference for today. Thank you for participating, you may all disconnect.






------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------