Earnings Transcript for LAND.L - Q2 Fiscal Year 2022

Mark Allan: Ladies and gentlemen, good morning. Welcome to the Landsec Interim Results Presentation for the Six Months to September 2021. I'm delighted that we're able to deliver these results in person today, but also of course that we're able to stream live for those unable to attend this morning. I'll shortly give you an overview of the first half and six particularly, important themes before Vanessa gives you more color on financial and operational performance. I'll then give a strategic update before moving to Q&A. So, the six particularly important themes that I mentioned. First, positive business performance and building strategic momentum. Now, given the pandemic-affected 2020 comparatives will not be a surprise that the key indicators are all positive year-on-year, but the recovery has certainly been at the stronger and the more sustained end our expectations range from six months ago. And more importantly, the business recorded its first increase in net asset value per share for over five years. Second, robust leasing performance in London with investor demand driving down prime yields. I said six months ago that we expected prime rents to be resilient with perhaps low single-digit falls and that there was the prospect of some yield compression. In both cases, the actual picture has proven stronger particularly so in the case of yields where large amounts of capital chasing finite amounts of prime stock has pushed yields down and there is more to go. Third, a strong retail leasing performance over the past couple of results presentations. I've talked about rents approaching sustainable levels and the evidence to support this has been increasingly encouraging in the first half. Like-for-like sales up across our retail estate, vacancy down, and lettings ahead of ERV. Fourth, we have made excellent progress in accelerating our mixed-use strategy most obviously with the MediaCity and U and I transactions announced earlier this month. Strategy in this part of the business is moving from talk to action. Fifth, a continued focus on capital discipline. And we have continued to maintain a strong balance sheet over the period, net debt was neutral, cash generation strong, and we retain excellent portfolio liquidity. And finally, leading the way on net zero. Having been the first commercial real estate business to set a science-based target five years ago, we are today the first to set out a fully costed plan to 2030 to support the transition to net zero. Now, turning to each of these themes in a little more detail. The business delivered a 3.7% total return for the six months with every major segment contributing positively. Arguably more important, however, is the momentum we've been able to build in executing our strategy. A year ago when we launched our new strategy, the capital recycling element of our plans was unsurprisingly focused on disposals. But as things have progressed and the outlook has become if not settled at least less unsettled, we've been able to focus increasingly on investment opportunities. We now have excellent visibility of new opportunities and potential returns across each area of our business. And this allows us to assess relative return prospects and to be more decisive in our capital allocation decisions as a result. You've seen this with the recent announcements we have made and it's a theme that I will return to later. And this strategic progress also shows in the steps we have taken in changing our culture, the importance of which I outlined last year. Now, we still have plenty to do, but Landsec is already a more agile business, closer to its customers, and more readily able to respond to changing conditions. Put simply we are now making more of the undoubted potential of our talented people. Now, turning to London and firstly, occupier markets where our performance has been encouraging. 12 office leases completed or agreed in the period covering £25 million of rent at levels supportive of ERVs which have themselves increased by 1.2% over the six months. And we have seen a noticeably sharp increase in activity levels since September with people increasingly prepared to make decisions about existing and future space requirements that were previously being put off. We have active interest over 250,000 square feet of new space and this step change is also clear at a market level where take-up in the third quarter was up 59% from the previous quarter and is now back close to the 10-year average, despite the unprecedented disruption of the past 18 months. And space under offer now sits above the 10-year average of 4 million square feet indicating a strong end to 2021. Now, over the past few months, I've met with a lot of our office customers and in particular, those that are making decisions about space now. And consistently the feedback I've heard is the importance of quality, flexibility, and sustainability in their decisions, all areas where Landsec scores highly. And consistently the discussions are about how their space is best used rather than how much they need. From a supply perspective, the pandemic has seen a number of ongoing build programs delayed and new construction starts pushed back. Forecasting delivery is therefore tricky, but relative to six months ago, we now expect a number of previous 2022 completions to be pushed back into 2023 with a knock-on effect into 2024 and beyond. n2 and Lucent, which together represent around 50% of new West End supply under construction and offer certainty of delivery to occupiers are well placed in this regard. Now in terms of the investment market, I commented earlier that yields contracted in the period and that there is more to go. And this is borne out by our own experience. Last week we completed the sale of Harbor Exchange, an office and data center with 20 years of unexpired income for £197 million and a 4% initial yield. And this is around 4.5% ahead of the most recent valuation. And based on other active discussions concerning potential asset recycling, I'm confident that we will see further tightening across the London portfolio in the second half. In retail, we have seen meaningful levels of leasing ahead of ERVs for the first time in quite a while. 181 leases covering £16 million of rent completed or agreed on average 3.3% above ERV. And this reflects a generally strong operational performance across the board, with like-for-like sales overall up an average 0.5% versus 2019 since the 5th of April and vacancy down to 7.5% at the period end. Outlets were particularly strong. So out of town shopping centers, city center malls lagged earlier in the period due to COVID restrictions, but have performed strongly since September. On the investment side, liquidity is beginning to return to the shopping center market and importantly senior debt is beginning to become available. For our own part, with increasing conviction in the affordability of rent levels, we continue to believe prime retail yields look attractive on a relative basis. Of course, shopping center rents are down just under 40% from peak, value is down around two-thirds. So it's only right to be cautious from here. However, our thesis remains that we are seeing a flight to quality among brands and among shoppers. And with prime rents at sustainable levels, vacancy will increasingly be concentrated in inferior locations. The mixed use or urban opportunities element of our strategy has been the smallest part of the portfolio to-date and the least developed part of our strategy, but that is now beginning to change. Through the acquisition of a 75% stake in MediaCity and our recommended all cash offer for U and I both announced earlier this month, we have materially accelerated our investment potential in this part of the business with a combined £1.1 billion to £1.3 billion of potential investment into high quality mixed use projects achievable over the short to medium-term. Both transactions show the more agile and entrepreneurial approach, we're prepared to take in executing our strategy. In the case of MediaCity, you can see that we're able to increase our investment in mixed use without needing to dilute earnings at a group level. And the proposed U and I deal also brings complementary front-end skills ideally suited to mixed use projects. And our existing projects are also progressing with planning applications on track at both O2 Finchley Road and Lewisham shopping center. Our focus on capital discipline will continue to be an important feature of our business and our strategy. You'll hear more from Vanessa shortly, but there are three key areas I would highlight. Firstly, modest leverage. Last year, we reduced our LTV tolerance to a core range of 25% to 40%. Net debt has remained flat over the past six months and we continued to operate firmly within our target range. Secondly, we are focused on matching the timing and quantum of disposals and reinvestment. Now of course, this is not an exact science, but we will seek to control both cash drag and leverage levels appropriately so that shareholder returns are not disrupted by portfolio recycling activity. And the much greater visibility that we have of investment opportunities across each part of the business coupled with good portfolio liquidity means that we are now much better placed to do this. And finally, we are focused on increasing optionality in our development program, which we see as key to preserving flexibility and agility across our business. We've already shown this with our recent acquisition announcements. And we are also pursuing plans to boost optionality in our existing portfolio. Now in 2016, Landsec became the first commercial real estate business in the world to commit to a science-based carbon reduction target. In 2019, we increased our ambition to align with a 1.5-degree global warming scenario. And that requires us to deliver a 70% reduction in carbon emissions by 2030 relative to a 2013/2014 baseline. Now we've already achieved a 55% reduction, and today we are setting out fully costed plans to support the remainder of our target. £135 million to be invested across our existing portfolio over the next nine years, the details of which Vanessa will cover later. Now this investment is in addition to everything we're doing in new development, where every project committed to since 2019 has been designed to be net zero both in construction and in operation. The Forge in Southwark is due to complete next year and will be the first such building to meet these criteria. And our plans keep us ahead of minimum energy efficiency standards requiring an EPC B certification by 2030 and align fully with 2050 net zero pathways as set out by the Carbon Risk Real Estate Monitor or CRREM. We are proud to be maintaining our sector leadership position in helping to tackle climate change. I'm now going to hand you over to Vanessa.

Vanessa Simms: Thanks, Mark, and good morning, everyone. I'm pleased to be able to present my first financial update at Landsec off from rather busy first six months in the role. I've seen the real benefits of the cultural change that Mark has initiated and we have increased our momentum with our strategy. So following the challenges of the pandemic, this has been a year of recovery, a meaningful transition for our business. The recovery has been at the stronger end of our expectations and we are well placed to deliver our strategy. It's worth noting when we're comparing the performance against the previous period that there are some one-off gains. So following the impacts of the pandemic last year, so I'll highlight these as we talk to our performance. EPRA earnings were up 56.5% and that's primarily due to the favorable movement in bad debt with no further provisioning required in the period. And today, we declared our second quarterly dividend at 8.5p. That brings the dividend for the first half to 15.5p per share, up 29% on the same period last year. Our policy is to pay an annual dividend in the range of 1.2 times to 1.3 times cover and we expect to be in line with this policy for the full year. In terms of our balance sheet, EPRA net tangible assets per share were £10.12 and they were up 2.7%. This was driven by the earnings and the valuation surplus. Group LTV has reduced marginally to 31.8% and our balance sheet remains robust. Our total business return over the six months was 3.7%. Looking at EPRA earnings in more detail. Gross rental income was £11 million lower for the first half of last year. And the gross rental income from our like-for-like portfolio is up £14 million, which reflects the recovery in our variable income and includes £7 million of surrender premiums. And this is partially offset by the higher average vacancy over the period and lower rents from lease regears. CVA and administration activity has reduced rental income by £15 million, which predominantly relates to the insolvency activity in the last financial year. This year, we've only had two occupiers enter into insolvency. That's a dramatic reduction from the 58 that we had last year. But of course, it's reflected in the moratorium on enforcement action. The net impact from acquisitions and disposals also reduced our rental income by £10 million. We sold seven Soho Square and one & two New Ludgate last year and then two retail parks in the first half of this year. And we have £2 million of increase from the acquisition of 55 Old Broad Street. Our direct property expenditure increased to £25 million and this is primarily due to the significant increase in letting and operational activity and to the release of the historic Landflex provision in the first half of last year. In line with the opening up and the trading and the improved rent collections, we have not needed to take further bad debt provisioning. And this has resulted in a favorable movement from an £87 million charge to a £3 million release in the current year. Overheads have increased due to the level of business change activity that's taking place across our organization. And one of my priorities has been to review the cost base to right size for the future. We're targeting to bring our EPRA cost ratio back towards 20% over time. That's from the current level of 23.7%. And I will update you further on this -- on our progress with this at the year-end. Over recent months, we've experienced a high level of operational activity, which I'll cover in more detail by segment. So starting with the Central London offices, where we have been partially -- particularly active as our occupiers are proactively reviewing the use of the space as workers return to the office. Over the first half, we have completed and we've agreed 12 lettings totaling £25 million of rents. The rent on the prime grade A London offices remains resilient and it's supportive of ERV, but there is an increasing focus on sustainability well-being and flexible space, all of which play to our strengths. Office utilization has increased over the recent months, as confidence in the workplace safety and public transport has improved. Utilization has progressed to an average of 55% of the pre-COVID levels, with a mid-week higher at 67%. And vacancy across the London office portfolio has marginally increased to 4.4%, and this was expected due to the completion of the Dashwood House refurbishment. Moving to London retail, as you're well aware, the recovery here has been slower. Vacancy in this segment increased to 11.9% and this includes the surrenders that we've taken on the retail units under Piccadilly Lights. The vacancy across the London retail will enable us to reposition the ground floor amenities to adapt to current trends. However, Piccadilly Lights are trading well, with strong bookings giving us the confidence that income will be back to 2019 levels by the end of the year. And rent collections over the first half of the year have also recovered. I'm pleased that, we've now collected 100% of our office rents and 83% of London retail. Across our regional retail portfolio, the period has been characterized by the phased reopening and the easing of restrictions, which has translated into a strong trading recovery for the majority of our occupiers. And this in conjunction with the level of operational activity in the recent months leaves us with a positive view on the outlook for our retail portfolio. We've experienced a high level of leasing with 181 lease events at 3.3% ahead of ERV. The vacancy across our shopping centers and outlets has reduced by 130 basis points to 7.5%, and we have further deals in our pipeline which suggest that this trend should continue. In common, with the wider sector, footfall across the portfolio is down meaningfully versus 2019. But with higher conversion rates and transaction values, our like-for-like sales in September continued to strengthen and they increased to 3.8% ahead of 2019. This has also supported our progress with agreeing rent concessions and we've now collected 92% of our regional retail rents. The recovery in operational performance across the hotel and leisure sectors has been stronger than we expected at the start of this financial year. Vacancy is reduced across the retail parks and leisure, and there's been a strong recovery in hotel occupancy since August. Cash collections within our leisure assets have been a bit slower as a result of the cinemas where we were waiting for the impact of the Bond release on Friday, before we finalize the rent concessions and payment plans. So looking forward on earnings there is two principal factors that are affecting income over the next two to three years. First, the rate of continued operational recovery; and second, the impacts of net investment, I set out our view on those factors here, although made no assumption with regards to the market rental growth. Overall, we see upside in gross rental income from the operational recovery over the next couple of years of around £27 million. This includes the reasonable leasing up of void space, the reversions to ERV and ongoing improvements in variable rents. On net investment, Mark mentioned earlier, our approach to capital discipline is to align the timing and the quantum of net investments, so that we manage our net debt position and protect income. The £42 million increase shown here reflects the expected impact on income from the committed developments and acquisitions, together with the known and planned disposals. This assumes disposals of £1.3 billion overall, which is approximately a-third of our £4 billion target and that's focused initially on Central London. We see potential growth of up to £69 million in income associated with these factors. While this does not illustrate the full impact of our strategy and it's not intended to be a forecast, it shows that there's income upside in our plans from here. At 30 September, our combined portfolio was valued at £11 billion, with valuation growth of £81 million in the first half. Our portfolio has seen growth on a like-for-like basis at a £33 million development profit. The majority of the COVID allowances that were introduced last year across our retail and leisure assets have been reversed given the strength of our operational performance. This contributed £40 million in the overall valuation gain. And we have £11 million of COVID provisions remaining, where the recovery from the pandemic has been slower. So I'll cover the major movements by segment. Starting with Central London, which is valued at £7.5 billion and it currently equates to 69% of our total portfolio. The London office assets, their values increased by 1.6% over the first six months and that's reflecting investor appetite for the higher quality assets. We saw like-for-like rental growth of 1.2% and yields compressed slightly. We've recognized GBP 33 million of development profits. And that's primarily been on 21 Moorfields as the construction nears completion and the yield rerating reflects the high quality and long income pre-let. This has partially been offset by increased costs at The Forge and Lucent. London retail was slower to recover from the pandemic with a further valuation decline of 6.7%. However, since September we have seen a notable increase in F&B demand across the London portfolio. And a contributing factor to that decline is two agreed surrenders under Piccadilly Lights which I mentioned earlier. We've taken the benefit of the surrender premium in our income and we've revalued the assets on a vacant possession basis. The other major asset in Central London portfolio is of course Piccadilly Lights, where the values increased as brands are committing to take space, recognizing the global reach of this iconic landmark. The rate of decline in the regional retail portfolio slowed markedly over the period with clear signs of stabilization in the second quarter. This stabilization reflects the improved trading performance from our occupiers and a reduction in our vacancy which has supported the release of the COVID provisions and only a modest yield expansion. Regional shopping center valuations fell by 4.1% reflecting a 1.8% decline in like-for-like rental values and an 18 -- a 16 basis points of yield expansion. Our outlets performance was stronger with valuations increasing by 1% as the sales and occupancy rebounded post lockdown. And sales are now consistently ahead of 2019 comparatives. Our urban opportunities portfolio consists largely of the retail assets that we're planning to redevelop. They're currently valued on an existing use basis and they're therefore aligned to the wider retail valuation sentiment. This portfolio fell in value by 3.4% a combination of the rising vacancy rates in suburban London shopping centers, but also the impacts of our vacant possession strategies. Our subscale segments is a combination of hotels, leisure and retail parks where the overall value increased by 5.9%. Leisure has stabilized over the past six months and the value of our assets increased by 4.2%. This is due to a combination of the yield compression, the release of the COVID allowances and then two significant regears and lease extensions with Snozone. Retail park valuations increased by 15.6%, with over 100 basis points of tightening in yields, reflecting the rapid recovery in the investment market. And we have taken advantage of this and we've disposed of two Retail parks in the period at 12% above their book value. And as the market continues to strengthen in our subscale sectors, we will continue to dispose of these assets with confidence over time. This slide provides details on our London development pipeline where we've got four schemes in progress totaling, 1 million of square feet with a current market value of £931 million. The cost to complete these projects is around £467 million. And we've also shared our yields on the market value and the cost to complete. So, if you compare this with the prevailing London office yields, you can see that we anticipate further development profits as we complete these schemes boosting our total returns. And we've got -- have potential to invest around £440 million on two consented schemes that's Timber Square and Portland House. And a third scheme that's in the design and planning phase is Red Lion Court. We've maintained, a conservative gearing and a strong liquidity position over the first six months of the year and our balance sheet is well positioned to deliver our strategy. Our debt metrics have remained strong with good recovery in our earnings and cash collections. Our net debt has remained neutral at £3.5 billion which combined with the growth in valuations has reduced our LTV to 31.8%. And we continue to have strong liquidity with £1.6 billion of headroom. As set out in our strategy review last year, our core LTV target range is 25% to 40%. If we're taking into account the current environment and our ongoing activities, I expect to maintain our LTV percentage below the mid-30s for the foreseeable future. We continue to manage our financial and operational risk prudently and our funding structure provides the flexibility at the right cost to deliver our strategy. Mark reminded you earlier of our sector-leading credentials in tackling climate change and the establishment of a £135 million net zero transition investment plan. Clarity around our transition to net zero is important. So going forward, I'll report on our investment progress towards our low carbon business. Our plan covers Scope 1 and 2 emissions and a proportion of Scope 3. So that the bottom chart here shows the component parts of the net zero transition from here to 2030. Last year our emissions were down from 80,000 tonnes in the 2013/2014 to 52,000 tonnes. And as you can see the largest benefit comes from the ongoing decarbonization of the grid. Our £135 million investment complements this in two ways

Mark Allan: Thanks very much, Vanessa. Now when we announced our new strategy in October last year, we talked about our core purpose

A - Mark Allan: Chris? Hi. Sorry, I forgot to do the Q&A bit.

Chris Fremantle: No, no. It’s all right. Chris Fremantle from Morgan Stanley. Just two questions really. The first is, just on the earnings trajectory. I think, Vanessa, you gave a good walk to get from starting gross rental income to ending. Can you just talk about the bits below that? You talked about the costs and a reduction in costs. Is there a potential to release further provisions in future -- in future periods that could help the earnings trajectory in the near term? If you just talk a little bit about the moving parts below the gross rental income line that would be helpful. And then secondly, you gave the figure on your carbon reduction plan and the £135 million, which doesn't seem a huge number in the context of an £11 billion portfolio. But where do we see that in the financial statements? Is that just sort of rolled up into your CapEx? Where does that actually come through? Is that going to come through in your income statement, or just a little bit of clarity on that would be helpful, please.

Vanessa Simms: Yes. Okay. Thanks, Chris. So from an earnings perspective, the performance of -- as you mentioned, we sort of laid out where we see some of the moving parts on gross rental income. And from a net rental income and a cost perspective, we're targeting to have our -- an EPRA cost ratio of around 20%. And that will be delivered over time, because we're going through a process at the moment of some business change. And we're looking to secure -- we're expecting to secure some benefits and some procurement activity as well. But in terms of provisioning, the main provision that we have in our accounts is the bad debt provision, which we've laid out quite a lot of detail in the RNS zone. And that really relates to -- is really one that we've carried forward from last financial year where we experienced more challenges with rental collections. In terms of provision, we've released about £3 million which is quite a small element in terms of the first half of this year. But that really reflects, I think, the progress of -- we've made in agreeing rent concessions and receiving payments from our customers. So on the current trajectory of where we're heading, we are well placed and we've got a fairly prudent provision in place. But it would be wrong of me to necessarily say that there's anything at this stage that we expect to release. In terms of the other components, I mean, the other main components would be around our financing costs. So we've got long-term debt, a pretty stable cost of debt. So we’d expect that to continue on the same basis with a neutral net debt position. And -- so then the second question you asked me was around the £135 million investment into our carbon net-zero investment plan. And that really relates to replacing, I would say, about -- around about £100 million of that relates to replacing the existing gas-fired boilers effectively and transitioning on to the grid, so using electric alternatives. And that would be seen as a CapEx item, as we replace those boilers, which would be in line with, we would over time be replacing those. But as we go through that, between now and 2030, we'd accelerate that. So that would -- we would expect that to come through as a CapEx cost. The other costs, there's quite a significant proportion which relates to upgrading our building management systems and then implementing AI management as well. So again, that would be really reinvesting into our systems. And then, we also would -- the costs also cover things like moving to renewable energy such as solar panels. So, I think in answer to your question probably the majority of it would probably be within CapEx and some within the OpEx.

Mark Allan: Now that gets us to a 70% reduction in carbon relative to our '13/'14 baseline by 2030. So there are still residual emissions at that point which to be net zero we would be offsetting. And that's not included within that £135 million number. Another question in the room. Got also in the front here. Just get your microphone.

Osmaan Malik: Good morning. Osmaan Malik, UBS. On the London office market, you discussed the prime end of the market being quite resilient, which I guess I agree with. What I'm interested in is, what's happened to the -- how representative is that of the whole London office market? And what's happening in some of the lower quality space? Does that throw up opportunities for you? How much is that lower quality space struggling, given the work-from-home theme and the other things that are going on in this market? Thank you.

Mark Allan: Thanks, Os. Yes, I think the most helpful answer I can give at this stage is, it's still very early days. Our visibility as you would expect is primarily on -- at the prime end. Certainly from the agents that we work with on space, they're consistently talking about how skewed that demand is. If you were to look at take-up relative to availability, generally about 20% of available space is grade A and it's accounting for I think just over 30% of take-up. So it is over-indexing in that sense. But I don't think we're necessarily seeing a collapse in demand elsewhere within the market at this point. I think it's still going to be a case of waiting probably another six to nine months to see how demand settles down over that period of time. Whether that represents opportunities, I think it's a really interesting question something as you would expect that we keep a very close eye on. And I touched on in the presentation that we have seen investors start to move up the risk curve and we've seen it most obviously in widely marketed development sites. But I think, we could also see it elsewhere where our capital chooses to work with a development partner or an expert asset manager to be able to reposition buildings to become grade A. I think this simple lack of high-quality grade A product available that investors are having to find different ways to get that access. So, we could see more competition there. It's one of the reasons we're so focused on acquisition opportunities in London, where we have a genuine competitive edge. So the 55, Old Broad Street acquisition that we made nine, 12 months ago, adjacent land ownership to Dashwood where there was a clear marriage value. And there's those sorts of situations or existing relationships with landowners or occupiers that we will continue to leverage to find the opportunities to deliver the right sort of returns. Any more questions in the room? I've got one I'll come to the conference call in a moment, but any more in the room, first? So it looks -- so I'm going to move to the conference call. I think we've got a question on the call from Paul May at Barclays.

Operator: There's a question from Paul May from Barclays. Please go ahead.

Paul May: Hi, everyone and thank you. I hope you can hear me. I got a number of questions. I think linking on from Os' a little bit with regard to London offices and demand there. Utilization of space is still fairly low. I'm not sure, given the UK is sort of fully open now what really drives that higher from here. Just wondered, when you believe occupiers will start to reflect that in their demand decisions for space given we seem to be running at a peak level of around 55% of total occupancy in terms of utilization. So, I just wonder what your views are there. You mentioned around demand -- or sorry competition coming through on development of prime space. I just wondered, when you see -- whether you see that putting any pressure on rental levels moving forward as more of that supply comes on stream. Just moving into retail, you mentioned that you believe that we're reaching sort of a bottom. And I think looking at your unlevered IRRs, you're expecting a 2% to 4%, it looks like medium-term rental growth per annum coming through on those prime retail assets. Just wonder what the drivers are there of that sort of higher than inflation expected rental increases coming on retail moving forwards. And then, just on your three speculative developments for Lucent and n2, it looks like losing value on those relative to total development cost. I appreciate yields are quite high on those. Just wonder, when you expect valuation improvement to come through. Is that just simply through letting up of those schemes over time? Thank you.

Mark Allan: Thank you, Paul. So the -- your first question is around office utilization and overall demand for London office space and what drives that from here. I think it's important to say that I think we are still seeing a reasonable amount of disruption in the rate of increase in utilization. So, for example, half terms school sending children home because of COVID situations and people having positive COVID tests. I think there's still quite a lot of noise in the wider occupational market. So I think your assertion that the UK is effectively back to normal and the economy is open I think is probably feels a touch premature at the moment. I think we are still going to see caution from people over the winter months. I think we're certainly not going to see anything from government that's going to dissuade people away from that. I think we're very focused understandably on maintaining an open economy, and therefore, discouraging travel et cetera unless it's necessary. So I think all of those things are going to act as a suppression on perhaps the genuine demand for at least the next six months. So for me it's, sort of, spring I think before we start to see a difference. And then at the moment our midweek utilization is at 67%, and I think it's probably the peak utilization that is the most relevant reference for long-term space requirements rather than the average because it closing that are mostly be in on a Tuesday, Wednesday and Thursday you need to have that one to be in on Tuesday, Wednesday and Thursday. So I think with growth from 67% to me that's still underpins good resilience in demand, all of the conversations I've had with the office customers I've met over the last two to three months has pointed to them having been previously uncertain still not clear about how they're going to use their space or how often people are going to be in but more comfortable that they do need the space that they have. Now that may well vary over time from occupiers it may well be the large financial service occupiers for example Myo look at opportunities to make savings in back-office occupation of prime buildings, but I think that's -- those cost driven business perhaps will see some reduction, it's clearly not a part of our business that we are part of the sector that we are or the economy I just said we're particularly exposed to. So for me it's a six to nine months view our own internal planning scenario and I wouldn't want to give the impress that this is super sophisticated in terms of the analysis behind it. But it does fail us that we should be planning for 20% fewer people in Central London at any point in time compared to before the pandemic. And that's simply just people coming in and out at different times rather than being a large number at the same time. So I think the impact from a value and demand point of view is more pronounced in the retail in the ancillary space. And you've seen that in the valuation impact that's come through again in the first six months of this year. But even there, I think we're now starting to see a shift in a turn -- upward turn in demand than anyone who's tried to book a table at a restaurant in London of late will probably have found it quite challenging. I think your point on development leading to competition is a really interesting one, very early at the moment. I don't see that necessarily in the near-term accelerating supply coming to the market. I think it's more at the moment an indication of just how much capital there is trying to get exposure to the London market and just the level of competition that there is for that. So some of the most recent estimates we've seen from our agents would suggest that there's something like £40 plus billion of capital trying to invest in a market where there is probably £6 billion to £7 billion of products available at the moment. I think that's where the near-term impact is going to be. Clearly we need to keep a very close eye on both how demand transitions from here and how the supply pipeline move forward. And that's why having flexibility in our pipeline is as important as the disease. So I'm not sat here saying, we know exactly how demand and supply is going to pan out for the next five years and we're putting all of our chips on a particular outcome. We've got Portland House ready to go next year. We've got Timber Square ready to go next year. We've got quite a lot going on at the moment in our committed pipeline. And as we see continued evidence of growth in demand in particular, we can press the button on those developments quickly and therefore keep ourselves well-positioned within the market. You asked a question about retail growth. And there's always a risk of taking one of my graphs perhaps too literally. But we certainly have indicated a view that I think there is the prospect of growth in the medium-term. We've got retailers looking to upsize within our centers. We've got retailers who weren't previously in our centers looking to relocate into them because they can see the strength in sales and footfall performance. You've got digital brands looking at establishing locations in those particular physical presence in those locations to support their online. I think we're seeing an increasing number of international brands perhaps looking at opening in the UK. And I think all of this is happening because rents are now at a materially lower level. There's more operational risk there's more linked to turnover. It's typically base plus a turnover performance. But I think that means if we can deliver the footfall, we can deliver the shoppers, the brands, the right category mix then I think we can see sales-led performance. And it would be that so I think that would underpin our medium-term confidence in growth at/or around inflationary levels. And then finally you asked about our three speculative developments and the cost situation and just the erosion of some of the margin. I'll ask Vanessa perhaps to comment on I think Lucent and Forge in particular.

Vanessa Simms: Yeah. So with Lucent and The Forge, I think what we've given there is a slight change in the program and as -- there's been a very, sort of small increase in those costs. But effectively, those schemes are in line to deliver some returns. We've seen increased demand in those assets. And if you look at the yield comparisons that we've got, combined to where we see the prevailing London office yields, you'll be able to see that there's some upside to come on those schemes. So there's still value accretion on the existing pipeline that's in progress.

Mark Allan: With The Forge and Lucent those are two of our projects within the pipeline where our approach to procurement has us taking a little bit more risk in terms of pricing. So where there has been inflationary pressure in the market as I think we all understand there has been over the last six or so months, it has impacted on those. Now the vast majority of those packages are now let. So the inflationary price risk and the cost to complete on those projects is, materially lower, now than it was. So it will be substantially less than 10% of cost to go, whether there will be any price risk. We have seen on some of our prospective developments where we're active in the tender market there is some upward pressure. But at the moment we are seeing tender returns still come in within levels that would be supportive of our overall appraisals particularly taking into account the design and procurement contingencies that we always include within our underwrites. Paul, I'm hoping, I've captured all of your questions adequately there. But please do tell me if there's anything I've missed or if you've got any follow-up.

Paul May: No. All good, just one quick follow-up, the confirmation, the peak utilization you mentioned the 67%, that's relative to sort of 85-ish-percent utilization pre-COVID? So 67% of 85%, is that right?

Mark Allan: That's correct. So that's of pre-effected levels. I think I have to put a slight caveat to that that the office utilization pre-COVID was not something that was measured in a particularly sophisticated way. So it is based on a series of data points and estimates pointing to around a 4.1 working day average week prior to the pandemic. So I would hesitate in being too precise about the comparison to pre-COVID, but that was how we've based that estimate.

Paul May: Good. Understood. Thank you.

Mark Allan: Thank you, Paul. Are there further calls on the -- questions, I should say on the conference call?

Operator: There are no further telephone questions.

Mark Allan: So I'm now going to turn to a couple of questions I have in front of me on the screen that have come in from the Webcast. Can you please advise the regional retail rental growth you were underwriting in the next circa five years including the impact of rent rate and occupancy? Also interested to understand how the negative 18.4% reversion will impact this growth unless you think this will partly reverse given you're achieving rent ahead of ERV. And that's from Claire at Resolution. I think Vanessa had a chart showing gross income or illustrative gross income progress that did show a couple of the moving parts within the retail portfolio. So I might ask Vanessa just to comment on that first. And then, I'll perhaps talk more generally about how we're thinking about the market.

Vanessa Simms: So in terms of the income progression chart that, we've included in the pack if we look at the retail the -- we've illustrated here how the negative reversion that we'd expect to see in our retail portfolio is expected to be offset by the re-letting up of vacant space to more a normalized levels. And also there's the aspect of variable income. So within our retail portfolio we're starting to see the recovery of variable income come through as the -- as our occupiers are now open and trading. And we're starting to see that come through. So broadly, we would expect those three aspects of our portfolio to be broadly flat going forwards to effectively offset each other.

Mark Allan: And in respect to the question of sort of the 5-year view for I think underwriting purposes you'll appreciate that we are still being cautious in our view. We've got six months of good evidence of lettings supportive or slightly ahead of ERVs. I think we need to see a little bit more of that come through in the second half. So I think we believe there is the possibility of the major retail destinations that attracts the brands reduce their vacancy drive footfall of shoppers that those would return to growth. And I think the increasing prevalence of turnover components to lease at least should mean that for those stronger performing sectors that growth should be more immediate in terms of how it begins to come through within rents. So I think we see the operational risk associated with that as being an opportunity to add value rather than being a sort of downside risk, which might be the more sort of typical sort of fixed income proxy way of thinking about things. So operational risk in retail estate, I think is a real opportunity to drive growth. So I don't think we're talking about market growth. I think we're talking about the opportunity really to drive operational performance at the assets that are going to be winning locations within their catchments. We have a second question from Tim Leckie at JPMorgan. At the full-year results, we mentioned there's potential to get vacant possession of some more medium-term potential developments earlier as tenants reposition post COVID-19? Is this still a possibility, or has the anticipated churn not come through? So that certainly is still a possibility. We're working hard on -- I talked about needing to -- you find situations where we have a genuine competitive edge to unlock development opportunities. Certainly, finding those within our existing portfolio would be one of those areas that we focus on. So there are active discussions in a couple of areas, as occupiers consider the longer-term requirements. And there is the opportunity to concentrate into the highest quality space and free up some of the older less flexible secondary space that they may occupy within our portfolio. So I think that will continue to be a trend. Question from Andrew Gill. What percentage of the portfolio by value ERV does the £135 million cover in improving environmental credentials? Is there further CapEx required in the current or future development pipeline that's not included in this figure to meet future environmental obligations? Vanessa, do you want to tackle that?

Vanessa Simms: Yes certainly. So the £135 million covers the whole of our portfolio, with a particular focus on the assets that we plan to retain in the portfolio. So I think that that's probably covers the first part of the question. And then I think in terms of further CapEx required in the future, in terms of the development pipeline, what we're doing now as we're designing new developments in line with net zero carbon, both in operation and from an embodied carbon perspective those costs are now being included within the costs of the development themselves. So that's where we would expect to see those costs coming through.

Mark Allan: So then and the longer-term costs that aren't reflected would be the cost of offsetting residual carbon. And of course, beyond -- this gets us to 2030. So this has us to a 70% reduction in our science-based targets. Now if you look at all of the CRREM pathways, and all of the stuff that was talked about at COP26 over the past two weeks, by the 1.5-degree scenario it isn't achieved by getting to net to a 70% reduction in 2030 and then stopping. So there is going to be further investment ongoing within assets beyond that. What we're doing is committing to all of the available technology and input that's there today and we can hit our science-based targets as a result of doing that. As new technology develops and emerges, as it will be required to do, in order to drive emissions further there are of course, going to be some longer-term aspect but I increasingly feel that the link between that investment and the rents that those properties are able to command in a market where that is a fundamental requirement of occupiers and increasingly regulators, I think should mean that the relative cost and return equation is something that means we shouldn't be overly concerned about costs that we can't recover through value. And then a question from Alan Carter. Can I say a bit more on the scale of cost increases at Forge and Lucent? Is it embedded? And the likely effect on yield on cost. So I think in terms of build cost overall at Lucent and Forge, in particular, where there was that greater exposure to procurement risk because of the way that we were taking those schemes forward, we've looked at cost increases that are in the mid- to high single-digits increases on the construction cost component of that, which I guess is crudely half of the overall development cost. But as I think as I mentioned a moment ago we now have packages substantially less across those projects. So cost inflation risk from here on those projects in particular should be minimal. It's all reflected fully in the numbers that Vanessa, shared on the development slide earlier. And so that increase in the percentage cost overall would have a consequential impact on yield on cost assuming rents remain consistent. So I hope that answers that question. There are no further questions on the webcast. And that was the third of the three ways in which people could ask questions. So I think that hopefully means there are no further questions. Thank you very much everyone for either attending this morning or taking the time to dial in or to follow on the webcast. Thank you very much. Have a good day.

Operator: This presentation has now ended.