Earnings Transcript for LAND.L - Q2 Fiscal Year 2021

Mark Allan: Ladies and gentlemen, good morning. Welcome to the live webcast of Landsec's 2020/'21 interim results. Now this morning's presentation will follow the usual structure, although for reliability purposes, in this second lockdown, certain elements are prerecorded. So I will provide an overview of the results for the period and the key themes affecting our market before Martin takes you through the financial review and Colette covers the portfolio. Martin's and Colette segments have been prerecorded. Then following brief remarks on outlook and the summary, we will open up for a live Q&A, where both Martin and Colette will join me on the line. Now when we delivered our full year results on the 12th of May, I was 4 weeks into my new role, we were all 7 weeks into our first lockdown. Nonessential retail was still 5 weeks away from reopening, the hospitality sector still 8 weeks away. As we now deliver our interim results 6 months later, we are in the first week of a second national lockdown. Nonessential retail and hospitality are again closed, having been open for no more than 21 and 18 weeks, respectively, between lockdowns. So it has been an extraordinary 6 months. But I believe we can begin to take some positives from our experience and the situation we find ourselves in. The business and more importantly, the people in it have demonstrated beyond question, their ability to respond effectively to a crisis. Our approach throughout has been and remains to be realistic, proactive and to act responsibly. Despite the significant challenges of the past 6 months, the business remains in a fundamentally strong position, particularly financially, with a low 33% loan-to-value ratio and good portfolio liquidity. London has come back from many crisis over the centuries and even now remains an attractive location for investors, underlining the importance of our Central London portfolio and its quality, resilience, and liquidity. As a result of this fundamentally strong position, we are pleased to be reinstating our dividend alongside these results. And we can also begin to look beyond COVID to medium- and longer-term opportunities that we expect to emerge. Increased obsolescence of older offices and major mixed-use/regeneration are 2 areas where Landsec is particularly well placed to create value. And all of this, of course, is reflected in our new strategy, which was launched at our Capital Markets Day 3 weeks ago. I mentioned that our approach to managing the impact of COVID has been to be realistic, proactive and to act responsibly. Let me give you a little more color. Firstly, the safety of everyone working in or visiting one of our properties has been and continues to be our #1 priority. We implemented COVID secure plans for our entire portfolio with the first lockdown, and we've adapted them with care, as restrictions have changed. Secondly, there is no question in my mind that our relationships with our customers have been strengthened by the need for us to collaborate. And this will set us up well for the future. Whether that is through the launch of our GBP 80 million customer support fund, the sensible dialogue regarding rent concessions or deferrals, all the way in which we have helped office and retail occupiers alike with their own COVID secure measures, our collaborative approach has without doubt been a positive feature of COVID. On development, we said at our full year results that we were being careful to preserve optionality in our development program, so that we didn't overcommit capital in an unsettled market. We maintain that position throughout the first half and have now elected to progress through to completion, the 2 speculative projects where we judge the prospective risk-adjusted returns to be the most attractive. This is in addition to our ongoing pre-let project at 21 Moorfields and means that our committed development program now extends to around 850,000 square feet with a total development cost of around GBP 950 million, 67% of which is pre-let. The remainder of our near-term development projects will now be paused and held in the state of readiness to recommence as the market outlook becomes more settled. As you will hear from Martin, our balance sheet is strong, and our finances continue to be prudently managed. And this extends to our assessment of bad and doubtful debts for provisioning purposes, where we have taken an appropriately cautious approach. And we have not needed to access any government assistance at all. Our proactive, responsible approach has helped to ensure that despite the, in many cases, extreme impact of COVID, Landsec remains in a fundamentally strong position. Maintaining a net debt-neutral approach over the period means that despite valuation weakness, our loan-to-value is still low at only 33%. And we continue to have a portfolio that offers good levels of liquidity. Our Central London assets, in particular, have characteristics, modern, sustainable spaces, great locations, strong tenants and long lease terms that continue to appeal to investors globally. Our sale of 7 Soho Square at 4% ahead of March book value was a great example of this. And our focus on sustainability continues to be recognized. For example, we were ranked third amongst the FTSE 100 by EcoAct for our ambitious net 0 strategy and our sustainability reporting. And as you'll hear from Colette, our leadership in this area is creating value and resilience in the portfolio. We also have a number of medium-term mixed use regeneration opportunities in our portfolio, in particular, suburban London shopping centers that offer significant value-accretive repurposing potential. And the business's strengths go beyond financial and portfolio considerations. Track record, reputation and relationships are a key feature of sustainable business success. We have continued to guard ours closely. And as I set out at our recent Capital Markets Day, the experience, expertise and capability of Landsec's people is one of its greatest assets, a strength that we intend to make the most of by ensuring that we foster a culture of empowerment and accountability. The combined effects of these strengths means that we can begin to look beyond the near-term effects of COVID to the medium and longer-term opportunities that we expect to emerge after the pandemic. Of course, we are still in unsettled times, but the path out of the pandemic through mass testing, more effective treatment and ultimately, a vaccine is much clearer than it has been. So it is important that we balance managing the near-term challenges effectively with ensuring that the business is properly positioned for new opportunities. And there are 2 areas in particular where Landsec is well placed to create considerable value. Firstly, in Central London offices, it is clear that the way in which people will use office space after the pandemic will change. Occupiers are thinking more deeply about the role of the office in their organization and their culture. But what is increasingly clear is that older office buildings will struggle to adapt to a post-COVID world where sustainability, adaptability and resilience are going to be crucial, whether as a result of physical constraints, such as lift or air handling capacity or the more esoteric qualities, such as health, well-being or sustainability credentials that are increasingly important to a modern workforce. And secondly, urban mixed-use regeneration. What society needs from its built environment is changing, in some cases, rapidly. And with sustainability targets, such as carbon net 0 by 2050, the required change can't be delivered in the way it might have been in the past. There is a clear opportunity for an organization, such as Landsec to play a lead role in helping shape that change. Of course, to make the most of these opportunities, we need to have the requisite resources, both financial and human. And in that respect, as I've already shown, we are in a great place. Low LTV, a Central London portfolio characterized by quality, resilience and liquidity, a hard-earned track record, reputation and network of valuable relationships and the capability, expertise and experience of our people. So having shared those key themes, I'll now share some color on how we're thinking about our core markets. Firstly, Central London. Unsurprisingly, COVID had a significant impact on both occupier markets and investment markets. On the occupational side, office take up over the 6 months was only 2.2 million square feet, around 1/3 of the long-term average. And availability of space has increased, pushing the vacancy rate up to 6.5%, and the very low levels of physical occupancy has also had a significant negative impact on footfall and sales in Central London retail and F&B, which is yet to recover. And in previous directions, where higher vacancy has led to significant downward movements in rents, they have tended to be preceded by periods of strong rental growth and a high level of speculative supply in response. As the top graph on the right-hand side shows, what we have seen in recent years is a demand and supply that have been more in balance, coupled with the flight to quality, meaning that while there could be some rental weakness in the near term, we can afford to feel more sanguine about its scale for the best space. This is borne out by some interesting statistics that we think will have an important bearing on how the occupier market develops from here. Of the total available space, only 26% is Grade A. The increase in availability is largely attributable to secondhand space, much of it tenant release. You can see this on the lower graph. Nearly half of space under construction is already pre-let. And 48% of total take-up in the 6 months was new space, well above the long-term average of 39%. On the investment side, activity dropped very significantly in the second quarter of 2020 before beginning to recover in the third quarter. The fourth quarter has started strongly with some significant transactions exchanging or competing. And so we see 3 key themes affecting Central London office market over the next few years. Firstly, sustained investor demand for quality led assets led to financially strong occupiers on long leases, the type of asset that typifies much of the Landsec portfolio, with demand supported by the low interest rate environment globally and the relative value of London compared to other global cities. Secondly, a bifurcation in demand from occupiers with older secondary stock becoming obsolete more rapidly a more modern, adaptable COVID-secure workspaces being in greater demand. And this has 2 benefits for Landsec

Martin Greenslade: Thank you, Mark, and good morning, everyone. Over the last 6 months, both we and our customers have had to adapt and respond to the challenges presented by COVID-19. The virus has impacted all parts of our business, but in different ways and to different extents. I will highlight where the impact was most significant, but it is important to recognize that we continue to have a resilient balance sheet and significant financial capacity. We have a strategy to position Landsec for growth and the balance sheet to support it and take advantage of the opportunities, which will inevitably arise, as we emerge from the pandemic. First, a summary of our performance. Revenue profit for the 6 months was GBP 115 million. That is down GBP 110 million or 49% compared with the prior period. This was due to the impact of COVID-19 across our portfolio. I will explain this movement in more detail shortly. Values were down 7.7% or GBP 945 million over the 6 months, leading to a loss before tax of GBP 835 million. Adjusted diluted EPS, which is based on revenue profit, that was also down 49% at 15.5p. EPRA NTA per share was GBP 10.79, that is down 9.5% or 113p since last March. And we're paying a dividend of 12p in respect of the half year, but more on that in a minute. Let's now look at how revenue profit changed compared with the prior period. Now as you can see from this chart, the GBP 110 million reduction in revenue profit was entirely due to a GBP 118 million reduction in net rental income. Almost all of this decline was due to COVID, as I'll explain in a minute. We saw a GBP 39 million reduction in gross rental income, resulting from lower turnover related income, principally from our hotels, down GBP 13 million, lower car park income, down GBP 7 million, a loss of GBP 5 million of income from Portland House, which was vacated for redevelopment at the end of March 2020. Now that is the only entirely non-COVID item. There was a GBP 3 million reduction in short-term income. That is principally at Piccadilly Lights, and around GBP 7 million occurred from the impact of CVAs and administrations. Net service charge costs were flat, excluding provisions for nonpayment. But the main driver behind the decline in net rental income was an GBP 85 million increase in bad debt provisions. Now I'm going to cover this in more detail in a moment. Net direct property expenditure was GBP 6 million lower than the prior period. And that is due to COVID-related reductions and delays in expenditure as well as a GBP 4 million provision release on the termination of one of our final Landflex leases. Net indirect expenses were GBP 2 million higher, as the prior period benefited from a higher provision release related to share-based payments. Net finance expense was GBP 10 million lower due to the liability management activity undertaken last year, lower prevailing interest rates and higher capitalized interest at our committed developments. So turning now to our bad debt provisions. On this slide, I've broken down the GBP 87 million charge in the period against revenue profit. In early April, we announced our GBP 80 million customer support fund. To support those customers most in need, with a particular focus on supporting F&B occupiers and small and medium-sized businesses. Now to date, we've agreed and documented GBP 20 million of concessions. And this may seem like a small proportion of the fund but in the absence of a meaningful way to enforce rent collection, it is difficult to reach agreement and document concessions when occupiers can withhold rent without consequences. On top of the agreed rent concessions, this period, we've provided a further GBP 45 million against outstanding rents and GBP 12 million for service charges. And we've also provided GBP 10 million for tenant lease incentives. So together, that makes up the GBP 87 million charge to revenue profit in the period. Now let me give you some context to our provisions. If we look at the level of provisions, we've just taken against rents recognized in this half yearly accounting period, then those provisions represent around 45% of all retail and leisure rent due for this six months. And if you look at our balance sheet, of the total amount of rent, which remains outstanding, around 75% is covered by a doubtful debt provision. I wanted to give you that context so that you can appreciate and judge for yourselves the level of caution in our approach. As things stand, we do not believe that we will need to increase the level of our customer support fund. However, our provisioning recognizes the level of rents that remain due, that enforcement remains difficult, the challenge of a second, hopefully, shorter lockdown and that we will see further CVAs, which may compromise outstanding rent. For completeness on this slide, on the right-hand side, I've broken down the GBP 87 million P&L charge by segment. And remember, these are the new segments we outlined at the Capital Markets Day. So turning now to rent collection. Now different companies will have different approaches to recognizing rent and making provisions. I've explained our approach to provisions. And here's how our rent collection is progressing. The first column represents all rent due in respect of this half year. So that's the March and June quarter days and all monthly rents from April to September. The second column is simply the September quarter day collections. While the total collection percentages look similar, you should be aware that the September quarter day numbers only cover those paying rents on a quarterly basis. And in practice, many retailers and F&B operators have long since moved to monthly rents. So in the September numbers, office represents around 62% of the total rent due, while it represents only 41% of the first column. As you can see, office rents continue to be paid, while the impact of withheld rents in retail and leisure is visible in all other segments, where the percentage of rent paid is generally between 50% and 75%. And let me be clear on one further point. Companies can improve their collection statistics by deferring the rent due to a later period, so it isn't yet payable and still recognize that rent as income in the period to which it relates. Now in our numbers, deferrals account for less than 2% of the rent due. So moving from income to valuation. At 30th of September, our combined portfolio was valued at GBP 11.8 billion. The total valuation decline was 7.7% or GBP 945 million. Now let me start by explaining how the valuers have reflected ongoing COVID-related rent payment concerns in the valuations. In Central London, the valuers have assumed a future 6-month rent concession at the 30th of September for retail and F&B, except where there is a revised agreement in place with the occupier. Outside Central London, retail has a 3-month concession applied and leisure activities, including F&B, have six months. Outlets and hotels are valued off increasing turnover assumptions with no additional concessions. Now the total impact of this in our valuation is GBP 72 million at 30th of September, and it is completely independent of the rent provisions that we're carrying. Now turning to the individual segments and starting with the Central London portfolio. Our Central London segment represents 67% of our assets. And it was valued at GBP 7.9 billion in September, that is down 3.8% from March. Offices were down 2.3%, with a like-for-like portfolio down 1.9%. Now within this, like-for-like rental values were down 1% with negligible change to equivalent yields. Our developments, they were down 3.9%, with proposed developments so that Portland House and Timber Square, down 9.4%, and the assets in our development program, down 1.2%. London Retail, that's mainly the retail below our office buildings and that has felt the impact of the significant reduction in office and tourist footfall and values here were down 16.7%, with rental values down by 16.5% and yields moving out 12 basis points. Other Central London is principally Piccadilly Lights, where the value was broadly unchanged with an increase in the valuation of the 3 medium-term arrangements, offsetting lower income from the short-term arrangements. Regional retail, which comprises our shopping centers and outlets, was valued at GBP 2.1 billion, and that represents 18% of our combined portfolio. Regional retail fell in value by 16.4%, with shopping centers down 20.4% and outlets, down 8.8%. Rental values for shopping centers were down 14.4%, with a net equivalent yield moving out 42 basis points to 6.6%, and the contractual net initial yield now at 7%. Within shopping centers, the equivalent yield spread is from 6.3% for Bluewater, 6.9% initial to 6.9% for Buchanan Galleries, 9.5% initial. Outlet saw rental values only fall by 1.3%, while equivalent yields moved out 38 basis points to 6.3%. So urban opportunities, which currently only represents 4% of our portfolio. Well, here, we saw values fall 9.8%, as rental values fell 5.8% and and equivalent yields moved out to 5.3%. Within this category, the largest fall was at south side down 20%, which is more in line with regional shopping centers, while the smallest decline was at West 12, down 4.7%. And finally, subscale, which represents 11% of the portfolio. Here, values were down 12.4% overall. Leisure assets were down 15.3%, with rental values down 3.9% and equivalent yields moving out 70 basis points to 70 -- to 7.1%. Our hotel portfolio was marked down 13.1%, with rental values down a similar amount, with those hotels that are most dependent on the travel industry seeing the greatest valuation declines. Retail parks fell in value by 7.3% with rental values down 6.1% and equivalent yields moving out 16 basis points to 7.6%. So let's move from valuation to our financing position. Over the course of the 6 months, our adjusted net debt was little changed, up GBP 14 million at GBP 3.94 billion. And group LTV was 33.2%. However, this doesn't allow for the disposal proceeds from the sale of Soho Square, which had exchanged at the 30th of September and has been treated as sold. Now including the disposal proceeds from Soho Square, pro forma adjusted net debt was GBP 3.86 billion and pro forma group LTV was 32.5%. Our average cost of net debt is 2.1%. Our next bond maturity is in September 2023, and it's only GBP 10 million, while none of our revolving credit facilities matures before 2024 at the earliest. So all of this means our cash and available facilities of GBP 1.2 billion are readily available to deploy for opportunities into the medium term. And moving on to dividends. In July, we said that we would reinstate our dividend with our interims. And that is what we have done today, at a level which reflects current underlying earnings. As we did not pay a Q1 dividend, we are wrapping both our Q1 and Q2 dividend into a single dividend of 12p per share, which will be paid on the 4th of January 2021. We intend to pay a Q3 dividend at the end of March, with the amount to be confirmed in early 2021, followed by a final dividend in July. Now depending on market circumstances at the time, the final dividend proposed is likely to see dividends for the year be 1.2x to 1.3x covered by underlying earnings, so an approximate payout range of 75% to 85%. And this is in line with what we said at our Capital Markets Day last month. So let me wrap up. We have taken what we believe to be a cautious approach to providing for unpaid rent. But time will tell. The retail and leisure sectors remain challenged and the current lockdown does not help. Against that backdrop, it is helpful that the London office market -- the London office investment market continues to provide liquidity, so that we can remain disciplined in our approach to funding capital investment through disposals. And our balance sheet has been resilient in the face of the pandemic, and we retain plenty of liquidity to manage future uncertainty and fund accretive opportunities. Now on that note, let me hand you over to Colette.

Colette O'Shea: Thanks, Martin, and good morning, everyone. This is indeed the most extraordinary of times. Not surprisingly, our performance has been challenged, particularly in retail. But this doesn't tell the whole story, and we've also had successes in the last 6 months. Notably, we've got closer to our customers, working to get them back up and running after the first lockdown, managing this lockdown, helping them with their lease obligations as well as navigating the ever-changing government guidance. Also, as we told you at the Capital Markets Day, we're talking to them as we think about how to optimize our Central London portfolio and how to reimagine our retail portfolio. I'm going to go through our operational activities as they now sit, Central London, regional retail, subscale and urban opportunities. But as it's only a few weeks since the Capital Markets Day, I'm going to focus on Central London and regional retail. So here are the headline numbers. In London, we're 98% let, we've delivered GBP 1.4 million of lettings with GBP 6.2 million in solicitor's hands. We've completed GBP 7.2 million of rent reviews at 1.2% above the passing rent. We've [renegotiated] GBP 3.2 million of income in response to COVID. Our office WAULT is 8 years, one of the longest in the sector. And we're taking advantage of the flexibility we built into the development program to manage capital expenditure and optimize delivery into the market. In our regional retail portfolio, the shopping centers stayed open during locked down for essential retail, and all assets were ready for reopening on the 15th of June. We then managed the capacity issues created by social distancing and the varied restrictions across the U.K. before returning to lockdown. Since reopening, footfall across the portfolio was in line with the benchmark. Sales were down less, but worse than the benchmark. However, the figures hike significant variations between locations and assets, as government guidance change and people adapted their shopping patterns. More on this later. In subscale, our retail and leisure parks traded throughout the first lockdown for Central Retail and takeaway food. After the 15th of June, we saw greater opening before local then national restrictions returned. In the hotel portfolio, 21 hotels reopened and 2 remain closed. However, our rent has been significantly impacted by the turnover nature of the leases. In Urban opportunities, our suburban London assets continue to trade for essential retail during lockdown and fully reopened after the initial restrictions were lifted. They benefited as people work from home. And of course, we continue to progress our development plans for 8 million square feet of mixed-use space across the assets. So that's the headlines. Now let me go through what we've been up to. Of course, safety is the priority we've worked hard to make sure we comply with all government regulations and guidelines. This has involved more signage, more security, more cleaning, more communication and importantly, working with our customers, store managers, facility managers, property managers, MDs and CEOs. What's been great is the positive feedback we've had from our proactive leadership. Discussions around rents and leases have dominated the last 6 months, and our GBP 80 million support fund is being put to good use as we work with hundreds of customers, primarily in retail, leisure and F&B. This slide shows how the rent roll of those 600 customers is split. We systematically work through each group, starting with the top 30, who represent over 1/3 of the rent roll and have now granted GBP 20 million of concessions that have a long way to go. Martin has covered the impact of CVA. So all I'll say is that where there are a legitimate tool to help a business in the stress we'll work with that business and have run so on many occasions, where we don't believe this is the case, we won't. So let's look at our Central London portfolio. The quality of our portfolio and our customer-centric approach have stood us in good stead this year. We remain 98% let, and our customer profile has protected our income. However, uncertainty is causing many businesses to postpone big decisions, whilst others have had their moves delayed. A likely outcome of this will be pent-up demand for more longer-term solutions in 2 to 3 years' time. This fits well with our development pipeline, which I'll talk about in a minute. This situation has created mutually beneficial opportunities. We've renegotiated 6 leases covering 58,000 square feet, extending lease terms by an average of 9 months with GBP 3.2 million of income secured. Not surprisingly, our letting activity is down in the first half to GBP 1.4 million, with a further GBP 6.2 million in solicitor's hands. But that's primarily due to having little available space. Over the summer, though, we did see a growing interest in pre-let for high-quality, healthy and sustainable spaces. Our extensive research, coupled with customer conversations is giving us insight into how businesses are thinking about their future office use. In May, I talked about the new scripts being written for offices. And here are some of the trends that are driving our activity. Let's start with the impact of the first lockdown. Our average occupancy in October was 15%. But within that, there were variations across the portfolio. Fro example, Nova was around 25%, Eastbourne Terrace only 10%. When we drill into these figures, it's clear that portfolio splits into 2

Mark Allan: Thank you, Colette, and thank you, Martin. I will now spend a few minutes wrapping up this morning's presentation before opening up for Q&A. [Operator Instructions] So I'd like to start my wrap up by taking you back to our strategy, launched at our Capital Markets Day 3 weeks ago, a strategy that positions Landsec for growth, a strategy built around 4 strategic priorities

Operator: [Operator Instructions] Your first telephone question today is from Max Nimmo with Kempen.

MaxNimmo: Just -- you mentioned Trafford Centre and the potential for that to transact. I was just quite interested to get your view on whether you think the values will look at that as an arm's length transaction, depending on who gets it. And there's obviously been some very low ball offers rumored around there. So I just want to understand your view on what that kind of read across could be like for your portfolio? And secondly, on the outlets business, I'm just trying to marry up what you're saying about it being a robust sector. Yet, we're still seeing yields pushing out sort of 38 basis points, values down 9%. Is that because of the way the values are approaching the risk to turnover rents? And could you maybe comment on the GBP 0.7 million of new lettings, where they are versus passing rent?

Mark Allan: Thank you, Max. So what other -- I'll offer a few thoughts on Trafford Center and also values. And then perhaps I'll ask Martin to add any comments around valuation specifically and Colette to talk about the new lettings that you mentioned. So I think the reason we mentioned Trafford Center as an important transaction, I think, is primarily because of -- as an asset type, I think it would be seen as being one of the strongest assets in the shopping center -- the regional shopping center space. So I think it has relevant parallels across the Bluewater. But you raised a very valid point that because of the relatively complex nature of the transaction and the fact that you can't decouple the asset itself from the capital structure that buyers will inherit, I think that does make it more difficult to get a read across. But really, in the absence of really any other transactions to speak of, I think it is something that will be looked at quite closely. And I think over time, we will get a little bit more clarity over how people, how prospective bidders and buyers are looking at the sustainable rent line within that as opposed to an immediate initial R&D equivalent yield because I think that, as we've flagged at our Capital Markets Day and, again this morning, I think getting a handle on that sustainable rent is the first thing that needs to happen in order for markets to then start to get confidence in valuation. Because if you look at the sort of cap rates that we have included in our results today on retail, compare them to other sectors, they clearly look pretty generous. The flip side is, of course, it's difficult at the moment to understand and really pinpoint what rent it is that you're capitalizing in that yield. So I think that's where there could be interesting evidence that will come through over time, but you are right to flag that because of the capital structure complexities of the Trafford Center, yes, it isn't going to be the perfect piece of valuation evidence. But I think, nonetheless, it will be an important reference point. I think with regards to outlets and values and why we've seen a decline there, I'll ask Martin in a moment to comment more specifically on how the valuers have approached things. But I think there probably is a degree of caution in that approach. And probably a view about the wider retail sector being under pressure, therefore, in relative terms, does there need to be some reflection with our outlets. What I will reiterate is the positives that we see within our outlets portfolio and why we have sought within our strategy at the Capital Markets Day and again today to decouple the way that we look at this performance compared to wider retail. So in advance of the second lockdown, I mentioned within 10% of prior year sales on a like-for-like basis despite capacity constraints, we would have seen growth to March 2020, had it not been for COVID hitting in the last couple of weeks. And I think what sits behind that is that you've got a portfolio of assets where there is much closer collaborative working relationship between us as the outlet operator and the store managers who tend to operate with a degree more autonomy than they do in full price outlets for a lot of the retail occupiers there. Turnover leases, so you end up with leases that are -- that they can't be over rented, a more proactive management to move occupiers around from smaller, larger stores and vice versa depending on trading performance. So more active asset management linked to that. The real estate itself is not particularly complex or tends not to be particularly complex. So you don't necessarily have that large maintenance CapEx bill, to think about. And as I mentioned in the presentation, not overly exposed to Internet retail because of the difficulties in replicating the experience of visiting outlets online. Martin, can I ask you to add any comments, particularly around how the valuers have approached the outlets values? And then I'll ask Colette to talk about the new lettings.

Martin Greenslade: Sure, Max. Listen, I think it's a very fair question. And let me give you just a color on one particular one because, clearly, the largest asset within that outlet portfolio is Gunwharf Quays.And the main driver of the valuation decline is actually the F&B there. So there's a reasonable amount of food and beverage at that scheme because of its location. And what we've seen there is it's the F&B that's been moved out around 50 basis points, Gunwharf has just been -- the yield has been moved out by 10 basis points for the outlet stores. So that's the main reason why it looks like the outlets are slightly weaker than the associated commentary, there is also then this reduction related to turnover. So for example, the valuers on Gunwharf have said, okay, for September to December, we're going to see turnover rents down by 15%, and then we're going to bring that back up to a normal steady state by the end of our financial year, by the end of March. So that's broadly how they've approached the valuation of outlets. Hopefully, that gives you a bit of color as to why the valuation decline is a little bit greater than you might expect. And probably I should hand you over to Colette there.

Colette O'Shea: Yes. Just to pick up your query about the GBP 0.7 million of new lettings. I think the main point to make there is that these are obviously based on a turnover arrangement. What I can say is the turnover arrangements are broadly consistent with the passing arrangements. And as we sort of said in the presentation, it's about getting the mix right and the sales, which are what going to drive the rent ultimately from those lettings, only fell just under 17% in the half. So it's been a lot about getting the mix right as well as getting the terms right. And I'll hand you back to Mark.

Operator: The next question is from Marc Mozzi with Bank of America.

Marc Mozzi: I have 3 questions. And the first one will be about what is the overall cash impact of your 77% rent collection over the first 6 months? When you do combine bad debt for GBP 85 million plus what has been put into client receivables. Can we have a sense of how much impact this has had on your net debt, please?

Mark Allan: Okay. What I'll say briefly is the most important thing is that the dividend we've declared is effectively covered by operating cash flow, having accounted for all of those cash collection rates and the other things you mentioned. But Martin, is there anything more specific that you can add?

Martin Greenslade: Yes. So just in terms of the actual cash delta, it's around GBP 100 million that -- yes -- no, sorry, it's -- if I just look at the -- if I just look at the 9 months, so if we ignore the September quarter day, it's GBP 83 million of cash that we haven't received. And to date, the amount that we haven't received from the September quarter is GBP 24 million. So if you put those 2 together, it's a little over GBP 100 million of cash not received that is due to us.

Marc Mozzi: Okay. So the increase in your receivables by GBP 110 million in your balance sheet does not reflect an increase of client receivable there. It's only GBP 20 million out of this GBP 100 million. Well, we can...

Martin Greenslade: Yes. Well maybe we'll pick up later, but there are a number of things in the receivables figure. And it's relatively complicated. So maybe we'll pick it up later.

Marc Mozzi: Yes. My second question would be very much about your capital recycling target of GBP 4 billion. Do you have any size order of what will be acquisition and what would be disposals? Because if I just look at what you might want to do in terms of refocusing your portfolio, we've got GBP 1 billion in subscale businesses, GBP 2 billion in regional retail, that's GBP 3 billion, should we say that we have GBP 1 billion of acquisition targeted in front of this?

Mark Allan: Yes. So the capital recycling target that we set out at the Capital Markets Day was around GBP 4 billion over the next few years, so over the next 5 or so years. We flagged subscale, as you mentioned, with no immediate urgency or desire to sell from there, but just signaling an intention in the medium term, particularly once trading is recovered from -- in the hotels and Leisure assets in particular to exit from there because of the lack of scale and relative lack of competitive advantage. And we also signaled an intention to recycle out of Central London offices, and particularly those assets where there is evidently strong investor demand, long let quality tenants, modern assets with long lease terms, where we've created significant value but can add relatively little more to those specific assets and then recycle back into what we flagged really as 2 opportunities. Central London, where we expect there to be more obsolescence and more rapid obsolescence in some of the secondary office property around the city that could offer redevelopment potential over time that we're well positioned for and obviously have a great track record in. And then the mixed-use regeneration, the urban opportunities, which I think plays increasingly well to the build back better agenda that we're starting to hear more about from government. Now the precise level of recycling there and the rate at which that happens and exactly where we choose to invest, I think will become clearer over time. We do certainly see acquisition opportunities in both of those growth areas that we would expect to see some news flow on over the next 12 or so months. We've set a net debt -- well, sorry, set an LTV target of 25% to 40%, recognizing the need to be at lower financial leverage to offset operational leverage. So it's difficult to provide precise elements at the moment. We will be recycling out of Central London before we recycle out of subscale sectors. And then where we choose to invest will depend on the progress of planning consents on our current urban opportunities program and the rate at which new opportunities either in urban region or in Central London present themselves. Hopefully, that gives you a bit of color Marc.

Marc Mozzi: Yes, it does. It does. And the final one, it's a small detail, but we spend a transaction on one of your assets at -- which is 50% of your Nova building, and it's 4.6% yield. How that yield compared -- will compare, sorry, to your book value at March '20, just to get a sense on how much value of this asset has moved over the past couple of months?

Mark Allan: Yes. So I'll ask Martin in a moment to comment on the the specifics of comparing that to the March valuation. Obviously, the Nova transaction itself, which was something which was contemplated prior to COVID, I think the fact that it came back and has been transacted with the same purchaser, I think still subject to their shareholder approval, but it's exchanged, I think that's a significant positive showing the resilience of the market. In terms of looking at book value, of course, we will value 100% of the asset. So there will be some differential for a 50% stake rather than a 100% stake. And of course, the -- conversely, the investment was into a corporate vehicle rather than the asset level. So broadly speaking, I think we can assume those 2 effectively net each other off. But Martin, perhaps you might just offer a more specific view on that.

Martin Greenslade: Yes. I believe that the transaction was at around a 5% discount to our March book value. I'm just -- I don't have the number right in front of me for the amount that Nova was written down. But it was -- but the values will adjust for the fact that there was -- that the stake -- that our ownership includes the asset management of the assets. So it won't have come down by the full 5%. I'll look at it and let you know.

Operator: Next question comes from the line of Christopher Fremantle with Morgan Stanley.

Christopher Fremantle: Just a question on your Retail. Can you just comment now on what -- the peak current decline that you have now seen in your shopping center valuations, if you have that number to hand? And to -- secondly, to what extent you believe your Retail valuations already reflect the 15% further decline in ERVs that you're talking about and that you say is necessary? And I suppose a final to that, do you think we're now through the worst of the value declines -- the valuation declines in retail? So just if you could comment on those 3 items, please?

Mark Allan: Sure. Thank you, Chris. Let me comment on the second two, and then I'll ask Martin just to see whether we have the information on the shopping centers peak to now movement. So I think with respect to our ERVs, our ERV projections on sustainable rents, the 15% we mentioned reflected in values, it's difficult to be precise. Of course, my judgment would be that they are partially reflected. And I make that comment really when you look at the equivalent and initial yields compared to other sectors that have seen quite significant rerating and the fact that there is a challenge in underwriting sustainable rents. I think if you believed a sustainable rent and there was clear credible evidence to support it, I don't believe investors would be looking for a yield in the mid- to high 60s for multi-let assets with -- that have got good footfall and good ongoing demand. So I suspect they are at least partially reflected, but it's difficult, of course, to be precise. Conversely, the valuations are also going to be reflecting the current contractual arrangements, the passing rent. So there is going to be a degree of burn-off of that over rent over a period of time. And of course, the rate at which that happens will depend on how we see CVAs or other things play out beyond the end of the pandemic, presuming at some point, the moratorium itself is suspending. And of course, there's a degree of judgment to be applied there. So I think -- I that would say, we still expect to see some -- there's still reasons to believe there will be some further downward movement. I think in the current situation, offering a view on whether we've seen the worst or not, I think would be probably a little bit rash of me, so I will duck that one, Chris, if you don't mind. I'm going to see Martin, if we got a number for the peak to current on shopping centers?

Martin Greenslade: No, I feel like a bit statue sitting here, [indiscernible] quickly work things out, but I'm afraid I don't have a peak to now movement. And just one other -- sorry, just one other bit of color that I will give is that, I mean, clearly, the valuers have to take into account the spot ERV. They can't take into account the future ERV in the numbers. The only way they can do that is in the same way that a buyer would through the yield number. So the ERV -- a further ERV change will come through into valuations. But as Mark said, the key question is what's the yield.

Mark Allan: I think, Chris, just -- and we'll try and get you that number separately. But I can't do the reverse compounding in my head, but the 20% decline over this 6 months, I think, followed an 18% or so movement over the second half of last year. I think that's when the bulk of the movements have been booked. So I'm sure there was some element prior to that, that at least gives you a sense of what's happened over the last 12 months anyway.

Martin Greenslade: Right. We've got -- I think the peak to trough is around 25% to 30%, but we'll try and be a bit more specific to you.

Christopher Fremantle: May I just sneak in one further the question, which is about your London office disposals. I appreciate it's difficult for you to talk about the sales that haven't yet completed, despite some being reported or rumored in the trade press. Can you just at least confirm how many assets do you have, just to give us a flavor of the quantum of sales that are either in the market or going through the process of disposal right now?

Mark Allan: As you say, Chris, we don't comment on the specifics. We flagged GBP 4 billion in recycling in total, signaling around GBP 1.5 billion of that to come from subscale type sector. So I think that gives you around GBP 2.5 billion that we had earmarked from Central London. I think the rate at which that happens will depend on how we see investor interest and, of course, how we see the opportunities to redeploy. The other factor we take into account is making sure that we keep our leverage nice and conservative so that we can capitalize on further opportunities. So I can't give you a number of what we expect to sell over the next 6 or so months. But we are active. And I think we're, in broad terms, as we've said in this statement here, encouraged by the depth of investor interest for that type of product.

Operator: Next question comes from the line of Matthew Saperia with Peel Hunt.

Matthew Saperia: A quick question following on really from Chris's around the sustainable rents. Could you just remind us of the methodology that you've used to get to those sustainable rent numbers? And then thinking about the 15% for -- from September's ERVs. Can you talk about the range and potentially, whether there's any sort of differences across different asset types or geographies?

Mark Allan: Sure. Thanks, Matt. So I'll offer just a few comments on the methodology, and then I'll check whether Colette has anything she'd like to add to it. With respect to your question on the range, I mean, there is a bit of a range either side of what we've indicated in terms of 15, but it's not a significant spread. So I don't think there's anything sort of particularly significant to be aware of within that. The methodology that we've applied to sustainable rents has really it's been to look at the trading performance of our occupiers across each of our assets and by extension, form a view of what the P&L for those occupiers and those segments of the wider sort of occupier market look like, look at margins, look at other operating costs and then look at total operating -- total occupational cost as part of that. And then we've made some assessment of channel mix and to what extent from the data that we see, do we expect there to be further shift to online and what pressure that may put on the P&L of the physical store. We then look to solve effectively for a total occupational cost, including service charge and rates, insurance as well as rent in the low teens. And what we've also done, just a further sort of extra level, I think, of prudence in our approach is, we recognize that in some cases, that calculation for stronger occupiers is going to point to the potential for an increase in rents. Where that is the outcome we have kept at current ERVs, recognizing that the negotiating strength. And I referenced it in some of my remarks about new anchors. The negotiating position is obviously somewhat different. So it would be unwise to factor that into our calculations. Colette, is there anything that you would want to add to those comments I've made?

Colette O'Shea: No, Mark, that's completely it.

Martin Greenslade: Mark, can I just come in and just give the answer on the shopping centers.

Mark Allan: Yes. Yes.

Martin Greenslade: We've -- on valuations, peak to trough, we've taken around 25 -- just over to 25%, maybe up to 30% ERV decline. Total valuation decline with yield shift as well is in the high 40s to low 50% declines depending on the asset. So around 50% is the decline, maybe a touch higher for some assets.

Mark Allan: Thank you, Matt. Hopefully, that gives you some more color on the sustainable rent.

Operator: There are no more questions from the phone, Mr. Allan the floor is back to you for the web questions.

Mark Allan: Okay. Thank you very much. So I'm looking at a couple of questions from Steve Bramley-Jackson on the webcast. So the first is, do we think as a result of the '08, '09 crisis and now the COVID pandemic, there are grounds for leading REITs in the U.K. such as ourselves to lobby for a reduction in the payout ratio of REITs. I mean it's not something that we have given too much sort of time and thought to. I think, though, both 2008, '09 and today point to a couple of, for me, very important things that we've tried to reflect on our strategy. The first is the importance of managing leverage effectively. And I think the net debt-neutral approach that Martin has overseen over the last number of years has contributed very significantly to the fundamentally strong position that I referenced earlier in my remarks. I think there is definitely a risk there. Too much focus on income could lead to over distribution or holding on to assets for longer than might be strategically the right thing to do. So my second point then we also picked up in our strategy is the importance of focusing on total return and recognizing that we are a business which is positioned to add value and to create value, and that's really where we should have our capital tied up. So no specific comment on the -- reducing the payout ratio, but hopefully some helpful context on how we think about that in the wider context of managing our business for returns and capital structure. Second question also from Steve. Are we expecting a number of tenants occupying larger HQ buildings to downsize at or feasible ahead of lease events? I think it's too early days. I mean, to really offer any firm views on that. A couple of, I guess, pieces of perhaps interesting evidence we continue to be in very close dialogue with Deutsche Bank with respect to 21 Moorfields. Now they, of course, still have the scope to look at reconfiguring space or reusing it differently because of the ongoing build program. I'm pleased to say there's been little or no change from them. So they -- in looking at their very substantial headquarters into which they were effectively consolidating the same size of workforce from a total, I think, of around 750,000 square feet into around 560,000 square feet at 21 Moorfields, I think that still seems very much their expectation. I think we have seen some evidence. We referenced our secondhand space and tenant release as part of the market trends generally. We have seen elements of that within our own portfolio. Interestingly, we've also seen tenant release space put on to the market and actually withdrawn from the market. And one of the things we didn't touch on too much earlier is the extent to which tenant release space ultimately might actually be withdrawn from the market. And therefore, actually, that current level of vacancy being dominated by secondhand space could actually be artificially inflated in the short term because of the lack of suitability and perhaps short-term nature of the way in which tenants have responded in putting space on the market. Question from Andrew Gill. Are we seeing a wide spread of valuation trends in London office between Grade A long-let assets and secondhand space, do we expect to see an acceleration of declines in secondhand space with availability increasing more rapidly? I mean I think that's the general theme of what we expect to see. It's very early days in terms of transactional evidence, and I'd like to be able to point to concrete evidence of that at the moment. And because of -- from a portfolio point of view, our portfolio is, of course, dominated by the long let, high-quality assets. We don't have valuation evidence of our own that shows how the values have approached those types of assets. But certainly, we are aware of and you would expect us to be relevant to be looking at some opportunities where there are older secondary offices where perhaps there could be an acceleration through to redevelopment. Potential. And as we flagged, we see that as being a medium-term opportunity. A question from Oliver Carruthers, a bit more color on dividend policy going forward. Does this interim level of 12p or 24p annualized, represent the trough level under the newly announced total return oriented to business plan, how should we think about the targeted progression of this dividend in the medium term, given you intend to recycle GBP 4 billion of capital over the next 5 years. So, of course, the reinstatement of dividend was as signaled at the Capital Markets Day. The level that we have pitched that out is at the more cautious end of the cover ratio that we covered at 1.2 to 1.3x. So it's around 1.3x cover of the first half actual earnings. So that's how that size has been arrived at. It's not intended in any way to revise some signal of where we see things going forward. I think in terms of where dividend may go from here, we referenced and Martin went through in some detail, and I will ask him to add some comments in a moment that the in period impact of COVID, the bad debt provisions, the like-for-like impact to gross rents because of the turnover related elements of parts of the portfolio, there's a strong argument that a substantial proportion of that will recover very quickly post pandemic. So of course, it's then down to how you judge the rate at which we emerge from the pandemic, which of course, is not something that we're able to to shed any light on. And then, of course, as you flagged, there will be some capital recycling. So our intention when we launched or reestablished the dividend and talked about our policy at the Capital Markets Day, was to make sure that we had flexibility within the dividend policy to progress asset recycling to pursue high levels of total return and the cover range and the fact that we have not talked specifically around progressive dividend policies is intended to give us just that. Martin, is there anything that you'd like to add to my comments?

Martin Greenslade: Just to remind people that, obviously, there was a reduction both in gross rental income. So hotels, car parks, turnover top-ups and outlets and the like, which, as you state, one would expect to rebound back post pandemic. And that is obviously, much more than likely to outweigh continued pressure around rents. And then it will be a matter of the bad debt provisions as well because as those come off, clearly, that was a major impact on the reduction, the -- just under 50% reduction in revenue profit. And clearly, revenue profit is the driver here.

Mark Allan: Great. Thank you, Martin. I'm being told that there are no further questions on either the conference call or the webcast. So it just leads me to say thank you very much for your time and attention this morning. I do hope you have found the presentation and the Q&A helpful. Of course, we are at your disposal for any further questions that you may want to send our way. But on our note, I'll end the webcast this morning. Thank you very much, and have a good day.