Half Year 2020 Land Securities Group PLC Earnings Call
Nov 12, 2019 AM UTC
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LAND.L - Land Securities Group PLC
Half Year 2020 Land Securities Group PLC Earnings Call
Nov 12, 2019 / 09:00AM GMT
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Corporate Participants
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* Colette O'Shea
Land Securities Group plc - MD of London & Retail Portfolios and Director
* Martin Frederick Greenslade
Land Securities Group plc - CFO & Director
* Robert M. Noel
Land Securities Group plc - CEO & Director
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Conference Call Participants
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* Alan Carter;Stifel Nicolaus Europe;Analyst
* Christopher Richard Fremantle
Morgan Stanley, Research Division - Executive Director
* Jonathan Sacha Kownator
Goldman Sachs Group Inc., Research Division - Financial Analyst
* Marc Louis Baptiste Mozzi
BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team
* Robert Alan Jones
Deutsche Bank AG, Research Division - Research Analyst
* Sander Bunck
Barclays Bank PLC, Research Division - VP of Real Estate Equity Research
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Presentation
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Robert M. Noel, Land Securities Group plc - CEO & Director [1]
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So good morning, everyone, and a very warm welcome to our half year results presentation.
We talked about our direction of travel in May, and most of you attended our London-focused Capital Markets Day in September. So you know we went into the year focused on progressing our development program, improving the mix at our retail destinations, further improving our sector-leading sustainability credentials and innovating in construction products and services. And we've done exactly that, as you'll hear today.
Unsettled politics and a tough retail market have been our backdrop, but as you will have seen this morning, we've produced resilient results. This is due to the quality of our assets and our conservative capital structure, with earnings up marginally and the effects of the decline in retail values on EPRA net assets limited by the diversification of our portfolio in recent years.
Before we get into the meat of the presentation, I just want to remind you of our portfolio breakdown both by sector and geography. As you know, we merged our operating units of London and retail during the first half, as we're increasingly applying skills from across the business on all assets. At our Capital Markets Day, Martin set out the resegmentation of our reporting into Office, Retail and Specialist assets, along with a reconciliation to our previous reporting, which is also on our website. You can see the breakdown by classification and subsector here, and we will refer to these as we go through the presentation.
By geography, 67% of our portfolio is now in London, shown on the right-hand side of this slide. And this is set to grow as we continue to work our way out of our remaining retail parks and a potential GBP 2 billion of development costs to come in our pipeline over the next few years, which is all in London, as you know.
As Marcus reported at our Capital Markets Day, the London office occupational market remains healthy. And we put lots of market data in the appendices to your packs. The flight to quality and convenience continues, and our Office portfolio is well set up for this and growing. The portfolio is pretty much full. Myo and Fitted, which most of you toured in September, have landed well with customers and are both well ahead of plan. As to progress with our development program, just over 900,000 square feet was on site at 30th of September, with over 100,000 square feet started since. And we expect to start a further 400,000 square feet by the time we report to you in May. This means we should have 1.4 million square feet underway in the next 6 months, of which 40% has been pre-let. Delivery of this space is in '21 and '22, at a time when we think the supply of good-quality space will remain constrained.
Our Specialist assets are holding up, with leisure and hotel assets at virtually full occupancy. Though the food and beverage sector is facing widely reported headwinds, our dominant destinations remain popular with the consumer and in demand from operators, with U.K. cinema attendance significantly up year-on-year. Hotel revenues have held up. And at Piccadilly Lights, our short-term leasing is going well, with 90% of our target for the financial year already committed.
The retail market is tough, as we all know, but it's nuanced. Outlets are holding up well, as is London retail in the main, while regional shopping centers and retail parks remain difficult as we all adapt to structural change and a more cautious consumer. There were a number of high-profile CVAs and administrations during the period. And limited demand, combined with poor investor sentiment, has impacted rental and capital values. Having said that, these 2 segments make up just 19% of our portfolio as a whole, and our performance against national benchmarks for footfall and sales is excellent. Same-center sales excluding the positive effect of automotive sales were down by 0.7% on the first half but versus the benchmark which was down 3.8%.
Martin will take you through the numbers and a breakdown of valuation in a few minutes, and Colette will cover all of our activity throughout the portfolio in more detail after that.
I talked in May about our ambition to push on with our sustainability agenda. Caroline covered it in more detail at the Capital Markets Day and reinforced how it's integrated into pretty much every aspect of what we do. We see this as a crucial part of having a license to do business with our communities, our customers and our partners; and in having the support of both our employees and increasingly our investors. We were really pleased to be recognized again in September as the sector leader, ranking first in the U.K. and Europe among our peer group, by GRESB; and as European leader in the Dow Jones sustainability benchmark. As planned, we continue to push on. Having been the first real estate company in the world to be recognized for our science-based carbon reduction targets, we have now raised our targets to reflect new climate science which shows that the world must remain within 1.5 degrees of warming. We're committed to being a net 0 carbon business by 2030. And at Sumner Street, we'll be developing our first net 0 carbon building.
So now to our results, and I'll hand over to Martin.
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Martin Frederick Greenslade, Land Securities Group plc - CFO & Director [2]
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Thank you, Rob. Good morning, everyone.
Look, as Rob said, our business has delivered a resilient performance for the first 6 months, and we remain in a strong financial position. So let's go through the headline numbers.
Revenue profit for the 6 months was GBP 225 million. That is up GBP 1 million or 0.4%, and that's despite the challenges that we see in the retail market. Our valuation deficit was GBP 368 million, leading to a loss before tax of GBP 147 million.
Adjusted diluted earnings per share were up 0.3% to 30.4p. EPRA NAV per share was GBP 12.96. That is down 3.2% or 43p since March. And finally, our dividend is 23.2p for the 6 months. That is up 2.7%.
So turning now to that GBP 1 million increase in revenue profit. And I can safely say that this is by far the simplest slide that I have ever had to present because, as you can see, revenue profit was up by GBP 1 million due to a GBP 1 million increase in net rental income, while all other costs were flat. So let's really get under the skin of that GBP 1 million movement in net rental income. Look, as I explained at the Capital Markets Day in September, we're one business and the London and Retail portfolio split is a thing of the past. Our segmental reporting, that now reflects the predominant use class of our assets grouped into Office, Retail and Specialist. And what this chart shows you is the changes in net rental income, and what I've done is I've broken those down. I've broken down the movement in like-for-like net rental income into those 3 use types.
So overall net rental income increased by GBP 1 million. Like-for-like net rental income, that was up GBP 4 million, with Office up GBP 3 million, Retail declining by GBP 2 million and Specialist up GBP 3 million. The GBP 3 million increase in like-for-like Office, that was due to GBP 1 million from rent reviews, principally at new Street Square. And GBP 2 million came from new lettings, mainly at Nova and 10 Eastbourne Terrace last year but also the new lettings at Myo this year.
Turning to Retail. And remember this is all retail, including our London retail. The like-for-like rental income declined by GBP 2 million. The impact of voids, relettings, rent reviews and surrender receipts, those broadly balanced out. We saw GBP 1 million improvement in bad debt and lease incentive provisions compared with this time last year. Now over the past 6 months, there have been a few high-profile administrations and CVAs, notably Arcadia and Debenhams, although we did take a provision against lease incentive balances for these 2 retailers at the end of last year. Lost income from administrations and CVAs, that totaled GBP 3 million in the period. Taking into account the timing of store closures and changes to rent, I would expect the second half decline to be around a further GBP 3 million. That is before taking into account any additional provisions for lease incentives that may be required. Now there's more information, as Rob said, on CVAs in the appendices.
On to Specialist, where like-for-like net rental income increased by GBP 3 million. Now GBP 1 million comes from lower lease incentive provisions compared with the prior year. And GBP 2 million was driven by increased short-term lettings at Piccadilly Lights, where we are really pleased with the progress.
So back now to the remaining elements of the movement in net rental income. What I've done is I've combined proposed developments, the development program and completed developments into one. And these saw GBP 1 million reduction in net rental income as we began vacating Portland House prior to redevelopment next year. Income from Portland House will remain at around its current level in the second half. Acquisitions had a GBP 1 million negative impact due to empty rates at Lavington Street. And we also sold Livingston Retail Park last year, which resulted in a GBP 1 million lower net rental income in this period.
So let's now look at the valuation. Set out here is our combined portfolio of GBP 13.4 billion split into various asset classes. Overall, our assets reduced in value by 2.8%, but once again there was a considerable variation in performance across the asset classes. Office, which makes up half of the combined portfolio by value, that saw no overall movement in valuation. Like-for-like rental values were up 1.9%, and there was a 5 basis point outward movement in yields. Within the Office segment, like-for-like assets, they were up 0.3% in value. And that's primarily because of an increase in rental values in Victoria. Our office development program increased in value by 3.8% largely due to construction risk reducing at 21 Moorfields, while proposed developments declined by 8.1%. And that reflects the valuation of Portland House now being done on a residual basis.
Moving on to London retail. That's the retail in Central London below our offices, plus our suburban London retail assets. Well, here that segment reduced in value by 3.5% due to a 2.7% reduction in like-for-like rental values and a 4 basis points outward movement in yields. Regional retail, so that's our shopping centers outside London: That was down 9.4%. And here like-for-like rental values fell by 3.7%, and yields moved out on average by 36 basis points. There was little difference in performance between any of the centers, with the best performer being down 7.9% and the worst down 11.5%.
Outlets, while these continue to be the best-performing retail asset class, with values up 0.6%, letting activity in the period resulted in a 1% increase in rental values. And Colette will talk about outlets a little more in a minute. Retail parks were down 11.1% in value, and that is largely due to a 58 basis points outward movement in yields. And our average equivalent yield on retail parks is now 6.7%.
And finally, Specialist. The value of our leisure and hotel assets was down 3%. Hotels were broadly flat, but the challenges facing the casual dining sector impact our leisure assets. And the other category here is principally Piccadilly Lights, where values were broadly unchanged.
So moving on to development expenditure, and I've set out here the potential cash expenditure on our 3.5 million square foot of development opportunities. As you can see, that totals just over GBP 2 billion. Now if all of that cash cost was funded from debt without any disposals, which it won't be, our LTV would rise to 37.6%, assuming current values and no profit on any scheme.
Over the 6 months, our adjusted net debt increased by GBP 61 million. And that, together with the decline in the value of our assets, was behind the increase in our LTV to 28.1%. Our weighted average cost of debt was marginally lower at 2.6%. And we continue to have around GBP 1.6 billion of firepower for investment opportunities and to backstop that committed CapEx on our development schemes.
So let me summarize. Despite the market backdrop, particularly in Retail, our income has proved resilient. Our balance sheet remained strong, and we have plenty of firepower for acquisitions and our exciting development program.
Now let me hand over to Colette.
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Colette O'Shea, Land Securities Group plc - MD of London & Retail Portfolios and Director [3]
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Good morning. We've continued to strengthen the portfolio introducing new products, staying ahead of market trends and driving through new and better ways of working throughout the business. This morning, I'll bring you up to speed on the whole portfolio; how we're tackling market challenges; and as far as possible, turning these into opportunities.
Our Office portfolio is virtually full. The new products Fitted and Myo are both performing well, and our development program is progressing at pace. As you saw at the Capital Markets Day, we're getting better and better at using technology and data to give customers more of what they need and want in both design and services; as well as to build faster more efficiently, saving costs and reducing waste. But as we all know, Retail continues to be challenged by structural changes which are here to stay. Again, we're using data and market intelligence to understand the new reality of retail; and what we need to do to drive down occupancy costs, drive up sales whilst protecting income.
Let me start by giving you some headline numbers. We're 98% let. We've delivered GBP 14 million of lettings, with another GBP 17 million in solicitors' hands, and completed GBP 16 million of office rent reviews at 10% above the passing rent. Our Office WAULT is almost 9 years, which is long for the sector. Our Retail net rental income has held up despite the challenging market, decreasing by only GBP 2 million compared to last year; and looking to the future with a mixed-use development pipeline of 3.5 million square feet, all of which is in London and will be delivered from 2021 onwards.
As our Capital Markets Day was only a few weeks ago, my London update will be brief. However, full disclosures are in your appendices. So the summary version: London continues to be a highly desirable location despite the political turmoil. It's an exciting, vibrant city where people want to live and work and invest. The dynamics of the occupational market have altered little in the last year. The flight to quality continues to drive activity, with Q3 takeup above the long-term average and 11% up on Q2, but as we've been saying for a while, there's limited supply of new space. And the vacancy rate is down to 4% compared to a 10-year average of 4.2%. There's approximately 8 million square feet of speculative space under construction, but with an average takeup of 5.5 million square feet over the last 5 years, there's just under 18-month supply being built. This gives us confidence for our own development pipeline which is delivering 3.5 million square feet between 2021 and 2027. And there are detailed charts in your appendices showing all this.
In the investment market, volumes are down 59% on 2018, with overseas investors appearing to take a wait-and-see approach. We remain vigilant, looking for the right London opportunities, but discipline is key.
Let me turn to our Office portfolio. I'm really pleased with the performance of all 3 of our office products. Starting with HQ: We're virtually full but have grown income through rent reviews and lettings. Fitted, our fitted-out solution, launched in the spring with 2 floors at 123 Victoria Street. Both are let at a premium of -- 20% premium to net effective rents. And as we roll out this offer, we'll be targeting a 5% to 15% premium. Myo is also proving the benefits of careful market analysis and greater customer understanding. We wanted a product that was truly differentiated and could also be integrated into our portfolio. By focusing on 1- to 3-year leases, together with the ability to personalize the space, we have a real point of difference, and it's paid off. We set an ambitious business plan, and 6 months in, we're beating our targets, with 60% of the space occupied. Interestingly, 30% of those customers are also HQ customers. And a further 20% come from businesses that are in some way connected to them, helping us build stronger, more lasting relationships. And of course, we fully expect that some of those who start in Myo will go on and move into our HQ buildings.
The strong early performances of both Fitted and Myo show there is demand for both, so we're now progressing them at Dashwood House and through the development pipeline.
We spoke at length about our Office portfolio in September, so I'll leave it there and move on to what we now refer to as the Specialist part of the business. This covers our leisure properties; the hotel portfolio; and of course, Piccadilly Lights, which Martin rather unceremoniously recategorized as other in his redefining of the accounts. You can ski, swim, play golf and pay to get locked in a room at our leisure parks. They're vibrant places where experience is everything. Their popularity has helped to sustain occupancy levels at 97%.
The cinema operators, who make up 26% of the portfolio, had a solid performance, with U.K. admissions up 9% as families flocked to see The Avengers. And the release of Star Wars 9 this December should ensure a cinema outing stays on the Christmas activity list. Around 17% of the rent comes from casual dining, and the issues here are well publicized. Older concepts are struggling, and others are carrying too much debt. However, history tells us that families keep going to leisure parks throughout cycles. Yes, we'll need to refresh the lineup with new concepts. And yes, some operators may need to restructure, but with the right lineup and our dominant cinemas, our destinations will continue to attract families for days and nights out.
Moving on to hotels. We really like our hotel portfolio, which has delivered 27% income growth over the last 10 years in the budget and mid-market sectors. They're let on turnover-only deals, which means local factors count, whether it's major sporting events or airline administrations. Some sites are up and some are down, but overall the valuations and income were flat. We also know there's a lot of potential in the underlying site values, which are well ahead of book value.
On to Piccadilly Lights brightening up the heart of London. Activity is gaining momentum. 3 of the screens continue to be used by Coca-Cola, Samsung and Hyundai on 2- to 3-year leases. And the other 3 screens are used on a short-term basis. We're doing really well and already secured over 90% of our target income for the year, with strong momentum in the run-up to Christmas. Selfridges, Reiss, BT, Pandora, Nike and Uber have all been lighting up the Soho sky. All this activity will start to provide evidence for future valuations.
Moving on to Retail. We're constantly reading negative stories about retail. And it's been a tough 6 months for CVAs and administrations, with more likely to come, but I'd like to put this in the context of our portfolio. As Martin explained, our net rental income is only down GBP 2 million on last year. And importantly, that's less than 1% of our group rent. The limited impact we see is due to the strength of our portfolio. Our occupancy rate has held up at 97%, and our sales and footfall performance have exceeded the benchmarks. Our same-center sales were up 0.7%, significantly ahead of the BRC benchmark. This is despite a decline in footfall, indicating an increase in basket size at our centers. Where we've been hit by CVAs, only 14% of our units have closed, showing the popularity of our assets. And where the units have closed, we've relet over half, including The Ivy Victoria which opens this morning in the old Jamie's Italian unit.
That said, we know we're operating in a retail reality with more challenges ahead, so let me tell you what we're doing to make sure our assets can meet these challenges. I'll divide this into three: activity in the last 6 months across the different subsectors, how we plan to maximize our performance in the medium term and what we believe are the longer-term trends and how we're going to stay ahead of the curve. So what we've done in the last 6 months, starting with retail parks, has been mixed. Despite the wave of CVAs and administrations, occupancy is high at 96%, and we've protected rental income. However, values declined by 11% as yields moved out. In light of this, I'm pleased we completed the sale of Poole for GBP 45 million, around 12% below the March book value. We said before that we don't see retail parks as core to our portfolio and expect to continue to make disposals.
Now to outlets, where we have a steady stream of lettings to 20 target brands. All our consumer research points to the fact that retail mix is key to our destinations' success, with nearly 70% of consumers giving retail mix as one of their top reasons to visit. So we're using data more and more to help us create the best lineup for each location. At Braintree Village, our research told us that Polo Ralph Lauren will improve performance and act as a drawer for both shoppers and brands. This has proven to be the case. Polo opened their temporary store in November last year. In the 3 months after opening, footfall increased by 6% and total sales by 15%, and this has continued with an improvement in total sales of 3.7%. Also as predicted, Polo has acted as a magnet for other brands.
Our regional shopping centers have been more challenged, but we've been working hard to attract brands that resonate with changing consumer demands and the way people spend their time and money. One trend is health and fitness. Peloton, which is all about cycling in your home, have opened at Westgate and Bluewater along with Ribble Cycles who have taken space at Bluewater as part of their online-to-offline strategy. We're also targeting categories like cosmetics, working with brands that have an appetite to move from online to offline such as Clockface, who've opened at Trinity; and more established brands like L'Occitane and Rituals, who've opened at Westgate, and KIKO at Buchanan Galleries.
And of course, we continue to hold events, but it's not all about new brands and fun days out. We also recognize the importance of working with the larger brands to ensure our destinations have the best mix. Bluewater is a great example of this, where footfall is up 2.5% and sales are up over 1%. Such a movement is never down to one thing in isolation, but the result of is making sure we have the best retail mix and the right size. Neither Apple or Tesla are new to Bluewater, but the launch of the iPhone 11 and the rollout of the Tesla Model 3 have drawn people to the center, but so has the opening of Primark. We identified a pent-up demand for Primark at Bluewater and worked hard to make the space for them. Using consumer card data, we can see that, in the 15 weeks after opening, Primark customers visited Bluewater twice as often as non-Primark customers. They spent over 50% more in total, and they spent in more stores than non-Primark customers. They may come for Primark, but while there, they visit more stores more often.
So in the medium term, performance in retail is about convenience in good locations with the right mix and environment. Customers then have a great experience and come again and spend more. And it's not just about having the right brands, how much space they have matters too. And when a brand is really popular, like Zara, bigger is better. Our research shows Zara customers have a longer dwell time, spend nearly half as much again as the average customer and 17% more on F&B. They visit and spend in more than twice as many stores compared to the non-Zara shopper. So upsizing Zara at Bluewater from 19,000 to 37,000 square feet. And we're curating space at St David's to deliver a 36,000-square-foot unit to bring them into the center for the first time. And at Trinity Leeds, we're upsizing another key anchor, H&M, from 25,000 square feet to 39,000 square feet so they can bring their full range of fashion, kids and home ware to the heart of Leeds.
This sounds straightforward, but it isn't. It's like a Rubik's Cube. We had to move 6 retailers to create the space for the 2 Zaras and H&M. They all needed the right location and the right-sized unit to create the best mix, a lot of negotiations. I talked earlier about the importance of working closely with our customers to help their businesses remain sustainable. One way are we -- one way we're doing that is to look at how we can reduce service charges to improve affordability and protect rental income.
So what of the future? There needs to be a fundamental change in the retail sector. As I said, the right retail of the right size in the right location performs well, but it will take data insights to find these sweet spots, and the reality is there will be less of them. That's because there is too much retail in the U.K. and poor sentiment is challenging liquidity, so some of it has to go. This creates opportunities for us. We're looking at alternative uses, particularly residential, across our whole portfolio. We've talked to you about O2, W12 and Lewisham. And since the Capital Markets Day, we've added Wandsworth to the list. At W12 and O2, we anticipate that we'll see retail and leisure shift from 100% to only 11%, with the opportunity for offices and around 1,700 homes helping to underpin values. At Lewisham, we're master planning. And at Wandsworth, our new entrants, we think there is potential for a residential tower, so we started work to see the art of the possible.
This leads me nicely to the rest of our development program. All is going well, and we could have 1.4 million square feet on site by April 2020. Again I'm not going to go through this in detail, but we'll give you the highlights from the last couple of months.
At 21 Moorfields, we finished piling, the hardest part of the program technically, and 12% of the steel frame is now complete. At Lucent behind Piccadilly Lights, demolition is 90% complete. And foundation and basement works are underway, with 70% of the piles installed. At Nova East, piling has begun on the 165,000-square-foot scheme. This will bring much needed prime space to Victoria and completes our pedestrian routes through Nova into Cardinal Place. We're already responding to requests from prospective customers for presentations for both Lucent and Nova East. At Sumner Street, we submitted a revised planning application to improve buildability, and demolition has started. We'll be applying automated methods of construction, a new technology to reduce construction time, waste and costs. Also, this will be our first net 0 carbon development.
At Portland, we received planning consent in September to add a 14-story extension to the existing floor play, giving us 394,000 square feet of new and refurbished space. The new Portland House will be home to all our products, HQ, Fitted and Myo; as well as a focus on wellness and leisure. Vacant possession is planned for March 2020. And at Red Lion Court, we're doing a short-term letting to maintain income while we progress our plans, which along with Lavington Street gives us the potential of over 600,000 square feet of offices in Southwark.
So it's been busy. The Office portfolio is full and performing well. Fitted and Myo are ahead of their business plans. Piccadilly Lights is exceeding expectations. Retail is challenged, but we continue to outperform on sales and footfall. We're using customer data across all sectors to inform our decisions. Technology and new ways of working are leading us to build better and more efficiently. And we continue to deliver all our activities in a market-leading, sustainable and responsible way. Our development program is gearing up, and we could have 1.4 million square feet on site by April next year. London remains a vibrant city, and we're making the most of what it has to offer now and in the future.
Now let me hand you back to Rob.
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Robert M. Noel, Land Securities Group plc - CEO & Director [4]
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Thanks very much, Colette.
So to conclude. Our direction of travel is clear. We are well placed to create buildings for our customers and value for our shareholders despite the continuing uncertainty. Customer demand for the right space will continue. London is supported by demographic and behavioral trends and has more than proven its resilience since the referendum. The market dynamics remain healthy for most uses. And customers are demanding quality space, great service and robust building performance; and this will provide opportunity for us. We have a good development pipeline entirely located in the capital. We have a strong track record in delivery, but we are taking it further. We're applying innovative approaches to design and construction. And of course, we're delighted to be delivering our first net 0 carbon building at Sumner Street.
We said in May that Retail will be mixed. It has been. We see continued rental growth in our outlets, as Colette has explained. Shopping centers and retail parks will remain tough in the near term, although as I said these segments make up less than 20% of our business. We see continued demand in our leisure parks, and our hotels are more than underwritten by site value, as you know.
Overall, we've created a high-quality and versatile portfolio with opportunities for the short, medium and long term. Looking ahead, we're positioning our portfolio for the future, so its shape is set to change, with a potential GBP 2 billion of expenditures to come in our existing development pipeline in London, and the continued workout of our retail parks.
Given the unsettled environment, I'm pleased we're in strong financial shape and are in a position to press on with the developments and seize opportunities when we see them. Let's see what December brings to all of us.
Anyway. So now we're going to hand over to questions. There should be some microphones hanging around -- there is one microphone hanging around. We've been kicked out of the theater by Vodafone today, so we're -- we'll be hand-to-mouth. So one microphone coming around. And please, if you would raise your hand so they can get to you and you will be spotted. If we can have your name and company, for the record for the playback on the [update call today].
Thank you very much.
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Questions and Answers
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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [1]
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Marc Mozzi from Bank of America. I just wanted to follow up on the press speculation about potential disposals you're targeting in some areas of your retail leisure space. Can you give us a bit of more color or size of what we should expect in H2 or in the future in term of capital allocation?
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Robert M. Noel, Land Securities Group plc - CEO & Director [2]
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So thanks, Marc. I mean the only guidance we've given on disposals is that we will continue to work out of our retail warehouse portfolio. I mean we're down now to 10 locations, down from about 30, I think, a decade ago. And it's now 4% of our business. We will continue to work out of -- our best advantage over time. Otherwise, as we always say, no asset is sacrosanct, but I've got nothing to say to you this morning about potential sales.
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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [3]
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Sander Bunck, Barclays. A couple questions from me, please. The first one, on your London retail ERVs. They came down. Is that -- was that actual letting activity? Or is it just the valuers taking a slightly more cautious stance?
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Robert M. Noel, Land Securities Group plc - CEO & Director [4]
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And your second question...
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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [5]
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The second question would be on just the overall retail valuations. Given that you're with one of the lowest gearings in the sector and have positioned the portfolio pretty much where you want it to be, why are you not taking a slightly more aggressive stance towards the -- to the retail values? And why are you not basically writing them down to a level where you think it is appropriate or where we see over the next 12 or 18 months it will be better? And then very lastly, are you seeing anything on WeWork at the moment? Do you think that has any impact, especially as the rest of the London letting market continues to be pretty strong...
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Robert M. Noel, Land Securities Group plc - CEO & Director [6]
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So that's 3 questions, yes, but I'm going to ask Martin to cover retail ERVs, if I may. Colette, can you cover WeWork? And if we can do Martin then Colette, but I'll first of all start off with gearing and valuations. So our capital structure is where it is through design. We've been on this route for a few years. As you know, we're trading at the bottom end of our capital structure range -- of our LTV range. We're really comfortable with that. As for values, I can very safely tell you that the retail values and all capital values are at the whim of CBRE, and not us. We are independently valued twice a year, so the best thing to do is to speak to [them, but the] -- there is no doubt that there is difficulty in the retail market. It is very, very difficult for them to put valuations on retail at the moment. I will say that, of the 2 segments retail warehouses and shopping centers, retail warehouses is somewhat easier. There has been quite a bit of trade over the last 6 months. So there is a sort of clearing price today that they can put their finger on. Shopping centers is more difficult. As you've seen, there's been very, very little evidence in the market. [Retail in terms] values.
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Martin Frederick Greenslade, Land Securities Group plc - CFO & Director [7]
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Yes. So just to give you a little bit of color on retail in London. So from a valuation perspective -- I know you asked about rental values, but from a valuation perspective, a couple of the suburban London retail sites, the shopping centers where we have the build-to-rent prospects, the closest built-to-rent prospects, those wouldn't have moved in value much. Those were underpinned by value. The other portfolios did move out not quite as much as regional shopping centers, but they did move out as the valuers moved out equivalent yields there. In terms of your question specifically on rental values, we have -- that is a combination of experience on rents. So let me give you an example. And remember there's quite a lot of retail in London retail, but for example, on Victoria Street, rental values will have fallen. And that is from experience of lettings we've done. So it's a combination of both anticipation on rent as well as some evidence from the deals that we've done.
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Colette O'Shea, Land Securities Group plc - MD of London & Retail Portfolios and Director [8]
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And then you asked the question about the WeWork impact. And what I would say to that is that we're really clear from the conversations we're having with our own customers and also the success of Myo and Fitted. It's that the flexible model is very much part of business planning now. So the issue really, I think, becomes who actually provides it. WeWork have come in as a sort of disruptor to the sector. And there's been a lot of responses from landlords, the likes of ours. I think what you also have to think about with WeWork, there are sort of 2 questions really. One is that we don't know what space is available within their own units. That's -- I mean we've highlighted that before. That's always been an issue in terms of sort of vacancy and availability, but equally if you look at the profile of occupiers they have, those business still need to be housed. So I think the point becomes, whilst there's a lot of sort of speculation around WeWork, I think the model is here to stay, but it's who actually provides the space that probably will change quite a bit.
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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [9]
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Chris Fremantle from Morgan Stanley. Just wanted to ask you a probably slightly awkward question about politics, which has clearly been a barrier to investment and sentiment over the last few years. How do you think your business and your markets are likely to be impacted by the various political outcomes in the forthcoming election? And is it likely to change your behavior either in terms of your developments or what you're doing to your capital structure? Is it likely that there is an outcome that could make you move from the rather defensive positioning that you have adopted over recent years?
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Robert M. Noel, Land Securities Group plc - CEO & Director [10]
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So thanks, Chris. I think that the -- I mean politics is very fluid and moving. And I don't think anyone in this room will be able to predict the exact outcome of the general election on the 12th of December; or indeed whether we're going to be in or out of Europe; whether it's going to be hard, soft or medium; and when that's going to be; and how long it's going to take to negotiate; et cetera. So as things stand, we are very happy with the developments that we've got committed. And we are very happy to be moving forward to get to the point of commitment on the developments we haven't started yet, based on the outlook that we see, which is there is a tide of demand and not very much supply. Now in the event that, that tide of demand gets switched off, then we may well change our view. Obviously we can't change the view on stuff that we're committed to, but of the stuff we are committed to, 60% is pre-let. So we're pretty relaxed about that. And the other 2 buildings are in amazing locations where there is -- at the moment we're already having conversations with people about whether they want to take pre-lets in these buildings that are 2.5 years out. So we're fairly relaxed, but we've positioned the business for a reason. The outlook is uncertain and we have to make sure that we can cope with that, which we can.
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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [11]
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It's Rob Jones from Deutsche Bank. A couple of questions. Just firstly, Rob, on Sumner Street on Page 5. This was touched on at the Capital Markets Day as well, but can you give us a bit more detail in terms of what you do differently to develop a net 0 carbon building? Secondly, Colette, interesting to see the stat on the Central London vacancy. Are you able to split out the figures for vacancy rates on new/substantially refurbished space versus secondhand space in the market today? Thirdly, just thinking in terms of success around timing of disposals. Obviously you mentioned Poole as a recent transaction, 12% below March '19 book value. Can you give us an idea or willing to disclose the figure in terms of what discount that, that was sold at versus its peak valuation during your ownership? And then a final question, yes: Colette, you said obviously casual dining, we know, has still got challenges at present. I appreciate it's only 17% of your leisure rents, but can you give us a figure in terms of quantifying how bad either it has been over the last 6 months or how you expect it to develop going forwards?
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Robert M. Noel, Land Securities Group plc - CEO & Director [12]
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So let me deal with Poole and net carbon. And perhaps, you can deal with new versus secondhand space and the fourth point. The Poole peak valuation, I'm afraid I can't tell you. [And this has been asked], and I cannot tell you what the peak valuation is. What I can tell you is that, over the last -- since the peak of the market in 2015 and '16, our retail warehouse parks have come down in value by 26%. That is up to September.
On net 0 carbon. So to get to a net 0 carbon building, there are sort of 3 work streams that one needs to undertake. First of all is to design and build your building as efficiently as possible to reduce waste. Secondly is to procure your ingredients for building from the best sources and in the best way. And those 2 things combined will reduce your embodied carbon -- or embedded carbon at the time of practical completion by as far as you can possibly go. The third element is then to offset what is the remainder. It is simply impossible to dig into and out of the ground and build a building and produce a carbon-zero building. It has to be a net carbon 0 building. So offsetting, as far as we're concerned, is a market that is going to grow very rapidly over the next decade. At the moment, we are only interested in offsetting schemes which are gold standard recognized by the United Nations. And just to give you a little bit of guidance on Sumner Street, where we have designed the building using digital twin technology to make sure that there is very, very little waste, where it's a manufacturer for assembly building so it's being component built. Indeed, some of the processes are being done automated. It's very efficient in terms of the way it's designed to run operationally going forwards. And the offsetting that we will have to pay to make that a net 0 carbon building at the point of delivery is less than 0.25% of construction costs. The way we see this going is that pretty well every business is going to have to be net carbon 0 at some point in the next decade or so. Otherwise, simply, society will not give you a license to trade. So we have to get on it, and we're doing it well. And we're doing it efficiently and we're doing it sensibly, but we're doing it as fast as we can.
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Colette O'Shea, Land Securities Group plc - MD of London & Retail Portfolios and Director [13]
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And in terms of the secondhand space versus the grade A. I can't actually split out the vacancy rate for you, but what I will say is that the themes that we've been seeing and been talking about are still very consistent. So we're still seeing a lot of takeup of the grade A space, what's very interesting in markets like the West End, and much more speculative pre-letting activity than historically. The -- also, the quantum of grade A space hasn't impacted on rental values. I think this is also why we're now starting to see people ask about Lucent and Nova East now very, very early on, is because people are looking for that type of space rather than going for the secondhand space that sort of is available. I think it also brings into question the flexible because what we're seeing is that people are sort of taking the grade A space. And then for the overflow space, they're flexible, so what the future of the secondhand space potentially becomes, I think, is -- has a question mark over it. Casual dining, it's very difficult to actually say what is going to happen there. The conversations that we're having are very much around the actual specifics of an offer. So there are certain offers that come within the casual dining sector that seem to be doing pretty well, and then there are others that are really not and where we've got customers who are providing multiple offers in various different locations. In one area, this is going really well. Somewhere else, actually, could we come out? So until we start to get a real sense of which of their offers are going to work versus not, it's quite hard to predict what the future is going to be, but I think we're going to see a lot more of it over the next 6 months.
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Robert M. Noel, Land Securities Group plc - CEO & Director [14]
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Jonathan?
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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [15]
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Jonathan Kownator, Goldman Sachs. Just coming back to Page 11 and the rent reviews on the retail side, I just wanted to understand. Did you have a period with limited rent reviews? Or you mentioned surrender premiums as well. I mean obviously it was flat, but perhaps also if you can comment on your relettings versus previous passing rents here, that would be helpful.
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Martin Frederick Greenslade, Land Securities Group plc - CFO & Director [16]
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Jonathan, we don't comment on letting versus previous passing or versus ERV. What I would say is that there isn't any great surrender premium that nets off against downs in this. This is just basically it's a 0. It's a combination of very small amounts. And I'd just lump them together not because there's anything in that. The amount of rent reviews, yes, is relatively limited. All the pressure in retail comes from your vacant space. That's where most of it is. Space that we had back from CVAs and the like, which will appear in the administrations column, that has been let at just under and it will vary very much. But in the 6 months it's let, it's being let at just under 20% below the most recent rent. So I'm trying to give you an idea of where we are on letting but not through the rent review process, actually through the empty space that we've had back...
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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [17]
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Do you have -- I'm not asking for [that] for lets or similar...
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Martin Frederick Greenslade, Land Securities Group plc - CFO & Director [18]
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Gosh, we -- so just our void stats are fairly flat, there's -- if you look at voids and admins together. We don't count temporary lettings as let. So we count those as voids, so it's not in the numbers.
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Robert M. Noel, Land Securities Group plc - CEO & Director [19]
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Alan?
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Alan Carter;Stifel Nicolaus Europe;Analyst, [20]
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Alan Carter with Stifel. It's fairly minor, but can you just explain how you -- within the retail sector, your priority is to protect income. But how would you reduce occupier service charge without that being detrimental to Landsec's income?
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Colette O'Shea, Land Securities Group plc - MD of London & Retail Portfolios and Director [21]
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Yes, this is something we're really focused on at the moment. And this is very much about the service element of what we're actually providing and as distinct from the rent. And clearly the two reinforce each other because, if we can get the service charges down, it helps reduce the overall occupancy costs. And there is no silver bullet. It's about tackling all aspects of how we run the centers. We're looking very much more at digitizing things, working out with a dialogue with the retailers what are the important things that they really want to keep going. I was talking to someone earlier. Security is really important, but as much, things like marketing, if we can use digital platforms -- so it's tackling everything and it will be done in phases. So we expect to have some impact for the next service charge round, and we will keep working on that.
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Robert M. Noel, Land Securities Group plc - CEO & Director [22]
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So there are no hands up and there are no questions on line, so thank you very much for coming. And we will see you next time.
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