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

Good morning, everyone. Thank you for joining us for the Landsec interim and results presentation covering the six months to September 2021. It's a real pleasure to present these results to you in person today, and naturally we're also glad to be streaming live for anyone who couldn't make it this morning. In a moment I'll take you through an overview of the first half and six especially important themes, and then Vanessa will provide more color on financial and operational performance. After that I'll give a strategic update, and then we'll move to Q&A. So, those six especially important themes I mentioned. First, positive business performance and building strategic momentum. Now, since the pandemic affected 2020 comparatives, it won't come as a surprise that the key indicators are all positive year-on-year. The recovery has certainly been at the stronger and the more sustained end of the expectations range from six months ago. More importantly, the business recorded its first increase in net asset value per share for over five years. Second, robust leasing performance in London with investor demand driving down prime yields. I said six months ago that we expected prime rents to be resilient, with perhaps low single-digit falls and that there was the prospect of some yield compression.

For both of those, the reality has turned out to be even better than expected — especially when it comes to yields. A lot of capital has been competing for a limited supply of prime stock, and that has driven yields lower, with further movement still likely. Third, retail leasing has performed strongly across the last couple of results presentations. I've spoken about rents getting close to sustainable levels, and the evidence backing that up has become more and more encouraging during the first half. Like-for-like sales are up across our retail estate, vacancy is down, and lettings have come in ahead of ERV. Fourth, we've made excellent progress in speeding up our mixed-use strategy — most obviously through the Media City and U+I transactions announced earlier this month. In this part of the business, strategy is shifting from talk to action. Fifth, we've kept a continued focus on capital discipline, and we have maintained a strong balance sheet throughout the period. Net debt was neutral, cash generation was strong, and we still retain excellent portfolio liquidity. Finally, we are leading the way on net zero. We were the first commercial real estate business to set a science-based target five years ago, and today we are the first to set out a fully costed plan to 2030 that supports the transition to net zero. Now I'll turn to each of these themes in a little more detail.

For the six months, the business produced a 3.7% total return, and each of our major segments added to it on a positive basis. What matters arguably more, though, is the momentum we have managed to create in carrying out our strategy. Twelve months ago, at the launch of the new strategy, the capital recycling piece of our plans was, not surprisingly, centered on disposals. As matters have moved on and the outlook has grown, if not settled, then at least less unsettled, we have increasingly been able to concentrate on opportunities to invest. Across every area of our business, we now enjoy excellent visibility of new opportunities and of potential returns. That lets us weigh relative return prospects and, as a result, be more decisive when we make capital allocation decisions. You have seen this in the announcements we have made recently, and I will come back to that theme later. This strategic progress is visible as well in the steps taken to change our culture, the importance of which I set out last year. Plenty remains for us to do, but Landsec is already a more agile business, closer to its customers, and better placed to respond when conditions change. To put it simply, we are now realizing more of the undoubted potential of our talented people.

Moving on to London now, and starting with occupier markets, where we've been encouraged by how things are going. During the period, 12 office leases were completed or agreed, covering GBP 25 million in rent at levels that support ERVs, and those ERVs have risen 1.2% across the six months. Activity levels have picked up noticeably sharply since September, with people increasingly willing to make decisions about current and future space needs that they had previously been deferring. We have active interest across more than 250,000 sq ft of new space, and this step change is evident at the market level too, where third-quarter take-up rose 59% versus the prior quarter and is now back near the 10-year average, despite the unprecedented disruption of the past 18 months. Space under offer currently stands above the 10-year average at 4 million sq ft, which points to a strong finish to 2021. Over recent months, I've spoken with many of our office customers, especially those making space decisions right now. The feedback I keep hearing is that quality, flexibility, and sustainability matter in their decisions — all areas where Landsec performs strongly. The conversations consistently focus on how best to use their space rather than how much of it they need.

On the supply side, the pandemic has caused quite a few build programs that were already underway to slip, and new construction starts have been pushed back as well. So forecasting delivery is difficult, but compared with six months ago, we now anticipate that several completions previously slated for 2022 will move into 2023, with a knock-on effect reaching into 2024 and beyond. N2 and Lucent — which together account for roughly 50% of new West End supply currently under construction and give occupiers certainty of delivery — are well positioned in that respect. Turning to the investment market, I said earlier that yields contracted during the period and that there is further to go. Our own experience bears this out. Last week we completed the sale of Harbour Exchange, an office and data center with 20 years of unexpired income, for GBP 197 million at a 4% initial yield. That is roughly 4.5% ahead of the latest valuation. Given other active discussions about potential asset recycling, I am confident we will see further tightening across the London portfolio in the second half. In retail, we have seen meaningful levels of leasing ahead of the ERVs for the first time in quite a while. 181 leases covering GBP 60 million of rent were completed or agreed at an average of 3.3% above ERV.

Overall, this points to solid operating results pretty much everywhere. Like-for-like sales across the whole business averaged a 0.5% gain compared with 2019 from the 5th of April onward, while vacancy had fallen to 7.5% by the close of the period. Outlets did especially well, and so did out-of-town shopping centers. City center malls trailed during the earlier stretch of the period because of COVID restrictions, yet since September they have turned in a strong showing. Turning to investment, liquidity is starting to come back into the shopping center market. Significantly, senior debt is starting to become obtainable. As for us, our confidence keeps growing that rent levels are affordable, and we still hold the view that prime retail yields appear attractive when viewed on a relative basis. Naturally, shopping center rents sit just under 40% below peak. Values have dropped by roughly two-thirds, so caution is warranted from this point. Even so, our thesis is unchanged: we are witnessing a flight to quality both among brands and among shoppers. Given that prime rents are at sustainable levels, vacancy will increasingly cluster in inferior locations. The mixed use, or urban opportunities, piece of our strategy has so far been the smallest portion of the portfolio and the least developed element of what we do. That is now starting to shift.

Earlier this month we announced two moves — the purchase of a 75% interest in Media City and our recommended all-cash offer for U+I — and together they have significantly stepped up what we can invest in this part of the business, with GBP 1.1 to 1.3 billion of potential investment in high-quality mixed-use projects that we can deliver across the short to medium term. Both deals demonstrate the more agile, entrepreneurial approach we are willing to adopt when it comes to executing our strategy. With Media City, as you can see, we are able to raise our mixed-use investment without any need to dilute earnings at group level. The proposed U+I transaction also adds complementary front-end skills that are ideally suited to mixed-use projects. Our existing projects are moving forward as well, with planning applications on track at both O2 Centre Finchley Road and Lewisham Shopping Center. Capital discipline will remain an important feature of our business and of our strategy. Vanessa will take you through more shortly, but three key areas are worth highlighting from my side. Firstly, modest leverage. Last year we lowered our LTV tolerance to a core range of 25%-40%. Net debt has stayed flat across the past six months, and we continue to operate firmly within our target range.

Second, we're concentrating on aligning both the timing and the size of disposals with reinvestment. This isn't an exact science, obviously, but we'll aim to manage cash drag and leverage levels in an appropriate way, so that portfolio recycling activity doesn't disrupt shareholder returns. With far greater visibility into investment opportunities in every part of the business, together with solid portfolio liquidity, we're now in a much stronger position to achieve this. Last, we're concentrating on adding optionality to our development program, which we regard as essential to maintaining flexibility and agility throughout our business. Our recent acquisition announcements already demonstrate this, and we're also pursuing plans to increase optionality within our existing portfolio. Landsec became, in 2016, the first commercial real estate business worldwide to commit to a science-based carbon reduction target. In 2019, we raised our ambition to align with a 1.5 degree global warming scenario. That calls for us to deliver a 70% reduction in carbon emissions by 2030 against a 2013 to 14 baseline. We've achieved a 55% reduction already, and today we're setting out fully costed plans to support the remainder of our target.

We'll be putting GBP 135 million into our current portfolio over the coming nine years. Vanessa will go through the specifics of that later. This investment comes on top of all our work in new developments, where each project we've committed to since 2019 has been designed to achieve net zero, in both construction and operation. The Forge in Southwark should be finished next year and will be the first building of its kind to satisfy those criteria. Our plans keep us ahead of minimum energy efficiency standards, which call for an EPC-B certification by 2030, and they align fully with 2050 net zero pathways as set out by the Carbon Risk Real Estate Monitor, or CREM. We're proud to be maintaining our sector leadership position in helping to tackle climate change. I'll now hand you over to Vanessa.

Thank you, Mark, and good morning to all of you. It's a pleasure to give my first financial update here at Landsec, following a fairly hectic initial six months in this position. The cultural shift that Mark has set in motion has delivered tangible advantages, and our strategic momentum has picked up. After the difficulties brought by the pandemic, this year has represented a period of recovery and significant transition for the business. That recovery has landed toward the stronger end of what we anticipated, and we're in a solid position to execute our strategy. One thing to keep in mind as we compare results with the prior period is that certain one-off gains arise from last year's pandemic effects. I'll point these out as we walk through performance. EPRA earnings rose 56.5%, driven mainly by a favorable shift in bad debt, since no additional provisioning was needed during the period. We declared our second quarterly dividend today at GBP 0.085. That takes the first-half dividend to GBP 0.155 per share, a 29% increase over the equivalent period a year ago. Our policy is to pay an annual dividend within a 1.2 to 1.3x cover range, and for the full year we expect to stay in line with that policy.

On the balance sheet side, EPRA Net Tangible Assets per share came in at GBP 10.12, up 2.7%. Earnings and the valuation surplus drove that. Group LTV has edged down slightly to 31.8%, and our balance sheet is still robust. Total business return for the six months was 3.7%. Turning to EPRA earnings in more detail: gross rental income was GBP 11 million lower for the first half of last year. Gross rental income from our like-for-like portfolio is up GBP 14 million, reflecting the recovery in variable income, and that includes GBP 7 million of surrender premiums; it's partly offset by higher average vacancy over the period and lower rents from lease re-gears. CVA and administration activity has cut rental income by GBP 15 million, which mostly relates to insolvency activity in the last financial year. This year, only two occupiers have gone into insolvency. That's a dramatic reduction from the 58 we had last year. Of course, it reflects the moratorium on enforcement action. The net impact from acquisitions and disposals also brought rental income down by GBP 10 million. We sold Seven Soho Square and one and two New Ludgate last year, and then two retail parks in the first half of this year.

The acquisition of Fifty-Five Old Broad Street contributes GBP 2 million of the increase. Direct property expenditure rose to GBP 25 million, driven mainly by a substantial pickup in letting and operational activity, together with the release of the historic Landflex provision in the first half of last year. With the opening up, the trading, and better rent collections, no further bad debt provisioning has been necessary. That produced a favorable swing, from an GBP 87 million charge to a GBP 3 million release in the current year. Overheads are up because of the amount of business change activity underway across our organization, and reviewing the cost base to right size for the future has been one of my priorities. Our target is to bring the EPRA cost ratio back towards 20% over time, from the present level of 23.7%. I will give you a further update on our progress with this at the year end. Recent months have brought a high level of operational activity, which I will cover in more detail by segment. I'll start with the Central London offices, where we have been particularly active, as our occupiers are proactively reviewing how they use their space as workers return to the office.

During the first half, we finished and signed 12 leases amounting to GBP 25 million in rent. For prime Grade A London offices, rental income is holding up well and supports ERV. Sustainability, well-being, and flexible space are drawing growing attention, and all of these align with our strengths. As trust in workplace safety and public transport has grown, office utilization has risen in recent months. Utilization has climbed to an average of 55% of pre-COVID levels, with a midweek peak of 67%. Vacancy in the London office portfolio has edged up slightly to 4.4%, which was anticipated following completion of the Dashwood House refurbishment. Turning to London retail. As we all know, recovery in this area has been slower. Vacancy in this segment has risen to 11.9%, including the surrenders we accepted on the retail units beneath Piccadilly Lights. The vacancy in London retail will let us reposition the ground floor amenities to respond to current trends. Still, Piccadilly Lights is performing well, with strong bookings that give us confidence income will return to 2019 levels by year-end. Rent collections for the first half of the year have also rebounded.

I'm glad to say that by now we have received 100% of the rents on our offices and 83% of London retail. In our regional retail portfolio, this stretch of time has been marked by the staged reopening and the loosening of restrictions, and that has led to a solid trading rebound for most of our occupiers. That, together with how much operational activity there has been in recent months, gives us a positive take on what lies ahead for our retail portfolio. We've seen a substantial amount of leasing activity, with 181 lease events coming in 3.3% ahead of ERV. Vacancy across our shopping centers and outlets is down by 130 basis points to 7.5%, and we have additional deals in the pipeline that would point to this trend carrying on. As with the broader sector, footfall across the portfolio is down significantly compared with 2019. Thanks to better conversion rates and higher transaction values, our like-for-like sales kept getting stronger in September and rose to 3.8% ahead of 2019. That has also helped us make headway in agreeing rent concessions, and we have now collected 92% of our regional retail rents. Operational performance across the hotel and leisure sectors has recovered more strongly than we anticipated when this financial year began.

Occupancy is down in retail parks and leisure, while hotel occupancy has bounced back strongly since August. Cash collection across our leisure assets has been somewhat slower because of the cinemas, since we were awaiting how the bond release would affect trading before we wrapped up the rent concessions and payment plans. Turning to earnings going forward, two main factors are influencing income across the next two years. The first is how quickly operations keep recovering, and the second is what net investment does. I'll lay out our thinking on both here, though I'm not assuming anything about market rental growth. All told, we expect roughly GBP 27 million of additional gross rental income from operational recovery over the coming couple of years. That covers sensible leasing of vacant space, reversions to ERV, and continued gains in variable rents. Regarding net investment, as Mark said earlier, our capital discipline means matching the timing and size of net investments so we can control net debt and safeguard income. The GBP 42 million increase you see here captures the anticipated income effect from committed developments and acquisitions, along with the known and planned disposals.

That's assuming total disposals of GBP 1.3 billion, roughly a third of the GBP 4 billion target we've set, with the initial focus on Central London. Income growth of as much as GBP 69 million is what we see as possible from these factors. Now, this doesn't capture the complete effect of our strategy, and we aren't presenting it as a forecast, but it does demonstrate that income upside exists in our plans going forward. As of 30 September, the value of our combined portfolio stood at GBP 11 billion, and valuation growth came to GBP 81 million in the first half. On a like-for-like basis, our portfolio has grown 3%, along with a development profit of GBP 33 million. Given how strong our operational performance has been, most of the COVID allowances put in place last year across our retail and leisure assets have been released. That added GBP 40 million to the overall valuation gain, and GBP 11 million of COVID provisions remain, in cases where pandemic recovery has been slower. I'll now go through the major movements segment by segment. To begin with Central London, valued at GBP 7.5 billion, which right now makes up 69% of our total portfolio. Values for the London office assets rose 1.6% across the first six months, which reflects investor appetite for the higher quality assets.

Like-for-like rental growth came in at 1.2%, and yields tightened a little. We've booked GBP 33 million in development profits. That's mainly from 21 Moorfields, where construction is almost finished, and the yield re-rating speaks to the high quality and the long income prelet. Increased costs at The Forge and Lucent have partly offset this. London retail recovered more slowly from the pandemic, with valuations falling a further 6.7%. Since September, though, we've seen F&B demand rise noticeably across the London portfolio. One factor behind that decline is two agreed surrenders under Piccadilly Lights, which I mentioned earlier. We've taken the benefit of the surrender premium in our income, and we've revalued the assets on a vacant possession basis. The other major asset in the Central London portfolio is, of course, Piccadilly Lights, where the value has risen as brands commit to taking space, recognizing the global reach of this iconic landmark. The pace of decline in the regional retail portfolio slowed markedly over the period, with clear signs of stabilization in the second quarter. That stabilization reflects better trading performance for our occupiers and a reduction in our vacancy, which has supported the release of the COVID provisions and only a modest yield expansion.

Valuations for our regional shopping centers dropped 4.1%, which mirrors a 1.8% fall in like-for-like rental values along with 16 basis points of yield expansion. Outlets did better — valuations rose 1% as sales and occupancy came back after lockdown, and sales now sit consistently above 2019 comparatives. Our urban opportunities portfolio is mostly made up of retail assets we intend to redevelop. Those assets are valued today on an existing use basis, so they track the broader sentiment on retail valuations. This portfolio's value declined 3.4%, driven both by rising vacancy rates in suburban London shopping centers and by the effect of our vacant possession strategies. Our subscale segments combine hotels, leisure, and retail parks, and overall value there grew 5.9%. Leisure has stabilized over the last six months, and our assets in that area rose 4.2% in value. That reflects a mix of yield compression, the release of the COVID allowances, and two significant re-gears and lease extensions with Snozone. Retail park valuations climbed 15.6%, with more than 100 basis points of yield tightening, which reflects how quickly the investment market has recovered. We took advantage of that and sold two retail parks during the period at 12% above their book value.

With the market in our subscale sectors continuing to get stronger, we’ll keep disposing of those assets confidently as time goes on. On this slide you can see the details of our London development pipeline, where four schemes are underway, totaling 1 million sq ft, with a current market value of GBP 931 million. Completing these projects will cost roughly GBP 467 million, and we’ve also set out our yields on market value and on cost to complete. Compare that with prevailing London office yields and you’ll see we expect further development profits as these schemes finish, lifting our total returns. We have the potential to invest about GBP 440 million in two consented schemes: Timber Square and Portland House. A third scheme, Red Lion Court, is in the design and planning phase. Over the first six months of the year we’ve kept gearing conservative and liquidity strong, and our balance sheet is well placed to deliver our strategy. Our debt metrics remain strong, with good recovery in earnings and cash collections. Net debt has stayed neutral at GBP 3.5 billion, which, together with valuation growth, has brought our LTV down to 31.8%.

Liquidity remains solid for us, with GBP 1.6 billion of headroom available. As we laid out in last year's strategy review, our core LTV target range is 25%-40%. Taking into account today's environment and the activities we have underway, my expectation is that we keep our LTV percentage under the mid-thirties for the foreseeable future. We go on managing financial and operational risk prudently, and the way our funding is structured gives us flexibility at the right cost to deliver our strategy. Mark earlier reminded all of you about our sector-leading credentials when it comes to tackling climate change and about the creation of a GBP 135 million net zero transition investment plan. Clarity on our transition to net zero matters, so from here on I will report on how our investment is progressing towards a low-carbon business. Scope one and two emissions are covered by our plan, along with a proportion of Scope three. The chart at the bottom here shows the component parts of the net zero transition from now to 2030. Emissions last year came down to 52,000 tons from 80,000 in the 2013 to 2014 period. As you can see, the biggest benefit comes from the grid continuing to decarbonize. Our GBP 135 million investment complements that in two ways. First, by swapping the existing boilers for electrical alternatives, such as air source heat pumps.

The second involves lowering the amount of energy our buildings require by fine-tuning our systems. At Victoria Street, we have already piloted AI management, and the results have been encouraging. These steps should cut our carbon emissions by 9,000 tonnes. Naturally, we are working together with our occupiers so that their energy use comes down as well. Taken together, these measures will bring down the energy intensity of our buildings consistent with best practice CRREM pathways and minimum energy efficiency standards. That guarantees we meet our science-based targets of a 70% reduction in carbon emissions by 2030, measured against the 2013 to 14 baseline. To bring down embodied carbon, every new building designed from 2019 onward is net zero in both construction and operation. Our first net zero building, The Forge, will be completed next year. We will offset any residual emissions from developments using verified schemes consistent with the UK Green Building Council principles. Those are carbon credits that are permanent, unique, and incremental. Doing this is right for the environment, and it keeps a prime portfolio for our occupiers. It lowers the danger of our buildings turning obsolete, and it gets us ready for legislation that is coming. For our customers, this is going to become decision critical.

In summary, we're seeing a robust rebound from the pandemic, and how we operate is getting better. That gives us an encouraging view of earnings and confidence that recovery will keep going through the months ahead. Our development pipeline and asset recycling program are moving along nicely. We've tightened how we apply capital discipline, and our balance sheet sits in a good position for the strategic shift in our portfolio aimed at optimizing total return and delivering improved returns to shareholders. Thank you. I'll turn it back to Mark.

Thank you so much, Vanessa. So, back in October of last year when we unveiled the new strategy, we spoke about the purpose at the heart of our business. Sustainable places, connecting communities, realizing potential. In today's world, being a genuinely purpose-driven company matters enormously to success, and that importance keeps growing. I also mentioned back then that our strategy rests on four pillars: optimize Central London, reimagine retail, grow through urban opportunities, and realize capital from subscale sectors. At that point, those pillars were essential for setting our priorities. Twelve months later, with momentum gathering, we're able to define the strategy's key elements with greater precision and a bit more simplicity. Our focus now sits on three key areas: Central London offices, major retail destinations, and mixed-use urban neighborhoods. What ties these three together is how much a sense of place matters to their lasting success, and to the success of the areas around them. We work to create, curate, and activate places that inspire people, unlocking value for all our stakeholders. As I said earlier, having clarity on these focus areas has given us very good visibility of potential investment opportunities within each one, and together with our existing portfolio, that gives us a clear-eyed view of relative return prospects.

Better organizational agility and portfolio optionality mean we can respond to that insight quickly and with conviction. Earlier I went through the main pieces of how we see Central London. These themes are widely grasped and broadly consistent with what you'll have heard from peers on the listed side. Occupiers are showing robust demand for the finest space, with emphasis on quality, flexibility, and sustainability. Availability of such high-grade space is limited mostly by the scarcity of new speculative development in recent years stemming from Brexit or uncertainty around Brexit, and given the recent drop-off in construction starts, that tightness in supply is not likely to ease soon. Should occupier demand keep strengthening, especially on the back of well-being and sustainability priorities, rents might break past earlier cycle highs. Turning to investment, robust buyer appetite has pushed yields down, with further movement ahead, which signals values firming up. Investors are also climbing the risk curve in order to secure product. They're following so-called build to core strategies, which heightens competition for prime, widely marketed development sites and may compress development margins in those cases. Against that background, we'll keep leveraging robust investor demand to recycle capital from assets with limited value add potential into growth opportunities throughout the group.

We’re going to bring our committed pipeline into this market as it improves, concentrate on leasing it up, and keep optionality on other projects that can progress—so we’re able to react fast and firmly as occupier demand strengthens further. Past that, we’ll build more medium-term optionality within the portfolio, both by unlocking opportunities inside our existing assets and by pursuing acquisitions selectively where our competitive edge is clear. We’ll also keep scaling up our range of offerings, Myo and Customised, to sit alongside Blank Canvas, capture asset management upside by working closely with customers to meet their needs, and, of course, deliver our net zero transition investment plan so we consolidate the sector-leading position we hold in this area. You can see that in what we achieved during the first half and in what we’re focused on going forward. On asset recycling, we finished the sale of Harbour Exchange, and more disposals are planned for the second half. On development, we’ve carried out a full review of programs and budgets across our committed projects together with our contractor partners, which underpins our confidence in the position Vanessa laid out earlier. We have 1 million sq ft of committed development on site and are ready to move ahead with Timber Square and Portland House—another 675,000 sq ft of consented space—at the appropriate time.

Should the amount of space available on the market stay high through 2022, we'd probably act fast on those projects. For Red Lion Court, our expectation is to file a planning application prior to the close of this financial year. Turning to leasing, at Dashwood 2 of the 10 floors are now either let or have terms agreed, and momentum on the remaining ones looks good. Occupancy at Myo is bouncing back rapidly. In Victoria, it sits at just under 70% and is rising. At Dashwood, terms are now agreed on nearly a quarter of the Myo space, and demand continues to be strong. Rents at Myo match the plan. Beyond that, we have 250,000 sq ft of active interest in new space throughout our pipeline, and turning that interest into deals is plainly a priority for the second half. Regarding medium-term optionality, we reached agreement with Deloitte on a surrender of Three New Street Square and intend to convert the 40,000 sq ft there to Myo next year. There are further options for unlocking value creation potential right across our portfolio, along with a small number of possible acquisitions we are considering. The surrender at Three New Street Square together with the planned Myo conversion forms a key part of scaling up the range of offers we make to customers, as does the acquisition of Oval Works, where contracts have been conditionally exchanged.

We're also planning to bring Myo into Lucent, and that will take Myo to roughly 140,000 sq ft in total across the City, Midtown, West End, and Victoria. Having a flexible offering like Myo is also showing up positively in Blank Canvas leasing conversations, and we have clear plans to scale it past 300,000 sq ft over the next few years. Customized, our fit-out solution, could reach a similar scale. Our thesis for retail is still clear. The pandemic sped up structural trends and pushed us to a turning point far sooner than we would have reached otherwise. It's clear there's too much space. We estimate roughly 25% surplus, but we're increasingly confident it will be concentrated in inferior locations, since rents in prime locations are now at or around sustainable levels and brands are focusing their presence in those locations. If that turns out to be the case, then equivalent yields in the mid-sevens for prime retail look attractive. We have to have the right plan to make the most of the situation. We need stronger, more strategic relationships with brands and a deeper insight into shopper behavior. Our retail business needs to be oriented toward our brand customers and our shopper guests.

When it comes to retail investment, our focus has to be on winning locations, and we must stay mindful of the CapEx needed to deliver the right footprint, the right lineup, and the right guest experience. So how is that plan coming along, and what should you expect to see from here? Well, we've already highlighted the lower vacancy levels across the portfolio and the lettings that support ERV. There are some interesting trends sitting behind those figures. Strong brands are seizing the chance to take larger stores at these lower rents, which lets them display their broader ranges. Zara across several locations in our portfolio has been a good illustration of this. We've seen digital natives opening physical stores to complement their online operations. Amazon at Bluewater is the most prominent recent example. Bringing in leisure uses that enhance guest experience is producing the results we wanted. Introducing Gravity Active Entertainment at Southside, for instance, has pushed footfall levels above pre-pandemic levels, with a knock-on benefit for sales across the center. Our leasing pipeline is healthy, and we expect to build further on this momentum in the second half. On the organizational side, we've now restructured our retail business into three core teams: brand account management, guest experience, and channel, and we've hired senior retailer expertise to complement our existing retail property capability.

Our orientation has shifted: we're facing the market now instead of looking inward. The next step is making sure the new structure and the new ways of working are properly embedded, since executing our plans ahead depends on them. Across every asset we hold, our plans are clear, viewed through both portfolio fit and CapEx investment. Investment market liquidity is starting to improve, so over the coming couple of years we'll probably be active on both the buying side and the selling side. Mixed-use urban neighborhoods, as you know, is a growth area we flagged in last year's strategy under the urban opportunities banner. It acknowledges that the boundaries separating where people live, where they work, and where they spend leisure time are increasingly blurred. These projects can be complex, yes, but for Landsec they offer a clear chance to build genuine and sustainable competitive advantage. Given that our investment in this area started out very small, it's no surprise that our plan has been to accelerate it, both by speeding up our own projects and by chasing new opportunities to invest in mixed-use situations further along than our own. Because mixed-use projects are different in nature, we've also concentrated on adding the right skills to complement the capability we already have.

The past six months have seen solid progress. By the close of this financial year, we expect to have submitted a planning application at O2 Centre Finchley Road, and Lewisham will follow roughly nine months later. Consultation with the public at Lewisham begins very shortly. Even more important, buying a 75% interest in Media City shows that attractive investment opportunities aligned with our strategy do exist. It is an established, high-quality first phase delivering strong income returns alongside growth potential. Then there is a substantial second phase providing development optionality starting in early 2023. Our recommended all-cash offer for U+I adds complementary capabilities and gives us access to a high-quality pipeline of sizeable mixed-use schemes that are further along in planning than our own. Thanks to the clarity our strategy delivers, visibility of potential investment opportunities across all three of our focus areas is now much greater, and so is our understanding of how the return prospects of each compare. Alongside healthy portfolio liquidity and a more agile, decisive organisation, this allows us to put capital to work knowledgeably, with confidence that our choices ought to be accretive on a risk-return basis. That, in my view, is a core strength of the Landsec business. The graphic on the right aims to show this using what the market is telling us today.

Every return I’m talking about is unlevered and cap rate neutral. In central London, the prospective returns run from a mid-3s yield on prime long-let stock all the way to low double-digit IRRs on speculative development. Under the strategy we’ve set out, we’ll shift a bit to the right along that spectrum from where we sit today, which is weighted toward the long-let secure income end. In major retail destinations, we’re confident in the high income yield on offer and believe catchment dominant locations can get back to growth over the next couple of years. On that basis, returns ranging from roughly a 6% initial yield on outlets, through a mid-7s equivalent yield on prime shopping centers, to low double digits, with some allowance for growth, start to look compelling — particularly given the high income component of that return and the absence of development risk. A mixed use of urban neighborhoods can deliver a blend of income, rental growth, and development-driven returns across multiple years, with the range shown here — mid- to high-3s for core income through to low-teens development IRRs — being comparable to Central London returns, arguably at lower risk. Pulling together the different elements of our strategy and our view on returns, our plan for capital allocation and portfolio weighting is shown here.

Over time, we anticipate a slight decrease in our London weighting, but alongside that, we'll also be shifting somewhat further out on the risk spectrum as we seek additional opportunities for value creation, so as to capitalize on our competitive advantage. London, though, will still account for the bulk of our business — maybe 55%-60% over the medium term, versus 69% at present. Our investment in regional retail might rise somewhat, to roughly 20%-25% in time from 16% today. That said, our planned and underway disposal of retail parks — about 4% of our portfolio at present and labeled subscale in this chart — means the actual overall change in retail weighting will be smaller than it appears. We do intend, though, to focus on catchment-dominant locations that we believe will be long-term winners. Our planned CapEx investment in mixed-use urban neighborhoods across the next few years should mean those projects account for 20% to 25% of our portfolio in the medium term. It is still our intention to exit subscale sectors — retail parks, leisure and hotels — over time, but to do so in a manner that crystallizes proper value for shareholders. Bearing in mind how we view returns for each segment, we believe this strategy can deliver mid to high single-digit returns on equity through the cycle — meaning, before any reflection of cap rate movements.

That's divided roughly evenly between income and growth. What matters to note, naturally, is that our pipeline visibility has gotten materially better during the last six months. Combined with solid portfolio liquidity, the route to delivering on this strategy is clear. To sum up, during the last six months, the business has accumulated genuine operational and strategic momentum as we come out of the pandemic. A positive business performance, with a 3.7% total return. A business that is now more agile and running at a quicker pace, and one with a clear view on relative value and capital allocation. A business with clarity of direction and momentum. Thank you, ladies and gentlemen. I will now open things up to Q&A. I'm going to start with questions in the room. We have a couple of handheld mics. If I could ask you, when you raise your hand, just to wait for the microphone so that we can capture the question on the webcast. I will then go to the conference call, and after that lastly to the webcast. Chris.

Hello.

My apologies — I neglected to share that.