Earnings Call: H2 2014

May 14, 2014

Good morning, everyone, and welcome. We are reporting strong results this morning. We are also going to show you how we are driving performance through the decisions and actions we have taken over time, as well as the effect of a strengthening market. in 2010, we took the view that it was the right time to be substantial net investors in the market, to take on more risk, mainly in the form of development, and to increase our exposure to London and to the Southeast. We have continued to execute well against that plan, almost completing our 2010 development program, replenishing our development pipeline, investing in attractive assets, and all the while, improving our operating metrics. We will use a similar format to the half year. Lucinda and I will make the formal presentation, and then Tim and Charlie will join us for questions. I will give an overview and talk about our two businesses. Lucinda will then cover the financials in more detail. Finally, I will talk about the outlook and our priorities going forward. Let us start with key performance highlights for the year. Our NAV is up 15.4% to GBP 688 pence, driven by an 8.3 increase in our valuation. Underlying profits are more than 8% ahead at GBP 297 million. The dividend is 2.3% to GBP 27 pence, in line with previous announcements. Our total accounting return for the year is 20%. This year, we have seen a material strengthening across our markets, in London and also in retail. You can see the valuation uplift on this slide. It shows how the trends have been improving over the last couple of years. For me, what is really striking is the contribution of our actions over the last 12 months. We have created around 50% of the value uplift, though yield shift has obviously also been a big factor. We have also continued to outperform IPD, this time by around 140 basis points on capital returns. Operationally, we have had another strong year. Lettings were once again ahead of ERV, adding some GBP 24 million of new rent. Occupancy is also ahead by about 130 basis points, and in retail we are pretty much full. A year ago, we were very explicit in setting out our objectives. As you can see, we have made real progress. First, we have put more money into the market, in part by investing our equity placing. Raising equity 14 months ago looks well timed. It enabled us to make some exciting investments at attractive prices. We invested ahead of schedule, and this has been accretive to earnings and net asset value. Our spend has been focused in London and the Southeast. Second, we have continued to focus on development. We are delivering our 2010 program on schedule, and we are making good progress letting up the remaining space. Total profits from our London program are now likely to be nearly GBP 640 million. That is GBP 64 a share. We have also replenished our development pipeline. We have already started on site at a number of new projects, notably Clarges. Third, we have continued to reshape our retail portfolio. We have taken advantage of a strong investment market to sell assets at good prices. We have also bought well. Over the last four years, we have traded around 40% of that portfolio. Let me turn now to our individual businesses. Retail first. Here, we have had a much stronger year. Four things really stand out for me. First, the improvement in our returns. Second, the continued strength of our operational metrics. Third, the successes we have had at our new developments, at Whiteley, Glasgow Fort, and at Hereford. Finally, our capital recycling. Starting with returns, we generated total returns of over 10%, and capital returns of 4.6%. You can see the significant improvement in the second half. Overall, over two-thirds of our capital return was driven by yield shift, and the balance by asset management. We have done more lettings than we did last year, but what is really notable is the quality of those lettings. You can see that from this slide. The breadth of the deals, too. We signed more deals with existing occupiers. Retailers like FatFace and Joules took their first out-of-town stores with us. We added more restaurant and leisure operators, and we signed significant space with home improvement stores. Our footfall metrics are consistently better than the market. Here you can see that despite the rise in internet shopping, our footfall remains robust. Recent research shows click and collect has been the fastest-growing channel. Nearly as many parcels are now collected from stores as are delivered to people's homes. Our exit surveys show that up to 25% of the people who go to our midsize parks are using click and collect. So it is not surprising that footfall trends on our shopping parks are consistently ahead. It has been a key driver of our overall performance. Our footfall was up 1.2% in the second half against a benchmark decline of 2%. Over four years, this differential is even more striking. Our rental growth was up 1.5% over the year. We have again outperformed the market by around 150 basis points. This consistent performance gives us comfort that we are providing the right sort of space. This chart is particularly interesting. It shows that rents on our retail portfolio, shown in blue, have grown as the economy, in gray, has improved as well. The same is not true of secondary, shown here in orange. That is why stock selection is so important, as is investing in our estate. In terms of development, we created nearly 700,000 sq ft of new space last year. Glasgow Fort is a great example of what we are doing on the existing estate. We opened a 46,000 sq ft cinema and restaurant extension. The impact on footfall, dwell time, and spend has been remarkable, as you can see on the slide. We opened Whiteley exactly a year ago. Sales continued to grow, and we have seen a capital uplift of over 20%. We are delighted it has just been named best mid-size shopping center in Europe. That is one you do have to practice. We are already on site with phase two. It is a 58,000 sq ft cinema and restaurant extension, which will take the leisure offer there to around 25% next year. We are also pleased with our new scheme at Hereford, which opened on the 1st of May. It was 96% pre-let with a great lineup of retailers. It is still early days, of course, but the figures since opening have been really encouraging, with 150,000 visitors over the first 5 days. We have also continued to improve the portfolio through sales and acquisitions. On the sales side, patience has been a virtue. We are taking advantage of strong investment markets to sell at decent prices. Over GBP 390 million since March last year. This has included shopping centers at Basildon and at Aberdeen, retail parks at Dumbarton and Cwmbran, as well as a number of smaller food stores. Our sales were broadly matched by acquisitions. Southgate Bath is a great example. We also completed a number of important transactions in the second half. We have increased our share in HUT to nearly 60% at an effective net initial yield of around 6%. Great value for one of the best park portfolios around. On superstores, we clearly recognize the challenges facing the sector, but there is still good value in some parts of the market, and stock selection is becoming ever more important. That is why we bought a 26% equity share in a portfolio of Sainsbury's superstores. They are some of the best stores in the country. We acquired them on a reversionary yield of some 5.7%, and we have already made a capital return of some 10%. It is also why we will continue to prune our existing superstore portfolio. Turning now to our office and residential portfolio, we have had an exceptional year. Key highlights include the completion of our 2010 West End development, the acquisition of Paddington and Shoreditch, the progress we have made at Clarges, and finally, what is happening at Broadgate. Overall, we grew the portfolio by a startling GBP 1.2 billion and delivered capital returns of 15.5%. Again, our actions were a really significant driver of value, delivering something like 60% of the overall uplift. Development was again important. There was another significant uplift from the 2010 program and a healthy uplift from Clarges, too. The improving occupational market is reflected in our leasing performance. We signed over 630,000 sq ft at terms over 8% ahead of ERV. We have seen demand from a broader range of occupiers. The TMT and insurance sectors have been prominent during the year, but there is broader interest now from hedge funds and wealth management companies in particular. Our leasing activity was spread right across the portfolio, as this slide shows. Inquiries have strengthened recently. Since the year-end, we signed or have under offer over 150,000 sq ft of space, including at Leadenhall and at 10 Portman Square. At Marble Arch House, we have just announced our first letting to Fulcrum Asset Management. At GBP 78.50 a foot for a 10-year term, that is materially ahead of ERV. There is more interest, too. Regent's Place continues to perform really well. Valuations are up over 15%, ERV growth of 5.4%, and a new rental high of GBP 71 a foot. We have let nearly 200,000 sq ft to a broad range of occupiers, including Facebook, Manchester City Football Club, and Santander, all at 10 Brock Street. The campus is almost fully let, thanks to more good lettings across that estate. Rental values have now grown by nearly 12% at Regent's Place over the last three years, which makes the entire estate 6% reversionary. Looking forward, we are planning a new program of refurbishments, likely starting at 338 Euston Road next year. We have made real progress at Paddington. It has increased in value by 11% since we bought it, and we have already let almost 40% of the vacant space. The current office rent average is GBP 50 a foot. That is attractively priced relative to competing areas. We believe the prospects for rental growth are good. As I said earlier, we are nearing the end of the program we started in 2010. But it continues to be an important contributor to our performance, both in terms of valuation and income growth. It has also modernized our portfolio substantially. Around 40% has been built over the last five years. We have shown you this chart before. The program generated nearly GBP 300 million of additional profit this year. We now expect total profits to be nearly GBP 640 million. Overall, we have let or placed under offer another 360,000 sq ft. The total program is well over 70% let, securing GBP 54 million of annual rent. We have also sold over 100 residential units, which leaves only 7 left to sell from this program, and of those, 3 are already under offer. Rebuilding our pipeline has been a key aim over the last 18 months, and we are in good shape. Adding over 1 million sq ft of potential development, Paddington and Shoreditch have been critical in this regard. We are getting on with this program, too. We are on site at Clarges, The Hempel, and Aldgate Place, which are mostly residential. Also at Yalding House, a small tech development in the West End. We expect to commit to Four Kingdom Street soon. Overall, we estimate total profits from our new pipeline to be around GBP 375 million, with GBP 290 million to come. Before I hand over to Lucinda, I would like to say a few words about Broadgate. We are delighted to have GIC as our new partner there. They share our vision of Broadgate. We think Crossrail will be a real game changer, which will really help us broaden the occupier base. There is plenty to do before Crossrail opens. We hand Five Broadgate over to UBS next year. We are really excited about what we are doing at Broadgate Circle. We are creating a major new food destination, not just for Broadgate, but for the city more broadly. You can get some more sense from this CGI of what it will look like. We have had a tremendous level of interest, and we already have 2 units under offer. The next opportunity will be at 100 Liverpool Street, where we are working up plans for refurbishment starting in 2016, when we get the building back. With that thought, I will hand it over to Lucinda. Thanks, Chris, and good morning, everyone. As Chris said, I am going to take you through our results today, and I will focus on the drivers of our strong results, the strength of our debt portfolio, risk management in the development program, and the potential uplift in our rental income. Starting with the financial results. NAV is up 15.4% to 688 pence, driven by the valuation up 8.3%. Profits are up 8.4%, principally due to investment of the placing proceeds and delivering the 2010 program. As expected, earnings per share are down a little due to the sale of Ropemaker last year. The dividend for the year is 27 pence, up 2.3%. Together, this translates to a total accounting return of 20%. It has been an active year for us, a year of delivering on our strategic objectives. We've invested the proceeds of our well-timed placing, and that has contributed half a pence to earnings in the year, ahead of our target. We're delivering on our developments as well as replenishing the pipeline. We've been successful in our retail recycling and will be doing a bit more. We've continued our exit from Europe, completing almost GBP 150 million of disposals. Europe now accounts for less than 1% of the portfolio, and we've got ongoing discussions for almost all of the balance. Looking at the results in more detail. Profits are up GBP 23 million, and in summary, that's GBP 30 million from placing investments, GBP 8 million from developments, a healthy GBP 6 million like-for-like rental income increase, and you can see the impact of last year's disposals in red. All of this means that our underlying profits stand at GBP 297 million for the year. Looking at net rental income in a bit more detail, this is up to GBP 562 million for the year, an increase of GBP 21 million. Placing investments are already generating income, and they've added GBP 31 million to rent. All of our West End 2010 developments completed during the year, and they've contributed materially to our income. Like-for-like rents grew 2.2%, adding GBP 6 million. That's 3% uplift from retail, driven by asset management initiatives and letting of voids from administrations, taking occupancy up 110 basis points to 98.5%. Against this, we saw a reduction of GBP 26 million due to the disposals in the last year. I've given the usual annualized impacts in the appendix for your models. If we turn now to financing costs, these are lower by GBP 4 million overall at GBP 202 million. The additional borrowing taken alongside the placing proceeds adds GBP 1 million. Interest on completed developments adds GBP 5 million, and the disposal of Ropemaker, together with the associated close out of swaps at the time, reduced our interest charge by GBP 8 million. Bringing this all together, profits are up over 8%. Looking down the income statement, you can see that admin costs are up by GBP 2 million, reflecting the increased investment in people that we talked about a year ago. As predicted, our operating cost ratio has increased to 16.2% today. Looking forward, I expect the ratio to continue pretty much at this level. The strength and longevity of our cash flows enable us to pre-announce the dividend for the coming year. The dividend will be increased by 2.5% to 27.68 pence for the year. That's a 6.92p quarterly dividend, and that reflects our confidence in the future outlook. Looking at the portfolio as a whole, Chris has taken you through capital returns. I'm going to focus on the valuation. We've seen a strong performance with the portfolio up 8.3% on the year, 5.5% in the second half. The stronger returns were driven by an improved performance from our standing investments, up almost 7%, and another excellent period for developments, up more than 20%. This performance is a reflection of a number of factors, the quality of our assets and how we manage them, our well-timed development program, and our portfolio allocation decisions, including increased investment in London and the Southeast, which now account for 60% of the portfolio. We've outperformed the market across the portfolio with capital returns 140 basis points ahead of IPD. We're pleased to see continued ERV growth across all sub-sectors, up 3% overall, ahead of the market by 130 basis points. We've also seen over 30 basis points yield compression over the year, taking our net equivalent yield to 5.5%. That's 5.6% in retail, 5.2% in offices. If we look at retail in a bit more detail, valuations are up 4.4%, 2.9% in the second half. 26 basis points of inward yield shift has contributed around two-thirds and our asset management, the balance. All our retail sub-sectors showed positive valuation performance, with a particularly strong performance from London department stores and our Virgin Active clubs, driven by yield compression. Our superstores portfolio is principally open market rent review, and there's been limited transaction evidence here recently. However, we are pleased with the interest that we have seen for some assets that we currently have in solicitor's hands. Looking at the office portfolio, again, performance has been weighted to the second half. Our decision to increase exposure to the West End is clearly additive, up 17%. City performance was also significantly up at around 12%. Some 60% of the valuation performance has been driven by our decisions and actions, both development and asset management, with the balance driven by yield shift of 40 basis points. We have had strong ERV growth across the portfolio. The city is up 4% on a like-for-like basis, 7.9% reflecting refurbishment assumptions. You can find further details on this in the press release. Occupancy stands at just over 92% today as a result of completing those West End developments. On a like-for-like basis, it improved 190 basis points. As we now have some 300,000 sq ft of completed development space to let, that's a great prospect in today's market. The standalone residential portfolio increased in value by more than 15%, primarily due to increased sales values. Across the portfolio, valuations increased by GBP 950 million, driving an NAV increase of over 15% to 688 pence. This slide shows you the components of that growth. The valuation surplus is 92 pence, which, as you can see, is pretty evenly spread across developments, offices, and retail, and pretty evenly split between our decisions and actions and market yield compression. Overall, our investment activity, that's acquisitions and disposals, has been accretive to NAV. This includes the placing investments, which have added six pence, more than making up the initial dilution on the placing. I have talked before about our ability to access low-cost debt from a variety of sources. We have raised GBP 1.5 billion of debt finance in the last 12 months on competitive terms. I am pleased by our most recent deal. We have taken advantage of the market to raise GBP 785 million unsecured revolving credit facility with a syndicate of 14 banks at a margin of 115 basis points. The facility has an initial maturity of five years and may be extended to a maximum of seven. On average, the interest rate on nearly three-quarters of our debt is fixed for the next five years. This significantly mitigates the potential impact of increasing interest rates whilst retaining valuable flexibility. In total, we have raised GBP 4 billion since March 2011, and we now have no further British Land refinancing requirements for at least the next four years. An important feature for our lenders is the strength of our debt metrics. Our LTV stands at 40% today, at the bottom of our 40%-50% range. Looking forward, debt levels will be impacted by retail sales as we continue to hone the portfolio, development spend, and by acquisitions. You've seen our ability to exploit opportunities where there are fewer competing bids. I can see that with ongoing strength in markets, and depending on the timing of transactions, our LTV will remain around the 40% level, perhaps a little above or a little below. Our weighted average interest rate is 4.1% today, and that compares to 4.6 March last year. You can see our interest cover is 2.5 times. Average debt maturity is 8.7 years. We are currently drawing some cheaper shorter term facilities. As Chris said, we've been successfully replenishing our development pipeline, and the chart shows the impact of our actions. You can see that while the 2010 program, shown in blue, is completing, our recently committed, shown in orange, comes on stream. Our recent commitments are London-focused and mainly residential. We set a limit for our residential development exposure of GBP 500 million. Today, we're below that level at GBP 440 million. We're not planning on buying more, and I expect our exposure will come down as we'll be making some sales during the year. Including recently committed projects, our total development commitment is now GBP 1.4 billion. This is well within both our 15% limit of the investment portfolio and 10% on a speculative basis. The deal we did at Shoreditch last year is good for us, great for us. We've paid GBP 6 million to date, and we can decide when to draw down over the next three years. In addition, at 4 and 5 Kingdom Street, the returns there should be magnified by improved performance as we complete the entire Paddington campus. In the appendix, I've included the usual slides on the development spend. Finally, bringing together our developments with the portfolio and looking out over the next five years. Our current cash rent today is GBP 557 million, with the potential to grow by over GBP 200 million. We've already got GBP 100 million of further rent contracted. We're optimistic about the prospects for letting the balance of the 2010 program, and this should add around GBP 28 million to rents. Our recently committed developments should add around GBP 11, and our near term pipeline, a further GBP 11. Our investment portfolio benefits from around 10% of rents being subject to RPI, and letting of vacancies would add a further GBP 21. To remind you, the amounts shown here are at today's levels. They don't anticipate any growth. On that note, I'd like to hand you back to Chris. Thanks. Thanks, Lucinda. I now want to look at three things: how our business is positioned today, our view on the markets, and our priorities going forward. From where I stand, our business is in good shape. A year ago, I told you that we were working hard to build more growth into the business and to take further advantage of London's extraordinary success. We just raised new equity to accelerate that process. I'm really happy with the progress we've made this year, and from a longer perspective too. Of course, we invested our equity quickly ahead of schedule and ahead of the recent rally. This chart helps you appreciate the scale of our investment activity over the last four years. GBP 4.6 billion of gross activity made up of over GBP 3 billion of investments and GBP 1.6 billion of disposals. It's important to put all this activity into context, to set out, if you like, the whys as well as the what. In recent years, we've positioned our business around several key trends. We identified these trends early, we talked to you about them, and bought and sold accordingly. Our first trend, occupiers are much more focused on the environments in which they operate. It's a theme right across our business. It's why we talk about places people prefer, but also why we're investing more at Paddington, at Broadgate, and at Regent's Place, as well as at Whiteley and at Glasgow Fort. These are campuses and estates where we can have a real impact on the overall environment as well as on individual buildings. Secondly, London. The London story is a powerful one. Both operationally and from an investment perspective, our weighting in London and the Southeast is now more than 60%. Our third theme, public transport will become more and more important in London. As I said, Crossrail is going to make a big impact. We already own more than GBP 3 billion of real estate within a stone's throw of a future Crossrail station. If we take Paddington as an example, it'll be just two minutes away from Bond Street, effectively edging it into the West End. Fourth theme, shops will remain critical to retailers even in today's world. But success factors are changing. That's why we've been so active buying, selling and developing. GBP 2.3 billion of activity in total. Our retail business is much better placed as a result. Finally, development remains a fundamental driver of value. As you know, our 2010 program has been a real success, and we've made great progress replenishing our pipeline. But we've also kept plenty of optionality, recognizing that things can change. We've done a lot to put our business in good shape, as our results show. But what's really important to me is that these themes have enduring relevance as we look ahead. So what's our view of the market? Across the U.K. as a whole, we're still in the early stages of an economic recovery. Real wages are only just starting to nudge ahead. Overall, the differential between property and bond yields is still wide by historical standards. We've certainly had cap rate compression much earlier than many people expected, albeit at different rates in different areas, with London ahead. That's partly because of easy money and because the London economy started to recover sooner than the rest of the U.K. We see our key markets as having rather different dynamics looking forward. In short, we think that London residential is ahead of London offices, which in turn are ahead of broader U.K. retail. Let's start with the prospects of London. Overall, we remain positive about the long term for London, as I've already said. In offices, a lot of yield compression has already come through, but occupational demand is definitely picking up, so we expect rental growth to be the main driver of performance over the coming year. In prime residential, price growth seems to have slowed, but we're selling our units at prices well ahead of valuation. Looking forward, the bulk of our exposure is at Clarges, and we're perfectly happy with that. In retail, away from London, the cycle is at an earlier stage, and that reflects economic reality. We're still significantly off trough yields, particularly for some of our larger assets. There's more money coming into the market. On top of that, retailers are clearly more confident about the outlook for consumer spending, and they're looking to take more space. There are, of course, risks to all of this. You can argue that political risks, both at home and abroad, are greater than they were a year ago, and these may have an impact. But I draw considerable comfort from the strength of our business. So what can you expect from us over the next 12 months? First, and perhaps most importantly, we'll be focused on driving rental growth right across our business. We still have, remember, over 700,000 sq ft of development space to let out. Next, we'll move forward with our new development program. We expect to commit to Four Kingdom Street at Paddington and to submit a planning application at Shoreditch. Third, we'll continue to take advantage of strong investor demand to sell mature retail assets. We currently have over GBP 150 million under offer or in the market, and I could easily see that number doubling. Fourth, in terms of acquisitions, good investments are clearly harder to get. So we're not putting ourselves under pressure to invest. Having said that, I do expect we'll continue to find some attractive deals. So I expect to be roughly balanced in terms of acquisitions and disposals. To wrap up, the business is in good shape. We've delivered a strong set of results. Around half of our performance can be attributed to our own actions. And those actions also leave us well positioned for the future. With those thoughts, I'll ask my colleagues to join me up here and turn it over to questions. What I would say, usual housekeeping, we've got a number of people on the phone, so if you could just give your name, rank, and serial number, that would be great. There should be a couple of microphones, and we will try and direct them two at a time. There's one there, and then if you pass one over the next row forward, we can sort of do it. Just one there for afterwards. Good morning. Remco Simon, Kempen. Chris, if I can ask a bit more about your view on the development cycle. You indicated that you intend to start Four Kingdom Street. How do you see the cycle progressing? Some people have been pointing to 2016 as the ideal time of completion. Do you still see opportunity to extend that to 2017 and potentially 2018 with Shoreditch or Five Kingdom Street, or what you- Yeah. Look, I'm going to get Tim to comment in a bit more detail on London with respect to development. But in short, yeah, we do think there's an opportunity. Otherwise, we wouldn't be planning to press the button on 4. Tim, do you want to comment? Yeah. First of all, from a demand perspective, the occupational markets are very healthy at the moment. If you look at it, the economy's growing, business confidence is growing, so you'd expect that demand to increase. Then if you look at it from a supply side, you can see from the supply figures what is likely to come out in 2014 and 2015, and that is relatively straightforward to assess because people are promoting or developing schemes that are going to be developed and delivered within the next 18 months. The issue then becomes, what do we think of 2016 and 2017 on the supply side? Looking at that, our prognosis is that there is not likely to be excessive supply. Therefore, we think at this stage that the market over the next three to four years generally will be good. What you've heard from the presentation is that Lucinda's talked about us putting ourselves in a position to commit for Four Kingdom Street, and it is likely that we will commit to do that, and that is a delivery date late in 2016. On something like Shoreditch, again, Lucinda talked about optionality. We want some optionality. We don't need to make a decision on when to commit on Shoreditch yet. We won't have to do that until the early stages of next year. Next year, of course, we will have better information for what the market's going to be like in 2016 and 2017. All in all, we're pretty positive about the outlook for the occupational market over the next four years, and therefore, rental growth. And if I can maybe ask you on the outlook for investment markets. You signaled some further capital recycling in retail, but also an expectation that most of the yield shift in London has already happened. Does that mean that you're going to start looking for some further profit-taking or capital recycling in London as well? Well, look, the first thing is just to reinforce what Tim said. Because we expect rental growth, we have continued to be constructive on likely price performance via ERV growth as opposed to further yield compression. So I certainly don't think there's We're not waking up tomorrow morning and thinking we're at some sort of peak in our view. The caveat I would give you is probably the one I've made here before. There's a price for any asset in the portfolio, and if somebody comes along and says to us, "We will pay you that," and when we run our numbers, it looks like we're kind of collecting future rent or we're collecting future value, then of course, we'd look at that, as I think you'd expect us to do. That's an ongoing situation rather than different. You've seen us do it in the office portfolio. You've seen us do it in retail. No reason to believe we wouldn't do that, but it's different from calling some sort of peak. Okay, maybe last question. Charlie, there was a bit of an acceleration in rental value growth in retail. Do you expect that to continue going into this year and next year? I think certainly the second half of the year, retailers and consumers were more confident, and you have seen that in the leasing figures. The second half lettings were 6.6% ahead of ERV, and the ERV growth was 0.9 in the second half versus the first half. So, with occupancy up at nearly 99%, with a wider range of retailer interest. If you look at the mix of retailers that we have leased space to over the last 12 months, it has been broader and stronger. So we are reasonably confident. I think timing and amplitude is the bit that is less certain, but certainly the arrows are in the right direction. What we are seeing in that context is more investor interest coming in on the back of some of these positive flows. As you know, in some cases, we have been taking the opportunity to sell assets that we do not believe necessarily have got performance for the future. But if the retail cycle follows the same sort of London cycle, then you could actually see some yield compression ahead of rental growth. So that is plausible. I am not saying that is exactly what will happen, but that sort of picture would be plausible given what happened in London slightly earlier. Thanks. Man with the microphone. That is right. Yeah. Nick Webb from Exane BNP Paribas. I just want to ask, is there a bit of a mismatch between your assessment of the cycle and the composition of your near-term development pipeline? Because you gave, I think, a pretty fair assessment where you said London residential, we're quite far in. London office is less far, retail, relatively early. But we look at the schemes that you've now started, they're very heavily dominated by residential schemes, clearly. Sure. Obviously, we're not bothered by what you describe as a mismatch, and that's principally because we like where the exposure is. If you think about our total exposure, the bulk of it is at Clarges. We think that that is particularly an attractive investment, and there's also a lot of profit to come there, which gives a buffer, if you will. I think I'll just mention one other thing, which is the development pipeline in London inevitably gets a lot of focus. But as we see the retail market improving, we do have considerable capacity to do smaller scale developments, which can start to add up to quite interesting numbers. Typically, not always, but typically, they have slightly shorter lead times. Charlie's going to kill me for that because he'll tell me it takes five years to get any sort of approval. Nevertheless, you could see that side of our business following on that same pattern. So no. Okay. That's fine. Thank you. Down the front, if we go there, and then two. Osman Malik from UBS. Sorry to labor the point on development- It's a pleasure. But just looking at your recent successes, and your outlook that you've given us a few times, are you not tempted to flex your 15% limit on development upwards? We are very comfortable where it is now. I think that it is a good discipline. I think you always got to remember, again, I have said this before, but I think it is important to recognize the difference as a what we think is going to happen and your position as a risk manager, which is, I might not be right. What we like is that combination. It gives us exposure. But if something were unexpected to go wrong, this business is still in great shape. For me, we want to continue to be able to pay the dividend, to grow that dividend, to grow the business. I like that combination, and I am comfortable with it. There will be years when people will be able to say, "Hey, if you had done more." If I look at what we did in 2010, I am not worried about our ability to take big decisions or to take more risk, but I like that combination. Very clear. Thank you. Just one back, and then maybe we can pass the next mic down to there, too. Sorry. Michael Burt at Liberum. You talked about the importance of identifying key trends in the retail sector. I was just wondering, how confident are you that the slight underperformance in capital growth terms of superstores in the second half is just a temporary blip and not something more structural? Well, I am going to turn it over to Charlie in a second, but, as I said in my formal presentation, we do recognize that there are challenges in that sector, so we are not trying to dodge that. With that thought, maybe Charlie, I will turn it over to you. Yeah, sure. I think there is probably three parts to that. The first part is, Chris just touched on. It is also why, over the last three years, we have decreased our superstore weighting from about 23% to 19%. As Lucinda said, we have got a few more sales in the market. The second thing is for the superstore sector, it is obviously still a very profitable sector, even though it has got challenges. It is still a volume game. They still need space. All the big operators are still taking space. Possibly more relevant, they have all started significant refurbishment programs, so Tesco is going to refurbish their entire portfolio within the next three years. Then the third point is that it has become much more stock-specific. So property fundamentals are going to be much more important. There are still areas of the country where there is no supply, planning is tight, demand is still there. In those areas, we think that we will get good rental growth. Because we have got such strong relationships with the major operators, we feel we are in a good place. Yeah, go. Hi. Bart Gysens from Morgan Stanley. You are upping the dividend by about 2.5% Yeah on a quarterly run rate. As the earnings or earnings per share growth accelerates when you complete quite a few developments, should we expect a more punchy increase in the or should the dividend follow with the earnings in years to come? I think this is one that goes to my colleague on my immediate left. Yes. The payout that we are running at the moment is relatively high with the year's dividend that is just passed for actually year 2014. At over 90%, it is a 92% payout. And we have been increasing the dividend as we have been contracting the lettings on the development program. If you look back over the last few years, the payout has been much more in an 80s range, and I think you should see that as a level that we would expect to be at over the longer term. Hi. Good morning. Cameron Cosset from Green Street. Just wanted to pick up on the very strong letting at Marble Arch, the GBP 78.50. The ERV seems to have moved up, but nowhere near as much. I look at it as something like high 50s is my calculation. I do not know if that is quite right. But I just wondered why is there such a big discrepancy, and does this apply to some of your other schemes? Is there material room for growth still in some of the developments, please. Hamilton- Are you holding back? I always look forward to your technical questions. Is it technical, is it? It is. It's a technical question. Okay. Yeah. I mean, first of all, with the Fulcrum letting that Chris mentioned, we're really, really pleased with it because it's a big rent. It's GBP 78 a square foot. And if you look at it in relation to the ERV at the start of the year, it's 24% higher. And if you look at it even in relation to March 2014 ERV, it's still about 7% higher. So in other words, the Fulcrum letting is going to help us grow the ERV on that building going forward. And also, we've got other interest in the building. So again, I think we will be doing further lettings ahead of ERV. So if the question is, are we positive about those lettings? Are we positive about look for the ERVs? Yes, we are. Yeah. Sorry, I didn't mean it to be a technical question. It's a big picture question about why is there such a big discrepancy, and there appears to be one. Where do you think the discrepancy is? Just explain to me. 24%, I think, Tim. Sorry. Sorry? It's- 24%. Okay. Okay. It's, it's the GBP 78.50. It's just that seemed like a really strong number, which is- Yeah. Yeah. Is that unique in any way? The ERV growth across the whole of the portfolio is 5.8%. What will happen at any point in time is we're going to have some buildings where we're doing lettings, and we can be very explicit with the values that we've got growth. Then there are other times where the values will be looking at growth from a market perspective. We are going to get situations where even in a rising market, sometimes buildings won't take that step forward on the ERV, because usually, the values will only be marking the ERVs up in incremental levels. Again, there are going to be some bright spots in our portfolio. The West End is a bright spot at the moment. New buildings like Marble Arch and Portman Square are also bright spots where we will get good ERV growth. I also think, if truth be known, that Tim's being a bit modest because, you know, when the, when the team identified that building, I mean, if, you know, the good news is where it is, the bad news is where it is, if you will, because it's right on the corner of the Edgware Road. What we've done in conjunction with the Portman Estate over the course of the last few years is really see the quality of that area. The Portman Estate are doing a lot of work on the, on the public realm. It's something we talk a lot about in terms of places people prefer. So we got that kind of combination benefit of a great building in a rapidly improving area. What is hard for the valuers to do, and in the end, it is an externally valued number, is to judge exactly where that's playing out. So for us, we get a big benefit from having been there, chosen to do it when we did, and all those things. It's tough for the valuers where to spot it, but, you know, credit the team here, a number of whom are here, for, for choosing that spot and developing it so well. You know, if I look elsewhere in the portfolio, I said it in the formal presentation, I look at somewhere like Paddington at GBP 50 a foot. Do I think that has a real opportunity to grow over time? Yes, I do. Do I think that the the the the stuff we've learned by being at Regent's Place in terms of completing estates and in terms of improving the whole public realm, again, that'll have a big effect on time. You know, you can't go to the valuers today and say, "Hey, guess what? All that hope value is worth another GBP 10 on the rent or on the " It's not how it works. That that that's our business. Okay. On the one side, we've just talked about the very strong lettings. On the other side, some of your schemes, I think you've talked about increased activity in the last six months. Things like 199 Bishopsgate, which I think completed in 2012, 39 Victoria Street, schemes like that, are they Are you holding back on purpose because you're in a rising market? Is that a strategy that you're adopting given the market conditions? No, we we're not purposely holding back space. We we're trying to market buildings at the appropriate time. So 199 Bishopsgate, it's 55% let. That's okay progress on 199. On Victoria Street, actually, that is a building that only completed within the last few weeks, and we literally had the agent's launch a couple of weeks ago. So there, we've got interest in it. But something like Victoria Street, where we've taken a building, quite a tired building, and we've significantly refurbished it's in our interest to present it to the market in a really, really polished way because too many people have got the vision of how the building used to be, and it's completely changed. So on Victoria Street, launch has been successful. We've had RFPs. The market's healthy. Expect to make good progress on the letting of Victoria Street. Again, not remotely thinking why haven't we pre-let part of Victoria Street? Because I think the type of market that we're going to, the type of building that we've provided, isn't conducive with doing lots of pre-lets. Okay. Thank you. Just one last question, sorry. Just touching on what Raviko was saying about potential sales in the Central London market. Regent's Place has been obviously a great success. You've developed the estate into what's now pretty much mature. Some of the rents are around GBP 70. The investment market's very strong. Is now a good time to be thinking about selling a stake in an asset like that? The short answer is no. There was some risk of me beating you to the draw there, but I thought. Chris, in his slide on Regent's Place, showed you the average rent, and the average rent at Regent's Place is GBP 46. It's quite interesting because people always take the headlines and they apply the headlines to the whole of the estate. Yeah, we're absolutely thrilled that we've done a letting at GBP 72 a square foot in Brock Street. Brilliant building. Yes, we are. But there's still lots of intrinsic growth off the GBP 46 a square foot. I think we've had absolutely tremendous success in repositioning Regent's Place and attracting people like Facebook. I mean, who'd have thought, even probably two years ago, that Facebook would've considered going to Regent's Place? So haven't done really well in it, very proud of it. But I think that there's more to come. I think that we're also going to be not only helped by what we can do to the environment to improve it and to keep on improving the profile, but I think we'll also be helped by the marketplace. I think that the rents will rise because of the market. That's very clear. Thank you. Just to the- Quick couple of questions from me, please. Charlie, first, in terms of the retail park performance, I thought it was stronger than I was expecting. Obviously, you've been buying the HUT units. Could you split out the underlying performance versus the closing discount on the units? Another quick question is, hypothetically, if you were bidding for Lendlease's stake in Bluewater, what would the funding rate be for that package after capital market activity? Chris can answer the second one. For the record, the first of those is a technical question, whatever you thought about it. Lastly, just looking at your valuation table in terms of the yields, you have an overall topped up net initial yield of 5.5% across the portfolio and 5.5% on a net equivalent yield. They are the same. Does that imply the value is already caught up with your quite positive and strong rental growth expectations? Your City goes from 5.9 to 5.3, isn't that a disappointment? I will take the middle question first. Yeah. We wouldn't comment on deals that are ongoing in the market, so we'll all wait to see how that one pans out. On Hercules Unit Trust, we saw an opportunity 4 months ago where, given where the pricing was of Hercules Unit Trust, the yields were circa 6%. In fact, there was a redemption window, which we took an opportunity to buy up units. So we've bought 150 million GBP worth of units, which is a gross property value of about 250 million. We did it on an average discount of about 4%. There's no stamp duty on it, so there's no trading cost for us. So we've got an implied property yield of about 6%. And relative to where we believe the market's going, we thought that was great value. Also, with the HUT assets, they're assets that predominantly large retail parks where we think there's a lot of opportunity, and it's where we're doing a lot of the leisure extensions, food and beverage extensions, et cetera. On the last question, I think that's a reflection that actually we believe we're in a good place because we think that rental growth is starting to come, it shows the portfolio is broadly rented at the moment. So we feel comfortable about that. And as Chris said, short term, we see increased investor appetite. And in a historic context, 5.5% cap rates doesn't feel expensive for prime real estate. Do you want me to answer the- Yeah. The City's about Broadgate. So the initial yield is 5.5%. The top-up, as you say, is 5.9%, and that is topped up for rent frees and minimum uplifts. It doesn't exclude vacancy. And then the equivalent yield is 5.3%. And that feels slightly counterintuitive that your top-up yield is higher than your equivalent yield. But your top-up yield doesn't include the vacancies, it doesn't include the CapEx that your values are putting into refurbishing, for example, 100 Liverpool Street. So by the time you've taken into account the CapEx, the potential voids following refurbishment, that reduces your equivalent yield. All of that comes off your equivalent yield. And we are going through a process where, one, we're completing some exciting developments like 5 Broadgate and Broadgate Circle, as you well know. But we're also positioning ourselves for 100 Liverpool Street to redevelop that. And if you look at the way the valuers value that, they build in all the costs and the voids into the equivalent yield, but they have great regard for the end capital value for the site. 100 Liverpool Street, in round terms, is valued about GBP 500 a square foot. I know it is hard work buying sites with buildings on them in London at GBP 500 a square foot. So we think that is going to be a good opportunity. In your defense, Mike, when we first saw those numbers, we were all scratching our heads a bit as well. It is a bit counterintuitive, and it was one of those first meetings where everybody is going, "How did that?" Now you have got the technical explanation, but it is a slightly weird effect of the estate. Who was next? Mark, can we pass it along? That would be good. Hi, Martin Allen at Deutsche Bank. Is it correct to attribute 100% of ERV growth to management actions? The numbers, we had the best go we could at trying splitting it out between just yield shift and trying to put it in the context of where we had done management action against the performance. But I am the first to admit it is somewhat arbitrary, which is why we have used numbers like roughly and approximately. We can take you through all the numbers if you want, but it was our best effort, to give you an order of magnitude. Do not know if anybody wants to add anything. Can I just say as a compliment? Management talk is about being in the right place at the right time. That applies to the entire business. Thank you very much. Anybody else? Anybody on that? Thank you very much. Anybody else? Anybody on there? There is one at the back. Oh, sorry. There is one there, and then I will take one from the conference call. Good morning, Neil Green, J.P. Morgan. Just one quick question, just on Bluewater again. Given these kind of lot sizes and assets don't come up very often, would you expect there to be a positive read-across for your portfolio? I think this comes into the nice try, no cigar. We do not comment, and therefore, if we were to make a positive readout, we would be making a comment. So we are not going to fall into that particular trap, but thanks for trying. With that, I will just take a call from the phones, I think. Looking in the glare. We have Bernd Starley from Kempen. Good morning, guys. Great results. Quick question. We are five years in an up cycle now. If we add four years, it is nine. That is pretty long for a typical up cycle. I do not say you are wrong. Actually, I would tend to agree. Question is, what is most likely the imbalance that will build up over the next few years that will turn this cycle? What is your best guess estimate? Well, look, I would say a couple of things. First of all, and hopefully we have made somewhat clear, we do see the two parts of our business at slightly different stages. So I think really seeing the retail part as four or five years into the cycle does not feel right, Bernd. So I think logically, there is potentially longer to run. Tim, you might want to comment on those things that I will have my view, but you might want to have a crack at- Yeah. Hi, Bernd. If you think the last office cycle in London, apart from probably the odd blip in 1998 and 2002, it ran from 1992 to certainly 2007, maybe 2008. I do not think nine years is going to be absolutely exceptional. Then I think also you have got to take it in the context of the economic cycle. I think that this economic cycle to all of us seems as though it has been a long time improving, and probably it is only in recent months that we have got on a sustainable growth level. So it would not surprise me if this is a longer cycle, and certainly at this stage, that is what the analysis of the demand and the supply suggests. I guess the only other thing to add to that is, for those of you who remember the famous Macmillan quote about the difficulty of politics being events driven by events, we always have to recognize that there is always the prospect of some shock to the system. That is why we talk about this balance between risk management, and between what we expect to happen. That is why we have built a lot of optionality into our program. Okay, looking around the room and at the back of the room, I think we are done. So thank you very much for your time and attention. Much appreciated. Thank you.