Earnings Call: H2 2011

May 23, 2011

Good morning, and thanks for coming. I am pleased to report a strong set of results this morning. There is also a real momentum in the business that is driven largely by the actions that we as a management team have taken. The format this morning is the same as usual. You will hear from Graham, Steve, and myself, and then we will take questions. I will kick off today with an overview of the year. Since I have been at British Land, I have said consistently that we want to deliver superior total returns. Our results this morning show that we are doing just that. Net asset value per share has grown 12.5% for the year, and the dividend return was 5.2%. So we delivered a total return of 17.7%. Let me turn now to our relative performance. As you can see, we have outperformed IPD capital returns by 240 basis points and IPD total property returns by 180 basis points. Just to be clear, these numbers are on an unlevered basis. We have achieved this performance through a focus on five key priorities. Creating sustainable and growing income, focusing on assets which increase in capital value, creating extra value from higher return opportunities, controlling costs, and finally, exploiting our scale and financial strength. I will talk about each of these in turn, starting with income. Income is a major focus because it allows us to pay a substantial dividend and to finance growth. Estimated rental value is an important indicator of future revenue streams, and over the year, ERV performance for the whole portfolio has been good, especially compared to the index. While IPD ERVs were broadly flat for most of the year, you can see the British Land's were up 2.7%, and that our outperformance continued through the year. In our retail portfolio, ERVs rose for the last three quarters in the year, while in the broader retail market, they continued to fall. We see this as a modest but important turning point. It reflects what is happening out there in the retail market. Retailers want to operate from high-quality locations across the U.K., and not just in the Southeast. Polarization is continuing, and we benefit from that trend. In offices, we are benefiting from our focus on prime assets in central London, with ERV growth of 7.7% compared to 2.1 for IPD. Of course, ERV growth doesn't always create more income immediately. We drive income growth by managing the existing portfolio effectively and by adding new space. So what have we been doing to manage the existing portfolio? I will start with retail. Despite concern about the sector, occupancy rates in our U.K. retail portfolio were stable at 98.5%. Although our properties are virtually full, we are increasing our rental income. Over the last 12 months, we have carried out new lettings, lease renewals, and rent reviews on 3.2 million square feet, or 14% of the portfolio. That has given us an increase of almost GBP 6 million on previous passing rent. As you can see from the slide, new lettings were 1.8% ahead of ERV, with a much stronger performance in the second half of 6.8% above ERV. I believe this puts our retail portfolio in a better place than many others. In offices, we've carried out new lettings, lease renewals, and rent reviews on almost 900,000 square feet, which represents 13% of the portfolio, and occupancy rates increased from 93% to 98% as we let most of our remaining space in recently completed developments. We took a 13% share of last year's high-quality lettings in Central London as a result. These lettings were more than 11% ahead of ERV, demonstrating the quality and appeal of our developments to tenants. Our ability to deliver energy-efficient buildings is also a competitive advantage in attracting occupiers. Altogether, leasing activities added incremental revenues of GBP 8.4 million to the office portfolio. Putting the two together, retail and offices, we've added gross income of GBP 14.2 million on an annualized basis, which is a good performance in the current environment and completes the replacement of net income given up through disposals. We're also adding new space to grow future income. In retail, this has mainly been through acquisitions, including Drake Circus in Plymouth and Green Lanes in Barnstaple. This year's retail acquisitions will add GBP 23 million to the rent roll on a full year basis. Graham will take you through the net numbers in a minute. In offices, new space is largely being created through development. At today's ERVs, our current development program adds GBP 71 million to our rent roll, and some 40% of that increase is already secured through pre-let. Bear in mind, though, that the program will not add net income to the P&L immediately. I'll come back to development in a minute. Capital performance is obviously the other major component of total returns. Our capital returns for the year were 7.3%, of which 2% was in the fourth quarter. As I said earlier, we outperformed IPD capital returns by 240 basis points over the year. This performance reflects strong investor interest in the type of assets that we own, as well as asset management, which added significantly to the valuation surplus. At the same time, we're starting to see the benefits of our development program feeding through into capital values. Regent's Place, our estate just north of the Euston Road, is a good example of all these factors. The net value of the estate grew by GBP 170 million over the course of the year to a total of GBP 859 million. You can see the big impact which asset management has had, accounting for 44% of the net uplift. Yield compression represented 32%, and you can see that NEQ, the final phase of development there, has already had a meaningful impact. This is a great example of how British Land has created outperformance over the course of the last 12 months. As you know, our primary focus is on income generation and growing capital value. But we also seek higher return opportunities through development, through repositioning assets, and by exploiting market anomalies, adding fizz to our portfolio, if you like. The best current example is our London office development program. We took early action last year because we identified a future shortage of supply at a time of growing demand and limited access to development capital right across the industry. During the course of the year, we committed to 2.2 million square feet of London office development, including the Leadenhall Building. I'm pleased that we were able to announce last week that Aon, the global insurance company, has agreed to pre-let almost 200,000 square feet of Leadenhall. That's a third of the building and the bottom 10 floors at a rent which is ahead of our investment case. Aon obviously had real choice, and they opted for us quite simply because of the quality and the location of the building. A pre-let of this size gives us great confidence, not just about Leadenhall and its prospects, but right across our development program. We told you a year ago that we were investing roughly GBP 1 billion in development. We expected profit then of about 25 pence per share. If you factor in rental value growth, that profit could be closer to 50 pence a share. I've focused on our office development program here. We'll talk later about our growing retail development program. Let me move on now to costs. Clearly, we want to ensure that the maximum amount of rental income drops to the bottom line, and our net operating costs as a proportion of gross rental income are well below the industry norm at 13.5%. This is a competitive advantage that we want to maintain. It arises from a mix of factors, including a modern portfolio, an effective outsourcing model, and a small but efficient head office. Finally, let me turn to the benefits of scale and financial strength. Economies of scale in our industry may not be as big as in others, but they do exist. In my view, their importance is growing. In part, they arise through access to a wide range of financing markets. British Land has very good access to these. In total, we raised more than GBP 1 billion of financing over the last 18 months. This included 560 million through a new unsecured facility, with something like 340 million raised by the German Pfandbrief or covered bond market. Access to a range of capital markets will become even more important in years to come as Basel III requirements make it less attractive for banks to lend to corporates. Our size also means that we can commit to the type of projects likely to bring superior returns and to developments costing hundreds of millions. We were able to take early decisions on Leadenhall and on NEQ at a time when others were unwilling to proceed on a speculative basis. Our scale, combined with our existing pre-lets, leaves us in a strong position with other prospective tenants. I started this morning by saying that our aim is to deliver superior total returns. We delivered outperformance last year by creating sustainable and growing income, by growing capital value, by creating extra value from higher return opportunities, by controlling our costs, and by exploiting our scale and financial strength. With that, I'd like to hand over to Graham now to take you through our financial performance for the year. Thank you, Chris, and good morning, everyone. It's a personal delight for me to present my 10th and last, final presentation to you with such strong results, an additional pleasure to do so in front of the man who persuaded me to join 10 years ago. Thank you, John. I will start with the returns per share. We achieved a total return of 17.7% on net assets invested. The table here shows highlights the key elements of that total return. I'm using some new terminology here to distinguish the leverage corporate level returns from the ungeared property returns which Chris referred to. At 28.5 pence per share, the REIT income return or in accounting terms, underlying earnings per share, yields over 5%. We've largely passed this on to investors over the year with a dividend of 26 pence, and we intend to maintain the dividend at 6.5 pence per quarter for the coming year. Our REIT capital return is 60.5 pence per share. This represents valuation movements and other capital items and takes total return per share to 89 pence. I'll come on to explain the key drivers of the valuation movements later. Taking all these items into account, NAV is up by 12.5% over the year to 567 pence, including a 3.5% increase in Q4. After taking you through the numbers, I'll give you an update on financing. This slide summarizes graphically the movement in underlying profits year-on-year, which are up by GBP 7 million to GBP 256 million. The two items on the left relates to prior years, the credit risk provision, and the effect of disposals. The increase of 2.8%, or 9.9% excluding the credit risk provision, understates the real achievement in rental growth terms, and these are evident from the right-hand side of the chart. The first item here is our 2011 net investment activity, which added GBP 5 million in the period after related interest costs. This principally affected Q4. The full-year effect on rental income of acquisitions is GBP 25 million, and of disposals, GBP 5 million. This will be reflected in the coming year. After interest, the effect on annual underlying profits is in the order of GBP 14 million. As you can see here, the major influence on underlying profit comes from lettings, where we added GBP 24 million net in the period. Of this, GBP 21 million relates to our recently completed London office buildings. The remaining GBP 3 million of letting impact reflects organic growth captured from the investment portfolio after taking account of lease expiries. Surrender premiums added GBP 4 million. Our net finance costs improved by GBP 7 million, largely reflecting income from short-term liquid investments and bond buybacks. Capitalized interest in the year was GBP 5 million, down from GBP 13 million in the previous year, and there has been no increase in operating expenses net of fees. More about this shortly. Annualized gross rental income is 4.2% ahead of the prior year at GBP 546 million. This slide is designed to help you understand the effect of market rental growth on annualized gross rental income. The top three lines show the accounting rental income growth in the like-for-like portfolio, which increased by 1.4%. Retail improved by 2.3%, benefiting from lettings and rent reviews across the portfolio. A considerable number given the economic climate facing retailers, and this reflects our relative negotiating strength. The reduction of 1.2% in offices largely reflects the impact of a Victoria Street lease surrender, for which we received a surrender premium. Clearly, over-renting means we did not pick up additional rental income from offices in this year, and we expect this position to continue for a short while longer. Steve will cover the rental value market outlook for our main sectors later. The lower half of the table shows the annualized impact of acquisitions, disposals, and development activity. These contributed more than three-quarters of the overall increase in annualized gross rental income. For your models, I have included a breakdown of the annualized rent by sector in the appendices, as well as the usual analysis of future income subject to lease break or expiry. As Chris says, we have an advantage in the level of income which we can pass through to investors. As you can see here, our infrastructure only takes 13.5% of gross rental income. This is 75 basis points on the portfolio value. A third of this is property outgoings, two-thirds, or 50 basis points, is administration costs net of fee recoveries. These efficiencies are achieved through a combination of full occupancy, scale economies across sectors, our well tried and tested outsourcing model, and our choices of investment, which focus on those with low maintenance and low landlord or common area costs. Turning now to the valuation. The 6.9% full-year increase reflects both increasing investor appetite for London offices and prime retail, as well as the benefits of asset management initiatives. I have given here the equivalent yield compression across our core portfolio, which has been meaningful at 31 basis points for retail and 18 basis points for offices. Interestingly, our equivalent yield compression of 29 basis points over 12 months is much less than that reported for IPD at 44 basis points. So in outperforming IPD, we have not done so through yield shift, but through sector and asset selection, combined with asset management. In the latter, we have either increased rents or extended the duration of our income. Now we will talk about yield shortly, but just as an aside, the EPRA top-up initial yield shown here of 5.8% is net of purchases costs, not gross, as I have shown previously. Rental values have moved ahead in both retail and offices at 0.7% and 7.7% respectively. Our London development program showed a 21.8% improvement, reflecting the achievement of key milestones across the 2.2 million sq ft of developments. I would now like to illustrate the geared effect of office developments in a rising market and give you some flavor for its potential future effect on NAV performance. As Chris said, the central cases for board approval purposes for each development project added to just over 25 pence per share. This March, the external values assessment of these projects implies profits of 27 pence per share, of which only seven pence has been recognized to date. The recognition of some profit early is because we crystallized the land value when we signed the Leadenhall joint venture, as well as creating profit at NEQ on signing forward residential sales. No benefit has been taken yet for the UBS lease. In arriving at their development profits to come, representing some GBP 0.20 per share, the value as ERV average is GBP 56 per square foot. Remember, this is City and West End, and there is an average yield of 5.6%. Now remember, these figures exclude growth. To give you a sense of the impact of growth, if there is a 10% improvement in rents and investment yields harden to 5%, the potential development profit is in the order of GBP 0.50 per share. We would also expect improvements in incentives and residential. I have included a table in the appendices showing different outturns for different assumptions on headline rents and yields. We have aligned our yield disclosures with the new EPRA definitions to assist in comparability with our REITs, and this analysis shows the EPRA net yields, which are 5.2% net initial, 5.8% topped up for GBP 60 million of rent frees and the minimum uplifts, and 6.1% topped up for a further GBP 21 million of rent from fixed uplift leases, which are not included, as you know, in the EPRA methodology. In total, then, the portfolio will benefit from GBP 81 million of guaranteed incremental rent, which is the increase you see here from GBP 505 million to GBP 585 million. Just to remind you, this is cash flow. The accounting figures are, as usual, supplied in the appendices. Development ERV at March 2011, rental value is GBP 80 million, of which GBP 71 million relates to the office development program. This slide shows you the different components in the NAV growth of 12.5%. Retail and offices have contributed equally to the revaluation. Underlying profits contributed GBP 0.28, and the dividend payout was GBP 0.26, giving a total NAV of GBP 567. Of the GBP 0.31 contributed by the office portfolio, around GBP 0.07, as you know, was generated from our committed developments. Now let's look at the balance sheet statistics. The portfolio valuation at GBP 9.6 billion reflects the impact of the valuation and acquisitions during the year. Incidentally, we now own and manage GBP 14.9 billion worth of property. Net debt is marginally up by some GBP 200 million at GBP 4.4 billion, also reflecting the cost of those acquisitions, and now represents 45% of the value of our properties and investments. Our interest cover continues to improve, reflecting the benefit of lettings, and our average interest rate is reducing as we have drawn down variable rate bank debt during the year, and is now 4.9%. As you know, we are in good shape from a financing perspective, having followed sound principles of risk management for many years. As you can see from the chart, we have spread our refinancing risk across capital markets, banking, and private placement markets, secured and unsecured. Overall, group senior debt includes GBP 1 billion worth of debentures and U.S. private placements with over five years to maturity, and most of these exceed 10 years. These are not specifically rated by external rating agencies. Our group senior unsecured credit rating, relevant to those lending to us on the same terms as our banking groups, was upgraded to A minus during the year. Our joint ventures and funds also have scale and strong credit metrics, and these enable them to access similar markets to British Land. 70% of our joint venture and funds debt is investment grade, and of that, two-thirds is rated AAA. The remaining third of joint venture and fund debt is secured bank loans, such as those financing the Tesco joint ventures, and these have been popular with secured lenders as well as other major banks. In addition to diversification of sources, we have carefully avoided large refinancing concentration risks by spreading maturities. The average maturity of our joint venture and fund debt is over nine years, and the group is 10.7 years. All in all, we remain an attractive lending proposition. This chart shows you the profile of the group's near-term refinancing requirements and capital commitments. Over the next three years, we have debt maturities of some GBP 450 million and development spend in the region of GBP 700 million. Although not pressing, as you know, we have taken the opportunity since the year end to raise some five-year unsecured bank facilities, and as mentioned earlier, have just closed a GBP 560 million facility at a margin of 125 basis points. This replaces the GBP 720 million facility you will recall matures this summer. We launched at GBP 350 million and were oversubscribed, so I'm pleased with this response. Among the 11 banks involved were four new banks that were not existing lenders. With the undrawn facilities and cash at the end of the year, we would have had refinancing requirements in 2013 and 2014. This new facility lifts our available facilities with over three years left to run from GBP 1 billion to over GBP 1.5 billion, and extends our refinancing deadline to the following financial year. The lending markets have come a long way since the financial crisis, with steadily increasing access to capital markets and progressively improving lending appetite from the banks, especially for quality borrowers. It is so important not to be complacent and recognize that this thawing process is subject to risks. Sovereign debt exposures remain, for example. We bear this in mind with our refinancing approach, which has always emphasized liquidity reserves. Rather than wait till refinancing is imperative, our approach remains to raise further funds opportunistically from time to time and from whichever market is most favorable at that time. We have refinancing to do in the joint ventures and funds, some GBP 570 million within the next two years. That figure is our share. We have a strong track record of achieving these refinancings. We've closed GBP 560 million in the last 18 months in three transactions. The 2012 refinancings include that of the HUT Fund, but I'm relatively relaxed at the scale of this. The main component here is a GBP 500 million securitization, currently rated AAA on a sub 40% loan-to-value portfolio. Although I shall be around to see that deal over the line, I'm very confident in Lucinda and her team's ability to execute that refinancing well. In summary, good growth and income takes us to full occupancy. Over the years, you have heard me talk about our income quality many times over, so forgive me if I repeat it just one more time. It is the best in the sector for longevity, diversity, and short-term resilience. This year, we've improved that quality further with long leases in London offices, replacing short-term income foregone on earlier divestments. We've delivered an impressive 17.7% total return, and after a 5.2% dividend, our NAV is some 567 pence. We're focused on maintaining our operating efficiency. Finally, we are continuing to think ahead and deal with our refinancing requirements in good time. On that cheery and final note, I'll hand over to Steve. Thank you, Graham, and good morning to everybody. This time last year, I told you that British Land's portfolio is well-placed because the assets are in the right places, and they meet the needs of today's occupiers. I talked about a number of key themes, sales in retail polarizing to fewer, more dominant locations, strong returns from London offices driven by limited supply, a shortage of debt finance, especially for development, and an increase in the flow of properties coming to the market. I also said our priorities during the coming year were to grow and improve the portfolio, focusing on our two core sectors, significantly increase our commitment to London offices through development, and to our long-term exposure in the West End, and selectively acquire assets where we could find value. Let me tell you how we've done that, starting first with our activity during the year. We passed a number of important milestones in our GBP 1.6 billion London office development program. We now have planning approval for five of our six projects, and with the City of London's conditional approval, Five Broadgate moves a step closer. We're now on site at four of our developments, and we've pre-let nearly 900,000 square feet. As expected, we've started to see more assets coming to the market, and we invested nearly GBP 500 million during the year, mainly in retail. We also sold GBP 285 million of assets at average prices nearly 8% ahead of book value. These activities add a total of GBP 91 million to future income. Looking at the balance of our portfolio, the relative weighting of retail and offices remains broadly the same. On a pro forma basis, including developments at their completed value, our office weighting moves to 37%, with the West End moving from 12% to 15%, improving the balance of the portfolio. Sector allocation is driving out performance, delivering around 2% of total returns. This reflects the strength of investor appetite for prime property, growing momentum in London office rents, and a realization that we've reached a turning point for prime retail rents. Our performance relative to IPD was strong, with capital returns and rental growth exceeding the benchmark. Diverging performance between better quality assets and the rest is reflected in rental value growth, and our performance is not reliant on yield shift. The equivalent yield for our portfolio compressed by 29 basis points, compared to 44 for IPD. Our total return was 13.1% compared to 11.3% for the market. Turning to the future, we are positioning our portfolio to deliver on our promise of superior total returns with an income bias. We expect our prime retail assets and Central London offices to generate strong, sustainable income, combined with long-term value growth and limited volatility. We are also creating incremental value by exploiting market anomalies. I will start with income and capital growth in retail. Many of the easy gains made in the early days of low-cost, out of town alternatives to the high street have played out. The market is maturing. Anemic economic growth is accelerating polarization, making the market a much more challenging place. Online sales have increased the pressure on less efficient retailers, and we expect that poor quality property will suffer as a result. Across the market, we are seeing increasing divergence between prime and secondary property. While rental values are starting to rise in prime, they are still falling in many secondary locations. At the same time, vacancy remains stubbornly high in secondary schemes, at about 12% for all secondary retail, whereas in prime it is about 2%. This is not just about a regional divide or having the biggest, most expensive shopping centers. It is about the complex interaction of local demographics and the impact of shifting spending patterns. Is your property in the right location? Is it accessible, and does it have the capacity and quality to dominate the local market? Are the rents affordable? Is the space well-configured and flexible? Above all, is your property a place where people want to go? From here on, outperformance will be achievable in fewer locations and it will demand greater focus on individual assets. Activity in our portfolio bears this out. Since September, we have agreed over 300,000 sq ft of lettings at rents 6.8% ahead of rental value. We currently have about 400,000 sq ft of lettings in solicitors' hands. With a vacancy rate of about 1%, there is competition for space on our schemes, and that is why we have started to see growth in rental values. Let me give some examples. At Teesside Shopping Park in Stockton, a 460,000 sq ft scheme, we have secured lettings to H&M and Republic, and we have agreed terms with M&S, moving rental values ahead by 3.5% over the year. At Parkgate in Rotherham, we have let over 100,000 sq ft, or 20% of the total floor area, at rents that are 13.2% ahead of rental value. Although retailers have had a difficult start this year, interest hasn't dried up. We have seen good demand for space, and rental value growth for our assets exceeded IPD in virtually every U.K. region, as you can see on this slide. Retailers will pay for the right space, even in economically disadvantaged regions, provided it meets their ever more demanding criteria. As Chris mentioned, we have also been building our retail income through acquisitions. While the assets we have acquired are diverse, they each meet our core criteria. Drake Circus, for example, is a new scheme built to a high standard. The unit sizes are larger than those in the town center. It is attractive for people to shop in. The rents at GBP 160 Zone A are comfortably affordable for most retailers. With limited competition locally, there is potential for rental growth. Our Barnstaple Shopping Centre should be seen in the same light. The property is dominant in its location with limited competition. The environment inside the shopping center is attractive, and the rents at around GBP 55 Zone A, highly affordable. The initial yield at more than 8% per annum is sustainable and should grow steadily over time. Turning now to offices. London continues to gather momentum. It remains economically robust and continues to attract global capital flows. The flight to Zurich did not materialize and London retains its status as a strategic financial center. We have seen no letup from investors looking to acquire a wide range of property and demand from occupiers remains robust. Although takeup to date has been driven largely by structural events, we are seeing the first signs of expanding demand. Rental growth has been strong and the trend is expected to continue beyond the middle of the decade as Grade A supply remains constrained. The window for delivering a new building before 2015 is closing rapidly, as you can see from the chart on the right, which shows a very limited development pipeline. Our portfolio of Grade A property and developments means we have enjoyed a disproportionate share of takeup. We have let or pre-let 1.2 million sq ft of space at rents well ahead of rental value, and our lettings accounted for 13% of all Grade A lettings in central London and 25% of lettings in the City. Year-on-year, our rental values were up 7.7% in the City and 7.9% in the West End. The gap between our rental values and contracted rents has narrowed dramatically. With rental values predicted to increase by as much as 20% by 2014, the prospects for income growth are very positive. Looking at the standing office portfolio as a whole, we have a good balance of income from a strong occupier base and high security of tenure. With an initial top-up yield of 6.1%, you can see that it is a portfolio with the potential for long-term performance and low volatility. I want to talk to you now about creating incremental value, which is crucial to outperformance. As you know, we committed early to development in London offices in order to deliver incremental value. We are also expanding in London residential, at the moment, exclusively in the West End, usually alongside office schemes, but sometimes in standalone circumstances. Overall, the value of our committed residential program is around GBP 200 million. And we have seen very strong demand for our residential properties. We have pre-sold units with a value of GBP 89 million at Baker Street and Regent's Place at numbers well ahead of our investment case. Turning to retail development, there has been a lot of talk about new schemes, but not much activity so far. At British Land, we have a pipeline which currently stands at over 1 million sq ft. At Whiteley Village, we are developing 300,000 sq ft. We have pre-commitments for around 40% of that space, and we expect to start in the next six months. We are building major extensions at Glasgow Fort. We have pre-commitments there on over half the new space, and we will move ahead later this year. And we have just completed the purchase of a 20-acre site in Luton with the potential for a major open A1 scheme. In addition, in Europe, we expect to complete our 2.2 million square foot regional shopping center at Zaragoza in time for Christmas 2012. Turning finally to the year ahead. In retail, polarization is creating a two-tier market with a widening gap between prime and secondary. We see a small but definite inflection point for prime retail rents, but we're not clear where rents for secondary will eventually stabilize. While we expect to see a widening spread between prime and secondary yields, as sellers become more active, yields for good quality assets may well continue to compress. It's also a case of widely diverging trends for offices, and we expect central London to forge ahead, while many other regions may stagnate. The investment market's likely to be more active in the coming year. There'll be continued pressure in the key markets, a dearth of speculative finance, and limited appetite amongst investors for secondary assets. This divergence will create conditions ideally suited to opportunistic activity, and we're starting to see opportunities as banks work through their stockpile of plain vanilla assets and begin to release more complex properties. With high-quality retail assets and a strong development program in both offices and retail, we believe our portfolio has good potential for further outperformance. Thank you very much for your attention. I'd now like to hand back to Chris. We've announced strong results this morning, and we feel optimistic about the business going forward. We're invested in sectors which offer good prospects. We expect to see continued growth in our ERVs, in both offices and retail, with a faster increase in offices in the near term. We will continue to add incremental value through our development pipeline. There, as you've heard from Steve, there will be opportunities for acquisitions. We are well-positioned to take advantage of these. As I look back over the past year, we've also come a long way. Steve and Charlie are now well-established in the business and have made a terrific contribution in their first year. It's also a great reflection on Graham that we've been able to appoint his successor from within the finance team. Below board level, we've hired a number of talented people, including a new head of retail development. Together, this group has added significantly to our capabilities right across the business. The organization itself is changing. We're putting even more emphasis at all levels on performance, on personal accountability, and on teamwork. This too is contributing to a growing sense of momentum. Most important of all, we have a clear direction of travel. We talked this morning about the five key priorities that contributed to outperformance during the year. It's no coincidence that these priorities fit well with what it means, I'll say that again, to be a real estate investment trust. They're not just about one year's performance. They represent the way we run the business, enabling us to pay a dividend supported by secure and growing income streams while investing in assets with good growth prospects. In short, they represent the way that we intend to deliver superior total returns to shareholders over time. Thank you very much. My colleague is going to join me on the platform. Before we turn it over to questions, I have got two jobs to do this morning, at the end of the speaking part, as it were. The first thing is to introduce Lucinda Bell. Lu, stand up, wave. Who becomes Finance Director immediately after these results. The second thing is obviously to say a few words about Graham. The first thing I want to do is to, on behalf of the whole board, to thank Graham very much, for his job over the best part of nearly 10 years. It is obviously invidious, I think that is the right word, to have to select a few things to say about somebody who has had such a big impact on the company over such an extended period of time. But when I talk to my colleagues around the business, there were really a few things that kept on coming back in terms of delivery from my perspective, what he kind of stood for, stands for in the business. The first of those has been sound liquidity management. Most people know just how varied our financing sources have been, how varied the bank facilities have been, and how strong, and that has served us very well. The second thing has been his contribution towards investor relations, which I think it is fair to say have changed dramatically, transformed over the time he has been in the job. A lot of that has had to do with the transparency of our reporting, which I think everybody would agree is first-class at this point. The third thing, which I think is worth remembering, is the contribution that Graham made toward REIT conversion, which was a big deal, although it sounds, for a lot of people, like a long time ago, and perhaps got maybe overwhelmed for a while by what was going on in the market. But overall, it has made a real difference to the industry and not just to British Land. If those are the three things that he is to be remembered for within the company, I think the other thing from a characteristic perspective, has been Graham's ability to stay calm under pressure. From my own perspective, obviously now here two and a half years, I would like to thank him personally for all his support for me over the course of that period. If I was to pick one moment in my own time, unsurprisingly for most people in this room, I guess it would have to be the rights issue when obviously I was, let us say, a little new to the business, and his support was absolutely critical. If you think about Graham's characteristics a little more, it is worth noting that he has had the privilege or curse, or however you want to look at it, of working with three quite different Chief Executives. There is probably one thing that people would say all three of us having in common, one particular subject that we could always be relied to have a view on, all three of us, a theory, perhaps possibly a prejudice, some might say. That, of course, is finance. So Graham is a man who can deal with pressure and deal with it calmly. With that thought, I'll turn it over to questions. Hi, it's Martin Allen at Deutsche Bank. Martin. I've got a few questions on the Aon pre-let. Just one question is, what led you to announce it while it was still non-binding? Could you give us an idea of what rent it was struck at? What outstanding issues remain to be sorted out before it becomes binding? What sort of timeframe do you expect that to take place over? Sure. I'm going to turn most of those questions over to Tim, and hopefully he's taken note of them, although we may have to have a quick series of inquiries to make sure we've covered them all. I think in terms of announcements, the first part I'll take. One thing I've learned in the real estate industry, and there are good reasons for this, is it's a market with relatively free information, shall we say. This has been speculated on a lot, so it just seemed better as soon as there was a signed agreement, then it would make sense to make that public. Tim, do you want to pick up on the rest of the questions? Yes. I think the other thing with the announcement is that Aon were sensitive that their staff were talking about it because they'd read about it in the press. They're absolutely thrilled to have agreed non-binding heads of terms with us, and they want to announce it positively with their staff. Now, the clue in the way I'm going to answer the question is non-binding. So at this stage, we can't announce what the results are or the rent is. But as Chris has said, it is ahead of our investment case, and it is accretive to the valuation. I think, Martin, the really significant thing is that Aon have chosen to come to Leadenhall. We've pre-let the lower 10 floors of that building, and that puts us in a very good position going forward to let the remainder of the building. You talked about what other things it is conditional on. It's purely conditional on entering into an agreement for lease. In terms of timeframe, I would imagine legal documentation would take 2 to 3 months over the summer period. Just going to have one follow-up on that. Could you remind us what your investment case was? At least we got that one down. Yeah. On the table. Well, the average ERV for the building is about GBP 62.50. You can work that out. It is information that is in your pack. There is clearly a spread of rents from the top to the bottom. The top, you would be expecting to get well into the 60s, maybe into the 70s. The bottom part, I am going to leave that for you to work out the averages. Sure, Tim. Bart Gysens from Morgan Stanley. Following up on developments, there was a bit of press speculation over the last couple of days about 5 Broadgate and a potential listing status from English Heritage. Could you comment on that, what your views are there, what the potential impact could be? Sure, Bart. The first thing to say is obviously these matters, there's only a limited amount we can say. But the first stage for us, and we regard it as a very positive stage, was to get, as we said earlier, conditional planning from the City corporation. So that's a very important stage. There is a possibility, prospect, that English Heritage will apply for listing. Our understanding, which could be imperfect, is if they do that, they'll do that quite soon, in a matter of days or at most weeks. We've obviously looked at the case, and we think it's a weak case. It's a technical case. It's a weak case. So we remain confident that it won't be listed. Tim, I don't know if you want to add anything to that. No, I think good answer. Thank you very much. Beth. Good morning. Harm Meijer, J.P. Morgan Cazenove. You are talking about more sales coming to the market. Would you mind giving us a little bit more color on that? What kind of sales? You are also talking about more opportunities for your sales, what kind of opportunities you are currently looking at, and if you see a big opportunity, would you actually raise equity? Sure. I'll take that the wrong way around, and I'll ask Steve, who runs our investment committee, to comment specifically on what we're seeing. In terms of the equity question, I think I've certainly tried to be consistent on this topic, so I'll say the same thing again. At the current time, we feel that our balance sheet is in good condition, and what we see coming along is perfect, we can accommodate it. In that context, certainly from a liquidity perspective, you'll have seen the bank facility that we just announced. By the way, you'll have seen that despite a number of acquisitions, our LTV actually fell during the course of the year. The feedback we've had from shareholders, broadly speaking, is if you see opportunities which you think are appropriate, which are too big for the current state of the balance sheet, then come talk to us. So far, we've been able to accommodate what we've seen in the context of the existing balance sheet. Steve, I don't know if you want to comment on the specifics of the acquisition. In terms of volumes, the volumes are significantly higher than they were throughout the whole of last year. The spread in the type of assets is pretty diverse. We're seeing all sorts of assets, some of them less than perfect. To be clear, last year, most of the activity was around relatively prime property, where people felt they could get out at quite good costs or rather, values. You're seeing property coming from a range of sources. It's not just banks, it's institutions, and quite a lot coming out of private equity in various forms. All of that says to me that we will see much more activity. We'll see a much wider spread in yields overall. I think where we can add value is at the more complex end of that equation, because I think those complex properties with difficult financing issues are probably ones where we can add value. This year will be a much busier market overall. Yeah. It is worth saying that a couple of the things that we have touched on this morning have been linked in some way or other to, if you will, short-term holders. For example, the Luton deal that we talked about came out of an Irish developer effectively being encouraged to sell. That enables a much bigger development than the sheer cash cost. One of the very positive aspects of that from all of our perspective was the fact that the local council were very keen to work with us because they recognized that we have the capability of carrying out the development. Look, there will be a variety of things that come up. The only reason if we sound a little lacking in specific nature is what we have seen so far is it is actually difficult to predict exactly what comes up, and this ability to be opportunistic, if you will, but also to judge each case pretty cold-bloodedly from an investment perspective. Maybe just one more, if I may. Just the yield on your assets. That looks still quite good, I would say. Any comment on that, whether you think for certain asset classes it still looks a bit too high, or were you quite comfortable with the outcome of the value? We are very comfortable with the outcome of the value. Steve, I do not know if you want to add anything. Yeah. One of the wonderful things is arriving at British Land to find that the valuations were quite sensible. Clearly, we do not influence our valuations. Those are the preserve of our independent valuer. But with a major holding in Superstores at 5% and a retail warehouse portfolio at five and a half, and having been very conservative with the convention around the way you add value through developments, I think we are pretty confident about our valuation overall. I am going to use quite sensible in quite a lot of meetings, probably with some of you over the course of the next few weeks. Thank you. Next question. Sorry, Keith. Go. Staley, Merrill Lynch. Two questions. One, what kind of level of underlying earnings do you need before you feel comfortable to increase the dividend? The first thing to say is dividend and earnings are very important to the company and to the board, and this is a topic that gets considerable discussion all the time. I would draw your attention in particular to the fact that we did not cut the dividend, almost, I think, uniquely at the time of the crisis. So we did not cut the dividend, and at the same time, our dividend in whichever way you cut it, and I've looked at it a lot of different ways, as I know you have, it looks very sensible compared with our competitors, our peers, however you want to call them, competitors. So that's where we are. But in terms of looking forward, it's the intention of the board to have a progressive dividend policy over time. No, I'm not going to be drawn on exactly what cover is required, but we can have a go at that if you like. Second question is, can you remind us of what your strategy is with respect to the continent? Sure. Europe, ex the U.K., represents a relatively small number of our assets, less than 5%. We've said, in this venue and I think others, that we would be very comfortable growing the portfolio when we see good opportunities. You heard Steve mention that we're in the process of developing out Zaragoza. It's a development we're all very excited about. If we see opportunities, we'll take them. That would tend to be on an incremental basis rather than a huge scale deal. I could see, having said that, the amount of business that we do in Europe increasing. From my perspective, it has to be in those areas where there is an economy of scale or there are synergies, and that's why we're in the retail business and only in the retail business at this point. Okay. Thank you. Yeah. John. Good morning. John Matias from Green Street. Just a follow-up on Vern's question regarding the continent. There's a published news report about a retail park in Spain that British Land may have purchased. Can you comment on that? You see those sorts of conversations specifically in the light of what I've said, with respect to our willingness to look at incremental assets. Steve, I don't know if you want to comment on the specific. I can do that. Thank you. In terms of the generality, though, we are comfortable with where we are in Europe. Essentially, the strategy moving forward is going to be opportunistic in the areas in which we are currently invested, and it will continue to be in out of town. The acquisition you're talking about there would be something that very much meets our strategic template for the U.K. So this is one of those retail schemes which is going to dominate the local catchment. It's 750,000 sq ft. It is pre-let to around 82% from memory. We're paying for it when it's completed, so it is a pre-commitment on our part. The earnings yield is about 8%, and the rents, most importantly, are probably at around 60%-70% of what they would've been at the peak. Of the 82% of occupiers, the vast majority are French companies that are quite happy to trade out of that location. So overall, on an opportunistic view, we think that looks like good business, and we'll probably incrementally add to the portfolio if we see other similar circumstances. It probably only makes sense to buy incremental deals in, for example, Spain, if you want to go in there in size. Is that right? One of the thought processes we go through regularly is around scale in the European operation, and that could herald future focus, perhaps around Iberia in the future, but that is not decided at this point. If I may stick with you, Steve, and follow up on a comment that you made. You talked, I forget the terminology you used, but the impression I got was increased evidence of net absorption in the City. Can you add a little color to what you are seeing in terms of tenant demand? Perhaps talk about it in contrast to the slowdown in take-up so far this year. What are you seeing out there that gives you the confidence to say that you see increased strength? I might throw that over to colleagues to talk about specific inquiries, but it is very evident if you look at the research done by CBRE, LaSalle, et cetera, that there is a growing buildup in inquiries. I think the point that we all need to take away from that question is that this is about quality. Whatever the level of demand in the coming period, you are seeing a flight to quality. So tenants are going to the better buildings. They are going to go to the better locations. From our point of view, even if this turns out to be quite a long, slow return to a healthy City market, we are very comfortable with the type of product that we are putting into the market. Tim, do you want to talk about inquiries? Yes. First of all, John, we are still seeing encouraging levels of demand across London, and your question was specifically about the City. We have done 250,000 sq ft of lettings, and they are 11.6% above our ERV. So that gives you an indication that we are getting a bit more pricing pressure. The two main buildings really that we are talking to people about in the market are Broadgate Tower, and over the last few months, we have had 18 serious inquiries in that building that total 250,000 sq ft. Now, we are getting a bit more coy about lettings. We want to do lettings that prove ERV growth, so we are driving a hard bargain. But we have got levels of interest which give us hope that we will be able to keep on pushing up the rental values. Also, in terms of Leadenhall, obviously, we have got some demand there with Aon, but we have got interest in that building. As buildings go, it has generated more interest than any other building I have been involved in. Thanks very much. Nick Eastborough with Peel Hunt. Is it coming through? Yep. I think it is. Very well. The complete radical change of perception about London in the last 12 months, of course, there was a bit of an elephant in the corner of the room last week, where we suddenly got a very big, that is very large, change in development program appearing there. I just wondered if you have further buildings in the existing portfolio in London that you could advance into this window, which is perceived to be three years at the moment. This one's coming straight to Tim. Okay. Well, first of all, we have got 2.2 million square feet, and we are committed to it. As, I think it was Steve said, we are on site on four out of the six, so we are not just talking the talk, we are walking the walk. In terms of the rest of the portfolio, we have got about half a million square feet that I would consider to be potential development. One of the properties is Victoria Street, which we bought about 18 months ago, where we are busily working up a significant refurbishment program. So we have got opportunities, and of course, there are also opportunities in the marketplace we are looking to try to buy. Sorry, I apologize for this, but Zaragoza, I cannot remember anything about this. Is this a significantly profitable scheme, Zaragoza? From this point onward, it should be very profitable. Thank you very much. A very good result. Upwardly mobile result, but presumably we are slowing down a little bit from here. There seems to there is an underlying slowdown. Sorry, I would- likely in the overall rate of growth, isn't there? We're in a poor, stricken sort of country in the U.K. If you look at the underlying retail business for a minute, what we showed in the slides that's in your book is the change in our ERVs in that market. If we take for a minute the importance longer term of ERVs to future valuations and all that stuff, then we did see that as being an important, if modest, turning point. We're actually, as I said just now, positive about ERVs and positive about our business. There is no question there is something of a dichotomy between what we're experiencing and what others are experiencing, and that, I think, comes back to this quality of the retail portfolio. That actually, and you'll have seen that our performance against ERV in the last half, at 6.8% above ERV, reflects that change positively, in fact. Now, predicting exactly how that goes forward is, of course, a tough thing, but it's that, combined with what we've already talked about in London, that gives us confidence and optimism both for the future. Final question is about the residential. I see you have got 368,000 sq ft. That's excellent. As we've seen now, that the rich are no cleverer about buying houses than the poor. In fact, they're probably more stupid. Can that be increased significantly? Have you got scope to look at any marginal rubbish in London and turn it into GBP 1,500 a foot? GBP 2,000. Sorry, GBP 2,000. I can't believe it would be good for us to talk about marginal rubbish. Most people have some. Look, there are some opportunities within the existing program, and there is a shortage of development finance, so I think there'll be opportunities around the place. You will know that the planning game is never a slow one in this space, so we have to work our way through it. We remain optimistic that there will be new opportunities, one way or another, in our resi business. Bear in mind, in the context of the pre-sales that Steve mentioned, none of the stuff that has been pre-sold is out of the ground yet. So we are well ahead of the game, both in terms of versus plan, versus completion, and also versus our expectations of net selling levels. Thanks. Thanks. That's all, Keith. Hi, morning. Can I ask on the dividend, can I just confirm that it's going to be the same for all four quarters this year, is it? That's what we said. Great. Thank you. Could you give us more detail on Luton, the scale of it and- Yes. What you want the town or the development? The town. Sorry, that's a cheap shot. Just the development. I do apologize for that. That gives Charlie the opportunity because he's going to get this particular baton. Morning. It's 20 acres right next door to the shopping center in Luton. It was originally proposed for a large mixed-use retail and residential scheme. It's more likely to be a traditional big box retail scheme. Square footage is going to be anywhere between 150 and 200,000 square feet. We just completed the acquisition on Friday, and we have to start the planning process this week. Thanks. Are you looking at anything in Hereford? It is one of the schemes that we are looking at, amongst others. One of the things that has become very clear, as Chris mentioned earlier on, a lot of local authorities around the country feel let down by schemes that haven't happened. They want to make sure that whoever takes on the development agreement has the wherewithal to build them out, and lease them to aid urban regeneration. They realize that there are very few parties that can do that, and we, therefore, come right to the top of the list on that. If that project was to happen, roughly what would the sort of costs for it be? If it were to happen, it is roughly GBP 100 million. Graham, you look as if you are falling asleep. I was hoping you would let me off. What question should I have asked you? Hugh, I deliberately made sure that I covered the capitalization of interest in my speech, so I think I managed to hit it on the nail. We will take a call from the telephones right now, I think. We have a question from Steve Bramley-Jackson from Credit Suisse. Morning, Steve. Thank you. Yeah, good morning, Chris. I just got a two-part question, really, in relation to your comments about the total return attraction of British Land. I think the first thing is, if I look on the operating side of the business, your NRI was up both in a like-to-like and total basis. Interest costs are down and your expense ratio compares very favorably as you show on your slide, relative to some of your peers. I was curious as to why the board actually didn't vote for a dividend increase, particularly as your cash cover with your scrip in place is something like 1.5 times. Part A was just in relation to that dividend, and I appreciate you've had a couple of questions on your dividend already. But on the other side of the ledger, even if I look at capital growth, your NAV result was something like 60% in terms of appreciation of your closest peer, yet your balance sheet is that much more geared. Do you think you have more diversification to do on the asset side of the business? If I look at all those questions, let me take the dividend point first. I would really reiterate, first of all, thanks for the compliments about the business. I appreciated that. I wish I had made some of those points myself. Look, I think from our perspective, as I said before, we have a strong dividend. We maintained it through the course of the very tough times. As a result of that, if you will, confidence at the time, the dividend remains higher than other people in the sector. In that context, we are taking the opportunity to rebuild cover. Something which I would remind you that a number of people were concerned, in this audience maybe, were somewhat concerned about only a year or so ago. That is what we are doing, and the board thought about it very carefully, and we are very comfortable with that decision. But it does not, and hopefully it came across from our presentations this morning, that in no way should be taken as any lack of focus on income or indeed income growth. In terms of diversification of our business, as I said, we are very comfortable with the sectors we are in. We are very comfortable with the fact that in terms of our NAV growth during the course of the last 12 months, there was less yield shift than was the case for IPD. So we think that puts us in a very strong position. In terms of our gearing, as I said, and it is a conversation we have had a number of times, we are very comfortable with the gearing at this stage in the cycle. Seems to us to be appropriate. In terms of diversification of assets, again, we like being in the two sectors we are in. You have seen us take more, for example, exposure to London residential than we have had perhaps historically on all but a couple of occasions. So all that has served us well. If you look at where can you compare with one or two others, then there is at least one entity out there who had slightly more exposure than us to London retail, and that is just a fact. Okay. All right. Thank you very much. I have just got one further question, actually, probably for Graham, or definitely for Graham. Just on the refinancing, Graham, the 125 basis points of margin that I think you said earlier in the presentation that you had achieved. Is that what I would call a clean margin? Is there any sort of bullet repayment aspect to that refinancing? Or is that a margin we can compare with other groups that talk of margins, I suppose, around more like more recently five-year yields at 150? It is the same sort of structure as others. There is nothing unusual in that. Okay. All right. Thank you very much. Right. We have not got any more from the phone, so I will just Any more questions from around the place? Sorry, two more follow-up questions, if I may. Of course. On Spain, you said that the rent you are getting now is 60%-70% of peak rents. Is that specifically to the scheme, or is it reasonable to expect that that was the case for Zaragoza as well? Those comments related specifically to the acquisition we were talking about. In terms of Zaragoza, we are very pleased indeed. The retail park, which is 800,000 sq ft, is now virtually fully let. So you have IKEA there, Leroy Merlin, you have Media Markt. In the shopping center, we are around 40%, and we are getting really strong inquiries from some quite spectacular prospective tenants. So we have some U.S. retailers, one in the sort of personal, sophisticated, electric, electronic stuff that I have never understood. And we have also got some of the real premium brand, clothes retailers for young people coming through. And those rents are generally at levels which strongly support today's investment case. So when I said we are going to make money from here on, we are going to make money at the rents we are now getting in Zaragoza. Okay. Second question for Tim. Can you remind us how much space Aon will be vacating to move into Leadenhall? And secondly, is it fair to assume that the rent on the option, because it is higher floors, is at a higher level than the rent on the base levels they are agreeing on? Yeah. Aon will be vacating around 200,000 sq ft across London, part of which they will already have on the market. In terms of the option space, it is at a significant premium to the average rent that they are paying on the base take. Thank you. Which reflects not just the floors, but also the optionality. Anybody else? Back there. Sorry, there will be a short pause while we get a microphone to the other side of the room. Hi, Graham Jones from Arbuthnot. Do you have any comments at all on corporate rather than direct property acquisitions at all? Could you be a bit more specific? Well, I think in the past, BL have done a number of JVs and/or ended up buying the joint venture partner out. Sure. Looking at corporate acquisition rather than- Yeah Underlying properties. Look, one of the attractions that we think or one of the strengths we have right now, the variety of ways that we can buy real estate, and that, as you know, we have probably more operating JVs than other people in terms of Sainsbury's and Tesco, and also obviously, if you will, the slightly more financial JVs that we have. From my perspective, what we find is that track record gives us, if you will, a great deal of attraction to potential parties. When it comes to acquisitions through corporate structures, again, BL has a great deal of it, and it's certainly useful at the current time. For example, the work we did down at Drake Circus in Plymouth, it really helped that we had the variety of ways of purchasing the asset. Yes, I think it's a competitive advantage. Of course, we're not the only people who can do the corporate stuff, but we are one of the very few people who has that range of options and-