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

Good morning, everyone. Thank you for joining us for Landsec's annual results presentation covering the year to March '22. On the agenda: I'll begin with a quick look at where the business stands and the main highlights from the year, then walk you through each of the 3 pillars of our strategy in greater detail during the operational overview. Vanessa will follow with the financial review and explain what delivering our strategy should mean for returns. After a brief summary and outlook, we'll open the floor for your questions. As you'll remember, back in October 2020 we launched our updated strategy — that came before vaccines existed and while we were still deep in the pandemic. Notwithstanding today's economic uncertainties, I'm glad to report that momentum across each of our key markets has come back strongly since that point, and over the past 12 months we have achieved meaningful progress on our strategy. London is still a world-class city that will keep drawing large numbers of visitors, new businesses and international talent. And life has returned, with streets, bars and restaurants often as busy on many days as they were before the pandemic.

When it comes to Retail, the pandemic drove a major speeding up of the move away from bricks-and-mortar stores toward online purchasing, along with the related repricing of rents and capital values. That said, we're seeing growing evidence that in some instances this trend may have overshot, and that genuinely prime retail locations have a favorable future. Meanwhile, in mixed-use, there's still a strong structural demand for more sustainable neighborhoods that serve communities' evolving needs and the ways in which we live, work and enjoy our leisure time. Given this background, Landsec is positioned well for growth. Because our portfolio is high quality, we're well placed to satisfy rising customer expectations regarding sustainability, quality and the amenities provided. Thanks to our successful capital recycling, we can rotate capital into opportunities offering higher returns, while also ensuring our balance sheet stays strong. And we've now put together a Central London and mixed-use pipeline in which we believe we can invest roughly GBP 3 billion of CapEx across the next 5 years, targeting a profit on total costs of approximately 20%. Consequently, we have a clear chance to grow our returns substantially, with about GBP 120 million of upside in income from recycling capital into our pipeline, and a target of delivering on average a mid-to-high annual return on equity over time.

Looking at this year, after factoring in some allowance for the capital recycling we have planned and ongoing, we anticipate EPRA EPs will increase at a low-to-mid single digit percentage rate, which supports additional dividend growth from here. Consequently, we are in excellent shape and look ahead with confidence. Moving to how we performed during the year. This slide effectively captures the positive momentum built throughout the business. Leasing in London hit a record level this year, showing the considerable interest in our high-quality assets. Our committed pipeline stands at 56% let, with solid interest in the remaining space at rental levels above ERV. We have also kept recycling capital out of mature assets at prices significantly above book value. In Retail, demand for our prime centers has recovered strongly, with GBP 29 million of lettings signed or in solicitors' hands, averaging 2% above ERV. After 5 year of declines, valuations for our shopping centers turned the corner during the second half, and we bought an additional stake in Bluewater — one of the U.K.'s very best retail destinations — at an attractive 8% plus yield. Lastly, in mixed-use, the U+I and MediaCity acquisitions not only doubled the size of our pipeline and added complementary skills, but also pulled forward the potential delivery timeline, since both could begin on site within the next 12 months.

So because of that, we can now see clearly the potential for mixed-use to expand to 20% - 25% of our portfolio over the years ahead. Moving quickly to our financial results. Our robust operational performance and the strategic choices we've made are evidently generating returns. Our total accounting return rose to 10.5%. EPRA NTA per share was up 7.9%, with growth accelerating to 5% in the second half. Earnings per share climbed by 42% as trading conditions returned to normal and like-for-like income growth was positive in every segment, while our dividend is up 37% and comfortably covered 1.3x by earnings. And our balance sheet stays strong, with LTV remaining below the mid 30% even after our investment in future growth opportunities during the year. Now while all of this is, of course, positive, to be truly successful over the long-term, we know it's essential not just to concentrate on financial returns, but to ensure we deliver those returns in a sustainable way. And this has been a focus for Landsec for a long time, as we were, for instance, the first commercial real estate business in the world to set a science-based carbon reduction target back in 2016. And last November, we were the first U.K.

We're a REIT that will lay out a net-zero transition investment plan with full costing. Taking this further now, we've recently introduced the "Build Well, Live Well, Act Well" framework — our new approach that guides each of our sustainability initiatives individually and ties them clearly to our purpose. Under that, we've now committed to cutting embodied carbon in development by 50% by 2030, down to under 500 kilograms per square meter; to putting GBP 20 million into our Realising Potential Fund so that social mobility improves both in our industry and in the places where we invest; to empowering 30,000 people toward the world of work by 2030; and to ensuring every one of our colleagues has individual objectives tied to remuneration that are connected to delivering these sustainability ambitions. These targets are ambitious, and we can't achieve them alone, so we'll keep working alongside our stakeholders and our supply chain to make sure we get there, and to ensure Landsec remains at the forefront of driving change in our industry. With that, I'll now take you through each of our 3 business units in a bit more detail, covering for each one: the market, our operational results, and what you should expect from us next.

Turning to Central London first. Demand has bounced back strongly, and the space currently under offer is still above the 10-year average — which, of course, is a key forward-looking signal for take-up going forward. The future of the office is still much debated. Some occupiers might shrink their footprint to adapt to new working patterns, yet quite a few others are expanding as their businesses grow. And a number of large employers that are presently headquartered outside London are now actively hunting for space in the capital. After all, it's obvious that these days the office has to deliver far more than benches and desks if it is to draw in key talent. So although there's no single pattern when it comes to how much space companies are after, the kind of space they want is becoming clearer and clearer. Beyond the lively amenities that make places appealing to people, practically every occupier is now focused on sustainability, with some also seeking greater flexibility. Market vacancy as a whole is still elevated, but green, modern space fitting those requirements is in fairly short supply. That holds particularly true for the West End, where more than 60% of our completed office portfolio sits.

Roughly 80% of the vacant space throughout the market is second hand. Consequently, for the coming year we anticipate prime office ERV growth landing somewhere between low and mid-single digits. And with investment demand still elevated, we see yields staying broadly flat, assuming there's no significant additional rise in real interest rates from this point. Now, with customers increasingly focused on quality and sustainability, Landsec holds a very strong position. Close to half our portfolio was either constructed or substantially redeveloped over the last 10 years. 44% already carries an EPC A or B rating, which is roughly 3x the market average. Our results demonstrate the impact of this, since we've enjoyed a record year for leasing, with GBP 63 million of rents signed, on average 4% ahead of valuers' assumptions, plus a further GBP 6 million in solicitor's hands, and that's 13% above valuers' assumptions. We completed a number of significant lease regears over the year, for instance with Deloitte in New Street Square and with several occupiers throughout our Victoria estate, which underlines our strong customer relationships and the appeal of our assets. As a result, notwithstanding a modest rise during the year, partly driven by the finished refurbishment of Dashwood House in the city, which is now in lease-up, vacancy across our office portfolio stands at half that of the wider London market.

In London, our retail, leisure and F&B properties—the ones that bring vibrancy to a lot of the offices sitting above them—took a heavy blow during lockdown, but demand has come back now that workers and tourists are returning to the city. As a result, leasing activity has begun to pick up too. Going forward, we've built considerable optionality into our pipeline. Competition for sites is still intense, so we're glad to have landed 2 new opportunities through creative off-market style transactions. First, the U+I acquisition gave us a consented 200,000 square foot scheme, Liberty of Southwark, just 2 minutes' walk from London Bridge Station in Southwark. Second, the lease regear with Deloitte that I mentioned earlier—not only did it drive a significant value uplift across our New Street Square estate, it also unlocked a longer-term redevelopment opportunity of roughly 300,000 square foot at Hill House. Altogether, our total potential pipeline now sits at 2.8 million square feet, equal to about 50% of our present portfolio. Of the 1.1 million square feet that is on site and due to complete within the next 13 months, 56% of ERV is let, with good interest in the space that remains. And through design innovation and close collaboration with our supply chain, we've managed to cut embodied carbon on these projects by more than 20%.

We’ve recorded a 3% rise in estimated final cost, along with delays of a few months on our committed pipeline over the year. However, 97% of costs are fixed at this point. And judging by the leasing negotiations currently underway, we anticipate that higher ERVs will more than offset this. We keep flexibility regarding our future pipeline. Yet assuming demand holds up, we expect to launch as many as 3 new schemes in the year ahead, at an attractive average 6.4% yield on cost. Moving on to the rising demand for flexibility and for offerings that are partly or fully serviced. We continue to develop our 3 office products: Blank Canvas, our headquarters type or CAT A space; Customised, our fitted out and connected offer; and Myo, our flexible, fully serviced product offer. Our first Myo location is 98% let. And the second one, which we opened during the year, is already 64% let, with occupancy climbing. We intend to open Myo in a further 4 locations, amounting to roughly 170,000 square feet over the next 24 months, with additional opportunities identified beyond that. And on the basis of an assumed average 85% occupancy, we target net income for Myo after costs, after depreciation, at around 20% above the equivalent Blank Canvas rents — a meaningful premium.

We anticipate additional expansion in our Customised segment, which serves the rising need for completely furnished options. Thus, thanks to the range of products on offer, our premium existing properties, and our sizeable development pipeline, we're in a strong position to capitalise on robust appetite for adaptable, sustainable, contemporary space in lively areas. Turning next to Retail, where occupier interest has rebounded markedly during the last 12 months. Among numerous top brands, it's now evident that digital and brick-and-mortar sales channels are entirely linked. Particularly in recent months, once all COVID restrictions were removed, the divide between online and in-store purchasing shrank considerably, with internet sales decelerating while store sales carried on and keep on improving. For direct-to-consumer brands, customer acquisition costs, or CAC, have risen 60% across the last 5 years. Per Shopify — a company that expanded swiftly by giving clients the infrastructure required to sell online — omnichannel is going to be essential for any direct-to-consumer business's future expansion. According to them, confronted with the fact that paid social media advertising can't be depended on for growth indefinitely, digitally native brands have begun moving into physical retail to bring down their customer acquisition cost.

That old saying—CAC is the new rent—has flipped: now rent is the new CAC. That isn't to say store portfolio rationalization has run its course, since there's still a substantial amount of excess retail space, and today's inflationary pressure on retailer margins might even speed up rationalization of the marginal tail end of brands' portfolios. What this means is a growing emphasis on fewer, bigger and better stores in the locations drawing the highest footfall, and that's exactly where we're now seeing rents stabilize and occupancy increase. That rising confidence in income has begun to fuel a recovery in investment demand, with retail investment volumes in 2021 reaching their highest level since 2017. A lot of that, naturally, came from retail parks, where yields compressed around 200 basis points in just over a year. So prime shopping center yields, as we see it, now provide a very attractive risk premium, and for the best assets we expect they may well start to come in over the course of the next year. During the year, we restructured and strengthened our Retail team so it focuses more on growing our brand relationships and guest experience, and less on traditional asset management.

We've also cut our Retail leasing agency roster down from 31 to 5, and all of that makes doing business with us simpler for brands. Results are already starting to come through from this new approach, since across the year we've seen demand pick up from a broad range of customers. Relationships with existing customers are expanding, with stores opening in new locations like Zara in Cardiff and Mango in Bluewater. Together with our brands, we've upsized existing stores, for example H&M in Leeds and Nike at Gunwharf Quays. We've also built new relationships with digital native brands, and we've seen brands move into our assets from weaker nearby locations in a flight to prime, such as Nespresso and Space NK in Leeds. Our food and leisure offer has been expanded too, with examples being The Ivy Asia in Cardiff, the Big Easy in Bluewater, and the world's first official Formula 1 competitive socializing concept signed at the One New Change. Occupancy rose 170 basis points as a result, reaching 93.2%, and we expect further growth this year. As you may remember, 12 months ago we said we believed prime rents were getting close to sustainable levels, and our results have confirmed that. We signed GBP 20 million of lettings at an average of 2% above ERV, and a further GBP 9 million of rent sits in solicitors' hands at an average of 3% above ERV.

While footfall remained 19.6% below pre-COVID levels, like-for-like Retail sales finished the year 1% ahead, and that sales momentum has carried through the last month. So even with near-term economic headwinds, this robust operational showing only strengthens our confidence in the durability of income and our belief that prime retail destinations are capable of returning to growth. And that belief isn't built merely on the idea that retail as a whole has been oversold and will sooner or later correct — it rests on the investments we've made in our team over the year, which now deliver a genuine competitive edge for us. We'll keep investing as well in developing our offer through non-retail uses — office, F&B or leisure — which we expect to rise from roughly 18% today to roughly 25% within a few years. Even so, the gap between total sales across our shopping centers, which have fallen about 10% over the last 5 years, versus rents, which have fallen about 35%, and values, which have fallen about 65%, is striking. In our view, that creates an appealing opportunity — exactly what we seized this year by acquiring an additional stake in Bluewater at an attractive 8.25% equivalent yield.

So we're selectively looking at additional opportunities consistent with our belief that major retail destinations could rise to 20% to 25% of our portfolio, up from 16% at present. Moving now to pillar three of our strategy: mixed-use urban neighborhoods. When we launched our strategy in late 2020, this was a fairly new area for Landsec, but over the course of the year we've made substantial progress. Long-term growth trends keep supporting the market, whether through demographic growth that drives residential demand, urbanization, or the way cities are evolving, with the boundaries between places to live, work and play becoming ever more blurred, and a rising emphasis on sustainable space that genuinely delivers for its local communities. Outside London, the government's leveling up agenda plainly provides additional support. Even setting that aside, the chart on the right shows economic growth in Manchester, where we invested in 2 major projects during the year, has matched London across the past decade — or rather, the decade before the pandemic — and in fact was well ahead in the 5 years right before the pandemic. What's more, mixed-use urban projects provide an appealing blend of income returns, development upside and medium-term growth, particularly in residential, with a reasonably balanced risk profile thanks to the ability to phase CapEx commitments, the diversity of uses and the range of locations.

As I said, we achieved significant progress over the year, since the U+I and MediaCity acquisitions meant that we not only doubled our potential pipeline but also sped up delivery of that pipeline, as both projects arrived with planning consents already in place—unlike our existing urban opportunities, where we advanced well during the year but which sit somewhat further back in the planning process. Through the U+I acquisition we gained 5 key projects across London, Manchester and Cambridge, 2 of which are near-term, with the potential to invest roughly GBP 400 million to GBP 600 million over the coming 5 to 6 years. We are progressing strongly on monetizing approximately GBP 200 million of the business's non-core assets, with GBP 61 million already sold or exchanged at an average of 10% above book value, and another GBP 26 million of disposals currently under offer. The U+I acquisition additionally brought us valuable skills and experience, and we are now integrating our own schemes and people with those of U+I to create one new mixed-use regeneration business. Our second key acquisition was a 75% stake in MediaCity in Salford, Greater Manchester—Europe's largest purpose-built creative tech and media hub—which offers an attractive income return on the completed first phase and the potential to invest more than GBP 400 million in new residential, office and retail space across the second phase of this highly successful project.

The chart on the right illustrates how this, together with the projects we already have, could result in mixed-use growth of between 20% and 25% of our portfolio over the coming years. All told, our mixed-use pipeline currently spans roughly 7,000 homes and about 3 million square feet of commercial space, with the potential for around GBP 1.5 billion of CapEx investment across the next 5 years. Our target IRRs sit between 10% and 14%, with our London schemes at the lower end of that range and regional schemes at the upper end, plus a target profit on total development cost of around 20%. We intend to begin on site with the first phase of Mayfield later this year, and MediaCity early next year, and, subject to planning, with the first phase of O2, Finchley Road, later in 2023. As you can see in the bottom right, our overall pipeline now represents a significant opportunity for long-term growth. And because we can phase investments across a range of projects, we are able to generate a relatively repetitive stream of development returns in the years ahead, whilst retaining flexibility to adapt to shifts in demand. And now I'll pass you over to Vanessa, who will take you through our financial results.

Thanks, Mark, and good morning to everyone. It's a pleasure to be presenting the first full year results for our business, which show the momentum we have in delivering our strategy and the positive operational performance. Let me begin with the headlines. We've had strong financial results for the year, and we've delivered a material increase in EPRA earnings, which rose 41%, driven by positive leasing results and trading conditions normalizing after the pandemic. Reflecting that earnings growth, our dividend for the year is up 37% to 37p, and we expect earnings and the dividend to grow further over the next 12 months. We delivered a strong total accounting return of 10.5%. EPRA net tangible asset value per share is up 7.9% for the year, and that follows a 5% increase in the second half. This reflects the growing momentum across each part of our business and the actions we're taking to drive value. At the half year, I shared our plan to reduce carbon emissions, and I'm pleased to say we remain on track to meet our long-term targets. However, the year-on-year changes in carbon emissions and energy intensity are distorted by COVID. As during the prior year lockdowns, much of our portfolio was either closed or hardly utilized.

Relative to the 12 months that ended in March 2020, our carbon emissions came down by 10 percentage points, and energy intensity likewise fell by 15 percentage points. Now moving on to EPRA earnings. Those rose GBP 104 million, reaching GBP 355 million, and the driver was a GBP 105 million lift in net rental income. I'll walk through the gross rental income movements in a moment, but the main factor behind the net rental income change is clearly the drop in bad debt, since trading conditions have returned to normal following the prior year's lockdowns. Rent collections have recovered to where they stood before COVID, with 96% of the March quarter rent collected. This also speaks to a more proactive, customer-focused way of going about rent collection over recent months. And less than GBP 1 million of rent was affected by insolvencies or CDAs across the year. Having said that, the pandemic's effects continued to weigh materially on costs. Increased vacancy in the prior year pushed void costs higher, adding roughly GBP 15 million, while greater leasing activity contributed GBP 8 million, reflecting our success in rebuilding occupancy this year. And bear in mind that the prior year also gained from approximately GBP 10 million in cost savings tied to temporary closures of our centers, plus a GBP 4 million one-off provision release.

Taken together, the pandemic's effect on our EPRA cost ratio for this financial year came to roughly 3% to 4%. As occupancy continues to be rebuilt, void and letting costs will normalize, so over the next 2 years we expect our rental margin to grow to around 90%. Admin costs rose marginally, and the savings achieved from the business change activity during the year were offset by the higher cost of the U+I acquisition. Looking ahead, we see further opportunities for cost savings. In the current financial year, we expect admin costs to be broadly stable, before reducing the year thereafter, and that's despite inflationary pressure. We're actively managing our cost base, and over the next 2 to 3 years we expect to achieve an EPRA cost ratio reduction towards 20%. Moving on to gross rental income. This was up GBP 17 million for the year, with positive like-for-like growth across every part of our investment portfolio. Retail and subscale sectors saw the highest growth, as both were the sectors most heavily impacted during the lockdowns and the restrictions of the pandemic. Like-for-like income in Retail was up 4.5%, principally driven by the increased turnover-related income and variable income from car parking, both of which reflect the strong bounce back in trading.

In our subscale segment, like-for-like income rose 13.8%, driven mainly by hotel income and the turnover-related leases. Gross rental income gains from acquisitions were offset by the loss on disposals. Income from our future development assets dipped slightly as we keep advancing our vacant possession strategies. Over the next 12 months, we anticipate like-for-like income will be positive overall, with offices and subscale sectors rising and Retail broadly flat, since any historic overrenting is offset by occupancy growth. This slide breaks down the movement in our portfolio value, which rose GBP 409 million. Our valuations fully reflect the cost needed to reach an EPC B rating by 2030. As you can see, momentum picked up in the second half, with a 2.9% value uplift as virtually all sectors posted value growth. Our Central London portfolio rose 3.7% for the year, with yields stable. 4 key drivers stood behind this. First, West End office ERVs climbed 4%, reflecting our strong leasing activity during the year, which drove rental value growth. Second, city office values increased 5.6%, driven principally by the impact of the 15-year lease regear we signed with Deloitte for 478,000 square feet at 1 New Street Square.

Third, London retail — that includes Piccadilly Lights — posted a 5.3% rise in values during the second half, with footfall still recovering as tourists and workers return to the city. Fourth, London office developments gained 4%, mainly reflecting the upside on 21 Moorfields. Retail values ended the year essentially flat, and that comes after a 1.7% increase in the second half, reflecting our positive operational momentum, with occupancy growing and leasing ahead of ERV. After several years of decline, shopping center values turned a corner, rising 2.5% in the final 6 months, as income stabilized and investment activity is starting to come back. Our mixed-use development assets fell 6.5% for the year. 3 shopping centers account for most of this value, and they're valued on their existing use. The decline reflects the shorter leases, as we work towards vacant possession. Finally, our portfolio of subscale assets rose in value by 12.9%, or GBP 170 million, which vindicates our decision not to sell in the short term and only monetize after recovery in values. So overall, a positive result with growing momentum in the second half. The growth in valuations and the strength of income are the key drivers for our strong total accounting return of 10.5%.

On the right-hand chart, you can see how EPRA NTA has risen, with a large share of that GBP 409 million valuation surplus coming from active management in 3 key areas: leasing and development work, our profitable method of recycling capital, and our strategic choices. Per share, that meant EPRA NTA rose 7.9% over the year. We are proposing a final dividend of 13p per share, taking the full-year dividend to 37p. That fits our policy of covering dividends 1.2x to 1.3x through EPRA earnings. When we did our strategic review in late 2020, we stated we would aim to dispose of roughly GBP 4 billion of mature London office and subscale-sector assets across the following 6 years. 18 months into that plan, we remain on track, having sold GBP 1.1 billion so far. Over that same stretch, we have put GBP 1.4 billion into acquisitions and CapEx, and every one of those investments should produce a materially higher IRR than the mature assets we divested. Since March last year, we have disposed of GBP 445 million of assets, on average 13% above book value, including the GBP 195 million sale of the Strand that we agreed last week.

We are in active talks about additional disposals in London, consistent with our strategy of recycling capital out of mature assets and into growth areas. And we keep watching for the optimal moment to monetize our GBP 1.5 billion of assets in our subscale sectors, since we anticipate further recovery. Our plan continues: sell GBP 3 billion of assets over the next 4 years and recycle the proceeds into a profitable pipeline and selective acquisitions. Our balance sheet stays strong, which keeps supporting delivery of our strategy. LTV rose modestly during the year to 34.4%, reflecting our investment in future growth opportunities. That sits comfortably within our target range, though I expect to stay below the mid-30% level over the medium term. The Strand sale after the period end will cut our LTV by 1.1 percentage points. Our planned disposals will lower net borrowings over the next 12 months, and we will apply the proceeds to repaying operating debt. Consequently, the share of fixed debt will rise significantly from the current 70%. Committed CapEx of GBP 378 million is more than covered by GBP 1.1 billion of available facilities, and with just 18% of our debt maturing in the next 3 years, and an average debt maturity of 9.1 years, our overall financial position remains very strong.

Back in November, we became the first U.K. property company to roll out a fully costed plan for net-zero transition investment. That plan supports our science-based carbon reduction goal and makes sure the whole portfolio carries an EPC B rating or better come 2030. As I said earlier, a substantial share of that investment is already baked into our valuations. Since then, we've made solid progress and laid out clear targets for the year ahead. Our review of building management systems turned up opportunities for meaningful energy savings. So we're implementing system optimizations across the office portfolio right now, while continuing to advance our machine learning and AI technology. Because our customers account for a significant portion of the energy consumed in our buildings, we've partnered with 15 key customers to bring down overall consumption across the portfolio. This year we'll extend that effort to another 10 customers, and together these 2 groups account for more than 40% of our customers' energy consumption in the office portfolio. On decarbonizing heating, we've finished feasibility studies on 5 buildings, which pinpointed potential energy savings of 20% to 30%. We're now developing the detailed designs to move this forward.

44% of our offices already hold EPC B or better, and as Mark mentioned, that's about three times the market level. Every one of them is rated EPC B or above, consistent with the 2023 lease regulation. Retail works differently, since EPC ratings there are assigned to each individual unit. So we're focused on ensuring the small number of units still remaining each carry an individual EPC rating of E or higher. To sum up, we're positioned well. I have confidence that over time our strategy will produce a mid to high single-digit yearly return on equity, divided broadly and evenly between income and growth. The chart on the right gives an updated picture of what I showed at the Capital Markets Day earlier this year. Net investments made during the past 6 months have already lifted annualized rental income by GBP 32 million. And by recycling capital out of mature London offices and subscale and subscale sectors into our pipeline, we could generate another GBP 90 million of growth over the medium term. As we keep improving operational performance, we have the potential to increase income by at least GBP 120 million, excluding any further market growth, while keeping our LTV below the mid-30s.

So as we line up what we're investing with what we're selling off, we anticipated that earnings per share would rise by a low-to-mid single digit percentage and push dividends higher still. To put it plainly, genuine momentum has been built, and our strategy continues to move ahead. With that said, Mark, I'll turn things back over to you.

Thank you so much, Vanessa. I'll close now by summarizing three things: what you should expect from us going forward, the conditions we're currently working within, and our outlook ahead of Q&A. As this morning's remarks will have made clear, our attention is firmly fixed on generating growth across all 3 areas in which we operate. We can see plainly the returns available from both our current portfolio and possible new opportunities, and we have room to move our capital across a wide range of risk-return profiles. Because of that, our capital allocation is becoming more decisive, and we intend to make full use of our considerable expertise and capabilities. In London, we plan to launch as many as 3 new developments during this year. We'll keep recycling capital out of assets that are more mature, and we'll expand our flexible office offering further. On the Retail side, our new team is now in place, and we'll carry on building on the positive momentum. We'll deepen our brand relationships and restore occupancy, and we'll look selectively at investment opportunities in which our know-how can generate growth. Lastly, in mixed-use, we're targeting a site start on our first project later this year, plus another 2 the following year, as we begin delivering the appealing combination of income, growth and development upside that we anticipate from this part of the business.

Through all of this, we're staying focused on keeping discipline around capital and protecting the strength of our balance sheet. And even with the economic headwinds we face right now — inflation sitting at a 30-year high and interest rates climbing sharply — our strategic focus means the business is resilient. In the London office market, construction costs are going up, rising roughly 6% over the year. But when it comes to our near-term pipeline, we expect ERV growth to more than offset that. Rent is still a small piece of the overall operating cost for the average London occupier — under 1/10 of salary costs. There's a shortage of sustainable, high-quality space that's fit for today's key talent. And the ERV growth needed to keep development profits stable comes to half or less of the headline growth we've seen in construction cost, since land values cushion the impact. In retail, margin pressure is felt online just as much, if not more, than in physical space, and prime retail rents have already reset to a far more sustainable level. So the flight to prime that we're already seeing will likely speed up as pressure mounts on marginal stores. And we're only beginning to see the upside from the new customer-orientated approach taken by our restructured retail team.

At the same time, wage inflation plus the excess savings of about GBP 170 billion that households accumulated through the pandemic ought to give consumer spending a bit of a lift. On capital flows, we keep redeploying money out of older assets with lower yields, yet on the whole, prime yields in the sectors where we operate continue to present an appealing risk premium when set against real interest rates. Compared with other asset classes, real estate also delivers competitive real returns, and that does, and should, keep supporting the heavy flow of capital into the sector and hold up valuations. Lastly, our LTV is low. Our exposure to interest rates is limited, with nearly 75% of our debt fixed after the recent Strand sale, and under 20% of our debt comes due in the coming 3 years. So to sum up, we've generated genuine momentum and sit in a strong position for growth ahead. More active capital recycling, combined with leverage of our expertise, is poised to produce meaningful income growth and back our goal of a mid to high single-digit annual return on equity over time. We're firmly on track for that, and we expect to divest another GBP 3 billion of mature London offices and assets in subscale sectors over the years ahead.

There's also a clear opportunity for us to put that GBP 3 billion back to work in our secured London office and mixed-use urban pipelines across the next 5 years, which would meaningfully lift our overall return on this capital. We can achieve all of this while keeping our capital base strong, as we balance disposals against reinvestments to reposition the portfolio. With that, I'll now open it up for Q&A. First, I'll take questions from the room. After that, I'll move to the conference call facility, and then lastly, I'll pick up any remaining questions that arrive via the webcast facility. <<operator_script>> The question is in the middle here.

Robert Jones here from BNP Paribas Exane. I've got one topic on flex office and another on construction cost inflation. So on flex office, Mark, you obviously mentioned that you want to expand the flex office offering going forward. Could you share some figures on what Myo's occupancy currently stands at? I can see you're obviously aiming for 20% above the kind of traditional Blank Canvas net rent at 85% occupancy, but I'm curious what the present occupancy is for the Myo space that already exists? And then second, related to that, Myo as a share of the portfolio, including the 4 new locations you're planning, what percentage does that represent — are we talking 4%-5%? Obviously, that's across the next couple of years. Would you like to take the construction cost questions now or in a minute?

Please continue.

Now, on construction cost inflation—as you mentioned, for offices across the London market generally, you're seeing 6%. Do you have a number for what you expect going forward, and how long construction cost inflation might stay elevated? Also, I believe you mentioned 3% for Landsec, since obviously you've locked in some of those costs going forward. How long can you keep seeing a smaller impact from construction cost inflation on your portfolio compared with the broader market?

Let me give you a little more detail on Myo. We have 2 assets in operation right now. The first one we opened at 123 Victoria Street in Victoria. It's 98% let, so effectively full. The rents we achieved are actually running ahead of what our business plan had projected for that location. And encouragingly, I think, we saw that hold up through the pandemic. During the lockdowns, occupancy bottomed out somewhere around 55% to 60%, and then it came back very, very fast. The second asset is Dashwood in the city, where 4 floors of the refurbished Dashwood House are dedicated to Myo. That building was completed in the summer of last year. Given how that timing lined up with lockdowns and the return to the office, lease-up was fairly slow at first. It sped up from September until Omicron hit us in December, then picked up again in January. As things stand now, it's 64% let, and leasing is moving quickly from there. And once again, the rents we're getting are ahead of our overall business plan. So I think what the flex offer is showing us is clearly very strong demand, and that translates into rapid lease-up.

I think we should view it as a key element of the range of offerings we're able to give office customers. So, for instance, we have — so 170,000 square feet of identified Myo expansion opportunities. We took back a 40,000 square foot building in New Street Square, for example, which we converted to Myo with a roof terrace. I've talked with 3 or 4 of the major occupiers elsewhere in New Street Square, and all of them regard the presence of a flexible offer that they might use for specific project space or particular events as a net positive for them being located in New Street Square. In Victoria, we've had people occupy or take space in Myo while they've been expanding, while we're getting other space ready for them to move elsewhere within the estate. So I think the real opportunity in flex is to see it as one of a range of options, which means businesses like Landsec can offer a full range of options to occupiers. And flexibility in the broader sense, I think, is going to be something they're looking for. With the 170,000 square feet, that would take us to around 250,000 square feet.

At that point, space terms represent roughly 5% or so of the portfolio. If you consider where we believe demand's scale might land, it could easily be triple that over time. However, we've zeroed in on 170,000 square feet right now since that's what we can pinpoint and know we're able to deliver from our pipeline across the next 12 to 24 months. On your build cost inflation question: we cited a figure reflecting essentially what we've observed across the past year, roughly 6%. At present we're looking at — and this really speaks mainly to London offices, where we're most active right now with our tenders — our expectation is that we'll likely witness something comparable across the next 12 months. That 3% cost growth in our secured development pipeline stems less from inflation and more from spec or program changes to on-site projects. All of those sit effectively under fixed-price D&D contracts. So price increases usually tie either to risk items where we're carrying the risk, or to upgrade specification changes. But roughly 6% is what we're kind of planning and expecting to come through.

At this moment, what's genuinely fascinating is observing the dynamics inside the supply chain and the forces behind that inflation. Energy costs, of course — a major element in steelmaking; in my view, about 1/3 of the expense of making steel comes down to energy. As a result, anything tied to steel or concrete is exerting considerable pressure on material prices. We've also witnessed tightness in labor. In the construction sector today, I believe there are 6% fewer jobs than there were 3 years ago, in 2019. Brexit has clearly played a role in that. The effect is more acute, candidly, in London than it would be in the regions. So, for instance, in Manchester we're seeing less labor pressure, since there was less net migration out of the workforce in the regions. What we're discovering, though, is that contractors are, first, being somewhat more cautious with their margins — adding a bit more margin to hedge their buying risk. Beyond that, we're seeing them be selective about whom they choose to work with, since they recognize they could be exposed to pricing risk in those contracts. So large-scale developers with a proven track record and, crucially, a pipeline of possible further work that firms would see themselves positioning their businesses toward — that, I think, places us in a better-than-average position, so to speak.