Half Year 2014/2015 Land Securities Group PLC Earnings Call
Nov 11, 2014 AM EST
LAND.L - Land Securities Group PLC
Half Year 2014/2015 Land Securities Group PLC Earnings Call
Nov 11, 2014 / 09:00AM GMT
==============================
Corporate Participants
==============================
* Robert Noel
Land Securities Group PLC - Chief Executive
* Martin Greenslade
Land Securities Group PLC - CFO
* Scott Parsons
Land Securities Group PLC - MD, Retail Portfolio
* Colette O'Shea
Land Securities Group PLC - MD, London
==============================
Conference Call Participants
==============================
* Remco Simon
Kempen & Co - Analyst
* Timothy Leckie
JPMorgan - Analyst
* Marc Mozzi
Societe Generale - Analyst
* Nick Webb
Exane BNP Paribas - Analyst
* Alan Carter
Oriel Securities - Analyst
* Chris Fremantle
Morgan Stanley - Analyst
* John Lutzius
Green Street Advisors - Analyst
* Osmaan Malik
UBS - Analyst
==============================
Presentation
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [1]
------------------------------
A very good morning to all of you, and welcome to our half-yearly results. There should be no surprises today, not least as many of you will have been at our Investor Day in September. We have been very clear on how we're running the business, and these results demonstrate we haven't taken our foot off the pedal.
Scott and Colette have absolutely hit the ground running, with the pace and the scale of our activity, ensuring that we deliver on our plan. And while the current political environment creates some uncertainty for all companies, our business is in great shape, and getting stronger.
As you know, we run Land Securities based on property fundamentals; and that's because we recognize our markets are cyclical, and that our occupiers' needs are constantly changing. And it's this evolution in occupiers' needs, and that's in all of our product lines, and ensuring that we own and deliver the right space is crucial.
Since emerging from the global financial crisis, we've been building and trading our way back to a position of strength by recycling capital, with a well-timed development program in London, and decisive action in our retail business with our push into leisure and dominance.
Nearly GBP7 billion of sales and acquisitions and development CapEx since we started development in 2010, while following a broadly net debt-neutral approach, is transforming the business, both in terms of quality and resilience.
Over 40% of our portfolio today has either been acquired or redeveloped in that time. And, as you will hear later from Colette and Scott, we have more opportunities to exploit.
So, here's the running order this morning. First, Martin will take you through the numbers and the valuation; Scott will then talk about the continued reshaping of our retail business; and finally, Colette will bring you up to speed with what's going on in London.
Martin.
------------------------------
Martin Greenslade, Land Securities Group PLC - CFO [2]
------------------------------
Thank you, Rob. Good morning, everyone. It's been a good six months. Values are up, earnings are up, and the quality of our portfolio is up, with Bluewater giving us the opportunity to demonstrate the flexibility of our balance sheet.
So let's look at the headline numbers. Our profit before tax was GBP1,031.1 million. Now that includes the valuation surplus of GBP880.2 million, and GBP38.2 million of disposal profits.
Adjusted diluted NAV per share was GBP11.29; and that's an increase 11.5%, or 116p, since March.
Revenue profit. Revenue profit was up for the six months at GBP170 million, up 8.6%, or GBP13.5 million, on the same period last year.
Adjusted diluted earnings per share were up 7.5%. And growth here was slightly lower than for revenue profit, and that was largely due to take-up under our scrip dividend scheme, increasing the number of shares in issue. Now, as you may recall, we suspended the scrip dividend after the payment of the April dividend.
And on the subject of dividend, we've today confirmed a second interim dividend of 7.9p. And that brings the total to 15.8p for the six months; up 3.9%.
Overall, these results translate into a total business return of 13% for the six-month period.
So turning now to more detail on revenue profit, this slide sets out the main components of our revenue profit on a proportionate basis. Revenue profit increased by GBP13.5 million; and that was mainly due to a GBP7 million increase in net rental income, and lower interest costs.
Our net indirect expenses were GBP39.3 million, and that compares with GBP40.4 million in the prior period. This reduction is primarily due to lower staff costs, partly offset by higher feasibility expenditure, in the current period on properties that we do not yet own.
The net interest costs of the Group, and joint ventures, decreased by GBP5.4 million. That was primarily due to the repayment of X-Leisure external debt in the previous year, using our cheaper Group facilities.
So let's now look at that GBP7 million increase in net rental income. Here, we have net rental income broken down into the various categories and compared against the first half last year. There's a more detailed split in between London and retail in the appendix, but this slide brings out the main points.
Net rental income on the like-for-like portfolio was up GBP4 million. Now, the majority of this increase was in retail; and it was largely due to new lettings and the settlement of a number of rent reviews, with an increase in bad debt offset by lower direct property costs.
In London, gross rental income was up by some GBP3.5 million, but we expensed a similar amount of development-related costs on an asset where progress had not sufficiently advanced for us to capitalize those costs.
The development program saw net rental income increase by GBP10.3 million. Almost all of this increase came from 62 Buckingham Gate, and 20 Fenchurch Street.
Completed developments were up slightly, as a result of the final lettings at 123 Victoria Street. But that was partly offset by higher bad debt provisions impacting net rental income at Trinity Leeds.
Acquisitions contributed a GBP15.7 million increase in net rental income. Now that is due to the purchase of our 30% stake in Bluewater at the end of June. But it's also due to the increase in our ownership of X-Leisure in September 2013.
And finally, disposals. The scale of our disposal activity resulted in a loss of GBP24 million of net rental income. The main impact was from sales we made last year, and that was, namely, Bon Accord, The Overgate Center in Dundee, Bankside 2 and 3, and Empress State; together with the disposal of The Bridges in Sunderland, which occurred in the first half of this year.
So let's turn now to the valuation surplus. The value of our combined portfolio as of September 30, was GBP13.2 billion. And the valuation surplus over the six months was GBP880.2 million; an increase of 7.5%. And within that, retail saw values rise by 5.4%, and London by 9.4%.
The 7.1% increase in the like-for-like portfolio was due to a rental value growth of 2.2%, and inward yield shift of some 27 basis points.
Within acquisitions, Bluewater was flat; and the X-Leisure properties were up 5.4%.
And, once again, it's the development program that delivered the highest percentage increase, up 14%; and that represents GBP197.7 million of surplus. And within that figure, the major contributor was 1 & 2 New Ludgate, which produced a GBP73.6 million surplus in this six months.
So let's now look at the valuation surplus, and how that and other movements affected adjusted net assets. We started the period with adjusted NAV per share of GBP10.13.
Adjusted earnings were GBP170 million.
And then comes our valuation surplus, which is followed by two items related to disposals and acquisitions. First, you have GBP38.2 million from the disposal of investment properties; and that was mainly The Bridges in Sunderland.
And then, you have a goodwill impairment related to the acquisition of our 30% stake in Bluewater, which is accounted for as a business combination.
Now, Scott will cover all the exciting aspects of Bluewater in a minute, but, first, I've got goodwill amortization.
The goodwill that's impaired here relates to the difference between the fair values of what we acquired, as determined by our external valuer, and the consideration we paid. The difference is largely due to prospective purchaser's costs, which are deducted by the external valuer in arriving at their valuation; as well as a lower value being attributed to the 110 acres of surrounding land, where we were prepared to pay a premium, due to its long-term potential and adjacency to Ebbsfleet.
Now, more information on the accounting for Bluewater is included in note 18 to the financial statement, and there's also a separate slide in the appendices. If you do look at these, you will learn that there is a small additional element of goodwill of GBP6 million, of which only GBP0.1 million has been impaired. Now that relates to a deferred tax liability on an intangible asset, of course.
Our cash dividend in the period was GBP105 million. And we spent GB5.9 million buying shares for the EBT. With other reserve movements of GBP1.1 million, that's how our adjusted NAV per share ended the period at GBP11.29p.
So let's move onto cash flow. Set out on this slide, and only available here, are the major components of the cash flow movements which affected our adjusted net debt, so all on a proportionately consolidated basis.
We began the year with adjusted net debt of GBP3.95 billion. Operating cash inflow was GBP118.3 million. And acquisitions here relates to the purchase of our 30% stake in Bluewater in June. And we spent GBP205.1 million on development and refurbishment CapEx, including our joint ventures at Nova Victoria and 20 Fenchurch Street.
We received consideration of GBP201.5 million from disposals. And after some sundry items, we ended the period with adjusted net debt of GBP4.62 billion; that's up GBP674.6 million.
So let's look at how our net debt has moved so far this year compared to last year. On this slide, last year's adjusted net debt is in red, with the year to date in blue. And we started out the year with lower net debt than we'd had for a number of years. But following the Bluewater acquisition, adjusted net debt jumped to around GBP4.6 billion.
However, on average, our net debt was only GBP21 million higher in the first six months of this year, compared to the prior period. And that confirms my earlier comment: that our lower interest costs were due to the type of debt, not the amount.
Looking forward, we know net debt is going to come down by some GBP340 million, following the sale of Cabot Circus in Bristol, and 47 Mark Lane. And it may come down even more, if market pricing tempts us into further sales. As we've discussed before, disposals do have a negative earnings impact, particularly with our marginal cost of debt currently at below 1.5%.
Let's now briefly look at financing. The increased in our adjusted net debt, well, that led to a 1.1 percentage point rise in our LTV to 33.6%. However, if you adjust for the recent disposals of Cabot Circus and 47 Mark Lane, as well as the Exeter Buchanan Galleries asset swap, that would take our LTV down to 32%.
The weighted average maturity of our debt is 8.2 years, with a weighted average cost of 4.5%. And that was down from 5% at March, as increased the borrowing on our cheaper revolving credit facilities to fund the Bluewater acquisition.
So, let me summarize. There's been a huge amount of activity in the business with capital transactions, so far this financial year, totaling GBP1.5 billion.
Our financial performance has been strong, with good growth, both on the valuation side and in our underlying earnings.
And, as we demonstrated with the acquisition of Bluewater, our balance sheet remains robust and flexible.
So now let me pass over to Scott, for news of the retail portfolio.
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [3]
------------------------------
Thanks, Martin. Good morning, everyone. In our results presentations over the past few years, we've spoken about the evolution in consumer behavior, and its impact on the retail environment.
And against that backdrop, we've shared with you our plan to reshape our portfolio along the lines of dominance, experience, and convenience; selling out of assets less relevant to the changing landscape, and recycling the proceeds to fund acquisitions and developments that will not only cope, but will thrive.
Over the past six months, we've increased the pace. Since the beginning of the financial year, we've completed investment transactions totaling more than GBP1.4 billion. We acquired a 30% interest in Bluewater, and the 50% that we didn't already own in Buchanan Galleries; and we've sold centers which don't fit with our plans.
Over the six-month period, we've produced a valuation surplus of 5.4%.
Voids remain low, and sales are up.
So, why are we moving up the quality curve? Well, it's because rental tension is driven by retailer demand for space. And retailers are only really demanding space in the most successful trading locations; and here's why.
We monitor each of our shopping centers' performances closely, via retailers' sales; individual store contribution to total retailer profit; and consumer footfall. We also monitor other centers as closely as we can.
In a number of centers, we've witnessed flat or falling sales densities, and footfall. Now, this leads to difficult conversations with retailers, with their appetite to continue to trade in some centers diminishing as they, in turn, seek to reshape their store portfolios.
But retailers located in other centers have seen strong sales densities growth on previous years; in some cases, up to 20% ahead of where they were last year.
And our extensive turnover data consistently demonstrates that stores in dominant locations, such as Bluewater, St. David's, and Buchanan Galleries, contribute much more to retailers' coffers than those in Sunderland, or Dundee, for instance.
Having strong-performing and profitable retailers ultimately provides us with a better base to grow rents within our portfolio. And that's why we've invested in dominance.
In June of this year, we acquired a 30% stake in Bluewater, and full ownership of 110 acres of surrounding land. We also acquired the full asset management rights of the center.
Outside our direct holding of 30%, Bluewater is co-owned between three other owners: M&G, who own 35%; LLRP, who own 25%, which is made up of over 50 different investors, of which we're one; and 10% by Hermes.
The management lease gives us the ability to set the annual budget and the five-year strategy; determining the vision and the path forward for Bluewater. Now, this is agreed each year between the four co-owners. And our relationships with them are strong and collaborative. They're glad to have Land Securities at the tiller.
Bluewater reaches a catchment of 6.6 million people, with a potential annual spend of GBP13 billion. It's an affluent and growing population, dominated by over 70% [ABC 1s], and the catchment is forecast to grow by over 11% in the next eight years.
The scheme is a highly accessible and convenient location. It's 23 miles outside central London, and it's located just off the main A2/M25 junction. And it provides 13,000 free car parking spaces.
According to CACI's retail footprint study, Bluewater is ranked number one in the UK. And that's based on a weighted catchment comparison [spend], and a dwell time of 167 minutes. Now, that's ahead of its peer group, including both Westfield and the Trafford Center.
Occupier sales are in excess of GBP865 million annually; and that's up more than 6% year to date.
And we've been busy since the acquisition in June. We've started to reduce voids, as we said we would when we announced the acquisition. We've completed eight new lettings, totaling GBP2.5 million of rent per annum; and further deals, representing annual rent of GBP3 million, are in solicitors' hands.
We've also agreed a store upsize and lease restructure with Next, and that will facilitate a multi-million pound store refit. That's in line with our plan to reduce the number of smaller shops in favor of larger flagship stores, to meet retailer demand and to maximize rental income. A number of similar tenant upsizes are in the works.
As you know, every Land Securities asset has a plan. So, looking ahead, Bluewater has 350,000 square feet of active retailer demand from more than 50 interested operators. Now, 85% of that demand is for units above 5,000 square feet, and 65% for units above 10,000 square feet. And we'll exploit this demand through reconfiguration, and limited edition of new space.
Glow is Bluewater's event venue. And it's historically been unprofitable and underutilized, so this 60,000-square-foot space presents a great opportunity for us to work this space harder. We're exploring a number of options to convert it to further strengthen the retail, leisure, and catering offer; and that will complement and improve the Bluewater consumer experience.
Now, let's move onto the rest of our investment portfolio. Footfall within our current portfolio has edged up over the six-month period by 0.6%; and our same-center sales are up 6.9%.
While voids and administrations in the like-for-like portfolio have increased from 3% to 3.6%, the level of voids has remained relatively flat over the first six months of the year. The increase has mainly been driven by administration; namely, Paul Simon, Phones 4u, and La Senza.
But our occupancy remains high at 98%. And since September 30, lettings accounting for roughly 40% of the ERV of our units and administration have exchanged, or in solicitors' hands.
Our detail -- our usual detailed disclosure on voids, administration, and occupancy is included within the appendix to your packs.
At St. David's, in Cardiff, the new Primark store opened in June. And it's already producing weekly sales almost double those of their previous Cardiff store. And our footfall is up 5% year to date.
At Trinity Leeds, sales are up 5.6%, with significant activity on the leisure and catering front. The Everyman cinema has opened an additional screen to satisfy customer demand, and we've exchanged contracts with four new catering lettings in the first six months of the year. The consumer experience at Trinity is going from strength to strength.
The retail park portfolio has seen an increase in activity, mainly driven by homewares, discount retailers, and catering; although the occupational market for larger units at retail parks remains challenging. So, overall, our retail park ERVs are slightly down.
Now, we've covered the merits of our interest in the leisure sector. ERVs are up, and the market is performing well. The breadth of food and beverage on offer continues to expand, with operators such as Five Guys taking units in out-of-town locations and standalone leisure destinations for the first time.
Rental income from the core portfolio averages approximately 20% of net turnover. And we've seen strong year-to-date turnover growth, with accumulative increase of 6% to the end of September.
Now, the core hotels are unlikely to be long-term holds for us. But as we've said before, they're underpinned by vacant possession values that are well above investment values. And we're really happy with their performance prospects, for the time being.
On the development front, we have a good pipeline of opportunities, but we remain disciplined in evaluating which development schemes to pursue.
Our exclusivity period with AEG, to develop a designer outlet center at the O2 in Greenwich, expired in July. And we decided not to pursue the opportunity, based upon our feasibility assessment.
At Maidstone, we were refused planning permission for a 225,000-square-foot retail park development. Now, we have very little capital tied up in this strategic site and we're now deciding whether or not to appeal the decision, or to explore other options.
The Bishop Centre, in Taplow, which is a 105,000-square-foot scheme in a convenient South East edge-of-town location, had a very strong opening and is almost 90% let to retailers, including TK Maxx, Tesco, and Nike.
Elsewhere in the South East, we exchanged a development agreement with Guildford Borough Council in June, and we're undertaking feasibility work for a potential retail-led, mixed-use scheme in the town center.
Outline planning permission for Filmworks, a potential mixed-use leisure and residential development in Ealing, was granted in July, and contracts have been exchanged with Picturehouse Cinemas to anchor this scheme.
At Worcester, we'll be submitting a planning application towards the end of the year for a 240,000-square-foot development, which is almost 70% let to John Lewis; Marks & Spencer; Sainsbury's; and Next.
And we've made good progress on extension plans for the Westgate center in Oxford, and Buchanan Galleries in Glasgow, where we now have full control. As you know, both schemes have outline planning consent. And we anticipate achieving reserves matters consent by the end of the financial year, by which time we'll have decided whether or not to commit to these developments.
Moving onto sales, we've made more than GBP580 million of sales for far this year. And that's just over GBP185 million in the first half of the year, and almost GBP400 million since September 30.
As we signaled at the beginning of the year, we sold The Bridges, in Sunderland.
In our JV with Sainsbury's, we sold a supermarket in Hull, and now have only standalone supermarkets remaining in our portfolio.
And since September 30, we've sold our 50% stakes in Cabot Circus, Bristol, and Princesshay in Exeter. Now, these are relatively new schemes, but from the passing rent, and due to competition with the new cities, we don't think future performance will be acceptable.
So, to conclude, the retail market has proven liquid. We've taken, and will continue to take, full advantage of that liquidity to recycle our capital away from assets that don't fit with our plans, and into assets that do. Our capital recycling over the past six months has made a significant impact.
Today, all but one of our shopping centers is either in dominant regional, or in Greater London. The retail portfolio's exposure to secondary shopping centers is now just 3%, and standalone supermarkets account for only around 0.5%.
Looking ahead, our potential developments in Oxford and Glasgow will further enhance the quality of our portfolio; in line with our key themes.
As I said at the start, over the past six months we've increased the pace of reshaping our portfolio along the lines of dominance, experience, and convenience; and we're really pleased with our progress.
Thanks very much, and I'll hand you over to Colette, to update you on London activity.
------------------------------
Colette O'Shea, Land Securities Group PLC - MD, London [4]
------------------------------
Thank you, Scott. Now, to London. Martin updated you on our valuation performance, and we gave you an update on the market two months at the investor conference, so I'll focus on our operational activity. We're in good shape, as you'll see.
As you know, we've spent the last four years bringing forward a large development program, which is now at its most active, and is being delivered over the next 24 months into a market which is relatively starved of space.
We struck the construction cost curve at the low point, and are delivering highly efficient, technically resilient workspace that our customers want into increasingly well-connected locations. This, along with supply-constrained conditions, means we're able to capture rental growth, and negotiate longer leases.
Since April 1, the weighted average lease term of the 362,000 square feet that we've let is 19 years. But this negotiating position won't last forever.
With supply set to pick up beyond 2016, and a hot construction market putting pressure on costs and resource, the risk dynamics of development are changing from when we started large-scale developments in 2010. Then, we had little competition and low construction costs. This is why we said, in May, that any future development starts would more likely be on the back of pre-let. I'll talk more about our future pipeline later.
Onto the individual developments. You'll see, we've been very busy. I will start in the City. Since we saw you in May, 20 Fenchurch Street has moved to 90% let. We've achieved an average rent of GBP64 per square foot, and a weighted average lease term of 17 years.
At New Ludgate, we've let 61% of the space, all on 20-year leases. The average rent is GBP58 per square foot, which will rise to a minimum of GBP62 at first review. The scheme is due to complete in April, and we're confident about letting the remainder of the space. As part of our place-making activities, 25% of the retail is now in solicitors' hands.
At 1 New Street Square, construction is well underway. This is a 270,000-square-foot building, located within 10 minute walk of Blackfriars and Farringdon, where Crossrail meets the Thameslink. We're confident about the prospects of this central part of mid-town, and the scheme will also have a positive impact on our holdings to the west.
Over in Victoria, our master-plan approach means the buildings are complementary. They offer customer choice, and they provide value creation for us.
At 62 Buckingham Gate, we're now 69% let. Whilst the building has taken longer than we'd hoped to let, as Victoria remains a building site, we are achieving average office rents 6% above our original appraisal level.
At The Zig Zag Building, we're 35% let. We're working to an anticipated average rental value of GBP73 per square foot. We believe the risk is on the upside. Practical completion is now programmed for July.
Next door, at Kings Gate, which is also due to complete in July, 85 of the 100 apartments have been pre-sold. We've achieved an average price of just over GBP1,700 per square foot, for which we hold 20% deposit. Virtually all of the remaining value is in the top three floors, which we've previously said we're most likely to sell post PC. We have, though, recently sold one penthouse apartment for GBP9.75 million, or just under GBP2,800 per square foot.
Up the road, at Nova, on the recent tour, you'll have seen that the site is a hive of activity. We're on program for completion of the residential in April 2016, and we've pre-sold 128 of 170 apartments, at an average price of just over GBP1,800 per square foot. These sales represent approximately 55% by value.
And, as with Kings Gate, the majority of the remaining apartments are on the upper floors, which we expect to sell after practical completion. We've started marketing the offices last month; and of the 18 retail units, eight are in solicitors' hands.
We have two Nova office buildings: Nova South, which is 296,000 square feet; and Nova North, which is 184,000 square feet. Both are due to be delivered in July 2016. As with The Zig Zag Building, we are working to an average rental value of GBP73 per square foot. We're confident in our timing, and we're already seeing early interest in the space.
Victoria really is changing.
Elsewhere in the West End, we have the advantage of being focused around Crossrail. At the East end of Oxford Street, we have our joint venture with Frogmore. Construction started this month to deliver 72,000 square feet of retail space, and 18 private apartments by November 2016.
We've already pre-let 64% of the retail space to Schuh and Primark. For Primark, we will be building a 40,000-square-foot extension to their existing 148,000-square-foot store. Now construction has started, we'll be marketing the other two flagship stores.
At Eastbourne Terrace, right outside the entrance to Paddington Crossrail station, we will be delivering 93,000 square feet of office space in February 2016.
As you know, our development program has already produced some great returns for us since we started in 2010, and there is plenty still to come.
Elsewhere in the portfolio, the investment and asset team remain busy. We've completed 17 investment lettings, and smart lease regearing activity continues to strengthen our income. Our weighted average unexpired lease term in our offices is now 9.1 years, which excludes our development lettings.
There are a couple of transactions I'd like to highlight. At 40 Strand, we achieved a 59% increase in rental value by letting 2,800 square feet of space to ITSU on a 15-year term.
Since September, we've also let the second floor at Cardinal Place to Schneider Electric at GBP61 per square foot, for a 10-year lease, with a [tenant] five-year break.
At Thomas More Square, News UK breaking their lease in September was the largest contribution to our voids increasing since March. The space is being refurbished, and we've already re-let 50%, or 97,000 square feet.
The other main contributor to our voids was 5 New Street Square. This was due to GSM Association's decision to vacate the seventh floor because they had run out of space, and we were full. This now gives us the opportunity to re-let the space into a supplier-constrained market.
As you'd expect, we continue to recycle capital. Since September 30, we've sold 47 Mark Lane for GBP73.2 million, after completing some letting and lease regearing activity. We've taken advantage of market conditions to crystallize the value gain we created. As we've said before, every asset has a plan.
We made no acquisitions in the first half, although we spent nearly GBP190 million on our existing assets and development program.
So now, let me look forwards. In the West End, at Portland House, we have consent to remodel this 1960's tower building into 206 apartments. As you know, we are rolling the office income over to 2016. This remains a very popular office building, so we have good optionality.
At Phase II of Nova, we are revisiting the 2009 planning consent. We're looking at how we can evolve the product, and create more value.
At the Piccadilly Lights site, we're now carrying out feasibility studies for comprehensive redevelopment of the remainder of the block.
In the city, at 21 Moorfields, we have the opportunity to acquire a 1.9 acre development site at the western entrance to Liverpool Crossrail station.
We already have an option to purchase the leasehold interest in the site from the administrators, and we've now agreed heads of terms for the freeholder, TFL, for a new lease and development agreement. We're hoping to conclude this shortly; after which, we aim to submit a planning application for around 500,000 square feet of retail and office space.
So we now have a potential future pipeline of almost 1 million square feet in the capital; and if you include 21 Moorfields, this increases to 1.5 million square feet. And we expect to grow this, as opportunities present themselves.
In summary, we're entering the busiest phase of our development program, at a time when the availability of space is low.
Our investment and asset team are moving full-steam ahead. We have a clear plan for every asset, which is improving the quality and resilience of the portfolio.
And looking to the future, we're actively restocking the pipeline.
Now, let me hand you back to Rob.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [5]
------------------------------
Thanks, Colette. And I'll be brief. Sorry, we've run on a bit. As you've heard, and as I said at the start, there are no surprises. And that's because we have been crystal-clear on our intent.
In retail, it's about moving our assets up the retail hierarchy. We've been decisive, and we've been very busy, as you heard from Scott. And as you've also heard, with good capital flows in the market, this work can continue.
In London, the market is behaving broadly as we expected. Our developments are well-placed. They're being delivered right at the point of low availability and low development completions.
Now, we've always said we'd run the business with discipline. From having relatively short leases in London, and a large tail of secondary retail assets at the top of the last cycle, we've been building and trading our way back to this position of increased strength we've been talking about today.
And by the time we've completed our speculative development program, we aim to have a retail portfolio of appealing, dominant, and convenient environments. We expect to have a robust weighted-average unexpired lease term on London offices, and a more conservative loan to value. And I am very pleased with the progress against these goals.
With that, we'll hand over to you for your questions. Thank you very much.
==============================
Questions and Answers
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [1]
------------------------------
There should be some microphones flying around. I can already see some hands going up. But if you could state your name and company, so we've got a record of the question, that would be great. Thank you.
------------------------------
Remco Simon, Kempen & Co - Analyst [2]
------------------------------
Remco Simon, Kempen. On your comments on the London pipeline, on looking to actively restock the London pipeline, could you tell us a little bit more about that? Is that with a view of developing that through a next cycle? Are you actively looking for sites that you can pre-let and still bolt onto this cycle; you're looking for sites; you're looking for short-term income? Can you just talk a little bit more about your thoughts on that?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [3]
------------------------------
Thanks, Remco. I'll hand over to Colette to talk about the acquisition we're in the process of doing. Remember, and as we said at the beginning, we're in a cyclical market. We've been a very early cycle developer this time, that's what we said we'd do.
We, at some point, have to restock the program and we will restock the program because that's the core process of a property company. So, where we see opportunities to buy, we will.
So it's probably best for Colette to talk about the opportunity we have at 21 Moorfields.
------------------------------
Colette O'Shea, Land Securities Group PLC - MD, London [4]
------------------------------
I think in answer to your question, I think it's probably all of the above. 21 Moorfields is very much an opportunistic purchase and it gives us another site very close to Crossrail.
In terms of the timing of that in the future, it very much depends on when the land would come back from Crossrail. But it is the site that could be either extended on to the current cycle, or could become a site for the next cycle.
------------------------------
Remco Simon, Kempen & Co - Analyst [5]
------------------------------
Given the competition that is out there for what you mentioned, short-term income, is there a lot of opportunities to add to the pipeline at the moment? Or are prices too high?
------------------------------
Colette O'Shea, Land Securities Group PLC - MD, London [6]
------------------------------
It's quite tough at the moment. And I think it's -- we're very disciplined with our cash, wherever we are spending it, and it's about being very selective in terms of what we want to purchase today.
------------------------------
Remco Simon, Kempen & Co - Analyst [7]
------------------------------
Maybe on capital recycling, you've done a lot in retail. Is this a point where there's maybe one asset still to come in retail?
And then, just finally, to move a little bit more towards London to look at opportunities for sales. If you see Brazilian billionaires buying stuff at 4% yield, are you having a look at the portfolio and saying, well, actually, we've got a bit of that we want to sell?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [8]
------------------------------
Yes, Brazilian billionaires are very useful, occasionally. I mean, listen, we're on a very clear path. We -- no asset is sacrosanct. We haven't been selling in London because the yields have been coming in. We sold some last year, because we believed the product, we wanted to get out of it, and so we did. And we're also funding quite a large development program. As you know, we've been running this net debt-neutral position, so we have to make some sales.
Will the sales rate pick up in London? Not by a great margin over the next six months, I wouldn't guess. But at some point, yes, we will want to check out of some assets.
------------------------------
Remco Simon, Kempen & Co - Analyst [9]
------------------------------
Right. And the last question, if you look at deals like that, are you worried that the market is getting a bit ahead of itself, the investment market?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [10]
------------------------------
Yes, I think you have to remember that London, especially the spot market, is in quite a good rental cycle at the moment. There is simply not enough space available to let for the demand that there is. This is the good quality space that we've been talking about.
And that rental cycle has got a while to run, and this is why we're developing a lot of space. Our development program goes on for another two years. We've still got 1.4 million square feet coming out of the ground that we need to find a tenant for. So we've got plenty of operational leverage.
------------------------------
Remco Simon, Kempen & Co - Analyst [11]
------------------------------
Thanks.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [12]
------------------------------
Tim?
------------------------------
Timothy Leckie, JPMorgan - Analyst [13]
------------------------------
Just two quick questions, I think. Previously, you've spoken about current ERV pace of growth (technical difficulty).
------------------------------
Operator [14]
------------------------------
(Operator Instructions).
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [15]
------------------------------
(technical difficulty) on track for that, so I don't really want to add to that.
------------------------------
Timothy Leckie, JPMorgan - Analyst [16]
------------------------------
And just, hopefully, I can get this out quickly, the LTV evolution over the next 12 months, it'll obviously be reduced by the sales. If you assume another half year of strong capital growth, it's going to take you down into the mid-20s. Now, obviously, there are -- you're on the lookout for acquisition opportunities across the board, but it is a tough market? Is 25% a level you're comfortable with, or is that getting on the low side?
And I guess there's a third option. When you've got operational leverage there, does that make 25%, or maybe 20%, the right number?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [17]
------------------------------
Why don't I let Martin talk on it?
------------------------------
Martin Greenslade, Land Securities Group PLC - CFO [18]
------------------------------
Well, I'd be delighted if our values rise such that our LTV does go down to 25%, but that's your prediction, not mine. But generally, a low LTV, as we get towards the -- as we move through the cycle, we're very comfortable with that.
As Rob said, we've still got plenty of operational leverage, and I think we'll have to see what opportunities are there. But we are not -- we absolutely recognize there's a place for leverage, but we also have to recognize the risk that it brings. And as we move through the cycle, we're comfortable with that financial leverage coming down.
------------------------------
Timothy Leckie, JPMorgan - Analyst [19]
------------------------------
Just one last one. You know you're now a good quarter into Meadowhall, happy with the purchase?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [20]
------------------------------
Bluewater?
------------------------------
Timothy Leckie, JPMorgan - Analyst [21]
------------------------------
Bluewater (laughter). I should have stuck with two questions.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [22]
------------------------------
We're delighted with the [purchase], very happy, thanks. Marc?
------------------------------
Marc Mozzi, Societe Generale - Analyst [23]
------------------------------
Marc Mozzi, SocGen. My first question will be on your retail portfolio. Which part of your retail portfolio today you do consider by being on the dominant side of the picture? You were [calling] out experience, dominance, and convenience; if we can have a breakdown on your analysis of what is the proportion of each.
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [24]
------------------------------
On the dominant side, I'd say all of our regional shopping centers we'd class as dominant centers. The London centers would be more along the convenience side; and, increasingly, on the experience side. The retail part portfolio would be a mix of dominant sites where they capture almost all of their catchment spend, or more convenience oriented.
------------------------------
Marc Mozzi, Societe Generale - Analyst [25]
------------------------------
Okay. Therefore, my next question will be, how do you think the change in regulation around carbon-emission reduction would potentially impact dominance of shopping centers in the future? Meaning, if today your catchment area is, let's say, 160 minute, as you said, should not tomorrow be only 30 minute? Are that going to affect potentially your strategy?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [26]
------------------------------
Interesting question, although what we're finding is that for the dominant centers people are actually traveling further distances to get to them. So the catchments are actually increasing for the dominant centers.
------------------------------
Marc Mozzi, Societe Generale - Analyst [27]
------------------------------
Okay. And finally, on retail, should we expect the same strong performance that you did in H1? Meaning this is the first best performance -- it is the best performance in 10 years in terms of like-for-like rental growth, if I'm correct on my numbers, I would say. Should we expect the same for going forward?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [28]
------------------------------
I don't know if we'll see quite the same scale as the yield shift, but we are hoping to see rental growth looking forward, yes. I think rental growth will be concentrated on the best-performing assets, but I think we've upped the quality of our portfolio to concentrate on the best-performing assets.
------------------------------
Marc Mozzi, Societe Generale - Analyst [29]
------------------------------
So, 3% is something you had in mind ?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [30]
------------------------------
Don't ask me for a number (laughter).
------------------------------
Marc Mozzi, Societe Generale - Analyst [31]
------------------------------
Okay. And maybe just one on the office side. I think, if I'm correct, on the London portfolio you experienced a decline in like-for-like rental growth in H1. Can we have just a reason why? And should we expect this to recover in H2?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [32]
------------------------------
Yes, we didn't actually have a decline in like-for-like rental growth; we had a decline in net rental income. Is that what you're looking at?
------------------------------
Marc Mozzi, Societe Generale - Analyst [33]
------------------------------
Yes, net rental income, yes.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [34]
------------------------------
It would be because we've got a sale, effectively.
------------------------------
Marc Mozzi, Societe Generale - Analyst [35]
------------------------------
Okay.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [36]
------------------------------
Nick?
------------------------------
Nick Webb, Exane BNP Paribas - Analyst [37]
------------------------------
Nick Webb, Exane BNP. Could I just ask what it is you don't like about hotels, because you say they're not a long term-hold, but they seem to have the characteristics that you would quite like? They've got good income; they're a leisure, Internet-proof asset, you would have thought. You talk about the vacant possession values giving you some capital growth potential. So what is it about them that means you don't want to hold them in the long term?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [38]
------------------------------
We like them very much, which is why we still own them. What we said is they're just not long-term holds for our business. The reason, if there's any reason we don't like them, it's because we don't control the income, their turnover leases. Otherwise, if we didn't like them, we'd have sold them ages ago.
We were very clear about this three years ago. They're not core for us, long term. They've got a long way to go, and we'll hold them while they make that trajectory. Demand is up; rents are up; yields are down; they're underwritten by development site value, what more is there -- what is there not to like about them?
------------------------------
Nick Webb, Exane BNP Paribas - Analyst [39]
------------------------------
That was what I was trying to understand.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [40]
------------------------------
Well, that's why we still own them.
------------------------------
Nick Webb, Exane BNP Paribas - Analyst [41]
------------------------------
And can I just ask, on the Glasgow and Oxford developments, you said you're going to take a decision at the end of --
or relatively soon about whether to commit. What are the key things that could prevent you from committing to those two schemes that look quite attractive, at this point?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [42]
------------------------------
They're both very exciting schemes, but, of course, we've got to maintain our discipline. In coming up with the decision, there are two key factors that will drive it: one, we're going through the procurement process as we speak, so it'll depend on the outcome of that; and two, we always look to see a broad range of retailer support for our schemes before pressing the button. And so far, so good, but we should be able to give you a proper update before the financial year end.
------------------------------
Nick Webb, Exane BNP Paribas - Analyst [43]
------------------------------
Perfect, thanks.
------------------------------
Alan Carter, Oriel Securities - Analyst [44]
------------------------------
Alan Carter, Oriel. For Scott, can you just say a few words on you've done a number of lettings obviously at St David's Cardiff, and Trinity Leeds, and in a short period of time at Bluewater. Can you break the mold of companies that own big shopping centers and give an indication of what [O&A] rents you're actually getting there, please, and whether it's an increase from where we were 6 or 12 months ago?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [45]
------------------------------
It varies a lot, depending on the center. At Trinity, we've done a few lettings on Albion Street that haven't quite hit our targets. But actually, we've seen ERVs grow on the MSUs and in the prime units at Trinity, so we're getting a bit of a range.
At St David's, the trend has been upwards; some lettings we've done on The Hayes have increase the tone across that entire pitch. So, it really depends on the unit within the center, and its location.
------------------------------
Chris Fremantle, Morgan Stanley - Analyst [46]
------------------------------
Chris Fremantle, Morgan Stanley. Just a quick question on London offices. You say supply picks up beyond 2016. Can you just talk about how quickly you'd expect vacancy to bounce off the lows there?
Are you -- is there anything that is going to take vacancy back to average levels and create a tenants' market for the next couple of years after that? I'm just trying to get a feel for how long we remain in a landlords' market. Most people agree the next couple of years is fine, but how quickly do we bounce back to average vacancy?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [47]
------------------------------
Yes, we spent some time on this in May, at the results; we also spent a little bit of time on this, [Caleb] bought people up to date at our Capital Markets Day.
The issue about London, for us, is managing a large-scale operation in what is a very large market. This is a 220 million-square-foot office market. You can never balance exactly supply and demand. Demand can get turned on and off by that. And supply, as we have demonstrated, takes three years to build up, and then three year to slow down. And you look back on history, there are lessons for all of us.
What we've said is that we feel more comfortable developing in an environment that is very clear. And when we started off in 2010, it was absolutely crystal clear. No one was building; people were taking up space; no one could get the money to build; and construction costs were on the floor. And we felt that the market was under-rewarding us -- sorry, over-rewarding us for the risk that we'd be taking.
Where we stand now is that those parameters have changed. Anyone can get money from virtually anyone to do virtually anything they like at the moment. It's as if the global financial crisis wasn't there. People have started building. Construction costs are rising and, therefore, we're not sure that people will be over-rewarding us for the risk that we're taking if we start off now.
So our program winds down in two years' time. All we've been saying is, in that period, we don't think anything can upset the balance between supply and demand.
What we talked about in May was this [policentricity] of London with a whole load of planning consents with people out there who've got schemes to build. And they may well build them; we don't know.
One thing we were sure about in 2010 is they weren't going to build them because they didn't have the money, but now they have so they might.
And so it's with that thought in mind, and with that risk dynamic changing, that we think we've had a, whatever it is, GBP3.5 billion program; we've done pretty well; it's just time to take the risk off the table.
------------------------------
John Lutzius, Green Street Advisors - Analyst [48]
------------------------------
John Lutzius, Green Street. Just a question on the same-center sales print number that's so strong. Very impressive number; Scott, can you give a little bit more color on it? A couple of questions come to mind. For example, what percentage of the portfolio that you own today does that represent? You've done a lot of buying and selling, so how much of the current portfolio does that speak to?
And then, the real question is why is it so strong? Is there extensions in that? Is Trinity in that? Just I'm trying to understand that very strong print.
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [49]
------------------------------
Okay, the answer to the first question, our same-center sales for the September 30, results include Bluewater, and include Exeter; but we've taken Bristol out because, as at September 30, it was an asset earmarked for sale already. So it includes the bulk of what we've got in our portfolio today.
In terms of trends, I think it ties back to the second slide in my presentation. The retailers want to be in the dominant centers because that's where their sales densities and their contribution to overall profit is higher. And they've seen amazing performance over the last six months, especially the larger unit, the MSUs.
Next, for example, where they're going to upgrade and upsize their store in Bluewater, they'll spend a lot, turning that into a state-of-the-art shop that showcases their entire range that carries all sizes in stock. So people will travel the extra mile to go there.
------------------------------
John Lutzius, Green Street Advisors - Analyst [50]
------------------------------
So it's genuine strong like for like, rather than something that's been driven by capital, like, for example, the extension and refurbishment of Trinity? It's not capital-driven?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [51]
------------------------------
No, it's not capital-driven; it's essentially on a like-for-like basis.
------------------------------
John Lutzius, Green Street Advisors - Analyst [52]
------------------------------
Okay. A question on Bluewater. Your strategy to roll up units and exchange a number of small units for bigger units, can you talk about the income impact of that; how much capital you have to put into do that, and then what happens to the tone of rents as you exchange small for big?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [53]
------------------------------
In terms of capital intensity, it really depends on the deal. If we're swallowing up an adjacent vacant unit, it's a lot cheaper than if we've got to shuffle people around the center. But the deal we've done so far has increased rental income overall. And what we hope is the similar tenant upsizes that we've got in the works will either maintain or increase rental income.
------------------------------
John Lutzius, Green Street Advisors - Analyst [54]
------------------------------
That's great. And then one more question, if I may, just switching over to London. Is there a way to give a sense of the equivalent land value per letable square foot for Moorfields? I'm just trying to get a sense of the range; I'm not looking for an exact number. But if you think about how land values swing in London over time, can we use that as an example of where we are?
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [55]
------------------------------
Yes, John, great question. We've talked about Moorfields today because the whole thing got out into the public domain about a month ago, so we thought it'd be odd if we didn't talk about it.
We will give all those numbers once we have finalized the deal with TFL. And so, hopefully, we'll be able to give you those numbers in May, or even at the IMS, if we've done it by Christmas.
------------------------------
John Lutzius, Green Street Advisors - Analyst [56]
------------------------------
Fair enough. Thank you.
------------------------------
Osmaan Malik, UBS - Analyst [57]
------------------------------
Osmaan Malik, UBS. Scott, on Bluewater, I think you just answered my first question actually, which was Next, the multi-million pound store re-fit, they're paying? You're not paying anything towards that, I take it?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [58]
------------------------------
[We don't pay.]
------------------------------
Osmaan Malik, UBS - Analyst [59]
------------------------------
Okay. The second question is on the 350,000 square feet of demand that you talked about at Bluewater. Presumably, a lot of that demand was already there when you bought it. I was just wondering how do you balance that against the 5% vacancy?
------------------------------
Scott Parsons, Land Securities Group PLC - MD, Retail Portfolio [60]
------------------------------
[No, I don't think it was there]. No, some of it obviously was there before. It is a lot of demand. But, again, we've got to deliver the right size units to meet that demand, and that will take a little bit of time; a little bit of shuffling.
------------------------------
Osmaan Malik, UBS - Analyst [61]
------------------------------
Okay, thank you.
------------------------------
Robert Noel, Land Securities Group PLC - Chief Executive [62]
------------------------------
Look, guys, sorry, we've run over a bit of time this morning, but, as you can see, we've got an awful lot going on in the business.
Thank you very much for coming. We're around all day, if you've got any further questions. Have a good day.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------