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

Good morning, everyone, and thank you. Welcome to the presentation of Landsec's 2022 half year results. As usual, on the agenda: I'll begin with a quick look at where the business stands and the main highlights from the half year, then walk you through each of the three pillars of our strategy in more depth during the operational review. Vanessa will follow with the financials, and after a brief summary, we'll open things up for questions. Since our full year results in May, global economic and financial market conditions have, of course, shifted substantially. Rising inflation and bond yields have begun placing pressure on values across every asset class, property included, and we think this value adjustment is likely to carry on. The precise scale of this repricing will, of course, hinge on where interest rates settle over time, which is hard to judge. What's clear is that a return to the ultra-low interest rate environment of the past decade looks unlikely. Importantly, the new strategy we launched in late 2020 was never premised on that low rate environment lasting, since we deliberately built our strategy around two key principles of sustainable value creation.

First, we wanted to concentrate our resources on areas where we hold a real competitive edge, and second, we wanted to keep the balance sheet strong. Since that time, our actions have stayed tightly focused on those two principles. Now, back in late 2020, yields across many sectors were quite low, which fed into our belief that asset values in those sectors appeared full. So instead, we concentrated on disposing of mature London offices, where our capacity to add further value was limited, and by now we have sold close to GBP 2 billion of those assets, on average only 1% under book value. We directed our investment exclusively toward opportunities where we perceived clear value or that we believed provided long-term optionality. That shows up in the attractive income returns from our investments at Bluewater and Media City, and in the purchase of U and I, which brought substantial urban development optionality at a low cost. Meanwhile, we made a deliberate choice to avoid moving into new sectors that happened to be fashionable at the time, where we lacked competitive advantage, and where record low yields are now correcting quickly. On the balance sheet side, we stated we would cut financial leverage, and since then, our net debt has fallen, our LTV has fallen, and our net debt to EBITDA ratio has fallen.

We've carried out our strategy effectively, it's still the correct approach, and it gives us considerable resilience, supported by our three main competitive strengths. A portfolio of high quality, the strength of our customer relationships, and our capacity to unlock complex opportunities through our extensive development and asset management expertise. Thanks to the successful execution of our strategy, we're now well positioned for this new market reality. The quality of our portfolio is high, which is an increasingly fundamental decision driver for customers, whether in office or retail. We've been decisive in allocating our capital to where we can add genuine value, and in reducing our investment in those assets where we believe we can't. We've unlocked new, valuable, long-term development optionality that can drive future growth through several innovative deals, either via major lease restructurings within our existing portfolio or via our acquisitions of U&I and Media City. Although importantly, we keep full flexibility on the timing of any future capital commitments. We've further strengthened our balance sheet with a low 31% LTV, net debt to EBITDA of around 8x by the year end, taking into account the full year effect of our recent disposals, an average debt maturity of nearly 10 years, and no need to refinance any debt until 2026.

So all of that puts us in a solid position to seize the opportunities that will undoubtedly come up during the next 12 to 18 months while the market keeps adapting to a new reality. Now, looking at how we performed across the half year, the durability of our ties with customers and the calibre of our portfolio plainly keep driving our positive operational momentum. In London, we completed yet another stretch of robust leasing, which pushed ERV growth further. We realized meaningful gains in valuation and development, and we advanced further in leasing our existing pipeline, with deals spanning the portfolio during the last six months averaging 3% above ERV. On the retail side, we have signed, or are in solicitors' hands on, GBP 27 million of lettings that on average are marked 12% above ERV. Retail sales keep rising, with like-for-like sales now ahead of where they stood before COVID. We have achieved a 1.2 percentage point rise in occupancy since March, reaching 94.4%. Lastly, in mixed use, we have moved along well when it comes to planning and getting our pipeline ready. While we keep full optionality, we could potentially begin the first phases of Mayfield, Media City, and Finchley Road as early as next year.

Moving on to the numbers now. EPRA EPS grew 9%, and that came off the back of a solid operating performance, which pushed like-for-like rental income up 8.3%. The half-year dividend, meanwhile, is 13.5% higher. As you'd expect, rising bond yields have weighed on our total accounting return and EPRA NTA, since they're beginning to push property yields higher — for us, mostly in London offices. Steps we'd already taken strategically, chiefly on disposals, have softened that blow, and as a result our LTV came down to 31%. Now, even with economic conditions shifting, we're as convinced as ever that securing long-term success means we have to keep delivering in a sustainable way. On our long-term ESG goals, we've made further headway. Energy intensity held steady year-on-year, even though utilization of our portfolio rose relative to the first months after lockdown last year, so we remain on course to cut energy intensity 45% by 2030 against a 2013 to 2014 baseline. Detailed planning is now underway for the GBP 135 million net zero transition investment plan we announced a year ago, and we're on track to begin the first air source heat pump retrofits next year.

At present, 43% of the offices in our portfolio hold an EPC B rating or better. That figure matches the benchmark required for 2030, and the wider market sits at 15% by comparison. By 2025 we anticipate that share rising above 50%, and after that point the genuine effect of the money we are putting into net zero will begin to show. Of course, this roadmap takes us all the way to 100% by 2030. We also revealed earlier in the year the following stage of our net zero commitments: a goal of cutting embodied carbon by 50%, bringing it below 500 kg per sq m. A number of our near-term projects are already demonstrating what comes from our emphasis on designing buildings more intelligently and with lower carbon intensity. The presentation that lots of you viewed at our latest Capital Markets Day, which you can find on our website, holds further information. Lastly, we announced the start of our Realising Potential fund, through which we will commit GBP 20 million to improving social mobility within our industry and to helping 30,000 people move toward the world of work by 2030. Those goals are bold, yet they will guarantee that Landsec stays at the leading edge of pushing for change across our industry. Having said that, I will now take you through each of our three business areas in greater detail.

To begin with Central London, where leasing momentum has stayed robust after we set a record for leasing in the prior year. Broadly speaking, we anticipate that more flexible working patterns will lower demand for traditional office space throughout the U.K., though this effect won't be felt evenly from one asset and location to the next. In our view, large headquarters-style premises, or places that give little incentive to visit beyond getting work done, will experience a notably bigger decline in the amount of space required. At the same time, demand should prove far more resilient for appealing, energizing locations that give people a real reason to want to spend time there. We still see some customers shrinking while others expand, and the single demand trend that stands out unmistakably is that quality has turned into the top decision driver for virtually every customer. That plays to Landsec's strengths, since close to half of our portfolio was constructed or substantially redeveloped over the past 10 years. Its sustainability credentials already sit materially ahead of the broader market. Alongside our strong customer relationships, this shows up in our robust leasing results. We have signed, or are in solicitor's hands on, GBP 41 million of annual rent at levels averaging 3% above valuer's assumptions.

Portfolio vacancy is still roughly 50% of the wider London market, since the modest dip in occupancy we saw during the period has been entirely made back after the period end. Occupancy overall is unchanged from March at 95.1%. The strength of what we offer as a product also shows up in the developments we currently have underway. We took a great deal of risk out of the pipeline by selling 21 Moorfields in September, which locked in a solid 25% profit on cost. We're left with just GBP 110 million of committed CapEx to deploy across the three schemes that remain. When those finish, they should produce an ERV of approximately GBP 38 million. So from here they offer meaningful income upside for a modest additional outlay. 38% of that is either already pre-let or with solicitors, and we're in active talks on more lettings, among them the first floors at The Forge in Southwark. Over the last six months, deals have averaged 11% above ERV, underscoring that demand persists for modern, sustainable space in places with appealing amenities. Turning to what lies ahead, we're concentrating on preserving optionality amid continuing macro uncertainty, while making sure we don't give up momentum. Grade A supply is still very scarce, and if past cycles tell us anything, new starts look likely to drop steeply, which means completions two to three years out will be constrained in much the same way.

We’ve got three projects adding up to 900,000 sq ft that could be delivered by late 2025 — so they’d land right in that low-supply window. With a gross yield on costs above 7% and a yield on incremental CapEx above 10%, the potential returns on those projects look attractive. That said, to avoid major capital commitments while uncertainty is elevated, we plan to commit GBP 55 million to early works at the two projects that are ready to move forward — Timber Square and Portland House — instead of signing full design-and-build contracts right now. That gives us 6 to 9 months before we have to decide whether to commit the remaining CapEx of roughly GBP 400 million, while still keeping a delivery program for 2025. Turning now to retail, where we continue to see demand growing for prime locations. We’ve spoken before about how key brands increasingly view online and physical sales as connected. That trend has kept building since then, as the pandemic’s effect on consumer behavior has faded and some online trade has moved back to stores. In fact, over the last few months, Shopify, Next, and Zalando have all acknowledged that the pandemic-era surge in online sales — which everyone assumed was a permanent five-year leap forward in online sales penetration — proved more temporary, with online sales effectively falling back to their pre-COVID trend.

So because of that, we keep seeing brands put their money into concentrating on fewer, bigger, better stores, and that is producing a real rise in demand for space across our shopping centers, which you can see on the right. That slide shows close to 50 recent or current cases where brands are upsizing and in effect doubling their footprint, moving into our centers from other parts of the city, or where we are expanding the relationship by bringing them into new locations. With the economic outlook difficult and margins under pressure, offline and particularly online, we anticipate that this push to rationalize the tail end of store portfolios and the flight to prime will speed up further from here. The squeeze on consumer spending is, of course, something we monitor closely, but we do not anticipate it being the main driver of occupier demand. On operational performance, it is evident that our investments last year in strengthening the retail team and in changing how we operate so as to focus on brand relationships and guest experience are paying off. We have continued to see brand sales grow, and that has underpinned a 70% rise in leasing activity. We signed GBP 12 million of lettings at an average 20% ahead of ERV, which partly reflects a small number of new outlet deals at material premiums.

And even when you strip those out, lettings came in about 15% above ERV on average. That positive momentum has carried through since then — we've got another GBP 15 million of leases sitting with solicitors, averaging 7% over ERV. Because of that, occupancy has risen 120 basis points from March, reaching 94.4%. Given how strong our leasing pipeline looks, we'd expect that figure to climb again during the second half of this year. What sets our platform apart, the depth of our customer relationships, and the sharper view we're gaining into trading trends from turnover data — all of this gives us an ever more distinctive read on where value sits in prime retail. Now, over on the right-hand side, you'll see that our brand sales have bounced back substantially across the last 18 months, yet rents are still considerably lower, and that really brings out how much more affordable physical retail space has become, particularly next to distribution space, where occupational costs have climbed sharply and which — once you factor in the much steeper costs of acquiring customers online plus transport costs — shows just how dramatically the economics have tilted between online and offline. By this point we've let or relet a quarter of our retail rent across the past 18 months, averaging 7% above ERV, which makes the sustainability of rents at these levels unmistakable. That said, the chart on the right also reveals that valuations are still sitting at the depths of COVID distress and at peak online penetration levels, even though online penetration has since reversed and our operational performance has recovered strongly over the last 18 months.

So looking ahead, near-term macroeconomic hurdles and the tight supply of debt financing mean that this gap could very well remain with us for a while longer. As we see it, that keeps pointing toward the possibility of appealing value opportunities. Let me move to part three of our strategy—mixed-use urban neighborhoods—which, naturally, we flagged as an opportunity back when we launched the strategy in late 2020. The structural growth trends that support this view are still intact, whether it's demographic growth fueling demand for residential, urbanization, or the shifting nature of cities as the boundaries between living, working, and playing get more and more blurred, along with a rising emphasis on sustainable space that genuinely serves its local communities. Our capacity to unlock complex opportunities has substantially increased the optionality within this part of the business, thanks to last year's acquisition of U and I—and specifically of U and I. The U and I and Landsec teams are now completely integrated as one regeneration business, one that keeps the best of both. Since the acquisition, we've already sold, or exchanged to sell, roughly half of U and I's non-core assets for GBP 85 million, which is an average of 22% above book value.

The mix of income returns, development upside, and medium-term growth across our total pipeline of mixed-use urban projects still looks appealing — residential especially. And with a balanced risk profile, thanks to our capacity to phase CapEx commitments, the variety of uses, and the spread of locations. Progress on that mixed-use pipeline is staying on track, and we keep complete flexibility regarding any capital commitments down the road. Since May, detailed planning consent has been secured for the first phase development at the Media City, and terms have been agreed with our JV partners at Mayfield so that Landsec holds an option to fund 100% of the first phase of development — roughly one-third of the total project. A planning decision at Finchley Road is also expected in the H2 of this financial year, which could let us begin works on site across all three projects as soon as next year. Now, we are clearly mindful of the possible impact from shifts in economic and financial market conditions, particularly in regions where returns can be more sensitive to changing conditions because of lower land values. Even so, significant optionality comes from our pipeline, since we have the opportunity to deliver some 9 million sq ft of mixed-use, sustainable, well-connected urban space, against a current book value of around only GBP 350 million.

Since these sites currently yield 6% in income, the expense of carrying them is fairly minimal. So with that, I'll pass things over to Vanessa, who will walk you through the financial results.

Thank you, Mark, and good morning to all of you. The results for our half year capture a stretch in which the occupier side has stayed robust while investment conditions have proven tougher. I'll begin with the financial highlights. Earnings have come through strongly, with gross rental income rising 15%, and we've posted a 9% lift in EPRA EPS to GBP 0.266, helped by acquisitions we made deliberately and by positive leasing activity. Today we announced a Q2 dividend of GBP 0.09, taking the H1 dividend to GBP 0.176 per share. That represents a 14% gain versus the same period a year earlier, due in part to the smaller payouts last year when we were coming out of the lockdown. Full year dividends should, in our expectation, rise in line with growth in underlying earnings. The significant rise in interest rates since March has plainly pushed our property yields upward, though strong leasing activity and disposals have offset part of that. Even so, EPRA NTA per share fell 5% to GBP 10.10. Our active approach to capital allocation has strengthened the balance sheet further, with LTV now at 31.1%. Looking more closely at EPRA earnings, these rose 9% to GBP 197 million. Gross rental income climbed GBP 43 million, reflecting last year's acquisitions and solid like-for-like income growth, which I'll walk through in more detail shortly.

There was also a GBP 10 million rise in surrender premia, which came from our lease regear and contributed GBP 0.013 to EPS during this period. Direct property expenditure went up by GBP 13 million, and acquisitions accounted for nearly half of that. Three factors explain the rest of the increase. First, letting fees were higher because letting activity was strong. Second, asset utilization was higher, since part of the prior period was still under lockdown. Third, cost inflation played a small part, and cost savings have offset most of it. Insolvency activity has been limited during the period, but we have kept a prudent debt provision, and we remain in active dialogue with our customers, which is helping our cash collections. Admin costs were flat, in line with our guidance, and next year we expect admin costs to fall despite inflationary pressure, as our plans to shrink our cost base remain on track. Net interest costs rose by GBP 7 million to GBP 40 million, mainly because of last year's acquisitions, which raised average borrowings in the period. Disposals have brought down our net debt and our variable rate exposure.

As a result, we anticipate that net interest costs across the whole year will come in just a bit above the previous period. At 26.2%, our EPRA cost ratio matches the prior full year. It's somewhat higher than the prior H1, which reflects the post-COVID normalization of trading as well as movement in bad debt provisions. Our goal is still to bring our EPRA cost ratio down toward the low 20%. The elevated inflation we're seeing now will probably stretch out the timeframe for getting there. Still, I'm happy with how our cost efficiency initiatives are progressing, and we started those over 12 months ago. Centralized procurement, a more efficient operating model, and our investment in technology and automation are three of the biggest. We have visibility into the benefits these programs will deliver in the years ahead. Turning to gross rental income, it rose 15% overall and 8.3% on a like-for-like basis, with positive growth across every segment. In central London, we achieved 5.5% growth in like-for-like income, since demand for high-quality assets is strong and London retail is recovering. Across major retail assets, our strong leasing performance has lifted occupancy and growth in variable rents, and has delivered a 4.8% increase in like-for-like rental income.

Within subscale the effect was actually more pronounced, posting a 23.3% gain, mostly thanks to a robust rebound in hotel performance. Our investment activity contributed GBP 16 million net, chiefly from buying Media City together with our extra stake in Bluewater. That GBP 10 million rise in surrender premia I mentioned before is tied to the Deloitte regear at New Street Square. Reshaping their lease has created space for asset management moves throughout the estate near term, whilst we develop medium-term redevelopment proposals at Hill House. Our committed London office developments finish during the coming eight months, so they will lift income in the following financial year. Moving on to property valuation, where the advantages of our strategic choices are visible. At the point we introduced our strategy two years back, we stated we would concentrate purely on sectors in which we held a competitive edge. We likewise stated we would cut our exposure to mature London offices with low yields, which proved well timed since those yields are now adjusting, as our half-year results show. By contrast, values across the two sectors we have been putting money into, shopping centers and mixed use opportunities, have held up.

On the whole, our portfolio declined 2.9%, and robust leasing evidence drove 1.8% growth in ERVs. Our central London portfolio fell 4.4%, since higher yields were partly offset by ERV growth of 2.6%. Valuations for West End offices held up better than the city, reflecting how strong occupier demand is in this location, and we expect that to continue. As you can see, our city offices saw a decline of almost 10% during the period. Developments were broadly stable, as pre-letting activity pushed ERVs higher, though a softening in yields offset this. Shopping center valuations rose 1.1%, with ERVs up 2.4%, which reflects the growing positive leasing evidence. Outlet values dipped fractionally, reflecting a marginal reduction in turnover income after last year's strong lockdown inventory clearance. Our mixed use portfolio declined just 1%, with a small increase in yields at Media City offsetting the valuation upside at Mayfield. Lastly, our portfolio of subscale assets also stayed resilient, with hotels in particular benefiting from strong operational performance. We intend to trade out of the subscale assets over time, but over the past two years we have deliberately concentrated our disposal activity on mature London offices.

Going forward, we anticipate that property yields will keep softening in those sectors where they sit at the lowest levels. For us, that is mainly London offices, though we expect ERV growth to keep offsetting part of this, since Grade A space availability is still scarce. We think the effect on the rest of our portfolio will be smaller, and shopping centers in particular are likely to prove more resilient, given their recent value correction and high yield. Because of the fall in property valuations, our EPRA NTA per share declined 5%. Essentially all of that came from London offices, which accounted for 95% of the GBP 323 million valuation deficit. The GBP 92 million loss on disposal was mainly tied to the sale of 21 Moorfields, where we disposed of the asset at a discount to its March book value. That sale crystallized a healthy 25% profit on cost and de-risked GBP 800 million of capital. Consequently, our total accounting return for the H1 year came in at negative 2.9%. The strong earnings performance during the period has underpinned the strong dividend growth. Over the past two years, we have said consistently that we would be more decisive on capital allocation, and this slide illustrates that.

Starting in late 2020, we've disposed of GBP 2 billion in assets, and that figure includes GBP 1.8 billion of London offices. That worked out to an average of 1% under book value. On the investment side, we've put GBP 1.5 billion to work, which has made the portfolio more resilient and opened up meaningful opportunities for growth going forward. It remains our intention to sell the other GBP 2 billion of assets we identified for disposal over time, and we anticipate being a net seller in the near term. While we take a pragmatic view on value, our strong financial position allows us to be selective regarding disposals. Now to the balance sheet, which is in excellent shape thanks to our strategic actions. Our LTV came down from 34.4% in March to 31.1%, comfortably inside our target range and giving us considerable flexibility. We have substantial headroom against our debt covenants. By the year end, we expect our weighted average net debt to EBITDA ratio to fall to around 8x, which leaves us in a very strong position. Our average debt maturity rose to nearly 10 years, 84% of which is hedged or fixed, and no debt needs refinancing until 2026, also taking into account GBP 1.8 billion of undrawn credit facilities.

All in all, our financial standing is still very solid. Let me give you a quick recap. Even with the economy less certain than before, the strategy we've concentrated on for the past two years leaves us in good shape. Because our debt maturities stretch far out, we have visibility on earnings, and with leverage low we retain optionality. The earnings guidance we issued in May stands. For this financial year, we anticipate underlying EPRA EPS growth in the low- to mid-single digits%. That figure leaves out the beneficial effect of larger surrender premiums, which, as I said earlier, currently sit GBP 10 million ahead of the prior year. In the coming year, income will be supported by our committed pipeline, which carries GBP 38 million of ERV, with only GBP 110 million of investment left to finish the three schemes we have under construction. How exactly EPS progresses past the current year will, of course, hinge on when future disposals and new investments occur. The present market dislocation will no doubt throw up interesting opportunities. With the strong position we hold, we are well placed to take advantage of them. That said, I'll hand things back to Mark.

I appreciate that, Vanessa. Now I'll close by giving you a summary of how we view the present situation and what to expect from us, and after that we'll go to Q&A. As I mentioned during my opening comments, it's evident that both the economy and capital markets have shifted substantially since this year began. In fact, the volatility seen during the six weeks following this balance sheet date has been especially pronounced. Interest rates around the world have climbed sharply in reaction to mounting inflation, and the Central Bank support that held bond yields artificially low through most of the last decade has now clearly gone into reverse. Gauging where rates will ultimately settle is hard, yet from a long-term perspective it appears evident to us that the ultra-low rate conditions of the last decade represented the deviation, rather than the rates we observe today. We believe adapting to this new reality will probably leave a lasting mark on our asset values, whether in equities, bonds, or real estate. As is always the case, in listed markets that price adjustment runs well ahead of direct markets. When it comes to real estate, this adjustment is now significantly advanced as well, even if September valuations do not yet fully capture it.

Even though investment markets are still functioning, we anticipate that this pricing adjustment will carry on. It is not likely to be an efficient process, since markets, as we know, always over and undershoot instead of moving smoothly toward a new fair value. From our perspective, the sectors facing the greatest risk of continued repricing are still those where yields had compressed the most before this year began. Meanwhile, sectors that had already repriced and arguably overshot in the process, like prime retail, appear to us to be far more resilient. Turning to occupational demand, more and more customers, whether in London or in retail, recognize that the quality of space is pivotal for attracting key talent and attracting customers. Because this space remains in short supply, we therefore expect that demand for the right places in both sectors will hold up better than it might have done in previous economic downturns, and that in turn will offset some of the pressure from rising yields in the form of continued rental growth. This means that portfolio quality and balance sheet strength are the two most critical attributes in this current market, and Landsec scores highly in both areas. In summary, asset values are repricing to reflect a higher rate environment, with the keenest yields likely to move the most.

In the near term, this is going to hurt total returns, no question. But over the medium term it ought to open up some compelling opportunities, which means that across the longer term we can produce improved returns for shareholders. So our main priority for the next 12 to 18 months has to be getting Landsec into the right position for that recovery. The strategy we have is still the correct one, and over the past two years we have generated solid operational momentum in every area of the business. We'll keep building on that, while ensuring we remain close to customers, that our cost base is at an appropriate level, and that we go on nurturing a more agile, outward-looking culture that draws the best from the considerable talent we have. The speed at which we reposition the portfolio will probably shift somewhat, though we'll keep seeking to monetize mature assets where there's limited room for us to add further value, or assets sitting in sectors that are subscale for us. Given the near-term outlook, we feel less urgency about reinvesting proceeds. Consequently, we anticipate that disposals will be greater than net investment — or new investment, rather — across the next 12 months. We'll go on maximizing optionality in the development pipeline without losing momentum, and make certain we keep our balance sheet strong.

And when you pair that with the strong portfolio we hold and our capacity to resolve tricky circumstances, it’s precisely this resilience and adaptability in our capital structure that leaves us well placed to seize the chances that will undoubtedly emerge while the market keeps readjusting. The outlook we foresee over the coming few years fits perfectly with the competitive strengths of the new Landsec. So with that said, I’d like to hand things over now for Q&A. I’ll take questions first from people here in the room. Please just hold on for a microphone before you ask your question. After that, I’ll turn to the conference call line, and then we’ll take any questions arriving through the webcast facility. First question down here, Hemant.

Good morning, Hemant Kaul here from Kolytics. Strong results given how tough the environment is. I have a couple of questions about valuation and what you're observing on market pricing, since you've hinted that pricing may get softer ahead, particularly where valuations are concerned. Starting with valuations: if you look at the yield curve for financing rates, it has likely shifted roughly 200 to 250 basis points between your March valuation and the September one. That has clearly moderated somewhat since then. Given that 200 to 250 basis point move in funding rates, I'd guess the corresponding yield move was just 20 basis points. What exactly were the valuers focusing on? Was it a shortage of transactions? Why did they lag in adjusting valuations, and why do you believe more is on the way?

Okay, thank you, Hemant. I mean, we addressed this in the presentation, and it's something we've discussed internally — that, you know, given everything that's taken place in the roughly six weeks since September ended, if you look at valuations now versus September, a great deal has occurred in that window which, you know, arguably isn't fully reflected. What I'd say is this: if I take the largest piece of our portfolio and the area where we saw the biggest valuation shift, Twenty One Moorfields closed a transaction shortly before September came to an end. That was a live deal in the market. Given the bond-like character of the income stream, it was very much tied to gilt rates. And it closed successfully at that point. I think we have very robust valuation evidence for that portion of the portfolio. Now, in the interim, I think gilt rates have risen by more than 100 basis points and have come broadly back down to that same level. I think conditions have been more stable across the last couple of weeks. I think that is beginning to show up in the market, with more people who had perhaps been waiting on the sidelines for a few weeks holding back.

I do believe credit terms are going to have moved. Credit spreads, I think, would have moved. The availability of debt finance is going to have moved. A few of the deals, 21 Moorfields among them, that took place in September, rested on credit terms agreed six months earlier. Credit conditions, I think, is probably one of the factors that will have a bit of an impact. The other factor that, for us, is going to matter as we go forward — we just need to keep in mind — is transactions that took place in sectors where debt was put in place at rates materially below where it could be refinanced today and where it will be refinanced again down the road. That, of course, will take time to work through the market, but it's something we expect to show up in values. Of course, that will differ by sector. You know, nobody has been putting debt into shopping center acquisitions for a while, so I don't see a particularly negative impact. Debt that has gone into low-yielding sectors, pricing in growth based on a structural shift in societal behavior or the economy that isn't coming through at the same pace — that's where I would expect some exposure.

I do believe that as we move ahead, valuation shifts won't be the same everywhere across the real estate sector as a whole, but we have to position ourselves for an environment with higher rates.

Thanks. That makes sense. When you look at the subscale sectors and their equivalent yield, it comes to 6.3%. That compares with the average for Central London, which is 4.7%, so it's higher. Since you're looking to sell some of those subscale sectors, and pricing could soften from here, how much do you take the approach you took with Moorfields — essentially bite the bullet and push ahead as fast as you can, particularly given that they've held up well?

Well, look, I think when you're in the process of selling assets, especially in a market like this one, the worst thing you can possibly do is take the offers that are out there and stack them up against a historic valuation. Doing that, in my view, just stops you from making decisions and leaves your organization, I think, rather flat-footed. Through 21 more fields, we've demonstrated that this isn't the way we want to look at things. What we'll focus on instead is the returns we think we can generate somewhere else by drawing on our competitive advantage, based on what the wider market is showing us. For us, that's the right comparison. I do think that when it comes to our disposals, the fact that over the next couple of years we're selling into a number of different markets — whether that's retail parks, hotels, or more London office — yeah, we're selling into different pools of capital, and I think that gives us a couple of things. I think it gives us resilience when it comes to being able to progress disposals, because we aren't dependent on a deep pool of investor demand for just one type of asset, but I think it also gives us live, valuable information about how investment markets more widely are viewing the different sectors in terms of pricing.

Alright, final question, if I may. You have clearly already hinted that assets with lower yields — which for your portfolio means Central London — could be exposed to additional valuation drops. You have also mentioned that when it comes to your development activity, you intend to proceed cautiously regarding the three main schemes you have and the GBP 400 million of CapEx involved. What conditions would lead you to choose not to move forward with those?

As a quick reminder, we have three London office projects that already have planning consent, and each one can be delivered within a 2025 window. From a demand standpoint, our 2025 view is that other construction starts will slow, demand for the highest-quality space will stay very resilient, and so we believe that will be a very attractive window in which to deliver some of the best-quality products on the market. We want to keep our momentum, but we look at everything around us, and especially when we were considering these decisions about advancing projects 3 to 4 weeks ago, there is a huge amount of macro uncertainty, and it felt unnecessary to us to commit GBP 500 million of future CapEx. We wanted to maintain maximum flexibility. What would it need to look like? I think it would need to look very volatile, and that the better thing for us to do for our shareholders is to preserve balance sheet strength and preserve flexibility. We've been able to do that on these projects by taking the two that are ready to go, Timber Square, which many of you will have seen on our Capital Markets Day, and Portland House in Victoria.

Early works packages are something we can move forward on. Our own ties into that section of the supply chain are solid. That risk is one we can price very well. Program can be maintained, and then spring gives us the chance to review market conditions. Judging by what the recent weeks have shown, I think that will be a stretch when we will hopefully have seen some stability that holds. In this market, it simply felt like the right call. Next question from the room. Here at the front.

Hello there, good morning. This is Osmaan Malik from UBS. I'll try to keep this brief. Your development pipeline stands at 38% pre-let. In your earnings guidance, you mention that fully letting that pipeline would generate GBP 38 million in income. Could you share some detail on how confident you are about leasing the remaining unlet space in that development pipeline? What underpins that confidence? And what sort of timeframe should we expect? Thank you.

We’ll give it our best shot. I mean, when we’re underwriting London office developments—looking at our IRR assumptions and the leasing assumptions beneath them—we would assume roughly 25% pre-let at PC. We’re already substantially ahead of that, and as I said in the presentation, we have active dialogue and active negotiations underway across every one of the assets completing over the next few months. My sense is that within H1 of the next financial year, we will see a material overall increase in our occupancy, so I think a meaningful amount of that GBP 38 million is going to start accruing to the P&L during the next financial year. At N2 in Victoria, which completes around the end of the financial year, we’re about 60% pre-let from the top of the building coming down. I think we have to acknowledge that lower floors can sometimes be a little bit slower to let, but, you know, a substantial portion of that building is already pre-let. Lucent in the West End—we announced a couple of days ago—pre-letting at the top of that building as well, and I think demand there is very strong. The Forge as the third building, which is in Southwark, that smaller floor plate, we’ve just sort of got into the window for letting there.

The clearest illustration of that would be Triptych, the office building right next door, which you will have seen again at the Capital Markets Day. It came to market in March, and as of November just half of a single floor is still available. My expectation is that The Forge will track a broadly comparable timeline, with active negotiations already underway on a few of the upper floors there. Momentum, I think, is really strong. By the middle part of next year, I would expect us to be moving things along quite materially.

Thanks, that's quite useful. So then, just a wide-ranging question here. Please set me straight if I've got this wrong. My recollection is that when you looked at total shareholder return before, framed as a return on NAV, the figure you mentioned was, I believe, a mid- to high-single-digit return. But now that conditions have shifted, and you've noted that we're settling into a higher level of higher background rates, could you share your view on what that number would look like if you ran through the exercise again today? Apologies if that point was covered in the statement and I missed it.

Sure. I mean, back in what you might call the old days — probably before the financial crisis and for a few years afterward — the rough guideline we tended to use was that total property returns, broadly speaking, sat somewhere in the 8%-10% range across most sectors. You'd apply some leverage to that, make adjustments for your cost base so you were delivering low double-digit total returns on NAV, and doing so on a consistent basis was roughly what you needed in order to justify an NAV-type valuation. What we observed as we shifted into lower rate environments is that 8%-10% turned into something more like 6%-8%, and then probably closer to 5%-7% during the last few years. Should things normalize back toward a long run trend, my expectation is that the return requirements for total property return would return to those high single digits. I think we'll find interesting opportunities in that kind of range, and what that means is that, whereas we've been discussing mid to high single digit total returns in a low rate environment, we should be targeting — and I believe we'll have more chances to identify opportunities that let us deliver — in the low double digits.

That’s clear. To make sure I’m really understanding — and I realize this may be difficult to answer — is that double-digit return being viewed on the basis of where valuations could ultimately end up, or on the basis of the September valuation?