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Earnings Transcript for BLND.L - Q2 Fiscal Year 2021

David Walker: Thank you. Good morning everyone. I’m David Walker, Head of Investor Relations at British Land, and I’m on the line today with Chris Grigg, Chief Executive; Simon Carter, our CFO; and Darren Richards, our Head of Real Estate. Before I hand you over to Chris, could I just remind those of you joining us by phone that, the slides are available to download now at britishland.com. And you are able to register questions on the conference call at any time from now during the presentation. For those of you listening through the website, slides will appear automatically, and you can submit written questions via the website, which I will read out following our prepared remarks.
Christopher Grigg: Thank you, David. Good morning, everybody. As you know, for nearly 12-years I’m stepping down as CEO for British Land. It has been an honor to lead this company, to work with so many talented individuals, not least from projects, which have literally changed the face of London. The things we have done to reshape and reposition the business under the course of the decade have also been fundamental to our ability to navigate the impact of COVID-19. There are few key things, I would point to, the quality of our assets, the clarity of our strategy, our focus on operational excellence and the needs of our customers as well as our strong balance sheet. I would like to talk through these points in a bit more detail. First the quality of our asset. We have delivered fantastic buildings including the , 100 Liverpool Street and Clarges. We transformed places like Paddington as you can see here and Broadgate of course. This has created tangible value for our shareholders, as well as delivering real benefits for our customers and communities. But we have done all of this while keeping our financial discipline at significantly reduced leverage to lower in mid twenties in 2018, compared to more than 50% when I joined in 2009 that is why we have been able to absorb value on the retail side of our business. But remember, we also have no requirement refinance until 2024. We have a clear strategy. Our focus on mixed used campuses is a real differentiator, because it presents opportunities overtime. Our product is attractive to customers. The campus is also allow us to change the mix of usage and try to - so we can react to growth. Again, Broadgate is a great example. our operational capabilities are simply best-in-class, from developing world-class buildings and keeping them full, to enhancing our environments through place making. Our ability to manage spaces, safety and security has never been more important. We were among the first in our industry to really focus on the customer and to make data essential to that. Our insights and the relationships we do will be valuable as we navigate the changing dynamics in our markets. And last our culture. This isn’t something we usually talk about in the results presentation, but I absolutely believe its British Land’s real strengths. We are more diverse and inclusive than we were a decade ago. We are innovative and we are flexible. We have a breadth and depth of skill set that goes beyond developing and managing buildings and corporate that is and sustainability in technology in marketing, and of course in finance.
Simon Carter: Thank you, Chris. Good morning, everyone. The rest of the toddy’s presentation are in three parts. Firstly, it won’t be my last job, the CFO, I will take you through the financial. Then down we will talk about our operation performance, putting this in the context of our markets. And then my first job as CEO, I will set out my priorities, which is designed to make the most competitive edge. Before we do any of that, however, I would like to take this opportunity to thank Chris. for the guidance and support he has provided me for the last 12-years. But most importantly, the great business built under his leadership British Land team and best wishes for future. Turning to the results for six months to September, EPS is down to 75%, primarily due to increased provisioning for rental receivables, as well as the impacts of CVAs and admins. Average net intangible asset value, which is $0.10 to £6.93. That is due to a decrease in our portfolio valuation 7% as a result of a 15% decline in retail, and a 3% decline in . Our financial position remains strong, LTV is 35.7% of just 170 basis points in the half year. have accessed one million facilities cash, significant covenant headroom and no requirement to refinance until 2024. Following our announcements in October, we intended to receive dividends, 58.4 based on our new policy we are paying now 80% of underlying EPS. Payment will be made in February 2021. Looking a moment in EPS, customer activity added 0.2 COVID delayed recognition has now reached completion. And one Triton square schedule is complete. Pretty efficient to our committed to development program, we expect this to be completed and committed annualized EPS, already delivered from our post referendum program.
Darren Richards: Thanks, Simon and good morning. I’m going to give you an update on valuations these things and our approach to the occupational markets. Starting with valuation. Overall values are 7% in the period, offices have decreased by 3% driven by a yield expansion of eight basis points with ERVs very marginally up. Recent activity and investment markets more than support these values, this includes our own as well as take this morning we announced the sale . Retail down 15%, reflecting 33 basis point average deal shifts and an ERV decline of 11%. What is interesting here is a divergence in values between shopping centers down 18% and retail parks and 13%. The Parks is more transactional evidence and early signs that a pace of rent declines may be slowing. Overall, however, we expect continued downwards pressure on rents, given the considerable challenges faced by retailers. That is part of the evidence by the number of CVAs and administrations, 16 more of our occupies entered CVA or administration in the half accounting units, only 13 of those closed, but we saw an £11.6 million reduction in annualized rents as a result. Finally the value of Canada Water has decreased by 6%, reflecting a full in value of the existing use, which is predominantly retail and a small increase in forecasted construction costs, which we expect to unwind on the drawdown of the head lease by the end of the year. Let me turn you the office market. Here, the leasing activity covered 130,000 square feet, half of this was long-term leasing and 9% ahead of ERV. Now, obviously we are operating in a very subdued market, but we are encouraged by the conversations we are having at the moment. We are under up from 310,000 square feet and in discussions on the 360,000 square feet something potential
Simon Carter: Thanks Darren. So what is our competitive hedge and how do we make the most of it. Returning to 2018, I’m struck by the strength and depth of expertise right across the business from asset management and property management development finance investment and technology. Best-in-class - rated capability combined with our proven track record relevant it is a real competitive advantage. And that before factoring our unique mixed use campuses, attractive development pipeline and long-term commitment ESG. It is clear to me when we combined these we deliver the best buying for our shareholders. Let me give you a few examples. Develop in the last 10-years of its development generated 1.8 billion profit. That is the iconic buildings and some of the smartest most sustainable space in London. great examples all skills of work, we acquired in 2013, we invested in public realm, develops new space, added story and capitalize on its outside location, the cafes, bars and restaurants. As a result, as outperform IPD by 100 basis points last five years. And only a few weeks ago, we received planning adding more potential and optionality. Retail at the moment, but that is not deep asset management capabilities really comes to perform. As you have heard from Simon, our assets around performing operations, we have collected more rents and others. Our ranging capabilities also enables us to innovate. You have seen that story, when we rapidly build a market leading business in standard . It was similar causes, which was an opportunistic purchase. And we quickly developed the expertise to deliver super prime residential, which gain is delivered more than 200 million profit, which we now obtain the sale of the opposites in retail. Broad case another example of an innovative and nimble approach. Coming out of the GIC, many of the challenges faced in financial services would adversely impact performance of these assets. But in short space of time, we successfully reposition the counters to attract new type occupy is involved in placing the fiber to the nearby shortage and specifics is a great place between developing high quality sustainable buildings and enhancing public realm. This ability to innovate, we continue to our future success. Another important strategy is the way we work in partnership. The likes of GIC partnership give us access to new opportunities enhance for service mitigate risk and support investments in our platform. These are the key things that we expand are really well in place to our broader purpose, let this people perform. Among the focus on them, we deliver most value. Building on the I want to talk about my priorities in business, you can see them on the slide. Realizing the potential of entities, progressing value increases development, addressing the challenges in I will go through these detail sharping entities. will remain at the core of what we do. It complements our skills set, it is what our customers and their ability to increase success is the best fundamental. We seen matters we will look to gain same elsewhere. Regions places a good example. It is proximity to the knowledge quarter to over 100 academic cultural scientific media localization positions us well the benefit from each strong demand from we have amazing opportunity. I have missed this flexible optionality. After liberal means we can change the mix to response the demand through this . This brings me to a next priority, progressing value and creative development. We have 8 million square foot of opportunities within our portfolio. Options created over the last few years a low cost. The majority are in producing, we can progress them rapidly when it makes sense. This combination of optionality and flexibility is a key. And most are in and around our campuses. So it is another way we further enhance our core business. Importantly, we have building more sustainably than ever before. You remember I said how our 20% to 30% building strategy in May. by 2020 and to most. In order to focus the great example of that, we are building 540 kilograms in operationally efficient, increasingly that is what our looking for. It is also fantastically located adjacent campus, but clearly reflective that shortage time. So it is exactly the sort of space we succeed going forward. And we have further opportunities in our life line. That brings me to kin of the . Here we were delighted to achieve planning earlier in the year. We expect to drawdown the head rate before Christmas. We have successfully overcome process and maintain momentum by commencing enabling works to phase one, so market conditions permitting real positions to placed in medical contracts in the spring. We are looking at a range of uses, we are delighted to be in partnership with delivering that engineering and improve works. As you can imagine, given the unique nature of the project, we have been approached by many investors. And when COVID restrictions allow, we would look to capitalize on this by taking opportunity bringing higher gross margin. Turning now to retail, very active asset management approaches that I explained. The clear time as we start the capital is well mixed . With our advertising security and cash flows in the rental space so we are expecting lower rents events where that makes sense. In a low interest rate environment, our underpins values and liquidity positioning us well our plan. We think that continues to start assets and we have been remains a shift on the years around 9%, that should be attractive in any environment. Just last week, this is the same another example of innovation I talked about earlier. We will continue to deliver best value to shareholders. Alternative and additional . It will not worthy in any case but our initiative and testaments is that we will have more health spaces through the Land, which we can convert in the 2.5 million square feet and reduce it to residential and office space. The good example of this is around 440,000 square feet with which we have similar opportunity. These projects are very early stage and we wouldn’t expect to deliver some when it is possible but the progress we have made helps to underpin value. Additionally, we will explore logistics opportunities with the regional partner for rents beginning to cross over. the way we manage our capital and since the start of the pandemic, we have executed more than 450 million retail spaces - and we have progressing opportunity to realize from standalone offices to will look to maintain this momentum and crystallize that and those who done clear focus in the key new opportunities and across the market. We will retain our financial strength and the fundamentals for how we run our business because it means we can development at a time of being able to do so. And finally, we will capitalize on reputation partnering with . Before I wrap up, I would like to say few words on the outlook. No one knows the extension or duration of pandemic. But as we look forward today, our view is that, occupation market for as you can see, occupied where they can and supply in space is up. So, the market forecast for rents to be down by 5%. The supply of new space lease will remain constraint. That is where we feeling the strongest demand. The increased politicization towards modern type of leases in the space outcome generated. We expect our portfolio throughout It is encouraging that the investments market seems to be taking building in changing times within pre-COVID pricing because and a number of and then environment with more comparing worlds for the Europe is likely to continue. As we feel rents to continue to effecting the further decline of 10% to 15%. Based on recent activity, we think rents will stabilize first on retail properties and then related to shopping centers and we expect this to replicate to the investment market. We are seeing after 5% of these and we think you can long-term liquidity and and asset values to stabilize. So, let me remind you about realizing the potential of assets progressing value of addressing the challenges in retail to increase liquidity are more apt to be smart in our approach to pace delivery needs to be on the table, this is our financial strength are best in class, our ability to innovate and to work in partnership, I need campuses and attractive development commitment. Thank you. We are happy to take any questions.
David Walker: Thanks Simon. Before we move on to questions, because we are doing this by conference call on over the web today, can I please just ask a couple of things. Firstly, if you could please limit your questions to a maximum of two at a time to ensure that we don’t miss anything clearly though, if you have any follow ups, we would be more than happy to take those as well. And secondly, please do bear with us if there are any spikes or nasal pauses as we go through the Q&A. It could well be caused by the conference calls, lines or delays on the webcast. I think first let me have you back over to Casey, for questions from the phones before I take any questions we have had online.
Operator: Our first question is from Sander Bunck from Barclays. Your line is now open. Please go ahead.
SanderBunck: Hi, good morning, Kim. Two questions from meetings. The first one is actually on the hearts group. And I believe there is an imminent focus, where there is going to be decision whether to extend or wind down the JV. Can you just share some thoughts on what you expect to be doing over the next couple of months. And the second one is a kind of a broader question. But you mentioned that you expect the forecast performance by 5% to 10%. Do you have any idea of secondary rents and is it fair to assume that kind of values, in your mind follow that path or do you actually believe that there could be some useful information on the other end to kind of mitigate some of those values and this kind of ties in to a slight follow up question in terms of how are you thinking about your development to eight million square foot development pipeline in that regard? Thank you.
Christopher Grigg: Hi Sander. Thank you for those questions. I think there were three that goes on first question related to the Harvard review. There is an extension both in February. We clearly have external investors in that vehicle. So, it is probably not right for me to reveal our intentions. But what I would say clearly we have seen the relative outperformance of parks that performed well in terms of foreign sales. A lot of our leasing activity looking forward is almost part so they are an important parts about our portfolio going forward and some of the best parts. On your second question, which I think was around the London office market and the outlook for rents, I will give an initial feel and then maybe hand across to down to add a bit of color to that if that is okay. So on the rents you know we said primary full costs at the moment are down, say 5% to 10% over the next 12-months to 18-months, as I apply through my prepared remarks, we think that our portfolio will do better than that. Because we think for the type of space that we are delivering, particularly use space. that is where the demand is going to be a bit of a pinch point there. But I think you are right in your assessment, the secondary space, because we are seeing quite a lot of that go on to the market is down flat, but we could see more softness there. And then linking them together by the years, so I think the deployments, you may use in the opposite direction to offset those rents declines. As we said, the investment market remains strong. We have seen transactions take place actual around pandemic pricing, and clearly with charges today, we have sold an asset 7% about guidance, I’m going to guarantee on to expand on that.
DarrenRichards: Yes sure. As Simon says, in terms of the secondary market, there has been a huge release of space. And 74% now secondary highest level since 2014 to put that in perspective, that is over 19 million in terms of total availability. So it is a lot of secondary space. And the vast majority of it is 10,000, 20,000 square floorplates on refurbish. So a much different type of policy to do, the assets handle we are going to be marketing. And I will remind you as well, a lot of these assets, a lot of these floorplates available also on campuses, which we think is going to be a big advantage.
SimonCarter: And then and I think last quarter was around the square foot of development pipeline, is that right?
SanderBunck: Yes. How that -.
SimonCarter: Right. Well, I think it is all linked to the point that Darren was making around supply of new site being constraints. And that is what is giving us the confidence commit to today, this can be a great scheme. I think it will be delivered right into where we think that will be a pinch point.
SanderBunck: That is great. Thanks.
Operator: Our next question comes from . Your line is now open. Please go ahead.
UnidentifiedAnalyst: Good morning everyone and thanks for taking my question. Just one question from my side and I was wondering, if you could share a little bit more detail on some of your disposals and particularly on the retail side, as you just noting in the results commentaries that you achieve an average premium to book value, or at least the last valuation of 6.7% across those sales. And I was curious to understand in terms of what sort of breakdowns you could share across various elements of those disposals. So, obviously, there was quite sizable grocery led and assets sold in terms of the Tescos and Sainsbury’s plus a mix of the in queues. And I was wondering when you walk for the light you can shed on the premiums between those property types or this sense? Is this a situation given the liquidity within the grocery led investment markets at the Tesco et cetera achieves quite significant premiums and perhaps B&Q have been at a discount?
SimonCarter: Good morning and thank you for that question, happy to share detail there. Actually across the disposals, they were roll effectively sold premiums to book value and quite similar premium from memory 5% to 10%. And that is across both the B&Q and the store disposals.
UnidentifiedAnalyst: Okay, very good. Thank you.
DarrenRichards: Just a follow-up on that. While you are digging into this area is worth kind of pointing out that. Those residual evaluations that we are left with once we have disposed of the first doors on these parks and one of them in the case study I gave, it means that you are chucking out in effects in excess of 9% initial yield on the residual part you are left with, compared to yield in the that we have gotten our evaluation. So we have think that is evidence as well as itself.
UnidentifiedAnalyst: Okay, that is helpful. Thank you very much.
Operator:
David Walker: Thanks. We have got your lines, and perhaps we will take these in the meantime. First here is from . Can you give the range of rent per square foot on your retail part portfolio and what percentage of retail product tenants of passion versus discounters, et cetera?
DarrenRichards: Well, good morning, I will take those two in reverse order. And in terms of the broad spread, and on the sectors, we have got about roughly 25% of our retail occupiers we are looking to fashion space. We don’t break out specifically for this cancers, Rob be able to get a ticket to you. But we generally tend to put those in the general merchandise or in the food store categories, which combined are about 20% of our portfolio. In terms of the spread on rent, it can be anything on our retail parts from £15 per square foot all the way up to £60 to £70 per square foot, but that is in the minority that tends to be very, very small units is 1,000 square feet, for example, where we are quite successful recently carving up and driving those economics. And the average for the portfolio will probably tell you a lot which is in the kind of early 2020s. And we have already seen since peak 2017, 2018 around 25% decrease in those so the point where we can now transact on the volumes that were presented.
David Walker: Thanks Darren. Question from . Alternate use for retail space is often viewed as something of a Holy Grail. But usually current valuations preclude this type of activity. How much further evaluation downside you think there is in order to facilitate these conversions? Simon.
SimonCarter: Good morning. Thank you for that question. And the alternative use, importantly towards a additional use for us, as I indicated, we begun a scoping supply across a million square foot of retail and surrounding lands, we think we can deliver about 2.5 million alternative in addition we use, that based on what we believe is viable today. So and some of the assets, the families and our assets face when we can deliver, we believe these development profitably and then on our part, it is actually where we have got surplus land. And so that allows us to drive the economics going forward. And I think we think they will continue to fall in retail that will create opportunities for further conversion, I think. But it is very early days in terms of the exercise we carried out.
David Walker: Thank you. I think we have got further calls from the telephone that we could take and I do have a couple more online as well. But Casey should we flip to the cause for the next question.
Operator: Okay. So, our next question comes from Jonathan Kownator from Goldman Sachs. Your line is open.
JonathanKownator: Thank you. Good morning. Thank you for taking my questions. Firstly on the further disposables, I mean, you have been able to successful in invest in retail and offices. Can you help us to understand how much you can sell further over the new two months and for guidance that obviously you are saying that the individual X-campus profit is to be - if I’m not mistaken there is a bit of a billion of that, and in retail, do you have further opportunities like other carve outs to the stores or any other opportunities and in that respect? Thank you.
SimonCarter: Thanks Jonathan. In terms of disposals, we are working in the space over this period and 675 million Obviously, future pace will depends on the economic environment. But it is reassuring that we have managed to see now that we have included lockdowns. The opportunity that we have and where we will be focus is on offices where there we can leave that can be opportunity for the scope there as you market is pretty strong that we expect today. Then in retail, which is few more stores around portfolio, but the focus will to increasingly be on some of the more multi-tenant and over the market is beginning to come fast for those retail COGS based on that improving occupation.
JonathanKownator: Okay. And also the individual offices and how much of them also you would say is your and drive it?
SimonCarter: 600 million to 700 million those offices .
JonathanKownator: Alright. Thank you.
David Walker: Hi. A question from (Ph) Could you comment further on the valuation movements in city offices in particular where they didn’t pocket by lower occupancy levels and higher expressions of flexible office? And then the second question, again on Hercules, any covenant cure has been required for that?
DarrenRichards: I will take the question on the valuation of the officers. So, we haven’t seen any disruption from as a result of valuation levels as a result of COVID and that is backed up by the transaction activity that you have seen, including our own. So, I think that is what we can say there.
SimonCarter: And on the cost and covenant side, in the period we refinanced one of the office of 200 million extended. We have had a few covenant ejections that we have made stay within the covenant of one of our facility but liquidity to be able to do that. And as we said today, the LTP across the two facilities one is side event and one is 65%.
David Walker: Thanks. Question from . If your retail letting were below ERV why did the value is not adjusted to the market rents you achieved ? And secondly, what percentage of new listings have the turnover elements? And how does this work our internet purchases and returns to store excluded from the center of the data? I guess both of those are for Darren.
DarrenRichards: Yes, and verify fair questions. Just to be clear in terms of our ERVs and the deals and the deals that we have done during the hub 160,000 square feet I sizes that have been done 8% below ERV, those are versus our March numbers. And the deals that I have cited in terms of our under offer the nearly half a million square feet, those have been done, on average at the levels reflecting in our September book, because they haven’t actually concluded yet. And that is the comparison there. So, in terms of all the deals we are talking about, in effect, they are reflected broadly in our September ERVs. Just turning to turnover, our turnover is normally worked for us, as I said in my prepared comments is there is an element there. And these normally work by having a base rent that is normally set at about 80% of the ERV, and then a turn over top up. The calculations will vary. You are absolutely right in pointing out into that returns and looking forwards and having the correct kinds of closes to represent the kind of Omni-channel world then that is going to need to be factored in some of the older turnover leases, closes that we have got haven’t got internet returns back to the incident was just by virtue of that when they were signed.
David Walker: Thank you. Question from . Regarding your conversion to alternative or additional uses of 10 million square foot, what will be the cost implications for this and how would you approach to fund it?
SimonCarter: The question around costings, consider his early days in attendance produce about half full costings today. Of the 2.5 million square million square overall 1.5 million square foot is in logistics. So, the cost consequences are relatively modest. But it used to be fundable within the context of groups we think we have made significant progress on display was to recycle that campuses, then residential and office components, potentially for some of the residential we may do that in partnership with others. And some of the assets we may actually sell, capturing the value from getting funding and then someone else would deliver it. So, it would be a mixture of funding rates, or very deliverables in the context of British Land.
David Walker: Couple more on online. One from (Ph). ARVs for shopping centers is averaging 26 to 40 per square foot, are you implying the ARVs will bottom at around 22.50 per square foot i.e.10% to 15% lower? And on that basis what will be the trough occupancy cost ratio average for the shopping center portfolio based on 2019 turnover sales, Darren?
DarrenRichards: Good morning, Peter, in terms of our forward guidance, and taking average rents, and yes, that would be your calculation would be would be correct broadly. In terms of where we are the look forward and occupational cost ratios is concerned, we have got an average currently taking on policy of over 14% of the portfolio. Shopping centers, traditionally higher take it things super regionals, places like Meadowhall being covered centers, they tend to have higher service charges. So that drives that also high rents, but they are driving high volumes. So if you look forward and take how things like Meadowhall and on the basis that we don’t have a lot of covered centers, you have got to remember, we have only got four covered schemes in our portfolio right about 45 plus schemes. Then our occupancy cost ratio moves to around 12.5% for our shopping centers, and down to between 10% and 11% for our retail parks. Again, there is a clear differential there. And that is going back to the points I was raising earlier in terms of the affordability of that sub sector.
David Walker: Thanks Darren. One more from from Clarence Capital. Could you please split up the light like-for-like revaluation on your campus offices versus non-campus offices? And then a second question, what is LTV ratio would you be uncomfortable with?
SimonCarter: In relation to your first question, I don’t have a split to hand between the but drivers of the like-for-like were one industry avenue and Houston road, which are both on our campuses. So we thought it would have come from the campuses in this period. And then in relation to your second question around what LTV that we are comfortable with. Firstly, we are very comfortable with the level, you seem to check off a little bit with the valuation declines that we have seen that is been litigated by disposals we have made in the period. But also post period ends with disposed to 430 million of property, which we effectively bring the LTV back lower than where we started the period. So we have a range that we are comfortable with. Staying below 40% feels the right place to be in the currency environment. Whenever we think about leverage, we have always factored in the possibility to the values we change, so it values that doesn’t necessarily mean that we have in .
David Walker: Thank you. That is all the questions we have online and on the phone line. I will hand back Simon for quick wrap up.
Simon Carter: Thank you, David. Well, thanks, everyone, for your time today and for your questions. That was a really useful session. I’m really looking forward to seeing many of you in the road show over the coming days. We will be taking to virtually and introducing David in his new role as Interim CFO.