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

Good morning, everyone, and welcome to the presentation of Landsec's 2023 Half-Year Results. So, three years have passed since we launched our new strategy, which rests on two clear and simple principles: focus our resources where we have genuine and sustainable competitive advantage, and keep a strong balance sheet. Because we have consistently focused on those two principles, we remain in excellent shape. Three years ago, interest rates stood at historic lows and liquidity was high, so property yields across many sectors were at or near all-time lows. Of course, economic and financial market conditions have changed considerably since that time. And one year ago, we set out a clear view that rates would likely remain higher for longer and that property values would need to adjust to that new reality. We acted on this early by selling GBP 1.4 billion of long-let offices last year, and that brought total disposals of mature offices and assets in subscale sectors since late 2020 to GBP 2.5 billion. As investment activity remains subdued, the adjustment to this new high rate reality continues. But encouragingly, inflation has come down from its recent highs, and long-term rates have started to stabilize. So if this persists, we expect the outlook for values for the best assets to improve in 2024.

Looking at things through the customer lens, we stay committed to anticipating, understanding, and responding to how their needs keep changing. We had said we expected the best-in-class retail space to bounce back after the big pandemic reset, and that we were preparing for total demand for conventional office space to shrink, with the heaviest hit probably landing on large headquarter-type space and on locations that hold limited appeal for staff. On both counts, that is pretty much what we are seeing. Because our portfolio is high quality, we are well placed, with occupancy and rents both rising across the two sectors. On capital allocation, we keep taking a proactive stance on risks and future returns, just as that approach has successfully steered our decisions over the past three years. Our investment will keep going solely to places where we see a clear chance to create value, and we will sell assets where we do not. Preserving our strong balance sheet stays a priority, since its strength is what underpins our ability to capitalize on new opportunities that enhance future returns. That clear focus has served us well over the past three years and should keep doing so going forward. The strategy continues to rest on our three competitive advantages: our high quality portfolio, the strength of our customer relationships, and our ability to unlock complex opportunities through either development or asset management expertise.

The successful execution of this strategy has allowed us, during the first half of this year, to concentrate on improving operational performance and getting ourselves ready for possible new opportunities — and to do so at a moment when leverage or refinancing problems are forcing many others across the wider sector to act. Demand from customers is increasingly centered on best-in-class space, and that is pushing occupancy and rents upward, with our portfolio sitting in an ideal position to benefit. We have cut back substantially on exposure to segments where risk looks higher or returns look weaker, and the long-term pipeline we have assembled provides meaningful optionality. Naturally, we remain aware that conditions outside the company have shifted, and our investment choices will therefore need to take that into account. Even so, we have confidence that we will keep unlocking further accretive opportunities, including ways to boost our growth by drawing on the value of our platform as time goes on. Alongside our strong capital base, this supports the resilience of our returns, and we are well positioned to achieve an 8%-10% return on equity over time while continuing to grow our attractive earnings and dividend yield. Turning now to operational results: a clear gap persists between the solid occupational demand for our assets and developments in capital markets.

In London, we had another stretch of robust leasing activity, which drove both occupancy and rents upward. And since leasing at our recent developments is substantially better than we first anticipated, we've now launched two additional schemes that offer a double-digit yield on incremental CapEx. On the retail side, sales keep rising, and that underpins our ongoing positive leasing results, with GBP 24 million of lettings signed or in solicitor's hands, averaging 6% above ERV. Meanwhile, rental uplifts on renewals have turned positive for the first time in a number of years, and our occupancy right now sits some 100 basis points above where it stood in March. In mixed use, we're continuing to advance preparations for a possible start on site of our first two schemes at Finchley Road, North London, and Mayfield, Manchester, during the first half of 2024. Turning to financial results, EPRA earnings per share held steady compared with last year, which is consistent with our guidance for the full year, as our strong operational performance — with 2.8% growth in like-for-like income — along with efficiency improvements, offset the impact from disposals and from rising interest rates. Our dividend is up 3.4%, again, in line with our guidance, and our return on equity improved slightly, even though it continued to be affected by the rise in bond yields, putting further pressure on valuations.

Even so, because we sold assets at good times last year, our balance sheet is still in a strong position, with LTV at 34% and net debt to EBITDA of roughly 7x. We're also continuing to make headway on our ESG goals, and we see that as essential to securing our success over the long term. Early this year, we set out our new Science-Based Target for cutting emissions — aligned, completely aligned, with the new Science Based Targets initiative Net Zero Standard, which is the only framework globally for setting corporate net zero targets that matches climate science. So we have now revised our energy intensity targets to fit that standard, which works out as a goal of cutting energy intensity by 52% against a new 2019/20 baseline. Energy intensity fell 3% year-on-year, so we are tracking well toward those targets. We've made additional meaningful headway in lowering embodied carbon across our development pipeline. We're set to begin retrofitting air source heat pumps at our first two offices as part of our Net Zero Transition Investment Plan. Through that plan, every one of our offices will be EPC rated B or better by 2030. Right now we stand at 44%, up from 38% in March, and we anticipate reaching at least 50% by 2025 as the earliest gains from our Net Zero investments start to show.

Finally, we're beginning to realize the advantages of our new Landsec Futures Fund, set up to improve social mobility within our industry and help 30,000 individuals on their path toward employment by 2030. Together, these factors mean Landsec continues to be a leading force for change in our sector. So let me now walk you through each of our main business areas in somewhat more depth, beginning with Central London. In a world where talented people are in short supply and can choose how and where they wish to work, for most employers, space lacking proper transport links or sustainability standards, or situated in places without the amenities that make people want to spend time there, is simply no longer viable, almost regardless of cost. We've said all along that we anticipated overall demand for traditional office space across the U.K. would shrink because of more flexible working patterns. Crucially, though, the effect would not be evenly felt, with big single-tenant headquarters-style properties or locations missing the right amenities probably hit hardest. And by and large, that's what appears to be occurring at present, as you can observe, for instance, in the supply of sublet space, roughly 80% of which sits either in the City or Canary Wharf.

So what that tells you is that when you see recent headlines about, say, big banks cutting back on space or moving to different neighborhoods in the city, those headlines aren't really a shock. However, because demand has split this way, looking at market averages has become pretty much meaningless. The chart at the top right illustrates exactly what I mean. Because even with overall vacancy across London sitting high at 8.8%, nearly 40% of that empty space is concentrated in only 1% of London's buildings. 90% of it is found in just 10% of buildings, and practically 85% of all office buildings show no vacancy at all. Vacancy is largely a building-specific problem rather than something affecting the whole market. What this also tells us is that offices today look very different from retail roughly five years back, when new technology shifts posed a fundamental challenge to business models, and in shopping centers, vacancy rose even for the best assets, which pushed rents down. But in London offices, grade A space availability is still scarce, and since future supply will probably be held back by a shortage of development finance, rents for best in class space keep rising. So given our clear read on risk and future returns, we have substantially repositioned our London portfolio across the last three years.

We disposed of GBP 2.2 billion in assets — essentially all single-let headquarter buildings located in the City and Docklands. Consequently, our exposure to the City has been nearly cut in half, and 76% of the portfolio now sits in the West End and Southwark. Because these submarkets offer a broader mix of uses, amenities, and multi-let space serving smaller customers, high-quality space there stays scarce. As a result, rental value growth is beating the City by a notable margin, consistent with our guidance. How appealing our space is to people also comes through in utilization figures. On a like for like basis, unique daily turnstile tap-ins keep rising, and midweek utilization hit new highs in September and then again in October. Footfall overall during the first half rose 22% compared with the same period a year earlier and 10% versus the six months to March. That supports the value our space delivers to customers. You can see it in the fact that under 1% of our space is currently being marketed for subletting. Although the wider market keeps polarizing, our leasing results remain solid. Across the past 12 months, 6 customers departed, yet we relet four of those spaces quickly.

During the 35 new lettings or renewals we signed, 17 involved customers who were upsizing, and 10 stayed in the same space they had before. Among those who opted to shrink their office footprint, most did so by cutting space elsewhere, and just two customers reduced their floor space with us. That reflects a combination of successful businesses adding headcount, along with customers planning for more space per person. And when we look at roughly 350,000 sq ft of recent lettings across a wide range of different customers, on average the space per person they were planning for came in between 130 and 160 sq ft. Before the pandemic, by contrast, many occupiers were planning for densities closer to 100 to 120 sq ft per capita. This continued demand meant we signed, or had in solicitor's hands, GBP 17 million of lettings, on average 3% ahead of ERV. Our occupancy rose further to 96.5%, meaning our vacancy is roughly one third of the overall market, while our entire Victoria estate is 100% full. We also kept seeing strong demand for our Myo flexible offer, where occupancy has reached 97%, and we're opening three new locations this autumn.

Turning to developments, our committed pipeline was successfully completed in the first half. N2 and Lucent are both effectively full at this point, and rents came in 11%-16% above what we originally assumed. So they're producing a profit on cost of roughly 10%-20%, even with the rise in valuation yields witnessed across the last 18 months. Our expectation remains that new development starts will be held back by scarce development finance, despite build cost inflation beginning to ease. Across the market, we're seeing more refurbishment of existing assets, though how far these meet customer requirements will probably differ, since demand is still firmly concentrated on the best space. Because of that, we still see an appealing chance to provide the most sustainable, high quality space in a market where supply of that kind of product stays limited. And we anticipate that this will keep driving additional rental growth for the very best space. So we've committed to two new schemes, with an attractive yield on incremental spend of circa 12%. Turning now to retail, where appetite for best destinations keeps rising. For major brands, online and physical sales channels stay firmly interconnected. As overall retail sales keep rebalancing back towards stores, with online non-food sales now down for each of the last 26 months.

For companies that operate purely online, margins stay narrow. So instead of the old approach of using inexpensive capital to purchase market share, their attention is now fixed on enhancing profitability. Meanwhile, omnichannel brands keep concentrating on fewer, larger, and superior stores, since top-tier urban retail destinations underpin rising consumer appetite for experience and connection to brands. Retail formats located outside town centers lean toward convenience over experience, and secondary sites will probably stay under pressure for a while as brands keep trimming the weaker end of their store portfolios. Even so, sales at our stores keep beating overall sales growth for a number of key brands, which highlights the enduring attractiveness of our locations. The money we have put into our retail team and our distinctive operating approach—centered on brand relationships instead of merely assets—also keeps driving our operational results higher. We have kept witnessing existing brands enlarge their stores, new brands join our centers, and current customers launch additional stores with us in fresh locations, as sales growth stays positive. During the period we signed GBP 13 million of lettings on average, consistent with the March ERV, and a further GBP 11 million of deals sit with solicitors, 14% above ERV.

What matters here is that, for the first time in years, renewals have delivered a positive rental uplift — evidence that rents are turning a corner not only in ERV terms but in cash flow terms as well. Occupancy at the half year held steady, yet several large leases signed just after that month end have lifted current occupancy 100 basis points above March, putting it virtually back to where it stood before COVID. That underpins what we expect for major retail destinations: low- to mid-single-digit ERV growth this year, after 1.4% growth in the first half. And that in turn keeps supporting our belief that value exists in this space. Because income yields are high, even for the very best assets, valuations feel less of a hit from rising interest rates. As a result, overall returns have stayed positive since the hiking cycle began last year. Online sales, which grew rapidly during the pandemic, have largely reversed, while sales at our centers have returned to pre-COVID levels. With rents and business rates having reset materially, though, brands' profitability from operating physical space has improved significantly, and occupancy cost ratios now average around a quarter lower...

So what that means is the gap keeps getting bigger between how the business is actually performing — which keeps getting better — and where values sit, as you can see in the chart in the upper right of this page. We've already been adding to this sector on a selective basis for 2 years now, through our investments in Bluewater and Cardiff, and we're still looking at ways to build on our expanding retail platform. Moving to part three of our strategy: mixed-use urban neighborhoods. The structural trend behind this piece of what we do — whether that's demographic growth creating demand for additional housing, or urbanization and shifts in the way people live, work, and use their free time — is still very much with us. Being able to build thriving mixed-use urban places doesn't only help future projects within this part of the business, though. It supports the remainder of our portfolio too. Take Victoria, for instance, which is now far more than somewhere to go to the office, with Saturday F&B sales matching Thursdays, or the centers of Leeds and Oxford, where the draw of our major retail destinations comes from far more than standard shops alone. Our portfolio in this area stays concentrated on fast-growing urban locations with excellent transport links — like our potential near-term scheme in Manchester, located directly beside the city's mainline Piccadilly train station, or at Finchley Road, in zone two of central London, surrounded by five tube or train stations.

In addition to what’s in our medium-term pipeline, these projects still present considerable upside potential. Of course, we’re conscious of how the risk-return dynamics shift as development moves forward. So any choice to commit capital will be weighed carefully against the broader economic and financial market conditions in place at that moment. That said, given an existing income return of 5%-6%, the cost of holding our current investments is low, which lets us time additional investment for the best result. Now, on to the individual projects. At Mayfield, in Manchester, we obtained detailed planning consent for the first two offices, and those buildings will rank among the most sustainable in the city. We’re working through detailed designs, cost plans, and returns. Subject to that, we could be ready to begin on site in the first half of next year. Excuse me. At Finchley Road, we’re advancing further planning work after the March resolution to grant consent for our 1,800 homes master plan. We obtained vacant possession of a key portion of this scheme’s first phase. Subject to further land assembly, enabling works here could potentially begin in the first half of 2024.

Yet simultaneously, we are achieving meaningful headway on improving our proposals at Glasgow and Lewisham, and those schemes still present considerable potential over the medium term. However, we are currently revising our master plans in order to cut embodied carbon by making greater use of the buildings that already stand, instead of just tearing every one of them down and beginning afresh. That, too, lifts financial returns, since keeping more of the current income effectively delivers interventions with lower carbon and lower capital intensity. On that note, I will pass things over to Vanessa, who will take you through the financial results.

Thanks, Mark, and good morning everyone. Let me begin with the financial highlights. Rental income and EPRA EPS came in largely steady across the first half. Solid operating results helped counter the effects of last year's asset sales as well as higher finance costs. Consistent with the full-year guidance I gave in May, our interim dividend has risen 3.4%, once again matching that guidance. Owing to the continued climb in interest rates, valuation yields moved higher, though strong leasing activity partly cushioned this, generating 2.5% ERV growth. Consequently, our total return on equity for the first half stood at -2.4%, an improvement versus both the first and second halves of last year. EPRA NTA per share fell 4.6%, and in spite of that, the balance sheet stays robust. LTV rose to 34%, yet overall net debt sits 16% below where it was a little over a year back, and net debt to EBITDA is lower at 7.2x. Now to EPRA earnings in greater detail. Gross rental income dipped slightly, but on a like-for-like basis it rose GBP 5 million. Net rental income climbed GBP 4 million, and I'll walk through that movement in more depth shortly.

As you might remember, we conducted an organizational review last year aimed at speeding up how we execute our strategy and enhancing both the scalability of our platform and our operating efficiency. I'm happy to report that because of this—and even with the elevated inflation in the U.K.—our costs have gone down, and that means our EPRA cost ratio got better by a bit more than 3 percentage points, reaching 23%, while our operating profit rose 3%. That offsets the rise in finance costs, since interest that was previously capitalized is now being expensed after our developments were completed, along with the effect of higher variable rates. When we factor in both of those items, we anticipate interest expense will rise slightly once more during the second half. On the whole, EPRA EPS matches our full-year guidance of stable earnings per share compared with last year's underlying level of GBP 0.501. Net rental income rose 2.8% on a like-for-like basis. That came mainly from strong growth throughout our major retail portfolio, which increased 9.9%. In central London, like-for-like income in offices edged up a little, though a reduction in variable income across our London retail and other assets offset that. The major retail results were fueled by growth in variable and turnover income, together with a substantial improvement in operating costs.

Half a year back, I stated that we anticipated the rest of the negative reversions in retail would reset across this year, and during the first half, we've now observed rental increases on retail renewals turning positive at 2% above passing rent, and that comes after a sustained stretch of downward correction. Our sub-scale assets kept performing nicely, with like-for-like income rising 3.9%. The income loss from last year's disposals of low-yielding London offices was essentially offset by extra income from our selective acquisitions, mainly St David's in Cardiff. Income from our development assets dipped a little, but it will pick up during the second half now that our recent London pipeline has finished and will start generating income. Surrender receipts in the first half declined somewhat, yet for the full year our expectation is that surrenders will be broadly consistent with our underlying level over the last two years. So moving to portfolio valuation, the additional increase in interest rates since the year began has kept global investment activity subdued. As a result, we've seen yields shift out further, so even with positive ERV growth in every segment, our portfolio's value fell by 3.6%.

In central London, our portfolio declined 4.5%, since higher yields were partly offset by a 3.3% rise in ERVs. That keeps us comfortably on track against full-year guidance calling for ERV growth in the low to mid-single digit range. As Mark said earlier, we shifted our London portfolio toward the West End over the last few years, and that choice is clearly paying off. Just as last year, West End values held up better once again, with notably stronger ERV growth, and we see that pattern carrying on in the near term. London retail and our other assets also held up well, though developments fell 4.9%, because softer valuation yields offset the gains from successful leasing. Valuations for our major retail assets stayed fairly flat, since a slight softening in yields was almost entirely cancelled out by ERV growth of 1.4%. That, too, is on track against full-year guidance of low to mid-single digit growth. With income included, this means our major retail portfolio, after outperforming the year before, once again posted the highest total return. It shows the resilience coming from higher yields in today's interest rate environment along with an improved operational outlook. Mixed-use assets dropped 6.2%, driven by yield expansion and, for future developments, a shorter income duration ahead of redevelopment.

For our sub-scale assets, valuations were broadly unchanged. Within that, hotels saw a slight increase, while leisure asset valuations began to steady after Cineworld's successful recapitalization. Looking ahead, today's muted investment activity might lead to a bit more yield expansion. That said, as interest rates start to settle, we anticipate investment activity improving in 2024, and values for the best assets — those with genuine rental growth — should begin to stabilize, whereas secondary values are likely to keep declining. Turning to total return on equity, it improved versus last year to -2.4%, and NTA per share, which fell 4.6% after dividends paid. Over time, we target a return on equity of 8%-10% per annum, and that comes from returns, income returns, and capital growth driven by both rental growth and developments. Because valuation yields fluctuate in the short term, we won't land exactly in this range every single year, but this is the basis for our medium-term decisions. The chart on the left shows the components of our return on equity. In blue, you see the return on equity, driven by income, rental growth, and developments. The light gray bars and the dotted lines then overlay the effect of yield movements.

For the six months ending in September, the return we achieved on income, rental growth, and developments came to 5.9%, a meaningful increase compared with last year. Yield movements clearly still weigh on us, so the total return for the first half was -2.4%. That demonstrates that once yields settle, we ought to be well placed to hit our target of 8%-10% annually. To produce sustainable returns, our attention stays on capital discipline and on managing the balance sheet right through the cycle. When we allocate capital, we hold a clear view of risk and returns, just as we have done over the past three years. So far this year, we have disposed of GBP 85 million on average, which is 6% above the March book values. Sales across the last three years add up to GBP 2.5 billion, of which GBP 1.4 billion came last year. The bulk of that was mature single let city offices, as Mark said. As a result, our capital recycling efforts are now concentrated mainly on the subscale sectors, and we intend to make progress there over the coming six months. We keep directing our investments to places where our competitive advantage is clear; appealing opportunities within our current pipeline, like the two London schemes we have just begun, provide a yield of 12% on incremental spend.

On top of that, prime retail locations combine income yields in the high single digits with the potential for rent growth, which means they can deliver appealing total returns. All of this continues to be supported by balance sheets that lead our sector. Our solid investment-grade credit rating is unchanged, and our corporate bond spreads rank as the tightest in the sterling real estate market, which hands us an obvious edge on cost of capital. Net debt rose modestly over the period, yet it is still GBP 655 million below where it stood eighteen months back. Because we issued our green bond in March right on time, average debt maturity is still above nine years, and with more than GBP 2 billion of undrawn facilities available, nothing needs refinancing before 2026. At the launch of our strategy in 2020, we laid out an LTV range of 25%-40% to accommodate market cycle swings. Lately we have been running in the low 30s, since yields sat at or near cyclical lows. Our active portfolio recycling has kept LTV at that level, but valuations now sit well away from cyclical lows. As a result, we would be at ease with LTV drifting up somewhat from here, especially when the right investment opportunity comes along.

That said, we've always been clear that a robust balance sheet comes first, and LTV is just a single measure. When we turn to the other key leverage metrics, net debt to EBITDA is essentially unchanged at 7.2 times, while ICR dipped slightly to 4.2 times. Both figures rank among the strongest ratios anywhere in the sector, and over the longer run we intend to hold them under 8 times and over 3 times, respectively. So our solid balance sheet keeps giving us the flexibility to seize new opportunities whenever they come up. In summary, a strong capital base plus the substantial repositioning we've done across the last three years leaves us well placed to grow. We're keeping the rental value growth guidance we issued in May, and we repeat our guidance that EPRA EPS for this year should be broadly flat against last year's underlying GBP 0.501, before growth resumes in the following year. Since dividend cover sits at the upper end of our 1.2 to 1.3 times target, we still expect dividends to rise by a low single-digit % annually across this period. With that, I'll pass things back to Mark.

Thank you, Vanessa. So I'll close now by sharing how we see the present climate, what to expect from us over the coming year, and after that we'll take your questions. Our decisive moves across the previous two and a half years, during which we sold GBP 2.5 billion of mature assets, mean we entered this financial year aware that we could concentrate on pushing operational performance and getting ready for future growth opportunities, instead of needing to fret over leverage or refinancing risks. You can see that in our strong operational results, since demand for our best-in-class space stayed robust, and occupancy along with rents kept rising. That continues to be a central focus for us as we go forward, as we keep actively reshaping the portfolio and building on our improving organic growth prospects and our key competitive advantages. Now, with interest rates having climbed further since the beginning of this year, global investment activity is still subdued. But if the recent stabilization in rates holds, we anticipate those activity levels will improve next year. For the best assets, which deliver genuine rental growth and thus a healthy risk premium against real interest rates, that would point to valuations beginning to stabilize for such assets in 2024.

That said, properties whose income durability is in doubt will probably keep experiencing valuation declines. We stay alert to the possible dangers of reversing ten years of extraordinary monetary stimulus, and to how interest rates staying higher for longer might affect companies and households alike. Against this new market backdrop, what matters most is portfolio quality and balance sheet strength. Landsec performs well on both fronts, thanks to how successfully we have carried out our strategy. Looking ahead over the coming 12 months, we anticipate that occupier demand for our best-in-class assets will hold up, even though economic headwinds will probably endure. Our portfolio's quality, the strength of our customer relationships, and our capacity to unlock complex opportunities will keep being a major source of competitive advantage, generating value and delivering growth... In recent years we have succeeded in reshaping our portfolio to fit market conditions. In the first six months of this year, during a very quiet investment market, we were less active on this front, yet we fully intend to take up this reshaping again over the next 6 to 12 months, keeping our focus where we hold genuine and sustainable competitive advantage. To turn to our second key principle of sustainable value creation, maintaining our strong balance sheet.

We're seeing the market return to a place where companies must deliver value, and investors get rewarded for that. The period of easy money—what people call the carry trade—is definitely over. Since we've set the business up well for that kind of climate, we're still enthusiastic about what lies ahead. With that said, let's begin the Q&A. I'll take questions from the room first, then move to the call and the webcast, in that sequence. If you're here in the room, the microphones are probably in the back of the seat ahead of you. You simply press and hold the button when you speak. So let me start with questions from the room. Max to begin, and then we'll come around behind. Thank you.

Hi, yes, Max Nimmo here from Numis. I just want to verify that I've got one point right regarding the LTV, as you describe it. We're near cyclical lows, so if opportunities come along, you'd feel fairly comfortable exceeding roughly 35%. Is that intended for a brief window, or is it really that, if we think values are at cyclical lows, we might actually be quite at ease operating, you know, beyond that 30%-35% band for a much longer stretch and, you know, possibly reaching toward 40, perhaps even higher, if you're convinced that, you know, we, we've arrived in terms of yields, and so on?

So I think, as I mentioned before, that we're in a position where we believe those cyclical lows, in terms of valuation yields, are behind us. So we do have that stated range of 25%-40% LTV, and that really was there to allow — it was stated back in 2020, but it was there to allow for the movements in the cycle. So we always plan to operate within that 30%-35%, and we have been there in the recent years. And in the near term, I would just say that we would be comfortable with a slight increase from there, if it really provided the opportunity, 'cause there is a capacity there for a good opportunity for us. But I think in the longer term, we would also look to progress asset disposals and continue to recycle assets. So I wouldn't expect us to be operating above 35% for a particularly long period of time. It would just be that it's there for the flexibility. And I think I always do comment as well, which you're probably familiar with, that I think we have to also look at other leverage metrics rather than just being hung up on one that is quite highly aligned to valuation.

So I think you need to weigh that alongside ICR and net debt to EBITDA too, and those, again, are in a good spot.

I might just tack on a couple of points here—less about leverage, and more about how we're framing things in a broader sense. So there are, I think, two factors that give us the confidence to begin pursuing new opportunities in the market in a measured way. Leverage capacity is one of them, and Vanessa has spoken to that. The other is healthy levels of liquidity within our subscale portfolio. So if you look at that subscale portfolio, it holds roughly GBP 1.5 billion of assets, divided more or less evenly into thirds across retail parks, hotels, and leisure parks. And among those three, I'd say leisure parks are the only one where liquidity is currently constrained. So that's GBP 1 billion of assets sitting in sectors where we're seeing activity, where debt is available. They're great quality assets. It's just that we don't feel we've got competitive advantage as our reason for selling. So it's a combination of those factors that will give us the chance to manage. The second point I was then just going to make is, well, you know, what are the opportunities? Well, to sort of describe what I would see us looking to invest in over the next 6, 12, 18 months, it will be scarce opportunities at great prices.

This isn’t about simply opening the wallet for no reason. What we’re really doing is identifying the rare chances that probably won’t come around a second time, and that is exactly what we’re getting the business ready for.

Thanks very much. If I could, I’d like to ask just one follow-up, on the outlets side. I was hoping you might give us a bit more detail there regarding what’s going on with valuations and the ERV growth coming through. Is the variable component involved in that, and the way buyers view it? I probably would have anticipated somewhat more of a recovery there, but maybe there’s more to it than that.

I mean, the way outlets are running operationally is likely still the best-performing piece of our retail portfolio—less so on the valuation side, and that's, as you said, a matter of how much credit valuers are willing to assign to future variable income. We keep seeing that come through really strongly, so I think we'd anticipate outperformance in that area.

Thanks a lot — that’s helpful.

There's one more question coming up.

Hi, thanks for the presentation. This is Sam Knock from Kolytics. I just have one question about the earnings guidance. You've guided to roughly flat versus last year on EPRA EPS, and that implies a pretty big sequential drop in EPS for H2. What's driving that, roughly? Is it purely the finance costs, or the disposals flowing through, or could you help me understand that decrease?

Thanks, Sam. On the earnings guidance side, we've set a target of roughly 50.1 pence in EPS for this year, with growth thereafter. There are likely several different elements at play in the second half. One of them, though, is that during the first half, our surrenders have been broadly in line — and they were pretty elevated last year, as you'll recall, matching the prior year. But we don't really have any visibility on specific surrenders materializing in the second half. So looking at H1, we did see surrender premiums come through in H1 — just under GBP 17 million, I believe. That therefore means the picture is somewhat skewed. I think viewing it across the year, as an H1 versus H2 comparison, should assist with that — with that position.

That is fantastic. Thank you.