Full Year 2016 Land Securities Group PLC Earnings Call
May 17, 2016 AM EDT
LAND.L - Land Securities Group PLC
Full Year 2016 Land Securities Group PLC Earnings Call
May 17, 2016 / 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
* Colette O'Shea
Land Securities Group plc - MD, London
* Scott Parsons
Land Securities Group plc - MD, Retail Portfolio
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Conference Call Participants
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* Hemant Kotak
Green Street Advisors - Analyst
* David Prescott
Barclays - Analyst
* Miranda Cockburn
Stifel Nicolaus & Company, Inc. - Analyst
* David Brockton
Liberum - Analyst
* Oliver Reiff
Deutsche Bank Research - Analyst
* Michael Burt
Exane BNP Paribas - Analyst
* Alan Carter
Stifel Nicolaus & Company, Inc. - Analyst
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Presentation
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Robert Noel, Land Securities Group plc - Chief Executive [1]
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So, good morning, everyone, and welcome to our annual results presentation.
If you're not here to listen to the Land Securities annual results presentation, you're in the wrong room, but don't leave now because the business in terrific shape, following a year in which we delivered what we said we would deliver: continued development letting momentum with great progress at Oxford; and in London, not far short of last year's record.
A healthy operational performance right across the business, and a stronger balance sheet with, as we signaled at the half-year, some net disinvestment in the second half, taking advantage of a market relatively starved of product.
Operationally, and in contrast to national benchmarks, we had higher footfall and higher same-store retail sales in our shopping centers; and, we had higher occupancy across the board, with rents up and voids down.
With these good operations, we built on last year's outstanding results, with the valuation up, good surpluses made on disposals, and strong revenue profit performance.
But, it's about more than just one year's results. Our strategy is working; we have a much stronger business with better quality assets, longer income streams in London, and lower gearing.
To underline our confidence, we've recommended a final dividend, which would take the dividend for the year up almost 10%.
Martin will give you more detail on all the numbers in a moment. What I'd like to do is remind you of the journey.
It was six years ago now that we kicked off three broad strategic objectives. First, a huge 3.5 million square foot speculative development program in London.
Second, the transformation of our retail portfolio under our themes of dominance, experience and convenience.
And third, financing all of this activity through capital recycling, and this chart shows our capital recycling over the period.
Over the last two years we have shared with you our plan to get to the end of this calendar year with no developments on site which are not substantially let; a longer-weighted average lease term in London offices; and a first-class retail portfolio.
To achieve this, we have worked flat out with GBP4.5 billion of capital activity, and over 1.4 million square feet of development leasing activity over the last 24 months.
Six months ago I signaled we'd be net sellers in the second half, and we have been.
Importantly for shareholders, our actions have ensured that this positioning has not impacted our underlying performance.
You've seen this chart before, now updated it shows our ungeared total property return since March 2010 in green, against our key benchmark, the IPD Quarterly Universe in blue.
We have delivered a strong performance at property level over the period, with the value of outperformance being approximately GBP2.8 billion versus the underlying market.
This pink line shows our total business return over the period, that's rise in net asset value per share plus dividend. We have achieved this while halving LTV from 44% in March 2010 to 22% today.
As economic and political risk outside the business have been rising, we have been reducing risk within. This has put us into a position of great strength and resilience.
So, let me now hand over to Martin to take you through the results in detail, before we have updates on London from Colette, and on retail from Scott. What you'll hear is that there are common themes running right through the business, with teams that are all over their assets and all over their markets, and that's why Land Securities is in such good shape.
Martin?
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Martin Greenslade, Land Securities Group plc - CFO [2]
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Thank you, Rob. Morning, everyone. As Rob said, these are a strong set of results. They're driven by actions we've taken, and they're supported by good market conditions.
So, as I run you through the results, I'm going to try and draw out those aspects, but I'm also going to point out where our results don't yet fully reflect the decisions we've already taken.
So, starting with the headline numbers. Our profit before tax was GBP1.34 billion. That includes our valuation surplus of GBP907.4 million and GBP119.4 million of disposal profits.
Our adjusted diluted NAV per share ended the year at GBP14.34. That is in an increase of 10.9%, or 141p.
I'm coming to revenue profit in a minute, but it was up 10% over last year, with adjusted diluted earnings per share up a similar amount to 45.7p.
We're recommending a final dividend of 10.55p, bringing the total dividend to 35p, that is, up 9.9%. Now, I want to be clear; 35p is a level from which we're confident we can continue to grow the dividend in a sustainable manner.
Just to make sure there isn't any confusion, the first quarterly dividend for next year will be 8.95p, that is, up 9.8% on this year's first quarterly dividend.
Our aim is then to follow the pattern of previous years. That means three equal quarterly dividends followed by a review of the final dividend.
So, turning now to more detail on revenue profit. This slide sets out the main components of our revenue profit on a proportionate basis.
Revenue profit increased GBP33 million to GBP362.1 million, with around half of that increase from lower interest costs with the balance down to increased net rental income and lower indirect expenses.
Now, I'm going to come to net rental income in a minute, but let me cover the indirect expenditure first. That was down GBP12.4 million and the decrease comes through these two lines.
Now, one of the key variables in our indirect costs is the amounts that we spend on feasibility on properties that we don't yet own. These costs were down by GBP6.4 million compared to last year.
Unallocated expenses were also down. That was down due to a lower headcount and a reduction in variable pay following last year's stronger relative performance.
The net interest costs of the Group and joint ventures decreased by GBP16.4 million; let me explain why.
Around GBP4 million is due to lower debt following disposals. GBP3 million is due to higher capitalized interest. But the majority is due to lower interest rates following the repayment of joint venture debt last year, and the expiry of some fixed-rate swaps.
Now, I'm going to cover that net rental income in a little more detail. On this slide what I've set out are the changes in net rental income and that's split between London and retail.
Overall, net rental income increased GBP4.2 million. Now, that's made up of a GBP15.3 million increase in London, and a GBP11.1 million reduction in retail.
Like-for-like net rental income was up GBP13 million with the majority of the increase in retail, which also benefited from some GBP4.1 million of surrender receipts.
Net rental income grew at a number of properties, including Gunwharf Quays, Trinity Leeds and the Accor hotel portfolio.
London's net rental income, the growth there is entirely driven by the rent review cycle, and the main uplift this year was at Dashwood House. Colette is going to cover that a little bit more in a moment.
The development program; that saw net rental income increase by GBP21.5 million with almost all of the increase coming from 1 & 2 New Ludgate and the Zig Zag Building, and that is following practical completion of both of these schemes.
Acquisitions were up GBP11.2 million, and that is predominantly due to the purchase of our 30% stake in Bluewater in June 2014.
Then finally, disposals. The scale of our disposal activity resulted in a loss of GBP51.1 million in net rental income. The main impact was from sales we made in the previous financial year; namely, our retail assets in Bristol, Livingstone, Sunderland, and also Time Square and Oriana in London.
So, turning now to the valuation surplus. The value of our combined portfolio, at March 31, was GBP14.5 billion. The valuation surplus was GBP907.4 million, that is an increase of 7%. Within that retail saw values rise by 3.7% and London was up 9.7%.
Of course, these numbers include the impact of the 1% increase in stamp duty to which the Chancellor helped himself in the March budget.
Around 60% of the valuation increase came from the like-for-like portfolio, which I'll cover in a minute.
Within acquisitions Bluewater was up in line with the overall retail portfolio, but this was partly offset by a decline at Buchanan Galleries, as we put the development there on hold.
Our completed developments were up 12.4%, or GBP109.3 million. The two main contributors are 20 Fenchurch Street and 62 Buckingham Gate, with the latter performing particularly strongly as it went from 69% to fully let over the course of the year.
The development program. That saw the largest increase. That was up 16.6%, or GBP253 million, with all six developments performing really well.
So now briefly back to that like-for-like movement and what was behind it. Shopping center values were up 4.3%. That's due to a combination of inward yield shift and rental value growth.
In contrast, retail parks were down 1% as yields moved slightly out and rental values were flat.
It was another good year for our leisure and hotels portfolio with both types of assets showing similar performance.
Our London like-for-like office portfolio was up 6.3% with the City and midtown performing a little better than the West End, but that was due entirely to a fall in value at Queen Anne's Gate.
Now, the eagle-eyed amongst you will have spotted a counterintuitive 6 basis points outward yield shift for London offices; for the bat-eyed it's there in that box.
Now, those of you who were here six months ago will recall that this is down to the change in our valuers from Knight Frank to CBRE, and their different approaches to yields and rental values. I also warned you that we would most likely encounter the situation again at the yearend. As you can see, we have.
Now, I am not going to repeat my fascinating explanation from last time. But I promise you that this marginal rebasing of equivalent yields and rental values between our valuers is done. I shall never ever mention it again.
Finally, Central London shops, these were up 10.3%. That is on the back of strong performances from the retail at One New Change and Cardinal Place.
So moving on to adjusted net assets; we started the period with adjusted NAV per share GBP12.93. Adjusted earnings were GBP362.1 million. Then comes our valuation surplus, which is followed by disposal profit. We made some GBP78.8 million of profits from selling investment properties. That is largely Thomas More Square and Haymarket House. We made GBP40.7 million from selling trading properties, and principally there that is the 86 apartments at Kings Gate, which completed this year.
Our dividend in the period was GBP255.4 million. And we had an exceptional cost of GBP27.1 million related to redeeming our 2017 bond. So you can see, with other reserve movements of GBP3.9 million that's how our adjusted diluted NAV per share ended the year at GBP14.34.
So a quick look now at our net debt. In the appendices, what you'll find is my slide on our cash flows for the year. But what I've set out here is how our net debt has changed, with this year in blue and last year in a rather fetching pink color.
Now, what you can see is how our net debt jumped last year following the acquisition of Bluewater and then declined somewhat as we paid down debt with proceeds from disposals. This year, we've continued to pay down debt with disposal proceeds, particularly in the second half of the year, as we moved away from net debt neutral to being net sellers.
There are two important points here. First of all, our decision to be net sellers was driven by the combination of specific assets, and that's largely those where we've completed asset management initiatives; and a strong investment market receptive to that type of asset.
The second point is that while the proceeds have come in and net debt is down now, these disposals will have an impact on earnings next year, because the assets that we've now sold contributed some GBP36.4 million in net rental income this year. There will be some interest benefit from the lower debt, but this will be small in comparison to the lost income.
So let's now briefly look at financing. As a result of disposals, our adjusted net debt is down GBP933 million over the year. So that reduction, together with the continued rise in asset values has led to a 6.5 percentage point reduction in our LTV to 22%.
Right at the end of the year, we redeemed the GBP400 million outstanding on our bonds maturing in 2017. There's an exceptional cost of GBP27.1 million related to this, of which GBP26.2 million is the redemption premium.
But looking ahead and taking into account the facilities used to pay for that redemption, we're going to save approximately GBP16 million in interest next year and GBP9.6 million in the year after. So the interest savings, they broadly match the redemption premium.
But the important thing is that the premium can be offset for tax purposes against the GBP40.7 million of trading profits we made this year. Together, that makes the transaction NPV positive and that floats my boat (laughter). And I'm always open to more of those.
Now at the end of the year, the weighted average maturity of our debt is 9.6 years, with a weighted average cost of 4.9%. That's up from 4.5% last March, and that is because we repaid cheaper revolving credit facilities.
So let me summarize, it has been a good year for earnings growth. We have raised the dividend meaningfully and we aim to progress it from this level. Quite simply, our balance sheet is in great shape.
So on that note, let me hand you over to Colette to cover what she's been doing in London.
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Colette O'Shea, Land Securities Group plc - MD, London [3]
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Thank you, Martin. We've seen another very good year in London. We've had a strong year of lettings, as you've heard from Rob and with rigorous asset management, continue to lengthen income, growing the portfolio's resilience. We've also taken advantage of a strong investment market to sell some assets.
Before talking about all our activity, let me update you on the market. As you'd expect, we track the market forensically. Last May, I talked about a supply-constrained market with a falling vacancy rate where the negotiating position was firmly with the landlord. We've taken full advantage of these market conditions, as you're about to see.
Today, supply to 2017 is as we predicted. After that, we're now expecting it to increase at a faster rate than we were anticipating one year ago. The vacancy rate has also started to rise.
There are some slides in the appendix to your pack which show the detail. For the record, these assume we remain in Europe.
That's the market context, so what about our performance? We've let half the 1.1 million square feet we had available on an average lease term of 14 years. 20% of the remainder is already in solicitors' hands. What's left is mostly in the West End, where we offer a great product and environment at a competitive price point.
As you can see on the slide, the City schemes are almost full; and, I'm really pleased with the great progress we've made in the West End.
Now to Nova, which completes this phase of our Victoria transformation and also means we're approaching the end of the GBP2.4 billion development program we started in 2010. Our customers get it. And with Egon Zehnder, BHP Billiton and Advent International adding to our who's who of names in the portfolio, we're already 38% pre-let or in solicitors' hands.
When London's newest food quarter opens, along with a new underground entrance, I'm confident its popularity will continue to grow.
Residential at Kings Gate and Nova substantially concludes our development activities. A combination of unwelcome tax measures and uncertainty arising for the Europe question has left a challenging Central London residential market. However, we're confident in our product and have flexibility in our marketing to attract buyers.
The development program has produced some great returns for us, but it's not just about development. As I said at the start, our asset management is rigorous. We have a great team, who many of you've met on our tours.
We're constantly in dialog with our customers throughout their lease, which gives us insight and enables us to be proactive. This helps us do a good job in keeping our customers, as well as improving rental values, which in turn gives the portfolio greater resilience.
Since March 2010, we've increased the lease term in our offices from 7.8 years to 9.2 years, rising to 9.7 years if you include completed developments.
This year, we've done GBP18 million of investment lettings, GBP25 million of rent reviews and have continued to see rental value growth. Voids remain low at only 2.9%.
Let me give you some examples. Cardinal Place celebrates its 10th anniversary this year. It was our first phase in Victoria and kick-started the transformation. It's a popular building.
In 2012, new developments were completing around it, and we were approaching breaks or expiries in three-quarters of the income. Since then, a number of high profile customers have committed to longer leases. We re-geared nearly half the space that was subject to breaks and expiries and taken the income through to 2026 and beyond.
This year, working closely with EDF Trading on their occupational strategy, we agreed their rent review early at higher rent and moved their lease expiry to 2026.
When Microsoft vacated in March, we moved quickly and in just six weeks, 75% of the available space is already pre-let or in solicitors' hands.
New Street Square, our other major London campus, is nine years old, fully let with an office lease term of almost nine years.
As well as Deloitte's expansion into 250,000 square feet, on a 20-year lease, other customers are committing to these popular buildings. For example, Taylor Wessing have now completed all their leases until 2025.
We're seeing good rents too. Our latest lettings have achieved GBP63.50, and two rent reviews have achieved a 12% uplift.
All this activity is creating good evidence ahead of reviews on over 50% of the income over the next 24 months.
Our rent review activity continues at Dashwood. Last May, I mentioned that over 80% of the income was subject to review by March 2016 and that we have created good rental evidence in advance. We've now reviewed over 70%, increasing the passing rent by 23%.
Turning to retail activity in London; at Moorgate Hall, we've grown the retail rent through active management. We took back an HMV unit; split it; let it at a higher rent at a time when 56% of the retail income is subject to renew or renewal, increasing the Zone A from GBP250 to GBP288 per square foot.
The One New Change retail celebrated its fifth anniversary last October. We have 53 retailers here; 12 had breaks. Only two breaks were exercised, and we re-let both units straightaway at higher rents. Over the last 24 months, the retail passing rent has increased by 31%, and year-on-year sales are up by 4.9%.
As Rob and Martin have said, we used the strong investment market to implement our plan to sell some assets. But where we've seen opportunities to actively manage ahead of a disposal, we've done so, such as at Thomas More Square and Holborn Gate.
At Thomas More Square, we purchased our partner's 50% share in 2014 for GBP85 million, when the estate was 21% vacant, following the departure of News International. We carried out our plan to reposition the whole estate, refurbishing vacant offices and the public realm. This meant we were able to increase rents and complete our plan, by selling it for GBP284 million, crystallizing a 36% surplus on the purchase price in just 16 months.
It's a similar story at Holborn Gate, which we sold immediately after it had been refurbished and re-let. These two, along with our other disposals contracted in the year, amount to a total of GBP661 million, at a 14% surplus to the March 2015 valuation.
While we've been doing all this, we've also had a clear eye to the future, working on more than 1 million square feet of new developments. In the last few months, we've made good progress securing planning consent at Nova East and 1 Sherwood Street.
At 21 Moorfields, we've started demolition and enabling works, and secured the requisite consent from the City, to help us with rights of light. We've started designing a scheme at Southwark of 140,000 square feet.
In summary, we have a high-quality, well-let, resilient portfolio. The focus this year will be on letting our remaining space, capturing reversion in the portfolio through active management, and progressing the future pipeline.
As you've seen from Martin, we're in an excellent financial position to take advantage of any new opportunities that may arise.
I'll now hand over to Scott.
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [4]
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Thanks, Colette; good morning, everyone. Now, the retail market continues to face some challenges and uncertainty, but there's been no uncertainty in our retail strategy.
At our last Investor Day and the interim results presentation, we said that there were five key factors driving success for a retail property business. This morning, I'm pleased to report that we've delivered on all of them.
We said we'd dispose of less resilient assets to invest in quality, and we have. We said these assets would achieve sales growth ahead of the pack, and they have. We said we'd deliver a constant flow of leasing wins, and we have. We said we'd keep voids low to deliver rental tension, and we have. And, we said we'd relentlessly manage our assets to drive growth in that rental income, and we have.
The result of this strategy has been a year of good relative performance from our retail business and confidence in the year ahead. Here's why.
Our retail portfolio valuation stands at just over GBP6.2 billion or GBP7.7 billion including our Central London retail assets. Amongst our peers, we continue to benefit from by far the largest proportion of Greater London and leisure assets, where performance has largely been strongest.
As Martin said, values are up 3.7%, and we've outperformed the retail IPD benchmark by 150 basis points. London retail, leisure, St. David's and Buchanan Street were particularly strong performers.
Over the period, we made disposals of GBP385 million, made up of retail parks at Gateshead, Dundee, and Derby; a first generation leisure park at Maidstone; and our last remaining standalone food store at Crawley. These disposals were ahead of book value and were well timed, given the lull in market transactions that we've seen since.
So we've been strategic with our sales and selective when acquiring, ensuring that our assets appeal to consumers and occupiers alike.
What appeals to occupiers is strong footfall and sales. Footfall in our shopping centers was up 3.4%, outperforming the benchmark, which was down 1.3%.
Not only are we attracting more than our fair share of consumers to our centers, they're spending more. The BRC benchmark for total like-for-like same-store retail sales over the year was up [2.1%].
Now, it's worth pointing out that this is total, non-food retail sales growth, including online. But if we look at bricks and mortar retail sales growth in isolation, the figure is actually a decline of 0.2%.
Now, that's a somber picture for many landlords but not for us. Our like-for-like same-store retail sales were up 1.5%, and that's outperformed the national benchmark by a very healthy 170 basis points.
Our total growth same-center retail sales, taking into account new lettings and tenant changes, were up [3.3%]; again, outperforming the benchmark by a whopping [270 basis points].
But that's just our retail. Remember that we're at the forefront of bringing the optimum mix of leisure and catering to our centers. We're outperforming here too. With like-for-like same-store catering sales up 3.8%, beating the national benchmark by 260 basis points. Total growth, same-center catering sales also beat the benchmark, and are up [6.6%].
A few highlights from around the portfolio include strong sales growth from St. David's and Trinity; Bluewater sales surpassing the GBP900 million. And Gunwharf Quays, where sales growth and record breaking sales densities, paved the way for asset management wins that delivered 19 fantastic letting deals.
Speaking of lettings, momentum has been really strong. Investment lettings during the year totaled more than GBP20 million, a five-year high. Food and beverage, health and beauty, fashion and homewares have all been active, and we've been particularly busy upsizing retailers across the portfolio.
On the development lettings side, Filmworks in Ealing, where the CPO has been confirmed; Worcester Woods, where we await a planning decision in the coming months; and Selly Oak, where we hope to start on site in the autumn are all substantially pre-let, with Worcester and Selly likely to be over three-quarters let before we even break ground.
We're now on site at White Rose, where our leisure extension has only one unit that's not already spoken for, with 10 months to go until practical completion.
Our Oxford team has had a brilliant year. I think you'd be hard pressed to find a major UK shopping center development that has secured more pre-lets at this stage in its program.
Opening in autumn 2017, it's now more than 50% let or in solicitors' hands to brands including Tommy Hilfiger, Calvin Klein, Joules, Bobbi Brown and Jo Malone, alongside John Lewis and Curzon Cinemas.
Remember, our strategy for Oxford is to secure leases outside the Landlord & Tenant Act to give us better control and choice when it comes to asset management and tenant mix.
But having leases outside the Act alone isn't enough. As I've said many times before, real choice needs rental tension and you can't have rental tension if your voids are high, and our voids are lower than ever.
In fact, our retail parks are 100% let, with no voids compared to 1.4% this time last year. Our leisure is just 0.7% voids and our shopping center voids are down 40 basis points to 2.8%. So total like-for-like voids for the portfolio now stand at just 1.8%. Administrations are also down at just 0.6%.
Now, a highlight of our efforts is Bluewater where, in the 18 months since we took over the asset management, the void rate has come down roughly 200 basis points to 3.5%, and that's no easy feat for a 1.8 million square foot shopping center.
Now, every asset has a plan and the combination of great destinations and low voids means we can implement those plans a lot easier. You will have all seen the recent press on BHS. Well, this doesn't present a problem for us; it presents an opportunity.
Besides a small exposure to them at Lewisham, BHS occupy MSUs at White Rose and Trinity. Now, retailers in both these centers are performing well and both centers have minimal voids. As a result, two key MSU occupiers in each of the two centers want to upsize into state-of-the-art flagships.
So while BHS is still a moving beast, we're ready and able to backfill their space, which will improve the offer to our consumer and increase the value of our assets.
Adding value through asset management wins is what we do best. That's why our like-for-like net rental income is up overall by more than 4.5%, driven mainly by our leisure portfolio and regional shopping centers with Trinity, White Rose and St. David's all up by more than 6%.
Asset management initiatives driving these increases include upsizes across the portfolio, giving our customers the space they need and, importantly, without sacrificing rental tone.
At Bluewater, the team has delivered upsizes for Fat Face, Next and H&M, along with 25 lettings, bringing in 16 new brands, including Michael Kors, Mint Velvet, Tesla, Aveda and Anthropologie. Overall, these new lettings were well ahead of ERV.
Now, growing net rental income keeps Martin happy and our thriving centers keep our customers happy. But I'd like to wrap up this morning by adding that we're very passionate about keeping our consumers happy: from convenient parking, to clearway finding, to tenant mix, catering and leisure lineup.
That's why it's in a Land Securities' asset where more people watch the new Star Wars flick than any other landlords. That's why Bluewater sells more gift cards than any other European asset. That's why 2.5 million people have learnt to ski in a Land Securities property. And why our annual student lock-ins generate an additional GBP2 million in retailers' sales in just a couple hours.
It's why 1 million people spend about GBP60 a second in a Land Securities center. Now, that's more than GBP3,500 a minute, GBP200,000 an hour and GBP7 million each and every day.
Thanks very much and on that note, I'll hand you back to Rob.
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Robert Noel, Land Securities Group plc - Chief Executive [5]
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Well, thanks very much, Scott. Now, before we hand over to you for questions, I'd just like to share our outlook for the current year.
In London, rental value growth should remain positive, albeit at a reduced rate. This is because we expect the supply/demand balance, which has been tipped very much in favor of the landlord as we've been telling you over the last three years, to start slowly changing as the vacancy rates rise from historic lows.
We will continue to work our assets hard, capturing reversion within the portfolio, leasing up the remainder of our development program, and we will continue to work on building our development pipeline for the future.
In retail, we have strong destinations and we also expect rental values to edge up. We are very pleased with what we own and we believe it right to have disposed of secondary retail where we think the market is becoming really challenging, particularly where net effective rents are concerned.
We're adding to our development pipeline, both at White Rose and Selly Oak, and we also hope to do so at Worcester Woods and we will continue to attract yet more customers through constantly improving their experience: great brands; great catering; great connectivity.
Now, this all assumes that next month's referendum reaffirms the UK's position within the EU. If we vote to leave the EU, we will likely be looking at a different picture.
Business which is not expecting a vote to leave would take an immediate intake of breath.
Now, we have consistently spoken before our market being driven fundamentally by the balance between occupational supply and demand. A vote to leave would bring uncertainty for business and that would likely lead to a negative impact on demand for office space, particularly in London. In turn, this would put downward pressure on rents.
Whatever the outcome, Land Securities' consistent strategy over the last six years means we are well placed to navigate through a more uncertain and volatile macro environment.
As you've just heard from Scott, our retail portfolio is in really good health, as evidenced by strong operational metrics, a load of accretive asset management plays and a development program with good retailer support.
In London, with our great leasing momentum, we have low voids and longer income streams, and while we concentrate on working up our future pipeline, a remain vote would see us able to capture reversion within our portfolio.
In the event of a leave vote, our strong balance sheet means we're well placed to take advantage of any opportunities that arise.
So as our strategy continues to deliver, it's been another strong year for Land Securities. And, as I said earlier, the business is in terrific shape.
So let's now hand over to you for questions. There will be some microphones floating around. Just one thing, if you could please state your name and company when you ask your question, then we'll have a record for the upload to the website later on this afternoon. Thank you.
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Questions and Answers
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Unidentified Audience Member [1]
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(Technical difficulty).
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Operator [2]
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(Operator Instructions).
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Unidentified Audience Member [3]
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-- do you need to, or how big does the -- does any value correction need to be for you to step back in and to restore that net debt neutral strategy?
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Robert Noel, Land Securities Group plc - Chief Executive [4]
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Is that one question or two?
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Unidentified Audience Member [5]
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You choose.
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Robert Noel, Land Securities Group plc - Chief Executive [6]
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Okay, so what we said in the statement is that we don't -- we have no intention, there's no likelihood that we're going to make any material sales next year.
The guidance is that the net debt will be roughly the same next year as it is this year. In a business our size, zeroing that down to the last few hundred million is quite difficult.
As we've always said, no asset is sacrosanct. So if we get an offer for a building, and we think we can put the money to better use elsewhere, we're liable to take it as you've seen us do so in the past.
In terms of what correction there needs to be for us to wade back in, which I think was the second part of what you asked. Who knows, we're in a cyclical market, we've always said that.
Actually, we have a very benign outlook for London over the next 12 months. I think it's unlikely that we will be wading into the market unless we've got some nice development sites we can get hold of, as you've seen us with Moorfields last year.
I think if we vote to leave the EU that the market will show a different path, because it will interrupt demand and, therefore, will move very much back into a tenants' market from a landlords' market, and that will throw up opportunity.
So I think an exit, an exit to leave would see us -- a vote for leave would see us reinvesting sooner than it might otherwise do.
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Hemant Kotak, Green Street Advisors - Analyst [7]
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Hemant Kotak, Green Street. You've got very low leverage now. You've got a very good portfolio of very high quality assets. If we vote to stay in, as you say we're in a benign market outlook for Central London for the next 12 months.
This is about as good an opportunity as you have I think to consider a demerger again. Is that on the cards? And if not, what's the strongest argument? What's potentially changed since you thought about it last, please?
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Robert Noel, Land Securities Group plc - Chief Executive [8]
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So, I haven't thought about it since taking over at Land Securities. I've been very public about this; it's is not on my agenda.
We are very happy with the balance of our business; our retail portfolio is in great shape. We are experts at it. As you've seen from what Scott has said earlier on, we're right on top of it and there's no translation over the last few years.
In terms of demerger, of course, we talk about it. You would expect us to talk about it regularly. As with every asset we talk about our capital structure and the core markets we operate in.
But, at the moment, we're very happy with it. The retail gives us a good solid earnings as long as you're in the right locations, and gives a good foil for the sex and violence, which is the London market.
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Hemant Kotak, Green Street Advisors - Analyst [9]
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Okay, thank you (laughter). Maybe one on office then if I may.
So I think you point to rising supply in 2017. What's the risk that schemes get delayed, as they naturally do, and the supply pipeline flattens out and it stays benign for longer? Could that happen? How realistic is that?
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Robert Noel, Land Securities Group plc - Chief Executive [10]
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Sure, well, why don't I pass that over to Colette, who runs our London business, she can answer that.
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Colette O'Shea, Land Securities Group plc - MD, London [11]
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Yes I think the -- it's interesting to look at the supply this year relative to last year. As I said 2015, 2016 and 2017 the quantum is pretty much exactly as we were predicting.
What I signaled last November, and again reinforcing today is that beyond that, if you look at the charts in your pack, there's probably about an additional almost 5 million square feet that's coming through in 2018 and 2019.
Clearly, people may put the brakes on that. Costs are still rising; rents are rising; so, the market I would say is more risky.
I think when you analyze where that supply is potentially coming from, it's quite interesting, because there's quite a proportion in the City, but there's also quite a proportion in the fringe as well coming through in Stratford, Shoreditch, Hammersmith.
So you're right: people may put the brakes on it, but equally they may keep going; and there's a broad spread across the whole of London.
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Hemant Kotak, Green Street Advisors - Analyst [12]
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Just one follow up point, I think that point's well made.
Interestingly enough though, the net supply number looks a lot healthier this cycle than it has in previous cycles. Would you agree with that? And is that perhaps less headline grabbing, but means that again it could be more benign for longer?
Of course, I don't know what the outcome is any more than anyone else, but just trying to throw that out there please.
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Colette O'Shea, Land Securities Group plc - MD, London [13]
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I think as you said, we simply don't know, we don't know and all we can do is report on what we're seeing at the moment.
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Hemant Kotak, Green Street Advisors - Analyst [14]
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Thank you.
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David Prescott, Barclays - Analyst [15]
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David Prescott, Barclays. A question on your London portfolio.
Capital growth at 6.3% seems to be below IPD and below some of your peers. Can you just talk us through a little bit of why that wasn't as impressive as some of the others?
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Robert Noel, Land Securities Group plc - Chief Executive [16]
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We'll let Martin answer that, because he's in charge of all valuation questions (laughter). He explains the movement of value so well.
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Martin Greenslade, Land Securities Group plc - CFO [17]
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Let me see if I can confuse you. So if we look at the portfolio, as I said it was in the West End was largely where there was an underperformance.
The first thing you've got to know is that our portfolio has been through a large amount of development. So you have a smaller core group there, and it's going to be very much driven by the lease lengths and the leases in that, so you're going to get differences.
We are not the same as the much smaller lot size that you'll see in the smaller London specialists. We are going to be different from IPD.
If we look at the West End in particular, Queen Anne's Gate is a very specific type of asset, and that has gone backwards in value. It's got a lease to the government, the Ministry of funny walks or something, and that's got 10 years left on the lease. That -- so the value in that building is actually declining towards its effective site value.
So I'm not surprised, if you actually go back over the last five years there have been years of outperformance and underperformance, I just wouldn't look at it on a very short-term basis.
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David Prescott, Barclays - Analyst [18]
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Okay, great. A second question maybe, kind of following up on Chris's question.
You've been a pretty reasonable net seller over the last three years, why is now the time to stop being a net seller given the market has risen since then, why have you decided now? Is it that the LTV has got to a level you're comfortable with, or you've reshaped your portfolio, without wanting to answer your question?
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Robert Noel, Land Securities Group plc - Chief Executive [19]
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Yes, I don't really want to go too much over old ground. We were not a net seller until November. In November we had net debt of GBP4.2 billion; in March 2010 we had net debt of GBP4.2 billion. It's only the second half of this year that we've been really net sellers.
This, as Colette very eloquently said, was just taking advantage of fantastic market conditions, and buildings that we felt, you know what, the market conditions may not be so liquid for this type of asset in the future, we'll take advantage of that.
As we said in the statement, I think there will be no material disposals on balance this year, so expect net debt to be roughly the same in 12 months' time to the nearest few hundred million.
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David Prescott, Barclays - Analyst [20]
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Thank you.
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Miranda Cockburn, Stifel Nicolaus & Company, Inc. - Analyst [21]
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Miranda Cockburn, Stifel. Just one question on interest rate.
Your capital growth is obviously slowing, means income and earnings are going to become a greater part of total returns. So if you're focusing on growing earnings, I know you've talked about it before, but 4.9% interest rate is still relatively high, is there any more that you can do on that this coming year?
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Robert Noel, Land Securities Group plc - Chief Executive [22]
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It's difficult. It's difficult to do in an NPV positive manner. The debt is long term, and has an average cost of 5.25%. I think we explore all options to do that. I would see it as fantastic potential over the long term, is the way I'd look at it. But clearly, we'll try and drive that through, as soon as we can. The 2017 bond was just an example of that.
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David Brockton, Liberum - Analyst [23]
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David Brockton, Liberum. Actually, my question follows on from Miranda's; two on the income statement.
Firstly, does the completion of Novo resi actually give you some more ammunition to pursue some NPV positive redemptions of bonds this year? Or does it become incrementally harder, because you've done the easier ones first?
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Robert Noel, Land Securities Group plc - Chief Executive [24]
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The resi and the buying back the bonds, they're completely unconnected. We have plenty of cash to do -- and fire power to do whatever we want. So we can make those sales and then -- I see, sorry I understand --
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David Brockton, Liberum - Analyst [25]
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(Inaudible).
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Robert Noel, Land Securities Group plc - Chief Executive [26]
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You're going towards the taxable point. Possibly, it makes that opportunity work. The longer dated bonds though, have much greater redemption pricing in them, so relatively, they cost more to buy back. But, absolutely, it's something we would look at.
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David Brockton, Liberum - Analyst [27]
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Okay, thanks. And the second point in relation to the income statement, the reductions you've made in terms of feasibility costs, through this year, in terms of unowned properties, have you got that as low as you want it? Could that trend up from here, is it sustainable?
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Robert Noel, Land Securities Group plc - Chief Executive [28]
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Well, I think we've always said that spending money on development, whether we capitalize or write off, through the income statement, we'll make that judgment on whether or not we should be spending that money. So it's really just an explanation for why costs are lower. We don't spend that money lightly.
In terms of where we are, the reason that it's gone down is that we had the expenditure on 21 Moorfields, which we now capitalize, because we're taking that building down.
There is an example of something that we think was absolutely worthwhile spending money on, and now we're capitalizing on it, so it doesn't come through the income statement.
So that type of cost absolutely, we'd love to keep spending it if it ends up with assets like 21 Moorfields.
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David Brockton, Liberum - Analyst [29]
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Okay, thank you.
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Oliver Reiff, Deutsche Bank Research - Analyst [30]
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Oliver Reiff, Deutsche Bank. Two questions from me. The first is on your retail portfolio. Now, that it's repositioned, what do you see as the greatest competitive threat?
And do you see a risk of the assets sort of struggling, going through an aggressive defensive CapEx cycle? That's the first.
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [31]
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As you say the portfolio's in great shape, so I don't see too many threats. I don't want to sound overconfident, but we are outperforming on all our benchmarks and targets.
I think, as Rob touched upon, rental growth isn't going to blow the lights out; it's going to be a steady uptick. So our focus in the year had to drive outperformance is going to be on the net rental income front.
We're good asset managers, and there's always stuff to be done with assets of this scale.
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Oliver Reiff, Deutsche Bank Research - Analyst [32]
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The second one was on your portfolio rating at this point in the cycle. I appreciate that a Company of your size can't move things around quickly, but would you prefer to be more overweight retail, if you could be, at this point in the cycle?
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Robert Noel, Land Securities Group plc - Chief Executive [33]
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I think the -- at the moment, with -- if I could switch out of London in the next four weeks and five weeks, in the lead up to the referendum, and was able to switch back in at the same price if we voted to remain, I would absolutely do that trick.
As you rightly say, we can't do that. You can't run your business on the basis of 50/50 bet. These markets are very well set absent a vote to leave.
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Oliver Reiff, Deutsche Bank Research - Analyst [34]
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I should have added in the event that we remain.
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Robert Noel, Land Securities Group plc - Chief Executive [35]
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Well, I don't know whether we're going to.
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Oliver Reiff, Deutsche Bank Research - Analyst [36]
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Thanks.
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Michael Burt, Exane BNP Paribas - Analyst [37]
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Michael Burt, Exane BNP Paribas. I just had a quick question on the development pipeline. From everything you said today, you're keen to get on with schemes in the retail pipeline, as CapEx is coming to an end in the office side.
Can you just maybe give us a feel for why you feel so differently about being keen to ramp up CapEx in retail, when you're taking -- well, investing less in offices, progressively?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [38]
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Sure, the difference between the retail and the London development pipelines is one, as we've talked about so many times over the last few years, London is a cyclical market.
But the real difference is that in retail, we tend to have a significant quantum of retailer support, before we even break ground.
So on Worcester Woods, for example, with a fair wind, we'll have planning permission next month. We're in discussion on 100% of the units, in that development; ditto with Selly Oak; Westgate, more than a year to go to PC and more than half the units are spoken for.
So that degree of pre-letting activity and retailer support gives us a bit more confidence, no matter what the wider market's doing.
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Alan Carter, Stifel Nicolaus & Company, Inc. - Analyst [39]
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Alan Carter, Stifel. Just this retail theme, can we just expand a bit on it please, Scott, because you say rental growth won't blow the lights out? But given the caveats that you mention that require rental growth, they all seem to be in place. The level of pre-letting is incredibly high within the portfolio.
Colette ran us through some rental increases at Moorgate Hall. I'm sure you won't say a word about Zone A rents in any of your shopping centers. But you just give an indication perhaps, on Oxford, what rental tones have done since you started the letting program there?
And then just one for Rob afterwards. Is there anything that's floated across your desk so far, that you've even been half tempted to spend money on, to buy?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [40]
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Well, shall I start with rental tones on Oxford?
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Unidentified Company Representative [41]
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(Inaudible).
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [42]
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Normally we'd expect in the early years of a shopping center development, to do a few loss-leading deals to bring in key tenants and anchors.
So the bottom line for Westgate is we're actually delighted in that, on a net effective basis, and remember we always focus on net effectives, because rent ERVs versus incentives can be whatever you want.
On a net effective basis, we're a few percent ahead of where we had expected to be in our appraisal.
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Alan Carter, Stifel Nicolaus & Company, Inc. - Analyst [43]
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Across the shopping center portfolio would you say that the pace of annualized rental growth will accelerate this year, compared to the year that's just finished?
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Scott Parsons, Land Securities Group plc - MD, Retail Portfolio [44]
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Hard to say, but I hope so.
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Alan Carter, Stifel Nicolaus & Company, Inc. - Analyst [45]
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Thank you.
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Robert Noel, Land Securities Group plc - Chief Executive [46]
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So Alan, what's been tempting us? Not very much is the honest answer. As you see, our acquisitions this year have been around about GBP100 million, split 50/50 between London and retail; for the business outside that, nothing.
Remember, we are very firmly in execution mode. We have been on a very clear path over the last five years. We have two huge levers we can pull. One is the amount of operational gearing we've got, which has affected our development program. The other is our financial gearing.
We push them pretty far forward at the beginning of the cycle. We've now got them coming right back. We think that's the right thing to do. We'll sit and wait for a bit. We're not going to be tempted into tinkering at the edges, because actually the main play is every few years.
Sorry, no more hands. It's 10 o'clock. No questions, thankfully, on the radio, the wireless, or the Internet.
So thank you very much for coming, and we'll see you in -- at the Investor Day in London this year, in September, I think. We'll see you in November, not in this room. Hopefully over the road.
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