Preliminary 2013/2014 Land Securities Group PLC Earnings Conference Call
May 15, 2014 AM EDT
LAND.L - Land Securities Group PLC
Preliminary 2013/2014 Land Securities Group PLC Earnings Conference Call
May 15, 2014 / 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
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Conference Call Participants
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* David Prescott
Green Street Advisors - Analyst
* Nick Webb
Exane BNP Paribas - Analyst
* Miranda Cockburn
Oriel Securities - Analyst
* Keith Crawford
Peel Hunt - Analyst
* Remco Simon
Kempen & Co - Analyst
* Osmaan Malik
UBS - Analyst
* Jon Stewart
Liberum - Analyst
* Chris Fremantle
Morgan Stanley - Analyst
* Tim Leckie
JPMorgan Cazenove - Analyst
* Martin Allen
Deutsche Bank Research - Analyst
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Presentation
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Robert Noel, Land Securities Group plc - Chief Executive [1]
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Good morning, everyone. Thank you. (Laughter) It's a two-way thing today. Welcome to Land Securities' results presentation. It's the usual drill today, a presentation from Martin on the financial results, followed by some detail on progress in our retail and London portfolios.
But before we launch in, I'd just like to take a minute to give you my perspective on how we are putting our strategy into action.
First, people strategy; by any measure, these are strong financial results, but we're also performing well in terms of people. We said we wanted to drive more pace, and we are. Across the business we have great people in all disciplines.
Second, property strategy; in London we said we would be early-cycle developers, and we have been.
You will see the strength of our London development performance today, our call to develop speculatively early in the cycle is paying off and there is plenty more to come. You will have seen our pre-let on 2 New Ludgate on a 20-year lease this morning, for example.
In retail, we have been talking for four years about the dramatic change in the landscape. We said we would re-focus our portfolio away from secondary locations and into dominance, experience and convenience, through both acquisitions and development, and we have been.
Our occupancy rate at over 98% and a return to ERV growth are testament to our strategy and this re-shaping will continue as consumer behavior continues to evolve.
Third, risk strategy; the growing economy points to a strengthening retail market. The London market is resurgent. Everyone is feeling pretty chipper.
But, and it's a big but, as we've said before, we operate in cyclical and changing markets and just at the moment a time of political and economic uncertainty, both here and abroad.
The property business is maybe more risky than ever. Retailing, as we all know, continues to change at pace, and a lot of retail locations will not survive.
With London offices, not only is the market highly cyclical, the interconnectivity of London and global business means change can happen faster.
That's why we also said we would be consistent and disciplined in the management of our balance sheet. We have been.
Over the last four years we have been running a broadly net debt-neutral position, funding all our accretive activity through sales. The aim was to bring our LTV down as we move through the cycle. We have done, as Martin will show you, and our business has become stronger every year.
Our strategy is working for shareholders. We are nurturing their capital, growing their dividend, and managing risk, and creating headroom for new opportunities.
Now, I'll cover the huge amount of activity we have going on within the business in a moment. But, first, let me hand you over to Martin.
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Martin Greenslade, Land Securities Group plc - CFO [2]
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Thank you, Rob. Good morning, everyone. If you're not CEO (laughter).
Right now, as Robert said, today we've reported a strong set of results. So let me start by taking you through the financial summary.
Now, I'll go into greater detail on a lot of these figures as I go through my presentation, but, in summary, our profit before tax more than doubled to GBP1.1 billion. Our assets rose by 7.1% over the year, delivering a valuation surplus of GBP763.8 million. Our adjusted-diluted NAV per share was 1,013p; that's an increase of 12.2%.
Now looking at underlying earnings. Revenue profit was ahead of expectations at GBP319.6 million, up 9.9%, and adjusted-diluted earnings per share, they were up 10.1% to 40.5p.
Moving on to the dividend. Today, we're announcing a recommended final dividend of 7.9p; that brings the total to 30.7p for the financial year. That's up 3%. It's bang in line with our aim of progressing the dividend in a sustainable way.
Since we use the final dividend as the basis of our next three quarterly dividends, it's likely that dividend growth next year will be a little higher than the 3% this year.
So let's go through some of these numbers in a bit more detail, starting with the valuation surplus.
The value of our combined portfolio at March 31 was GBP11.9 billion and over the year the valuation surplus was GBP763.8 million; as I just said, a rise of 7.1%. Of that total increase, London saw values rise by 11.9% and retail by 2.2%.
Now, the clear driver of the valuation surplus was, as you'd expect, our development program, which delivered a 22.3% surplus, representing some GBP273.8 million. The major contributor to that performance was 20 Fenchurch Street which delivered a GBP100 million surplus this year alone. And just to be clear, that is our 50% share.
So, turning now to revenue profit. Our revenue profit was GBP319.6 million, that's GBP28.9 million higher than last year. The main reason for the increase was the GBP46.3 million rise in net rental income. That was partly offset by higher indirect costs and net interest charges.
More on net rental income in a minute, but first just a couple of comments on our costs and interest charges. Let's start with costs.
As I'm sure you'll remember, this time last year I took you through a detailed breakdown of our costs, because cost control is extremely important to us. But also, I wanted to explain how some of our costs relate to our business model, like the running costs associated with our car parks, while there are other costs, like development expenditure, which represent an investment in our business.
Now, I've updated the detailed cost analysis and you will find that in your appendix; so that's a little treat for you for later.
But what you'll find when you look at the cost breakdown is that tenant default and void-related costs are down by some GBP3.8 million. While the development related expenditure, that investment I just mentioned, that is up by GBP8.1 million.
Now, the lower tenant default and void costs, they come through these two lines, along with GBP4.2 million of the development expenditure increase.
The increase in the indirect costs, that's a result of the rest of that development expenditure increase. It relates to sites over which we don't -- we have an option but we don't yet own. And then the other element of the cost rise relates to share-based payments, and that increase we saw at the half-year.
Now taking all of our costs together our total cost ratio for the year was 18.8%, and that's down from 19.7% last year.
Our net interest charges increased by GBP10.5 million and that was partly due to some higher average debt balances, but it also reflects the end of capitalized interest on our completed developments.
Let's now look at that breakdown of net rental income. So overall net rental income up was by GBP46.3 million, or 8.5%. Net rental income on the like-for-like portfolio was up overall by GBP5.7 million.
Now, behind that number retail is up GBP8.2 million, and London is down GBP2.5 million. And what we saw is that retail benefited from increased income on a number of properties, as well as lower bad debts, while London was down and that was largely due to a surrender premium that we saw in the prior year at Cardinal Place.
Net rental income from the development program was GBP3.6 million higher. That's on the back of lettings at 123 Victoria Street and 62 Buckingham Gate, but that's partly offset by the loss of income from vacating Nova Victoria last year and 1 New Street Square this year.
Completed developments were up GBP23.8 million, primarily due to Trinity Leeds and Buchanan Street, Glasgow, alongside a GBP2 million increase in net rental income from One New Change.
Now the major contributor to net rental income growth was acquisitions, with much of the full-year effect of the leisure acquisitions we made in the prior year, and these include the majority share in X-Leisure, and the Printworks in Manchester.
Disposals; disposals including Empress State, Bankside and Bon Accord in Aberdeen resulted in a GBP21 million fall in net rental income. If you look closely, those assets that we've now sold, those contributed GBP34.5 million of net rental income this year and, that income, we will not be receiving in the year ahead.
So, turning to cash flow. Now, on this slide what you will see is the major components of our cash flows proportionately consolidated and referenced to the movement in our adjusted-net debt over the year.
Now, as you know, you'll find almost none of these figures in our statutory results. So those of you who cannot do without our IFRS cash flows, well, you should turn to the appendices now for your fix; no movement.
So, we began the year with adjusted-net debt of GBP4.29 billion. Despite us delivering higher revenue profit than last year, operating cash flow after interest was lower at GBP192.2 million.
As I explained at the half-year, Easter weekend last year fell between March 29 and 31, and what that meant was that some GBP40 million of interest, related to the prior year, was paid this year.
This year we paid out GBP175.6 million in cash dividend. Now, that's a figure that will rise next year as the April dividend was the last one where we offered scrip dividend alternative.
And then after dividend come three items related to capital transactions, that's acquisitions, and in that we've included the increase in our share of the underlying X-Leisure asset; and there's capital expenditure; and there's disposals. When you take these three together there's a net disinvestment of [GBP342.9] million.
When you add in some sundry items the adjusted-net debt for the year ended at GBP395 billion; that's down GBP342 million over the year.
So let's move on to financing. The decrease in our adjusted-net debt coupled with the rise in asset values, well that's led to a reduction in our Group LTV from 36.9% to 32.5%.
The weighted average maturity of our debt is 9.3 years with a weighted-average cost of 5%. With no significant bond repayments before late 2017 and 94.5% of our debt fixed, any variation in the cost of our debt will be driven by the level of drawing on our revolving credit facilities.
With our low gearing and GBP1.1 billion of available funds, we have got considerable capacity for rapid investment should opportunities arise.
Now, before I summarize what I'd like to do is to remind you of a slide I put up at the interims this year. It shows the progression in our adjusted-net debt.
Blue here represents this year's adjusted-net debt, and red last year's. At the half-year, the difference between these two lines, the shaded part, that amounted to an average higher net debt of a little under GBP300 million.
And that GBP300 million broadly represented the higher net investment that we'd made in the first half compared with the year before. In this ultra-low interest rate environment each GBP100 million of net investment broadly represents somewhere between GBP4 million and GBP6 million per annum of increased revenue profit.
Now, if we roll this forward to the end of the year, the two lines cross. So while the average net debt for the year is still some GBP170 million higher than it was last year, what you can see is that the end point isn't. The outlook for this coming year's revenue profit will be significantly influenced by the acquisitions or sales we make in the near term.
Yes, we are going to have new rental income coming through from 20 Fenchurch Street; there will be further lettings in Victoria. But as I said earlier, assets we've sold this year contributed some GBP34.5 million to our net rental income.
Now, at this point in the cycle and as Rob said right at the start, we're continuing with a broadly net debt-neutral approach.
However, our asset decisions, so that's whether we buy or sell, those are not made on the basis of this year's revenue profits alone. Instead we make them on a longer-term view based on total return.
So let me summarize. Alongside our investment in leisure, our developments have driven earnings growth in the business. Our good operational performance, particularly in retail, has also played its part. Our balance sheet is in great shape and it gives us great flexibility to capitalize on whatever opportunities lie ahead.
And, importantly, our dividend cover is in great shape as well, and what that does is it allows us to smooth out any earnings bumps which come from developments or disposals.
Now I'll hand you back to Rob for more detail on the London and retail portfolios.
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Robert Noel, Land Securities Group plc - Chief Executive [3]
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Thanks, Martin. So let's now cover activity within the business and I'd like to start with the retail portfolio.
Over the last few years, we have discussed with you at these presentations the effect on the shift of the shift in consumer behavior. That shift is being driven by the requirement of connectivity, experience and/or convenience.
The impact of supermarkets eating into non-food sales; the emergence of multi-channel retail and how retailers have reacted in different ways; the threat of home delivery, morphing into click-and-collect models; and the rapid growth of eating out. They have all had an effect, an impact, on bricks and mortar retailing and they will continue to do so.
Fewer shopping trips; increased journey times; longer dwell times have combined to separate winning and losing locations. Winning locations reshape catchments, so we need to be aware of that as well.
All retailers are changing the way they use their space. Fashion retailers want bigger stores in fewer locations. Food stores want smaller stores in more locations. Apart from the very densely populated areas, the High Street is on a downward slope with some of it already dead.
As you know, our overall plan through our retail portfolio has been to reshape it in the face of this structural change by selling out of those assets less-well able to cope with the changing landscape and using the proceeds to fund acquisitions and developments, which fit in with our themes of dominance, experience and convenience.
This is a process which has actually been going on for some years and has seen our retail portfolio already transformed. Looking at this slide, on the left-hand chart you can see that when we converted to REIT status in 2007, our portfolio was dominated by secondary shopping centers, in light blue, and retail warehouses.
Since then, we have sold most of our secondary shopping and most of our bulky goods retail warehouses. Today, dominance, experience and convenience are key.
This year, we've taken advantage of a liquid market to take money off the table in Welwyn, Livingston, Aberdeen, Dundee and Preston; all conviction sales.
Now, Dundee merits an explanation. We only bought it four years ago and its sale demonstrates how quickly we think this market is changing. Although it trades well at the moment, we couldn't improve the experience without disproportionate capital expenditure and it risks not maintaining its position in the retail hierarchy.
The proceeds of earlier sales have been reinvested into X-Leisure where we now own 95% and also to work-up schemes that get with the program; a leisure extension to White Rose; a leisure and retail extension to Buchanan Galleries in Glasgow; a leisure-led mixed-use scheme at Ealing Filmworks.
Edge-of-town schemes with retailer support at Taplow, Selly Oak, Maidstone and Worcester; and, following on from our success at Trinity Leeds, a new city center scheme for Oxford.
Now talking of Trinity Leeds, this time last year we'd only just opened it. Trinity Kitchen, our award-winning new food concept and Primark opened in the autumn. Footfall for the first 12 months 22 million, with the run rate increasing after the opening of Trinity Kitchen and Primark.
In the 28 weeks since opening, Trinity Kitchen has generated almost as much income to us as we had planned for the whole first year of operation.
Interesting, the impact on White Rose has been less significant than you might think. Like-for-like same store sales at White Rose up 1.2% for the year and occupation up to 99%.
That resilience is borne out across the portfolio. Over the year, while footfall was down 0.8%, same-store sales were up 0.9% with same-center sales up 4.7%. Interestingly, the last quarter has seen a general improvement with footfall and same-store sales improving.
We completed GBP18.3 million of lettings in the year. Voids and administrations in the like-for-like portfolio have fallen from 5.3% to 3.4%. Our occupancy has risen from 97.2% last year to 98.1% today. We are virtually full.
And, as I said a minute ago, we have a good pipeline. We have two major city center schemes we're working up; in Oxford in our JV with the Crown Estate we received planning consent during the year for the proposed redevelopment of the Westgate Center.
We anticipate agreeing detailed planning conditions and agreeing terms with the building contractor by the end of this year. For an earliest start on site in March next year; this would see practical completion in October 2017.
The scheme will be anchored by a 140,000 square foot John Lewis and a Curzon Cinema. Our early discussions with retailers have been positive.
The city currently has a weak retail offer with a plethora of small, poorly configured stores. We will be able to provide well-configured retail and leisure space into an undersupplied market.
Oxford is ranked number 1 on the promise retailer requirements ranking. And it's no wonder; an affluent population of 430,000 people in its catchment with an annual spend of GBP4.3 billion; 30,000 students; 8 million day tourists; 1 million tourists stay overnight.
In Glasgow, jointly owned with Henderson, we also have outline planning consent, have finalized tax-increment funding for the public [Railman] infrastructure works and we have agreed terms with Network Rail. By virtually doubling the area of this existing scheme we would establish as the dominant retail center in Glasgow; the second retail location in the UK outside London.
Extensions are difficult to manage. We know that. But we've agreed terms to remodel John Lewis and deliver a new 150,000 square foot Marks & Spencer. We've secured Showcase as a cinema operator and we will be working on detailed design and feasibility over the summer.
At White Rose, we've received consent for an extension, which will include a cinema and food and beverage outlets, and we're now working up detailed plans.
We've also been working out plans for schemes in Guildford and the O2 in Greenwich, both under exclusivity agreements, and I'll report on progress on these in November.
In our edge-of-town program, following success at Crawley and Wandsworth, we're on site at Taplow with practical completion due in July. The scheme is 85% let; all in solicitors' hands. In Selly Oak, JV with Sainsbury's where we have planning. Sainsbury's will be shortly starting the land reclamation and preparation work. This will clear the way for development from January 2016.
In Maidstone our proposed scheme is already 37% pre-let to Waitrose and Debenhams. Our planning application is still set to be heard at committee next month.
And in Worcester, 55% of the space is in solicitors' hands and we aim to submit a planning application in October.
As you know, we tend to secure these schemes by option or conditional contract. And it's only when we have support from retailers and local authorities, in the form of planning consent, that we spend any meaningful money.
Development yields will be in the mid-60s, with long lease lengths and, at the point we commit, relatively low risk.
The retail landscape, as I said, is fluid, but our strategy is right for these conditions. While economic growth and the emergence of a rise in real wages are welcome news for retailers, it will not lead to rental growth right across the market. We have spoken about this before.
We have exited our most at risk locations and are recycling the capital into dominance, experience and convenience. Selling and buying activity will continue this year and we have some great development opportunities to continue the momentum.
I'd like now to turn to London, where you know our strategy has been to develop early and speculatively; striking the construction cost curve at the low point, and this at a time when developments announce was scarce, rather than compete in the investment market.
Now, since we started in 2010 we've committed to over 3.3 million square feet of speculative development with a total development cost of GBP2.4 billion. Again, we've been funding the CapEx through sales.
In November I talked about the majority of our sales, so I won't cover them again today.
Our committed schemes are all due to complete within the next 28 months, and we're quite content with that position.
On the back of increased business confidence, occupier activity has increased over the year, and demand for our highly-efficient, technically-resilient schemes appears solid.
Our usual development disclosure is included within your pack, but I'll just run you through the program. On our completed developments since the yearend 123 Victoria Street has become fully let. Over the road at 62 Buckingham Gate it's now 65% let.
As you will appreciate Victoria is somewhat of a building site at the moment, and I'll come onto that. But despite this short-term disruption, we're very pleased with the exceptional tenant mix we've achieved, and the amount of interest we have in the remaining space.
Rents achieved in both buildings are ahead of plan.
Sentiment was in a very different place when we announced the formation of a JV with Canary Wharf to build 20 Fenchurch Street in this room exactly three and a half years ago. The building is now 87% let, the space has been handed over to tenants for fitting out. The scheme has already been very successful to us, for us, as Martin has said. We are confident in leasing the remainder of the space this financial year.
Planning consent for the application of the solar shading solution has been received, and works are now underway. These works are being carried out externally and will not interfere with tenant fit-out or occupation. The cost has been negotiated with the cladding contractor, and, as we've previously guided, will not alter our original total development cost for the building.
Moving west, first to the Crossrail Thameslink interchange area, at New Ludgate, we're very encouraged by progress. We announced this morning that the entirety of 2 New Ludgate had been let to Mizuho Group on a 20-year lease. 49% of the space is therefore pre-let, and we have a further 12% in solicitors' hands with a year to go to practical completion.
Construction has now also started at 1 New Street Square, with practical completion due 14 months later than New Ludgate in June 2016.
In the West End at Kings Gate we've made great progress on residential sales, completion of this scheme is now scheduled for next May, following another slight delay due to the UKPN works and the very wet weather. We're not expecting this to impact timing any further than it already has.
Next door at the Zig Zag building we've let the retail space to Mango, and Iberica, and have a healthy level of office negotiations.
Just up the road from these two is Nova, and here you can see the full scale of a 5.5-acre city center project coming out of the ground. First there is the Nova building, which is the residential element in green, then the two office buildings shown in orange. These all sit above two new retail streets shown in blue.
Below that, and going on at the same time shown in pink, you can see the London Underground site. They are working on the new Victoria Line station concourse and Crossrail 2, future proofing, we're due to get this land back in 2016 for Phases II and III.
Like Kings Gate, we have made great progress on residential sales. Based on like-for-like floor levels pricing has been 20% ahead of Kings Gate, on average. As with Kings Gate the majority of the remaining apartments are on the top two floors, which we would expect to sell post-PC.
As you know, we also have planning consent to convert Portland House to private residential. But we are extending leases to June 2016, while we work up our plans in details. At Portland we will maintain optionality, because the building remains a very popular office building as it is and has a good economic life expectancy.
Finally, at 20 Eastbourne Terrace right on the entrance to the Paddington Crossrail station the construction contract has now been placed with Wates and completion set for February 2016.
At Phase II of Oriana in Oxford Street, our JV with Frogmore demotion is underway, we'll place the building contract very shortly; completion now estimated for September 2016.
As I said, our usual disclosure on committed developments is set out in your pack, and you will be able to work out there is plenty of surplus up for grabs over the next two years.
Now, I'd like to spend a few minutes giving you our view on the London office market, because it's important to put our activity into context. Up to December 2016 we believe there is very little that can be bought on stream to change the demand/supply balance.
However, development starts are set to pick up, and construction costs are rising. That changes the risk profile of development. We have said that any new commitments by us are likely to require pre-let. Let me explain why we have taken this view.
The green bars on this slide, and you've seen it before, show the historical run of development completions in Central London. The bars on the right-hand side show what is forecast to be delivered over the next two years. Pre-let and speculative space actually under construction are shown in white and red respectively.
The dotted bars are proposed and deliverable, our view of what will be brought on stream. They include new schemes and grade A refurbished accommodation.
The next two years are virtually set in stone, and you can see in a historical context that speculative development completions remain relatively modest, especially when you consider vacancy.
If we overlay the vacancy rate, now shown in the red line, you can see that vacancy in 2009 was much lower than previous vacancy peaks in 1992 and 2003, and it's now falling towards historically low levels.
Post the global financial crisis it was this low vacancy peak, combined with a lack of development finance, and our conviction that people would still need to move, that gave us the confidence to start development in scale in 2010.
Last May, we talked about increased occupier activity on the horizon. We believed there was simply not enough new efficient technically resilient space being developed, and that's why we committed last year to more speculative schemes to be delivered into 2015 and 2016.
But we've got to remember, these market dynamics will change at some point. Funding for development is now available from a variety of sources. We are witnessing strong bidding for sites. So development activity may start picking up, not only in central London, but also in satellite locations.
Don't forget, London is a polycentric city and, although we complain, the transport system is better than most capital cities, and it's improving.
The 30 million odd square feet of development completions forecast in the bars on this chart over the next five years are concentrated in what we all now regard as mainstream markets. They would take us above the long-term average for development completions. They're all represented on this slide.
If we also consider the potential starts for offices in more fringe areas, which are not included in this 30 million square feet, and which were unthinkable when we started our program, then we see a new dynamic shown in yellow, which we have to factor into our decision-making. As rents rise the propensity for occupiers to move out increases.
Going back to our bar chart, we can add the yellow, and show the scale of it. Now we are not saying that this will get built out. The point is that development risk is shifting. We will shortly move from a period of below-average delivery and low construction costs to one of above-average delivery and rising construction costs.
And, although it will depend on the development response to improved market conditions, the development balance beyond 2016 may start to change. This is why any new commitments by us in London are likely to require pre-lettings.
Before we wrap and following plenty of press coverage around Ebbsfleet Valley over recent weeks, I thought I'd just mention our strategic land portfolio.
As we said in Q&A in November 2012, we're not a general house builder and we do not intend to become one. Our role is to unlock value by delivering plots to house builders, and act -- and as with everything else we said we would do, we have been.
We have four positions, three of which we own, that sit within trading properties, and had a book value of GBP108 million, at March. There is one at Lodge Hill, which we don't own, which is classified as a long-term contract, and we carry work in progress of around GBP11 million.
You can see their locations here, and we have provided some more color in your pack, where you will see there is plenty to shoot for.
So to wrap up, we have continued to do exactly what we said we would, and our strategy is working for shareholders, as I said at the beginning.
In retail it's about moving our assets up the retail hierarchy under the themes of dominance, experience and convenience. We have made real progress and this will continue.
In London it's been about speculatively building fabulous workspace into a market which, simply, has not had enough, and increasing lease length. This is beginning to pay off handsomely.
But it's a highly cyclical market, cyclicality requires balance sheet and operational discipline, which we have continued to exercise. And as we've said before, markets are ever more transparent and quick to react.
So, we've got to manage each part of the cycle appropriately. Looking forward, we have a London development program with GBP700 million of CapEx still to spend, being delivered into the sweet spot; a resilient retail portfolio, with plenty of development opportunity; a strong balance sheet to deliver them; and great talent within the business.
And so we look forward to reporting further progress with you in November.
And on that note, I'm going to wrap up, because my voice is about to go, and we'll move to Q&A. Thank you.
There should be some microphones floating around. Stick your hand up, we'll get one to you. Could you please just mention your name and company, so we've got it for --
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Questions and Answers
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Operator [1]
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(Operator Instructions).
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David Prescott, Green Street Advisors - Analyst [2]
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David Prescott, Green Street Advisors. Crossrail is a big theme, emphasized by many of your listed peers. How do you feel you're positioned in terms of Crossrail, and to what extent do you think it's factored in already, into rents and such?
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Robert Noel, Land Securities Group plc - Chief Executive [3]
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Yes, Crossrail is a huge theme. It's going to benefit the whole of Central London, because it's going to provide a lot of capacity in the transport system. As I said a moment ago, transport is improving in this city.
As for exposure, of course, we've got New Ludgate Complex. We've got 1 New Street Square. So that is on their own, 600,000, nearly 700,000 square feet coming out of the ground speculatively, to be delivered to just before Crossrail completes.
We've also got Eastbourne Terrace, which we're completing, which again gets delivered in 2016, so that adds another 100,000 square feet. So there's 800,000 square feet literally on Crossrail stations.
We've also got our New Street Square complex as well, which as you know, Deloitte occupy. So we're very well positioned on that.
Again, as I said it will reduce -- it will increase capacity across London, so the whole of central London will benefit.
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David Prescott, Green Street Advisors - Analyst [4]
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And the potential impact on Victoria, as a destination [off] the back of Crossrail?
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Robert Noel, Land Securities Group plc - Chief Executive [5]
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It can only improve it, because capacity will be increased.
Victoria for us, don't forget, is -- it sits on the busiest railway station in the country already. We are completely transforming what was, and I've said it before, a pretty grey civil service alley with people with beards and glasses, to somewhere where beautiful people want to go and live and play.
Sorry, anyone who's got a beard here. Sorry, John, at least you're not wearing a corduroy jacket.
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David Prescott, Green Street Advisors - Analyst [6]
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And just one further question on retail, the like-for-like number, retail, came in at 3.5%, which seems a quite strong number. Can you elaborate maybe on some of the drivers of that, and if we can expect to see that going forward, as well?
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Robert Noel, Land Securities Group plc - Chief Executive [7]
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Yes, I think most of the -- the retail is about resilience. We've got a full portfolio. We've got our occupancy up. We've returned to rental value growth. The whole thing is about positioning our portfolio into where the retailers want to be; that is the key.
The thing about a business of our size and our peer group in the reach is that between us we have the best retail space. We've got very, very deep relationships with retailers, not always good ones, but deep ones.
So we know where they trade well, we know where they don't trade well, and that's why we've been able to position the portfolio into resilience. And that will continue, as I say, with our activity. Following on from Leeds, building these new shopping centers, to create destinations.
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David Prescott, Green Street Advisors - Analyst [8]
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Brilliant, thanks a lot.
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Robert Noel, Land Securities Group plc - Chief Executive [9]
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Nick?
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Nick Webb, Exane BNP Paribas - Analyst [10]
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Nick Webb, Exane BNP. I'm just trying to understand in the valuation, you've put a table in the release, that shows over the last 12 months, rental value growth in your London office portfolio, was 1.8%.
I think if we look at IPD, British Land yesterday, anyone, that's a very low number, relative to what we would have expected. Perhaps you could explain the reasons for that?
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Robert Noel, Land Securities Group plc - Chief Executive [11]
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Sure, there are a number of reasons for that. First of all, it's like-for-like rental growth, so it excludes our development program. We've got a lot of development on, where we're seeing quite good rental growth, as you know.
We are full, so it's very difficult to create evidence within the buildings, and the bulk of our portfolio, in the city it's under development and in the West End it's in Victoria, which always lags.
In addition to that, in Victoria, we've been doing quite a lot of lease re-gearing. So if you take, for example, Cardinal Place, where we've re-geared 20% of the leases this year, from 4-year terms to over 10 years, what we've done is, we've gone to the tenants and we've said: we'd like you to stay, would you like to stay? Yes. So we tear up the lease expiry and move it out.
So the next event is a rent review not an expiry. The difference between an expiry and a rent review in valuation parlance, is that an expiry you move to headline ERV, with associated CapEx. A rent review you have a net effective ERV.
So those ERVs from a valuation point, have come down, eating into the thing. So it's not entirely representative, but the problem is we report on exactly the same basis every time we report, so the figures are what the figures are. We are quite relaxed.
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Miranda Cockburn, Oriel Securities - Analyst [12]
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Miranda Cockburn, Oriel Securities; a couple of questions. Just on how have you performed versus ERV in terms of retail letting and also I suppose, on the London side as well?
And also, just on the IPD, I'm noticing that you've underperformed IPD. Can you just again explain the rationale behind that?
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Robert Noel, Land Securities Group plc - Chief Executive [13]
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Sure. Well, let's talk about retail letting first and actually if you go back to, I can't remember if it was the last presentation or last year, we just said we're not going to give performance against ERV, because we don't think it's helpful so we don't give it.
I'm itching to tell you what our leases are against ERV, but I'm not going to because when they come in badly I won't be itching to tell you. So we're very consistent.
You can make a letting against ERV say whatever you want to say, because if you have a five year lease and you give it four years rent free, you can to let something like GBP120 a square foot if you want to, so we just don't give it.
Miranda, I'm really sorry. I've forgotten your second question.
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Miranda Cockburn, Oriel Securities - Analyst [14]
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It's just regarding IPD and the performance.
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Robert Noel, Land Securities Group plc - Chief Executive [15]
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Sure. Okay, so people talk about performance against an IPD in very different ways. Some people use some benchmarks and some people use others.
When we report our progress against IPD, in London we report it against the Central London Index; in retail we report it against retail warehouses and shopping centers. You will have noted that our retail portfolio, I think, has outperformed our IPD benchmarks by about 0.5%. Our London has come in quite a long way behind.
The Central London quarterly index is GBP20 billion of mostly GBP30 million Mayfair lot sizes. We have a GBP6 billion portfolio across London, which is not performing at the moment like GBP30 million lot sizes in Mayfair. So that is why we have underperformed that index this year. That will reverse when markets correct.
What I can tell you is that against those same metrics, we've outperformed over the long-term and the medium-term. You know me, I'm not really a great IPD fan. If you think the market's is going rise, you should get on and gear up operationally and if you think the market's going to fall, you should hunker down. You shouldn't just aim to outperform IPD, so hopefully that answers your question.
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Keith Crawford, Peel Hunt - Analyst [16]
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Keith Crawford, Peel Hunt. I apologize for these being slightly odd questions.
Now, the first thing I'd like to ask about is Portland House. Now, first I'd assume that you were asked to settle this on a fairly frequent basis, and there seems to be a propensity in London for people to find this kind of real estate extremely attractive.
Furthermore, if you're improving the entire area, even the station which currently floods regularly and is closed regularly, and we've reached this euphoric moment, will that not be an even more dramatic residential asset worth more --?
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Robert Noel, Land Securities Group plc - Chief Executive [17]
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Why? Because it will be on the water's edge you mean?
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Keith Crawford, Peel Hunt - Analyst [18]
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Well, you know how it is. It's a long walk to the next station from there, by the way. The -- it just seems to me, it overlooks -- does it not overlook the Palace Gardens at St. James'?
I can't see the, in my mind, the attraction of that is going to change, even in surplus conditions. It's unique. It's an extraordinary thing from a residential perspective. You've got the permission and it doesn't seem to be very highly valued in the books to me, at this stage.
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Robert Noel, Land Securities Group plc - Chief Executive [19]
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There's quite a bit in there. So let's just talk about Portland House for a minute. Portland House is a 200,000 square foot building. We have, as you have rightly said, permission to convert it to residential.
When you get a planning, consent you spent as little money as you can getting planning consent; the real money gets spent when you're doing the detailed design. And detailed design in a building which is as complicated, that takes a long time.
So you read into the comments today that we're actually extending leases out to 2016. That is because we can. A lot of the tenants just want to stay there and roll over.
So effectively we're just keeping the income producing on that development site for another two years. It was already going to 2015. It's now going to 2016 while we work up the detailed plan.
Depending on how you procure and how you design that building, it can have a massive effect on the cost of development and the time of development. So the more we can hone that down before we go any further, the less risky it will be.
But you're absolutely right, this is a unique asset. It looks straight down into the gardens of Buckingham Palace. We will never get planning permission to a building of that size again in Central London. And so it is -- as you say, should endure through the cycles.
It's very difficult for our valuers to put any other value than existing-use value until we have given them a very concrete set of figures and timings for a development.
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Keith Crawford, Peel Hunt - Analyst [20]
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My other question is really a very difficult thing, but you've raised some big calls again in relation to trends. I think it's a reasonable guess that as Crossrail comes in the cycle will turn down. That's the nature of human life. That's not that long away, actually.
Now these companies, the leading property companies, issued colossal quantities of equity, all of them, and did this during the -- shortly after the crisis.
I was just looking at the share price, which is well over GBP20, none of this is your fault personally by the way, the slightest bit. It's going to be a long time before we get GBP20, unless of course, when you think that this is trending downwards. You've done your work. You've done the construction on Howard Samuels Estate and (inaudible), and God knows what, and the best of the retail opportunities.
What about some share cancellation as being at least on the agenda? I don't even mean treasury, I mean cancellation, quite fun. That's a way to win a lot of share price performance.
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Robert Noel, Land Securities Group plc - Chief Executive [21]
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There we go. Keith, for the next couple of years we're just going to concentrate of what we said we were going to concentrate on.
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Keith Crawford, Peel Hunt - Analyst [22]
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Just a general call.
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Robert Noel, Land Securities Group plc - Chief Executive [23]
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So let's leave it at that, at the moment. Thank you.
I will get through you all; Remco, then Os, then John and then Chris.
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Remco Simon, Kempen & Co - Analyst [24]
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Remco Simon, Kempen & Co.
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Remco Simon, Kempen & Co - Analyst [25]
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Question, you seem to stick to your view on the cycle and the length of the cycle. Some people have recently been hinting that it might well take longer, because the economy is only just about to -- has only just started to pick up.
What would make you change your view on how long the development opportunity lasts? And what kind of flexibility in the business do you have to react to that, should it be an extended window of opportunity
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Robert Noel, Land Securities Group plc - Chief Executive [26]
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Sure. [Remco], we're not pulling the cycle round, Remco, as I hopefully, I tried to explain. All we're saying is the balance of risk changes and you take an awful lot of risk when you speculatively develop a building, especially when you're doing one in scale. Certainly, in terms of development, it's complicated work.
We've been very clear right from the beginning, we will be early-cycle developers; that's exactly what we have been. We are still going to be developing and delivering space for the next two years, so this is not calling the cycle.
Beyond that, we've got plenty of opportunity. We've got Phase II of Nova; we've got Portland House; we've got Oxford; we've got Glasgow. And as with everybody else, deals are like buses, they come along. We will get into more opportunity.
But just as we've sold out of some, Arundel Great Court, for example, development is about timing. And you need to deliver into a market at the maximum point of tension, as we have demonstrated this morning with New Ludgate, and that's all we're doing.
What we're saying is the risk dynamic is changing. We're not calling the cycle.
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Remco Simon, Kempen & Co - Analyst [27]
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Okay, and maybe another question. You've been selling a lot of retail assets over the last years already. I appreciate you got some big retail development opportunities, which you lined up. But is there any point in time where you could see yourself dusting off the old demerger documents again or is that definitely out of the window?
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Robert Noel, Land Securities Group plc - Chief Executive [28]
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Yes, we look at this quite regularly and we are -- we've been again pretty clear, both Martin and I, over the last couple of years. Demerger is not on the agenda, I said that very clearly in 2012 when I took over from Francis. We like the diversity we have.
The shareholders we speak to are perfectly content with the diversity we have. They know exactly what we're doing and those are the guys we're working for. So we always look at this stuff. We wouldn't be doing our jobs if we wouldn't, but there's nothing on the agenda.
Os next.
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Osmaan Malik, UBS - Analyst [29]
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Osmaan Malik, UBS. Actually, I think Remco just beat me to it. But my question was in your preamble you said that there may be more risks than ever in the property market. I was just wondering whether you could think back to 2006 and 2007 and compare what you're thinking now versus then in relation to that statement.
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Robert Noel, Land Securities Group plc - Chief Executive [30]
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I remember 2006 very, very clearly. Everyone was screaming at the property companies saying they were under-geared. Everyone was screaming at property companies saying they weren't doing enough development, and look what happened.
I remember 2006 very clearly as well, because everyone said Lloyds Bank was the most boring business in the world and it was paying a dividend yield of 6%. If only, we all had hindsight.
The property market is cyclical and it's changing, and we have to recognize that. It's all about risk management.
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Osmaan Malik, UBS - Analyst [31]
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Okay, very clear. The second question is just drilling down onto the retail sales -- the sales in retail you've made.
You mentioned you sold Dundee. You bought that four years ago, so I was wondering if you could talk about the performance of that asset, of what you underwrote it and four years ago, and what changed to make you sell it now and the read-across for the rest of the portfolio on them.
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Robert Noel, Land Securities Group plc - Chief Executive [32]
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Yes, a great question. We bought it for about GBP140 million, I think? I can't remember the exact figure. We sold it for GBP125 million. We had a 7% running yield during the time that we owned it. When we bought it, rents in Dundee were roughly between GBP100 and GBP110 zone A. We were absolutely convinced that that was stable. This was before the Eurozone crisis if you remember.
What has happened over the past four years is that as we've been saying and as we've been rehearsing with you, the way the consumer behaves is changing. And that drives the way the retail is changing.
We were convinced in 2010 that retailers would want to stay in Dundee. We're not necessarily convinced they want to stay in Dundee or in this center any more, and that's why we sold it.
So what we could do is really upgrade the experience there to drive people in. That would cost. We wouldn't get a return on capital. So we'll let someone else do it.
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Osmaan Malik, UBS - Analyst [33]
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Okay, thank you.
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Robert Noel, Land Securities Group plc - Chief Executive [34]
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It says something about us that we will have the discipline to fess up to something that didn't go quite as we thought it would be and be very open about why we've sold it.
Jon? I'll come to you in a moment, Chris.
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Jon Stewart, Liberum - Analyst [35]
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Jon Stewart, Liberum; just two questions if I might.
Firstly, in terms of the retail development cycle, you've got a very clear view on the London office development cycle. And I just wanted to get an idea, are you seeing the same sort of construction cost pressures in retail and does that pose a risk that that cycle becomes unnecessarily truncated?
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Robert Noel, Land Securities Group plc - Chief Executive [36]
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Yes, it's a great question, Jon. Retail is not cyclical; London is cyclical. London is -- we are a 220 million square foot office market. You can never exactly match demand and supply. You get inflexion points of you go oversupply and undersupply. You get rental rises and rental falls when you go through those inflexion points. That's what we went through in 2010 and that's what we're building in to now.
Retail is not the same. Retail, it's about providing the space that the retailers want to trade from, and they will only go to that space. So we're not really -- we are depending on retailer demand for the space, not the cyclicality of consumer trends.
As for building costs, they absolutely will rise. They're not rising in the provinces at anything like the rate they're rising in London. And that's due -- that is not due to commodities pricing; this is due to preliminaries affecting capacity within the contractor market.
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Jon Stewart, Liberum - Analyst [37]
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Just one other question; I guess both yourselves and British Land yesterday made references to potential political uncertainty and political risk.
I just want to get an idea; do you see any specific risks that are on the political front and, probably more pertinently, to the commercial side than, I guess, the residential side, where we can all see the risk there?
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Robert Noel, Land Securities Group plc - Chief Executive [38]
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Yes and I've said it in the statement this morning. The 12 months leading up to the general election will bring risk for everybody because these politicians themselves on what is going to be a very closely fought battle, much closer than people were expecting two years ago and probably closer -- and probably changing color in the past few weeks compared to where they were a few months ago.
So it's going to be pretty close and they will all be positioning themselves royally over the next nine months; we all know that. As you know, Ed Miliband's statement about effectively rent controls last week, for the private rented sector, for example, is a complete death knell. So we have to be aware of that.
I think the thing that will pose the biggest risk for business in the UK is whether either party demonstrate that they're not perhaps as open -- UK is perhaps not as open for business as our reputation stands at the moment. It is very important that we maintain that; so immigration is the hot topic, housing and infrastructure is a hot topic.
And if -- the risks are that as they score political points, they'll be bringing in policies where the law of unintended consequences will only catch up with us in a few years' time, and we try and read those in advance.
Sorry, I was going to go to Chris and then I'll come back to you, Tim, if I may.
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Chris Fremantle, Morgan Stanley - Analyst [39]
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Chris Fremantle, Morgan Stanley. You've been very clear about the -- your view on the London rental market. Just more wanted to understand how you expect yields to behave in that rental market?
Do you think yields stay low and so effective your rental growth is pretty much equivalent to your capital growth over the next few years? Or do yields start to rise in anticipation of a rental peak. How do you think that plays out?
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Robert Noel, Land Securities Group plc - Chief Executive [40]
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Well, yield's clearly very important to all of us, especially at the NAV level.
At the moment, there is a -- there remains a huge wall of capital. And to pick up Keith's point, we get calls daily for most of our buildings: will you sell them? Will you sell them? And the prices are laid in front of us, which is very exciting. But we have a business to run.
The -- we are in a rental-growth phase. And history tells us that in a rental-growth phase, yields will continue to be stable, or harden.
We're also in a historically-low interest rate phase, and we've got a yield gap, which is wider than ever. There is no outward pressure at yields on the moment. And that, I think, will depend on where the interest rate curve goes.
You heard the Governor of the Bank of England yesterday. You probably heard Ben Broadbent on the Today program this morning. They're being pretty consistent in what they're saying about interest rates. They -- if they rise, they will be done very, very gradually, and it's not immediate.
So I think for the time being we're set very fair in London.
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Tim Leckie, JPMorgan Cazenove - Analyst [41]
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Tim Leckie, JPMorgan Caz. It's pushing on, so I've just got the one, and you did allude to it slightly in that last answer.
Given the wall of capital, we're seeing new investors coming in. Global pension insurance funds, they want yield, they want long lease. We've seen other listed property companies either take development finance from the source, or enter into joint ventures. You say you're seeing this capital knock on your door.
Could you expand your previous comment, maybe, into the LTV strategy? You're probably going to be under pressure over the next few years, as you mentioned, and leading in 2006 [to] raise gearing.
Now, 32% is moderate; allows you to exploit the operational risk. But would you be happy to see that go lower if you get the silly bid on the table, and it's too good to refuse, despite the comment that you do have a business to run?
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Robert Noel, Land Securities Group plc - Chief Executive [42]
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We have said absolutely consistently, and we demonstrated it with the sale of Park House, while we were building it, even, that no asset is sacrosanct.
If we get a bid that we -- from which we think the forward-look return is going to kill our business, we will sell. And that includes every single asset in the book.
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Martin Allen, Deutsche Bank Research - Analyst [43]
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Martin Allen, Deutsche Bank. Martin's explained very clearly the benefits to the revenue account of gearing. Obviously, over the last five years you've generated an average capital growth, at the -- on a leverage level, of about 6%.
Could you just remind us what the advantages have been to Land Securities over that period of having a relatively-low financial gearing?
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Robert Noel, Land Securities Group plc - Chief Executive [44]
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I think you have to remember with gearing, Martin, is, that you have financial gearing, and you have also operational gearing.
And one of the things that we've had to be really -- we've really had to take into account is that we've had a huge speculative development program. We still have a huge speculative development program. We've got another GBP700 million of CapEx over the two years; 2 million square feet at risk in London and around the place, at the moment.
A mixture of operational gearing and financial gearing, if markets change, is toxic. We've seen that before. So that is why -- we're an overall return business. We've decided to allocate capital to speculative development. That's what we did.
We've demonstrated this morning that's beginning to pay off, with a 22% rise this year, and 18% last -- rise last year. Plenty more to come next year.
And yes, we could have had financial gearing in hindsight. But when we started 20 Fenchurch Street in 2000 -- when we announced it in this room in 2010, there was almost a sort of intake of breath as we said we were going to crack on with this development scheme. People have very short memories.
We've got a question on the screen: 20 Fenchurch Street has been a great success from its heavily-written-down site value point. Thanks for that (laughter).
But what has its longer-term IRR been? You say you have been bold in your strategy; but would you have not done better to have been even bolder at 20 Fenchurch Street, and kept 100% of the development gains?
There we go. I knew it was coming.
Let's talk about written-down site values. I arrived in this business post the war in 2010. We have the deck of cards we have. We do the best we can with them.
When we announced we were going to start development at 20 Fenchurch in 2000 -- in November 2010, as I said, there was a deep intake of breath: why are you doing it?
We said we were doing it, because we had to go speculatively, because we wanted to deliver it in mid-2014, because we said the supply/demand imbalance would be different then, which it has been.
We said we wanted to do it with a partner, because we also had other schemes to do; witness Nova Victoria.
We absolutely could have done 20 Fenchurch Street on our own at the time, but we didn't know we were going to pre-let it to the tune of 87%. As far as we were concerned, we were still going to have that coming out of the ground at the same time as we wanted to commit to Nova.
And if we'd been unable to do Nova, because we hadn't let 20 Fenchurch Street, that would have not been the right place to be. As it happens, we've been right to do both, and I have absolutely no regrets.
The IRR, to answer your question: I don't know what it is from the previous value. But from the written-down value it's been pretty stonking.
[Bernard], if you're there, you're on a conference call.
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Unidentified Participant [45]
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One question. You point to a potential substantial pick-up in development supply over the coming years. And you point to the potential -- the pick-up in development finance that is available out there.
In the early '90s you had [London and Edinburgh] trust, Speyhawk, you had another 20-plus property developers that basically went bust. Since then the market has become a lot more oligopolistic. Who's going to do all these developments? And is the capacity to actually deliver them in the timeframe that you've pointed out?
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Robert Noel, Land Securities Group plc - Chief Executive [46]
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Yes, it's a good question. It's a good challenge. Things move pretty quickly. You've seen in the last couple of weeks, for example, both [Exemplar] and Helical Bar have had their schemed prefunded in the City of London, so they'll be coming out of the ground.
You have seen the [FCA]; and rumored this week, Transport for London committing to between a 600,000 square feet in Stratford on the railway and [Linley] scheme. These are big numbers, and they can make a difference.
And if you think about the stuff that is in London, that is controlled by people with good balance sheets: Wood Wharf; Paddington; south of the river, the Shell site; Kings Cross, there is a lot of space that can be delivered, and there's no reason why it shouldn't be.
It may not be. We're not saying it are -- it will be. But the risk is also, as from where we were in 2010, where we said no-one had the money. But we had, and that's why we cracked on.
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Unidentified Participant [47]
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But you say the knowledge and the -- is there in the industry to deliver all these projects?
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Robert Noel, Land Securities Group plc - Chief Executive [48]
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The knowledge is absolutely there. The funding is there. The appetite is there. So the propensity is there.
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Unidentified Participant [49]
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Good. Thank you.
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Robert Noel, Land Securities Group plc - Chief Executive [50]
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Sorry, we've gone over a bit, chaps. Thank you very much for your attendance this morning. I hope it was useful. Martin and I will be around if you've got further questions. Otherwise, we will see you in November.
We have actually -- sorry, we have an Investor Day in September, which this year is in London; which will be hosted by Scott and Colette. It will be a London-focused day, so the majority of the day will be run by Colette. But Scott will be giving you his take on the retail market, and what he's done since he arrived to take over the retail business four weeks ago.
Thank you.
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