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

Good morning, everyone, and welcome to the Live Virtual Presentation of Landsec's results for the year to March 2021. Over the next hour, Martin and I will walk you through how the business performed financially and operationally, share our thinking on the key markets we operate in, and set out what we have planned going forward. There will also be a chance to ask questions. This is, of course, the last set of results Martin will present as Landsec's CFO after more than 15 years in the role. I know I speak for the entire business when I thank him for everything he has contributed during that time and wish him all the best going forward. No review of the past 12 months can avoid being dominated by the COVID-19 pandemic — the devastating impact it has had on individuals, families and communities across the globe, the dreadful loss of life, the unprecedented steps governments have been forced to take to mitigate a health catastrophe, and the profound economic and social consequences of those measures, much of which will continue to play out for years to come. With that as the backdrop, our task was to make sure Landsec stayed able to meet the needs of all its stakeholders, both now and in the future.

Right from the start, that meant putting the safety of our employees and anyone who visits or spends time at a Landsec property first. It also meant keeping our eyes on what the pandemic could mean over the longer term, taking preemptive action where it made sense, and not losing sight of other challenges and other opportunities. Thanks to the proactive steps we took last year, Landsec is coming out of the pandemic in a fundamentally strong position. The business is poised for the recovery, and following our strategy review, it has a strategy that positions the business for long-term growth. Financially, we remain in very good health. The disposal of £630 million of assets with little or — little remaining value add potential at very good prices protected our balance sheet and kick-started the £4 billion capital recycling program that underpins our strategy. Our largest market, Central London offices, proved remarkably resilient, particularly from an investment perspective. The retail and F&B sectors were hit very hard, accelerating painful structural shifts that were already underway. The financial impact has been severe, but this has also accelerated other related trends that now offer the chance for a much needed reset of the retail property landscape. And despite the headlines being dominated by COVID, the defining challenge of our time, the climate crisis has not gone away.

On the global stage, the UK has aimed to assume a prominent leadership role in confronting this challenge, and within real estate we've kept up that leadership, advancing well on our own net-zero goals. Let me now go through each of those points in somewhat greater depth. As I said a moment ago, throughout the pandemic our task was making sure Landsec stayed capable of delivering for every one of its stakeholders, in the near term and over the longer haul. Right from the beginning, we were intent on doing all we could so that Landsec came out of the pandemic in the strongest possible position. Our focus was on three areas. First, backing our customers, employees and communities. We set up our £80 million customer support fund right at the start of the year, designed to help those of our occupiers facing the greatest need. We acted swiftly to boost support for our local community charity partners, partly funded by Board Directors, and we put real effort into supporting our employees through better communications and a range of health and wellbeing initiatives. Nobody on staff was furloughed. Second, we collaborated closely with our supply chain partners to control and reduce the disruption brought about by COVID preventative measures. Crucially, at our development sites, we managed to take action to limit any impact on programs, and we also worked together to keep optionality alive on our development program for as long as we possibly could.

What this did was allow us to push back substantial capital commitments until things got a bit less uncertain. And then thirdly, our attention went to keeping the finances strong and flexible. We went into the pandemic with a solid balance sheet, and we moved early and decisively on asset disposals, which safeguarded that position and leaves us nicely set up to go after opportunities from here. Thanks to those steps, we're coming out of the pandemic with better relationships with customers and partners and a healthy balance sheet. We could also bring back the dividend during the year, though at the lower level, reflecting earnings. Our new strategy was launched in October last year. It centres on a core purpose — sustainable places, connecting communities, realizing potential — and has four strategic priorities: optimize Central London, reimagine retail, grow through urban opportunities and realize capital from subscale sectors. At the heart of the strategy sit a number of fundamental principles. First, that our efforts should concentrate on creating value for all our stakeholders over the long term. For shareholders, that means concentrating on delivering attractive total returns. Income is a key component of that return, but it shouldn't be the key driver. Second, to deliver attractive total returns, we need to concentrate on areas where our competitive advantage is attainable and sustainable.

Specifically, that means capitalizing on the substantial experience, know-how, and skills we have inside the company. And third, we must align our capabilities and expertise more closely with the capital we have invested. That underpins our intention to dispose of £4 billion in assets across the coming years in cases where we see limited scope for creating additional value. Assets in subscale sectors, leisure, hotels, and retail parks, where our competitive advantage is minimal or nonexistent, plus certain long-let prime Central London holdings that defensive capital prizes highly and prices accordingly. We achieved strong progress during the year, with £630 million of disposals, and we plan a comparable amount of sales in the present year. And as the outlook improves, our attention is turning more and more toward redeploying those proceeds. When our strategy was introduced last year, together with our established Central London development program, we pinpointed additional value-add Central London acquisitions and mixed-use regeneration projects as areas that would probably present solid reinvestment opportunities, with both set to gain from clear long-term trends. That is still true. And we may shortly add prime retail to that list, where appealing opportunities might start appearing over roughly the next year or so, after the very large valuation drops of recent years.

Landsec's people—their experience, expertise, and capability—are among the company's most important assets. I'm lucky to have an executive team beside me that includes Colette O'Shea as COO and Vanessa Simms, who joined as CFO Designate just two weeks ago. We do have skills gaps in a small number of areas of the business that we're moving quickly to fill, but Landsec's people remain a key advantage. As I said when we announced our new strategy, getting the most out of our people requires fostering the right culture. Culture matters as much as strategy, and we're working hard to raise levels of empowerment, accountability, agility, and pace. We made some organizational changes in late 2020 to help begin this process of change. Remote working, of course, has limited how quickly cultural shift can take effect. As we now start to return to the workplace, I expect things to speed up. The resilience of the prime London office investment market throughout the pandemic was one of the more positive aspects of the past year. Investment levels were around half the long-term average, but this was largely a function of logistical challenges—such as restrictions over site inspections and international travel—slowing things down.

Particularly for prime long-let assets, yields proved resilient, since London offices' relative value within a worldwide setting lent support, and we anticipate that pattern carrying on through 2021. Occupational market resilience showed up as robust rent collection and merely modest ERV decreases, even though physical utilization sat below 10% during most of the year and take-up across the period hit its weakest point since records started. Market-wide vacancy rose considerably and is now a touch under 9%. Three-quarters of that space, though, is second-hand, where we see demand staying limited. Grade A space — where we believe demand will be greatest — represents just 2% of vacancy market-wide, and prospective new supply stays fairly constrained. Going forward, and bearing in mind overall vacancy, we foresee certain rental softness over the coming year, yet focused on secondary space, consistent with the vacancy picture itself. And crucially, obvious signals of life are now coming back to London offices that have sat empty or mostly empty since March of last year. From a survey covering close to 150 of our office occupiers, we anticipate physical occupancy across our portfolio returning to roughly a third of pre-COVID levels after the latest round of restrictions, which were lifted only yesterday.

And that figure ought to climb to roughly 60% once the remaining limits are removed — the date presently pencilled in for that is June 21. From that point it should keep increasing at a steady pace through the next few months. On top of that, pre-let interest is coming back: several sizable requirements that had been paused have by now either been converted or become active again. Viewing activity is picking up too. As an illustration, Knight Frank’s average weekly viewings across April and May are, anecdotally, twice what they were from June 2020 through March this year. Naturally, it is very early days, but we are cautiously optimistic. One of the questions that kept economists busy during the pandemic was how far pent-up consumer demand would accumulate, laying the groundwork for a substantial lift in spending once restrictions loosen. The data backs this up. Per the ONS, the household savings ratio has sat at 2x to 3x its long run trend level ever since the first lockdown came in. And the early signals on the ground are also encouraging. During the 3 weeks following the April 12 reopening in England, retail sales at shopping centers ran approximately 5% above the equivalent stretch of 2019, pre-COVID. Outlets were up 14%.

We anticipate a comparably robust reaction in leisure and F&B once restrictions are fully removed. Obviously, among the most dramatic effects of the pandemic was the extent to which it sped up structural shifts already underway in retail — above all, the migration of sales to online channels. For shopping center rents and values, the financial fallout has been harsh. Market-wide vacancy stands at a very elevated 17% and is probably set to climb even more from this point. In barely over 4 years, ERVs have dropped roughly one third from their high. Values have declined by close to two thirds, as outward yield movements have compounded those rent reductions. That said, one could argue this acceleration has now laid the groundwork for a fundamental and much needed reset across the retail property market, arriving far sooner than it would have otherwise. The online share of the channel has climbed quickly, and while it will retreat from 2020 levels as the pandemic recedes, it will stay the main growth channel for a while still. Yet physical retail is not dead — though plainly it must evolve to stay relevant. It has to complement online, provide something not readily replicated online, or do both. Outlets are a prime illustration.

Also, we think rents at prime shopping centers are getting close to sustainable levels now—meaning the point where retailers can turn a profit at the store level, even if we allow for more channel shift. At a time when lots of retailers are choosing fewer, bigger stores in prime locations, that could set things up for a flight to prime among occupiers. So yes, market vacancy is really high and it’s going to go higher from here. Yes, CapEx will be needed to support the evolution prime shopping centers require. Yes, there will be additional near-term pain, with solvency events probably staying elevated over the coming year. And yes, today’s weaker shopping centers are going to turn into tomorrow’s urban regeneration projects. But in a world where prime shopping center rents have fallen by more than a third now, and prime equivalent yields were nearing 8% versus yields in the hot sectors that start with a three, attractive opportunities are going to start appearing. We have an established retail platform, strong relationships with brand partners, asset management and development expertise, and a strong balance sheet. That mix leaves us uniquely positioned to capitalize. Now COVID has obviously been the defining challenge of the past year, and climate change is going to be the defining challenge of the next two decades.

A number of years back, we made it our goal to be the sector leader in this area. In 2016, we became the first commercial real estate company in the world to set a science-based carbon reduction target. And in 2019, we became the first UK REIT to align our science-based target with a one and a half degree global warming scenario — a key step in our commitment to become a net-zero carbon business by 2030. Our progress to date has been encouraging: reductions of 55% and 43% in carbon emissions and energy intensity respectively versus our 2013/2014 baseline, and material reductions in embodied carbon through design development at each of our new projects. On our first net-zero carbon development at The Forge in Southwark, but much remains to be done. As always, the earliest gains are typically the easiest, the later ones, the more challenging. Targeted investment in new ideas and innovation will be required, but we are fully committed and we have good momentum. And subject to AGM approval of our new remuneration policy, these net-zero targets will be baked into our remuneration plans in a meaningful way, influencing both short-term and long-term variable pay. We are deadly serious about our net-zero and wider ESG ambitions.

And now I'll pass things over to Martin.

Thank you, Mark, and good morning to all of you. By any standard, this has been a remarkable year. Our business has been significantly affected by the pandemic, especially in the retail, leisure and hotel sectors. In addition, physical occupancy in our offices has been low through most of the past year. Even so, we remain in a resilient position. Our balance sheet stays strong, with gearing at a sensible level, and we possess the financial capacity needed to fund the investment plans set out in our new strategy. Let me begin, then, with the financial summary. Revenue profit came in at £251 million for the year, compared with £414 million last year — a decline driven almost entirely by COVID's effect on net rental income, which I'll return to shortly. The valuation deficit stood at £1.646 billion, which produced a loss before tax of £1.393 billion. Adjusted diluted EPS, calculated on the basis of revenue profit, was 33.9p, a fall of 39.4% versus last year. EPRA NTA per share came to 985p, which is 17.4% lower, or 207p less, than last March. And last, the dividend: following our half yearly results we reinstated it, combining our Q1 and Q2 dividends into one payment of 12 pence per share on January 4.

The Q3 dividend we declared at 6 pence per share went out on March 30, 2021, which took our total distribution up to £133 million. That comfortably exceeded the £84 million required for us to satisfy our REIT obligation. A final dividend of 9 pence per share is coming, which makes 27 pence per share for the full year, and earnings cover that 1.25x. Turning to how revenue profit moved versus last year: our revenue profit came in at £251 million, a decrease of £163 million year on year. The main driver was the change in net rental income, partially offset by lower net finance costs. As you'd expect, COVID accounted for most — though not all — of that movement. Gross rental income fell £94 million, chiefly because of reduced turnover-linked income from Accor, with top ups £34 million lower. CVAs and administrations cost us £22 million, car park income was £15 million lower, Portland House produced no income at all — £9 million down — and the net effect of sales and acquisitions subtracted £7 million. Within that £94 million drop in gross rental income, roughly 70% is attributable to COVID.

Net service charge stayed pretty much flat, while net direct property expenditure came in £11 million lower. That mostly came from cost savings tied to COVID — on things like car parking operations and marketing, for instance. The £94 million reduction, or increase, in our bad and doubtful debts mirrors what we expect around recoverability of outstanding rent and lease incentives, and I'll say more on that shortly. Net indirect expenses ran £6 million higher, driven mainly by modest rises in uncapitalized development-related expenditure along with professional and consultancy fees. And lastly, net finance expense was £21 million lower, reflecting cuts in interest payable after debt management exercises done last year and lower base rates this year, plus more interest capitalized on our developments. Now, before I move off this slide, I should flag that this year's net rental income included £16 million from properties sold during the year — principally 1 & 2 New Ludgate. So let's turn now to rent collection and the bad debt provision. I've laid out here the collection rates for net rent covering the period from March 25, 2020 to March 24, 2021, along with the rates for the March 25, 2021 quarter day.

Beginning with the quarter day of March 25, 2021 — and keep in mind that this one leans more heavily toward office rents, given how many retailers pay on a monthly basis. At this point, we've collected 81% of the net rent due, which works out to £82 million, leaving £19 million outstanding. For the stretch running from March 25, 2020 through March 24, 2021, our collection rate stands at 86%, equivalent to £554 million collected and £89 million still outstanding. As Mark mentioned, offices continued to show high collection rates, while retail and our smaller sectors came in lower, which mirrors the difficulties those businesses encountered over the year. As you're aware, we moved swiftly in early April 2020 to set up an £80 million customer support fund aimed at helping those customers facing the greatest need. To date, £42 million has been allocated to customers in the form of concessions. That said, we do anticipate this figure will grow, since the conclusion of the rent moratorium should push those who haven't paid to come to agreement on resolving what they owe. Where it made sense, we've also helped customers through other means, such as shifting to monthly rent payments and deferring amounts due. Now let's turn to our bad debt provisions. Our total bad debt provision came to £127 million, an increase of £94 million compared with last year.

We have £42 million tied to occupiers with whom we've reached concession agreements funded from our customer support fund. On top of that, we've set aside another £58 million to cover outstanding rents, along with £40 million for service charges — that figure includes our portion of the joint venture charges — and we've additionally made a £13 million provision for tenant lease incentives, which takes the overall total up to £127 million. Let me now frame our bad debt provisioning so you can gauge how prudent our numbers are. Our provisions cover roughly 38% of the total retail, leisure and F&B rental income for this year. That works out at about 4.5 months of rent across all rent within that category. When you remove rents for which we judge neither a provision nor a concession is needed — essential retail being one example — the provision level rises to approximately 60% of rents in the category, or seven months. Turning now to valuations: as of March 31, our combined portfolio carried a value of £10.8 billion, with the overall valuation falling 13.7%, which amounts to £1.646 billion. Before I go through our valuation segment by segment, I'd like to offer a few general remarks on how the valuers went about this valuation.

The uncertainty clause has been removed, except for hotels, and the mechanical method of subtracting three or six months of rent from the valuation is also gone. What we have now is a specific deduction from capital values to account for any agreed future rent concessions; where no agreement exists, CBRE is reflecting the following. For retail and F&B in London and outside Central London, the deduction is six months of rent — three months for retail, six months for F&B, and nine months for cinemas. For outlets and hotels whose income is turnover-related, CBRE has assumed turnover rebuilds over one year for outlets and three years for hotels. So let me now go through each segment of our combined portfolio in turn. Our Central London segment was valued at £7.3 billion in March, which is down 6.5% versus last year. It's our largest segment, representing 68% of the portfolio. Offices overall declined 4.1%, with our developments down by a similar amount. Rental values fell 1.9%, while equivalent yields were broadly unchanged. It's worth pointing out, however, that the two larger office disposals we made this year — namely, 7 Soho Square and 1 & 2 New Ludgate — were both sold above their March 2020 valuations, by 4% and 1%, respectively.

In London, retail really took a hit from the pandemic, given how little office footfall and tourism there was. Values there fell 26%, with rents declining by roughly the same amount and an outward shift in equivalent yields to 4.5%. The rest of the Central London sector is mostly Piccadilly Lights, where values dropped 1%. That comes down to the short-term income, where the yield has moved out slightly, and the valuation now assumes a somewhat longer, stepped recovery. Our regional retail segment was valued at £1.8 billion, a decline of 31.4%. At regional shopping centers, values fell 38.2%, as rental values dropped 21.5% and equivalent yields moved out 140 basis points to 7.6%. The spread of valuation declines across shopping centers was in fact fairly narrow — between 35% and 43% down — with equivalent yields now ranging from 6.5% to 9.5%. Outlets did better, though they were far from immune, falling 18.5%. With a smaller share of Central Retail, the lockdown periods meant limited trading at these assets, which affected turnover top-ups. Even so, this retail segment has an inherent appeal, as the bounce backs after the lockdowns show. Outlet equivalent yields moved out 60 basis points to 75 basis points, while yields on F&B generally moved out 100 basis points, with higher yields applied to tenants at risk and to vacant units.

The urban opportunities part of our business consists of 5 retail properties located in suburban London, and that accounts for roughly 3% of the portfolio. These assets, then, have a fairly high share of essential retail, and you can see that in how their valuations performed — down 23.3%. Taken together, our subscale sectors fell 16.4%. Leisure dropped 23%, with rental values off 7.1% and equivalent yields widening by 118 basis points. Because of how COVID hit our turnover rents, our hotels declined 13.4% across the 12 months, though that was in line with the half-year values. Last, retail parks came down 10.1%. This is a sector that has held up better over the past year, given the open-end character of these assets and the fact that investor demand has clearly come back. It's worth noting there's a very wide spread of yields across our schemes — equivalent yields run from 5.1% to 8.7%, and initial yields run from 4.7% to 11.4%. That mirrors the character and the strength of the different occupier bases. Turning now to committed CapEx: we have fully committed office developments — that's 21 more fields loosened The Forge and n2, plus the related Wardour Street. The outstanding committed CapEx across these schemes comes to £523 million over the coming 4 years.

On top of that, we'll be putting £32 million toward demolition at Timber Square, along with £12 million to finish preparatory works at Portland House. After those works are done, we'll have the choice to carry on with or pause either or both schemes, depending on what's appropriate. And with £35 million of committed CapEx at Castle Lane trading property, our total committed CapEx comes to £602 million. As we've mentioned previously, disposals will be how we fund this CapEx, and as the next slide shows, the net disposals we've completed this year mean we're well on the way to getting there. So let's take a closer look at where we stand on financing. At the year-end, adjusted net debt stood at £3.489 billion, a reduction of £437 million across the year, mainly driven by our disposals of 7 Soho Square and 1 & 2 New Ludgate, though this was partly offset by investment into our development pipeline and the acquisition of 55 Old Broad Street. Group LTV went up to 32.2% from 30.7% a year-ago, and that was entirely because our property values fell. Our weighted average cost of net debt came in at 2.2%, down from 2.4% last year. As for facilities, aside from £10 million in September, 2023, our next bond maturity doesn't come until February 2024, and we currently have £1.6 billion of available undrawn bank facilities.

Let me now turn to what lies ahead and wrap things up. The coming year is going to be defined by bouncing back from the third lockdown—which we hope is the last one—and by what the new normal ends up looking like. Financially speaking, during this year we set aside substantial provisions for rent concessions and bad debt. Our view is that these are prudent and adequate to address probable rent concessions as well as the effect of CVAs and business failures on how much outstanding rent we can recover. That said, only time will tell. Several things will matter here: the economy reopening, furlough coming to an end, and the rent moratorium ceasing. We are definitely seeing occupiers engage more, especially in cases where rent concessions have not yet been agreed and documented. And as the economy reopens, we expect activity-related income—our hotel rents and car parking charges, for instance—to recover gradually, and naturally, bad debt provisions to come down. We'll keep a sound balance sheet, recycling capital ahead of redeployment, while retaining plenty of firepower for opportunities that come up. Now, I'll hand you back to Mark.

Thank you, Martin. To walk you through the operational update, I'll frame things around our strategic priorities, beginning with optimizing Central London. Quality, liquidity and resilience are what define our Central London portfolio. By a wide margin it is the biggest piece of our portfolio, with a combined value of £7.3 billion, and it accounts for nearly 70% of portfolio value. That quality, resilience and liquidity therefore flows through to the broader portfolio in a meaningful way. The chart at the top right of this page illustrates the historic liquidity of our Central London portfolio. £3.7 billion of disposals across the past 10 years, which works out at approximately 5% of this part of the portfolio per annum. As you know, we have close to £2 billion of additional Central London disposals planned over the next few years, and asset recycling rates are planned to rise from here. One aim behind this stepped-up portfolio recycling is to increase optionality within the Central London portfolio — chances for us to create value by applying our expertise and matching our capabilities and our invested capital more effectively. Progress is starting to show, with over 15% of the combined portfolio now either under development or intended for development.

Next year, when 21 additional fields reach practical completion, this will fall away, giving us room to chase further opportunities while continuing to manage risk in a very effective way. So against that background, what does optimize Central London actually mean for us? First, it means concentrating on value creation by concentrating on what we excel at: development, building resilience, and an unwavering focus on the customer. Second, it means capturing that value through disciplined capital recycling — being willing to dispose of certain assets once only a few value add opportunities are left, and selling those assets to investors who prize the prime defensive characteristics we have built more highly than we can, or than the equity capital markets can. We have a committed development program of £1.2 billion, with further projects either ready or earmarked for development at roughly the same amount again. 57% of the program is pre-let, and the anticipated average yield on cost is around 5.5%. That compares with roughly 4% for prime investment yields, so a healthy margin — but for a fair amount of risk. So these achievable yields demonstrate how competitive the market is, and the vital importance of expertise and track record. So how did we create value through development last year?

Okay, so first off, we partnered with our contractors in order to limit the effect on the program from COVID restrictions. Our sites shut down for over 10 days at this point before reopening in a COVID-secure way. Social distancing rules did cut on-site labor at 21 more fields, which pushed anticipated PC back by roughly three months, to July 2022. But other sites that leaned more toward less labor-intensive work—like groundwork or foundation programs—were mostly unaffected. Second, we kept optionality in the program for as long as we could. Rather than committing to full design and build contracts, we procured smaller packages, which let us properly evaluate market conditions before taking on big capital commitments, and about £500 million of capital was safeguarded this way. After a full review of our near-term developments, we then committed to building out The Forge in Southwark and Lucent, Piccadilly Circus in September, before adding n2—formally Nova East—in Victoria in early 2021. We judged these developments to provide the best risk-adjusted returns, based on a detailed review of the remaining construction risks and the likely demand and supply dynamics in each submarket. Strip-out works, and therefore the rating, have been completed at Portland House in Victoria, but we chose to delay the start of major works so it would fit better with delivery of n2 into that same submarket.

When you compare the relative scale — n2 comes in at roughly 170,000 square feet while Portland House is 400,000 square feet — that played a significant role in how we sequenced things. Over in Southwark, we obtained planning consent at Timber Square, which is another net-zero project. Demolition gets underway soon, and we'll make the call on delivery timing during the coming few months. We also bought 55 Old Broad Street in December for £87 million. That property stands at the corner of Old Broad Street and London Wall, right beside our existing Dashwood asset. It may lend itself to redevelopment starting in 2025, carries meaningful upside in terms of added height and massing, and offers considerable synergy value alongside Dashwood itself. Although building both out at the same time is unlikely, we can push design development forward across the two sites in a complementary manner, producing a stronger combined result than either could achieve on its own. So with all of that, our development program now appears as follows. The table's top four projects are our committed developments. Timber Square and Portland House have consent and are ready to go, though as I noted a moment ago they aren't yet committed. Our development pipeline stands in a fundamentally strong position, and across the next 12 to 18 months our focus comes down to five things.

Finishing the committed pipeline on schedule and within budget will drive our lettings forward. Every one of these locations stands out on its own merits. Across all the relevant sub-markets, new supply is extremely scarce — certainly nothing of comparable quality. On top of that, each of our developments earns strong marks for sustainability, adaptability and wellbeing — the credentials our target occupiers care about so deeply. We also have several active discussions underway. Beyond that, our priorities involve sustaining momentum in the pipeline and increasing optionality: planning consent at Red Lion Court, decisions on delivery timings at Portland and Timber Square, and targeted acquisitions. Our acquisitions will focus on situations where we hold a strong conviction that Landsec is especially well placed to create value and where the strategic fit is strong. I've leaned on the word resilience a great deal when talking about Central London, and that was quite deliberate. Resilience carries real value, and much of our expertise lies in building that resilience through an unrelenting focus on what our customers want. Our Central London business offered some excellent illustrations of this. For instance, throughout the portfolio as a whole, we are currently in live discussions with occupiers — customers occupying more than 1 million square feet in total — about rightsizing their space requirements.

This isn't just about leases coming up for renewal — it's being driven by strategic partnerships with our occupiers and a proactive approach to delivering the right solutions for them. In Victoria specifically, we're currently in active discussions with seven occupiers across 300,000 square foot of space in five buildings to rightsize their respective footprints. Those requirements range from a 40% upsize to a 20% downsize. The outcome will be stronger customer relationships, regeared leases, a more diverse product mix and reduced vacancy across the estate — resilience grounded in customer focus. In development, the net-zero credentials of our projects matter incredibly for resilience and matter incredibly to our customers. More and more occupiers are establishing their own net-zero targets. Sustainability credentials are increasingly critical to hiring the right caliber of people. Carbon taxes are surely only a matter of time. All of this is feeding into occupier decisions. Our leadership position here is real, it is vital, and it will be one of the foundations in building resilience from here. There's been a lot of focus on net-zero development with very positive progress, but there is plenty to do in the standing portfolio, too.

This year, we're going after well building standard accreditation for the whole portfolio — that certification acknowledges how we take a holistic, integrated approach to health and wellbeing. We're also rolling out a set of initiatives aimed at improving energy efficiency across our existing estate, and many of those can only be delivered through close partnership with occupiers. Offering a range of propositions and price points is another key element of resilience and customer focus. We've now completed our second Myo project at Dashwood, along with more of our customized product, and we have clear plans to scale both offers further. Opportunities we can deliver within the existing estate would let us grow Myo from 70,000 square foot currently to roughly 300,000 square foot over five years, before any new acquisitions are factored in. Our customized proposition, which includes an on-demand offer that can be delivered to occupiers within 12 weeks, could expand to around 450,000 square foot, and both of these build on the investment we've already made in Landsec Lounges across the portfolio. Having a range of flexible products and drop-in offers throughout the city will be essential to meeting the varying needs of customers in the ecosystem that will increasingly support the workplace of the future.

And we think the effect on office space going forward is going to be twofold and, in a way, paradoxical. First, there's added value and benefits for companies and their people, who get more flexibility in how and where work gets done. Second, there's the undeniable worth of a workplace that is healthy, connected, flexible and sustainable in maintaining the culture and the talent that businesses require to reach their potential. At our Capital Markets Day in October, we said a hybrid model would probably take shape. And research from Leesman indicates that people with the best office space preferred it as their main place of work. Landlords — and, really, buildings — able to give customers an engaging and relevant ecosystem of products and a mix of amenities are going to be the most successful at drawing occupiers. That will probably involve a network of headquarters, flexible offices, meeting and project spaces, and home. That's the backdrop against which our optimize Central London strategic objective is going to be delivered. Strategic partnerships, curated experiences, and healthy and sustainable spaces. So now let's turn to retail. In a year that saw three lockdowns, a myriad of different restrictions in between, and the moratorium on enforcement action throughout. Now Martin has already flagged the severe impact this has had on rents and values, and the operational statistics are sobering as well.

Footfall is off roughly two-thirds compared with the prior year, with like-for-like sales declines of 14% in outlets and 31% in regional shopping centers. A total of 58 brands, or 360 separate units, went into CVA or administration, and £29 million of rent was affected as a result. That count of insolvency events is roughly 3x last year's level, and the rent impact has climbed too, now nearing half of previous passing rent. Voids stand at 7.5% in the like-for-like portfolio, with another 6% of units in administration. Compared with the broader retail market, vacancy in prime locations has increased a little faster, reflecting the volume of prevailing fashion and department store space. Persistent vacancy, though, is somewhat lower. It is reasonable to assume CVAs and administrations stay elevated over the year ahead. Businesses that struggled before the pandemic keep struggling after it. Arguably, though, valuations now largely reflect these factors. Since reopening, the picture has been more encouraging. Naturally, drawing too many conclusions at this early stage would be foolish, especially with pent-up demand yet to subside and government support still tapering, but it does show fundamental underlying demand.

To eliminate the skewing impact caused by differing dates and rules in Wales and Scotland, we've provided headline trading figures here covering our English properties during the 3 weeks following the April 12 reopening. On a like-for-like basis, retail sales overall rose 8.2% compared with the same 3-week stretch in 2019, a period that contained the Easter weekend. Including F&B, where only takeaway or outdoor table service was permitted, total sales were still 3.7% higher. Outlets performed especially well, with like-for-like retail sales 14% above 2019 and total like-for-like sales including F&B up 10%. We anticipate an equally robust reaction as restrictions ease further, with every one of our retail, F&B and leisure locations positioned to gain. The public's wish to go out and share experiences is beyond doubt. It also seems a consensus is forming around how to unwind the rent moratorium in a managed fashion — pairing decoupled arrears with continuing obligations, strengthening the code of conduct and adding binding arbitration as a backstop looks like a sensible path ahead. Landsec played a key part in forging that consensus. To sum up, it's too soon to reach conclusions about retail's prospects from this point, though the early signals are largely encouraging.

As I said earlier, the swift worsening of painful structural shifts may start providing the foundation for a badly needed reset in physical retail. Four main themes, in my view, jointly make up the groundwork for that reset. First, retail winners want fewer, bigger stores as part of their omni-channel approach. The standout case in our portfolio has been Zara, which during the last year renewed its lease at White Rose in Leeds, signed new leases at One New Change in London and St. David's in Cardiff, and doubled the size of its store at Bluewater — roughly 100,000 square foot of space altogether. Decathlon has opened a new 35,000 square foot store at Trinity Leeds, and we have several other active discussions under way across the portfolio. Importantly, these lettings also bolster our own view on sustainable rents and other key trends, such as tighter operational alignment with brand partners. The second key trend, which builds on the first, is the potential for a flight to prime. We estimate that surplus retail space could reach as much as 25% of the current market within five years.

The vacancy rate is already at 17%, but the decline won't be uniform, with some shopping centers and retail parks sitting a quarter empty. Occupiers are going to seek out space that strengthens their omnichannel proposition, drawing customers in by delivering the right blend of broad appeal and experience. Trinity Leeds illustrates this well. According to payment provider data, it currently represents 19% of retail space in Leeds City Center, yet captures a 35% share of relevant category spend. Naturally, flight to prime has come up more than once in recent years, but today it isn't merely a matter of expecting retailers to pay a premium for prime space in hopes of boosting brand awareness and sales more broadly. As rents move toward sustainable levels that support sensible store level profitability, this is turning into a far more straightforward business decision for brands. Trend number three is a stronger emphasis on experiences. The clearest example in our portfolio is our outlets. The outlets experience simply cannot be replicated online. Destination days out with family and friends, shopping a variety of brands with a great value offer in a relaxed and welcoming environment. Leisure will also be another key element of experience, such as the 80,000 square foot multidimensional offer that Gravity Leisure are creating for us in Wandsworth.

That’s going to create far more appeal and footfall than the dated retail offer it’s replacing. Still, we have to be cautious about treating these things as a panacea. Leisure offers can fall victim to shifting tastes, and CapEx requires careful underwriting. Done right, though, with the right partner, they can play an important role in striking the right balance of brands and attractions across centers. The last trend is tighter operational alignment with brand partners—developing propositions, whether product-related or leasing constructs, that encourage collaboration and the sharing of data and insights. Turnover-based leases are one piece of that, and we’re seeing a sharp rise in their number. Higher operational risk is a reality, but it’s something we can embrace and treat as an opportunity. So going forward, our reimagine retail strategy centers on creating value in three ways that reflect those trends and are real time experience. Deep brand partner relationships—we can only succeed if our customers do. Tailored guest experiences that integrate seamlessly with our partners’ physical and digital propositions, reduce friction in our guests’ shopping and leisure missions, and improve our ability to measure, predict and influence shopper behavior—and asset management expertise, making sure our interventions are appropriate, targeted and sustainable.

Landsec already has a solid retail platform, strong relationships with brand partners, expertise in asset management and development, plus a healthy balance sheet — and all of that leaves us well placed to seize the opportunities that come along. Before I finish and hand over to Q&A, I want to take a few minutes to talk about the two strategic priorities we have left: growing through urban opportunities, and realizing capital from subscale sectors. First, let me get a bit more precise about what an urban opportunity actually means to us. Societal shifts already underway are having — and will keep having — a profound effect on our built environment, making parts of it obsolete and in need of regeneration. Whatever replaces it will have to be far more flexible and adaptable. The boundaries between different uses are getting blurrier all the time. And this regeneration has to be delivered in a genuinely sustainable, net-zero way. Urban opportunities are basically mixed-use, multi-phase regeneration projects, and we regard them as an appealing source of growth — one where Landsec can draw on its skills, its track record and its scale. There are three reasons these projects appeal to us. First, they offer genuine placemaking potential, and when placemaking is done well it can generate real value and drive long-term appeal and long-term growth.

Two, they do tend to be large and complex—so much so that most developers couldn't take them on—and they're multi-phase. What that means is you can approach capital allocation and risk management in stages. As project delivery moves forward, strategies can be adjusted. And three, across their lifespan they deliver balanced returns: a mix of income, development profit, and rental growth. That's the profile we'll be seeking in any new acquisitions, though naturally we already hold five projects in our portfolio—all suburban London shopping centers, where alternative use values and site intensification potential work in our favor. The furthest along is the O2 shopping center on Finchley Road, North London. I realize we've discussed this project previously, yet it's an opportunity that demonstrates particularly well why these mixed-use, multi-phase projects appeal. From a placemaking standpoint, it sits in an established part of London that already enjoys strong transport links. Our vision links Finchley Road and West Hampstead via three distinct character areas: a new commercial Town Square, a quieter but connected residential neighborhood, and a new social and community hub anchored by a new linear park—potentially 1,900 new homes, 150,000 square foot of commercial uses, and 2.6 hectares of new public open space, all of which will help underpin long-term value and growth.

When you look at it from a phasing standpoint, we'll bring the project forward in stages across several years. Total investment over all the phases could come to somewhere between £800 million and £900 million, though split into manageable pieces. That way, capital commitments and risk stay effectively under control. On returns, the shopping center already generates income, and although leasing strategies will require careful handling, that income won't be disturbed during the early development phases. So planning gains, development profit, fresh income and growth can all start building up before any existing income disappears — a balanced return profile within one project over the long term. We're also aiming to submit a planning application at O2 in the current financial year. Finally, just a quick note on our plans to realize capital from our subscale sectors, leisure hotels and retail parks. That's £1.3 billion of assets altogether, after an aggregate 16.4% decline in values over the pandemic-affected year. We intend to dispose of these assets, and that rests on our view that we have neither sufficient scale nor competitive advantage in any of these sectors. Of course, though, we're focused on getting the best value for these assets, and we don't generally feel that would be the outcome if we sold them in the near term.

Every one of these portfolios got hit hard by COVID — leisure and hotels especially — and so each is in a strong position to gain substantially from the robust spending and rebound we anticipate during the coming 12 to 18 months. Selling these assets is thus most likely to happen on a two to three-year timescale. That said, we might seize the chance to offload one or two retail parks sooner, so as to capitalize on the investment market in that subsector, which is gaining strength. As I mentioned when the presentation began, Landsec stands ready for the recovery, with a strategy that sets it up for long-term growth. So what should you expect from us across the next 12 to 18 months? Well, first, continued capital recycling. Asset sales out of our Central London portfolio, reinvestment into our development program, and fresh investment in our target areas — our value add Central London opportunities, mixed use multi-phase regeneration, and potentially prime retail. Second, the payoff from collaborating strategically with our customers, an increasingly diverse and flexible range of offers in London — for instance, new concepts within our shopping centers, innovative deals with major occupiers. Third, tangible progress on our ESG targets, particularly net-zero carbon.

And lastly, there are clear indicators that our culture is on the right track: people have more empowerment, there's more accountability, things move at a faster pace, and agility has increased. Everyone has found the last 12 months difficult, but our strategy is clear, the outlook is improving, and momentum is starting to build — we're poised for recovery, with a strategy that puts Landsec in position for long-term growth. Ladies and gentlemen, many thanks for joining us and for giving your attention to the presentation during the past hour. I'll now open things up for a Q&A session. So I think I'll first hand over to the moderator on the dial-in conference line, and we'll take our first few questions.

We're ready to take questions from our phone audience now. <<operator_script>> Our first caller is Max Nimmo from Kempen. Your line is open.

Good morning, and thanks for the presentation. Turning to the potential opportunities you see coming forward in prime retail space: should I take it that this is obviously mostly within the destination shopping center market? And in the larger asset space, would we expect you to be looking at something like the stake in Bluewater — which you don't own — that's rumored to be returning to the market? Secondly, on yesterday's High Court news about landlords not being treated fairly in CVAs, something we've all been discussing for some time: is it fair to say we've come around a corner on that? Do you think it will affect how many retailers will look to do CVAs going forward? Thanks.

Thanks, Max. Now, regarding your first question—where we might consider putting money back into retail if the right opportunities come up—I think you're absolutely right. It comes down to those destination-type locations. You heard in the presentation about the four trends: retailers concentrating on fewer but larger stores, the potential for a flight to prime, and working more closely with brands, for example. All of that, I think, supports the view that occupancy will concentrate around those destination locations, and consequently some of the less prime locations are likely to become obsolete more quickly. So when it comes to investing purely in retail for the future, the bulk of our retail platform is likely to be those kinds of destination centers. And as you alluded to, we clearly have a range of different ways to get there, and that could include looking at stakes in assets we already have an interest in but don't own a 100% stake in. So that would be one of a number of options we'd take into consideration, but we don't have a more precise strategy than that about exactly where we might choose to invest.

Regarding the CVA question, I'd say several rulings have come out over the past week or so, and taken as headlines they can look quite alarming. Right now we're working through the specifics of some of those judgments to figure out how far future case law will be shaped by what they found. That said, I'd offer two general observations. First, as I mentioned in the presentation, our confidence keeps growing that the ERVs in our valuations are getting close to sustainable levels, and CVAs and administrations as such have no bearing on those levels. So for us the strategically bigger question is how confident we are in those sustainable rents and how near we stand to them. CVAs and similar mechanisms really affect how quickly we travel from where we are today to those levels. Naturally, though, should we conclude that landlords as a creditor class are being singled out unfairly, we'll go on defending our position, just as we have in a number of cases during the past 12 months and just as others have done.