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

Good morning, everyone, and thank you for joining us. As you can see, we're here in the office, but hopefully, next time, we'll be able to meet in person. Our plan today is for David to take you through the full year results. Then Darren will review our operational performance, and I'll outline our new strategy. These presentations have been prerecorded, and we'll take your questions live afterwards. Before we start, I'd like to thank our people. They've gone to extraordinary lengths to support our customers, communities and each other. And I'm incredibly proud of what they've achieved. Looking back over the year, our performance has clearly been impacted by COVID, but we still delivered an underlying profit of GBP 200 million, sold GBP 1.2 billion of assets ahead of book value and leased more space in retail than ever before. We've also maintained a strong balance sheet. So we're in an excellent position to capitalize on an improving economy. The new strategy I'm setting out today is shaped by my experience both inside and outside the business. We have a long tradition at British Land of finding attractive investment opportunities and financing them smartly. In more recent years, we've enhanced our operational capabilities, enabling us to deliver fantastic places. My aim is to make the most of all these skills by taking a more active approach to value creation. So we will focus on situations that exploit our strengths in development, active management and repositioning. And we will invest behind 2 key strategic themes: first, our Campuses; and second, Retail & Fulfilment. Our Campuses are a clear differentiator and will benefit from increasing customer demand for the best space, which is in shorter supply. I've looked at retail in depth over the last 6 months. I described the sector as challenging in November. But I now believe we can deliver attractive returns if we think about it more broadly as Retail & Fulfilment. We already have a market-leading position in retail parks, which are playing an increasingly important role in fulfillment networks. We now see value here and an opportunity to complement this with urban logistics development in London. I'll talk more about this after you've heard from David and Darren. So over to you now, David.

Thank you, Simon, and good morning, everyone. This has, of course, been a unique year, but we've been active and clearly demonstrated our resilience, whether that's through rent collection, leasing activity or the outperformance of our assets, while continuing to benefit from our financial strength, something we further reinforced through the year, providing a strong platform to deliver the strategy Simon will outline today. I'll start with the key takeaways from the financial results. Underlying profit was GBP 201 million, down 34%. Primarily, that's due to increased provisions for rental debtors, like-for-like rental declines as well as the impact of asset disposals, which totaled GBP 1.2 billion in the year. Net tangible asset value reduced 16.3% to 648p per share. The key driver was a decrease in our portfolio valuation of 11% as a result of a 25% decline in Retail and a 4% decline in Offices. Darren will expand on the moving parts within these valuation moves later, in particular, the encouraging trends we've seen in offices and retail parks through the second half. Rent collection across our portfolio stands at 83% for the year, with office rents effectively fully collected at 99% and retail continuing to increase with 71% now collected. Importantly, our financial position remains strong. LTV is 32%. That's down 200 basis points in the year, following the sales we've executed at an average of 6% ahead of book value. We have access to GBP 1.8 billion of cash and undrawn facilities, retain significant covenant headroom and have no requirement to refinance until early 2025. Based on our new policy of paying out 80% of underlying EPS, the dividend for the year is 15p per share. Dividends are now semiannual, and so the final dividend of 6.6p will be paid in August. The movement in EPS is laid out on Slide 4. Overall capital activity decreased EPS by 1p after our disposals throughout the year were partially offset by the recognition of development income following the practical completion of 100 Liverpool Street in October. 1 Triton Square completed last week. And with the addition of Norton Folgate and 1 Broadgate to our committed development pipeline, we now expect recently completed and committed developments to add a further 5.4p to annualized EPS once they're fully let. That's on top of the upside we've already delivered from our post-referendum program. Like most businesses, we've seen a significant impact from COVID-19. Like-for-like decline in rents accounted for 4.6p of the movement in EPS, including the impact of CVAs and administrations, while provisions for outstanding rent, service charge and deferrals led to a further 6.1p reduction. I'll explain details about our approach to provisions in a moment. Finance cost savings added 0.6p to earnings due to our successful hedging approach and as we continue to benefit from lower market rates. And finally, as you can see on the right-hand side of the chart, the underlying tax charge reduced EPS by 2.8p. This relates to the temporary suspension of the dividend, a decision we took at the start of last year immediately after the pandemic struck, which resulted in a shortfall in our REIT distributions, in turn, creating a corporation tax liability equivalent to the withholding tax on that shortfall. Turning to net rents, let me draw out some key points, as we've laid out on Slide 5. The impact of the net sales we've made was GBP 25 million. Like-for-like rental decline in Retail was 17.4%. This equated to GBP 40 million, of which GBP 20 million relates to the impact of CVAs and administrations with the remaining GBP 20 million a result of lower rents, longer void periods and reduced car parking income over the closure periods. In addition to this, like-for-like decline in Offices was 1% or GBP 2 million. This was driven by expiries at Exchange House and 155 Bishopsgate, both of which are currently being refurbished. Provisions for outstanding rents and service charge income reduced net rents by GBP 53 million. We've provided a further GBP 6 million against deferred rents. And tenant incentive provisions were GBP 2 million lower than last year. Developments contributed GBP 14 million, following the practical completion of 135 Bishopsgate and 100 Liverpool Street, which were partially offset by expiries at 1 Broadgate, which moved into vacant possession ahead of the redevelopment there. Moving to rent collection, where our performance is the result of continuous engagement with our customers right across the year. For those materially impacted by COVID, we've agreed pragmatic and equitable solutions for the period of closure. These include monthly payments, deferrals and partial concessions, typically in return for more favorable lease terms. In other cases, we've incorporated discussions about lease extensions or taking new space into conversations about the payment of legacy rents. This approach has driven consistent improvement over the year, as laid out in the table on Slide 6. As you can see in the top row, as of the 18th of May, we've collected 83% of the total build for the year. That's 99% in Offices and 71% for Retail. In line with our experience for each quarter date, in the weeks since our announcement in early April, our March '21 collection rates have continued to improve with 98% collected for Offices and 72% in Retail. Full rent collection stats for the March quarter are set out in the appendix. The market-leading outcomes we've delivered in this regard over the last 12 months in very challenging circumstances are the result of consistent efforts from teams right across British Land, and Darren will give you more details about our efforts in this space. The impact of provisioning has been significant, as you can see from Slide 7. We've taken a bottom-up systematic approach to assessing the appropriate level of provisions based on both the age and credit quality of the outstanding balances. In the first subtotal, you can see that as at the 31st of March, GBP 109 million of rent and service charge were outstanding. This is our tenant debtors balance. GBP 72 million has been provided against this, resulting in a P&L charge for the year of GBP 59 million, with the balance recognized in prior periods. For deferred rents, GBP 10 million is held as accrued income on the balance sheet, and we've provided GBP 6 million against this. These primarily related to the March 2020 quarter when we had to respond quickly to help occupiers immediately after the pandemic struck. They will fall due over the next 3 quarters. We agreed GBP 17 million of rent concessions in the year. Under the accounting standards, these are spread over the term of the lease to first break. In the year to March, the amount amortized was GBP 4 million, with provisions against the outstanding balance applied in line with our tenant incentive provision policy. And finally, it's important to note that since the end of March, having collected GBP 24 million more cash, the outstanding balance is reduced to GBP 85 million, meaning we're now 85% provided for. Slide 8 sets out the income statement. We've covered net rents. There was a GBP 2 million decrease in fees and other income as development fees were lower following completions at Broadgate. Something we focused very hard on across the business this year was our admin costs, meaning they were flat year-on-year despite the cost resulting from our COVID response. Financing costs have fallen by 7% as we reduced debt levels and benefited from lower market rates. Looking ahead, I've included a slide in the appendices which details some of the key moving parts to take into account as you think about next year's financial performance. Let me reiterate the new dividend policy we introduced at our half year results. Dividends are now paid semiannually rather than quarterly. They'll be announced at the time of our interim and full year results with payments made to shareholders in February and August. Dividends will be calculated at 80% of underlying EPS based on the most recently completed 6-month period. This new policy ensures dividends will automatically flex in line with our earnings to reflect the impact of development completions, acquisitions, disposals and trading conditions as they change. Given the unique circumstances of the last year, specifically in terms of rent collection, I think it's also worth stressing that despite the volatility we faced and the withholding tax payment we've made, our full year dividend remains cash covered by operating cash flows for the year. The reduction in NTA was driven by property revaluations, partially offset by undistributed underlying profits and gains on disposals. The strength of our debt metrics is a key competitive advantage. And here, we continue to benefit from the work we've done over many years. This has been recognized by Fitch who affirmed our single A, unsecured rating in August. And we ended the year with cash and undrawn facilities of GBP 1.8 billion. We've had another very active year on the balance sheet. We repaid our GBP 350 million convertible bond in June and extended GBP 1.1 billion of facilities, including our GBP 450 million ESG-linked RCF, which we moved up by a further year to 2026. You'll remember that in January, we sold a 75% stake in 3 West End offices to Allianz. We retained 25% and established a new JV, within which we raised a 7-year, GBP 160 million loan. As a result of this activity, taking into account committed CapEx and future debt maturities, we have no requirement to refinance until early 2025. Our LTV remains low at 32%, down 200 basis points since March and 370 basis points since the half year in September. That's despite the valuation falls we've seen and is driven by asset sales of GBP 1.2 billion. Our weighted average interest rate remains low at 2.9%, increasing 40 basis points since the half year, following the repayment of our RCFs with disposal proceeds. With no income or interest cover covenants on our unsecured debt, we continue to have significant headroom. And we could withstand a fall in asset values across the portfolio of 46% before taking any mitigating actions. Back in June, we launched our 2030 Sustainability Strategy. And since then, building on the progress we've made over several years, we've made a great start working towards our 2030 ambitions. Recognizing what we've delivered, we achieved a GRESB 5-star rating 2 years ahead of target. And we were delighted that our climate commitments have been validated by the Science Based Target initiative as being aligned with the 1.5-degree global warming scenario. That's the most ambitious designation available. 100 Liverpool Street is not only an incredible building, but we're proud that it's our first net zero carbon development to complete. And with embodied carbon at 390 kilograms per square meter, it's already well ahead of our 2030 targets. When it's operational, 1 Broadgate will be our most energy-efficient building ever, something we know is key to JLL's decision to take space there. And as a reminder, under our new strategy, all of our current and future developments are net zero carbon. Through the levy we apply to embodied carbon in developments, our innovative Transition Vehicle funds energy-saving initiatives right across the portfolio, including our retail assets. And it's also how we fund the purchase of certified offsets, something we'll use as a last resort, having explored all options to recycle and reuse materials at the developments, as we've done to such great effect at 100 Liverpool Street and 1 Triton Square. I'd like to leave you with a couple of key takeaways. Our financial position is strong. That gives us the platform we need to grow and the ability to act quickly when opportunities arise. Our new dividend policy provides clarity. And despite the unique challenges that have been brought about by the pandemic, we have proven our financial and operational resilience. We've executed significant capital recycling, driven rent collection and delivered consistent operational outperformance. And to give you a bit more color around that, let me hand you over to Darren.

Thank you, David, and good morning, everyone. I'm going to give you an update on valuations, leasing activity and the occupational markets. Starting with valuation. Overall values are down 10.8% in the year. Offices have decreased by 4%, driven by yield expansion of 9 basis points, primarily in the first half. Yields were flat in the second half, supported by strong investment market activity, including our sales of Clarges and a 75% share of 3 West End offices. ERVs were marginally up due to a change in valuation assumptions on some buildings. Without these changes, ERVs were down by circa 1%. Retail is down 25% over the year, reflecting 81 basis points outward yield shift and an ERV decline of 17%. There's a couple of things to pick out here. Firstly, a clear divergence in values between shopping centers, down 36%; and retail parks, down 19%, in the year. Secondly, we've seen the rate of decline slowing for retail parks, which were down 6.5% in the second half. And our midsized parks were only down 2%. We've seen investor demand for retail parks really pick up with volumes of over GBP 1 billion in the second half, up from around GBP 650 million in the second half. That's helping to support values. But the wider sector is still challenging, 49 more of our occupiers, including Arcadia entered CVA or administration, altogether accounting for 205 units, 66 of those closed and 110 saw reduced rents. This resulted in a GBP 25 million reduction in annualized rents. Canada Water is down 2.5% overall, but values have increased by 3% in the second half, following the drawdown of the 500-year headlease with the Southwark Council in December. Let's look at activity on our campuses. Leasing activity in the year covered nearly 400,000 square feet with long-term deals at 2.5% ahead of ERV and rent collection at 99% for the year. The market has been subdued for obvious reasons, but we're really encouraged by the ramp-up of activity we've seen recently. We let a further 160,000 square feet post period end, including 134,000 square feet to JLL at our 1 Broadgate development, taking total leasing since the 1st of April last year to 556,000 square feet. And we have another 474,000 square feet under offer or in negotiations. Storey is also seeing some strong increases in demand. In March, we had 115 inquiries, nearly double that in February and our best month of activity on record. We've let 14,000 square feet since the year-end, and we're under offer on a further 48,000 square feet. Storey at 100 Liverpool Street is nearly 40% under offer just a few weeks after launch. Now there's obviously been a lot of speculation about the market and the impact of working from home. We've undoubtedly seen an evolutionary leap forward in terms of how people work. The reality is this is going to take time to play out, but there are already some emerging signs of the future direction of travel. I'll start with what we're hearing from our customers. Firstly, everyone we've spoken to is now focused on plans to get back into the office. COVID may have demonstrated the capability to work from home, but it's also highlighted the benefits of physically working together, and there's concern around productivity without this. Secondly, many are thinking about how they use their space to varying degrees, but most degree, it's not straightforward. For example, they need to accommodate peak occupancy and configure space to enhance collaboration and wellbeing, which could mean a degree of de-densification. We've had very few requests from our existing customer base to reduce their space. However, there are some new customers coming to us who are looking at reducing their physical footprint. But for many, this was a fact to pre-COVID as they were already subletting excess space. Even though most are thinking about how they'll use their space, some admit there's no real pressure at the moment to decide. Equally, there were those who waited for a year and now need to commit. They're happy with their planned footprint. Or they're planning for growth, for example, occupiers in the tech sector. Finally, what we're hearing is customers are becoming much more focused on having space to act as a hub for their business to drive culture, collaboration, meet clients and demonstrate their commitment to sustainability. This is where the drive to quality is coming from. So how's demand playing out? Take-up, as you all will know, is obviously well down versus the long-term average in terms of volume, but there's been some strong deals coming through to support prime rents. More than 20% of recent deals are above GBP 90 per square foot compared to just 6% prior to the pandemic. The agents are also reporting that viewings are heading back towards near normal levels with a focus on quality space again, with the majority of inquiries focused on new or refurbished space. This tallies with our experience. We've received RFPs on over 1.5 million square feet of new or newly refurbished space in the past year. We can see this trend reflected in supply. Vacancy is now at 9%. Nearly 80% of this is secondhand, the highest on record, of which an increasing amount is tenant controlled. At the same time, the supply of new space remains constrained. The pipeline coming through over the next 3 years is circa 2.5 million square feet per annum, broadly half the usual 5 million square feet take-up for new space, and that's before you factor in a quality drive. So quality looks to be a key factor, but it isn't as simple as just being about new space. It's having a great building with the highest possible levels of sustainability, which are well connected and have the environmental amenities wrapped around them. But it's also increasingly about the services and flexibility which is offered and the partnership with the organization delivering this. This is what we provide for our customers at our campuses. Let's take Broadgate as an example. People returning to work in the next few weeks will see the new retail arcade at 100 Liverpool Street: new restaurants, a new gym, global Italian brand, Eataly, opened their doors last week. And we're on site delivering 1.5 acres of green space in Exchange Square. Storey is now opened at 100 Liverpool Street, providing quality, flexible work space as well as meeting rooms, conferencing and drop-in space that anyone across our campuses can use. Our ability to deliver all of this is why businesses choose our campuses and why JLL have chosen 1 Broadgate for their flagship London office. But as is increasingly the case, sustainability is key. We're targeting a BREEAM Outstanding rating at 1 Broadgate, which will be the most energy-efficient building we've ever delivered. So it helps JLL deliver on their own ambitious net zero commitments. It was also about wellness for their team. 1 Broadgate has 47,000 square feet of outside terraces and space for over 1,000 bikes. The configuration is designed to support more hybrid ways of working, so we're on track for the WELL Platinum standard. Our ability to provide all of this is why we think there will continue to be a gravitational pull towards our campuses, and Simon will elaborate on this shortly. So now let's turn to Retail. Despite COVID, this year has been the most active year we've ever had with 1.7 million square feet of leasing. Deals were about 20% below passing and 11.5% below March ERV, but the trend here is positive. I'll come back to that in a moment. Our pipeline remains encouraging with a further 580,000 square feet of space under offer and another 750,000 square feet in active negotiations. A lot of that is on our parks where we've done multiple deals with the likes of Aldi, Home Bargains, Next and Sports Direct. 70% of Arcadia's out-of-town space is under offer or in negotiations. And we proactively linked deals to rent collection to enable us to reach 71% for the year. And our centers are trading well. These charts show footfall and sales since reopening. And as you know, this reflects our long-term outperformance against these benchmarks. Sales are actually nearly 10% ahead on our retail parks where footfalls recovered strongly. On that note, I'd like to show you a breakdown of our retail portfolio because it demonstrates why we're well positioned. Traditional covered centers are only about 1/5 by value. That's mainly Meadowhall and Plymouth. Open air schemes, which are technically classed as shopping centers, are 12%. That includes the likes of Bath, where we've just signed Peloton and Lululemon; and Ealing, where Amazon Fresh opened their first store outside the U.S., which is becoming increasingly mixed use. Retail parks now account for more than 50% of the Retail portfolio. And let me tell you why we like them: they're convenient with high conversion rates and a home to an increasing amount of retailers, for example, food and discount operators whose models are online resilient. But at the same time, we're increasingly compatible with online. Over 80% of our retail park customers offer click and collect because they've got good infrastructure connections and access to residential areas. This increasingly includes shipping to customers from store, helping them to compete more effectively on delivery times. Finally, retail parks are more affordable for retailers. ERVs have declined by 18% from the March 2018 peak to March '20. In the first half, we saw them down another 12%. But since then, we've seen the rate of decline slowing. Since September, they reduced by only 4%. And the large amount of deals we have under offer are 2% above ERV. So we think we're at an inflection point here on rents. Based on 2019 sales and today's ERVs, our total occupational cost ratio for parks is 11%. And as you've just seen, on reopening, sales have reverted to pre-pandemic levels. Even if they end up reducing, this is balanced by lower ERVs being reflected in the next rating revaluation. We think these ratios are sustainable, and the large leasing volumes we're seeing backs this up. Going forward, if we see business rates reform, this ratio will obviously reduce further. This may be a big factor for shopping center OCRs, which are much higher, 15% on the same analysis. This is why we still think that shopping centers have further to travel in terms of rental declines. As a result, we think retail parks look increasingly stable going forward with stronger and more sustainable cash flows. This is why we find this part of the market very attractive, which Simon will talk you through. And with that, Simon, over to you.

Thank you, Darren. I'm setting out a new strategy today which builds on the competitive strengths I talked about in November: our development and asset management capabilities; our ability to innovate and work in partnership; our unique campuses and development pipeline; and our strong sustainability credentials. I also highlighted that in the past, we've delivered most value when we deploy these skills to transform places as we've done at Broadgate or Paddington, for example, places where people can be their most productive and where we can deliver the greatest positive impact. From now on, we will recycle capital more actively into situations like this, which leverage our proven capabilities to create value. And as I said earlier, we will invest behind 2 key strategic themes: our Campuses and Retail & Fulfilment. You're all familiar with our Campuses. They offer some of the best-connected, highest-quality and most sustainable spaces in London. That's becoming more and more important post-COVID. Retail & Fulfilment builds on our existing expertise in retail parks. We see real value here as rents and valuations start to stabilize. Urban logistics is highly complementary to our retail parks business. By urban logistics, we mean the most efficient in-town or edge-of-town warehouses with good infrastructure connections and access to local residents. Rents will grow strongly here, especially in London. And we have the right skills to develop the new product required in this rapidly evolving market. So let me set out now our broader approach to value creation. First, we'll source both growth and value opportunities. For example, as I've said, we see value in retail parks where we have recently bought GBP 200 million of assets. Second, we will drive returns by more actively managing and developing our space. We have a rigorous process to determine how we can do this for every asset in the portfolio. We've shown how we can drive returns at Broadgate through world-class developments such as 100 Liverpool Street. More recently, we've committed to 1 Broadgate and Norton Folgate. This demonstrates our confidence in both our campuses and London. We've also successfully repositioned our offer at Broadgate to target faster-growing creative and technology businesses. Elsewhere in our portfolio, we have opportunities in other innovative sectors. Third, we will recycle capital more actively. Again, we've made some smart sales this year, including our new joint venture with Allianz. We released capital from 3 well-let buildings, Marble Arch House, 10 Portman Square and York House, to reinvest in our development pipeline. But we'll continue to manage the buildings through our joint venture. Our priority is to deliver higher returns, and we will not hold on to buildings if we can deliver better value elsewhere. Our job is to target the right sectors at the right time. Today, that means campuses and retail fulfillment, but this will evolve as demand changes. The constant will be leveraging our competitive strengths to deliver the best, most sustainable places. Now let's look at these 2 strategic themes, starting with Campuses. What's clear is that businesses are increasingly focused on the best space, as you heard from Darren. Many of us have experienced working from home in the past year. We know it can work, but it depends on the relationships built up in the office. That's why it proved more successful in the first lockdown than the third and why the data now points to people wanting to return to the office, yet things have undoubtedly changed. Businesses want buildings that enable them to perform at their best. That means modern, high-quality space in great locations with strong transport connections, inspiring public realms, engaging amenities and, increasingly, a genuine sense of community. This is exactly what our campuses provide. More and more, sustainability is the differentiator between the best and the rest, and we've demonstrated our credentials here. This year, we delivered 100 Liverpool Street, our first net zero development and one of very few in London. These strengths explain why JLL committed to 1 Broadgate for their flagship London office and why we're under offer or in negotiations on over 470,000 square feet, primarily on our developments. But we can go further to realize the full potential of our campuses. The first way we can do this is through development. As I told you in November, office development has generated nearly GBP 2 billion of profit in the last 10 years. One of the benefits of the campus approach is that we can create development opportunities within our own portfolio. This lifts the value not just of the individual development, but of the campus, too. We've got a strong pipeline. I've mentioned 1 Broadgate and Norton Folgate, but there are more. We received planning at 2 and 3 Finsbury Avenue and 5 Kingdom Street during the year. These are opportunities we created ourselves. And at Canada Water, we've assembled a 5 million square foot site, which will be our fourth campus. Canada Water has been 10 years in the making, and we're delighted to have spades in the ground now. In December, we completed drawdown of the headlease. We're on site with enabling works, and we expect to place the main build contract for Phase 1 over the summer. The master plan is deliberately flexible. We can build 2,000 to 4,000 homes and from 0.5 million to 2.5 million square feet of work space. So we're able to adapt our offer to evolving demand in a post-pandemic world. This is a 10- to 12-year program, and we're targeting annualized development returns in the teens, that we aim to bring in partners to accelerate these and mitigate risk. This is a unique opportunity. So as you can imagine, we've already had some very constructive conversations. We're targeting occupiers from a range of sectors. And we are pleased to have signed TEDI-London, a higher education partnership focused on engineering. Their innovative modular campus will take just 9 months to deliver. So Canada Water is already starting to take shape, and we're talking to other occupiers in this space. Targeting innovation sectors like this is another way in which we can realize the full potential of our campuses. For example, we're looking at technology, science and engineering, artificial intelligence, life sciences and sustainability. For many of these innovative sectors, clustering is key, and that's something we can leverage through the proximity of our campuses to hubs of innovation and creativity. I talked about life sciences in November. We have a clear opportunity here at Regent's Place, which sits among the academic and scientific institutions in the Knowledge Quarter. The U.K. has 4 of the world's top 10 universities, and the cost of top talent is relatively low. So we expect life sciences to benefit from significant investment just like the U.S. This is all in the context of an aging population, growing personalization of health care and, of course, the pandemic. As a result, we expect employment in the sector to grow 5% per annum, increasing demand for life sciences real estate. Much of the space needed by these occupiers will be dry labs or traditional office space, but it will also involve some more specialized buildings, including wet labs. We have a strong track record delivering a range of new uses as well as incubating growth businesses through Storey. We also expect to make selective hires from the sector or to partner with established operators. I want to emphasize, though, that this is just one of a range of innovation sectors we will target across our campuses. I'd like to move now to opportunities in retail, more specifically, retail parks. Here, the fundamentals are very different, and it's not about growth, but value. You heard from Darren that affordability on retail parks is key, and they also facilitate online fulfillment. That's why retailers increasingly prefer them. In many instances, retail parks offer better downside protection in the form of alternative use. They also leverage our skills and experience in asset management to drive returns and underwrite new investments. I'll give you a simple example to illustrate the value we see. Currently, retail parks are on an attractive net initial yield of around 8%. If you assume modest rental decline of, say, 5%, an improvement in occupancy of 5% and some yield compression driven by the increased capital targeting in this sector, this gives a base case double-digit IRR. Though clearly, this will depend on the rate of economic recovery. This focus on returns drove our acquisition of The A1 Retail Park in Biggleswade. It's in a great location and it's trading well. So as the market improves, we think it will be one of the first to benefit. The same applies to HUT where we've agreed to buy out the remaining 22% interest. Another reason we like retail parks is the increasing crossover with urban logistics. They're already being used by retailers to support last mile. And we're having conversations with third-party logistics providers about taking space on our own parks. We've seen assets being acquired in the South East for conversion. And increasingly, this crossover is reflected in capital values, as you can see on the slide. That's why we think a development-focused urban logistics business is complementary to our retail parks. Our view is that urban logistics rental growth will be strong. The drivers of demand are compelling, and they've accelerated during COVID. Online now accounts for 1/3 of all retail sales. And even though growth is likely to pause after the pandemic, the trajectory is clear. There's also greater demand for same-day delivery. This could double to 5% to 10% of all online orders in the near future. Research we've commissioned suggest these factors will increase occupational demand by around 60% over the next 5 years. Most of that growth will be inside the M25, which is where we will focus. Clearly, the investment market is hot right now, but we don't envisage buying standing investments. We're buying to build. The product is quite immature in urban logistics, so we think there will be a lot of innovation. It will require creative solutions to source land, obtain planning and deliver complex developments, such as multi-storey or underground facilities or integration into mixed-use schemes. You all know that I worked in logistics for a number of years. And when I look at British Land's experience delivering complex schemes in Central London, it's very clear that this is an area where we can excel. So this is the rationale for our first logistics acquisition in Enfield. It's an 11-acre site within the M25 with a low coverage ratio for an urban scheme at 40%. This gives us the opportunity to build up as well as out. And in Enfield, the planning environment for intensification of uses is supportive. In the meantime, it's fully let of rents of GBP 10 per square foot, so it's highly reversionary. Our primary focus will be on London, but we also have opportunities on our wider retail portfolio. Our most significant projects are at Meadowhall and Teesside, which together cover around 1 million square feet. We're in the process of working our planning here. And we're also evaluating opportunities on our campuses. We've already made key hires in this space and have real conviction on the potential for rental growth, but we'll only deploy capital if we can hit our target returns. Before I turn to outlook, I'd like to talk about the 4 priorities which underpin our strategy. We've already delivered good progress against each of them since November, and we have a clear plan to take them forward. On our Campuses, we'll target life sciences at Regent's Place and leverage our flexible planning consent at Canada Water to attract other innovative growth sectors. We've made great progress on developments. We plan to place the main build contract at Canada Water in the next few months and explore partnerships to mitigate risk and accelerate returns. In Retail & Fulfilment, you can expect our weighting to retail parks to increase, but we're not setting targets. As I've said, we'll be opportunity- and returns-driven. We'll also maintain our focus on keeping occupancy high and delivering sustainable cash flows. In urban logistics, we're progressing opportunities on our own portfolio, and we'll look to acquire further development opportunities within the M25. Finally, we will actively recycle capital. As you heard from David, we've made some great sales this year. And you can expect to see us recycle more into development to drive returns. Turning to the outlook. Clearly, there's ongoing uncertainty, including the impact of COVID variants. This makes forecasting difficult, but I'd like to give you our central case. In November, we said office market rents would soften by 5% to 10% before recovering. That remains our central case. So we think there's perhaps up to 5% to go. But we expect our campuses to outperform this given demand is for the best space where supply is tight. The next few months will provide further leasing evidence, but we are encouraged by the recent uptick in demand. The economic backdrop is stronger today than we envisaged a few months ago. So we anticipate downward pressure on yields for the best offices as confidence improves and investors target the yield differential with other European cities. Turning to Retail & Fulfilment. In November, we said retail rents would fall 10% to 15%. ERVs on our own portfolio have reduced 6.6% since then. We're starting to see them stabilize on retail parks, that we expect to see a further decline of around 5% here. There's more money targeting this sector now, so we think yields will compress. Shopping centers will likely take a little longer to stabilize. They've been more impacted by COVID, but a reduction in business rates could be a catalyst here. In the meantime, we're actively managing our space and driving occupancy to deliver more sustainable rents. Once stabilized, we'll decide whether to hold or exit individual centers based on the return outlook. Finally, for the reasons I explained earlier, we're expecting growth of around 4% to 5% a year for urban logistics within the M25. So to wrap up, we're focusing our capital where we can exploit our competitive edge, and we're investing behind 2 key strategic themes. We're well positioned to benefit from an improving occupational market given our low leverage, depth and breadth of expertise and the opportunities we've created for growth. Thanks very much. And we'll open it up now for questions.

Good morning, everyone, and welcome back here to York House. I'm David Walker. I'm here with Simon Carter and Darren Richards again to take any questions you may have.

Before we go to questions from the phone lines, we've had a few submitted online, so we will take those first, and I will act as a compare for that. And starting with a question from Miranda Cockburn from Panmure Gordon. Would you look outside of London at any campus opportunities? First question. Second question, around the acquisition of The A1 Retail Park in Biggleswade. Net initial yield at 8.5%, where do you estimate the net equivalent yield to be? And then third question, for you probably, Darren. Can you give us the range of rents on the retail park portfolio?

Thanks, David. I'll take the first couple of questions there. Miranda, on campuses outside of London, yes, absolutely, we would look at opportunities outside of London. We think our skill set around placemaking and regeneration will translate in other places. And in particular, in the new strategy today, we've talked about innovation, and we think there could be some interesting opportunities in the innovation sectors, particularly life sciences outside of London, likely to be development-led in that instance. And then on Biggleswade, acquired at a net initial yield, as you say, of 8.5%. The net equivalent yield is around about 7.5% there. Darren, I don't know if you want to take the third part of the question.

Sure. Miranda, on average, retail park rents are currently about GBP 22 a square foot across the portfolio. If you look at our ERVs, closer to GBP 20 a square foot. There's quite a big range there though, and that's dependent on 2 things really: one is location and the other thing is unit size. So you see quite a big variance around that kind of average as a result of those 2 factors. Anything, to be honest with you, up from GBP 10 to GBP 12 a square foot up to as high as GBP 60, GBP 70 per square foot where you've got very small units on parks, but the massing in the middle is probably more around the -- about that average I gave you.

Thank you both. A couple of questions have come in on Canada Water. And specifically, how will Canada Water benefit the company in terms of earnings and asset growth going forward? Simon, one for you.

That definitely feels like one for me. So Canada Water, as I said in my prepared remarks, really excited by the prospects there. I think it's going to be a big driver of returns going forward. We actually gave some numbers in the presentation around prospective returns. Obviously, it's a ground-up development. And we are targeting development returns in the low teens, so effectively over 13%, 10- to 12-year program. So we would expect those returns to come through pretty evenly over that period, albeit we did indicate that we're looking to bring in partners. And by bringing in partners, we would hope to accelerate some of those returns and also mitigate our risk.

Thank you. A question here on retail parks. So what role has the pandemic impact played in your decision to focus on retail parks given that nonessential retailers based in shopping centers will be under severe pressure going forward and what we've heard from some retailers about the role retail parks are playing for them as we come out of this?

Should I? I think that there's a couple of things here. One is, obviously, the way that retail parks have traded during COVID, particularly, obviously, during those open periods when you've got essential retailers there and click and collect, we were able to see that there were some good patterns developing there. But to be honest with you, it's more about an acceleration of the trends that we've been seeing, which I covered in my prepared remarks. So this crossover between fulfillment and logistics with retail, that's definitely what we've seen accelerate. We've also seen this issue around affordability. A lot more retailers are coming to retail parks, as I took you through in the presentation. So when you combine that, the amount of deals that we've been doing, the affordability and those forward trends, and you look at the prices that we may be able to buy them in the market, they're throwing off attractive returns. And ultimately, that's what it comes down to.

Thank you. Question from Osmaan Malik at UBS. We talked about the potential for double-digit IRRs in retail parks. Could you comment on where passing rents are for these retail parks and whether a high level of over-renting threatens this double-digit IRR target?

Sure. I'm happy to take that one. Osmaan, so as you said, I set out the double-digit IRRs that we're expecting. We put the net initial yield there, but the analysis is really run off the net equivalent yield. As you flagged today, our net initial yield is about 8% on the retail parks. Our net equivalent is about 7.5%. Two factors there: rents coming off and feeding through, but also increasing occupancy over time, which we expect to drive. So taking those factors into account and a bit of yield compression with yields moving to the mid-6s, that will give us that double-digit IRR that I spoke about.

Thank you. One here from someone asking around our weighted average interest rate having gone up 0.5% to 2.9% and the reasons why. It's probably one for me. So as I said in my remarks, we were delighted to sell GBP 1.2 billion of assets through the year. Overall, 6% ahead of value. We will use those proceeds primarily to drive the growth and value that Simon has described today. But equally, we used some of those proceeds to pay down debt. LTV at 32%, which is a very comfortable place for it to be, and that was down 370 basis points through the second half. But as we paid down those RCFs, and on top of that, as we redeemed our 0 coupon convertible bond earlier in the year, that did have the effect of slightly reducing the weighted average interest rate, but they are the key reasons why there. So one more question here perhaps before we go to the phones, from Kirsty Abbott at Wells Fargo. Now that BL owns 100% share in HUT, can you share more on your strategy for the portfolio? Probably, I would just clarify that we've committed to buy out the minority interest in HUT, but that is not yet -- that transaction is not yet complete. It will complete middle of June, we expect. But in terms of rationale, I might hand over to Simon.

So on HUT, effectively, it will be the same approach that we do for the rest of our retail parks. So as Darren talked about in his presentation and I did as well, it's about driving occupancy, so increasing occupancy. It's dipped down. So as we move out of the pandemic, we'd look to increase that, rebasing rents to sustainable levels and continuing to change the customers there so we've got profitable, strong covenants on longer leases, and that will drive value and as we're looking more broadly in the retail park space for opportunities where we can deploy that skill set.

I think we might go to the operator now for any questions that have come in on the phone at this point.

[Operator Instructions] Our first question comes from Max Nimmo from Kempen & Co.

I've just got 2 questions. I can -- first one, I completely see your kind of competitive edge in retail parks and campuses, which you already have size in that space. But I have been struggling a little bit to understand what you feel your competitive edge is in urban logistics. I mean you bought the Enfield site, and I think it was a kind of a 2.5%, 3% yield, but still 4.5 years of income left on it. Is that what we should be expecting more of that kind of stuff? Do you expect more IRRs on that? I'm just trying to kind of get my head around where you think your edge is there because there's obviously a huge amount of people looking to do this exact same thing in that space. And the second question, just picking up on the point you made about the double-digit IRRs in retail parks there. So rents went down a bit, occupancy up a bit and yields moving back to the mid-6s. So just trying to understand, is there any kind of science behind that mid-6s? Or is that just roughly where you think things should settle out in that space for yields on the retail parks?

Max, I hope you're well. To answer your question on edge, it's really the market that we're looking to focus on. It's that last mile piece in Central London. We're seeing really huge customer demands there. As I said in the presentation, expecting rental growth of at least sort of 4% to 5% per annum driven by e-commerce and same-day delivery. But we're seeing an awful lot of innovation in that space. Customers are struggling to get units. And so we're going to have to see multi-storey underground facilities. And London is very much our patch. We've been developers in London for many years. So we're good at sourcing land. We're good at taking it through planning. And then as the developments that require -- get delivered are requiring more engineering skills, that plays to our strengths there. And on Enfield, in particular, as you highlight, it's an asset today that's got a lease in place. It's highly reversionary. So that helps in terms of a standing investment, but we really acquired it as a development opportunity. We think there's a really strong opportunity to increase the density. And the type of returns we'd expect to deliver across our broader deployment is double-digit IRRs, and that was the case on Enfield. With redevelopment at the end of the lease, we would expect to deliver a double-digit IRR there. And then I'll take the second one, around the science behind the yield compression. And this is just based on a view that we've got across the business that once you get to stabilized cash flows, so people can see that the security of the income is there, given where interest rates are, we think about 6%, 6.5% type yields in retail. But the important bit is stabilized cash flows. And we've looked at that in the sense of returns investors would expect to get for the risk that they would be taking.

Okay. That's helpful. And just to come back on that point, you do your IRRs for the urban logistics. You're doing that kind of after if the leases have burnt off. So you assume you get the low income for the next 4 or 5 years, and then it's -- you're doing a calculation based off that afterwards, right?

Actually, Max, on that case, that's running the IRR from acquisition. So there's obviously lower income for a period of time and then a big increase in value on redevelopment.

Our next question comes from Sander Bunck from Barclays.

Two questions from my side, probably one for Simon and one for David. The first question I had was just on the new focus on urban logistics sites. And I was just curious to kind of understand how much of your current GAV or rental income would be suitable for that. And how much, as a kind of potential rent roll, do you see coming out of that from the existing assets as opposed to acquiring new assets? And the second question for David was very much about how to think about LTV in that context. And how much -- yes, what kind of capital rotation are you happy to go with? And in terms of like why would that take LTV in the short to midterm?

Sander, so in terms of the amount of earnings or GAV allocated to urban logistics, we've deliberately not set targets today. The approach that I've set out is really one that sees us be nimble based on the returns we can deliver. But as I said a moment ago, we do have strong conviction around the rental growth. So we do think it will be a meaningful part of the portfolio, and we do think we'll have opportunities to enter and deliver attractive returns. But having said that, on our existing opportunities within the portfolio, those are Meadowhall and Teesside. And then we think there's some opportunity within our campuses. But that would be a relatively small part of our overall deployment in urban logistics. We see it as further acquisitions of development sites going forward.

And on your question on LTV, Sander. Thanks for the question. I think what I'd say is we're benefiting and have benefited over the last 12 months from the work we've done over several years to reduce LTV. So as I said in my prepared remarks, 32% today, that's up 200 basis points on last year -- sorry, down 200 basis points on last year, down 370 basis points on the half year following the sales we've made. And we think that's a clear advantage to us. And that appropriate level of LTV really supports the strategic ambitions we've got going forward. Having said that, we'd be comfortable with that level ticking up towards the mid-30s, I think, as we progress particularly on the developments and with Canada Water coming onstream through the course of the summer. But equally, as Simon said in his script, we have the option to dispose of mature assets as we progress things going forward as well. But net-net, very comfortable with where it is today. Equally, if that were to tick up a couple of percent into the mid-30s, I think we'd feel comfortable there, too.

[Operator Instructions] Our next question comes from Colm Lauder from Goodbody.

Just one question from me and perhaps it's for David, just relating to the statement on joint ventures and funds, and in particular, the 2 Norges joint ventures. I spotted -- when I was trying to reconcile my own numbers, I spotted there was an impairment on the loans to both the Norges joint ventures taken over the course of the year of GBP 144 million. And obviously, the net asset value in the balance sheet of both those joint ventures in negative territory. I was wondering if you could perhaps explain the move there and the impairment on those loans to those joint ventures.

Sure. So the Norges joint venture relates to Meadowhall where we're in a 50-50 JV with Norges. And look, the impairment reflects the situation we've seen in terms of retail performance, retail asset performance. It's similar to what you would see in the equity markets, I guess, and the impairment of the loan reflects the underlying trading positions in those retail assets.

Okay. And the same for the West End office, Norges joint venture?

Yes. So the Norges joint venture for West End office relates to West One, sits within the Offices portfolio because of the mix there. But equally, as those of you familiar with that asset will know, it includes an element of retail that sits on top of Bond Street and the Jubilee line station there, so yes.

We have a further question from Marc Mozzi from Bank of America.

Just a technical question for me about your taxation. So maybe you have touched on them in the presentation, but I might have missed it. But since your underlying taxation is up significantly this year due to dividend payment, it's up to GBP 26 million, first of all, can you explain us again how it works and how we should look at this number in the future?

Sure. Thanks, Marc. That's probably one for me as well. Yes, so we paid tax equivalent to the withholding tax that would have been paid by shareholders on the dividend shortfall. We temporarily suspended the dividends immediately after the pandemic struck. That was principally to protect the financial position of our business and make sure we could prioritize helping our occupiers, as everybody knows. The ongoing success of those occupiers is absolutely key to the success of our places. We felt that was the right thing to do. We resumed the dividend as early as we could, as was always the intention back in November. But that temporary suspension did lead to a shortfall in our period of distribution, our REIT distribution. As such, a tax liability arose GBP 28 million on that shortfall. So the bulk of the tax that you referred to there, Marc, relates to that REIT shortfall. That's been fully settled. We don't expect that to repeat going forward now that we've resumed dividends on the basis of our new strategy -- sorry, new policy.

It appears we have no further questions by the telephone line, so I'll hand back over to the host. Thank you.

Thank you. There are a couple of more questions that have come in online before we wrap up. First is from Marcus Phayre-Mudge from BMO. So do we have any Virgin Active units? And are you concerned about the use of cramdowns elsewhere by retailers? So we have 6 Virgin Active units across the portfolio, which is probably my part of that question. I'll hand over to Simon for the second part.

Marcus, so as you saw on Virgin Active, we challenged that situation. We thought our case had merit. So disappointed to see the ruling go against us. One observation I would make on this process restructurings there for bigger businesses, the businesses need to be in financial distress. And really, it came down to where value breaks in the alternative administration to the extent to which landlords would have a say in the outcome and a vote. Overall, looking forward, clearly, one of the things that's really important is to have high-quality real estate in good locations. And that's why actually in terms of Virgin Active, the vast majority of our assets were unaffected. We had a couple of smaller units that were impacted, but the main ones were unaffected. It was more about the precedent there.

Thanks. Then just one more before we wrap up, on urban logistics, from Osmaan again at UBS. I understand you're planning to build multi-storey and underground urban logistics in London. Would this be done on existing sites or mainly new sites still to be acquired? And are there many of these assets already out there?

I'll take that one. So most of it, in terms of underground and multi-storey, we envisage most of it will be on new acquisitions as opposed to on our own assets, albeit we do have some opportunities for underground facilities across our campuses. A number of our campuses have big underground space today, and we think that could be repurposed very profitably to urban logistics. To date, in London, we haven't seen a huge number of these facilities. But that's why my comments about it being a rapidly evolving market because if you look at other major cities, dense cities, you're seeing an increasing trend in this way. And it's getting more and more important to get the facilities as close as possible to the customer. So that's really the angle there.

That's it.

So do we have any more questions on the line? Or is that us finished on the line there? Sounds like that's us done for today. Well, thank you very much for joining us. I hope you found the presentation and the Q&A useful. As I said in my prepared remarks, we look forward to seeing you in person next time. We're hoping that our next results presentation will be at 100 Liverpool Street, which you saw in the intro as a cracking building. So look forward to being there and seeing you in person, all things going according to plan with the road map. So look forward to seeing you soon. Bye-bye.