Earnings Transcript for LAND.L - Q4 Fiscal Year 2024

Mark Allan: Ladies and gentlemen, good morning and welcome to the presentation of Landsec's 2024 Full Year Results. So over the last three years, we have been focused on two clear strategic priorities. Firstly, increasing our investment in best-in-class assets where through our competitive advantages, we can drive long-term growth. And secondly, preserving our balance sheet strength. So, including the sale of a hotel portfolio that we announced last week, we have now sold around 40 assets since late 2020, totaling some GBP3.1 billion. And the vast majority of these were long-term single-let assets where our ability to add further value was limited. And we've reinvested at accretive returns in a targeted number of our key places, such as Victoria, Piccadilly, Bluewater, or Cardiff. And as a result of that, around 80% of our current portfolio is now concentrated in our 12 largest places. And as we continue to invest in shaping and curating these unique multi-let locations, we expect them to drive superior income returns and growth over time. At the same time, our proactive disposals mean that our capital base has remained strong and our 32% LTV is lower than it was two years ago before the rising interest rates and the correction in real estate values that followed. And this now provides us with significant financial capacity to capitalize on the future growth potential in our pipeline and to acquire high-quality assets that will supplement our existing best-in-class portfolio at an attractive point in the cycle. And this strategic focus remains critical as it has never been more important to own the right real estate. The normalization in cost of capital over the last two years means that value drivers across all of the sector, have fundamentally changed. Over much of the prior decade, leveraging up the spread between income yields and ultra-low borrowing costs or picking high-level sector themes was often enough to drive performance. However, irrespective of sector, there is now a growing distinction between those assets that meet customers' future requirements and can therefore deliver income growth and those that don't. Vacancy across the overall London office market is elevated at 9%. UK retail vacancy is above 10% and even big-box logistics vacancy is now 8%. However, the very best assets in each sector are in short supply and therefore continue to see high occupancy and rental growth, which means it can be very dangerous to look simply at market averages. And the quality of our portfolio is demonstrated in its continued outperformance, as is shown on the charts here. In London, utilization of our offices is up 18% over the past year, significantly ahead of overall growth in commuter activity. And our occupancy has continued to increase, now at 97.3%, even though overall market occupancy has been falling. Similarly, in retail, our occupancy is up to 95.4%, and outperforming the wider UK retail market. And as footfall growth in our locations is well-ahead of the UK market, we are seeing more competitive tension as brands focus on fewer, bigger, better stores. We have now seen a clear inflection point in retail rents and as we are now capturing positive rental uplifts on re-lettings and renewals across both sectors, we expect like-for-like income to continue to grow. At the same time, the outlook for investment markets is improving. Back in late 2022, we said that we expected property values would continue to adjust for some time as markets would have to align to a new higher rate reality. And this has indeed proven to be the case. And even though we do not anticipate a sharp reduction in long-term rates, the recent relative stabilization is clearly a positive. Drawn by the historically attractive pricing of good-quality income in London and in the best retail destinations, we are starting to see interest emerge from investors who have not been active in these markets for some time. And reflecting this, 60% of our portfolio effectively saw stable values in the second-half and yields overall were flat in the final quarter. Absent any macro shocks, we therefore think the value of high-quality assets has largely bottomed-out and will start to grow in the foreseeable future as rents continue to grow. And having now sold the vast majority of assets that we said we aimed to sell back in late 2020, our net debt is GBP1.1 billion lower than it was before the market correction. And given that we're starting to see more signs of interesting acquisition opportunities becoming available, we have the capacity and intent to be a net investor from here. With an attractive 5.7% income return and continued ERV growth, this means that we are well-placed to deliver on our 8% to 10% return on equity target. All of this is underpinned by continued strength in our operational performance. We continue to lease space well ahead of ERV. We are capturing positive reversionary potential on re-lettings and lease renewals in London and for the first time in a number of years, now also in major retail where rents have started to grow, supported by strong growth in both sales and footfall. In mixed-use, we secured planning consent for our 1,800 homes development at Finchley Road, where we're now starting the first enabling works ahead of a full start on-site next year and we continue to optimize our plans for the rest of our pipeline. So, in terms of financial results, EPRA EPS was stable versus last year, in line with our guidance, as our strong operational performance with 2.8% growth in like-for-like net rental income and efficiency improvements offset a rise in finance costs. Our dividend is up 2.6%, again in-line with our guidance. And at minus 4%, our return-on-equity improved versus the prior year. Even though the impact of rising bond yields put pressure on valuation yields in the first-half of the year in particular and meant our NTA overall was down 8.2%. At the same time, we have reduced our energy intensity by 3.7%, which means we remain firmly on-track to reduce this by 52% versus our 2019/2020 baseline by 2030. And 49% of our portfolio is now rated EPC A or B, and that's up from 36% a year ago and that will increase further from 2025 onwards as the benefits from our net zero investment plan begin to come through. So onto our operational review. Now, although the principal use of the places we create and curate differs across our business, the success of each of them comes back to our three key competitive advantages, the high-quality of our portfolio, the strength of our customer relationships, and our ability to unlock complex opportunities. These are valuable and scarce attributes, which are essential in sustainable value creation. For example, in working with two of our key customers at New Street Square to decarbonize their office whilst upsizing their space and extending their leases by over 15 years. Or in the completion of three highly complex developments over live tube stations this year, which combined delivered around GBP240 million of profit. It is these competitive advantages, which underpin our ability to continue to drive growth across each of those key places, be they office-let, retail-let or mixed in use. In terms of Central London, the market continues to polarize, with customers firmly focused on the space, which has the right transport connectivity, the right sustainability credentials, and the right amenities. For many employers, space which is lacking these characteristics is now simply no longer an option, almost irrespective of price. We continue to tailor our capital allocation accordingly. For example, with the pipeline that we have created in South Bank, which sits within a few minutes walk of two of London's busiest train stations in an area rich in cultural attractions and which is the second-highest density of bars and restaurants in London after Soho. And our continued presence in Victoria, again, right next to one of London's busiest rail terminals. So, even though London office take-up across the market was just over 10% below its long -- its long-term average last year, the outlook for demand remains encouraging and space under offer was close to an all-time high at the end of March. Overall vacancy is elevated at 8.8%, but as the chart on the right shows, this is still mostly a building issue rather than a market issue as almost 40% of all vacant space sits in just 1% of office buildings. And as the supply of the very best space remains low, this means that rents for this space continue to grow as we are seeing across our portfolio. Against this backdrop, we continue to reshape our portfolio. We have sold over GBP2 billion of mature standalone office assets since late 2020 and reinvested into profitable developments, such that our five largest multi-let places now make up 88% of our Central London portfolio, all exhibiting high occupancy and strong ERV growth. And we have room to build further on this through future development. The scale and the scarcity of each of these places allows us to continue to curate them and drive further growth. For example, with new leisure concepts in Victoria, a new iconic rooftop restaurant to Piccadilly Lights or interactive digital media space below the Lights. So what are we seeing from our customers? Well, the utilization of our offices continues to grow, especially mid-week, as you can see in the daily turnstile tap-in data on the left here, up 18% for the year. At the same time, our customers are planning for significantly more space per employee than they did pre-pandemic as they're designing for more collaboration, meeting, or well-being space, which continues to translate into sustained demand. Over the past 12 months, we've only had four customers leave and we quickly re-let three of those spaces. And across the 36 new lettings or renewals that we signed, 17 were for customers upsizing, 12 kept the same space that they occupied previously. Only seven customers reduced their overall office footprint, mostly by reducing space elsewhere as only one customer reduced their floor space with us. With our portfolio virtually full, this strength in demand continues to drive rental growth. And so our leasing performance remains strong. We signed or in solicitors' hands GBP35 million of lettings on average 6% ahead of ERV with re-lettings and renewals on average 15% above previous rents. Our occupancy increased further to 97.3%, significantly ahead of the wider market and less than 1% of our space is available for subletting. On our two retained developments, we delivered around 20% profit on cost despite the softening of yields and both were effectively full within four months of completion at rents materially ahead of initial ERVs. And we've recently opened three new Myo locations, adding to the two existing ones where we saw average occupancy grow from 86% to 93% during the year. All-in-all, our successful leasing drove 5% ERV growth, which is at the top end of our guidance for the year. Moving now to retail, there continues to be a similar trend of growing demand for the very best destinations and we continue to shape our portfolio to ensure these are positioned for this. We sold our two smallest retail outlets during the year and prior to that increased our investment in Bluewater and St. David's, such that our five largest assets now make up 75% of our retail portfolio. We've continued to invest in our assets over the last couple of years, but we will be adding to this more meaningfully with a number of new initiatives. These will see us repurpose existing space to create a new F&B destination in the center of Leeds, new public open space leisure office in Cardiff and enhance the visitor experience at Gunwharf Quays. These initiatives will drive further footfall and sales and support the growing demand for space in those locations. And what underpins this demand is that for many key brands, the stores they have with us are outperforming their overall sales growth as we show here on the left. Whilst at the same time, overall online sales are no longer seeing the growth that was present before and during the pandemic, partly as the thin margins in online have been challenged by the marked rise in cost of capital. And this means we continue to benefit from brands focus on fewer, bigger, better stores. As major retailers such as Inditex and H&M announced they're increasing their investment in the best physical space to improve customer experience alongside their more convenience-led out-of-town or digital channels. The chart in the middle shows that even though several brands are reducing their total number of stores, they have increased the average unit size for their remaining stores by around 20%. Aside from demand from new occupiers, this means that many existing customers want more space or more stores in our destinations. And as there is effectively zero new supply of retail space to meet this growing demand, this is starting to drive competitive tension and rental growth. Our continued investments in our retail team and our data and tech platform continues to support the strength in our operational performance. We have now seen a clear inflection point in income, as for the first time, we are starting to capture positive uplifts on re-lettings and renewals. Now this was still modest during the year at plus 1%, but has improved further since then with deals in solicitors' hands now plus 6% to previous passing rents. We have been leasing space well ahead of ERV for a number of years now and continue to do so over the past 12 months, but this shows that rents have now also turned the corner in cash-flow terms. And moreover, occupancy increased by 130 basis points and is now effectively back to pre-pandemic levels. ERVs were up a relatively modest 1.4% as value assumptions continue to trail our actual operational performance, yet to us, the strong growth in cash income is the more relevant measure. So in terms of investment, we continue to invest in our key places in ways that will drive future earnings accretion. We plan to invest more in major retail destinations, such as with the additional stake in Cardiff that we bought just over a year ago. And following a period of very limited transaction activity, we are now seeing clear signs of activity levels starting to pick up. We also plan to invest around GBP100 million into new initiatives across our key assets over the next three years. We expect both new investment and accretive CapEx to deliver high single-digit initial income returns. In London, we started two new schemes during the year in Victoria and South Bank, which will deliver highly sustainable space with low embodied carbon into these attractive locations. And we expect these projects to deliver a gross yield on costs in excess of 7% and a yield on the incremental CapEx we're investing of over 10%. Overall, these opportunities not only provide an attractive return on the new money that we invest, but they often also enhance the return of our existing assets in those locations, either through improved operational flexibility, increased amenities, or better services for our existing customers. Beyond this, we have built a substantial pipeline to expand our existing key holdings or to create the next generation of scarce urban places. In London, we have four sites in South Bank, which could deliver a further 900,000 square feet of net-zero office space in one of the most vibrant parts of town. Two of these projects already have detailed consent and the first could be started later this year once de-construction of the existing building is completed. We also secured two planning consents during the year for major developments at Liverpool Street in the City and the next phase of New Street Square. The earliest start for these will be 2025 and 2026, respectively, that reflects vacant possession timeframes and both are located in close proximity to Elizabeth line stations. And in mixed-use, we have two major near-term opportunities. The first is Finchley Road, Zone 2 of Central London, where during the year we secured planning consent for our 1,800 Homes master plan and a detailed consent for the first 600 of those homes. As planned, we have started the first site enabling works, which subject to further proprietary work could put us in a position to start the first phase of development in mid-2025. And at Mayfield, next to Piccadilly Station in Manchester, we are working with our partners to optimize the development strategy where we have the option to start the first office late this year, which then unlocks future residential phases. These opportunities add up to a pipeline of GBP4 billion of highly sustainable space with our consented schemes currently showing a 40% reduction in embodied carbon. And even though all of this can be managed in discrete manageable phases across an extended period, the overall size of this pipeline is more than we would be comfortable undertaking on our own balance sheet. So, we are likely to look to supplement our own investment with other complementary sources of capital over time. And that brings me to how we are thinking about capital allocation, risk, and returns. So clearly, the marked increase in cost of capital has had a significant impact on the prospective returns of the investment opportunities available to us. Major retail looks to offer the best risk-adjusted returns in our universe as income returns remain high and there is clear evidence of rents returning to growth. This is therefore likely to be our key focus in terms of near-term investment activity beyond our two committed developments. Returns from London investment from here also look more attractive than they did two to three years ago, given the increase in yields and continued rental growth for best-in-class space, which bodes well for the return prospects of our portfolio. Returns from future development, be that in London or mixed-use, continue to offer a premium at comparable investment assets and of course, offer the opportunity to deliver modern, high-quality space into a polarized market where demand is concentrated at the top-end. Development does, however, entail more risk and whilst rents continue to grow, margins have been eroded by cost inflation and higher exit yields. We need to ensure that developments offer a sufficient risk premium versus the returns on any assets we might choose to sell from here to fund our investment. As a result, we've been working hard to optimize our pipeline of development projects to ensure that they reflect this new reality. Now in some cases, this involves revisiting design or specification. For others, it might involve working out less capital, less carbon-intensive options by retaining more of the existing buildings and income. In all cases, however, we will only commit capital to new developments where we are happy that the prospective returns on offer justify the increased risk. Now, Vanessa will share more on our thinking here later, and I'll now hand over to her to talk you through our financial results.

Vanessa Simms: Thank you, Mark, and good morning. The wider market conditions improved as the year progressed and our operational performance has remained strong. So given our strong capital structure, this provides us with a positive outlook. So, let's start with our financial headlines. In line with our guidance, EPRA earnings per share was stable versus last year's underlying performance, as growth in like-for-like income and a reduction in overheads offset the impact of higher finance costs. Our dividend is up 2.6% to 39.6 pence, again in line with our guidance and it reflects a dividend cover of 1.27 times. Further yield softening during the first half of the year in particular meant that despite continued ERV growth, our NTA value per share was down 8.2%. Our return on equity was minus 4% and with value starting to stabilize, the outlook for this is now more positive. And moreover, our balance sheet remains strong and pro-forma for the hotel portfolio sale, our net debt-to-EBITDA is now low at 7 times and our LTV is 32%. So turning to EPRA EPS in more detail. Like-for-like gross rental income was up GBP16 million or 3%, reflecting our strong leasing performance and the quality of our portfolio. Service charge expense increased due to the startup costs of our completed developments. So, net rental income was up GBP11 million. Admin expenses were down GBP7 million despite high inflation, which I'll cover in a bit more detail shortly. As a result, we had a 4% increase in our operating profit, which offset a GBP18 million increase in finance costs due to the interest expense on our completed developments and an increase in our average borrowing costs. EPRA EPS -- our EPRA EPS was stable versus last year's underlying level and that's in line with our guidance. Our net rental income was up 2.8% on a like-for-like basis, and this was supported by positive rental uplifts on re-lettings and renewals, growth in turnover income and higher occupancy. Central London office income was up 1.4%, which was partially offset by lower variable income at Piccadilly Lights following last year's outperformance. Yet this remains a highly valuable asset with income up 9% over the past two years. Major retail was the strongest performer with like-for-like income up 6.9%. As the overrenting in the portfolio, which had persisted for several years, has now turned to positive reversionary upside. Our subscale and mixed-use assets saw like-for-like income rise 3.1%. Disposals more than outweighed acquisitions, whilst our completed developments only contributed income for part of the year. So as a result, net rental income was up GBP11 million. And we continue to focus on improving our operating efficiency as we have done over the last two years. Our overhead costs were down 9% last year, that's reflecting the benefits of our organizational review during the prior year and procurement savings. We expect further cost efficiencies to offset inflation this year and as we continue to automate and streamline our operating platform, we expect further cost savings beyond that. Over the last two years, we've delivered GBP21 million of cost efficiencies, which has helped to offset inflation and reduce costs. But you do not necessarily see the benefits of this when you just look at our cost ratio. As this also reflects the impact of our capital allocation decisions, where we have sold mature, low-yielding high-margin assets and we've invested in more operational, higher-yielding, and higher-return assets. Adjusting for this, our EPRA cost ratio would have been almost 3 percentage points lower. But our overall income return and our total return on equity would have been low as well. So, we'll continue to optimize our efficiency, but our main focus remains on driving our overall returns. And turning to our portfolio valuation. The March rise in interest rates during the first half of the year meant that global investment activity has remained subdued. As a result, our valuation yield softened. So despite 3.2% ERV growth from a strong leasing activity, the value of our portfolio was down 6%. The impact of the higher interest rates receded as the year progressed, 60% of our portfolio valuations were stable in the second half. And overall, yields were flat in the final quarter. In Central London, ERV growth came out at the top-end of our guidance at 5%, but this only partially offset a 46 basis points increase in yields. And the benefit of repositioning our portfolio towards the West End over the last few years is clear. As our West End offices continue to outperform with values virtually stable in the second half. Development values were down 9.9%, which reflects the risk premium for the early stages that these projects are at. Yet we remain confident that these schemes will deliver attractive returns once complete. And the valuation of our major retail portfolio was stable over the year and up slightly in the second half. Even though value has assumed, ERV growth of 1.4% continues to trail our actual operational performance. Our mixed-use assets were down 14%, which was driven by yield expansion at MediaCity and a shortening of income on existing retail assets in London and Glasgow. But a revised approach to these schemes should see us rebuild income and value in the future. Across our subscale assets, the value of our hotels and retail parks was broadly stable. The subdued investor sentiment towards cinemas meant that our leisure assets were down 8.2% despite positive operational performance. Looking forward, the relative stability in interest rates means that values look attractive for assets, which can deliver income growth, although we think secondary values will likely have further to fall. Again, we expect ERVs for our London office -- for our London and our major retail assets to grow by a low-to-mid-single-digit percentage this year. Our return on-equity was minus 4%, whilst our NTA per share was down 8.2% after dividends paid. We continue to target a return on equity of 8% to 10% per annum over time and that's comprising of a mix of income and capital returns, delivered through ERV growth and developments. Although fluctuations in valuation yields means that we won't be exactly in that range each individual year as we've seen last year. And the chart on the left shows how each of these components contributed to our return on equity. So in green, you see the return, which is driven by income, rental growth, and developments and the light gray bars and the dotted lines overlay the effect of yield movements. Last year, our return on income, ERV growth and developments was 9.5%, which shows that as yields stabilize, we're in a strong position to deliver on an 8% to 10% total return. And this outlook remains underpinned by the strength of our capital structure. We maintain our strong investment-grade credit rating and our corporate bond spreads are the lowest in the sterling real estate market, giving us a clear competitive advantage. Our GBP300 million bond issued in March with a coupon of 4.75% and a spread of 103 basis points is a great example of this. On a pro-forma basis, our net debt-to-EBITDA remains low at 7 times and ICR at 4.4 times as we have managed our balance sheet effectively through the recent period of rising interest rates. Including our disposal since year-end, our pro-forma LTV is low at 32% and our net debt is down GBP1 billion over the past two years. This gives us significant headroom to invest at what we believe is an attractive point in the cycle. As values are starting to stabilize, we would be comfortable to see our LTV increase from here for the right opportunities. Although we remain within -- we will remain within our 25% to 40% target range. In terms of our capital allocation, we maintain a clear view on growing our income, total return, and portfolio quality. We've sold GBP625 million of assets since March last year on average in line with book value. This brings our total disposal since late 2020 to GBP3.1 billion. So, whilst we will continue to recycle assets, our focus is now shifting more towards investment. The illustration on the right shows the interplay of our sources of funding and opportunities to invest. Mark outlined our return expectations earlier, so we plan to invest most of the existing balance sheet capacity following our recent sales in major retail and our committed pipeline. We expect to fund investment into new developments, principally through recycling out of mature and non-core assets, and given the size of the pipeline, we intend to supplement this with other sources of capital over time. So in summary, our high-quality portfolio, a strong operational performance, and balance sheet capacity means we're well-placed to deliver attractive total returns. Our earnings guidance, of course, should be seen in the light of our recent capital recycling. We expect to see like-for-like income growth at a similar level to last year, but how this translates into EPS growth depends on the timing and the quantum of investment activity from here. We have sold significantly more than we acquired over recent months. So with all else equal, this reduces our annualized earnings by around 4%. This is reflected in our guidance that before reinvesting any of the recent sales proceeds into acquisitions, we would expect EPS this year to be slightly below last year's level of 50.1 pence. And for the year to March 2026, we would expect EPS to be slightly above last year's level, reflecting a combination of continued like-for-like income growth and the reinvestment of the majority of our recent sales proceeds. As our dividend cover remains at the upper end of our 1.2 times to 1.3 times policy range, we expect dividends to grow by a low single-digit percentage again this year. And with that, I'll hand you back to Mark.

Mark Allan: Thank you very much, Vanessa. So I will now wrap up with our view on the current environment and what you can expect to see from us in the year ahead and we'll then move to Q&A. So our actions over the past three years mean that Landsec is well-positioned. Our balance sheet provides capacity to invest in what we believe to be an attractive point in the cycle and our increased focus on best-in-class places means we are well-placed to drive income growth in a world where demand is increasingly concentrated on quality. Reflecting this, we again expect ERVs to grow by a low-to mid-single-digit percentage. We said six months ago that we expected investment activity to pick up in 2024 and for values for the best assets to start to stabilize. And this remains our view today as the best assets, which offer genuine rental growth now offer an attractive risk premium versus real interest rates. Our operational performance remains strong with growing occupancy, growing rental uplifts on re-lettings and renewals, and growing like-for-like income. Performance drivers in real estate have fundamentally changed as irrespective of sector, asset quality, the ability to curate this will be much more of a differentiating factor than it has been over much of the past decade, something which plays to the strengths of our portfolio and to our competitive advantages. So to summarize, whilst uncertainties remain, the overall macro outlook has clearly improved and we continue to build on the positive momentum in executing our strategy. We expect like-for-like income growth to be similar to last year and to deliver further operational efficiencies. And having sold over GBP600 million of assets since our half-year results, we will focus on reinvesting these proceeds into accretive growth at what we believe is an attractive point in time. We'll continue to optimize the significant potential in our pipeline, yet as the size of this will over time exceed our own balance sheet capacity, we will continue to explore opportunities to access other sources of capital to leverage our platform value, accelerate our overall growth and to enhance our returns. As yields are starting to stabilize, our attractive income return and continued rental growth means we're well-placed to deliver attractive returns on equity in the future. And with that, we will now open the floor to Q&A.

A - Mark Allan: So as is usual with the Q&A, I'm going to take questions from the room first. We'll then go to any questions from the conference line and then we'll finish up with any questions that are posted via the webcast. So, a roving mic will be making its way through, so just wait for that. There's two questions down in this row here and I think I saw a question over here after that.

Sam King: Hi, good morning. It's Sam King from BNP Exane. Thanks very much for the presentation. Two questions, please. The first is just picking up on your comment on retail rents reaching an inflection point and how that ties to market-wide vacancy that's still running above 10%. Is that referring to your existing portfolio or more of a market-wide comment? And just thinking about this in the context of capital allocation and your comments that future acquisitions are likely to be retail-focused? And then the second one is just on the valuation breakdown. Clearly, there's a trend of valuation declines decelerating, but one of the segments that sticks out is London mixed-use urban, where values are down 10% over the year, but 9% in H2. Appreciate it's a small part of the portfolio, but any additional color on that would be helpful. Thanks.

Mark Allan: Sure. Thank you. So with respect to the comment on our retail rental growth, I mean, it's not a market-wide issue because, of course, there is fundamentally still too much retail floor space within the UK, but it does go beyond our portfolio to any catchment dominant prime center. We included the graph, I think within the slides there that just showed for a number of the key listed brands who get quite a lot of color on their plans for their portfolios that whilst often there's a reduction in total number of stores, what we are seeing is quite a material increase in the size of the stores they want to retain. And a lot of that is driving -- is because they want to be driving omnichannel and sort of a blending of channels rather than looking at things entirely separately. So what we see in our assets and there will be other catchment dominant assets beyond our portfolio that see the same thing is you're starting now to see a competitive tension for space where for a particularly suitably sized unit, you've got multiple retailers either looking to expand into that space or come into that space, and of course, as soon as you start to see that tension, you do then start to see rental growth. And so that's what's reflected within our pipeline. But it is very much going to be limited to catchment dominant prime retail centers. And I think then your question about sort of valuation in particular, the mixed-use urban in London, which as you say, is relatively small in terms of overall, but is clearly a part of the business that we wont to be investing in over time. The key thing that tends to go on, particularly mixed-use in London, so you'll see that in particular, L2 Finchley Road and to some extent at our Lewisham Center as well. But is that as we look to move those assets towards a development opportunity, there's inevitably an erosion of the in-place income towards block dates to facilitate development. Now when we underwrite our investment into those developments, we, of course, take that into account, but you do book that on each valuation before that ultimately if one achieves or underwrites recovering that through the subsequent development phase. Now we did talk a little bit within the presentation to evolving our approach slightly to some of these mixed-use urban sites and just to flesh that out slightly further, clearly development -- cost development margins, economics have moved on over the last couple of years. So what we've done on all of our sites is look at actually is the right solution here to completely remove or demolish the asset and replace it with something new, which gives you quite a big significant in cost or actually are there less capital-intensive, less carbon-intensive options where you can retain more of the existing asset and then look to develop incrementally around that. And I think that's something you'll see not just with us, but across the market as being a feature going forward. It makes sense from a carbon point of view, it makes sense from an economic point of view, but I think it needs a different skill set to simply development because you have to think through how the existing asset is going to evolve and change and integrate with the new additions.

Sam King: Thanks.

Unidentified Analyst: Good morning. [Ben Richard] (ph) from Bernstein. Just in terms of your capital management in future years, you've got intention to become a buyer again. You've got big development pipeline. And just how is that going to be balanced against disposals or the means to fund them in aggregate?

Mark Allan: Yeah. So we had a graph that we -- not graph, probably more of an image that was included within the slide that you just saw to show broadly speaking how we were thinking about sort of source and application of funds. So, we have clearly balance sheet capacity at the moment and we've been clear that we see buying high-quality income through high-quality retail assets as being the best risk-adjusted option for us right now, but we do have a very attractive long-term pipeline that gives us the opportunity to deliver best-in-class, highly sustainable assets into a market that's increasingly discerning around those things. So funding that really is going to be a combination of two things. It will be further disposals in the future, but those will be disposals that would happen post the point of committing to new development. So the trigger for committing to new development is confidence in our ability to achieve disposals in appropriate point of time rather than selling in advance. We have the size and strength and flexibility of balance sheet to do that. And we've also talked about if we wanted to fully bring forward that pipeline more rapidly, then we would need to supplement our existing balance sheet with other sources of capital. That's not something that's critical that we need to do because we could deliver that pipeline more slowly in incremental phases ourselves, but we do think there is an interesting opportunity to potentially accelerate the delivery of both mixed-use in Central London assets in the right way by bringing our partners in to pursue scalable strategies.

Unidentified Analyst: And just one other question, thanks. Queen Anne's Mansions, it's in the lease expiries in three years out, there's a big rent roll down. So could you just explain that further, please?

Mark Allan: Yeah. So I'll talk in general terms on Queen Anne's Mansions and Vanessa perhaps can just give a bit more specifics on the numbers. So Queen Anne's Mansions is in St. James, currently occupied by the Ministry of Justice and they will be vacating that space at the end of that lease. So we're currently working through options for that. Given its proximity, given the nature of that asset, I think we would see that as offering a whole range of opportunities across different sectors, not necessarily purely retention as office, but that's something we need to work through, but in the meantime, the valuation, of course, reflects a bit of a burn-off of the lease within that. But Vanessa, is there anything more to add?

Vanessa Simms: So, probably just worth referencing Page 40 actually where we put a bit more detail in on Queen Anne's. Admittedly an incredibly small print, but there is -- it does include a GBP20 million incremental lease incentive where we effectively some time ago fitted out the asset in that unwind. So, this is really an unwind of that contribution to that CapEx cost. So, you can there the year in which that unwinds and you have a GBP20 million impact which is '26, '27.

Unidentified Analyst: Thank you very much.

Mark Allan: Great. If we could have the mic coming down for a question over here and we will grab that one back from you there and then we will come back to the front row for the next question.

Sam Knott: Sam Knott from Kolytics. Thanks for the presentation. On one of the early slides, you mentioned that you've got positive reversion across both sectors now -- both major sectors. I was wondering if you could give a sort of number on roughly the uplift you think you can get on stabilization also on reaching those reversionary potentials and looking at bottom-line earnings over the next few years. How does that compare to maybe the interest and finance cost you're expecting as you sort of review -- refinance debts out to say '27 and beyond?

Mark Allan: Yeah. So I'll probably sort of reiterate some of the guidance that we provided within that. So, in terms of how that capturing reversion of value starts to flow through to the bottom line, we've guided to like-for-like rental growth for the year ahead to be similar to what we've just achieved, the 2.8% for this year. We've also said that we see this as being a long-term trend. So I think you could look at growth going beyond that current year. We've also said within earnings that whilst we would expect to see before you make any assumptions for the quantum and timing of reinvestment, the earnings go back a little bit this year, because of disposals before being back above 2024 levels by 2026. So, all things equal that you should see -- that we expect to see continued like-for-like growth and through those efficiencies, we'd expect to be able to offset any increase in interest costs.

Sam Knott: Okay. So even looking at sort of the '27 and '29 bond, you'd expect increase in net rents to offset that and have growth from '26. Obviously, high level, you're not giving direct guidance, but...

Mark Allan: Yeah, we don't provide, sort of, guidance out, I think providing guidance for '25 and '26 is pretty unusual, but we're not going to go further than that.

Sam Knott: Okay. Thank you.

Mark Allan: Sorry, there's a question at the front here. Mic on its way.

Adam Shapton: Hi, Adam Shapton from Green Street. I just wanted -- I guess a little bit of a follow-up on the previous question. You said before assumptions about redeployment of disposal proceeds in '25. Can you give a bit more color on what we could expect? Are there acquisitions under discussion, might there be acquisitions of non-income producing assets as I think they were last year? Any bit more guidance you could provide there?

Mark Allan: So, I certainly can provide a little more color. I'm not sure that necessarily is going to translate to any more guidance, but happy to provide a little more color. So as we said, we see the biggest opportunity to be acquiring high-quality income, major retail what we think looking at very attractive returns, because of having passed that inflection point on rents. So clearly in making that comment, we've got a formal judgment on our ability to execute in the market and we are definitely seeing signs of things starting to improve. A lot of broken capital structures that have stood in the way of assets that might otherwise have traded in recent years, I think now starting to be addressed. So, our focus would most sort of certainly be on that. With respect to sort of when those things land, if I just sort of flip it for a second to the three major disposals we've made in the last couple of years, 21 Moorfields, Deloitte and most recently the hotels, all of those deals took more than 12 months and all of those deals look different at the end than they did at the start. And so, whilst the investment markets are working like that, it's quite difficult for us to provide guides. Everything just takes longer. Everyone is just a little more slow, moving more slowly, a little bit more cautious on that. So, we've got to reflect that, which is why we've deliberately provided guidance sort of pre-reinvestment. So that when we then provide news going forward of that investment, people have got a base position from which to assess the impact.

Adam Shapton: Okay. And one more if I may. On the introduction of or potential introduction of private capital, you sort of made the qualitative comment that the pipeline is larger than you'd be comfortable taking onto the balance sheet. Can you -- are you able to quantify that a little more? How do you think about reaching that conclusion, is it a ratio of developments to operational real estate? Is it a matter of basic balance sheet metrics, because there's obviously another way you could expand your balance sheet capacity and that's by issuing equity in the, sort of, more conventional REIT route rather than introducing private capital. So how do you reach the conclusion that that's more than you're comfortable with?

Mark Allan: Yeah, I'm going to ask Vanessa just to sort of share how we think about, sort of, our balance sheet guidelines and then perhaps we'll talk more generally about how we're thinking about capital in that context.

Vanessa Simms: Yeah, so, in terms of when we're looking at our balance sheet from a sort of capital operating guidelines, I think I've kind of reiterated a couple of times before that we're focused very much on our three core leverage metrics, being LTV, which post the hotel transaction is at 32%, and our target is 35% to 40% to operate within that range. We've got the net debt to EBITDA is also an important measure, because we're looking at the earnings profile and we aim to keep that low between below 8 times and we're at 7 times and we've been in that position for a little while. And also interest cover as well, we always aim to be ahead of 3 times cover and again, we're around 4.4 post the hotel. So, they're the kind of measures that we use rather than just fixating on one particular area, but again, we would be looking at that at the moment in its current position, giving us an opportunity which provides around GBP1 billion of capital that we could reinvest. And of that, we kind of -- we need to allocate some, of course, to our committed developments, which are committed capex remaining on those schemes about GBP400 million, and the rest of that we would expect the majority to largely be invested into acquisitions or some accretive acquisitions.

Mark Allan: So and then just one overarching where how we think about development versus investment is we try to keep our sort of exposure to development activity at 10% of gross assets in sort of committed terms. And that just means that when we're committing to development, you're always having to take a view two to three years out-of-the market you're going to be delivering into. So were there to be external shocks that meant for whatever reason that you didn't deliver the returns you're expecting, you've got a balance sheet that can withstand that. In terms of how we're thinking about capital -- generally capital allocation, I think it's always important that the first point you should look at is, if you've got capital and assets that you think are ultimately sort of non-core to you, you should be looking to recycle that capital and we've been busy doing that over recent years, obviously getting towards the end of that program. I think we should then look at, I think it's good for a business to have access to multiple pools of capital, because they won't all be open at once. They may indeed all be shut at once, but at least some of them may be open at certain times. I think there is an interesting sort of debate to have, think about longer-term in terms of on what basis might have reconsidered to raise equity. I think there are some situations now you might look at where, if something is accretive to earnings, but dilutive on the face of it to NTA, I think that's something we would, sort of, need to need to think about. So, I don't think we would slavishly say it must be NTA, otherwise we don't raise. Clearly, we don't want to do something that's still dilutive to that earned on earnings, but there are opportunities you might imagine to buy ahead of our earnings yield, and to move the earnings of the business on without necessarily having the same impact on NTA. But it would have to be for the right opportunities and you heard us talking a fair bit and you'll hear more of this from us in the future. I think it is just important that businesses like Landsec owning genuinely scarce real estate that has a degree of irreplaceability to it. I think that's the sort of thing permanent capital vehicle should be looking to do.

Adam Shapton: Thank you.

Mark Allan: The question, Zach just behind you, so hand that. And then let's have, Paul over here after that.

Zachary Gauge: Thanks. It’s Zachary Gauge from UBS. Just one from me. Timber Square, I noticed that the ERV for that scheme seemed to drop by GBP1 million from the half year from 30 to 29, and the size of the scheme increased slightly by 5,000 square feet. So, made it a 4.6% decline in ERV per square foot. I was wondering if you just talk through what drove that decline in ERV.

Mark Allan: Yeah. I think it will largely be a value as you view of the market. I mean, I think where we look at our ERVs, and particularly in that South Bank area, I think we still expect to see significant outperformance. If you look at what we delivered at Lucent during the year, what we delivered at Portland House into Nova during the year, the actual income -- the leasing we achieved was double-digits ahead of those same ERVs. So, I think values will always form their own view and of course, they have to that's what we rely on, I think our view of what we will achieve will continue to support at least the sort of assumptions that were in place previously. Pass the microphone. Are there any other questions after this one in the room? I got one on this side after that. Thank you.

Paul May: Hi, thanks. It's Paul May from Barclays. And you mentioned quite a lot around cash flow and the focus there and I think I know the point on equity and looking at that as driving earnings growth rather than NTA. At what point do you think that you'll stop commenting around ERVs, and because there seems to be a lack of ERV movement into like-for-like rental growth, I think particularly in London, it was up 5% and like-for-likes were up 0.4%, at least in retail, we're seeing that positivity. When for the portfolio, do you expect that to shift to be able to capture that reversion in that ERV and actually drive cash flows forward?

Mark Allan: I mean for us it's all in the business, I mean that is absolutely happening -- has been happening for some time. I mean, for example, I know that this year, we will, through our AGM, get to our three-yearly review of rent policy and what shareholders will see within that and we've consulted on is a greater focus on driving like-for-like income growth. So, for us, it's a key focus is what teams are incentivized around. Of course, we have to have a sense of where the ERV is and the valuers need to have a sense of ERV. So we'll continue to report that, but in terms of how we're making investment decisions is where is the cash flow today and where do we think we can move that cash flow to.

Paul May: Thank you. And then just a second one, just a little bit more on regional offices and mixed-use assets. I think they were seen as quite a big opportunity for investment as part of the original strategy when you came in and there was a lot of investment in 2021. Was that simply a low-interest rate story or is there a future for those investments in a higher-rate world?

Mark Allan: I think there certainly is a future. I mean, if I look at the main investments that we've made were effectively to gain exposure to the Greater Manchester market through Mayfield, through MediaCity and what drove that was a view that the economic growth performance of Manchester as a real -- Greater Manchester as a region had outperformed London on a 5 and 10-year view into the pandemic that it had the ingredients for that going forward, which we saw as being a good diversity in terms of the economic performance of that in terms of the sectors that contribute to that and very strong universities, high graduate retention, stable political leadership. Those things are -- and I think an international brand as well and that's -- and all of those things remain the case. Clearly, when you're dealing in the regions versus margin versus London, the sort of margin dynamics and land and bill costs are somewhat different. So, it means you do need to work differently. But we've actually seen, on the bill cost side of things, for example, much less upward pressure on regional projects than we have in London, I think for a whole variety of reasons. But then on the flip side of that, we've also seen and it was -- you can see it in the valuation numbers that just with a lack of transactional activity on yields, you've seen valuers move yields out. Now we're investing in scarce urban places for the long-term and we look at MediaCity, we look at what Mayfield will be, they absolutely have those criteria. So, we're going to see some fluctuations sort of in between, but I think regional office doesn't quite capture what MediaCity is and how we will evolve that or what Mayfield will become.

Paul May: Thank you.

Mark Allan: So a question here and then Miranda in the middle towards the back.

Tom Musson: Thanks. Good morning. Tom Musson at Goldman. Just one, please on underlying earnings flat year-on-year. There was still a varying -- still varying levels of surrender premium, I think going into both years there. FY '24, for example, I think still includes a material amount from the Kings Cross deal. So I just wonder what the year-on-year move was if you exclude all the surrender premium from this year and last year and how much do you assume within the earnings guidance going forward?

Vanessa Simms: Yeah. So I think probably worth just talking a little bit more generally about surrenders is that the earnings guidance that we've always given post-COVID has made an assumption around where those surrenders -- we expect those surrenders to be. And so last year, we did actually make an adjustment to our underlying earnings position for a couple of exceptional surrenders. So that was about GBP22 million and then that left the, sort of, underlying surrenders more aligned to the year before, which was around GBP16 million and then the year after. So this year, we had surrenders -- surrenders were in total about GBP18 million. And what we did see generally across the portfolio is probably a little bit less activity around people rightsizing and reorganizing the space. So, we probably had slightly less overall on that underlying position than we probably expected. However, we did get one surrender through from -- on the Kings Cross asset, which is some space where we took that space back to reset for Myo. So, I think generally speaking, that sort of the unders and overs kind of worked out broadly to be -- broadly in-line with the underlying position of around GBP16 million to GBP18 million. Going forward, I think our expectation is probably that this will drop off to our guidance is based on an expectation that probably surrenders will be broadly about half of that next year, just given what we know today.

Tom Musson: That's great. That's helpful. Thank you.

Mark Allan: Great. And yes the mic has been coming your way.

Miranda Cockburn: Miranda Cockburn from Berenberg. Two questions, just firstly, just a brief Page 40, that gross reversion of GBP20 million. Can you just break that down between retail and office because you did say that retail is now positive?

Vanessa Simms: The '26, '27 number.

Miranda Cockburn: The total to 2029, where it's this gross reversion under lease provisions, which is GBP20 million now, is that mostly -- I mean, I'm assuming it's mostly all offices still there?

Vanessa Simms: I mean, it's not the offices. It basically within the -- within the retail side, we're still seeing pretty flat because the valuers aren't necessarily taking any reversion through to the valuation fees. So you saw that a little with the operational performance that we've had this year where we've only actually seen ERV growth of 1.4%, where actually we've outperformed that. So from a retail perspective, that's pretty much new.

Miranda Cockburn: And just secondly, can you just talk a little bit more about Victoria, because it's obviously a big part of the portfolio. It's 100% occupied. You obviously got Thirty High, which you're going to be developing out. But then after that, does it come to a bit of a position where it's looking ex-growth from your perspective or where do you see the opportunity in the medium-term for Victoria?

Mark Allan: Yeah. So I think if we just step back a second of what Victoria was targeted to be and what it delivers. I mean, it's a West End location, it delivers sort of city-style standard modern floor plates that you can't really find in any scale anywhere else within the West End and we're seeing that drive pretty strong consistent growth. And we've certainly got deals negotiated at the moment where people expanding into space that's going to become available because we've got one or two occupiers that are moving into N2 that have moves out of other Landsec assets and all of that space is earmarked for people to move into. So, I do think because we're going to see a lack of that type of product in the West End, the outlook for rental growth is fundamentally strong. If you then look at Thirty High, I mean that obviously is giving us more or less 30 floors of space to let I think with -- through a transfer floor and club room and stuff is probably 27, 28 floors that we're actually going to be letting there. And that will be coming to the market sort of later this year. So I think that will be a really interesting opportunity to demonstrate rents moving on, I think particularly in the upper half of that building with the views that it offers. We're also alongside Thirty High, we got planning within the last couple of weeks just to invest in some of the urban rail around Cardinal place just to lift and modernize that a little bit, which I think is just going to add further to the appeal to occupiers. So, I think then around the edges, we're always going to then look at, right, are we happy that we want to keep all of the assets we have or might there be opportunity to do a little bit around the edges. We're obviously seeing the former House of Fraser being developed by BentallGreenOak. I think that helps again demonstrate that location. We know John Lewis vacating their head office on Victoria Street. So there's going to be an interesting opportunity for someone there. You've gotten this probably going on for a long period of time, but you've talked to Network Rail about their plans for Victoria Station, something they'd like to see investment in and around. I think there's a lot that will be happening to that part of London that will continue to drive demand. So we see having been able to put together such a sort of a scarce contiguous ownership, we think that will drive value longer-term. I don't think there are any more questions in the room. I think we have one question at least that I'm aware of on the conference call. So, I'll go to that. I think Vince at Kempen. I just need to wait for the conference call to open on the line here.

Operator: The question is coming from Vince from Kempen, please go ahead.

Vince Verhoeven: Yes, good morning. Thank you for taking my questions. Well, actually just one question. You identified higher IRRC in your pipeline major retail, but acquisitions have an immediate impact. How do you balance that and what's higher on the agenda for the current year and perhaps does that change beyond the current year?

Mark Allan: Yeah. So we provide within the slide sort of an indication of broadly speaking, the ranges that we see on IRRs and the different opportunities. And so retail, as we said, is the one that we on a sort of risk-adjusted basis because of the level of income, the confidence for the right assets of those delivering growth. If you can be acquiring high-single-digits, you don't need to be making particularly heroic growth assumptions on top of that to be getting towards double-digit unlevered returns. So, that's what we would expect to see there, and for the right sort of assets, we'd expect that there should be a fairly even lease profile in terms of being able to capture that rental growth in underlying cash flows pretty much immediately. So I don't think we'd expect anything particularly near-term to be dilutive to that on those acquisitions. On developments, we've indicated sort of low double-digit returns as you might imagine, the returns on offer, and that we would seek in the regions are somewhat higher. Those that have a residential element, be there in London or in the regions compared to office in the same geography has a -- we'll have a lower starting initially, so you're probably looking at residential in London having a gross yield on cost in the low 60s, netting down probably to 5%, but with much less upfront vacancy, much greater diversification of the rent roll, and the ability to deliver annual rental growth in there. So it's a different profile -- slightly different profile to IRR from those types of projects, but we think again that gets us to around that low double-digit level for London, a bit higher for the regions.

Mark Allan: I believe we have no further questions on either the webcast or the conference call. Thank you so much, everyone, for taking the time this morning. Obviously, please feel free to reach out to any of us for anything, that you'd like to cover in addition to the content from today, but enjoy your Friday in the city, thank you.

Operator: This presentation has now ended.