Full Year 2014/2015 Land Securities Group PLC Earnings Call
May 19, 2015 AM EDT
LAND.L - Land Securities Group PLC
Full Year 2014/2015 Land Securities Group PLC Earnings Call
May 19, 2015 / 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
* Scott Parsons
Land Securities Group Plc - MD, Retail Portfolio
* Colette O'Shea
Land Securities Group Plc - MD, London
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Conference Call Participants
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* Hemant Kotak
Green Street Advisors - Analyst
* Tim Leckie
JPMorgan Cazenove - Analyst
* Ben Richford
Credit Suisse - Analyst
* Remco Simon
Kempen & Co - Analyst
* Marc Mozzi
Societe Generale - Analyst
* Michael Burt
Exane BNP Paribas - Analyst
* Keith Crawford
Peel Hunt - Analyst
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Presentation
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Robert Noel, Land Securities Group Plc - Chief Executive [1]
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Right, good morning, everyone. I think we'll make a start because it's nine o'clock. A very warm welcome to our results presentation. These are great results for shareholders, and very pleasing for us. We're pleased because they're delivered on the back of our very clear strategy for our cyclical and changing market.
As you know we've had three key points of focus, and let me start with the first one, the large speculative development program in London which we started in 2010. The program reached its peak rate of CapEx in the second half of the year, and is producing exceptionally strong returns for shareholders. That's because we procured them at the right time, at the right price, and because we're delivering the right product into today's sweet spot: rising rents and long leases. Colette will talk more about this in a few minutes.
The second point of focus is this; the transformation of our retail portfolio in the face of rapidly changing consumer behavior. As Scott has said before, and will say again today, that's been conducted under our themes of dominance, experience, and convenience. And it means we're exposed to, and through development are increasing our exposure to, the right assets in this rapidly evolving market. We've been bold and decisive and it's paying off.
Our third point of focus has been our financial discipline. Our broadly net debt neutral approach to life was designed to strengthen the business. It's instilled stronger capital discipline in our reenergized teams by forcing them to make choices, making sure we sell assets that need to be sold while the market conditions are good, and funding the transformation of our portfolio. So it's bringing financial leverage down as we move through the cycle.
This slide demonstrates it. It shows above the line our CapEx in blue and our acquisitions in green over the last five years. In aggregate this activity has been funded almost exactly by sales, shown below the line in brown.
Nearly GBP8 billion of acquisitions, development CapEx and sales since 2010, with adjusted net debt of GBP4.17 billion today within GBP30 million of where it was at the start. Half of our portfolio by value today has either been acquired or redeveloped in that time. We have completely transformed the business both in terms of quality and resilience.
For shareholders, delivering on this strategy has not only created significantly higher quality business but excellent growth with NAV per share shown in the green bars on this chart up 87% over five years; and greater strength, with LTV shown in the dark blue line steadily coming down as we move through the cycle as planned.
But importantly there is more to come, with 1.1 million square feet still to let in London's sweet spot, new shopping center developments with strong retailer support, a portfolio well-matched to customer requirements, new opportunities for the future, and all underpinned with a great balance sheet as you will hear today.
Here's the running order this morning; first Martin will take you through the financial results; Scott will then talk about the successful and continued reshaping of our retail portfolio; and Colette will update you on progress in London. I'll wrap up and then we'll open it up to your questions. Martin.
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Martin Greenslade, Land Securities Group Plc - CFO [2]
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Thanks, Rob. Good morning, everyone. It's a privilege to present such a strong set of results. Of course the market has been supportive but our London and our retail business, they have both taken advantage of their markets and outperformed. Let's start with the financial summary.
As usual I'll talk you through these numbers in more detail later in the presentation, but in summary our profit before tax more than doubled to a little over GBP2.4 billion; our assets rose in value by 17.3% over the year, delivering a valuation surplus of over GBP2 billion; and our adjusted diluted NAV per share came in at GBP12.93, that is an increase of 27.6%.
Moving onto underlying earnings, revenue profit was GBP329.1 million, up 3% and in line with expectations, while adjusted diluted earnings per share were up 2.5% to 41.5p.
Moving onto dividend, today we're announcing a recommended final dividend of 8.15p. That brings the total to 31.85p for the financial year. That's up 3.7% and it is right in line with our aim of progressing the dividend in a sustainable way.
So let's now go through some of these numbers in more detail starting with revenue profit. Our revenue profit for the year was GBP329.1 million, up GBP9.5 million on last year.
And the main reasons for the increase were a GBP5.5 million rise in net rental income and an GBP11 million decrease in net interest expense, with these two improvements partly offset by GBP7 million of higher indirect expenditure.
Now I'm going to come on to net rental income in a minute, but let me cover the indirect expenditure first. So the GBP7 million increase is made up of these two amounts shown on the screen. And it's primarily due to a GBP2.8 million increase in feasibility costs associated with properties we did not own, principally 21 Moorfields, with the balance largely due to higher variable pay and long-term incentives.
Our net interest expense decreased by GBP11 million to GBP179.7 million, and that was due to the repayment of more expensive asset-specific debt using cheaper Group facilities. Now, as usual, I've updated our market-leading breakdown of costs which you'll find in the Appendix.
So let's now look at net rental income. Overall net rental income was up GBP5.5 million, or 0.9%.
Net rental income on the like-for-like portfolio was down overall by GBP0.9 million. Now within that, retail was broadly flat as an increase in bad debt offset increases in gross rental income.
London's gross rental income was up by GBP6 million, but this was more than offset by higher property costs, and in particular, GBP3.7 million of pre-development costs related to Piccadilly Lights, which we wrote off, as well as higher void costs related to space that we're currently refurbishing.
Net rental income from the development program was GBP21.1 million higher. That was due to new lettings at 62 Buckingham Gate and the recognition of rent at 20 Fenchurch Street following practical completion.
Our only proposed development is Buchanan Galleries in Glasgow where net rental income was up GBP4.1 million, following the acquisition of the 50% interest that we didn't own.
Completed developments were up GBP5.4 million and that's primarily due to Trinity Leeds, Taplow and 123 Victoria Street.
Now, as you might expect the contribution from acquisitions was significant; that was up GBP31.6 million, and this was mainly driven by Bluewater. But there was also a full-year's contribution from our increased stake in X-Leisure.
The GBP57.3 million reduction in net rental income from disposals covers all of the properties we've sold in the last two years; now that is a long list. It includes Bankside 2 and 3 and Dundee, both sold in the previous year, plus Sunderland, Bristol, Exeter and Livingstone, all sold this year. And remember, as you look ahead, GBP47.6 million of this year's net rental income will no longer be in our results next year other than a small residual element to Times Square.
Turning now to our portfolio valuation, the value of our combined portfolio at March 31 was GBP14 billion with values up by more than GBP2 billion, an increase of 17.3%. Of that total increase, London saw values rise by 23.2% and retail by 11.1%.
It's easy to look at this breakdown and be draw to the performance of the development program, up 38.7%, and in a minute Colette will speak about the letting successes that have helped drive that performance. But what I'd hate you to miss is the valuation surplus of GBP1.2 billion on our like-for-like portfolio, which was up 16%, because that has driven more surplus than the other categories put together.
So, how does all of this impact our net assets? Well, we started the year with adjusted NAV per share of GBP10.13. Adjusted earnings were GBP329.1 million, and then comes our valuation surplus, which is followed by two items related to disposals and acquisitions.
First you've got GBP132.7 million of profit from the disposal of investment properties, largely Sunderland and Livingstone. And then a goodwill impairment related to the acquisition of our 30% stake in Bluewater, which is accounted for as a business combination. I explained the accounting implications of the Bluewater acquisition at our interim results last November. So, if goodwill impairment is your thing, you know where you can go.
Our cash dividend in the period was GBP229.8 million, and we spent GBP12 million buying shares for the EBT. With other reserve movements of GBP18.5 million, that's how our adjusted diluted NAV per share ended the year, up 27.6% at GBP12.93.
Let's now move on to cash flow. On this slide you can see the major components of our cash flows, all proportionately consolidated and referenced to the movement in adjusted net debt over the year.
So we began the year with adjusted net debt of GBP3.95 billion. Operating cash inflow was GBP323.7 million, and after dividends come three items related to capital transactions. Acquisitions relates to the purchase our 30% stake in Bluewater last June, as well as our partner's 50% interest in Thomas More Square and Buchanan Galleries.
We spent a little over GBP400 million on development and refurbishment CapEx, and we received consideration of just over GBP1 billion from disposals. So, after some sundry items, we ended the year with adjusted net debt of GBP4.17 billion. So, that is slightly up by GBP223.4 million.
And when you compare that with last year, our average net debt balance this year was GBP75 million higher and that supports my earlier comment that our lower interest costs were due to the type of debt and not the amount.
Let's move on to financing. So despite the small increase in our adjusted net debt, the sharp rise in our asset values has led to a reduction in our Group LTV from 32.5% to 28.5% and that is bang in line with our strategy, as Rob reminded us earlier.
The weighted average maturity of our debt is 8.3 years with a weighted average cost of 4.5%. In March this year we put in place a new GBP1.255 billion revolving credit facility with a 75 basis points headline margin. But importantly, it has a 5-year term with two 1-year extension options and what that does is it gives us potential firepower over an extended period. And, as we demonstrated with the Bluewater acquisition, we are able to move rapidly if the right opportunity arises.
So let me summarize. This is a strong set of results and it's a reflection of good performance across our business. London has delivered a total property return of 27.7% while retail has delivered 17.7% and, as Scott and Colette will explain, this performance has been delivered at the same time as we have upgraded the quality of our assets through capital recycling. So better, more resilient assets and a financially robust balance sheet. Now let me hand you over to Scott.
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [3]
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Thanks, Martin. Good morning, everyone. The last 12 months have been incredibly active and transformational for our retail business. They've also been productive. We've delivered a very strong set of results and at the same time positioned the portfolio really well for future performance.
Today our GBP6.3 billion portfolio is made up of fewer but larger and better quality properties with Greater London shopping centers like Southside, dominant regional shopping centers like White Rose and our leisure and hotel portfolio among the top performers. Not only are same store sales and footfall up but they're both well ahead of benchmarks.
So, I want to kick off today by taking a look at the make-up of our portfolio and how it's changed significantly and for the better. You may remember the likes of Corby, St John's and Martineau Galleries because it wasn't so long ago that we had a mixed bag of around two dozen regional shopping center interests dotted throughout the country.
Today, outside of Greater London, we've got seven and each and every one of them is dominant for its catchment. Each is seeing healthy sales growth that's well ahead of BRC and each offers consumers a fantastic experience that drives dwell time and spend. We've moved our shopping center portfolio up the quality curve because that's where tenant demand is most robust and where we think future performance will be best.
Over the year we completed more than GBP800 million of disposals at 14.3% ahead of March 2014 book value and at the same time, we bought Bluewater and the 50% that we didn't already own of Buchanan Galleries. Today, our exposure to leisure is significant and our expertise is unique and invaluable to the wider portfolio as leisure and catering play an increasingly significant role in retail and London schemes.
As you can see, our retail park portfolio has shrunk over the past few years as we've actively moved away from standalone food stores and oversupplied locations. Today we have only two standalone supermarkets and all our parks trade strongly within their catchments and offer a convenient location for consumers to shop.
Capital value performance within our retail park portfolio has been weaker for the larger lot sizes but better for the medium-sized convenience focused parks. Now, it's these convenience parks with retailing for things like furnishing, homewares, destination fashion and discounters where we're focusing our retail park strategy as that's where rents are more affordable and where tenant demand is greater.
On the retail park development side, 105,000 square foot development at Taplow reached practical completion in July and it's fully let and trading well.
We submitted a planning application in December for a 240,000 square foot development in Worcester Woods. It's already 69% pre-let to anchor tenant Marks and Spencer, John Lewis, Next and Sainsbury's. And we have outline consent for a 200,000 square foot mixed use scheme at Selly Oak in Birmingham with earliest delivery in 2017.
Moving on to progress in our leisure and hotel portfolio, the leisure portfolio continues to perform well. Net income is up, rental values are up and restaurant turnover and footfall are up. Yields have sharpened and voids remain low.
Next year should be even stronger in terms of consumer demand and operator turnover because 2015 is forecast to be an exceptionally strong year for the cinema industry.
Income from our core hotel portfolio is turnover-based and is now at its highest level since we acquired the portfolio in 2007. The increased income and the impact on yields of increasing demand from a wider investor base has driven the strong uplift in the value of the portfolio over the period. And remember, the value of this portfolio is underpinned by a vacant possession value that's higher than its investment value.
On the development front, we received Reserved Matters planning consent in March for a mixed use, leisure and residential-led development at Filmworks, Ealing. The scheme consists of 161 residential units, an eight-screen Picturehouse cinema and 50,000 square feet of retail and catering space and all in an area set to reap the benefits of Crossrail.
Now, moving on to our shopping centers, I'll start with our centers in Greater London. Our suburban London centers have performed well over the period with capital value growth of roughly 20%. This was mainly due to strong investor demand for London assets driving sharpening yields.
I think the fundamentals underpinning these locations are compelling; affluent and growing catchments and strong underlying land values as residential prices in these areas have grown on average by more than 50% over the last five years. Between them these centers add up to over 50 acres of suburban London real estate, so there's lots of potential for us to explore and that's just what we're doing.
At Southside, leading sports retailer, Decathlon, will open in July and it's a strong addition to the 25 new retail and catering brands which have opened at the center in recent years and the new 82,000 square foot Debenhams department store is due to open before Christmas.
If I turn to outside of Greater London, and as Rob said earlier, our strategy of focusing on dominant regional shopping centers is paying off. The transformation of our portfolio over the past year to focus on only the strongest destinations is perhaps best demonstrated by how a year ago we reported that our sales lagged behind the benchmark.
Today it's a radically different story. All our figures are well ahead of the benchmarks and the market in general. With our much better quality portfolio of shopping centers, we're attracting retailers and consumers and achieving strong sales, footfall and new letting activity; so good performance for today and resilience for the future.
We'll give you more details on each of our regional centers at our Investor Day in September but for now just a few highlights. St David's footfall has reached a massive 39 million people. Letting activity throughout the year has brought new catering and retail brands into the center and we're relocating H&M to an upsized 45,000 square foot unit to accommodate their need for more space. That's a recurring theme in our dominant high footfall regional centers.
Gunwharf Quays, which many of you will remember from the last retail Investor Day, is going from strength to strength. We have an increasing number of retailers now achieving sales densities of over GBP1,000 per square foot.
Over the year we've completed 22 lettings and introduced 10 new aspirational brands and we've just started enabling works on an upsized unit for Ralph Lauren to deliver one of their largest outlet stores in Europe. Watch out for Gunwharf this summer because it's the key event hub for the America's Cup World Series taking place in Portsmouth in July.
And at Bluewater it's been almost a year since we bought our managing stake and so far its financial performance is bang in line with our expectations. Letting transactions are running about 1% ahead of our underwriting assumptions and that's on rents totaling GBP6.8 million.
Our strategy to reduce the number of units to create more large statement stores has progressed well. We're creating an exciting new 45,000 square foot unit for Next which is due to open shortly. We're currently in advanced discussions on another tenant upsize and recent lettings like Le Creuset, White Stuff and Hackett demonstrate how Bluewater's consistently the destination attracting strong brands outside London and into a mall environment for the first time.
Plans for converting the Glow space to other experiential uses are making good progress and we're in detailed negotiations with a great anchor for this space. And our leisure expertise is serving us well in broadening the restaurant offer at Bluewater, and we have a number of new catering initiatives in the pipeline.
Our vacancy at 4.9% remains above the Land Securities average. We're pleased with progress in bringing it down from 5.3% at acquisition. This was a critical part of our asset management strategy last year because Bluewater is now 16 years old so we had to deal with the expiry of all the original 15-year leases, and there was about 160 in total.
I'm glad to report that 90% of those expiries have now been dealt with. And in doing so, we've also triggered considerable investment by retailers in their stores with examples like Schuh launching its new 2015 concept; Russell & Bromley investing in a complete new store format; Hotel Chocolat upsizing into a new store; and Starbucks choosing Bluewater as the place to launch their new design coffee shop. So Bluewater is performing well.
We're also investing in dominance through our development pipeline. In Oxford we're now on site with our exciting plans for Westgate where, in late 2017, we'll deliver a stunning 800,000 square foot retail, leisure and catering destination in the heart of one of the UK's most famous, historic and vibrant cities.
The scheme will provide a 140,000 square foot John Lewis, flagship units for Next, Primark, H&M and Michael Kors, and around 25 restaurants, cafes and bars, including Sticks'n'Sushi and a five-screen Curzon cinema.
Up in Glasgow work on our extension and refurbishment plans for Buchanan Galleries is ongoing and we continue to progress contractual arrangements. The proposed development has good retailer support and is over 36% pre-let. That's three years ahead of scheme opening, and it's anchored by John Lewis, Marks and Spencer and a state-of-the-art showcase cinema deluxe.
So to summarize, and as I said at the start, we've had an exceptionally active, transformational and successful year, and we're really pleased with our results. We produced strong returns in a year of strategic change. Our portfolio is better quality, it's far more resilient in the face of changing consumer habits, and it's very well positioned for future performance.
Thanks very much and I'll now hand you over to Colette to update you on our fantastic activity in London.
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Colette O'Shea, Land Securities Group Plc - MD, London [4]
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Thank you, Scott. Now to London where we're in a great position, and let me show you why. Since 2010 we've committed to 3.5 million square feet of speculative development, with our share of total development costs being GBP2.4 billion. We're delivering nearly half the space during the next 18 months and have 1.1 million square feet available to let in a market which is relatively starved of new space.
This is the Central London supply slide we showed you last May. The green bars show the historical run of development completions in Central London. The black bars show what was on site at the time. And the dotted bars are what we forecast to be delivered over the next few years. This final bar showed what we believed was on the horizon. The falling vacancy rate meant the negotiating position would remain firmly with the landlord.
If we zoom into the future, these bars show our 2014 forecast and these bars show today. As you can see, the outturn for 2014 was slightly less than we were predicting. This year it's slightly more. And next year looks about the same. Beyond 2016 potential supply is rising.
Turning to our main chart for 2015, the vacancy rate is still falling. This bodes well for our current schemes, which we're letting in the sweet spot that Rob talked about in his introduction. We have over 1 million square feet to let in these favorable conditions. With the future in mind we've also been working on new opportunities, and I'll talk more about that later.
Before that I'd like to talk about our record year of development lettings. We let 671,000 square feet with an average lease term of 19 years. And with over 1 million square feet remaining to let during the next 18 months, we're optimistic about maintaining this momentum.
I'd now like to turn to the City. 20 Fenchurch Street is now 92% let and has been a great success for us. New Ludgate is already 84% let or in solicitors' hands, on long leases with minimum uplift. At 1 New Street Square, just 10 minutes walk from Blackfriars and Farringdon, where Crossrail meets the Thameslink, we've let the entire 275,000 square foot building to Deloitte on a 20-year lease. That's 15 months ahead of practical completion.
Turning now to Victoria where our master plan is taking shape. At 62 Buckingham Gate we're now 87% let or in solicitors' hands. At the Zig Zag building we're 37% let or in solicitors' hands. Next door at Kings Gate we've a fantastic product in a prime location with outstanding views. And as we've said before, we expect to sell the remaining apartments after practical completion.
Going up the road to Nova, we complete the residential in April 2016 and, as with Kings Gate, we're confident in the product and the location, and again expect to sell the remaining apartments after practical completion.
We've two office buildings; Nova North and Nova South, both are due to be delivered in July 2016 and 12% is already in solicitors' hands. With 18 restaurant units, of which 13 are let or in solicitors' hands, to restaurateurs, including Jason Atherton, Will Ricker and Adam White, Nova will be London's newest restaurant quarter serving the growing office and residential population, as well as over 100 million people passing through Victoria Station. Victoria really is changing.
Elsewhere in the West End, at Eastbourne Terrace, right outside the entrance to Paddington Crossrail, we'll be delivering 93,000 square feet of space in April 2016. Our development program has already produced some great returns for us and there's still plenty to come with over 1 million square feet left to let.
Elsewhere in our portfolio the investment and asset team remain busy. Our weighted average unexpired lease term in our offices is now 9.2 years, excluding our development program. Smart lease re-gearing activity continues to strengthen our income and we've completed just over GBP19 million of investment lettings.
There are a couple of transactions I'd now like to highlight. At Dashwood House, 81% of the income is subject to review by March next year. Ahead of this we've achieved a record rent for the building, creating well-timed rental evidence.
At 130 Wood Street, we agreed a surrender of the top floor, and then re-let the floor to the majority tenant, increasing the passing rent by 40% to GBP52.50. And we simultaneously extended their existing lease. That increased the ERV by 24% and the average lease term from 3.3 years to 7.8 years. We sold the asset last week, crystallizing the value gain we had created.
Our voids have increased from 1.6% to 4.3%. The main contributors were Thomas More Square, 5 New Street Square and Holborn Gate, where we're refurbishing the space into a rising market; a sign at Piccadilly Lights, which expired just before the year-end; and Portland House where we're maintaining development optionality.
As you'd expect, we continue to recycle capital. We talked about the sale of 47 Mark Lane in November. Since then we've sold Phase I of Oriana and presold Phase II, bar the residential.
At Times Square we re-geared 20% of the income for a further eight years and have exchanged contracts to sell our 95% interest for just over GBP268 million. Our sales were 16% ahead of the March valuation.
Every asset has a plan and we've taken advantage of market conditions to crystallize the value gain we've created.
At Thomas More Square we purchased our partner's 50% interest for just over GBP85 million, having identified this as a good area for rental growth. We expect to capture that growth through refurbishment of the main tower and public realm. It's due to complete in September and 63% of the refurbished space is already let or in solicitors' hands.
At 21 Moorfields we secured a 250-year leasehold interest for GBP16.5 million, equating to a site value of GBP33 per square foot. The price is subject to overage provisions paid only when our hurdle rate is achieved on the completed development.
I'd like to spend a few minutes on the detail of the transaction. The site is 1.9 acres above the western entrance to Liverpool Street Crossrail station and Moorgate underground. The freehold is owned by TfL and is subject to a 79-year lease.
In 2010 the leaseholder went into administration. The administrator marketed the interest and selected us, because of our expertise in large-scale city center development and in particular, our experience of building over the railway.
We entered into a conditional agreement to purchase the leasehold interest in 2012. The conditionality was primarily around settling an outstanding Crossrail CPO claim which we did, and reaching agreement with TfL which we did in February this year.
We agreed an option and [a development agreement to] progress the scheme and draw down two 250-year head leases at 5% gearing. TfL can buy up the gearing to 7.5% and also have the ability to acquire a 15% to 25% stake in the development.
During the process we also worked up and submitted a planning application and in March we obtained a resolution to grant planning consent for two buildings totaling just over 500,000 square feet.
Our plan is to ready the site for redevelopment, demolishing the existing building and building to grade. That is, completing all the works below ground, which we aim to do by quarter 1, 2017. This is similar to the approach that we took at both 20 Fenchurch Street and 1 & 2 New Ludgate. The key here is that we would then be able to deliver 0.5 million square feet in 27 months, which sets us up well for the pre-letting market.
So turning to our future pipeline; at Portland House we have our residential planning consent, and as you know, a block expiry date of June 2016.
At Phase II of Nova we're progressing revisions to the 2009 planning consent and, like 21 Moorfields, we plan to take the development to grade, leaving us only 21 months from pushing the button to completion and again, sets us up well for the pre-letting market.
This means, with these and other schemes, we now have a potential future pipeline of 1.5 million square feet and a plan to progress nearly 680,000 square feet to grade.
So in summary, we continue to let our large development program and long leases ahead of appraisal levels, and we're strengthening existing income. We're selling some of our more mature assets into a strong investment market as we continue to recycle capital, and have over GBP390 million left still to spend on our developments.
And looking to the future, we're actively restocking the pipeline and building in optionality. The London business is firing on all cylinders, and as I said at the start, we're in a great position.
Now let me hand you back to Rob.
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Robert Noel, Land Securities Group Plc - Chief Executive [5]
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Thanks, Colette. So as you've heard, everyone, these are great results and they reflect our very clear strategy.
In retail it's been about moving our assets up the retail hierarchy. We were decisive, and as you heard from Scott, we've been particularly busy this year. And as you've also heard, sales are up, footfall is up and values are up.
The transformation will continue as we proceed with our fabulous new retail and leisure destination in Oxford with strong early support from retailers.
In London, as you've heard from Colette, 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, and we have provided the evidence with over 670,000 square feet of space let on a weighted average lease term to first break of 19 years.
We have 1.1 million square feet still to let this year and next in the cycle sweet spot and we're building our pipeline for the future, as you've also heard, as we plan to take a further 680,000 square feet to grade over the next two years.
As I said in November, from having relatively short leases in London and a large tail of secondary retail assets at the top of the last cycle, since 2010 we have been building and trading our way to transform the business.
And by the time we've completed our current development program, one, we will have a retail portfolio of appealing dominant and convenient environments, as you've heard from Scott. Two, we expect to have a longer weighted average unexpired lease term, as you've heard from Colette on London offices. And three, we will have a more conservative LTV and plenty of firepower, as you've heard from Martin.
I am really pleased with the progress we're making against these three goals. Crucially, we're in a very strong position. In London, we have the capability to turn up our development pipeline if we choose, and where we have a pre-let. In retail, where we've substantially transformed the portfolio, we can focus on managing these assets brilliantly.
So we look forward to seeing you at our Investor Day at Bluewater on September 25, and back here for our interims in November when I am confident you will see yet more evidence of our continued progress.
And so with that, we'll now hand over to you for questions. And I'm very sorry that the presentation has run on slightly longer than usual. We've had quite a lot to say.
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Questions and Answers
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Operator [1]
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(Operator Instructions).
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Hemant Kotak, Green Street Advisors - Analyst [2]
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Hemant Kotak, Green Street. Thank you for the very clear presentation and good results. Just a question on offices and your land comp at 21 Moorfields. Just to help us understand and put this in perspective to land values more generally in the City, please.
Clearly, GBP33 per square foot is a headline number but as you work through all the numbers, and it's very complicated, and I understand that, but as you work through it, what's the number that you have in your mind as an all-in cost for the land, please?
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Robert Noel, Land Securities Group Plc - Chief Executive [3]
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We paid GBP16 million for it. That's the number. We now have to spend money in developing the site and -- sorry, in bringing the site forward. We've got to go out to tender and get that, so we don't know the number yet. But paying GBP16 million for a site to put up 500,000 square feet in the center of the City of London right on top of a Crossrail station, that's pin money.
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Hemant Kotak, Green Street Advisors - Analyst [4]
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It does sound amazing so it seems like you'd be expecting some super profits and I just wonder, how was this possible that you were able to get this? Was it the complication of the deal? It sounds almost too good to be true.
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Robert Noel, Land Securities Group Plc - Chief Executive [5]
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I think you have to cast your mind back, Hemant, to where we were in 2010 and 2011 when we were negotiating this deal. Europe was heading towards the eurozone crisis; some things don't change. And the world was looking a pretty rocky place and if you had development sites, no-one wanted them. And if you had complicated development sites, very few, even fewer people wanted them.
So I think it was a question of timing our negotiation with the purchase which was, as I say, the best part of four years ago when we started. Clearly, we couldn't tell the market about it because the whole thing was steeped up in options and things which needed to get sorted before we were able to close the deal, which was this February when conditions were vastly different. So we were lucky.
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Hemant Kotak, Green Street Advisors - Analyst [6]
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Okay, thank you. And then just one last question from me. I guess as you look at the appendices slides in your presentation, the last slide, page 18, it's got all your big strategic land holdings. Can you help us and give us some more color as to the future prospects of that? When can we see some value realization from there, please?
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Robert Noel, Land Securities Group Plc - Chief Executive [7]
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Sure. Colette will answer that.
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Colette O'Shea, Land Securities Group Plc - MD, London [8]
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I think if we take them in turn, Harrow, we sold a proportion of the site very recently. We're working now on the balance of the site and feeling very optimistic about it.
Ebbsfleet, if you go down there, there's a huge amount of activity. There are houses now being built and our role there is to service plots and sell them to the house builders, so we're doing exactly as we said we would there.
Stansted, we're waiting for the outcome of a public inquiry on the planning. Again, our role is getting planning consent to unlock value.
And Lodge Hill, the planning has been called in for an inquiry and we're considering how we're going to manage that. So there's a lot of activity on the strategic land.
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Hemant Kotak, Green Street Advisors - Analyst [9]
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Just a follow-up question. Is there any numbers you could help us with, like order of magnitude; how much value that can be realized from some of these and how quickly?
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Colette O'Shea, Land Securities Group Plc - MD, London [10]
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I think -- the Kodak land was sold for GBP50 million and we bought it for sub GBP10 million, so I think that gives you a sense of the scale of the potential.
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Hemant Kotak, Green Street Advisors - Analyst [11]
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Okay. Thank you.
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Tim Leckie, JPMorgan Cazenove - Analyst [12]
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Tim Leckie, JPMorgan Cazenove. Just one question. The retail outlook. Sales up, you mentioned; footfall's up. Values are up. Rents, could you talk a bit more about your outlook for rental growth?
And maybe tied in to -- you touched on the re-lettings at Bluewater, 90% completed. Could you give us some color on how those went versus passing? And even if ERVs aren't moving up, are incentives coming down? Is the net effective rent coming in a bit higher? Can you provide some more color on that?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [13]
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Sure. It's still tough work out there but we are starting to see some ERV growth, and I think that's really testament to how we've transformed the portfolio over the last couple of years.
At Bluewater specifically, we -- I think I said in the presentation, we're beating our financial underwriting assumptions by about 1% and starting to see rental growth come through. And as a rule, incentives are coming down across the portfolio.
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Robert Noel, Land Securities Group Plc - Chief Executive [14]
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There's one on the screen. Steve Bramley-Jackson. How much of the projected profit from the development program is included in the full-year 2015 balance sheet?
Well, we give disclosure in the statement on all our developments which tell you what they're valued at today; what's got to be spent; what the ERV is; and how much of them has been let. And you will need to remember that valuation next year will be a function of the success of our letting, what rents we get and what yields are. And we're not in the forecasting business.
So whatever you think they will be, you will be able to work out how much is still to come from that table.
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Martin Greenslade, Land Securities Group Plc - CFO [15]
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Slide A14.
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Ben Richford, Credit Suisse - Analyst [16]
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Ben Richford, Credit Suisse. Just wondering about the retail portfolio repositioning overall. You've seen the benefits of re-positioning the shopping centers, I wondered whether there's more to come on retail parks that you can help us understand and when will you realize the VP value in the hotels?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [17]
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Well I'll answer the hotel question first because it's very easy. The hotels are let on a long lease so it might be a long way off before we realize the VP values.
In terms of retail park performance. There's really been two parts to the story. Performance has been more subdued for the bigger chunky lot sizes where we haven't seen any rental growth and yields have essentially been flat.
On the medium-size convenience focused parks, tenant demand has been better, we've seen a little bit of rental growth and yields have eked back a little bit.
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Ben Richford, Credit Suisse - Analyst [18]
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And just one other question on London office and development. Very interesting how construction costs are rising and the pipeline's rising along with rents. Just wondered in terms of your outlook for say three years' time, do you see the higher construction cost as leading to support higher rents going further from here?
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Robert Noel, Land Securities Group Plc - Chief Executive [19]
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I'll ask Colette to talk about construction costs generally in a second, but the correlation between rising construction costs and rising rent, I'm not sure we can really make a statement on because there's no real empirical evidence going backwards.
Rents are a function of supply and demand. When there aren't enough oranges for people to eat, when you go in the greengrocer the price goes up; and similarly, when they're about to go rotten the price goes down. And we're in a point for the next period where the price is going to continue going up. Construction costs.
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Colette O'Shea, Land Securities Group Plc - MD, London [20]
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Yes. The construction costs are rising and it's not just the construction costs you have to take into account. We're seeing a construction market that is very stretched in terms of labor resource, which is putting an added pressure on.
And I think the interesting thing is if you look in one of our appendices and you look at where we were buying our developments, relative to the cost curve rising, you can see why we timed our schemes when we did and this is the point about us being early cycle developers.
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Remco Simon, Kempen & Co - Analyst [21]
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Remco Simon, Kempen. Can you talk maybe a bit more about the balance of lettings in London? You seem to have great success in some of the City developments in New Street Square and New Ludgate but releasing up some of the Victoria assets seems to take a bit more time. Can you talk a bit more about that since the balance of the, well, the pipeline is now mostly in Victoria?
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Colette O'Shea, Land Securities Group Plc - MD, London [22]
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I would say that 62 Buckingham Gate, as we've said before, has been slower to let than we hoped and that was very much because it was a pioneering scheme in Victoria; it was being built into a construction site and we were developing the Victoria story.
In terms of Zig Zag and Nova, we are absolutely delighted with where we are. We PC Zig Zag later this year. Nova already 12% let and we don't PC it until next year and we are seeing very good interest in both those schemes.
I think the point about the West End market is we're now seeing the pre-let people moving on because they're seeing that there is a shortage of opportunities.
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Remco Simon, Kempen & Co - Analyst [23]
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Maybe a second question on London. You made a point a couple of times of the 19-year average lettings on your development schemes. Your existing London portfolio is let on average about nine years which means that there is also quite a bit of stuff which is a lot shorter. How do you see that portfolio progressing over the next couple of years?
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Robert Noel, Land Securities Group Plc - Chief Executive [24]
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Just to stop you. The 9.2% excludes our development program.
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Remco Simon, Kempen & Co - Analyst [25]
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Yes, indeed.
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Robert Noel, Land Securities Group Plc - Chief Executive [26]
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So the 9.2 --
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Remco Simon, Kempen & Co - Analyst [27]
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But on your existing portfolio there will be stuff which is shorter let; do you see an opportunity to extend those leases in the coming few years or is there more recycling to be done out of that?
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Robert Noel, Land Securities Group Plc - Chief Executive [28]
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I think, there are buildings with very short leases, so for example, Portland House has got, as we've told you, 11 months left till the block date, so that's a GBP250 million building or so, so they do have short leases.
I think the point on the average lease length is you can never, you don't want all your leases expiring at the same time. But where we were in 2006/2007 was that we were heading into a peak point in the market with an average lease term of six years across London and that did not leave the business in a very good state two years later.
And I think one of the things that we've been saying is we're working on getting that weighted average lease term up so that by the time we get to the point where the cycles mature this time, it will be much longer than it was last time.
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Remco Simon, Kempen & Co - Analyst [29]
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Thank you. I guess my point a bit is also, you started to, say, take a profit on some London assets, like on Queen Victoria Street. How much more of that could you see yourself doing in the foreseeable future?
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Robert Noel, Land Securities Group Plc - Chief Executive [30]
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As I said in the presentation, and as I said in the statement, the net debt neutral position has been pretty much a bedrock of our strategy this cycle. We've got something like GBP800 million committed of CapEx still to spend in our development program, both in London and of course now in Oxford. So that would tell you that there is circa GBP800 million worth of sales to be done over the next period; that's before we do any acquisitions. So there are still sales to come.
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Remco Simon, Kempen & Co - Analyst [31]
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Thanks.
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Marc Mozzi, Societe Generale - Analyst [32]
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Marc Mozzi, Soc Gen. I just have one question related to your retail segment. It seems that now you've been -- more or less nearly completed transformation of your retail segment. Have you sought or did you ever have the idea of disposing of that segment, and if so what would be the implied [brokerage] cost of the debt structure to do so, if you have measured it?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [33]
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Well the first one is no.
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Marc Mozzi, Societe Generale - Analyst [34]
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The first one is no; at all?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [35]
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We see the retail London business as very, very complementary. London, as Rob's repeatedly pointed out, is quite a cyclical market, retail is more steady provided you have the right kit; but no, we see the two businesses as being complementary.
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Robert Noel, Land Securities Group Plc - Chief Executive [36]
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I think one of the things, Mark, we've been saying as well today is that, it came through both from me and Martin, that moving towards a fortress balance sheet is one of the key threads of our strategy. Busting up the business isn't going to help that. We've been pretty consistent, this is not on our -- we always talk about it because we always should, but it's not on our agenda.
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Marc Mozzi, Societe Generale - Analyst [37]
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Yes, there was one point on that --
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Martin Greenslade, Land Securities Group Plc - CFO [38]
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Sorry, just on the debt, in note 14 you'll see what the difference is between the book value and the market value if you have to buy back the bonds.
We're actually in the situation now where the amount of bond debt that we have at GBP3.2 billion, you could probably live with that on the London portfolio. We are in a low-geared environment but we want to be in a low-geared environment exactly as Robert said. So it isn't really a feature of a discussion internally as to how we would shift that debt around.
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Marc Mozzi, Societe Generale - Analyst [39]
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Okay, thank you. What was your average cost of debt last year, can you remind me of this number?
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Martin Greenslade, Land Securities Group Plc - CFO [40]
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It was around 5%. It came down slightly and it's come down slightly more just because of the drawing.
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Marc Mozzi, Societe Generale - Analyst [41]
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Thank you.
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Michael Burt, Exane BNP Paribas - Analyst [42]
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Michael Burt, Exane BNP Paribas. You've been very clear on the outlook for supplying the London office market. I just wondered if I could push you a bit further on the demand outlook, particularly bearing in mind the likelihood now of an EU referendum in 2016 or 2017. How does that change the game in terms of the demand outlook, maybe looking a year or two further out?
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Robert Noel, Land Securities Group Plc - Chief Executive [43]
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Yes, well, the front page of the FT was pretty explicit about that this morning. We are not seeing any dampening of demand because of the EU referendum. Business is expecting the UK not to leave the EU.
However, anything which -- any political event like this causes uncertainty. We saw exactly what happened in Scotland in the lead up to the referendum last year.
From a UK within the EU perspective, I think the UK coming out of the EU would not be a good thing for London real estate. Whether it's a good thing for the UK or not is for other people to debate. I'm just a real estate guy. It would not be a good thing for London real estate. However, the bookies are saying we're not going to leave the EU and that's how most businesses appear to us to be running themselves.
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Keith Crawford, Peel Hunt - Analyst [44]
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Keith Crawford, Peel Hunt. Not wishing to draw you in any way on forecasts, of course, but it would appear that this valuation surplus of 17.3% is difficult to replicate. Because yield inward shifts of 81 bps, 52 bps, I don't think many of us would really expect those to be replicated. That's an extraordinary thing. How do you see it, just as a mixture of rent, management and a bit of yield shift, is that the sort of pattern, do you think?
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Robert Noel, Land Securities Group Plc - Chief Executive [45]
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As Martin explained, the valuation shift, GBP500 million, 5% of the value of the business virtually, has come through because we've leased up our development schemes. And that has been a stand-out thing for us.
The remainder of the portfolio moved ahead 16%. I think the equivalent yield came in 50 or so basis points across the like-for-like portfolio. Rents are up in London. Rents are pretty flat in retail but they're going to continue rising in London and they're going to start to rise in retail.
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Keith Crawford, Peel Hunt - Analyst [46]
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Yes, okay, thank you. I'd just like to ask you, if I may, about Portland House. It's going to be something of a rarity in one year's time as being a building of that size available in a prime location that happens to have the best view in London. And I just wondered whether you had any single party that might wish to avail itself of this opportunity at an unlimited rent.
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Colette O'Shea, Land Securities Group Plc - MD, London [47]
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What we're actually doing is we're still exploring both options, both the residential. We've got the benefit of the residential planning consent. Clearly, we were waiting for the outcome of the election. But also, we've got amazing demand for Portland House. It's still a very, very successful office building. So we're still considering which is the best course of action for that building but we have great optionality because we can do either.
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Keith Crawford, Peel Hunt - Analyst [48]
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Does the Government have any views on Queen Anne's Gate? It's one of the largest buildings that it occupies singularly, probably now the ugliest building in Britain (laughter). Any views on it, do they ever think about it? Do they think about anything?
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Colette O'Shea, Land Securities Group Plc - MD, London [49]
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If they do, they haven't told us.
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Keith Crawford, Peel Hunt - Analyst [50]
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I see, okay, so nothing. Have they got a rent review on that one coming at some point?
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Colette O'Shea, Land Securities Group Plc - MD, London [51]
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There is one coming up. I'm not sure of the date of it.
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Keith Crawford, Peel Hunt - Analyst [52]
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Okay and I just wanted to ask, Bluewater, did it in any way drag down the valuation surplus? Or was it representative in some way, Bluewater, within this high valuation surplus?
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Robert Noel, Land Securities Group Plc - Chief Executive [53]
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Bluewater is relatively flat in valuation.
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Keith Crawford, Peel Hunt - Analyst [54]
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Relatively flat. And of these retail parks finally, this GBP1.13 billion, what proportion of those would you still like to perhaps churn out under suitable circumstances? Or have you done most of them?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [55]
------------------------------
No specifics on it but what I will say is that, as Rob and Martin have said many times over the years, is that we fund our acquisition and our development activity through sales. We're capital recyclers. We have a great pipeline, so there will be some ongoing capital recycling.
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Robert Noel, Land Securities Group Plc - Chief Executive [56]
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We've got one question on the screen, James Wilkinson from BlackRock. Your average cost of debt has not really moved much, relative to the marginal cost of debt. Is this a disappointment? And could you do more to bring it down? Martin.
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Martin Greenslade, Land Securities Group Plc - CFO [57]
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Yes, it's terribly disappointing because interest rates out there are very low. And it would be great if we had all of our debt renewing tomorrow, then we could issue at super low interest rates. But, unfortunately, the way we're structured is as a long-term business and so our debt has to have a degree of term.
Those bonds that we have now that have an average cost of debt of around 5.2%, those bonds are trading at premiums to book value. So if we buy them in, we have to buy them in, effectively, at a market value that represents the super yield they're getting versus current rates. So there is no [LTV] positive way of doing that unless we were sitting on cash, which we're not.
So the simple answer is we're going to wait till those expire. We've taken the low-hanging fruit. We've taken asset-specific finance. We've refinanced that with Group facilities and so on. But in terms of those bonds, there isn't a way of doing it in a way that makes sense for shareholders.
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Unidentified Audience Member [58]
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Just one question then on the retail portfolio; just an observation I made is that your retail portfolio increased in value where most of your peers decreased in the second half. I was just wondering if you could give us a bit more detail on that.
It's obviously not relating to Bluewater, so presumably everything else went up even more. So could you give us -- is it broad-based across the portfolio, are there any specific assets that drove that outperformance in the second half?
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Scott Parsons, Land Securities Group Plc - MD, Retail Portfolio [59]
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Yes, if I had to pick a couple of key drivers there, I'd say the suburban London centers have ridden the wave of sentiment for London assets and so they've been a big driver of the uplift this half. And also we've had some fantastic wins on the asset management front, especially at Gunwharf and St David's. And they were big drivers as well.
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Unidentified Audience Member [60]
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Thank you.
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Robert Noel, Land Securities Group Plc - Chief Executive [61]
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Well thank you very much everybody. Sorry we've overrun a bit. We look forward to seeing you at Bluewater in September, back here in November. We're around all day if you've got any queries either here or back in the office. Thank you very much.
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