Land Securities Group Plc (LAND) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Landsec results presentation covering the year to March 2020. For the first time, this presentation is clearly being held entirely virtually, for reasons I know all of you will appreciate. It's also prerecorded, mainly to reduce the risk of technology-related interruptions. There will, however, be a live Q&A session at the end. So thank you for joining us, and I truly hope that you and your loved ones are well and have been able to adapt to the highly unusual circumstances in which we all find ourselves. These are, of course, my first results as CEO of Landsec, and I joined exactly 4 weeks ago today. And while I joined after the year had ended, there has perhaps never been a moment when the results and activity of the previous financial year have gone out of date quite so quickly. So today, you'll hear about the key elements of our performance for last year, but we'll also try to figure out the impact of COVID-19, both financially and operationally. That means the impact on these results and on what it might mean looking forward. But before I hand over to Martin and then Colette, I wanted to share some brief reflections on Landsec 4 weeks in.

First, strength and resilience. When you observe how people and organizations react to a crisis, I think you can learn an enormous amount about them. I came to Landsec roughly 3 weeks into lockdown, and it was already evident that teams throughout the business had swiftly come to terms with the new reality emerging, and were operating proactively and collaboratively, both among themselves and alongside customers and partners, to secure the most effective response possible. Taking that together with the calibre of our portfolio and our substantial financial resources, it means we went into this crisis from a comparatively strong position. Second, leadership and sustainability. Landsec has for quite a while been recognized as a front-runner in addressing climate change. But what has struck me especially is precisely how considerately and responsibly Landsec has behaved in reacting to the present crisis. That is sustainability in the broader sense — acting responsibly on behalf of all stakeholders. It is something I believe in passionately, and it is an area in which Landsec can and will carry on leading the way. And last, opportunity. Though it might appear strange to speak of opportunity at such a difficult time for all of us, arguably this kind of experience makes it simpler to consider change and bold action.

Coming in as CEO of a company with resources of this scale gives us a strong foundation for thinking through where we want to go strategically over the long term. I'll come back to those discussions later, but for now we'll pass things to Martin, and after that, Colette.

Thank you, Mark, and good morning to all of you. It has been quite an exceptional finish to the financial year. Given the COVID-19 situation we're facing right now, it would be easy to lose sight of nearly all that took place in the year prior to lockdown. Where I can, I'll therefore attempt to isolate how COVID-19 has affected our results. That said, our balance sheet is resilient, and we possess the financial capacity to carry us through a prolonged lockdown as well as a sluggish recovery in consumer spending. Let's begin, though, by framing the year. This slide shows the market backdrop through mid-March, followed by what took place in the closing stretch of our financial year. Prior to COVID-19, the Office market enjoyed good health, especially following the general election, and many anticipated yield compression arriving via what people called the 'Boris bounce'. Our portfolio stood virtually full. Our flexible products — Myo and Fitted — had performed well in letting terms, and our developments were progressing nicely. In the same way, our leisure and hotel assets were nearly full, even with headwinds affecting the F&B market. Cinema attendance had risen, and Piccadilly Lights was beating expectations. Within Retail, the situation was less uniform.

In a tough market, outlets and London retail were holding up fairly well, whereas regional retail and retail parks are still feeling more pressure from the trading environment. COVID-19's arrival has hit every one of our sectors hard. Our office assets have stayed open, but usage sits well under 10%. Our development program has slipped as contractors adjust to putting social distancing into practice on site. Leisure and hotel assets were mostly shut, with turnover-linked rental income taking a severe hit. In Retail, shopping centers are open for essential trading only, and footfall has essentially vanished. So let's turn to our financial summary. Revenue profit came in at GBP 414 million for the year. That's down from GBP 442 million a year ago, chiefly because of a provision taken at the year-end for next year's rent. I'll go into that charge in more depth later, but excluding it, revenue profit fell GBP 5 million year on year to GBP 437 million. The valuation deficit was GBP 1, 179 million, which produced a loss before tax of GBP 837 million. Adjusted diluted EPS, calculated from revenue profit and therefore including the provision for next year's rent, came to 55.9p, a decline of 6.4% versus last year.

Absent that provision, adjusted diluted EPS would have come in at 59p. As we recently announced, EPRA NTA is now our preferred net asset value measure. EPRA NTA per share stood at 1192p. That's a decline of 11.6%, or 156p, since last March. And lastly, the dividend. As you're aware, given the unprecedented market uncertainty, we decided to cancel the third interim dividend. With the outlook remaining uncertain and June rent collection likely to be worse, we judged it too early to propose a final dividend. We're very conscious of how much dividends matter to our shareholders, and we'll aim to resume paying dividends as soon as it's appropriate to do so. REIT regulations oblige us to pay a certain level of dividends annually, and failing that, we'd incur a tax charge, which is based on any shortfall. Our preference is not to pay such a charge but to pay the dividends instead, which would mean a distribution by the 31st of March 2021, of a minimum of GBP 78 million, or 10.5p per share. Let's now turn to how revenue profit changed from last year. So starting with last year's revenue profit of GBP 442 million.

Net rental income fell by GBP 12 million, and I'll cover that in more detail shortly. Net indirect expenses came in GBP 4 million lower, largely thanks to reduced staff costs, and we also gained GBP 3 million from lower financing costs. Taken together, these factors produced a revenue profit decline of GBP 5 million, bringing it to GBP 437 million, before a provision of GBP 23 million tied to next year's rent. Let me take a moment to explain that provision. As you're aware from the announcement we made on the 2nd of April, rent collection on our 25th March quarter day was solid in Office, yet noticeably weaker than usual in Retail and Specialists. Accounting standards now call on us to evaluate whether our year-end debtors can be recovered. So, drawing on our collection rate and an assessment of the outstanding debtors, we've provided GBP 24 million — GBP 23 million of which pertains to next year, since we invoice in advance, with the GBP 1 million difference connected to the final few days of March. I would very much like to take that GBP 23 million charge against the deferred income creditor sitting on our balance sheet, but unfortunately that isn't permitted. The entire charge must be taken this year.

So we've separated that out in our results because it ties specifically to next year's rent. Now, let's take a quick look at net rental income. Office like-for-like net rental income rose by GBP 7 million, driven mainly by lettings at Myo and the full-year effect of lettings at Nova. In Retail, like-for-like net rental income fell GBP 10 million, or 3.9%, with more than half of that tied to CVAs and administrations, and the remainder a mix of higher voids, temporary lettings and related legal fees. In specialists, like-for-like net rental income dropped by GBP 1 million. That said, it reflected a combination of better short-term lettings at Piccadilly Lights, offset by struggles in F&B and lower Accor turnover rent because of COVID-19 in March. Across Retail and Specialists, the impact of park and hotel income. The fall in net rental income at our developments comes mainly at Lucent and Portland House. Going forward, Portland House was almost fully vacated at the end of March. So GBP 11 million of net rental income that we recognized this year will vanish next year, and some related void costs are likely. In acquisitions and sales, we incurred costs linked to voids at Lavington Street and lost income after the sale of Poole Retail Park.

And last, there's GBP 23 million in provisions tied to rent for next year. Let's turn now to valuations. Rather than jumping straight into each asset class, I figured it would be useful to walk through the way CBRE has handled COVID-19 when doing their valuations. Broadly speaking, ERVs haven't moved, but adjustments have been made to valuations via capital deductions and shifts in yields. Offices have seen only a limited effect. Certain potential yield compression wasn't applied, and void periods were lengthened. Still, the impact on our valuations is negligible, since our occupancy is very high. Across all developments, CBRE has built in a 6-month delay to practical completion. Within Retail, values have been reduced by an amount equal to 3 months of rent — 6 months for London retail — along with yield shifts ranging from 15 to 50 basis points. In Specialist, the yield shift is similar, though the amounts differ by leisure occupier. For instance, restaurants carry a 25 basis point yield shift and cinemas 50 basis points. For Hotels, occupancy was cut sharply in year 1, and the discount rate went up by 25 basis points. So where does that leave us?

All in all, valuations fell 8.8%, which equates to GBP 1,179 million, and the entire drop came from Retail and leisure. Roughly 1/3 of that year-end valuation decline stemmed from COVID-19 factors. Across the board, Office gained 1.1%, as investment properties rose 1.7% while developments slipped 3.1%. Within the Retail sectors, outlets fell the least, at 10.3% lower, and more than half of that decrease was attributable to COVID-19. London retail dropped 15%, though the range was wide — from no decline at some of the Retail below our office assets, to a 27% fall at Southside. Regional Retail was down 27.6%, or 22.1% pre-COVID-19, and individual shopping centers moved in very similar fashion as equivalent yields shifted out to between 6% and 7.25% and ERVs came down. Retail parks felt a comparable impact, coming in 25.5% lower. And lastly, our Specialist segment: leisure and hotels declined 10.9%, with slightly more than half of that decrease due to COVID-19. Meanwhile Other, principally Piccadilly Lights, rose 1.3%, helped by better rental prospects. So moving now to our financial position: at the year-end, adjusted net debt stood at GBP 3,926 million. That is GBP 189 million higher over the year, reflecting spending on our development program.

When you look at our adjusted net debt, it includes nearly GBP 1.4 billion in cash. The reason for that is that late in March, we drew down on our bank facilities in order to cover the GBP 977 million that was outstanding under our short-term commercial paper program, and also to give ourselves a liquidity buffer. Because we had higher drawings on those bank facilities, our cost of debt dropped to 1.8% at the year-end, down from 2.7% last year. That said, our cost of net debt, once our cash balance is taken into account, came in at 2.4%. Group LTV increased to 30.7% from 27.1% a year earlier, which was partly driven by the rise in net debt but mostly driven by the decline in property values. We have no bond maturities over the next 3 years, and once we allow for repayment of commercial paper, we still hold a further GBP 1.2 billion of cash and available bank facilities. Those facilities can be drawn up to an LTV of 80% and above an ICR of 1.45x, which gives us capacity to absorb a further 59% fall in values or a reduction in security group EBITDA of around 80%, or GBP 412 million. You can find more details on our debt facilities in the appendices. So let me now look ahead and summarize.

Over the last 2 months, COVID-19 has hit the business enormously. In these results, it has raised our valuation deficit by approximately GBP 380 million, cut net income by GBP 5 million, and we have set aside GBP 23 million for next year's rent. Occupiers' capacity to pay will naturally affect our income in the year ahead, and we have acknowledged that by establishing our GBP 80 million rent relief fund. Predicting how much rent we will collect in June is plainly very hard, though it will probably be below March. That being said, our portfolio is diversified, with a strong occupier lineup in Office. Across our Office portfolio, a big share of income derives from our top 10 customers. Moreover, our Office income exposure leans toward sectors that are widely anticipated to withstand the effects of COVID-19. Turnover-related rent, which came to roughly GBP 38 million in 2019-'20, will decline. And as I said before, income from Portland House will be negligible. Our development program is highly flexible, with a year-end CapEx commitment of about GBP 340 million, roughly 1/3 of which is anticipated to be spent over the next 6 months, assuming sites stay open and efficient.

And most importantly, our balance sheet is strong, with ample liquidity available to cover our capital commitments and to endure an extended period of lower rental income. At this point, I'll turn things over to Colette.

Thank you, Martin, and good morning to all of you. As we're all aware, the past few months have been unlike anything in our experience. That has required us to make tough choices in order to safeguard our employees, customers and partners, and to secure the best possible future for them as well as for ourselves. There's no guidebook for periods such as this, but here's my view: I've spent many years at Landsec, and my pride in the people of this company has never been greater. We moved fast and acted responsibly, with a strong sense of community, aiming to protect the business over the medium and long term. The fundamental resilience of the company let us act decisively and pragmatically. Our own staff have remained on full pay, and as part of relocating our head office, we altered our ways of working and put money into technology that supports flexible working. So our adjustment to working from home has gone pretty smoothly, though I do miss chatting with everyone. We've also stood behind our service providers, who play a critical role in deep cleaning our buildings and keeping every location safe and secure, and who will be essential as we begin to reopen. We've been collaborating with our contractors, making sure people stay safe while our sites remain open.

And naturally, we speak with our customers constantly, every single day. We'll cover more on that shortly. We have raised the amounts we give to the charities we partner with, especially organizations assisting people who are homeless. We're also advancing our employment initiative, which, as with so many areas, is adapting so that technology takes the place of face-to-face assistance, and we have made our retail car parks free of charge for all NHS staff. Our buildings form essential parts of both ecosystems and communities, and our contribution matters now more than it ever has. Today I'll bring you up to date on how things stood before March, and afterward I'll provide further detail on the steps we took in reaction to the effects of COVID-19. Here's a snapshot of our headline figures. We are 98% let. We have delivered GBP 39 million in lettings. We have completed GBP 23 million of Office rent reviews, at 7% above passing rent. Our like-for-like net rental income proved resilient, falling by less than 1%, sitting within the doubtful debt provision Martin described to you. Our office WAULT stands at 8 years. Our retail destinations beat the sales and footfall benchmarks across the first 11 months. We are making solid headway on our retail repurposing plan, nearly doubling the number of planned homes in London while also examining other cities.

We also had 1 million square feet of development on-site, with solid flexibility to phase the program. I'll say more about that shortly. Now, turning to the different parts of the portfolio, beginning with offices. Through most of the second half, the market performed as we had expected. London office take-up during March came in slightly under the long-term trend and was 7% lower than 2019. Even so, pre-letting activity stayed robust. Since lockdown, responses have varied, with the biggest effect felt in the sub-20,000 square foot segment of the market, where deals fell through. Long-term strategic requirements, though, are cautiously moving forward. In Q4, available space declined, with the vacancy rate dropping to 4%. During Q1, availability rose by 11% to 14 million square feet, which is in line with the long-term average. That produced a modest rise in the vacancy rent rate, to 4.5%, largely driven by smaller secondhand units. By Q1, roughly 13.5 million square feet of speculative space was under construction, though 45% had already been pre-let. Since then, it's clear completions will slip and we could see a reduction in staff, and all of that will be factored in as we make decisions about our own program. I'll cover more on that shortly.

Looking at the investment market, 2019 volumes fell 40% versus the prior year — a continuation of that wait-and-see stance driven by Brexit and political uncertainty. In Q1 2020 we saw the weakest level since Q1 2010, as deals began to slow down or halt with COVID-19 emerging. Now turning to our portfolio. The heart of how we run this business is open, collaborative conversation. Those have proved essential over recent weeks while we work to balance safeguarding income and the long-term future of the business against supporting customers. Our offices are fully let, and every building remains open for occupation, though usage sits below 10%. Safety, naturally, has come first for us, and facilities management has been cut back to a minimum. Like-for-like net rental income rose by GBP 7 million, and roughly 90% of the rent due at the year-end has been received, with the remainder expected. Within the portfolio sit our flexible offerings, Fitted and Myo. By March, both had been fully let, ahead of their business plans. These products aren't aimed at start-ups and they attract existing and new HQ customers, which makes them more resilient. In our view flexibility will matter more and more as we move into the new norm.

Our plan to bring them into properties such as Dashwood House and the new developments is still moving forward. Clearly, the way companies utilize space is going to shift as we adjust to new working patterns. Among the themes on our minds are the requirement for healthy buildings that offer lots of flat share and solid lifting capacity, reduced occupation densities, flexibility permitting layout changes, backing for more adaptable working practices, and bear in mind there is a continuing need for offices to deliver the quality, safe and secure infrastructure that many businesses require and that cannot be replicated at home. Most of these trends have been discussed by us for some time, but they are now likely to speed up. We design for well-being and flexibility, and our offices can adapt. This isn't the first time we have described, in the script, stage sets that change. It's simply that at this point, we have a new script. So all of this, together with the customer profile Martin mentioned, means our portfolio is highly resilient. Now turning to Retail. Given the challenging structural trends, values keep declining, the number of CVAs and administrations has slowed, but occupancy costs were top priorities. Even so, our centers were busier than most.

We kept working on getting the best possible tenant mixes and unit sizes across our retail locations, and through most of the year our shopping centers and outlets stood at 96% let, beating the sales benchmark at 4% and footfall by 2.5%. That said, structural trends are still weighing on rent negotiations. 31 customers went into administration and CVA. Even so, fewer than 1/3 of those stores shut, and several were re-let. The primary cause of the GBP 10 million decline in like-for-like net rental income was CVAs and administrations. That figure, though, leaves out the provision for next year. Just as with offices, we've stayed in close contact with our customers to grasp how their needs are shifting, which allowed us, pre-COVID-19, to cut this year's service charge by 4%. Cost reduction efforts are ongoing, and we estimate a net additional 20% saving for the lockdown period, with that work set to continue. As of today, the sole sites open are those run by essential operators such as chemists and supermarkets. 38% of rents due at year-end has come in, and service charges look similar. Protecting the lineups we've been curating serves our interest. We've held talks with over 500 retailers. Their financial asks span rent freeze, deferment, percentage reduction, rent paid in arrears, monthly payments, and turnover only.

A lot of other themes, though, do keep coming up. Hundreds of thousands of employees have been placed on furlough. How are they going to operate with social distancing in place? And once they do reopen, costs are going to rise, because they'll need security staff, they'll have to deal with customers trying clothes on or handling merchandise, and they'll have to manage their supply chains. A growing number of them are frustrated that the CVA process is propping up businesses artificially. And store closures are part of the conversation. The structural problems have been sped up by COVID-19, and the size of the challenges is enormous now. It's our firm belief that partnering together will deliver the best results. We're not ruling anything out, but any solution has to work for our customers as well as for us. Given this acceleration, the work we've been doing on finding other ways to use our assets matters more than ever. Since November, we've widened what we're planning at O2 and begun assembling the site at Lewisham. Across the 4 London sites, we're now looking at roughly 7,000 homes, which is up from the roughly 4,000 we mentioned to you previously. We've also begun master planning at Buchanan Galleries in Glasgow, examining the option of adding residential and offices. Last month, we filed a planning application for a 120, 000-square-foot office building next door. Turning to the Specialist portfolio, like-for-like net rental income fell by just GBP 1 million, once you set aside the provision for next year's rent.

Right now, though, our leisure parks—which are usually bustling—and our state-of-the-art cinemas sit quiet. Hotels are mostly shut. Since their leases are turnover-based, GBP 26 million in yearly rent will be cut substantially until they reopen. Yet, as we've noted before, those underlying sites give us future opportunities, and as you might expect, we're examining them carefully. At Piccadilly Lights, heading into March, we had genuine letting momentum and were running ahead of our projections. Understandably, demand has been minimal since lockdown, though we are receiving bookings for later in the year. We also have the 3 screens let on 2- to 3-year leases, and that rent has been paid. Still, the Lights amount to more than a large advertising screen, so when we gave space to Public Health England and they aired the Queen's message, it drew international attention. As I mentioned, helping our customers—including through short-term financial support—serves our interests and those of our shareholders. The GBP 80 million fund we established is making a difference, especially for smaller customers. We assess each situation individually, prioritising independent businesses and F&B providers.

Still, it's early in the process, and much will hinge on the way we come out of the lockdown. That covers where things stand portfolio-wide. Let's now shift to the development program. Progress is being made. Safety comes first, naturally, and activity levels have come down. Yet crucially, flexibility was built into the program's design from the start, and we have managed to cut our planned commitment by roughly GBP 700 million. That leaves GBP 340 million committed, with the option to halt every scheme apart from 21 Moorfields, which is pre-let to Deutsche Bank, as you're aware. At GBP 273 million, that represents our principal commitment, and work goes on with safety foremost in our minds. Practical completion has slipped by roughly 2 months because of COVID-19, though naturally that hinges on productivity going forward, and we are in close contact with Deutsche Bank. With Lucent, Nova East and Sumner Street, the intention was always to build to grade separately from the main construction contract. That approach is less capital-intensive, leans on outdoor work and requires fewer contractors, which means fewer people on-site, so it can carry on safely within current rules. It is also a major advantage, since it gives us latitude over when we commit to the activities that demand more capital.

We can take a break whenever we like, then. As of today, Portland House's offices stand empty, which was the plan, and we are gutting the space while working up the design. After that we'll look at how to move forward, and we're pushing planning applications for Lavington Street and Red Lion Court. So all our schemes apart from 21 Moorfields are split into manageable pieces, which lets us check and evaluate each one before starting the following stage. The appendices hold further information. To sum up, then: the Office portfolio is full, fitted a mile ahead of our business plans. At our shopping centers, sales and footfall were beating the market. We're making solid headway converting Retail assets in city locations. Then the world shifted, and so did the way we must think about and run the business. Our Office portfolio holds up well, in the physical buildings and in the mix of our customers, and we'll manage to adjust to shifting occupational requirements. Customers will feel anxious for a time. We'll collaborate with them on solutions that serve us both over the long term. Our efforts to repurpose retail will speed up, and we possess the finest skills for this. We're carrying the development program forward while conserving cash and keeping optionality, and also obtaining further planning consents.

We're figuring out how we'll bring 24 million square feet of real estate back open and in use. As I mentioned at the beginning, we belong to an ecosystem, and we understand that both our everyday operations and the partnership role we're able to play will help sustainable businesses emerge, with a knock-on effect for communities across the U.K. I'll now hand you back to Mark.

Thank you, Colette, and thanks to you as well, Martin. Now, as we get ready to close out the presentation, I want to bring together everything you've heard from us regarding COVID-19 and where our thinking stands on it, along with what it could mean for us over the coming months and years. The way things look right now, it's evident that we confront an impact that is mixed yet significant right across our portfolio, though we do so from strength. Our London office portfolio, while not immune, is the most resilient piece of our business, thanks to a potent blend of secure income derived from a strong tenant base plus a modern, adaptable estate. And taken as a sector, London offices came into this crisis with a tight occupational market and yields considerably above those found in comparable global cities, and both of those factors ought to provide a degree of protection. Turning to retail, we hold a top-quality portfolio that was comfortably beating sales and footfall benchmarks as the crisis arrived. We have moved quickly and decisively to handle an effective full closure of our estate, and we are committed to playing our part and to collaborating with our customers and partners, as shown by our GBP 80 million rent relief fund, while staying sharply focused on keeping the right balance between protecting income and value and on helping customers who are in need.

Specialist is the part of our portfolio that's been hit hardest, since it has greater exposure to leisure and F&B and hotels on turnover rents. Once again, partnerships and collaborations have been the foundation of how we've operated up to now, and that will keep being the case. And last, as Martin has told you, financially speaking we're at an LTV of just over 30%, with cash and facility headroom of roughly GBP 1.2 billion. Looking ahead, the coming few months will revolve entirely around working together toward the new normal. We still don't know precisely what the route out of lockdown will look like, or how long that route will run, but several things are growing clearer. Every part of our portfolio will feel the effects of continuing social distancing restrictions for quite some time to come. Office usage will stay well below capacity while we and our occupiers wrestle with the difficulty of getting people safely into, out of and around our buildings. Shopping centers will probably face similar constraints for a considerable period, badly hurting footfall and in-store sales. Retail parks and outlets, which have more outdoor space, ought to be somewhat less impacted, though recovery will still take time. Our Specialist portfolio, given its greater exposure to leisure and F&B, is likely to feel the impact longest, and its longer-term recovery will also hinge on how the public feels about crowded spaces even once restrictions are removed.

What all of this means is that requests for support from occupiers are probably going to keep coming for a while yet. Our ties with customers extend far past the plain contractual relationship, though a contractual relationship it is. Against that background, we'll keep working with every one of our customers to find answers that get the balance right between safeguarding income and value and providing targeted support. It is our firm belief that this course will in the end produce the best result for our shareholders. As matters stand, we anticipate that June collection rates will come in quite a distance under March, especially since customers have minimal incentive to pay promptly and landlords have limited means of compelling them. Even so, it remains too soon to forecast what that will mean for rental income across the full year. Looking at valuation, we anticipate further softening in Retail and Specialist values in the year to March '21, while the outlook for London offices is more nuanced yet not likely to be immune. Given uncertainty running at such elevated levels, having optionality across our Specialist development program for roughly the coming 6 months is a meaningful positive for us. That ought to let us adjust our approach so it fits the new normal as well as possible.

So as we shift into the new normal, we are working up 3 possible scenarios covering the coming 12 to 18 months, each with a different level of severity, and those will guide how we make decisions over the months ahead. This is still work in progress, but it will help make sure we are well-prepared across a range of potential outcomes. And lastly, when lockdown restrictions have been fully lifted, it will be essential that we try to understand the potentially profound long-term impacts and respond to them proactively. For Retail, arguably COVID-19 has simply accelerated structural trends that already existed. What might have unfolded across the 5 years before could now happen in under 12 months. It seems prudent, then, to plan for more business failures, higher vacancy rates and further downward pressure on rents. And as Colette has told you, in some locations repurposing will play a growing role as well. In the London offices, the trends towards more agile and flexible working, and towards healthier, more adaptable workplaces, are likely to speed up. The shift towards higher occupational densities will perhaps slow or go into reverse. Either way, obsolescence in older stock looks likely to grow. Of course, we cannot claim to know with any certainty what the long-term outcomes will turn out to be.

What matters most, though, is that we try to get ahead of these developments and respond to them—treating them as openings while staying alert to the dangers. That is why, coming back to what I said at the start, this moment offers, in many respects, a perfect chance to pause and think about where we are heading strategically over the long term. And that is precisely what we are going to do—not just through a COVID-19 lens, but in a wider sense too, working to put the business in a position to gain from long-term trends, while at the same time drawing on the heritage and the capabilities Landsec already has. Naturally, it would be foolish of me to be overly specific about timelines for this to succeed given today's conditions, but we anticipate being able to share those results in the autumn. And lastly, coming back to my other opening remarks, leadership and sustainability. The collaborative way we work with our customers, together with the fast and substantial backing we have given to charities and to the communities we work with and within, all show how genuinely we approach responsible business. And well after the COVID-19 crisis is over, climate change will remain the defining challenge across the next 2 decades. With a pledge to reach net zero carbon by 2030, Landsec keeps leading the way.

This approach will help make sure Landsec endures over the long term, and that is achievable only thanks to our resilience and strength. From the exceptionally high quality of our portfolio, to how deep the capability runs in our workforce, and our considerable financial capacity, I am confident that Landsec faces the future from a position of strength.

We're going live now. <<operator_script>> The first call comes from Peter Papadakos at Green Street Advisors.

I’ve got 3 questions, if that’s all right. The first is about the pipeline flexibility you mentioned for the coming 6 months. What happens once those 6 months are up? Could you expand a bit on what you’d need to pursue after 6 months when it comes to your committed CapEx? Then a related one, going back to sources and uses of funds: could you say a little more about how much CapEx or other commitments you’ll have by the end of this year or at least, if possible, by the middle of next year? And how would those commitments be funded? I suppose the third one is more of a big-picture question. When it comes to capital allocation, how closely will you tie that to your cost of capital? Put differently, if you keep trading at big discounts to your reported NAV, will capital allocation lean much more toward shrinking the company rather than maintaining the current asset level?

Thanks, Peter. There are 3 questions there, and I figure each of us probably has one. So first I’ll turn it to Colette to discuss pipeline flexibility and how things develop past the 6 months we mentioned. Martin can address how our CapEx commitments could change across a 6- to 12-month horizon. And maybe I’ll cover capital allocation. So, Colette?

Yeah. On the pipeline side, we've got quite a bit of flexibility right now. At one point we were set to potentially commit GBP 0.5 billion by this stage. That figure now -- it currently stands at GBP 340 million. And we've committed GBP 33 million since March. What that does is let us keep the build to grade works going, carry on with the detail design and begin procuring long lead items. And as I mentioned, that carries us through the 6 months. Past that point, we then have considerable flexibility. We could move all the schemes forward. We could move 1 of them forward, or 2 of them. And we could also keep advancing them using another sort of bite-sized chunk approach for a further 6 months. So the way we've procured the projects has built in a lot of flexibility for us.

To give a bit more detail on those figures. So GBP 340 million is the commitment to date, and we expect roughly 1/3 of that to go out over the next 6 months. Then, if we were to commit to everything that's in the program — so Sumner Street, Nova East and Lucent, and please keep in mind what Colette has just said — that would add another GBP 250 million of CapEx commitment. And then we have additional flexibility to add, should we wish to, both Portland and Lavington, and that would be another GBP 500 million. Again, that's something we can decide on much further down the line. So back to the original question, GBP 340 million of commitment at the moment. And the vast majority of that — the overwhelming majority of that, over GBP 270 million is on 21 Moor.

Thanks, Martin. From where I sit, the flexibility, the optionality, and the development program are a really significant strength for us right now. It gives us the chance to then decide where we go and how we adapt — if we adapt that program — to fit our emerging understanding of a post-COVID-19 world. On your broader question about capital allocation and what we'll take into account there, particularly around cost of capital: I think this answer would really apply to anything to do with our review of strategy. Absolutely nothing is ruled in or ruled out of that. I think we're going into this very much with an open mind, prepared to be bold, radical if necessary, in our thinking, though not necessarily assuming that we have to have a radical solution to things. So we're not ruling anything in or out within that. I think it's a case of trying to position things for sectors and opportunities that we think have got structural support for the long term. But we, of course, have to ground that in where we are today, where our existing capabilities lie, where our existing portfolio is, and find an appropriately deliverable, executable way of marrying those 2 things together to deliver something that is appropriately compelling for the long term.

Our next question comes from Jonathan Kownator at Goldman Sachs.

I’ve got 2 questions, if that’s all right — one about Retail and one about Office. Maybe I’ll begin with Office: clearly, the collection rate has held up pretty well up to now. You said you expect weaker rent collection for June. Does that also cover Office? And within that, how is flexibility affecting things? Are tenants in the somewhat more flexible segment using the chance to exit the year at the same time, and are you seeing more demand for the flexible portion? That’s the first question. The second one is about Retail. You brought up store closures as part of the discussions. Could you go into a little more detail on that? And also point out whether some retailers are thinking about closing stores before they actually reopen stores as part of their reopening plans. And how widely is that solution being considered today?

Thanks, Jonathan. I'll keep my remarks short on where we stand regarding collection rates and how they could flow through the portfolio. Then I might turn it over to Colette for more detail on the part our flexible offering is playing, plus a little more color on the store closure comments and how those might fit with retailers' broader estate strategies. On our remark that June collection rates are likely to be somewhat worse than March: I think it's mainly centered on the Retail and Specialist sector, where the pain is greatest. And obviously, we're also saying that in light of the government announcement imposing a moratorium on enforcement action. On the office side we have a very strong tenant base, whose businesses are largely less directly affected by COVID. So we believe, for instance, that under 10% of the portfolio is let to tenants with an obvious exposure to COVID-19. But at this stage it's hard for us to judge how far that moratorium, which covers all occupiers, might play out within the office sector. So it will be more about Retail and Specialist, though we could see some of that leakage into the Office portfolio.

Colette?