Half Year 2016 Land Securities Group PLC Earnings Call
Nov 10, 2015 AM EST
LAND.L - Land Securities Group PLC
Half Year 2016 Land Securities Group PLC Earnings Call
Nov 10, 2015 / 09:00AM 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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* Tim Leckie
JPMorgan Cazenove - Analyst
* Hemant Kotak
Green Street Advisors - Analyst
* Chris Fremantle
Morgan Stanley - Analyst
* Remco Simon
Kempen & Co - Analyst
* Osman Malik
UBS - Analyst
* Alan Carter
Oriel Securities - Analyst
* Oliver Reiff
Deutsche Bank Research - Analyst
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Presentation
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Robert Noel, Land Securities Group plc - Chief Executive [1]
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Good morning, everyone, and a very warm welcome to our interim results presentation. As you'll hear today, we continue to make good progress against our plan; our letting progress in London; the final structural steps we're taking to reshape our retail portfolio; and our balance sheet positioning.
We've our usual agenda today but before Martin, Scott and Colette take you through their areas in more detail, I'd like to take a few minutes to remind you as to how we are managing the business.
As a large cap, Land Securities will always be invested in the market. But to deliver shareholder value through the cycles in our cyclical and changing market, the challenge for us, as management, is to correctly position the two key levers we have.
One, managing the amount of operational gearing in the business, with speculative development being perhaps the best example; and, two, managing the balance sheet, primarily through the amount of financial gearing we have; and to use both these levers appropriately to build or buy great buildings that our customers will compete to rent. And, just as importantly, sell those buildings that they might not want to compete to rent in the future, while the markets are a little less discerning.
To understand where we are now, it's necessary to go back a few years. In 2010 we felt that conditions in the London market were right to significantly step up speculative development. You will recall that in May 2010 we talked about supply-constrained conditions emerging on the horizon, coupled with value in the supply chain, low land pricing and low construction costs.
So we pulled the development lever, a GBP2.4 billion speculative development program. And you will recognize many of the buildings we have built. While much of this program is now complete, and some of it sold, there is still a significant amount of space to deliver and let over the next 12 months.
As a consequence of delivering great space into the sweet spot of the London cycle, the quality of both our portfolio and our income has improved, with the market conditions giving us great negotiating power, particularly on lease term, as I have mentioned before.
In retail our task was different. Post the legacy of balance sheet repair, it was to completely reposition our portfolio under our themes of dominance, experience and convenience. And in doing so, we took the lead on adding the important dimension of leisure into the mainstream.
You'll recall that when we built Trinity Leeds we pushed much further on the leisure content, and now even further still in Oxford. We also made important acquisitions with X-Leisure and, subsequently, Bluewater. Scott spoke about these at our Investor Day in September.
But, as I said at the outset, we have two key levers and we can't run a business like this one thinking it can go on forever. And so we've managed the balance sheet with as much care as we have our portfolio. You've often heard Martin or me talk about our broadly net debt mutual approach.
We've funded the GBP4.4 billion of investment in acquisitions, development and refurbishment expenditure over the last 5.5 years by recycling capital from GBP4.3 billion of sales, broadly matched, as our net asset value per share has doubled.
And these were some of our disposals: either because from the price offered, we felt it was simply a no-brainer, Park House, for example, or due to a need to structurally change our portfolio because of the rapidly changing retail landscape. Think Corby, Aberdeen, Sunderland, Livingstone and our superstores.
This chart shows our ungeared total property return since March 2010 in green, against our key benchmark, the IPD Quarterly Index in blue. Our actions have delivered a strong performance at the property level over this period, with the value of outperformance being approximately GBP2.5 billion versus the underlying market.
As I said in May, we've been building and trading our way back to a position of strength, driving net asset value per share, while creating more reliable income streams and reducing gearing as we move through the cycle.
This pink line shows our total business return over the period, rising net asset value per share plus dividend, and as this has happened, we have been reducing LTV from 43.5% in March 2010 to 26.5% in September 2015. And this is likely to fall further in the second half, as you'll hear from Martin.
So while creating value, we've also been building a much stronger business in order to be in a position to take advantage of opportunity when it comes, and that's the most exciting thing that we see in front of us.
In London, we remain in a strong market for the time being, into which we're operationally geared. We've also started to lay the foundations for the next chapter of development, as you'll see from Colette, for next time we think it's appropriate to pull the speculative lever.
In retail we now have a very strong business, having boldly and decisively repositioned it into the swiftly changing landscape, while capital market conditions allow.
Both our markets are dynamic, and that means there will be opportunity. For us the best raw material we can have right now is the operational and balance sheet strength to identify and seize those opportunities when they come, whatever the market does. And because of the way we've pulled the lever over the last five and a half years, we're very well placed.
So let me now hand over to Martin, Scott and Colette to take you through the results and operations of the last six months.
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Martin Greenslade, Land Securities Group plc - CFO [2]
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Thank you, Rob. Morning, everyone.
Once again the results that we've published today reflect the actions that we have taken. Values continue to rise, albeit at a slower rate; earnings are up; and our LTV continues to come down.
So let's have a look at the headline numbers.
Our profit before tax was GBP707.9 million; now that includes our valuation surplus of GBP519.3 million, and GBP9.8 million of disposal profits.
Adjusted diluted NAV per share was GBP13.67, that's an increase of 5.7%, or 74p since March.
Revenue profit for the six months was GBP184.2 million, up GBP14.2 million or 8.4% on the same period last year.
Adjusted diluted earnings per share was also up 8.4%, and our dividend was 16.3p for the six months, that is up 3.2%.
Now overall, these results translate into a total business return of 7% for the six months period.
So turning now to more detail on the revenue profit.
So this slide sets out the main components of our revenue profit on a proportionate basis. Revenue profit, as I've said, increased by GBP14.2 million and there are three main components to look at. There is net rental income, there's indirect costs, and interest. I'm going to skip over the increase in net rental income, as I'm going to come to that on the next slide.
Our net indirect expenses were virtually unchanged at GBP39.4 million, compared with GBP39.3 million in the prior period.
The net interest cost of the Group and joint ventures, that decreased by some GBP11.9 million and that's partly as a result of disposals, but it's also due to the repayment of joint venture debt in the prior period using cheaper Group facilities.
So let's now look at that net rental income in more detail.
Now I presented the movement in net rental income slightly differently today, and what this does is it enables me to highlight the key movements by portfolio.
Overall net rental income increased by GBP2.4 million and that's made up of a GBP6.8 million increase in the London portfolio, and a GBP4.4 million reduction in the retail portfolio.
In total we benefitted from around GBP4.5 million of non-recurring income, and that includes surrender receipts, much of which was in the like-for-like portfolio. And here we have income up GBP9.2 million, and the majority of this increase was in retail, and that was largely due to new lettings and increased income on the Accor portfolio. In London the increase was mainly to due to rent reviews, and surrender receipts.
Now taken together our capital activity, so that's developments, acquisitions and disposals, well that actually resulted in a GBP7.4 million decline in net rental income. And it's partly due to net divestment, but it is also due to the switch from higher-yielding secondary retail assets into lower-yielding prime assets.
The development program saw net rental income increase by some GBP7.9 million, with almost all of that increase coming from 1 & 2 New Ludgate following practical completion of the scheme.
Acquisitions contributed an GBP11.8 million increase in net rental income, and that's predominantly due to the purchase of the 30% stake in Bluewater, which occurred at the end of June last year; and in London GBP3.9 million of increase was largely down to the 50% of Thomas More Square which we bought in from our partner.
And finally disposals, the scale of our disposal activity resulted in a loss of GBP30.9 million of net rental income. And the main impact was from sales we made last year, namely our assets in Bristol, Livingston, Sunderland in the retail portfolio, and Times Square in the London portfolio.
So turning now to the valuation surplus; the value of our combined portfolio was GBP14.6 billion. The valuation surplus over the six months was GBP519.3 million. That is an increase of 3.8%, and within that, we saw retail values rise by 1.6% and London by 5.6%.
The 3% increase in the like-for-like portfolio was due to rental value growth of 3.7%, with little yield movement.
Within acquisitions, Bluewater was up above the average for the retail portfolio, but the standout performer in this category was Thomas More Square, which saw strong valuation gains as a result of lettings secured in the period.
Our completed developments; they delivered the highest percentage increase, up 10.7%, and that represents some GBP94 million of surplus. And the two main contributors here are 20 Fenchurch Street and 62 Buckingham Gate, with the latter performing particularly strongly, following the letting of nearly 30% of that building in the past six months.
We have only one proposed development, and that is Buchanan Galleries in Glasgow where our plans were put on hold in early July. Now understandably this uncertainty has impacted the valuation of the asset which declined by 7.7% in the period.
And the final contributor is the development program, which was up 6.8%, and that represents some GBP96.2 million of surplus.
Before we move on, there is one further aspect of the valuation to which I'd like to draw your attention.
In line with best practice and following a tender exercise, we've moved the valuation of our portfolio from Knight Frank to CBRE. As you would expect, there have been some minor differences on individual property values, but overall it is wafer thin and I believe our industry should take considerable comfort that our GBP14 billion property portfolio has been revalidated by another leading firm of valuers.
There is however a slight difference between the valuers on how they look at the rental value and equivalent yield components of a valuation. While this does not impact the individual property valuations, it does impact the rental value and equivalent yield movements between the March Knight Frank figures and the September CBRE figures.
For example, our like-for-like London offices, which are up 3% in value, they're showing a rental growth of 6.6%, which is ahead of the market and ahead of our expectation. But the office portfolio is also showing a counter-intuitive outward movement of yields of 10 basis points. This marginal rebasing of rental value and equivalent yields is a one-off event, although it's likely to be echoed at the year-end as we will again be comparing our results to March 31, 2015 numbers.
Let's move on to see how the valuation surplus and other movements affected adjusted net assets. We started the period with adjusted NAV per share of GBP12.93. Adjusted earnings were GBP184.2 million and then comes our valuation surplus, which is followed by the GBP9.8 million of profits from the disposal of investment properties and that's largely 130 Wood Street.
Our dividend in the period was GBP126.6 million and we spent GBP12.4 million buying shares for the EBT. And with other reserve movements of GBP11 million, that's how our adjusted diluted NAV per share ended the period at GBP13.67.
Let's move on to cash flow. Set out on this slide are the major components of the cash flow movements, which effected adjusted net debt, so this is all on a proportionately consolidated basis.
Beginning with adjusted net debt at March 31, of GBP4.17 billion, you can see that operating cash flow as GBP144.7 million; acquisitions of GBP94.8 million, that primarily relates to the acquisition of 6-17 Tottenham Court Road; and then we've spent GBP237.9 million on development and refurbishment CapEx. That includes our joint ventures at Nova, Victoria and Westgate, Oxford. And we received consideration of GBP446.1 million from disposals and the largest in that category is Times Square.
Then the next item relates to the repayment of a GBP50 million loan that was made available to the Trillium Investment Partners Fund when we sold Trillium in January 2009. And after some sundry items, we ended the period with adjusted net debt of GBP4 billion; that is down GBP163.4 million over the period.
Let's now look at how our net debt has moved so far this year compared to last year. So what you have on this slide is that last year's adjusted net debt is in pink with the year to date in blue. And what you can see is how our net debt jumped last June, following the acquisition of Bluewater, and then it declined as we paid down debt with the proceeds from disposals.
We started out this year with higher net debt than we had had last year, but with no major acquisitions this reversed in June and is on average some GBP205 million lower than the prior period. And we expect net debt to continue to fall as we received the proceeds of some GBP565 million of contracted disposals, which complete in the second half of this year.
You should note that assets, which we have sold in the six months, or now agreed to sell since September 30, together contributed some GBP16.1 million of net rental income in these first half-year results. But while these disposals will have a negative impact on earnings going forward we believe that owning the right retail and London assets is more important for our long-term total return.
Let's now look briefly at financing. The GBP163 million reduction in our adjusted net debt and the continued rise in assets, that has led to a 2 percentage point reduction in our LTV to 26.5%. And as Rob mentioned, I expect our LTV to fall further in the second half on the back of the disposals that I've just referred to. The weighted average maturity of our debt is 8.3 years, with a weighted average cost of 4.6%; that is marginally up from 4.5% at March as we repay cheaper revolving credit facilities.
So let me summarize. We've continued to deliver earnings growth at the same time as enhancing the quality of our assets, and reducing our gearing, and all of these put us in a very strong position.
Now for news on the retail portfolio, 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. We've delivered a strong set of results in the first half of the financial year. As Martin said, our values are up and, as I'll expand on in a minute, our sales and footfall are beating the benchmarks. We've secured a fantastic lineup of new lettings, our voids are down and we've delivered some great active management wins.
And to demonstrate those strong results I'm going to take you through what I think are five simple but crucial performance drivers in today's retail environment.
First, you've got to own the right kit. Second, if you've got the right kit, your sale should be ahead of the pack. Third, and it goes without saying but you need to attract the right occupiers, with a mix that reflects consumers' constantly changing needs. Fourth, to get growth you need rental tension and you can't have rental tension if you've got a lot of voids. And finally, you can't outperform without constant and relentless active management.
Now I'll take you through how we're on top of all five of these key performance drivers, but let's start with the quality of our assets.
Now those of you who joined us at Bluewater for our Investor Day in September will have seen a version of this slide, and what it shows is that we have the right kit. Almost 40% of our retail assets are dominant regional shopping centers, and these are all vibrant destinations with a high quality income stream. Like-for-like values for our dominant shopping centers are up 2.2% since March.
Just shy of 19% of our portfolio is leisure and hotels, and these have achieved a 2.8% valuation uplift in the first half. Leisure spend is rising as are rents. Our hotel income continues to grow and as I've said many times before, values are more than underpinned by vacant possession values.
More than one quarter of our retail is in central and suburban London and this is a great differentiator between us and our peers in terms of income resilience, tenant demand and growth potential. Values are up 6.1% and tenant mix is going from strength to strength on the back of exciting lettings from London Union and Polpo in Lewisham of all places, to Ricker and Jason Atherton in Victoria.
About 15% of our retail assets are retail parks. Now values are flat since March but we've been proactive, selling those with poor catchment and inflexible planning to focus on convenience parks. And since the half-year, this journey has continued with the sale of GBP270 million of retail parks in the North and Scotland. Post this disposal retail parks will make up about 12% of our total and all our parks will have good catchments, low voids and provide a strong and resilient income stream.
So we're pleased with the shape of our retail and the high quality, resilient income stream it provides. But a resilient income stream is only half the story because we think we're well positioned to grow that income. And that leads me on to my second key performance driver, strong sales.
Strong sales are key, they determine whether a retailer is thriving or failing in a location. They're critical in enticing new occupiers to a scheme. They're one of the deciding factors when it comes to decision-making at break or expiry. And they're a fundamental factor when retailers decide whether or not to invest in their stores. They're a key indicator of the health of a retail property. And our retail is in good health.
Football in our shopping centers was up 4.1% over the first six months of the financial year, outperforming the benchmark which was down 1.1%. Our like-for-like same store sales were up 3.8%, again outperforming the national benchmark. Trinity Leeds led the charge with growth of 7.9% in the first half, closely followed by One New Change at 7.7%.
Our like-for-like MSU sales growth has been particularly strong at 6.7% and in a moment I'll touch upon how we're upsizing a number of MSUs across our portfolio.
And our total growth of same center sales, taking into account new lettings and tenant changes, were up 5.2%. Affordability within our centers is good, with an overall sales to rent ratio below 10%.
Now these strong figures aren't just driven by our high quality assets, but also by our skills in knowing what consumers want.
They're demanding, and we're delivering brilliant basics. Things like good wayfinding, and free wifi, but also a bit of wow factor, with things like targeted marketing, a fresh and relevant occupier mix, and a great range of food and leisure.
So because we have the right kit, and we know our consumers, we're capturing more than our fair share of sales and footfall. And that's driven some great momentum on the leasing front.
Since April 1, almost 150 lettings have been completed, or are in solicitors' hands, within our investment portfolio, encompassing just shy of GBP15 million of rent per annum.
As you know, on the development side, we de-risk with pre-lets, to ensure retailer support for our schemes. Our potential development at Ealing, Worcester Woods and Selly Oak are 42%, 67% and 62% pre-let, respectively. And we're adding to the leisure and catering offer at Bluewater and White Rose, by converting and extending space. Both have extensive pre-lets.
We're on site at Westgate in Oxford, and progressing well for planned opening before Christmas 2017. We're about one-third pre-let and momentum is incredibly strong. In the past few days, we've put another 9% in solicitors' hands, so we're well over 40% pre-let. And that's two years before opening.
Strong demand for space means that we've got the confidence to pursue a bold leasing strategy, with annual fixed uplifts, shorter lease lengths and leases without automatic renewal rights, so that we can retain control over occupier mix, and keep our retail offer fresh.
The food and beverage, fashion and footwear, health and beauty and homeware sectors have all been active on the leasing front. But only for the best trading locations. Having the right space in the right place means that we have a choice when it comes to leasing, and choice means we can optimize occupier mix, rather than relying on pot luck to fill our space.
And if we have choice when it comes to occupier mix, that's a good precursor for rental growth. But importantly, you can't achieve rental growth without rental tension, and of course, you can't achieve rental tension if your voids are high.
Our voids are low. In the first half we reduced voids in administration in our like-for-like portfolio, from 3.3% to 2.4%.
Our like-for-like shopping center voids are down to 2.5%, and centers like Gunwharf, Trinity and White Rose are pretty much full. Our retail park voids are down to 1.5%, and adjusting for the portfolio sale we exchanged in October, that figure will fall to 1.3%. And our leisure and hotels portfolio has voids of just 1.1%.
So with low voids, great letting momentum, and strong sales across a high quality portfolio, we're well positioned to achieve rental growth. But we're not just sitting back and waiting for rental growth, to drive an increase in net rental income. Every asset has a plan, and our focus on asset management is relentless. We're constantly delivering initiatives to drive performance.
We spoke in detail at our Investor Day in September about asset management wins across our portfolio, so today, I'll just highlight a few key themes to give you a flavor for what's driving the increase in our like-for-like net rental income.
We're upsizing MSUs to give retailers the space they need. As I said earlier, MSU retailers have seen the best like-for-like sales growth and that's why, across our portfolio, we're busy delivering them new, enlarged stores.
These deals demonstrate the importance of the best trading locations, to retailers, and importantly, they're growing our net rental income, while increasing rental tension by taking out voids and smaller units.
With our strong customer relationships, we've also agreed a number of right-sizing deals, on our retail parks. At Blackpool for example, we downsized Dixon's to give them the right amount of space, while simultaneously letting their surplus space, and increasing rents by about 25%.
Now deals like these are win, win, win. Our customer gets the space they need, our consumers get a broadened tenant mix, and our net rental income goes up.
Throughout the portfolio, we've used our leisure expertise to increase the breadth of food and entertainment on offer. Since April 1, lettings completed, or in solicitors' hands, to leisure and restaurant brands, number about 50. The diverse range of leisure and catering in our centers, encourages longer dwell time and increased spend, and thus benefits our customers.
So there you have it. We've allocated our capital to focus on dominance, experience and convenience, and we'll continue to ensure we've got the right space in the right place.
Our high quality portfolio with its resilient and growing income stream, is the right kit to perform in today's retail environment. And because we've got the right kit, our sales are growing ahead of the benchmarks. We're achieving strong lettings, and really focusing on the best occupier mix for our consumers, because we know what they want.
Our voids are low, driving rental tension and enabling rental growth. And finally, our relentless focus on asset management means that we've got a constant flow of initiatives, to boost our like-for-like net rental income, and to add to the experience for our consumers.
Thanks very much, and I'll hand you over to Colette, for the London update.
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Colette O'Shea, Land Securities Group plc - MD, London [4]
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Thank you, Scott. Now for London, where letting and delivering the development program remains our focus.
For now market conditions remain favorable for our development. Rental values are continuing to rise, as supply remains low. So we're confident we can maintain our strong letting momentum. Let me start with that strong letting momentum.
Since March, we've let, or have in solicitors' hands, 500,000 square feet of the 1.1 million square feet we had available. Interest is strong, and we're really confident about letting the remaining space in our program.
We talked in detail about the market in May. The trends we identified with supply-constrained conditions continuing through 2015 and 2016 our sweet spot; and then supply increasing beyond 2016. Unsurprisingly, the outlook for development completions in 2015 and 2016 remains the same. But if you look at our main projections for supply, we now estimate there's 6 million square feet on top of that, which could be delivered from 2017 and beyond.
Supply is increasing. There's a slide in the appendix to your pack, that shows this. I'm going start in the City, where we're in a great position.
20 Fenchurch Street is 98% let. New Ludgate is now 92% let. And at 1 New Street Square you'll recall we've pre-let the whole building to Deloitte. Construction is due to complete in July next year, which has moved to accommodate work for Deloitte, but the rent start date remains unchanged.
Over to Victoria, and I think the transformation is now clear for all to see. As each building completes, and new occupiers move in, our vision is becoming a reality. And importantly, our customers now get it. Since 2010, we've built an amazing list of names, who've taken our space. We've repositioned Victoria, as a core business hub in the West End.
Turning to the remaining developments where we're creating clear value. At 62 Buckingham Gate, we're now 100% let or in solicitors' hands. At Zig Zag, we've made great progress. As we went to press, the building was 37% pre-let. This morning we've announced a 92,000 square foot letting to Deutsche Bank, which takes the building to 77% pre-let with a further 11% in solicitors' hands. This is a ringing endorsement for our product, and Victoria. Mango, Jamie's Italian and Iberica are all open, and M Restaurants opens next month.
At Kingsgate we sold 85 of the 100 apartments, and with the building completing last month, we're now starting the buyer completion process.
Up the road to Nova, right outside Victoria Station, not only are we creating new buildings, but two new pedestrian streets and a square, which together are the size of 10 tennis courts. They'll be lined with restaurants, shops, public art, and over 400 outdoor seats. This will be London's newest go-to food quarter, and I think an exciting place for where people want to stop and relax.
Our lineup of brands continues to grow, and the two new office buildings, Nova North and Nova South, are already 12% pre-let to Advent and Egon Zehnder.
At the Nova building we've pre-sold 135 of the 170 apartments. We estimate there'll be an eight-week delay to the completion, which reflects the complexities of delivering developments in the current market.
Now on to Paddington; Eastbourne Terrace is right outside the entrance to Paddington Crossrail Station and remains on program. The floor is 6,000 square feet, which is an attractive size in the West End, and as you all know, this size typically lets after completion, but we already have strong interest with 62% in solicitors' hands.
As Rob mentioned earlier, we've been improving the quality of our income, increasing our weighted average unexpired lease terms as we move through the cycle. In March 2010 our WAULT was 7.8 years; today its 9.2 years. This excludes our development program, which will make it longer still. Voids are down from 4.3% to 3.6%.
We're on the front foot, seizing and creating opportunities to increase rents. We're capturing rental value growth and completed GBP7.1 million of investment lettings, and GBP7.5 million of rent reviews.
There are a couple of transactions I'd like to highlight, starting with Dashwood House. In May we explained that 81% of the space was subject to review by next March, and that we've created good rental evidence in advance. We've now reviewed 40% of this space, 23% ahead of passing rent.
When News International vacated their space in Thomas More Square in 2014, we committed to a refurbishment to reposition the offices and public realm, and that also brought five new retailers to the estate. We're now attracting new occupiers on 10 year leases, increasing rental levels by 33%. 70% of the refurbished space is now let or in solicitors' hands.
It's a similar story at Holborn Gate; we're refurbishing some of the offices, reception areas and public realms and have increased rents by 14%. Again nearly 70% of the refurbished space is let or in solicitors' hands.
At 30 Eastbourne Terrace we have significantly improved rents; with two new lettings we've set a new headline rental tone in excess of GBP60 per square foot. That's created timely evidence in advance of rent reviews of 10 Eastbourne Terrace and the lettings of 20 Eastbourne Terrace.
All these transactions have been agreed in line with market incentives; as always every asset has a plan.
We continue to actively work the portfolio and we're successfully recycling capital. We incurred development and refurbishment CapEx of GBP179 million, and completed disposals of GBP363 million. These were ahead of the March valuation.
We made one acquisition, acquiring our partners 50% share in 6-17 Tottenham Court Road for GBP59.5 million. Located next to the new Tottenham Court Road Crossrail station, this is a retail property with both strong rental prospects, and good long-term development potential.
Turning to the future, we've an exciting pipeline of new development opportunities.
Starting with Portland House, I can now update you on our plans. This is a popular office building, so we decided to retain the offices and grow the income through light touch refurbishments and short-term leases.
Our success in letting our Victoria developments ultimately made this the standout route, but the Tower residential planning consent in Westminster is valuable, so we've banked this consent to maintain optionality for the future and still have the option to return to it in 2020.
We've submitted planning application for 1 Sherwood Street, behind Piccadilly Lights, and Nova East; and at 21 Moorfields, we're progressing the Section 106 consent. As we said in May, once we finalize the consents, we plan to build 21 Moorfields and Nova East to grade, in order to increase our ability to capture pre-letting opportunities. With these and our other schemes, we have a potential future pipeline of over 1 million square feet.
So, in summary, as I said at the start, we're really pleased with our strong letting momentum. Market conditions remain favorable and our negotiating position is strong.
Our key focus is on letting the remaining space in our program over the next 12 months. We're using every opportunity to capitalize on current market conditions to increase rents and lengthen leases.
Finally, we continue to work on a new pipeline of great sites and, as always, have an eye on future opportunities.
I'll now hand you back to Rob.
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Robert Noel, Land Securities Group plc - Chief Executive [5]
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Thanks, Colette. I'll be brief. As you've heard, and as ever, there is an awful lot going on in the business.
Our retail portfolio is now in really good health with positive operational metrics across the board, as you've heard from Scott today and at our recent Investor Day at Bluewater.
And since the half-year, we've continued to fine tune the portfolio with the sale of three retail parks. As Scott said, we now own the right kit, which we've achieved by selling in a liquid market, while it was relative starved of product.
In London, leasing momentum is good, as you just heard from Colette, and as she predicted it would be. The market conditions remain really favorable for the time being, and we remain operationally geared into it.
I'm really pleased with the progress we have made against our goals. The portfolio has been transformed over the last 5.5 years. The balance sheet is strong, and the likelihood of us being a net seller in the second half means it should be even stronger by March.
And as we have explained at these meetings, on Investor Days, and on our investor road shows, this is where we want it to be. We have a great team; we are all over our markets; we're building a hopper of opportunity for the future; and when we see opportunities outside, we're fully equipped to use our firepower.
With that, we'll hand over to you for questions.
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Questions and Answers
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Robert Noel, Land Securities Group plc - Chief Executive [1]
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Guys, there should be some microphones lurking around. Please could you state your name and your company, so that we have a record for the playback later on? Thank you.
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Tim Leckie, JPMorgan Cazenove - Analyst [2]
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Tim Leckie, JPMorgan. Just two very quick ones. You've made some very positive sounds on the leasing market London offices for the next 12 months, at least for the short term. Can you give an idea of the level of rental growth you're currently seeing, and maybe even just a range of the forecasts you might expect for market rental growth for the next 12 months, and maybe just beyond, if possible?
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Robert Noel, Land Securities Group plc - Chief Executive [3]
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Sure. And your next question?
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Tim Leckie, JPMorgan Cazenove - Analyst [4]
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Next question would be, adding to that, I'm expecting you'll say something positive, so that's [the lead]. The gross development yields, given the appendix, on balance sheet plus costs to come, 5.2% to 6%, looks like there's a decent amount of profit still to come. If you could follow up on the market rental comment with a comment on the development profit.
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Robert Noel, Land Securities Group plc - Chief Executive [5]
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Sure. Let me just talk about development profit; and then let -- Colette will talk about where the leasing is and ERVs and stuff, although we're not a forecasting company; that's your job, yes, as you know.
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Tim Leckie, JPMorgan Cazenove - Analyst [6]
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Used to that. Thanks.
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Robert Noel, Land Securities Group plc - Chief Executive [7]
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On the development program, what we provide you with every time is, A, the total development cost of the scheme, with the rental value as it was in September of space let and space still to be let, according to the valuers.
We then give you a column which says the value as at September, plus the CapEx to spend, and so you can see what the yield on that cost to come from the current book number is in the valuation. And, as you said, yes, some of our developments, ones which are generally not let, the yields are quite high; but that is because there is risk in the scheme.
So the delta that you see between the yields in the right-hand column and what you think the market yield is will be captured by as we lease up the building. So there is quite a bit to come, particularly at Zig Zag, because, don't forget, those lettings are post the balance sheet day; particularly at Eastbourne Terrace; and particularly at Nova over the next 18 months, or so. We're operationally geared into this market.
Colette, rental values?
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Colette O'Shea, Land Securities Group plc - MD, London [8]
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On the leasing and general progress, I think it's important to remind you, last year we did 670,000 square feet of lettings in the 12 months. We're now at 500,000 square feet let or in solicitors' hands, so broadly on the same run rate.
We're full up, as you've seen, pretty much in the City. So I think, probably, in answer to your question, if I focus on the West End and what we are seeing there.
In terms of rental values, I'm not going to give you detail of all the buildings. But what I have said before, and this is playing out, is that at the lower levels we quoting rents in the 70s; and as you move up the buildings, you move into the 80s. So, effectively, it depends where you take your space within the building. I think that gives you your range.
In terms of the future, the space that we have got left, so just under 700,000 square feet, we are seeing a very good lineup of names coming in behind those that I showed you earlier.
I think the important thing about Victoria is that it's effectively unveiled now. People can now actually see it. For us, the movement of people like Deutsche Bank, Jupiter, and Egon Zehnder, in particular making Victoria their home is only going to be a good thing for us over the next 12 months.
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Tim Leckie, JPMorgan Cazenove - Analyst [9]
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Thanks.
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Hemant Kotak, Green Street Advisors - Analyst [10]
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Hemant Kotak, Green Street. I've got two questions as well, please. The first one is this point about being debt neutral. I think you've talked about that for some time now. The debt in absolute terms has hovered around GBP4 billion. You're indicating that's going to go lower in the near future. If asset values keep rising you're going to get to an LTV of -- in the teens. Is that something that you're prepared to go as low as those levels and how far can that go? That's question 1 please.
Shall I go for the next question? The next question is, Scott, for retail you've highlighted the importance of sales densities, which we agree with. We notice that in other markets there's a lot more disclosures on sales densities. Could we see more? You've got some pretty big heavyweight assets. Could we see it for -- by asset level? We actually get it in some other markets. If it's so important, can we please see it in the UK as well?
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Robert Noel, Land Securities Group plc - Chief Executive [11]
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Right, before Scott answers that, let the chancellor talk about LTV.
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Martin Greenslade, Land Securities Group plc - CFO [12]
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Right. Hemant, we are not signaling a change to our net debt neutral approach. What we're saying is that we know we've got GBP565 million of disposals. We don't know what the acquisition opportunities might be. So we're saying for the next six months or so, we'll probably have net divestment and therefore LTV will come down. And we're very comfortable to let it come down.
We broadly operate between 25% and 55% LTV, but if assets rise as fast as they'd need to rise to get us well into the teens, then we'd be very comfortable letting our gearing come off.
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Robert Noel, Land Securities Group plc - Chief Executive [13]
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And then we'll move on to -- we'll just answer the retail question then we'll move on to -- Scott.
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [14]
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Hemant, it's really driven by our customers. They're pretty sensitive about too much transparency when it comes to sales densities. What I can tell you is ours run from the high GBP400s up to about GBP1,000 per square foot and every one of our major centers would lie within that range.
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Chris Fremantle, Morgan Stanley - Analyst [15]
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Chris Fremantle, Morgan Stanley. I just want to clarify the difference in valuations from the change in valuers. I think you described the differences as wafer thin across the board and then you said for London offices there was a yield differential of about 10 basis points, which, on my numbers is about 3%. Are the differences in valuations largely confined to London offices? Is that 3% differential -- can we extrapolate that across the whole portfolio? Any comments you can make to clarify that would be very helpful.
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Martin Greenslade, Land Securities Group plc - CFO [16]
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My comment about wafer thin is about the opening position. So if you were to value -- if you have Knight Frank's valuation and you have CBRE's valuation at the same point in time, obviously we don't, but what does it look like? It looks within 0.5%, certainly not as much as 1% difference.
So on individual assets they may be more than that but across the portfolio we've got about 0.5 percentage point of difference because of the change of valuers and different views on properties. And then we have a movement that relates to the six-month movement, okay. And within that, we get some confusion if we look at the individual components of valuation and rental value and yield.
And let me just explain that. It's easier to do in Q&A than it is when I'm presenting. But if you look -- if you imagine we only have one lease, if you look at an individual lease and you are valuing that, then there are three different types of rents that you could have. You can have your passing rent, you can have the valuer's assessment of the headline rent and the valuer's assessment of the net effective rent. And interestingly enough, and you probably know this, but the adopted rent, or the rental value, for that lease could be any one of those three.
If you were to choose the headline rent, then you might have a slightly higher yield for the fact that you've got a rent-free period, for the fact that you haven't got any growth off that.
If you were to take the net effective yield, you might have a lower yield, because there'll be more growth in that. And so you can get different components for the same value in the same way that six times two is 12 and three times four is 12. The difficulty comes when you compare one valuer to the other where one is using a net effective rent and one is using a headline rent.
And so if you're comparing the six and the three, you get a problem, but if you're looking at the overall valuation, there's no difference. So in ours, we have yield outward movement and excessive rental value growth in the London office portfolio.
If you were to try and strip that out and look at it on a headline-to-headline basis, you would have inward yield shift in our London office portfolio of between 0 and 10 basis points in. And you would have lower rental value growth of, say, around 3% or 4%, not the 6.6% that we're showing.
Does that answer your question?
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Chris Fremantle, Morgan Stanley - Analyst [17]
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Great, thank you.
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Remco Simon, Kempen & Co - Analyst [18]
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Remco Simon, Kempen. Given that yield shift seems to have largely come to an end and it appears to be that future value growth is more driven by rental growth, I was wondering if I could question you a little bit about your outlook for retail? You gave your view about where London offices are heading, but if you look across retail, shopping centers up 1%, retail parks down slightly. How do you see the outlook for rental growth going forward as that seems to become the main valuation driver?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [19]
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I think it will carry on being relatively slow and steady. I think there'll continue to be polarization between the winners and the losers. Just take footfall, for example. We're up 4%-odd. The benchmark is actually down. So I think rental growth will come to the right kit. We're up about 1.5% this year.
I guess the thing about rental growth is sales, footfall figures, all looking good, voids down; that provides the building blocks for rental growth. The only trouble is we can't get the joy very quickly because it's dependent on timings of rent reviews, expiries, breaks, etc. So at Bluewater, for example, the next big spike in rent reviews is 2017/2018 so that's when we expect to be reaping the joy.
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Remco Simon, Kempen & Co - Analyst [20]
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Okay. And another question maybe on your comment earlier, Martin, about you sticking to your net debt neutral policy. Given that you've got about GBP600 million of sales going out in second half of the year, you've only about GBP400 million CapEx left, and given that I assume that there won't be any major acquisition opportunities given where we are in the cycle, does the fact that you still stick to that net debt neutral policy signal that you don't really expect to sell much more really than you've already sold or --?
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Martin Greenslade, Land Securities Group plc - CFO [21]
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No, I think --everything's for sale if you're going to make us a really good offer, Remco. So we will take offers and there may come a time in the cycle where we will move away from net debt neutral, absolutely.
I think what we're saying is that if you go back to May last year, you wouldn't have expected us to spend GBP700 million on Bluewater. So opportunities come along and we're open to those opportunities. If they don't, then we will have lower debt at March. And as I say, at some point, having lower debt and reducing debt will be the right call for the cycle.
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Remco Simon, Kempen & Co - Analyst [22]
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Thanks.
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Robert Noel, Land Securities Group plc - Chief Executive [23]
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Okay, before we move onto Os, we've got a question on the screen. Martin, can you take that from James Wilkinson, please?
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Martin Greenslade, Land Securities Group plc - CFO [24]
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You have circa GBP800 million of debt expiring in 2016 and 2017 which would provide a further tailwind to earnings growth. If you wanted to maintain your average credit and interest rate maturities, what would you expect the marginal cost of debt to be to replace that debt? Thank you.
Right. We actually have around I think it's GBP660 million worth of bonds expiring in 2017 and 2020, so a slightly longer period than that because any short-term debt, if that's what James is referring to, would be off current interest rates already; they'd be revolving credit facilities.
But he's right. If you look further out, the interest rates on those bonds are, I think, between 4.8% and 5.2% and we would expect at the same maturity, so if we did an eight-year bond, say, you'd be looking at around 3% probably in today's market for that.
So there is an interest saving to come, in today's money, for those interest rates. Obviously, we don't know what the interest rates will be in 2017 and 2020 when those bonds expire. But on current interest rates, there would be a saving of around 2 percentage points.
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Osman Malik, UBS - Analyst [25]
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Osman Malik, UBS. A couple of questions for Colette, I guess. Colette, you mentioned an additional 6 million square feet of potential space coming onto the London office market. I was wondering, I think you do have a slide in the appendix, but could you give us some color on where and also who these people are? Are they new entrants? Are they existing players who just have a different view to you? Potentially could rising construction costs now make some of these projects unviable, I guess, in the end?
The second question, similarly London office. Could you just give us a bit of color on the recent negotiations you've had with tenants? So say the Deutsche Bank deal or others, what's on their minds? Are they talking about Brexit? Are there other themes that are on their minds? Could you give us a bit of color there? Thank you.
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Colette O'Shea, Land Securities Group plc - MD, London [26]
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So, first of all, the additional 6 million square feet since May. That is across Central London, so it is City, West End, across the whole.
I think the construction market is difficult at the moment. We are seeing costs rising. We are seeing contractors pretty stretched. Whether or not that will have an impact on some of those projects and move them back, possibly, but as yet, we haven't seen it.
And I think the other main point though is that our sweet spot, which -- using Rob's terminology, there's very little that -- well, there's really nothing that can change that. So for the next 18 months, the stats that we showed in the slide are pretty fixed.
Moving on to the recent negotiations, I think there are a few things that come through. First of all, we're no longer seeing a market where people are either City-centric, West End-centric, fringe-centric. What we're seeing is a market where people want the right product. They want the right environment and they want the right amenities. And this is all part of the war on talent and looking at improving the productivity of businesses.
I think this is where we're now seeing Victoria coming into its own because you can really see the transformation there. People no longer [have to] imagine it, they actually go there and they realize that we've got all the transport links and it's a place where their staff will actually want to be.
So I think those are very much the themes that we're now seeing coming through.
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Osman Malik, UBS - Analyst [27]
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Okay, so Brexit hasn't come up in negotiations?
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Colette O'Shea, Land Securities Group plc - MD, London [28]
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No, not at the moment. I think the only thing that might happen to us is potentially it might bring some uncertainty in the short term, but it's not come through at the moment.
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Osman Malik, UBS - Analyst [29]
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Thank you.
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Alan Carter, Oriel Securities - Analyst [30]
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Alan Carter, Oriel. Just a specific question. On the retail warehouse disposals that you've made so far in H2, are they primarily over-rented properties?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [31]
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They are.
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Alan Carter, Oriel Securities - Analyst [32]
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All of them?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [33]
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Two of the three.
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Alan Carter, Oriel Securities - Analyst [34]
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By what scale will that reduce roughly the level of over-renting in the retail warehouse portfolio?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [35]
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When the sale completes, it will bring our figures actually right to where we want them to be (laughter).
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Martin Greenslade, Land Securities Group plc - CFO [36]
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Roughly (laughter).
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Oliver Reiff, Deutsche Bank Research - Analyst [37]
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Oliver Reiff, Deutsche Bank. In light of the fact that you've repositioned your retail business, the development --
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Robert Noel, Land Securities Group plc - Chief Executive [38]
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Welcome to Victoria (laughter).
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Oliver Reiff, Deutsche Bank Research - Analyst [39]
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Unfortunately, I'm not going to be moving to Victoria (laughter). In light of the fact you've repositioned your retail business, the development pipeline is being brought to grade, you're likely to move your LTV down and not going to be pushing forward with any more development activity.
In the scenario where the investment market continues to be quite hot, could you just talk about your priorities from a management perspective in that sort of cycle scenario where you have a several-year prolonged period of a hot investment market?
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Robert Noel, Land Securities Group plc - Chief Executive [40]
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Yes. If you think that we have a several-year hot period for the investment market, then remember that we're GBP14.6 billion long in property, so that must be a good thing. I think that these markets come and they go and you have to make a bet.
The point that we have come -- or came from is that in 2010, when we kicked off this 3.5 million square foot program, we felt we were being pretty well over-rewarded for the risks we were about to take.
And I think that if you look at the development market now, the cost of getting into it and the cost of executing, I believe that you're not really being well enough rewarded for the risk you're taking.
So we're leaving that to other people and we think that's the right thing to do, it's the right way to guard our shareholders' capital which is what we're here to do. If the market keeps going on forever, then we're all in a good place.
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Oliver Reiff, Deutsche Bank Research - Analyst [41]
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Thanks.
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Operator [42]
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(Operator Instructions).
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Robert Noel, Land Securities Group plc - Chief Executive [43]
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So we've got no questions on the web, we've got no more hands in the air, so we'll draw it to a close eight minutes late, very sorry. Thank you very much indeed. See you in May.
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Operator [44]
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Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating. You may now disconnect.
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