Land Securities Group PLC Q3 2013/2014 Interim Management Statement Conference Call

Jan 22, 2014 AM EST
LAND.L - Land Securities Group PLC
Land Securities Group PLC Q3 2013/2014 Interim Management Statement Conference Call
Jan 22, 2014 / 08:30AM GMT 

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Corporate Participants
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   *  Robert Noel
      Land Securities Group plc - Chief Executive
   *  Richard Akers
      Land Securities Group Plc - Executive Director

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Conference Call Participants
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   *  Osman Malik
      - Analyst
   *  Tim Leckie
      JPMorgan - Analyst
   *  Mike Prew
      Jefferies & Co. - Analyst
   *  Hemant Kotak
      Green Street Advisors - Analyst
   *  Steve Bramley-Jackson
      HSBC - Analyst
   *  Christian Bandy
      UBS - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Land Securities Q3 IMS call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, January 22, 2014.

 I would now like to hand the conference over to your speaker today, Mr. Robert Noel. Please go ahead, sir.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [2]
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 Thank you. Good morning everyone, and welcome to the third quarter IMS. As usual, I'm joined by Martin Greenslade and Richard Akers. I'd like to give you a short summary of progress and then we'll take any questions you may have.

 In a positive sense, we're seeing more of the same; high levels of activity right across the business with a like-for-like portfolio all but fully occupied. In London, we've seen occupier demand increase in the last quarter. This has resulted in further letting progress at our developments. In retail, we've seen continued demand for good locations and strong demand for food and beverage.

 So in London, as you know, we're delivering sensational office space, highly efficient and technically resilient, on a speculative basis, into a market with increasing demand but constrained supply.

 At 20 Fenchurch Street, we're now 64% pre-let with a further 23% in solicitors' hands. Now that's 87% spoken for with three months to go before we hand space over to occupiers for fitting out.

 At 1 & 2 New Ludgate, we're very encouraged by the levels of interest in the space, and confident in the prospects for these two buildings. Now there's a distinct lack of new space coming onto the market in that part of the City between now and 2016. So that bodes well for those two buildings. And today we've also announced the start of construction at our 270,000 square foot scheme at 1 New Street Square.

 In the West End, our ongoing developments are moving with pace. Our residential developments continue to prove attractive. 77 of the 100 apartments at Kings Gate are now presold. And early marketing of the apartments at the Nova Building has resulted in 54 presold.

 123 Victoria Street has moved to 93% let. 62 Buckingham Gate is 67% let, or in solicitors' hands. And we're augmenting the program with the commitment to 20 Eastbourne Terrace.

 In retail and leisure, at Trinity Leeds, Primark opened at the center in December and has been attracting more than 80,000 visitors a week. In addition, the stunning new food van concept, Trinity Kitchen, has been a huge success, demonstrating the importance of providing the right mix of leisure in shopping centers. Now food and beverage demand, as I said, is particularly strong. So we're pleased with our acquisitions in the leisure sector where integration into the business has gone smoothly.

 Although more generally the retail market remains mixed, recent retailer trading shows that those retailers which deliver a great shopping experience through the right formats are doing well. The same is true for retail property. Voids were down in our portfolio over the quarter and occupancy is now over 98%. Although we've seen footfall decline slightly, spending is increasing per visit. Now this underlines the theme of people shopping less often, but spending more when they're there.

 We continue to progress our in-town and out-of-town development opportunities. We were granted planning permission for our extension to White Rose, Leeds, and for our cinema-led leisure, retail and residential scheme at Ealing during the quarter.

 We continue our net debt neutral strategy. With disposals exceeding investment this quarter, as we signaled in November, we saw our LTV fall from 37% in September, to just under 35% by the end of December. Now increases in property values are likely to reduce LTV further, and we're quite confident, quite content, with this position. As you know, it's bang in line with our plan.

 So in summary, we're seeing high levels of activity across our business. And the portfolio is virtually full. Our London developments are set to benefit as supply constraint conditions kick in. And in retail, we've continued to see demand for good locations, and strong demand for food and beverage. So our clear plan is working well for shareholders.

 So with that, I'd like to hand you over, please, for any questions you may have.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). [Osman Malik]

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 Osman Malik,  - Analyst   [2]
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 Very good IMS, very clear. Just if we could expand on the London office market please. You sound quite positive. I was wondering if you could frame that by talking a bit more about the movement of rents that you've seen over the past month, whether incentives have moved in. And I guess whether this makes you a bit more comfortable for longer on the London office market than maybe than you signaled back in November. Thank you.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [3]
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 Yes, sure, Os. There's a few bits to that question. Let's just talk about the mood now compared to November. I don't think there's any change in the outlook that we have now compared to what we had in November. This is very much a question of the proof point of the supply constraint conditions that we signaled on the horizon a couple of years ago now kicking in.

 And there are a number of things that are contributing to this. First of all, following the global financial crisis, there was a complete hiatus in development activity as we know. Businesses need to continue to move as they have, and although demand has been running at below the long-term average until now, it's now kicked up in line and indeed above the long-term average as expected. And therefore we've got very, very little space available.

 Secondly, occupational requirements are changing, people want very technically resilient and efficient buildings now. And there simply aren't enough of them. And all we're doing is coming into that stage of the market over the next couple of years where occupiers, who were beginning to realize that their choice was evaporating a year or so ago, are now realizing that they don't have much choice at all. And this drives fairly typical behavior which is, they get engaged in discussions with those people who are building buildings.

 Now what we are seeing is a noticeable uptick in the number of negotiations we're going on. I think, as we said in September, we signaled that we thought there would be some quite significant spot market increases in quarter 4, calendar year 2013, and quarter 1, calendar year 2014, of let's say between 5% and 10% spot market rental growth. We are absolutely in that zone.

 But bear in mind also, it's not just about rent. What happens in these market conditions is people are prepared to take longer leases because the whip hand is more in the hand of the landlord and incentives drop down as well. So if you recall, in November, when we spoke about the leasing up of 20 Fenchurch Street, and we said the average lease term was 17 years, that would have been unheard of three years ago. And so we're in a pretty good place.

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 Osman Malik,  - Analyst   [4]
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 Okay, so 5% to 10% over the six months, that's excellent. Does that just relate to primary space, or do you get the feeling that also secondary office stock in the City has seen that kind of rental growth?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [5]
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 Well it's spot market really, and we use the primary gauge because it's easy to follow. And if you look at all the agents, they would have said the spot market rent and benchmark spot market rent in the City in September was GBP55, and today they're saying it's GBP57.50. So that's 5% already.

 And the answer is any spot -- if you have space available you will let it for more today than you would have done three months ago. If your space is let, then you are at the vagaries of the rent review cycle as to whether you capture it or not.

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 Osman Malik,  - Analyst   [6]
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 Absolutely. Okay great, thank you very much.

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Operator   [7]
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 Tim Leckie, JPMorgan.

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 Tim Leckie,  JPMorgan - Analyst   [8]
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 Thanks for the color so far. I'd just like to ask firstly, capital flows seem to be very much back as a topic. Have you seen any evidence of the weight of money putting further downward pressure on yields over the last quarter?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [9]
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 I think, Tim, yes; capital flows remain at high levels and there is competition for virtually every asset offered to the market. And so we've seen market yields tighten a bit across all sectors over the last quarter. As we said in the statement, we expect to see our LTV reduce further as values rise, and we're quite content with this position.

 And we expect capital value, or capital flows to remain high for the foreseeable future. Our markets are mid-cycle; London is in a period of spot market rental growth as we've just been discussing, and good retail is set to benefit from increased consumer confidence. So I think we're going to expect more of the same for the next six months or so.

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 Tim Leckie,  JPMorgan - Analyst   [10]
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 And following it on there, can you maybe talk about delivery timing of the developments you've pulled the trigger on today, how they fit into the current timeframe?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [11]
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 Sure. 1 New Street Square is due to complete in July 2016 and Eastbourne Terrace December 2015. So we are as we were in November, our entire program is due to be delivered by the Summer of 2016. And that for us, there's method in that in that there's not much that we can see over the next two years that will upset the balance between supply and demand.

 Beyond that we simply don't have any visibility. If there is a huge development response in the course of the next year, then of course, beyond that the balance may tip the other way; but we simply don't know that yet.

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 Tim Leckie,  JPMorgan - Analyst   [12]
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 Final question from me, we've seen some other West End developers sell 50% of a project. Is there any potential do you think, or have you had approaches from people struggling to get into the London market, willing to take on some more development risk and partner you on some of your projects?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [13]
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 Well the answer is, to the latter part of that question, we get telephone calls all the time. And as you have said, there are huge capital flows from global equity coming into London, or trying to get into London. As far as us partnering people, we don't believe we need to or want to.

 We did on 20 Fenchurch Street in 2010 for the reasons rehearsed at that time. It was a big call at that time, and we were likely to be doing Nova at the same time. That level of risk at that point in the market was considered perhaps too much to do both of them on our own at the same time. So we wanted to do them both, it was about timing, and we chose to seek out partners for those two schemes. But the others, no.

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 Tim Leckie,  JPMorgan - Analyst   [14]
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 Okay, thanks very much for your time.

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Operator   [15]
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 Mike Prew, Jefferies & Co.

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 Mike Prew,  Jefferies & Co. - Analyst   [16]
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 I'm surprised that you're running with a debt neutral position with such a rosy scenario of a yield shift with a rental shift [across] what seems to be most of your asset base, apart from some of the retail assets that seem to be offering a mixed portfolio performance.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [17]
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 Mike, well, listen. We've been running in a net debt neutral position now for three years and we were very clear about why we were doing that. At the bottom of the cycle, with historically high levels of financial gearing, we wanted to bring that down as we go through the cycle. But don't forget, we've also got pretty high levels of operational gearing.

 We've got 2.6 million square feet of speculative office space being delivered into the London market over the next two years. Now, our economic interest in that is GBP1.5 billion. So we need to manage everything pretty carefully with that in mind, so we're quite happy to have our financial gearing coming down as values go up.

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 Mike Prew,  Jefferies & Co. - Analyst   [18]
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 And is that then reliant on the growth in values or the further disposals targeted?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [19]
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 Well what we said, a net debt neutral position has been exactly that. We had GBP4 billion of net debt at the end of -- in the early part of 2010, end of 2009, we've got GBP4 billion of net debt now. We have been funding our accretive activity through sales of assets which we do not think are as well equipped for the future as perhaps others.

 So we've been selling our secondary shopping centers, we've been selling mature London assets, or assets where we think that actually they're at great risk of perhaps not performing well in the future to fund this accretive activity. So as the V has been rising, the L has stayed the same.

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 Mike Prew,  Jefferies & Co. - Analyst   [20]
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 Okay. So can you just quantify the next couple of quarters, to take us up to the full year and say that the middle of this year how much you're intending to sell per quarter?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [21]
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 We've got a development CapEx run rate of about GBP200 and something million a year, so it is safe to assume that we will be selling at least that.

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 Mike Prew,  Jefferies & Co. - Analyst   [22]
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 And the Overgate Centre in Dundee, is that on the market at the moment?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [23]
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 I don't think we ever comment on what's on the market or not, Mike.

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 Mike Prew,  Jefferies & Co. - Analyst   [24]
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 Okay. How about the Manchester [Prem] Works?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [25]
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 ^ Manchester Prem; not that I know of. As I said -- (multiple speakers).

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 Mike Prew,  Jefferies & Co. - Analyst   [26]
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 All right, just the stories we hear. Thank you very much.

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Operator   [27]
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 Hemant Kotak, Green Street Advisors.

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 Hemant Kotak,  Green Street Advisors - Analyst   [28]
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 Very good progress on the resi sales. Can you just give us an indication of how the pricing at Nova compares to the GBP1,650 average selling price that you mentioned for Kings Gate back in November? And if there is a material difference, how much of that is attributable to the timing differences and perhaps the quality or locational differences?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [29]
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 It's a great question, Hemant, but I'm afraid I'm going to disappoint you. What we said in November is we give you residential pricing twice a year, so we give it to you in May and November. We don't give it at the interim statement.

 But what I will say is that the sales at Nova are ahead of our underwriting figures.

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 Hemant Kotak,  Green Street Advisors - Analyst   [30]
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 That's great. What were your underwriting figures, just to remind us?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [31]
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 I don't think we gave them.

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 Hemant Kotak,  Green Street Advisors - Analyst   [32]
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 I see, okay. Just perhaps another question on resi before I have one more on office. Did you consider holding back on the pre-sales in resi in light of the currently rising market, it's a pretty hot market; or is there actually a reason for you to get on with these sales because there might be some concerns about a correction?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [33]
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 Proceeding with the sales is nothing about a correction at all. We have quite a lot of capital going out and we want to know that we've got capital coming in. These are being built for sale, not built for rent, so sell them we will.

 If you dump them all on the market at the same time, then you're running around. If you sell them as a steady drip feed during the construction process, the process is easier. And, fine, you might be able to get a little bit more at the back end, but at least you've got your bases covered.

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 Hemant Kotak,  Green Street Advisors - Analyst   [34]
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 That's great, thank you. And just one question on the two new office schemes that you're going to develop; 1 New Street Square and 20 Eastbourne Terrace. Can you give us your projected rental levels for that given that you've mentioned that the market is rising?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [35]
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 Again, sorry, I'm going to disappoint you. We'll give them to you in May with the disclosure on rental values that you will have from the valuers as at March 31. But it's safe to assume that 1 New Street Square will be slightly ahead of New Ludgate, and the New Ludgate figures were given to you in November.

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 Hemant Kotak,  Green Street Advisors - Analyst   [36]
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 That's great, thank you very much.

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Operator   [37]
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 Steve Bramley-Jackson, HSBC.

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 Steve Bramley-Jackson,  HSBC - Analyst   [38]
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 I just had a question on 20 Fenchurch Street, having taken the degree of pre-lets up. Rob, can you give a sense as to how that may have impacted the average rent per square foot of GBP63 that you talked about back at the half-year?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [39]
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 Steve, good question. As you will appreciate, at the half year, the figures I gave you were on the back of about 67% and we're now at -- so we've got a further nearly 20% in solicitors' hands. But that 20% has got to move 60%. So although the rents are higher than the average we were talking about, the rate of increase in that average will slow down.

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 Steve Bramley-Jackson,  HSBC - Analyst   [40]
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 Okay.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [41]
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 I think we gave an average of 17 years lease term, GBP63, and nine months' incentives for five years. That average will have nudged up a bit.

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 Steve Bramley-Jackson,  HSBC - Analyst   [42]
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 A little bit, okay. The other question then I just had really was on debt. Obviously interest rates are leaning upward. I just noticed your debt's ticked up 10 basis points. Can you just give us a sense as to how that is expected to travel as you go through to the full year or maybe the next? Is there anything built in that will see a further increase by the full year?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [43]
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 The reason that that's ticked up, as you rightly comment, is that we have repaid -- when we sell assets we repay on our revolving facilities, of course, where the spot market levels are much lower. Much of our business is funded through our bonds which have an average price of 5%. So the more we have drawn on our revolver, the lower that number will be below 5%. If we had nothing drawn on revolver it will be exactly 5%.

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 Steve Bramley-Jackson,  HSBC - Analyst   [44]
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 Okay. Then following on from a question earlier then, you're going to be disposing to match your development CapEx, so we should see that continue to move in an upward direction as you complete those disposals.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [45]
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 Yes.

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 Steve Bramley-Jackson,  HSBC - Analyst   [46]
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 Thank you very much.

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Operator   [47]
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 [Christian Bandy], UBS.

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 Christian Bandy,  UBS - Analyst   [48]
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 Thanks very much for the update. I actually just want ask about the retail market actually. It seems to me that the retail sales numbers are showing some improvement, and I just wanted to know to what extent are you actually seeing this coming through in being able to charge higher rents or are you potentially seeing a greater diversity in the number of retailers which are talking to you about add-on space. Is there anything else you might be able to say on that market?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [49]
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 Richard will tackle that, if he may?

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 Richard Akers,  Land Securities Group Plc - Executive Director   [50]
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 Christian, I think what we've seen is a slight uptick in retail sales which is very good news. It's derived from increased consumer confidence, and a tick down in the savings ratio. So, fundamentally, consumers still remain under a fair bit of pressure and we think the outlook is still quite mixed, as we have said -- as we said in November; consumers are still under pressure as real wages are not really growing and disposable incomes are not really growing at the moment.

 But, yes, there has been an improvement in the occupation market and that continues to be evidenced in our yield position which is falling, and our higher occupancy. And, yes, there is steady demand for the space in our assets. And, as Rob said at the outset, strong demand in certain sectors like food and beverage.

 I think it's too early to call that this is leading to rental growth across the board, although obviously we do have pockets of rental growth in the food and beverage sector and in certain assets such as Gunwharf Quays where we continue to see very strong sales growth there.

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 Christian Bandy,  UBS - Analyst   [51]
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 Excellent. And then if I could just follow on from that and ask, at the half-year period, retail warehouses were weaker than expected. Is there anything, any color, you might be able to give on the performance of those in the third quarter? Are you seeing increased demand? Is there anything specifically on that asset class?

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 Richard Akers,  Land Securities Group Plc - Executive Director   [52]
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 Our void levels in retail warehouses are very, very low. We know that some of our occupiers in that sector have had a very good Christmas. I think the growth in retail sales has been focused on big ticket items such as electricals and furniture; very positive for that part of the market.

 Again, that sales performance doesn't necessarily feed directly through into rental growth or valuation growth. Clearly we don't have a valuation to report, but we're very satisfied with the performance of our retail warehouse portfolio since the half year.

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 Christian Bandy,  UBS - Analyst   [53]
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 Brilliant, thank you very much.

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Operator   [54]
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 Hemant Kotak, Green Street Advisors.

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 Hemant Kotak,  Green Street Advisors - Analyst   [55]
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 Sorry, I'm back for one more, please. Just on the debt neutral strategy that you have; obviously if the current uptick in capital values continues for a number of years, that could take your leverage pretty low. Do you have a floor or will you actually stick with this debt neutral strategy?

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 Robert Noel,  Land Securities Group plc - Chief Executive   [56]
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 I think that the best way to answer that, Hemant, is to refer you to the very, very consistent line we've taken on financial gearing, certainly while I've been in the business, and I suspect before I joined the business.

 In normal market conditions we would expect to operate between 35% and 45% LTV. We are in normal market conditions, we are at the bottom end of that range at the moment. We are happy to be at the bottom of that range because we've got a lot of operational leverage in the business with our developments.

 Late cycle and in outlying market conditions, peak and trough, we say that those parameters should move to between 25% and 55%. And I don't think I can give you any other guidance than that. I don't see any reason to change that guidance and, as we get later cycle, I'm very happy that the financial gearing eases down further.

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 Hemant Kotak,  Green Street Advisors - Analyst   [57]
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 Thank you.

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Operator   [58]
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 (Operator Instructions). There are no further questions at this stage. Please continue.

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 Robert Noel,  Land Securities Group plc - Chief Executive   [59]
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 Guys, thanks very much for joining the call. There are a couple of things I just want to leave you with. In London, supply constraint conditions have kicked in and occupier interest has picked up, and the combination of these two things means that we're very well positioned as we have a relatively large speculative, committed program.

 In retail, the overall market remains mixed, of course, but our portfolio's well placed. It's been largely repositioned up the quality curve over the last decade with a significantly increased exposure to the leisure sector.

 We're seeing demand for good locations with demand for food and beverage particularly strong. Both of these are evidenced by the increased occupation in our portfolio, which is over 98% occupied. So the portfolio is virtually full.

 Our net debt neutral strategy is seeing our balance sheet get stronger all the time; all this has been good for shareholders, and we're pretty confident as we head into the last quarter of the year.

 So thanks very much for joining the call, and we will see you in May.

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Operator   [60]
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 That does conclude our conference for today. Thank you for participating. You may all disconnect.






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