British Land Company PLC (BLND) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the British Land full year results call. My name is Seb, and I'll be the operator on your call today. [Operator Instructions] I will now hand the call over to David Walker to begin. Please go ahead, David.

Thanks, Seb. Morning, everyone. Thanks for dialing in today. I'm David Walker, Head of Investor Relations at British Land. And I'm on the line today with Chris Grigg, Chief Executive; Simon Carter, our CFO; and we also have Darren Richards, our Head of Real Estate, on the line. Before I hand you over to Chris, could I just remind those of you joining us by phone that the slides are available to download now at britishland.com. You are able to register questions on the conference call at any time from now during the presentation. For those of you listening through the website, slides will appear automatically, and you can submit written questions via the website, which I will read out following our prepared remarks. With that, I will hand you over to Chris.

Thank you, David. Good morning, everyone. First, I hope you're all well. We really appreciate you taking the time to dial in, in what a highly unusual circumstance. We planned to be with you in person for today's results. Obviously, that's not possible, but it's certainly our plan for the half year. And as usual, we'll be speaking with you -- as many of you as we can in the coming days. Before I start, I'd like to take a moment to thank our team. COVID-19 has presented unprecedented challenges, not just for our business, but for our people. They've had to adapt to new and often challenging working conditions, whether at home, on our campuses or at our retail centers. One of our core values is being smarter together. And when I look across the business, that's been very much an evidence in recent months, and I'd like to thank everyone for that. Today, Simon and I will update you on our full year 2020 performance. And while it's still early days, we'll also set out some of the ways in which we've been affected by COVID-19, how we're responding and our initial thoughts on what this could mean for us long term. Simon will also set out our ambitious new sustainability targets. They build on the progress we've made over the last 10 years and will be critical to the long-term performance of our business. We'll finish with questions when Darren Richards, who, as you know, is responsible for the whole real estate portfolio, will be joining. He's got some great insights into what we're seeing on the ground right across the business. Starting with the results. As you know, all of our operations are in the U.K. So for the first 11 months of the financial year, we were unaffected by the outbreak. In Offices, we leased nearly 950,000 square feet over the year, on average, 9% ahead of ERV, through a diverse, high-quality range of businesses through the SMBC and BMO. This demonstrates the real strength of our campus proposition. Our developments are nearly 90% pre-let, but they're effectively derisked with GBP 54 million of future rents locked in. They were up nearly 8% in value, contributing to an uplift of 2.3% across our London Office portfolio. Strikingly, this included a 5% increase at Broadgate, demonstrating that the transformation we've delivered there is really paying off. As you know, the retail market was very tough, even pre-COVID. So throughout the year, we were pragmatic in our approach to leasing. We leased 1.4 million square feet of space. That's not far off the previous year. But deals over year were on average 4% below previous passing rent because we accepted lower rents to keep the portfolio full, supporting footfall and sales. As a result, occupancy remains high at 96%. Inevitably, valuations have been affected. Ongoing structural challenges were exacerbated at year-end by the early effects of COVID-19. So Retail was down 26% over the year, and our portfolio was down 10% overall. The 6% decline in EPS reflected the impact of GBP 1 billion net sales of income-producing assets as well as a tougher retail market. Turning to COVID-19, how we've been affected so far and our response. Clearly, the current situation is unprecedented. There is very little certainty over how deep or how prolonged the impact will be on economic activity and how people's lives will be affected near and medium term. But there are certainly lessons to be learned from past crises, which I and the team have worked through. We realized fundamental long-term changes will emerge, and we do expect, based on past experience, that this crisis will accelerate a number of key trends, like more flexible ways -- like the more flexible ways we are all working and the further shift to online retail. Our strategy has been informed by that. It means that the progress we've already made on our campuses to modernize our buildings, to be more customer focused in our offer, to provide additional flexibility through Storey position us well for the changes which will inevitably come out of this. Our customers are telling us they need space which is cleaner, healthier and well-managed. So at our campuses in particular, our ability to control the environment with the support of our property management team is a real differentiator for us. This strategy has underpinned our leasing success. Here, we accounted for 7.5% of Central London leasing with just 2.5% of the stock. And looking forward, we think our approach will continue to deliver. But clearly, Retail is more challenging, and here again, we'd expect existing trends to accelerate. At the same time, when the full impact of COVID-19 becomes apparent and we get a fuller picture of what that means for our business and the sector more generally, maybe that we adapt elements of our strategy or evolve our approach. As we move through this, we really benefit from the work we've done over several years to really strengthen our balance sheet. Our debt remains low with leverage of 34%, and we have GBP 1.3 billion of undrawn facilities and cash. In March, we were pleased to agree a new ESG-linked revolving credit facility, so we have no need to refinance until 2024. And as you know, we announced a temporary suspension to the dividend. That's despite our financial strength and profits of some GBP 300 million. It wasn't a decision the Board took lightly because we recognize the importance of the dividend for so many of our shareholders. But with so little clarity on the outlook, we felt it prudent to retain the cash within the business. So we will look to resume dividends at an appropriate level as soon as we can, and Simon will tell you more. Importantly, this decision gave us extra flexibility to support our customers who've been hard hit. Simon will also set out the details of our rent collection and some scenario analysis we've done. The key takeaway is that we have a lot of headroom. We could withstand a further fall in asset values of 45% without taking any mitigating actions to satisfy our debt covenants, though, of course, we continue to actively manage our liabilities. So our financial strength stands us in very good stead, and frankly, that's very different to 2009. Turning to the impact we have seen across our portfolio. In Retail, all but 2 of our assets are open, providing access to essential stores, such as supermarkets and pharmacies. Overall, that's about 15% of our units. Our campuses are open. Every office building is accessible. But virtually all of the F&B, Retail & Leisure units remain closed. As you'd expect, physical occupancy is very low, but there are a few exceptions. With the restrictions starting to ease, we're now in active discussions with customers about returning to work. We initially suspended work at our developments to ensure the safety of the people working there. But we've been working closely with our construction partners, and today, all our major sites are open, albeit with a smaller workforce, in line with social distancing guidelines. 135 Bishopsgate has completed and is being fitted out. We do expect 100 Liverpool Street to complete in the autumn and 1 Triton to complete in spring 2021. Throughout this period, our focus has been on our customers. We have a broad range of occupiers, and we recognize their ability to weather this storm will vary, so we've tailored our response accordingly. In March, we released smaller retail, food and beverage and leisure customers from their rental obligations for 3 months. And we allowed others experiencing financial challenges due to COVID-19 defer March quarter to date rents and spread repayment over 6 quarters. Simon will give you the detail. In Offices, we benefit from a high-quality, diverse range of occupiers, so rent collection for the March quarter was 97%. At Storey, we offered all occupiers who needed it 3-month rent deferrals. Of course, physically getting back to work is now what's on everyone's mind. I'll come back to how we're doing that, but central to our response now and in the months ahead is the British Land property management. As I've touched upon, as we transition to a new normal, our ability to manage the whole environment will become more and more important in the months ahead, and that's a key competitive advantage. On that note, I'll now pass it over to Simon for an update on our financial performance.

Thank you, Chris. Morning, everyone. As usual, I'll take you through the results for the year to March, but I'll also outline our financial resilience, recent rent collection experience and our assessment of the initial impact of COVID-19 on our customer base, wrapping up with the important 2030 Sustainability targets we announced today. Let me start with the results. EPS reduced by 6%, primarily due to sales we've made over the last 2 years and increased provisioning in light of COVID-19. EPRA NAV is down 14% to GBP 7.74. That's due to a decrease in our portfolio valuation of 10% as a result of a 26% decline in Retail. Offices were up 2.3%. Our financial position remains strong. LTV is 34%. We have access to GBP 1.3 billion of undrawn facilities and cash, significant covenant headroom and no requirement to refinance until 2024. Our committed and recently completed developments are now 88% pre-let, reducing risk and locking in GBP 54 million future rental income. Costs to come on these developments are less than GBP 80 million, a good place to be in the current environment. Looking at the movement in EPS. This is primarily due to net sales of GBP 1 billion of income-producing assets over the last 2 years, which reduced EPS by 2.5p. We deployed sale proceeds into share buybacks, increasing EPS by 1.1p as well as our value-accretive development program. We expect the committed development program alone to add 4.2p to annualized EPS. Setting aside the impact of capital activity, the 0.8p reduction in EPS this period is due to increased provisioning in regard to COVID-19, which I'll cover in a moment. Cost savings through our financing activities and reduced admin expenses offset the impact of CVAs and admins. Turning to net rents, let me draw out some of the key points. Like-for-like decline in Retail was 5.1%. GBP 14 million reduction in rental income primarily relates to CVAs and admins across our Retail portfolio, the largest impacts being from Debenhams, Arcadia and House of Fraser. Like-for-like growth in Offices was 0.8%, lower than recent years due to expiries of Broadwalk House and 155 Bishopsgate, ahead of refurbishment. Broadwalk House is now let to challenger bank, Monzo. As a result of COVID-19, we have provided an additional GBP 7 million against tenant incentives. These are noncash charges against balances related to the spreading of historic rent frees and fixed uplifts. A further GBP 6 million has been provided against trade debtors. It is worth noting that where we offered to defer March rents, these are not debtors at year-end and, therefore, not provided against. Slide 10 sets out the income statement. We've covered net rents. There was an improvement in fees and other income. Our focus on cost control, combined with lower variable pay, resulted in a 9% reduction in admin expenses. We'll remain very focused on the cost base going forward. As you heard from Chris, despite making over GBP 300 million of profits, the dividend has been temporarily suspended. We took this difficult decision to protect the long-term value of the business, enabling us to support those customers hardest hit and further strengthen our financial position. As a REIT, the dividend is an important element of shareholder return, so we are focused on resuming dividends at an appropriate level as soon as we can more reliably forecast our cash receipts. For this, we will need to see a significant improvement in rent collection and have more visibility on the post-lockdown productivity of our assets, principally how quickly retail customers and office workers return. Turning to the balance sheet. The reduction in NAV was driven by the decline in retail valuations, partially offset by the buyback. Financing activity had a negative impact that delivers future interest cost savings. Last year, EPRA published 3 replacement measures of net asset value: net tangible assets, net reinvestment value and net disposal value. Going forward, we will publish all 3 metrics but will use EPRA net tangible assets as our primary measure, which is closest to the current EPRA NAV. The impact of the change is expected to be de minimis. Pro forma calculations are set out in the appendix. Turning to valuation book. As you know, the valuers have incorporated a material uncertainty clause across all property sectors as at the 31st of March. They have confirmed this doesn't mean the valuation cannot be relied upon, but in these current extraordinary circumstances, less certainty can be attached than would normally be the case. Overall, values are down 10%. But Offices have increased around 2%, driven by ERV growth of 3.2% in the period. However, Retail is down 26%, reflecting 101 basis points outward yield shift and an ERV decline of 11.7%. The value of Canada Water is up nearly 10% this year, reflecting progress on planning. This has decreased from 12% at half year due to a lower existing use value for the retail. But we expect this to unwind on the move to a full development appraisal following formal receipt of planning. Looking at Offices in a bit more detail. Investment volumes were low in the first half of the year. But following the election result, there was a noticeable increase in activity. More recently, while some transactions did complete after the COVID outbreak, a number paused or fell away. Looking forward, before committing additional capital, potential investors are keen to see collection stats for the June quarter date and for the forfeiture moratorium to end. On the occupier side, there is still a lack of high-quality supply, though we've seen ERV growth on the standing portfolio. Our developments once again delivered a strong performance. They were up 7.5%. And despite the current context, whilst we expect the market to be softer in the short term, supply of prime is constrained, and customers are continuing to look for space early if they have large space requirements. We're under offer on 220,000 square foot, and we've responded to nearly 400,000 square foot of RFP since March. On Slide 15, I've set out our retail valuations. Our valuations are as at the 31st of March. So our value was adjusted for the early effects of COVID-19, which increased valuation decline by around 6%. Specifically, they assumed a 3-month rent deduction on all nonessential retail, increased voids, additional structural vacancy and moved yields. Consequently, retail parks and shopping centers both declined by 29% on average, with solus assets holding up better. Generally, investment transaction volumes were very low for multi-let assets, albeit at the beginning of the year, there was a pickup in retail park activity, reflecting generally lower occupancy costs and CapEx requirements, supported, in some cases, by potential for change of use. However, the market for multi-let assets ground to a halt in the wake of COVID-19. Turning to CVAs and admins. Over the last 12 months, a more robust stance by us and others has reduced the aggressive use of CVAs. We have seen outcomes improving from the perspective of property owners. But clearly, COVID-19 has seen more retailers enter distress, and we expect further insolvency. Already over the last few months, you've seen the likes of Debenhams and Oasis enter administration. Against this tough backdrop, our focus has been on driving operational performance, keeping our centers full with the right type of occupiers. As a result, we have maintained occupancy at 96%, and leasing volumes for the year were 1.4 million square foot. Lettings longer than 1 year were, on average, 4% below previous passing rent with an average lease term of 6.7 years and average incentive of 10 months. Prior to COVID-19, footfall was only marginally down, and we outperformed the national benchmark by some margin. However, the impact of COVID-19 began to be felt in the Q4 footfall numbers. You can see on the right-hand side, footfall figures become less meaningful after lockdown with a reduction of 78%. The picture is very similar for retailer sales, as you can see on the chart on Page 19. Turning to rent collection and deferrals. Here, our focus was on helping customers most in need. We did this in 2 key ways. First, we waived rents for the March quarter date for smaller independent businesses, particularly in the F&B, Retail & Leisure sets, who were hardest hit by the lockdown. In total, these waivers amounted to GBP 2 million of rents. Secondly, we offered to defer the March quarter rent for larger businesses, primarily retailers who experienced significant challenges because of COVID-19. Here, repayment will be spread across 6 quarters from September '20. We will keep a close eye on the recoverability of these. The table shows our collection stats for rents due between the 2nd of March and end of April. As of the 15th of May, we have collected 68%. That's 43% across our Retail assets and 97% in Offices. Of the remaining 32%, 25% has been proactively deferred or waived by us, meaning 7% remains outstanding, primarily from stronger retailers. I thought you'd be interested in our bottom-up initial assessment of the impact of COVID-19 on our customers. We have segmented our rent roll into customers whose revenues have been materially impacted by COVID-19 and those whose businesses are more insulated. For sectors like leisure, F&B and fashion, the impact has been significant. By contrast, big technology companies, banking, insurance and legal customers have typically fared much better. As you can see, we estimate around half of our rental income is derived from customers in sectors where COVID-19's impact is likely to be higher. The other half is from businesses likely to be more resilient. This picture is supported by our rent collection figures for March, with lower-impacted customers paying 93% of rents due. But for those more materially impacted, payment rates are much lower at around 40%. To put these figures in context, income from our lower-impacted customers fully covered our operating outgoings last year. We take additional comfort from the fact that over 1/3 of high-impact businesses are listed companies with market capitalizations currently in excess of GBP 1 billion. The strength of our debt metrics is a continuing focus. And here, we're really benefiting from the work we've done over many years. We have undrawn facilities and cash of GBP 1.3 billion. During the year, we signed a new GBP 450 million ESG facility and extended GBP 925 million of facilities. Taking into account committed CapEx and future debt maturities, we don't have to raise finance until 2024. Our LTV is 34%. Financing activity and our use of caps has reduced our weighted average interest rate to a new low of 2.5%. Importantly, there are no income or interest cover covenants on British Land's unsecured debt. And given our covenant structure across the group, we could withstand a fall in asset values across the portfolio of 45% before taking any mitigating actions. Clearly, this financial resilience is a key advantage in the current environment, and it's something we will remain very focused on in the coming months. We will work to maximize rent collection and keep our CapEx and admin expenses under constant review to make sure that we continue to benefit from the robust financial position we have today. Looking further forward, I'd like to spend a couple of minutes on the new 2030 Sustainability targets we announced today. As we think about the future of our business, we're increasingly focused on how we can deliver space, which is both more sustainable and more inclusive. We've made a lot of progress in this area already and achieved many of the goals we set ourselves 5 years ago. We've already reduced our carbon intensity by a massive 73%, our energy intensity by 55% and supported more than 1,700 people into jobs. Building on this momentum, I'm pleased to announce our 2030 targets. Taking the environmental side first, our key commitment is to be net 0 carbon by 2030. The main elements of this are for all future developments to be net 0 carbon, and by 2030, all developments will have 50% less embodied carbon. We'll also reduce our operational carbon by a further 75%. We're taking a whole-life approach that the overriding principles are to reuse, recycle and resource sustainably will only offset as a last resource. Our innovative Transition Fund incentivizes us to reduce embodied carbon while funneling resources to improve the efficiency of the standing portfolio. We're seeing more and more evidence that sustainable buildings generate higher rents and lease quicker than other prime space. And with more of our customers explicitly committed to reducing their emissions, we think this approach really enhances our offer. Already, we're seeing the benefit of that in the conversations we're having. On the social side, we're rolling out our place-based approach to community engagement. We'll work with our communities, local authorities, customers and suppliers to tackle local issues, such as education and employment, as we've done so well at Regent's Place and Fort Kinnaird. This approach builds important relations, making our places more successful. And when I think about how quickly and effectively our community team responded to the current crisis, it's clear that we've made some very deep connections. To conclude, sustainability is a key part of our offer and our strategy. It's what our customers want, and that means it goes hand-in-hand with delivering value for our shareholders. We've set ourselves further stretching targets. We have a clear plan to achieve them, which are set out at our event in a few months' time. On that note, I'll hand over to Chris.

Thanks, Simon. I'd just like to echo those comments. At the moment, it's easy to forget that just a few months ago, scale of the environmental challenge we were facing was front of mind for us all. Of course, it hasn't gone away. What the current situation has done is to remind us of the importance of social impact, too. Our plans give equal weight to both. We'll continue to update you on our progress. I'm now going to talk about the short- and longer-term implications for our business as we see them, starting with Offices. Most of us have now been working from home for more than 2 months. Many won't have done that before, and some will be surprised at just how effective that's been. But much of that is down to our experience of working together in the office. And right now, my conversations with occupiers suggest many people are keen to get back there, though they know this poses real challenges. We're talking to almost every office occupier about the new abnormal, right? What it might look like? For example, occupation will be phased, potentially starting with just a few people. Going forward, slightly prolonged social distancing means we will then see a new normal that has real implications for day-to-day running of our places. It's already clear that lifts and lobbies are likely to be a pinch point, particularly in high-rise buildings. In the discussions we're having, some businesses are talking about staggered hours of operation, others are more focused on frequency of cleans. We've set up a number of virtual roundtables, so we're talking to a range of businesses, occupiers and others, to identify their priorities and concerns and share experiences. Some of our occupiers have global operations. Their insight in countries which are further ahead in this is really helpful. It's another great example of how our scale and our campus networks, in particular, are a real advantage. As well as these virtual roundtables, we surveyed more than 1,000 London office workers on their experience working from home. Vast majority are finding it harder to work effectively as a team, and they see the office as a central part of their company's culture. Things like hiring and training are also much harder to do when people are not physically together. But longer term, we know people will think about how much and what type of space they really need, and that's already part of our discussions with them. We're continuing to get inquiries on new and refurbished space, including some very large requirements. We expect demand for a headquarters-type space, modern and high-quality, will be resilient. On the other hand, the trend towards more homeworking will definitely continue, which may mean businesses need less backup or back-office space, most likely at the expense of smaller, lower-quality buildings. In our view, it's important to recognize that here again, we're talking about an acceleration of an existing trend. Equally, other trends may reverse. We'd expect office densities to fall and hot-desking to reduce. People place greater value on having more of their own space. So there are a number of ways this could play out, and we would be cautious about drawing material conclusions too early. Much will depend on how safe people feel traveling into London, how effectively we can manage social distance in the office as well, of course, as a prospect of a vaccine or cure. But the evidence from previous crises, high-rise buildings post 9/11 are an example, that when people feel safe again, things can and do move on. In summary, we think people are more confident that they can work from home. At the same time, they're very aware of the benefits that high-quality office space can bring for their businesses, customers and their people. And we think polarization towards modern, high-quality space will accelerate. At the same time, supply will remain constrained. This plays to our strength. We spent more than a decade delivering buildings which accommodate today's flexible working patterns with a real focus on well-being. At our campuses where we control just not -- we control not just the buildings but the spaces in between, and through Storey, Simon has talked to you about our current discussion. But in the short term, given the scale of the uncertainty, we wouldn't be surprised if overall demand for space was a bit softer. Turning now to Retail. There's no doubt, the current crisis has accelerated the use of online. As one commentator said, for many retail sectors, this is a mass experiment in single-channel online retail. I'd agree with that, and it has clear implications for physical retail. In the short term and to coin a phrase, shopping will be more mission-based. That means people want to buy what they need as efficiently as they can. So even when restrictions are lifted, we'd expect dwell times to remain low. And leisure operators like bars, restaurants and gyms still face real challenges. Given the impact that the lockdown has had across the U.K. and the world, it's genuinely hard to predict what recovery will look like. It's likely that some shops may never reopen, and the amount of retail space required in the U.K. will certainly drop. In many ways, this is a change that was always going to take place, just over a longer time frame. This sort of thinking has shaped our retail strategy for some time. We'll continue to refine our portfolio, focus on assets we think can be successful. One example is well-located, edge-of-town retail parks. They're open air that people will be more comfortable visiting, that may be the case, for example, with covered centers, and they complement an omnichannel offer, facilitating fulfillment from store and click and collect. The plan we announced in November 2018 was to reduce retail to 30% to 35% of our portfolio. Due to relative valuation changes, that's roughly where we are now. That does not mean, however, that we've achieved our aspiration. We'll continue to make sales selectively, but we recognize that will be hard to do for a while at least. So in the short term, given where retail yields are and the lack of liquidity in the market, in order to maximize value, our focus will be on intensive asset management, on keeping our assets full and exploiting increased demand for in-store fulfillment and click and collect. Just to be clear, a vibrant retail and leisure offer is still an important part of our mixed-use campuses. Longer term, people will still want places to buy a sandwich or a coffee and, as confidence returns, to eat out and to meet friends. But at the moment, just when that will happen is hard to know. As I said, it's early days, but we will remain alert to things as they develop. We're engaging with businesses, the government, local authorities and the BPF, so we're at the forefront of these developments. When the longer-term effects of the current situation become clearer, there will likely be elements of our approach that we change. We may accelerate certain initiatives or look at new avenues to create long-term value. Before I turn to the outlook, I'd like to update you on Canada Water. As you know, we received a resolution to grant planning in September, and in February, confirmation that the Mayor of London would not be calling in the application for further consideration. We're making good progress, albeit things have slowed with all parties working remotely. But the Section 106 agreement is in an engrossed form, and we anticipate signing in the next few weeks, and that will trigger the formal grant of planning permission. So we'd hope to draw down the headlease over the summer, and our earliest possible start date on site would be the end of this year. But of course, there is still a risk of judicial review. The resolution we have covers the detailed consent for the first 3 buildings. That's about GBP 330 million of spend. For the whole master plan, we'd probably look to take on partners. We're starting to think about that. As you'd expect, there's no shortage of interested parties. To wrap up, as a business, we're very focused on the day-to-day, collecting rent, reopening our places as regulation and demand permit, as Simon laid out on ensuring we reinforce our financial position. Looking forward, for Offices, we think occupational demand will be softer short term, although supply of prime space will remain constrained with developments likely paused. But longer term, we expect demand for the highest-quality, well-located and well-connected space to be good. Similarly, the London investment market will also be quiet in the short term. But as confidence returns and people are able to travel, we'll see the market strengthening again. In Retail, the occupier market will remain challenging. Operators will continue to struggle and not all will survive. But longer term, this crisis may help define modern physical retail space, which we think would be a good thing. However, it may take some time for liquidity to return to retail investments. To conclude, our business is financially very strong with a clear strategy, a high-quality portfolio and attractive development options we can pursue when the time is right. We benefit from an excellent team, many of whom you met at our Investor Day last year. So we're well positioned, not just for the coming months, but for the longer term. On that note, I'll hand you back to David. We're happy to take questions.

Thank you, Chris. Before we move on to questions, because we are doing this via conference call today, could I ask a couple of things? [Operator Instructions] Secondly, please do bear with us if there are any slight pauses or delays that may be caused by the conference call lines or webcast as we go through the Q&A. Before I hand you back over to our operator for questions from the line, we do have a few from the website, which I will take initially.

So the first is from Robbie Duncan at Numis. Chris referenced that the dividend will be reinstated at an appropriate level when there is better visibility. Is the logical assumption here that it will be reinstated at a lower and more sustainable level than pre-COVID given the significant headwinds on earnings from retail and potential disposals?

Sure. Robbie, good to hear from you however remotely as it were. Simon, do you want to take the dividend question?

Sure. Robbie, as we sit today, I think it's quite odd to form a view on the extent and the duration of the crisis, and that was one of the reasons we suspended the dividend. But as I said in my prepared remarks, we are very keen to resume the dividend as soon as we have clarity of outlook. We don't have that clarity of outlook yet. As I indicated, we're looking to rent collection and an improvement there. We'll need to see a significant improvement in rent collection. And I think we'll also need to see the productivity of our assets improve, and I think that is where your question was driving at. So I think both in terms of the timing and the level, it's too early to say. But what I would flag is that we are a REIT. REITs distribute -- need to distribute 90% of their qualifying income from their property rental business, and that's typically translated into payout ratios of 80% to 90%. And you've seen us and others target those kind of payout ratios. So when we have that visibility on timing and quantum, we will resume the dividend.

Thanks. Next question from the website is from Sander Bunck from Barclays. Am I to understand that the March 2020 valuations take into account COVID-19 impact?

Simon, you're getting all the questions at the moment. We might as well hand that one straight over to you, I think.

Absolutely fine. So yes, the valuations took into account the early impacts of COVID-19. If you think lockdown commenced 23rd of March, and this was a 31st of March valuation. And effectively, the valuers in retail moved values by about 6% for COVID. And I set out in my prepared remarks some of the assumptions that they made around that. So as at the 31st of March, the valuers believe that they reflect the conditions on the ground as they were seeing them.

Or not seeing them, I guess, in some cases.

Yes.

Thank you. Next up, John Cahill from Stifel. Could you foresee suspending the dividend even into where you might have to incur corporation tax? Or would this represent a red line such that you would start to redistribute rather than pay corporation tax?

I think that's another one for me. So in terms of the dividend, as you know, there's a requirement to distribute 90% of your taxable income, and you need to do so, as the legislation currently stands, within 12 months of your period end. But we've had very productive conversations with HMRC. They're very sympathetic to the approach we and others have taken to support our businesses, support our customers and people by suspending the dividend. So we're having productive conversations about an extension. And then as you mentioned in your question, there is a fallback if income isn't distributed by the end of an extended period to pay effectively tax on the residual that isn't distributed. And I guess you've got to look at that in the round because if dividends were made, they would be taxed in the hands of our shareholders. So it does feel equitable, to the extent there was any income that wasn't distributed, that we would pay tax on that. So I wouldn't say it's a red line, but we do envisage that we will get an extension, and so it won't be an issue.

Thanks. James Carswell from Peel Hunt. Given the advantages to a tenant of flexible leases and given the potential financial struggles of some of the leasehold operators, is now a good time to expand Storey across the portfolio?

I think the first thing I'd say is we're very pleased with how Storey has been working for us. So if you cast on back to what we said when we first launched it, it was about introducing different sorts of tenants, but also gaining greater experience and flexibility and being able to work with our larger tenants around this topic. It was also, from our perspective, a very deliberate decision not to become overexposed to the flexible operators themselves. And we're pleased with both aspects of that in retrospect, although we certainly didn't expect exactly this impact. I think going forward, we will look at flexibility as and where it's appropriate. We've kind of touched on that already, and we may see requirements for greater flexibility. I think the other thing that we have seen over the last few years, however, is that for bigger space demand, by and large, people want those leases to be quite lengthy because of the commitments that, that requires on the office side in particular. So I think you'll see a combination of things. It's early days, as I've already said. We don't, today, expect huge, huge requirements of extension of Storey-like space. But I suspect there will be some. And as I say, we feel in a good position to offer that. Darren, you're very much seeing discussions on the ground. I don't know if there's anything you'd like to add to that.

Yes. Sure. James, actually on the ground, even during the COVID crisis, we've seen an uptick in demand for the Storey product. And that's on top of the fact that we've got very high retention rates and expansion rates. Over 80% of people either stay with us or expand with us. There's another 90,000 square feet on top of the current 300,000 square feet in the next phase of the pipeline. So we've got expansion space there. And then going forward, as one of the benefits, obviously, of having a flexible brand and owning the product is that we've got optionality built in. So if we wanted to convert space going forward into a Storey product, we've got the ability to do so.

Thank you. That's all the questions we've had submitted via the website. So what I will do now is turn it back over to our operator, Seb, who will let us know if there are any questions via the conference call. Seb?

The first audio question comes from Peter Papadakos from Green Street Advisors.

Two questions, as per David's instructions. Maybe one on Canada Water. So given that you are talking to potential partners for that scheme, how advanced are those talks? Is it something that we should see in the next 12 months? Or are they sort of at a very preliminary level? And therefore, will you launch potentially some of those first 3 buildings on your own if they don't come to any -- you don't come to any sort of agreement? And then the second question is just on the office occupancy. There has been a fall year-on-year. You have had some leases pro forma post period end. What are you thinking in terms of occupancy for the Office portfolio by the end of this financial year? Will you try to get back up to where you were 12 months ago? Or is that too ambitious?

Cool. Let me take the Canada Water question first. First of all, I would say that inevitably, the discussion with potential partners are at an early stage. And that, from our perspective, is kind of inevitable given that we don't yet have the final stage of planning done. And as you can imagine, as I said, it slowed down a bit. So that's to be expected and in no way worrisome from my or our perspective. We had always planned that first stage, that GBP 330 million that I described, we would be perfectly happy doing ourselves, that remains the case. But we would obviously take that judgment, as I said. There's some degree of uncertainty around timing on this thing for all the obvious reasons, plus the possible risk of a judicial review. It's a big project with what that implies, but we're still very, very excited. On the question around Offices, I think I'll turn that over to Darren, if I may.

As we've set out in the release, so Office occupation is actually over 97%. So we've got some space in the portfolio, as you would always have when you've got nearly 7 million square feet that's in churn. We're constantly doing that. So I don't think we'd ever be in a position where we would be announcing 100%. So we're relatively fully let. On top of that, as you would have seen, we're nearly 90% let on our development program. We've got a couple of core floors or traditional office floors left at the very top of the buildings on 135 and 100 Liverpool Street. So as far as office occupancy is concerned, we think we're in a relatively resilient place. And particularly where our rental profile sits across the campuses, we still got average passing rents in the kind of mid- 50s and ERVs in the early 60s. So we think we're well positioned in that going forward.

Any follow-ups, Peter?

No, that's fine.

The next question then comes from Max Nimmo at Kempen Capital.

Just on the 97% of office rents that have been received, what is the risk that those office occupiers turn around in June saying, we'd look to the press to see what's happening, what's the worst that can happen if we don't pay rents in the situation given the moratorium on evictions, et cetera? And the second question, I'm just on Slide 67, and I totally appreciate this is a very difficult question to answer, but given that COVID has accelerating trends, in terms of where we are now with equivalent yields, what's your gut feel or your base case as to when we'll get to that stabilization point in terms of yields, and just if that has changed?

That question, was that on retail yields or yields generally or Offices? Sorry, I wasn't...

Sorry, I should say retail yields, I should say. Sorry.

Okay. Cool. Darren, do you want to just comment on the first part?

Yes. Sure. Well, as you spotted, we're 97% collected for March in Offices. We have had some issues but with only some -- with some very small operators, particularly those who are associated with things like the travel industry. And as Simon has taken you through in the presentation, we've got a pretty strong occupier profile. We have got no conversations going on with any of them in terms of what they're thinking about doing in June. The only conversations we've got going on with them, and these are extensive, is helping them return back into the workplaces and get their people back into the office building. So that's all I can really tell you on that.

Yes. And in terms of equivalent yields in retail, I think it's hard to make any real predictions from here because I think that equivalent yields tend to tell you something when you're in periods of relative stability. And I think it's just hard to know now. A couple of -- that's why we're talking and where our attention is today is about keeping our places as full as we can, getting the shops open again, collecting rent as and where we can. And we're going to see some big shifts of one sort or another. I think once you gain stability, I think these equivalent yields relative to where interest rates look, frankly, cheap. But how long it takes before we reach that period of perception that they're cheap, I think could be a while. So maybe we have to put a sort of end at the end of our comments since we're all at different places. We're all being very British and polite about this.

Yes. You're all being very polite about 2 questions as well. So any follow-ups, Max, at all from you before we move on?

No. No, that's all good.

Our next question comes from Sander Bunck from Barclays.

And also 2 questions from my side, and I'm afraid also for Simon. The first one is on a guidance slide. In the last couple of years, you did provide a guidance slide in terms of the kind of the various building blocks we had to take into consideration for the next year's earnings. Totally appreciate that, today, it's very difficult to say anything. But based on what you know today, is there already something that you can give us in terms of building blocks where you think -- which we should take into account when building our EPS number going forward for next year? That's the first one. And the second question is on -- and this is a slightly more technical question, but relates to the accounting treatment of kind of rent deferrals or rent waivers. How are you thinking about that going forward? Is that more -- will you be looking to straight-line some of those deferrals or rent waivers? Or will you be taking them as a one-off? Or is there a discretion in how you do it? Any further guidance there would be much appreciated.

Sander, thanks for those questions. On guidance, yes, as you keenly noticed, we removed the slide. I think it probably goes back to my earlier comment around one of the reasons we suspended the dividend was around the sort of lack of clarity on the extent and duration of this crisis and our ability to forecast within the normal realms of accuracy that businesses have. And you've seen it across all sectors, guidance being withdrawn. So at this present time, we do have guidance withdrawn. But in terms of building blocks, there's some building blocks which are very solid to forecast on. So I think there's good disclosures around our debt. You've got the quantum of debt outstanding. Our weighted average interest rate is 2.5%, a new low. That's going to come down a bit because we're benefiting from the fact that we use caps in our hedging. So we benefit from the base rate going to 10 basis points. And then, obviously, you can see the rent roll in the back, in the appendices, we've got the contracted rent position as at the period end. And then you would want to overlay some assumptions, which really comes into the second part of your question. So I'll take that and around the accounting and how that might work for deferrals. So it's actually an area we've given quite a lot of thought to, and there was some guidance that came out on the straight-lining standard. But effectively, it doesn't change anything from the perspective of lessors. So it's as accounting would have previously stood. So where you've got a deferral, it's not regarded as a modification of the lease. And so effectively, you would, absent any provisioning, recognize the same income you would have recognized previously. So if you think about what we had before the quarter date, we effectively deferred GBP 25 million of rents related to that quarter that would have been due before the end of March. And we agreed to spread them over 6 quarters from September '20. So that's when the receivable will come. There was no receivable at period end, so nothing to consider for providing. And then the income effectively would get recognized over the course of FY '21. And we would think about the recoverability of that income and make necessarily provisions to the extent we thought there were any issues during the course of FY '21. So hopefully, Max, that answers both of your questions, but let me know if you've got any follow-up.

Yes. So that's on deferrals. Secondly, how is that for rent waivers? And also lastly, when it comes back to reinstating your dividend, will you be looking at your P&L rental income or P&L EPS? Or will you be looking at the actual income that you receive on a cash basis, i.e., in the short, it could actually take slightly longer to rebuild that dividend because the cash impact will initially be higher than the P&L impact?

Sorry, Sander, I missed the first part of the question. I've got the dividend bit, but missed the first part.

Just on the waivers, are the waivers being straight-lined? Or are they being taken as a one-off?

Yes. So the waivers, they do qualify -- where you waive rent, it does qualify as a modification. So they get spread over the term of the lease, just as if you had a rent-free on a new lease. But again, you consider about the longer-term recoverability on all of those items, but they do get spread. And then on your question around dividend, I think at this current time, normally, there's a very high degree of correlation between cash and P&L. But as you pointed out that going forward, there may be a disconnect as we work through this. But I believe cash is the most important when considering dividends, the operating cash flow. So that's where we would look in the first instance. But the accounting shouldn't be that different from the cash because of what we described, but there will be an element of difference, as you highlight.

[Operator Instructions]

While you do that, I have one more question online from Liberum, Tom, related to the earlier question, I guess. Can I ask what level you would be a buyer of retail assets? Or is there simply no price?

I think that in this environment, we have been very clear with respect to our strategy, and our strategy is to reduce our exposure to retail. I don't see any current reason to change that approach or that strategy.

Okay. I have no more questions on the website, and we have no more questions on the line. So I think that's all for today. I'll hand you back over to Chris' line.

I'd just like to say, first of all, thanks to everybody for dialing in. Also, as we go through this, we'll, of course, keep you updated. Next time we're due to speak to the market is at our AGM in July. So thanks very much. Have a good day.

Ladies and gentlemen, this concludes the call. Thank you all for dialing in. You may now disconnect your lines.