British Land Company PLC (LABS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us at what is quite short notice. We really appreciate that. I'm Simon Carter, CEO of British Land. I'm joined today by David Walker, our CFO; and Jonty McNuff, our Head of IR and Strategy. Today, we want to take you through our recommended acquisition of Life Science REIT, a transaction that is both strategically and financially attractive. It strengthens our science and technology platform, a part of the business where we're seeing growing demand and real momentum, and it's immediately EPS accretive. We highlighted in November and in our recent trading update, the accelerating science and technology backdrop in the U.K. VC funding is at its highest level since 2022, with AI and tech demand particularly strong, more than offsetting any softness in Life Science's activity. This deal represents an attractive entry price for a portfolio of well-located assets in the Golden Triangle with significant scope to grow rents through both the lease-up of vacant space, much of it new and the capture of reversion. Through our scalable platform, we expect to deliver significant cost synergies from day 1 and to grow rents by attracting a broader range of occupiers from the science and tech sector than the previous Life Science's mandate has allowed. This, combined with the entry price, means that we're acquiring assets which are immediately earnings accretive from synergies alone with further accretion to come from the lease-up of the vacant space and the capture of reversion. Importantly, all this is achieved in an NTA-neutral way. So let's look in more detail at the transaction. This is a portfolio of assets in the Golden Triangle we know well with 2 prime Central London buildings in the Knowledge Quarter, Rolling Stock Yard and Herbrand Street, a 24-acre high-quality modern tech park in Oxford with very affordable rents, a 13-acre value-add campus in Cambridge and a small single-let asset also in Cambridge. As you know, targeting fast-growing science and tech occupiers is a core part of our campus strategy. So the acquisition portfolio will benefit from being brought on to our British Land platform. We anticipate a significant reduction in portfolio admin expenses, including the cessation of the existing management agreement as well as finance cost savings, leading to immediate day 1 earnings accretion from the existing rent roll. And as I mentioned, we anticipate further earnings growth through capturing embedded reversion within the portfolio and letting up vacant space, most of this new space at the Oxford Tech Park, which we intend to do by expanding the target occupier base from the previous Life Science's mandate into the far broader and growing science and technology market. I'll now hand over to David to take you through the terms of the transaction.

Thank you, Simon. Good morning, everybody. Our offer is comprised of 14.1p in cash and 0.07 new British Land shares equating to approximately 43p per share, a 21% premium to yesterday's close and a 15% premium to the 3-month VWAP. The GBP 150 million equity value is funded through a mix of cash and shares in the ratio of 33% to 67%, resulting in minimal impact on our LTV. The deal is unanimously recommended by the Life Science REIT Board, and we have already secured irrevocable commitments or letters of support from shareholders with interests in 31% of the share register. Subject to shareholder and court approval, we expect the transaction to complete in the next 3 months. The properties being acquired have a combined book value of GBP 333 million and the acquisition price implies a value of GBP 276 million. Rolling Stock Yard and Herbrand Street in London, along with the Merrifield Center in Cambridge are fully let. The majority of current vacancy is at Oxford Technology Park, where there are some excellent newly completed space to let at very affordable rents in the low to mid GBP 20 per square foot. And we're encouraged by the recent demand we've been tracking there. It's also important to note that less than 6% of the portfolio is lab space and of that, 80% is let. Our conservative underwrite of GBP 18 million of net rent in year 1 assumes just the rent roll today and deals under offer. What the BL platform then unlocks is the ability to capture significant reversion within the portfolio by accelerating the lease-up of the newly delivered space and continuing to diversify the occupier base from the previous Life Science's mandate to target a much broader group of innovation and technology businesses, just as you've seen us do at Regent's Place and the Peterhouse campus in Cambridge. When including the on-site developments at the Oxford Technology Park, we anticipate a stabilized accounting net rent of GBP 25 million, which is significantly earnings accretive relative to the size of the deal. At our half year results and our Q3 trading update last week, we spoke about the accelerating demand we're seeing from a broad range of innovation businesses across the science and technology spectrum. Looking at the acquisition portfolio, whilst it includes several well-known Life Science's businesses, the occupier base overall is well spread across science and tech, with 5 of the biggest occupiers representing almost half of the rent roll being Thought Machine, a fintech business; Oxford Ionics, a quantum computing firm; Fortescue Zero, an advanced engineering business; ZEISS, a leading lens manufacturer; and Wayve, the autonomous driving company. These fast-growing businesses are where the Golden Triangle is the center of VC funding in the U.K., with growth particularly strong in AI businesses, where there was $8 billion of investment in 2025, more than offsetting the decline seen in Life Science's investment since 2021. This AI growth cements the U.K. as the largest AI market in Europe and the third largest in the world. And this mirrors what we've been seeing across our portfolio. We now have more than twice as many innovation occupiers compared to 2022 and demand continues to build. VC funding is at its highest level since 2022, and we're currently tracking 1.5 million square feet of active demand from tech and AI businesses across London. And it's this demand that we're benefiting from at our newly launched innovation building, One Triton Square at Regent's Place. Since the launch in October, we've completed 63,000 square feet of deals to world-class science and tech companies, and we're under offer on a further 166,000 square feet of space, taking the building to 72% let or under offer. This has reinforced our view that we're experiencing a sustained upswing in science and tech demand, a supportive tailwind as we bring this portfolio onto our platform. You'll be familiar with this slide from our half year results, where we set out the value drivers of our business. These support our confidence in delivering 8% to 10% total accounting returns through the cycle. And this earnings accretive value-add opportunity clearly fits the wider BL opportunity, contributing to each of the drivers, earnings yield, valuation uplift and development upside. So let me finish where we started. This transaction offers highly accretive economics unlocked by the British Land platform. It strengthens our footprint in the growing science and technology market, is immediately earnings accretive and builds our scale in the Golden Triangle, the U.K.'s most dynamic innovation market. But it also reinforces a broader point. At British Land, we are focused on delivering sustained growth in sectors with the strongest occupational fundamentals, supported by our strong balance sheet and world-class operating platform. Thank you for your time, and we'll now take any questions you may have coming through online.

So we have the first question from Adam Shapton at Green Street. There are a couple of questions here. So two questions. The first question is, are you underwriting any CapEx beyond the committed GBP 25 million to achieve income upside? And the second question is, are you in the market for other science and tech assets in the Golden Triangle? Can you acquire a value similar to what you're paying for LABS?

Adam, thank you for those questions. So first one on the CapEx, as you highlighted, at Oxford Tech Park, there's 2 buildings that have just started construction with about GBP 25 million of CapEx. So that's the principal CapEx that we have in. And then effectively, Oxford Technology Park is a new asset, newly delivered. And across the rest of the portfolio, we will have normal low levels of CapEx if required when leases roll, but we're not envisaging a lot of further CapEx on this portfolio. It's in good shape, and the key thing is about driving the occupancy up from the 80% it is today to full occupancy. And as David spoke about, that will drive future earnings growth on the portfolio. And then are we in the market for further assets in the Golden Triangle? For a while, we've said we'd like to export our campus model to the Golden Triangle. You saw us acquire Peterhouse Technology Park a couple of years ago. That's an asset that's gone well for us. We bought existing assets. We bought a development plot, delivered that development plot and leased it to ARM. So we are looking at further assets. This is a very attractive entry price for the assets we are acquiring here. If we can see similar economics and similar ability to drive value, of course, we'll look at that.

So we have another question here from Mike Prew at Jefferies. He's asked, did British Land undertake its own valuation of the LABS portfolio?

Mike, thank you for that question. So we undertook our underwrite of this portfolio. And actually, we were tracking this for a while. And the -- you saw that there was a write-down in the portfolio in December, which was in line with where we expected it to move to. So very consistent with our underwrite. So we underwrote both value, but also obviously, more importantly, underwriting the cash flows and the returns we can get out of this.

Perfect. So we have another question here from Callum Marley at Kolytics. He's asked, you claim immediate EPS accretion from cost synergies alone. Can you quantify the precise annual cost savings in pounds million?

Thank you for that. Under the terms of the takeover code, I can't go into too much detail on the precise details. However, if you look at the slide pack, I think it's Slide 15 within the appendices, we lay out there an analysis of the admin cost base of the company. Hopefully, that gives you the building blocks to think about how we take that forward and particularly the costs that will fall away such as the fee to the manager, costs associated with being a listed company. We'd clearly as well finance the business moving forward on our own balance sheet. Our marginal cost of debt around 4.5%. I think that compares to about 6% for the Life Science REIT debt. So there's an uptick there as well. We've talked about the GBP 18 million of rent that we take on day 1. We've talked about our ability to grow that just through reversion and through development lease-up to GBP 25 million as well. So I can't give any more detail on that, but hopefully, that gives you the building blocks you need to think about the accretion numbers.

And Callum has asked one further question. What was the December reported EPRA net initial yield of Life Science REIT?

So the December contracted rent is GBP 18.7 million that's in the 2.7. And if you take the portfolio value of GBP 333 million, that gives you a topped-up net initial yield, so based on contracted rent of about 5.25% by my math.

We have another question here from Matt Saperia at Peel Hunt. Have you put together business plans for the 5 assets? And if so, what are you likely to do different to the incumbent manager to drive occupancy and income?

Thanks, Matt, for that. And as you would imagine, the answer is absolutely yes. So we've underwritten this portfolio in quite a lot of detail, as you would imagine. We've been relatively conservative on lease-up assumptions because as we talked about, this deal is accretive day 1. And then as we lease further space, that will drive further accretion. So we've put in decent periods of time for voids and appropriate rent freeze and being prudent on the rents. But to answer your question around what will we do differently? I think the key part here is our ability to target a broader range of occupiers. This business had a Life Science's mandate, which I think restricted it initially. So our ability to target a broader range of occupiers, but also just leverage the British Land platform. We've been very successful in lease-up, particularly at Regent's Place in recent months, and I think that reflects the quality of the team. And also, we'll be able to put CapEx, pay for the GBP 25 million of CapEx to go into those development assets where as Life Science REIT was a little bit restricted on that as they say in the 2.7.

Brilliant. And we have a question here from Eleanor Frew at Barclays. What's the expected time frame on vacancy lease-up and then eventually achieving the GBP 25 million rent roll?

So on our underwrite assumption, it varies asset by asset, but you should think 12 to 15 months lease-up period is what we've underwritten.

Perfect. I have another question from Mike Prew at Jefferies. Has British Land agreed to buy the external manager contract? And if so, for how much?

Mike, no, we haven't agreed to buy it. There was a notice served to cancel the contract by Life Science REIT. So we do envisage that we will cancel that contract.

I have a question here from Marcus Phayre-Mudge at Columbia Threadneedle. He has asked, how much of the GBP 18.7 million contracted rent is subject to rent-free or incentives? Does Oxford Technology Park have all the power provisions for the completed scheme?

So on the GBP 18.7 million of rent, we've shown an accounting rent, GBP 18.7 million is what's contracted per the 2.7, and we've shown an GBP 18 million accounting rent. So that includes the spreading of it. So hopefully that kind of answers your question. And yes, we do have the power necessary for these schemes.

I have one further question from Jonathan Kownator at Goldman Sachs. How long is the notice period for the management contract?

The notice period for the contract was 2 years and the notice was served in November. But we will take on management of the -- we envisage taking on management of the portfolio straight away, and we will provide for the cost of the management contract.

I have a further question here from Andrew Saunders at Shore Capital. Life Science REIT announced its formal sale process in March 2025. What is the rationale for taking this long to make your move?

Great question. This is a portfolio we've been tracking and a situation we've been tracking for a long while. And this felt like an appropriate time to act to get best value for our shareholders.

There are currently no further questions on the webcast. So we'll hand back to Simon for any closing remarks.

Thank you, Sean. Thank you, everyone, for joining us. I think the sort of punchline of what we've been talking about today is this is a business that is far broader than Life Science is and we're really able to lean into that with our expertise in that space and the platform can drive real synergies and accelerate the lease-up of the space, so delivering good EPS for our shareholders. So thank you very much, everyone.