Full Year 2017 Land Securities Group PLC Earnings Call
May 18, 2017 AM EDT
LAND.L - Land Securities Group PLC
Full Year 2017 Land Securities Group PLC Earnings Call
May 18, 2017 / 08:00AM GMT
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Corporate Participants
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* Colette O'Shea
Land Securities Group plc - MD of London Portfolio
* Martin Frederick Greenslade
Land Securities Group plc - CFO and Executive Director
* Robert M. Noel
Land Securities Group plc - CEO and Executive Director
* Scott Parsons
Land Securities Group plc - MD of Retail Portfolio
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Conference Call Participants
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* Alan Carter
Oriel Securities Ltd., Research Division - Real Estate Specialist
* Christopher Richard Fremantle
Morgan Stanley, Research Division - Executive Director
* Hemant Kumar Kotak
Green Street Advisors, LLC, Research Division - MD
* Keith Alan John Crawford
Peel Hunt LLP, Research Division - Analyst
* Michael Anthony Bessell
BofA Merrill Lynch, Research Division - Director and European Real Estate Analyst
* Michael Burt
Exane BNP Paribas, Research Division - Analyst
* Miranda Sarah Cockburn
Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst
* Remco Simon
Kempen & Co. N.V., Research Division - Research Analyst
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Presentation
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [1]
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Good morning, everyone, and a very warm welcome. There shouldn't be any surprises for you in these results. The company is in great shape, lease terms longer, cost of debt down, earnings up, dividend up another 10%. Since May 2014, we have had a clear aim to get to December 2016 with no developments on site, which are not substantially let, a longer weighted average unexpired lease term in London offices, a first-class portfolio of dominant and convenient retail destinations and lower financial gearing. And this aim's been driven by 2 broad themes. One, in London, preparing for what we thought could be an occupational supply and demand inflection point at some point in 2017, this meant having our significant speculative development program completed and let by them. Two, in retail, transforming our portfolio from one which wasn't in 2010 largely suited to the changing retail landscape to one which is. And we have delivered against this plan. At our busiest, in 2014, we had 2.6 million square feet on site in London.
Today, the only significant development we have on site is Westgate Oxford, which, as you'll hear from Scott in a few minutes, is 80% spoken for 5 months from opening. Our office lease term in London is now 10.3 years, our longest ever and the longest in the sector. The Retail Portfolio is pretty much unrecognizable compared to 2010. Gone are the large bulky goods parks, supermarkets and tailored secondary shopping centers, all sold while the market was less discerning, with the proceeds rotated into destinations like Trinity Leeds, the X-Leisure portfolio, Bluewater, Westgate Oxford and now the outlets. And on gearing, as you know, from March 2010, we set out or we ran a net debt-neutral strategy. This served us well as we progressed our plans with the portfolio. But in the second half of the last financial year, with risks rising outside the business, we allowed net debt to step down, while taking advantage of the strong market conditions to sell well over GBP 1 billion worth of weaker assets. So our LTV is low.
And as you'll hear from Martin, we've refinanced some of our debt during the year. Today, we are quite comfortable with our position because the outside conditions are difficult to read. The devaluation of sterling has been good news for manufacturers, but it's not such good news for retailers. It's also been good news for foreign investors, as evidenced by the sale of good quality assets. But as we stand here today, occupiers are a little more cautious. As I warned in November, the vacancy rate in London is rising, and this is simply because takeup is down at a time when supply has risen.
For the retailer, as we've all heard from the best of them in recent announcements, the climate is tough. The polarizing of the best destinations versus the rest that gave us or convinced us to reshape our portfolio so dramatically continues at pace. As we say, it's all about experience, and this is driven by the ability to curate a great destination.
Turning to our performance, you've seen this slide before, now updated. It shows our ungeared total property returns since March 2010 in green, against our key benchmark, the IPD Quarterly Universe, in blue. The pink line shows our total business return over the period. That's rise in net asset value per share plus dividend. And as I've said, we've achieved this while slowly halving LTV over the period, but crucially still consistently growing earnings and dividend per share. Since 2010, we've increased both by around 40%, and we retained good dividend cover. And so now, at a point where nobody knows how the next couple of years will unfold, our first class assets, well-let, combined with historically low financial and operational gearing, puts us in a good place. We can deal with any environment on the front foot. So Colette and Scott will talk about our operations in a few minutes.
But before that, let me now hand over to Martin to take you through the financial results in detail.
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Martin Frederick Greenslade, Land Securities Group plc - CFO and Executive Director [2]
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Thanks, Rob. Good morning, everyone. Look, as Rob has said, these -- the company is in great shape, and these are a robust set of results. As always, our performance reflects actions we've taken this year as well as those taken in prior years as part of our longer-term strategy. We also saw better market conditions than we'd expected, particularly in the second half when most subsectors recovered some of their first-half valuation declines.
But let's start with the headline numbers. Our profit before tax was GBP 112 million. That is down significantly on last year's GBP 1.3 billion of profit. And this reduction was principally due to the valuation deficit this year of GBP 147 million, that compares with the valuation surplus of GBP 907 million last year. Our adjusted diluted NAV per share, that ended the year 17p lower at GBP 14.17. Now that's a reduction of 1.2%, but it is up 9p on the half year. Revenue profit was up 5.5%. More on that in a moment. With adjusted diluted earnings per share, that was up 5.7% at 48.3p. Now we're recommending a final dividend of 11.7p. That brings the total dividend for the year to 38.55p, up 10.1%. And this increase, which is ahead of growth in adjusted earnings per share, reflects the fact that we have very little speculative development risk left in the business. And we've completed our program to dispose of weaker assets. The 10.1% growth in dividend is similar to the increase last year. Now I would love that to be the long-term sustainable growth rate, but that is unlikely. I am confident, however, that the total dividend for this year is a level from which we can continue to grow our dividend in a sustainable manner.
The first quarterly dividend for next year will be 9.85p. That is up 10.1% on this year's quarterly dividend. But the increase reflects this year's dividend growth rate rather than our expectation for the coming year. Our aim will be to follow the pattern of previous years of 3 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, all on a proportionate basis. Revenue profit increased by GBP 20 million to GBP 382 million. That is driven by a GBP 25 million reduction in net finance expense. This more than offsets the GBP 4 million decline in net rental income resulting from disposals, while indirect costs were broadly unchanged over last year, up GBP 1 million. Now I'm going to cover net rental income in a minute, but first, a quick word about finance costs. The GBP 25 million reduction in the net finance expense is actually made up of a GBP 31 million lower interest bill, partly offset by a GBP 6 million reduction in capitalized interest. Of that GBP 31 million of interest saving, around GBP 16 million is attributable to the GBP 400 million bond that we redeemed back in March 2016. GBP 7 million is due to lower average net debt, and around GBP 5 million is due to the sundry bond purchases that we made during the year. And that includes the bond tender that we did in February 2017.
So let's now turn to net rental income. So here, we have the changes in net rental income. What we've done is split that between London and retail. Overall, net rental income decreased by GBP 4 million, but that is made up of a GBP 10 million increase in London and a GBP 14 million reduction in retail. Like-for-like net rental income was up GBP 10 million, split fairly evenly between London and retail. And in retail, the increase mainly relates to new lettings and higher turnover rents as well as lower bad debts. But that was partly offset by lower surrender premiums that we received and the failure of BHS. In London, the GBP 4 million increase reflects new lettings and settled rent reviews, but that was partly offset by higher surrender premiums that we paid and lost income at Piccadilly Lights, following the start of the refurbishment works there. The Piccadilly Lights impact will increase in the coming year.
In total, our developments contributed an additional GBP 27 million of net rental income. And here, you've got the practical completion of 20 Eastbourne Terrace and 1 New Street Square, alongside a full year's income at the Zig Zag Building, 62 Buckingham Gate and 1 & 2 New Ludgate.
And finally, disposals. The scale of our disposal activity resulted in a loss of GBP 40 million of net rental income. And the main impact was from sales that we made in the previous financial year, that's namely our retail parks in Gateshead, Dundee and Derby, and also Thomas More Square, Haymarket House and Holborn Gate in London. Now disposals that we made this year in particular, that's the Printworks in Manchester and the Cornerhouse, Nottingham. The effect of those disposals will continue to be felt in the coming year, as they contributed some GBP 9 million of net rental income to this year's results.
So let's turn now to the valuation surplus. The value of our combined portfolio at 31st March was GBP 14.4 billion. We reported a valuation deficit of GBP 147 million. That is a reduction of 1%. And within that, we saw retail values fall by 0.8% and London by 1.3%. Within the like-for-like portfolio, that 1.4% decline includes a range of outcomes, from London offices down 4.4% to Central London shops up 6.9%, with the latter driven by Piccadilly Lights, where the valuation is now based on the new screen. And Colette will cover that in more detail in a moment. In the retail like-for-like valuations, there was, again, a range between categories, with retail parks down 4.2% and leisure and hotels up 2.3%. Shopping centers were in the middle, down 1.3%.
Now outside the like-for-like portfolio, the surplus on the development program is down to Nova and Westgate, while completed developments have been more resilient than the like-for-like office portfolio, down only 0.4%, and that is largely due to 20 Fenchurch Street.
And finally, in the appendices, and in my financial review, you'll see that rental values on like-for-like London offices are up 2.5%. Now that increase is due to a number of assets, where the valuer has moved from using net effective rents last year to using headline rents this year. On an all net effective basis, rental values on the like-for-like London offices, they were actually flat. And if you look at all our London offices, not just those in the like-for-like portfolio, net effective rents were down 1.4%.
So let's move on to debt. You'll find the usual disclosures on cash flow for the year in the appendices. What this chart shows is our net debt, how that has changed this year in blue and last year in red. And what you can see is how our net debt declined last year, particularly in the second half, during which we were significant net sellers. This year, net debt has been broadly stable. In fact, we ended the year with net debt just up GBP 22 million overall. The difference between these 2 lines, shaded here in pink, that amounts to an average lower net debt over the year of GBP 578 million. And as I mentioned earlier, this lower average net debt is responsible for GBP 7 million of the GBP 25 million reduction in net finance expense this year.
Let's now look at our financing activity. Over the past 18 months, we've changed the maturity profile of our bond debt. In March 2016, we redeemed the GBP 400 million bond that was due for repayment in November 2017. And during the course of this year, we purchased some GBP 690 million of our bonds, of which GBP 635 million occurred in February 2017 as part of a tender exercise. Related to that, we also issued a new GBP 400 million bond with a 7-year maturity and a GBP 300 million bond with a 12-year maturity. And since the year-end, we've redeemed all GBP 273 million of the outstanding Queen Anne's Gate bond. The impact of all of this activity will reduce our net finance expense in the coming year by approximately a further GBP 24 million.
Now with little change in our debt and property values over the year, our LTV is only up 0.2% to 22.2%. The bond refinancing during the year extended our debt maturities to 9.4 years, and it reduced our average weighted average cost of debt to 4.2%. If you take into account the recent Queen Anne's Gate bond redemption, then our pro forma cost of debt falls to 3.7%, while the weighted average maturity is virtually unchanged.
So let me summarize. We have a portfolio of resilient assets. Our balance sheet is in good shape. Our cost of debt is down, and our earnings are up. Taken together, that has allowed us to raise the dividend in a meaningful way again this year.
Now for news on London, let me hand you over to Colette.
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [3]
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Thank you, Martin. Our London portfolio is exactly where we wanted it to be. Our speculative development program is complete. Our average office lease length is 10.3 years, our longest ever. And our customers come from a diverse range of sectors. At our investor conference last September, I talked about our 4 areas of focus: one, letting the remaining space in the development program; two, extracting reversion from the portfolio; three, anticipating our customers' changing needs; and four, advancing our pipeline of developments and restocking the portfolio with new product.
I'll come back to where we're concentrating our efforts in a minute, but first, let me update you on our view of the market. On the next 2 slides, I'm going to talk about our supply forecast, takeup and the vacancy rate.
Starting with development and refurbishment completions, as a contributor to our supply story, the bars on this chart show our forecast today versus 6 and 12 months ago. The red dotted line shows average completions. Supply projections between 2016 and 2019 have fallen over the year. Approximately 7 million square feet has been pushed out beyond 2019, but we don't see the full impact of this because as we identified back at the investor conference, backfilling has continued, particularly as more refurbishments are brought to the market. Supply continues to grow to 2020. But by 2021, we're forecasting a fall. Back to today, supply is running above the long-term average. But takeup, the blue bars on this chart, is falling. And as a consequence, the vacancy rate, the red line, has been rising for the past 5 consecutive quarters and is now 4.7%, and we expect this trend to continue. As expected, this has led to a shift in the balance of negotiating power from landlord to occupier and a weakening of net effective rents. The future of headline rents will depend on business confidence and demand. As you expect, we monitor both closely. The investment market has held up well, with slight valuation falls in the first half, reversing in the second half due to a combination of few sellers and high demand from overseas buyers, particularly Asia-based capital, which led to record volumes traded in Q1 2017. Although volumes are down 17% over the last 12 months, again, as I said at the investor conference, the assets that have traded are particularly well high-quality buildings in core locations with longer income streams. This very much reflects our own portfolio. However, we expect a weaker outlook for the short-let, more risky assets, and that these will present opportunities for us to buy, but we won't be rushed.
Going back to our areas of focus, Martin has talked about our valuations, so I'll update you on the London activity that delivered that performance. First, development lettings. We had 540,000 square feet left to let at the beginning of the year, and virtually half is now let or in solicitors' hands. While the volume of leasing is down on the last 2 years, we've had far less space to let. Our city program completed during the year and is fully let. In the West End, we've completed or have in solicitors' hands 242,000 square feet. We achieved an average rent of GBP 76 per square foot, an average lease term of 14 years and an average rent free of 9 months for every 5 years, which is well ahead of our underwriting. More specifically, in Victoria, things have moved on at pace. The Cardinal Place tube entrance has opened, we've moved in, and the place is really beginning to buzz. If you haven't been recently, come and see for yourselves. Our focus remains on Nova, which finished in April. We've delivered 2 exceptional office buildings. And Nova Food, the restaurant quarter, is now open. The combination of high-quality product, amenity and flexibility ensures we're letting well, and delighted to have completed with Motorola, Brambles and Child & Child. This takes the scheme to 54% let and generated excellent momentum before our launch last month. We've made steady progress with our residential campaign in Victoria selling 18 units. Our remaining exposure of GBP 77 million represents less than 1% of the London portfolio. Completions are progressing well at the Nova building, and many residents have now moved in.
Now to asset management, where we're meeting all our targets. With Deloitte's new 20-year lease at 1 New Street Square, we've increased our portfolio WAULT, as I said, to 10.3 years. Our voids have risen from 2.9% to 7%, but the majority of this is Piccadilly Lights, which remains in like-for-like, while we replace the screens. More on this in a minute. We've completed GBP 13 million of investment lettings. Terms were 40% above passing rent in 43 transactions. The average lease term is 10 years if you take out Portland House, where we're doing short-term lettings as part of our asset plan. And we've completed GBP 15 million of lease regears, retaining and increasing rent by 14%, and extending leases by an average of 4 years. We've also been busy with rent reviews. Reviewing over GBP 40 million of rental income, that's 12% of our income increasing passing rent by 12%. More specifically, at Cardinal Place, we're into our second rent review cycle and had GBP 15 million subject to review. We've reviewed GBP 11 million and, after creating good evidence through a regear, increased the office rent by 14% and the retail by 23%. During the year, we also relet 113,000 square feet. At One New Change, 92% of the rent was due to be reviewed over 2 years. We've already reviewed 65%, increasing the office rent by 3% and the retail by 18%.
And we're not just focusing on our larger assets, we're looking at every part of the portfolio. For example, at 140 Aldersgate Street, we've reviewed 44% of the rent, increased the passing rent by 33%. So to Piccadilly Lights, our star performer in London, in October 2012, we completed our freehold ownership of the entire site of the world-famous Piccadilly Lights. Since then, we've instigated a clear plan to create value.
First, we moved a souvenir shop. This enabled us to reconfigure the retail to create new flagship units for Boots, Barclays and Gap. We let these on 10- to 15-year leases at 30% ahead of passing rents. In turn, these deals released a restriction, enabling us to install an additional screen, generating a further GBP 2.4 million per annum. We also safeguarded the future development at 1 Sherwood Street behind the screens, which I'll talk about later.
Turning to the screen itself. The plan was to create a block vacant possession date of December 2016, which we did. We also secured planning consent for Europe's most technically advanced digital screen. You'll be relieved to know that we're preserving the historic image the world knows and loves whilst using cutting edge and seriously cool interactive technology. It'll even react to the weather. If it rains, the screen can rain too. We've pre-let 50% of the space to Coca Cola, Samsung and Hyundai at 17% above passing rent and have just launched the marketing campaign for the 3 remaining screens. The total ERV for the screens is the equivalent of a 250,000 square-foot Grade A building in Victoria. We flick the switch in November. Whilst all this has been happening, we've been busy on our pipeline. We're tracking GBP 2 billion of assets we'd like to own as well as working on a potential 1.4 million square feet of new development. The developments are made up of 5 schemes in 3 London boroughs, where the specifications are all different, responding to our deepening understanding of our customers' future needs. At 21 Moorfields, we've secured consent for 522,000 square feet in 2 buildings. We finished demolition and committed to build to grade. All of this is in line with the plan we've shared with you previously. This approach means that we get the time-consuming belowground works out of the way and will have created a raft above the new crossrail station by June 2018. In turn, this means we can construct the new buildings in 24 months, giving us great flexibility on strategy.
As you know, we've agreed heads of terms with Deutsche Bank for a new headquarters on the site. Negotiations are progressing, and we'll update you with further news when we can. At Nova East, we're continuing to progress designs and secure LUL approvals ready for building 196,000 square feet. And next door, the Victoria Palace Theatre completes its refurbishment, ready for the eagerly awaited opening of Hamilton in November. I said I'd talk more about 1 Sherwood Street, behind Piccadilly Lights. The new screen is being constructed on a standalone structure, which frees up everything behind. We've secured consent for 142,000 square feet and plan to start detailed design later this year. In Southwark, we've obtained consent for 134,000 square feet at Sumner Street and anticipate an earliest construction start on site in October 2019. We're also well underway with a feasibility study for 360,000 square feet at Red Lion Court directly on the Thames.
So in summary, we're all over our portfolio. We've completed and virtually let the 3 million-square-foot speculative development program and transformed the portfolio to one that's well positioned for current market conditions and the short-term outlook. We've 1.4 million square feet of developments in the pipeline. And we'll be ready to start as soon as we think conditions are right, revolving our product to reflect shifts in workplace trends and the changing needs of our current and future customers.
And with the portfolio in such good shape, the team are focusing more on future opportunities. I'll now hand over to Scott.
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Scott Parsons, Land Securities Group plc - MD of Retail Portfolio [4]
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Thanks, Colette, and good morning, everyone. It's been a productive year in our retail business. And in a challenging retailer and economic environment, we've delivered a good set of results, all driven by our view that experience is everything. And alongside our ever-present focus on asset management, we've been particularly active on the transaction front. So I'll kick off this morning with a few updates that reinforce how we're proactive and disciplined when it comes to capital allocation.
In the last quarter of the financial year, we sold the Cornerhouse in Nottingham and the Printworks in Manchester. Now both assets were sold after adding value through our asset management strategy. And overall, the sales generated proceeds of about 5% over book values. As I've highlighted before, when it comes to our leisure, our focus is on a family-friendly offer that trades well all day long. Now Cornerhouse and Printworks were our last 2 wet-led leisure assets. And today, our portfolio comprises only schemes with a broad offer and all anchored by the dominant cinema for their catchment.
And on the hotel front, we've now sold all 7 of the hotels where Accor exercised their break options in early 2016. Now I've spoken a lot about how our hotels are underpinned by vacant possession values that are higher than their investment values. Now buildings that are worth more empty than they are when they're fully let are a rare treat for landlords, and I'm pleased to report that our total sales proceeds were about 9% ahead of book values. Our remaining 22 Accor hotels are all let without breaks until 2031 and saw income grow by about 3.4% over the financial year. Of the remaining Accor hotels in our portfolio, about 70% by value are located in London. And lastly, on the sales front, a few days post 31 March, we exited our metro joint venture with Delancey, selling them our 50% stake in Shopstop in Clapham Junction. Delancey simultaneously sold their 50% stake in Southside, Wandsworth to Invesco, who are now our JV partners. And as part of the transaction, we've taken over asset management of the center.
Now Southside was our only property where asset management was outsourced. And in an environment where consumer experience is critical, I feel much better knowing that the Land Sec team and not a third-party is delivering that experience across every single asset within our portfolio. And speaking of delivering on consumer experience, since 31st March, we've acquired a GBP 330 million portfolio of 3 outlet centers from Hermes, where we're excited about achieving strong growth in the years ahead by applying some of the magic that we've clearly demonstrated at Gunwharf Quays. The portfolio is made up of centers in Braintree, Street and in Castleford, which is right next door to our Xscape Yorkshire leisure destination.
Now our business plan is focused around working closely with our strong brand partners to improve the consumer experience, just like we've done at Gunwharf Quays, by improving the catering and retail mix and increasing average dwell time and spend. The outlet model for the very best assets enables greater control over brand mix because the typical lease is outside the Landlord and Tenant Act, and break options provide the landlord with the opportunity to replace brands that aren't meeting turnover targets. Now at Gunwharf, this hands-on strategy has really paid off. Over the past 5 years, our efforts have driven average retail sales densities up by over 40%. And we're now the largest owner operator of outlet assets in the United Kingdom. So we bought assets where we're confident that we can deliver a fantastic experience, but we're also developing them.
At Westgate, we're on time and on budget for opening in the autumn, delivering a much needed and eagerly anticipated retail heart for the city of Oxford. John Lewis has begun fitting out their full offer department store. Curzon is fitting out the cinema, and Next and Primark will soon be taking possession of their units. The amazing rooftop restaurants are all but fully let. Westgate Social, our new foodie quarter, is fully let with cool operators that are all new to Oxford. And the mix of retail brands has gone from strength-to-strength. We're now 71% let, with a further 9% in solicitors' hands. And since the half-year, we've signed pre-lets with brands like Hobbs, Cath Kidston, Seasalt, Levi's, Molton Brown and a flagship store for UNIQLO. We're also really proud of what we've achieved with our community employment program at Westgate and across the retail business, which has facilitated training, helped fill skill shortages and provided job outcomes for local people. Elsewhere in the portfolio, we've enjoyed similar success and retailer support for our very selective development and reconfiguration initiatives. The leisure extension at White Rose was 100% pre-let and achieved practical completion in March, with the 6 new restaurants and the state-of-the-art IMAX cinema opening soon. We're now on site at Bluewater, redeveloping the former Glow space to expand the thriving cinema, catering and leisure, which is about 80% let or in solicitors' hands. And our potential development at Selly Oak in Birmingham has more than 90% of the retail pre-let or in solicitors' hands.
Throughout the portfolio, we've continued to deliver and agree upsizes for key MSU retailers from H&M at Bluewater in Glasgow, to Next at White Rose, to New Look at Trinity. And on top of the MSU upsizes, we've driven some great wins on shop units, leisure and catering, too. Our focus on destination centers, combined with our asset management skills, has enabled us to develop strong partnerships with key brands, partnerships that will be reinforced with the acquisition of the 3 new outlet centers. We got to know Michael Kors, for example, when we added them to the lineup at Gunwharf Quays. Our partnership approach continued with lettings to them at Bluewater, then Cardiff, and then Westgate. D&D's first restaurant outside London was at Trinity Leeds. We then brought them to One New Change, and they've recently opened their latest restaurant at Nova in Victoria. Curzon will open in the autumn at Westgate after working with us to bring a much requested cinema to residents of Victoria. The list goes on and on with multiple deals with brands like Victoria's Secret, Tommy Hilfiger, Coach, Gant, Hugo Boss and Estée Lauder, whose 5 brands have all signed up at Westgate, each under their own fascias. Now that's the only center outside London to offer this.
So overall, disciplined capital allocation and expert asset management with a genuine focus on consumer experience and partnering with our customers adds up to some reassuring figures. And I'm pleased to report that we've had a solid year of performance across the portfolio. We completed over 120 investment lettings over the financial year equating to more than GBP 15 million in rent per annum, with another GBP 3 million in solicitors' hands. Like-for-like voids are 2.8%, up slightly, mainly driven by the BHS at Trinity, which since the year-end is now all spoken for, and some strategic voids at Bluewater to accommodate retailer upsizes and to facilitate the introduction of new brands to the center. Administrations are down at just 0.4%. And importantly, despite the challenging market and bumps like BHS, we continue to achieve growth in like-for-like net rental income, with our ever-active asset management driving growth of over 2% over the financial year.
Moving on to sales and footfall, we continue to outperform the benchmarks. Our same center sales demonstrate that a great destination can perform well even in an omnichannel world. The BRC benchmark for same center physical store sales, shown in blue, was down 1.9%. Now if you include online sales, shown in green, the benchmark was up 0.3%. But our same center retail sales were up 1.7%. So they were outperforming sales growth for bricks and mortar retail as well as all retail, including online. While the market has been tough for fashion and department stores, we've seen particularly strong performance from sportswear, jewelry and health and beauty. And highlights this year include travel, where our customers like Virgin Holidays and Kuoni sold almost GBP 50 million of holidays at Bluewater alone. That's up 24% on last year; and Trinity Kitchen, where our fun and vibrant street food vans saw sales increase by more than 25%.
So to wrap things up, we're pleased with our performance in what's been a challenging year for retail. We've sold in line with our strategy and our business plans, and we've bought and developed selectively all with strong retailer support. At our autumn results in November, I'll look forward to updating you on the integration of the outlets portfolio and, of course, to update you on Westgate's grand opening.
Thanks very much, and I'll hand you back to Rob.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [5]
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Thanks very much, Scott. So before we hand it over to you for questions, I'd just like to summarize our outlook for the year. In London offices, as you've heard from Colette, our outlook for supply hasn't changed significantly from our previous estimates. As we've said, we've entered a period of above-average supply and below-average demand. As we explained in November, the vacancy rate is rising. And so we expect net effective rental values to weaken further, unless we have more certainty over our future outside the EU.
From a valuation standpoint, any negative effects will be more keenly felt by vacant and short-let buildings. Now this is why we have been so keen to have a long weighted average on expired lease term and our developments let at this point. There will no doubt be many twists and turns in the weeks and months ahead. But remember, whatever happens, there will always be demand. Even in the nadirs of 1992, 2002 and 2009, takeup never dropped much below 75% of the long-run average. As ever, we will watch the supply outlook like a hawk. Particularly the vacancy rate and where it peaks, remember, this is what gave us the conviction to be first out of the blocks with our successful speculative development program from 2010. And as you've heard, we have a 1.4 million square foot program which is being made battle-ready, and we'll focus on growing this.
In retail, price rises are difficult for the consumer and difficult for retailers. However, as you just heard from Scott, we believe our strong destinations will continue to serve us well, and we remain pleased with our current position having sold our secondary assets during 2014 and '15. We'll continue to work the portfolio to keep it ahead of the curve, as you've seen with the sales of some provincial hotels, Printworks and Cornerhouse, and the acquisition of the outlets. In November, I said I thought we were in the right position for the current environment, and that remains our view today. Uncertainty usually provides opportunity. And although I think it's unlikely we'll be big net investors this year, we are fully prepared. In a market whose direction is difficult to read just now, we have great assets, a strong balance sheet, all of our options open, exactly as we planned and articulated over the last couple of years.
And on that note, I would now like to wrap up and hand over to you for questions.
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Questions and Answers
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [1]
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So there are some microphones in the armrests next to you. Remember from last time, keep the button pressed while you're talking. And also, I'll be really very grateful if you'd give your name and company name, so we've got it for the playback record later on. Thank you.
A sea of arms. Remco, you're in front. You go first.
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Remco Simon, Kempen & Co. N.V., Research Division - Research Analyst [2]
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Remco Simon, Kempen. You mentioned that it's unlikely that you will be a big net investor this year. Could you tell us a little bit more about what the signals are that you're looking for to change that position? Is that very simply prices coming down x percent? Or is there more to it?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [3]
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Not at all. I mean, we are ready to buy fully locked and loaded. The stuff we'll be after is the more risky assets. We simply can't tell when we want to go into the market. The environment is really very difficult to read at the moment. We simply do not know how the negotiations are going to proceed with Brexit, what that means in the long-term or the short-term. I don't think we'll miss out on much if we wait. So we'll be patient and disciplined as ever.
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Remco Simon, Kempen & Co. N.V., Research Division - Research Analyst [4]
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And you alluded to in your presentation that the market has held up a bit better than you expected probably 6 months or 12 months ago. Where do you see value at this point in time? What's the point where you would like to step back in? Can you give us some indication of where your view of the market is compared to where the market trades at the moment?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [5]
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Well, I mean, we stepped back in 48 hours ago, Remco, when we spent GBP 330 million on our portfolio of outlets, which we've been monitoring for quite some time, a highly accretive deal in a sector, which we've already demonstrated our expertise. And we're delighted to have bought them. So I mean, I can't tell you when and where we'll be buying, I'm afraid. You'll just have to trust us to do the right thing at the right time.
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Remco Simon, Kempen & Co. N.V., Research Division - Research Analyst [6]
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Fair enough. And one question on the outlets portfolio. How do you see the future for the outlets business? Is this the first step of growing that business further? And secondly, some of the leading parties in the outlets industry have all built up pan-European platforms like a Value Retail or McArthurGlen. Could you see yourself going that direction as well with outlets? Or is it purely U.K.?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [7]
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So let me answer the European question and then let Scott answer the question about what we're going to do with our outlets. I mean, the -- I think it is unlikely that Land Securities will go into the Continental European market. We've been very clear that we're a U.K. business. Our shareholders are very happy that we're concentrated on being in the U.K. It's a market we know every corner of. And I think in our real estate market, we're happy to know every corner of it. So no European acquisitions for the time being. Scott?
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Scott Parsons, Land Securities Group plc - MD of Retail Portfolio [8]
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Yes. In terms of growing the outlet portfolio, I'd apply the exact same logic that I would to the wider portfolio. We would focus on the best destinations or assets that we thought we could turn into the best destinations. And the joy about the outlet model is that about 80% of the rent is base rent. And that grows typically at RPI. Think of that as your meat and 2 veg. The remainder of the rent, think of that as your pudding. And if my brands aren't serving me a big enough portion of pudding, I'm going to order something else. And I like having that control over the brand mix and the consumer experience.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [9]
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Miranda.
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Miranda Sarah Cockburn, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [10]
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Miranda Cockburn from Stifel. Just a few questions. Firstly, on London, I saw that you underperformed the IPD. I was a little bit surprised, given that your lease longevity versus obviously others with shorter leases. Just wondered if you could give a bit more detail on that. Secondly, just in terms of 20 Fenchurch Street, can you give us some indication of the valuation move in the second half of the year just obviously given the Cheesegrater sale? And the last question was really just on the debt book. Can we expect more work on that over the next -- over the forthcoming year? And where could you see that 3.7% go to?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [11]
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So Amanda, if I could answer your IPD question, and I'm going to hand over to the chancellor to talk about 20 Fenchurch Street and the debt book because he's got all the figures at hand. IPD is an index that we measure ourselves against because there is no alternative. The IPD Quarterly London Index is a benchmark of not very many tens of millions of properties with an average lot size of 20 million, I think 24 million. So for us, it is very difficult to take a portfolio of GBP 8 billion with average lot size of 100 million and outperform an index such as that. We've put it in there because you will like us reporting against the IPD Index. And to be within 1% is -- I don't think you can -- it's such a wafer-thin margin that I'm not even going to spend any more time on it. So I'll now hand it over to Martin.
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Martin Frederick Greenslade, Land Securities Group plc - CFO and Executive Director [12]
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So 20 Fenchurch Street, the figures are in the joint venture note. So the building was valued at GBP 1.135 million for 100% at 31st March 2017. That is up 5.6% across the year. I can't quite remember where it was at 30th September, but I think it was broadly flat across the first half. So that growth has come in the second half. In terms of the debt book, what -- first thing I'd say is that I'd have to be careful here because our bonds are listed securities and the MAR police are always listening. So in terms of what we intend to do there, we will always look at our debt book and see whether or not there are ways of refinancing it, in a way that we think is good for shareholders. But we are mindful of the cost of doing that. In terms of where I can see our cost of debt going. Well, if you look at -- basically, one way you can reduce your cost of debt is to leverage up. So just buying the outlet center drives down the cost of debt from 3.7% closer towards 3.4% or 3.5% just on that transaction alone. So we absolutely will try and manage our debt book, but we will be very mindful of the frictional cost of doing so.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [13]
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Chris, you had your hand up?
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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [14]
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Just wanted to ask you on -- sorry, it's Chris Fremantle from Morgan Stanley. I just wanted to ask you on the retail as you talked about like-for-like growth of 2%. I just wondered -- in that like-for-like portfolio, what are you spending, if anything, in terms of CapEx to create that growth? There's clearly a bit of a theme about spending to create growth, but I just wondered if you can just clarify a little bit what you're spending on, on that growth.
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Scott Parsons, Land Securities Group plc - MD of Retail Portfolio [15]
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Yes. Our defensive CapEx is relatively small, about GBP 9 million last financial year. We're looking at slightly more than that, just over GBP 12 million, I think, for the year ahead. The rest of our CapEx is accretive like Westgate or White Rose's leisure extension.
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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [16]
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Okay. And just one other. You talked about the Deutsche Bank heads of terms. How likely is it that you get clarity on that particular development scheme before the Brexit negotiations are concluded?
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [17]
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I mean, I think -- I mean, we have a lot of clarity at the moment in that we finished the demolition, and we've now committed to start the pilings. So we're actually ready to build or we will be from next year. In terms of Deutsche Bank, as we've said publicly, as have they, we're in detailed negotiations with them. We said, at the time that the announcement went out, that those would take quite a few months because it's a big building, and it has the potential to be complex. And as and when we've got more information, as I said, we'll let you know. But the most important thing is we're sticking with the original business plan, which is to get the site ready, so that we can build and go with the pre-let.
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Michael Burt, Exane BNP Paribas, Research Division - Analyst [18]
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Michael Burt from Exane BNP Paribas. You've made very clear there's a very strong bid in the market of long-let assets, and you've also made clear that you think the net effective rents are softening slightly in London. Bearing that in mind, it looks like purchasers of those assets would be willing to buy them at an IRR on a forward-looking basis, which is potentially below your cost of capital. Are you still very much committed to those assets forming a key part of the portfolio going forward should you continue to still own them?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [19]
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Well, with a total property return of 3.6%, our entire business is performing at lower than our cost of capital this year. So I mean, we are where we are in the market cycle, and there's nothing we can do about that. I mean, I think we've been very clear, very clear about where we wanted to be at precisely this point in time, and we've been very clear about that since midway through to 2014. We've sold all the assets we want to sell. We've got our gearing to where we wanted to get it at this point. We've got our lease term as long as possible. What's not to like? I would add that no asset is sacrosanct. And if we get a bid for a building, from which -- the proceeds from which we can put to better use elsewhere, then we'll always do that. If it's an outstanding bid, always. But we're not planning to sell anything more.
Hemant. And then, Alan, out there at the back. Sorry.
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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [20]
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Hemant Kotak from Green Street Advisors. Maybe just the flip side of that conversation. So clearly, you're doing all the right things, long lease assets, high-quality assets. The share price is obviously trading where it is, and there's big discounts there. So clearly, shareholders are disagreeing. You're out in the market buying assets at full value when you give it some consideration that you also have the option to buy the shares, we've talked about this in the past, but does the acquisition in the outlets, does it represent such an outsized opportunity that you're using your pretty high cost of capital at the moment to acquire these assets?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [21]
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So the -- I mean, the acquisition of the outlets has to be considered in the context of sales we've made this year as well. I've been very clear, I don't think we'll be big net investors this year. I've said that already this morning. I really don't think we will for precisely the reason you've asked. It's a very difficult story. And I know where you're going to go to next, which is why don't you sell more buildings and hand money back to shareholders? But we also have been very clear on that, which is the time we'll think about what we do with our capital is the time that we want to reinvest in scale. And we are absolutely not there yet. What you see with the outlets is a very sensible working of the portfolio on what is a very highly accretive deal with a start yield of 6.5%.
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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [22]
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And then just a question on the Central London office guideline. So I've made it all the way to the appendix. And I'm looking at Slide A22, which is your pipeline. So you've also said at the front where you expect the spike in supply to be in 2020. What is the likelihood that, that shifts out? Because you're obviously expecting a trough in '21. Now given what we expect for demand, the fact that demand is softening, and there's a great deal of sense in the market with starting developments with pre-lets. Could this really push out quite materially?
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [23]
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I think it's -- I mean, this is based on the best information that we have today. And I think just to recap on what I've said previously, which is that if we look at between sort of '16 and '19, 7 million square feet of space has moved out. Now you would expect that to have quite an effect on potential supply. But what's actually come through is nearly 5.5 million square feet of backfill space. And the interesting thing about that is that more than half of that is refurbishments, and a big proportion of it also is schemes that are sub-25,000 square feet. So there's a lot of moving out, but there's also backfilling. I mean, in terms of then going beyond '19, what we've shown you today is our best estimate of where we think things will be, because, obviously, there'll be a runoff of completion of what we're seeing coming through in that 2019 period. But we're definitely sort of indicating that we see things are going to start coming off by 2021.
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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [24]
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Just to confirm, best estimate means not early as possible delivery, which is what some of these charts typically show?
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [25]
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These are our earliest anticipated delivery dates. But by best estimates, we go through and we analyze the schemes, and we believe these are about right in terms of being the earliest anticipated delivery dates.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [26]
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Alan. Then we'll come in the front again.
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Alan Carter, Oriel Securities Ltd., Research Division - Real Estate Specialist [27]
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Yes. Alan Carter, Stifel. Actually, it follows on quite nicely from that question from Hemant. You got about GBP 600 million in net rental income at the moment. The portfolio is only 5% reversionary, mainly because the retail element is still over-rented. That gives you about GBP 30 million of reversion. But 1/3 of that reversion, about GBP 10 million, relates to the London office portfolio, where significant lease expires occur in the years that you indicate there could be potential maximum new supply, 2021 -- 2019 through to 2021. So just how resilient or how confident are you in view of your thoughts about London office rental market, that that ERV on those lease expires and breaks is sustainable? Are there specific assets you can talk about that are extremely resilient or potentially very vulnerable?
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [28]
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I mean, I think what I would identify that by the time you get to 2021, you're into the likes of a One New Change, which is coming through its cycle from completion. I mean, where we're sitting at the moment is we're pretty confident. And this is why I was sort of identifying about the volume of reversion that we've done through rent reviews. What we do is we don't leave things right to the lease expiry date. What we actually do is we're talking to those customers ourselves because they don't want to leave things right to the end and trying to understand what their business needs are. And again, this year alone, we've managed to regear a number of leases. So we will be working with them now, and we are talking to the likes of the New Change customers along with Cardinal, understanding what their business needs are, and whether we can retain them in the building or even move them elsewhere. So the main message at the moment is that we're keeping an absolute track on that and trying to understand exactly what our consumers are doing and what their business plans are.
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Alan Carter, Oriel Securities Ltd., Research Division - Real Estate Specialist [29]
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Okay. I mean, that's great and not unexpected, but can you just give a comment on what that -- you think that ERV will be when you get to that point in time in view of your comments about where London rents are going? So what I'm getting at is, is that ERV at risk? And I'm just kind of mindful of the comments Martin made about future dividend growth potential. I mean, it's a relatively low level of reversion within the overall portfolio. And if that is likely to come down, then obviously there -- it begs further questions.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [30]
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So the difficulty in forecasting is -- manifests itself perfectly by the papers that are written by people in this room. And they change -- seem to change their minds every 6 months. And if I look at some people who thought that city rents in 2018 were going to be GBP 80 a square foot a year ago, and they now think they're going to be GBP 55 a square foot, it sort of answers the question for you. No one knows.
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Alan Carter, Oriel Securities Ltd., Research Division - Real Estate Specialist [31]
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Well, I'll pick you up on that because you've actually -- you did say, quite frequently, you thought London rents would fall 25%. So...
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [32]
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I never said London rents will fall 25%. I said we wanted to get our developments completed by now, and we think the outlook for rents is weaker. And the outlook for rents is weaker, and that's all we're saying. We simply don't know how far. You have asked me in the past, Alan, whether I think rents could fall 25%, and I said, "Absolutely, they could." And they have done 3x in my career already. Keith?
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Keith Alan John Crawford, Peel Hunt LLP, Research Division - Analyst [33]
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Keith Crawford, Peel Hunt. Just on the Deutsche negotiations or discussions, is that on both buildings effectively or just part of the proposed development?
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Colette O'Shea, Land Securities Group plc - MD of London Portfolio [34]
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I mean, I can't really talk in great detail about that, but what I would sort of guide you to is that we've got planning consent for over 0.5 million square feet on that space. They want a headquarters buildings. Inevitably, when we get interest and we start developing the design for these buildings, we tweak them to make them appropriate for the demand at the time.
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Keith Alan John Crawford, Peel Hunt LLP, Research Division - Analyst [35]
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Okay. Rob, now just from this presentation and the previous presentations, you presented your position extremely clearly. You reached your objectives. The company is in a different place to where it has ever been before, incredible strength, incredible resilience, not overdistributing. And I wouldn't be suggesting for a second you should then go out and do something crazy like selling assets. Some of which may actually rise quite well in the next couple of years, despite the conditions because they're so well-let, and they are fit for purpose. But shareholders about 8 years ago did, not under this management team, admittedly, raise money at GBP 2.70. And it was a big issue as a [5 for 8]. Now when you look at the share price charts, this sort of thing starts to come up. So I was just trying to think whether it was anything more one can do for investors. I mean, obviously, some companies are going to sell up definitely. Some are, if given special divs, the investors have had the special divs, even if the shares haven't moved very much. I mean, what about American-style treasury operation very slowly, very gradually reducing the number of shares? I mean, I'm not trying to be clever about this because I don't know either. I think maybe a bear market's on the way soon anyway. But the smaller number of shares, less to pay out, dividend payments reduced, that's sensible. Is that a possibility? Because it's extremely difficult from your present base to be sure that the hopper -- the size of the hopper you're going to require, encouraging as today's comments are, is going to be very big to move the dial. Meanwhile, the shares are good value.
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [36]
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Yes. I think, Keith, I mean, the -- we have been really clear on where we want to be at this point. We are looking at a fairly unclear or muddy environment outside. And so we're happy where we are at the moment. Where we go in the future, who knows? I think anything to do with buying in shares, et cetera, we'll absolutely have to wait until we want to reinvest in scale, as we've consistently said.
Sorry, there's one question, second row over there. Mike.
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Michael Anthony Bessell, BofA Merrill Lynch, Research Division - Director and European Real Estate Analyst [37]
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Sorry, Mike Bessell from Bank of America. One quick one on a completely different tack, please. At the end of your chief executive statement, you note the lack -- the need for infrastructure, including much-needed homes. Is this alluding to a potential third leg of Land Securities' operations going forward? Are you examining PRS and sort of seeing what other people are doing there with a view to that being a future extension of the business?
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Robert M. Noel, Land Securities Group plc - CEO and Executive Director [38]
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I think you're probably reading too much into this, Mike. I mean, the affordability of London is very important for all of our office customers and for attracting talent into the city. That's why I think it's really important. And as to whether Land Securities should get into the PRS market, why not? This is a massive megatrend. But I can tell you it will be no time soon because we need total cross-party political support and a proper planning regime before we do.
Okay. Well, I think we're done. Thank you very much indeed for your attention. Sorry, we've run over a bit. I'm sure you found it interesting. Well, I hope you did, and we'll see you in November.
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