British Land Company's (BRLAF) CEO Chris Grigg on Full Year 2015-2016 Results - Earnings Call Transcript

| About: British Land (BRLAF)

British Land Company PLC (OTCPK:BRLAF) Full Year 2016 Earnings Conference Call May 16, 2016 4:30 AM ET

Executives

Chris Grigg - Chief Executive

Lucinda Bell - Chief Financial Officer

Tim Roberts - Head of Offices and Residential

Charlie Maudsley - Head of Retail and Leisure

Analysts

Mike Bessell - Bank of America Merrill Lynch

David Prescott - Barclays

Michael Burt - Exane BNP Paribas

Oliver Reiff - Deutsche Bank

Remco Simon - Kempen & Co

Hemant Kotak - Green Street

Miranda Cockburn - Stifel

Ben Richford - Credit Suisse

Marc Mozzi - Societe Generale

James Carswell - Peel Hunt

Chris Grigg

I take it from the absence any more people coming in that we’re more or less done. Before we get going on the results, first of all, welcome. Thanks everybody for coming. Second, if I may, just draw your attention to - we don’t normally do this and we don't normally have the opportunity to do this, but just to draw your attention to the Queen's Award for Enterprise which we just received. It's for five years of hard work in the areas, and I won't use the slide around anything else. But it is I'd like to take the opportunity also here to thank all my colleagues for a lot of hard work over a number of years because it has been a lot of work.

And with that, let me turn to the results. I'm delighted to report that the business is performing well and we delivered another very good set of results. In summary, profits are up by 16% to £363 million. NAV is up by 11% to 919p. And that's despite the stamp duty increase. The results are backed up by good performances across the business. I'm particularly pleased with ERV growth of 5.3%, which alongside strong lettings added over £0.5 billion to our valuation.

I’m of course conscious of the wider issues, the EU referendum, economic concerns and where we are in the property cycle but our central case hasn't fundamentally changed. Occupationally the market is in good shape. Lower-for-longer appears to be the consensus now. And in this context, today’s cap rates don’t look out of line. Equally important, our business is in good shape, reflecting the work we've done in recent years.

First, we’ve built resilience into the company. That's gives us real comfort in the phase of some uncertainty. Second, we’ve created optionality in our development pipeline. We’re heavily committed today but well-positioned for the future. And third, our strategy. We are creating a portfolio well suited to future as well as current needs.

Let me start with resilience. We've concentrated on building resilience into the business for the medium term, taking the view that the cycle will be hard to core in this lower-for-longer environment. For us, resilience today means our long leases, quality occupiers and 99% occupancy. It also means newer modern buildings. We sold over £1.4 billion of retail over the last three years, investing roughly the same amount in higher quality assets, and at the same time, we paid careful attention to our finances.

Our gearing at 32% is moderate and well within our stress limits. Our average debt maturity is over eight years. Our next refinancing date is over four years away, and we have over £1 billion of undrawn facilities.

Let me turn now to optionality. Development has made us over £1 billion since 2012. However our current level of development commitment is modest. In Offices, we only have 180,000 square feet under development, significantly below our peak level. What we have created is a large pipeline going forward, but with optionality built-in, meaning we can press the button when the time is right.

Our opportunities extend across the portfolio ranging from Broadgate and Meadowhall through Paddington Central and Eden Walk, and of course, we've now got Canada Water. So lots of potential and optionality right across the business. A good risk manager will tell you for being long in the option is a good position in times like these, and we are.

I’ll return now to my third point; creating a high quality portfolio for the future. We’ve shown you these long-term trends before. We are evolving our strategy in the light of them to ensure that our portfolio remains just as relevant tomorrow as it is today. We want to own places where we can control the broader environment, exploiting our mixed used expertise to drive long-term performance. That means campuses or campus-lite in London and principally multi-let assets in retail.

We are putting place-making a part of what we do. That's how we create places people prefer; places where people want to work, shop, and eat. This framework we’ve up it out here applies to our entire business. It gets driven down to both sides of the business. There is increasing overlap between Offices and Retail, so the places we are creating are increasingly mixed use. For example, you can expect us to put PRS at Ealing, and much more Retail into Broadgate.

I’ll look at Retail first. As you know, a strategic focus is on our multi-let assets, where we control the environment. Technology continues to drive change. Of course, internet sales continue to grow, but around 90% of spend still touches physical stores. Consumers expect much more. It's not just about F&B and leisure, both intercity and connection with local communities are increasingly important. Natural light and open air also make a big difference. So it's not just about indoor environments. Hope you guys can still hear.

Convenience and proximity are more important than ever. The majority of spend is pretty local in the U.K. On our assets, the average drive time is under 20 minutes. Even at Meadowhall, average drive time is only 24 minutes. What this means is retailers need a broad network of larger and smaller scale stores, which are fully integrated with an online offer and these stores need to be in quality environments, which are brand consistent.

So whilst British Land well positioned in this environment, in short, of course we can deliver these stores to retailers. Our multi-let portfolio enables retailers to reach over 60% of the UK's population, through a network of regional and local centers, accounting for footfall of around 330 million people. Our places are not only highly accessible, they are also easy to adapt. We are now able to show retailers when they open a store on one of our centers, how will have a positive impact on their overall sales, not just indoor but also on the internet too.

Bear in mind that we are making significant improvements to our portfolio with relatively modest ad life. It may seem counterintuitive, but it turns out the annualized spend in regional and local centers are not as different as you might think, as you can see here, and less to do with frequency of visit. There are some differences between our regional and local centers around scale and store format, for example. So our approach in terms of management and marketing to retailers needs to be slightly different.

In our view, these divisions drive better insights and actions than the old shopping park shopping center distinction. The changes we've made to our reporting reflect this. For ease of comparison, we've also given you the old splits in the appendices. By focusing on both management and marketing, we are attracting a greater range of occupiers across our business, driving greater rental tension and ERV growth.

The brand from this slide have opened stores on our portfolio, where they have not traditionally taken space, brands like PRIMARK, FATFACE and PANDORA as examples. The work we've been doing is also reflected in our operational metrics. Footfall is up 3%, once again that's well ahead of the benchmark. Retailer in-store sales are up 2.4%. Importantly, as you can see, our local centers performed slightly better than the regional on these measures. We are also outperforming on rental growth. On our multi-let portfolio, ERV is up 3.4%. And the wider portfolio, including supermarkets, was up 2.4%, that's compared to 1.4% for the broader markets.

Where we'd been investing in refurbishments and extensions, performance has been even stronger. Old Market, Hereford is a great example of a local open air scheme that's really delivering. We've been delighted with this performance since we opened it two years ago. Its design quality and location have attracted some strong brands including Waitrose, RIVER ISLAND, wagamama, and most recently, Jack Wills. It also has a six-screen cinema. ERV growth during the year was nearly 5%. Footfall was ahead by 11.5%, and with a rent to sales ratio of only 8%, we are well positioned for future growth.

Glasgow Fort, as you know, is a large open air regional center. We've expanded it and improved it, focusing a lot on higher quality and better design. Believe it or not, that's what the new car park would look like. We've also increased leisure and F&B. We attracted seven new occupiers over the last year. By the end of the year, we’ll have 20 restaurants. You can see the dramatic impact this has had on performance. Footfall is up nearly 7% this year. For many of our retailers, Glasgow Fort ranks among their best trading locations.

Finally, turning to Meadowhall. We are well on track with our £60 million refurbishment. As we announced last week, we are about to begin public consultation on a substantial leisure extension. Here is a concept touring. As you can see, it's going to be quite something.

Let me turn now to Offices. Our three campuses account for over 70% of the business. We have a clear view how we can grow and improve all three, help at better infrastructure, particularly Crossrail, as well as more occupier focus on clustering. We have significant opportunities for development to widen occupier appeal and introduce a broader range of users more retail and F&B in particular. All of this will improve the environment and customer experience, not just for our office occupiers but the people who live, shop, and relax there. In this context, we will monetize places people prefer through improved rental growth, sustained high occupancy, alongside a more diverse and resilient occupier base.

Let's take a look at how this is working at Regent’s Place. In many ways, Regent’s Place is the model for our campus approach. It has the most diverse occupier base with a heavy TMT contingent, which is really different from 2009. It's been a strong performer with 25% ERV growth over the last three years, including 13% this year. We are now agreeing the first rent reviews at 10 and 20 Triton Street, with uplifts of over 30%, that's £2.5 million of additional rent, with a similar increase to come. These rents compare favorably with our newest office block at Brock Street. We've also got development options, the largest of these is 1 Triton Square, where we got exciting concept designs and some promising occupier interest, but we are unlikely to proceed with that pre-let.

We are also excited about Broadgate. We’ve transformed it from a high quality financial hub into the beginning of a broader based campus in one of London's best-connected and vibrant locations. Our aim is to soften the corporate image of Broadgate further, design buildings which appeal to a broader range of occupiers, increase and diversify the retail offer, over time adding as much as 400,000 square feet, as well as significantly improving the public realm. The work we've done at the circle and the improvements in the surrounding area are already helping, as will be a ride with Crossrail.

At 100 Liverpool Street is a major development opportunity. It's a building we'd be happy to start on a speculative basis. It would have a significant retail and leisure element including a rooftop restaurant. Our aim is to agree a building contract this autumn, so we are in a position to start development in early 2017.

Paddington Central is at an earlier stage, but it too has significant potential. Our plans to improve the public realm and complete the campus are progressing and here we've grown on our experiences at Regent’s Place in particular.

We’re due to top out 4 Kingdom Street this month and we’ll be opening a new co-working space at 2 Kingdom Street shortly. And we're also the proud owner of two narrowboats, part of our plan to enlighten the public realm. We are also starting to see rents increase, reflecting the work we and others are doing in this area.

Our focus on campuses has helped drive our office performance, with our actions contributing 45% of the valuation uplift, almost all coming from ERV growth, which was up almost 10%. This is supported by lettings which were nearly 6% ahead of ERV, with deals under office slightly better than that.

At the Leadenhall building, we've continued to set rental highs for the city. We’re holding out for rent on the last floor of over £100 a square foot. We’ve got a good chance of getting this. Our portfolio is now about 10% reversionary. Rent reviews are now a more important element of driving rental growth, with settling on average 17% ahead of passing rent, with more to come. Overall, our leasing activity added over £14 million of new rent.

Finally, a few words on Canada Water. Our long-term aim is to make it a great London campus, as you know, said by Roger Madelin. We are still very much in the planning process and we expect to submit planning in early 2017. In the meantime though, we are nearly £8 million of rent per annum, which helps cover near-term costs. Given its scale and because it will be truly mixed use, we’ll now report it separately, which we hope you'll find useful.

And that's the right point to turn it over to Lucinda.

Lucinda Bell

Thanks, Chris, and good morning, everyone. I'm going to take you through the numbers behind our strong performance. I'll show you the drivers of the total returns, while our strategic focus on place-making is delivering performance. And Chris has talked about resilience, so I'll go around a few where you can see this in our numbers, as well as the potential and flexibility we have in the development pipeline.

So turning to the highlights. The business is performing well and we've delivered another good set of results. Profits are up 16%. Earnings per share are up 11%. The reason for the difference, as we've discussed before, is that we are now required to anticipate conversion of the 2012 convertible bond. The dividend, as we announced in May last year, is up 2.5% at 28.36p. NAV is up 11% to 919p, driven by the valuation up almost 7%. Bringing this together, and with LTV at 32%, this translates to a total accounting return of over 14% for the year.

Looking now at profits. This is up £50 million, driven by our actions. In summary, that strong leasing activity across both on a like-for-like portfolio and our developments, and our financing activities. All of this means underlying profit stands at £363 million for the year.

Our portfolio is practically full and rents are growing. Rental income is up £35 million to £620 million. We've added £23 million through development lettings due to the completion of 5 Broadgate and they letting up at Leadenhall.

Like-for-like rents grew by 3.4% adding £15 million. Offices were up almost 7%. This is due to both the rent reviews in West End, which Chris has just talked about, as well as the leasing of completed developments that’s now on the like-for-like portfolio. Retail like-for-like was 1.4%, excluding the impact of selling the premier, it's 1.8%. This has been achieved despite ongoing asset management initiatives as we upgrade the portfolio.

The impact of acquisitions and disposals is a net reduction of £3 million this year. We've bought £330 million, and weighted towards the second half sold £550 million of income producing assets. Including CapEx and development spend, investment activity has been balanced overall. I’ve set this out in more detail in the appendix. We have a further £100 million of mature or non-core retail assets under our books.

Turning now to our financing costs. We’ve reduced our interest charge and it's now down to £180 million. I'm really pleased we’ve bought the weighted average interest rate down from 3.8% a year ago to 3.3% today. We've been busy refinancing at lower margins and at lower rates. We've undertaken over £1 billion of refinancing activity this year, including the £350 million zero-coupon convertible issued last summer.

Our approach to interest rate management has been another factor in reducing interest costs. 60% of debt is fixed on average over the next five years. That’s down from 85% three years ago. Together with what we did last year, our financing activity has bought our interest down by £27 million, and you can also see that as our development commitment has reduced, we are now capitalizing less interest.

Putting this altogether, profits are up 16%. Chris has talked about us getting closer to our customers and we now manage all assets in-house through our Broadgate Estates subsidiary. So we’ve changed the way we presented in our numbers. Importantly there is no impact on underlying profit or our cost ratio.

Admin costs are up £6 million, in line with our planned investments in people and technology. We expect the next year’s admin costs will be broadly in line with this year's levels. And I set out the various moving parts of the admin cost in the appendix, and I've also included the usual profit guidance slide there.

As you know, given the stability of our cash flows, we announced the dividend at the beginning of the year, and I'm pleased to say that we’ll increase the dividend for the forthcoming financial year by 3% to 29.2p.

Let us look now at the valuation performance. Our portfolio is evenly split between Retail and Offices. We've seen further valuation growth across the portfolio. It’s up almost 7%, primarily due to strengthening ERV growth of 5.3% and also benefiting from the yields compression of 17 basis points. Standing investments are up 6.4%, and developments are up over 9%. Remember this increased the adverse impact of the 1% increase in stamp duty. You will see that, as Chris mentioned, we are now showing Canada Water separately.

Our net equivalent yield stands at 4.7%, that's 5% in Retail and 4.4% in Offices. We've outperformed IPD on capital returns 50 basis points ahead, and ERV growth 130 basis points ahead. As Chris mentioned, resilience for us means long leases with quality occupiers and very high occupancy. So with letting 7% ahead of ERV, on a portfolio with 99% occupancy and a weighted average leasing for nine years, we are well placed.

Let's look at Retail in a bit more detail. Valuations are up 2.4% over the year. The underlying performance was the same half-on-half, excluding the impact of the stamp duty increase. The full-year uplift includes 13 basis points of inward yield movements and we’ve benefited from ERV growth of 2.4%. As Chris explained, we are segmenting the portfolio differently now and focusing on multi-lets. These are up in value by 2.8% with ERV growth of 3.4%, 2% of which came in the second half.

The strong inward yield shift of 37 basis points seen in Department Stores and Leisure reflects investments aligned to income driven assets. You will see Superstores are down just over 2% with softening yields reflecting continued uncertainty. Over the year, we've sold £122 million and our investment is now under £800 million.

Turning to Offices and Residential. Offices are up over 12% with performance weighted slightly towards the West End. The second half of the year saw flattening yields with performance driven by ERV growth, which was up almost 10%, and stand-alone Residential is up by almost 6% over the year. Also you will see the values have softened marginally in the last six months.

So when bringing this altogether, this translates to an NAV which has increased by almost 11% to 919p, that's 932p before the stamp duty change. Adding in the dividend, this gives a total return of over 14%. The valuation purpose is £1 billion, that's 85p per share with Offices contributing 68p and Retail 17p.

Turning now to our debt metrics. These remain strong. Our loan to value stands at 33% today. Pro forma for conversion of the 2012 convertible is 29%. We’ve already talked about the weighted average interest rate of 3.3%, and you can see the interest cover now stands at a comfortable 3x. The Group has undrawn facilities of £1.2 billion, and I'm pleased to say that the Group has no requirements to refinance within the next full year.

Turning to our developments. Our current speculative commitment stands at £530 million today, that's 4% of the portfolio, with a 100% of costs fixed. It's split equally between Office and the Residential. Our Offices at Clarges and 4 Kingdom Street are now residential, predominantly at Clarges. To remind you, Clarges resi has already really delivered for us. We’ve sold over 50% and generated profits of £80 million. We're planning on marketing the remainder on practical completion and when buyers can see the fabulous space and lease.

Looking forward, Chris has already talked about our plans for 100 Liverpool Street, and we continue our work to ready 1 Triton Street and 1 Finsbury Avenue for development. So we've got choices. Choices is the amount of capital we commit and when. We'll make the decision whether to commit three trust schemes at the appropriate time based on how we see the market and occupy interest or even better of pre-let. To remind you, our approach is less than 10% of the investment portfolio to be speculative development.

And as usual, my final slide looks at income growth over the next five years based on today's market rents. Current cash rent stands at £610 million today and could grow by over £200 million. We've already got £77 million of it contract, that's over a third. We have £16 million of rents secured in developments principally at Clarges and 4 Kingdom Street.

Looking at the investment portfolio, excluding near-term developments, the reversion of £47 million is mainly in the Office portfolio, which further 10% reversionary today. Our near-term development pipeline could add a further £69 million. As you know, the three larger schemes have been income producing investments. For your model, the £24 million with currently passing income is expected to run-off in Q4. I've simply shown the uplift here from today’s passing rents. And to remind you, all the increases shown are at today’s rents and exclude the medium term pipeline which of course includes Canada Water.

And with that, I'd like to hand you back to Chris.

Chris Grigg

Thanks Lucinda. So as you’ve heard, we've had a strong year, but of course it's all eyes forward now. At the half-year, I commented on the increased uncertainty in global markets and the potential for political events to be unsettling. Six months on, how do we see these things?

Uncertainty has impacted markets. The U.K. economy seems to have slowed and there are signs that the consumer has become a bit more cautious. Occupationally demand for space still feels robust. In London, we've got discussions underway with a number of businesses who seem willing to commit further out, reflecting low vacancy rates and a limited supply pipeline, while schemes continue to be delayed.

In Retail, demand for high-quality schemes is good. On our schemes, footfall remains robust but we had seen some slowdown in like-for-like retailer sales in the last couple of months. Looking at the investment markets, volumes are down, and yields for more secondary stock do seem to have slipped a little. But there is still strong investor interest in London and the regions, and we are seeing deals which are fully supportive of valuation.

As we look forward, it’s this combination of solid fundamentals and low interest rates, which is driving our central case, and so overall we remain constructive. Clearly the referendum brings uncertainty. We don't believe an exit would be positive for London or the broader U.K. economy, but judging the scale of this impact, if it happens, is really hard. One way or another, things will be clearer in a month or so.

In any event, what gives us comfort is the three things that I talked about at the outset. We have a business with considerable resilience. It's built into it for the medium term. We can grow our development program in a measured way. And the existing portfolio is very well positioned, particularly with respect to the longer term trends in our industry and the economy.

And with that, thank you for your attention. And we'll turn it over to questions. I'll ask my colleagues to join me up front. And could I just remind people that there are quite a few people on the phone, so if you can announce your name, rank, and serial number, that would be helpful. Mike.

Question-and-Answer Session

Q - Mike Bessell

Hello. Good morning all. Mike Bessell from Bank of America. Three quick ones from me please. One for Charlie. On Slide 15, the broader markets. So footfall down and sales up by in-store spend per visit increasing and your trend was - it was slightly the reverse. Is there any particular reason for that?

Charlie Maudsley

I mean, we've benefited from all works that we've been doing. And so I think we've just - we’ve - sorry, I completely lost my thought for a minute.

Chris Grigg

That’s what I always get - well, the opportunity to do - well my colleague has got to have a little thing, because don’t forget they don’t [ph]. Look, I think it's quality of the portfolio in short. It's one thing it’s quality of the portfolio. As Charlie says, if you add into that, the work we've been doing, and as I said, we've seen particularly strong impact where we've been making investments. So I think it's that quality that's been driving superior performance and you’ve seen it for a while now. That was the first question. Although if Charlie now wants to add anything, he is more than welcome.

Charlie Maudsley

I'll wait for the next.

Mike Bessell

The other two are on Offices and coming up to the referendum. Especially you've given yourself considerable optionality on the near-term pipeline, could you give us an indication of what factors you'll be looking at in particular to decide whether to your head with that?

Chris Grigg

Yes, and I'll give you a very brief overview and then I'll turn it over to, Tim, who is as we spoke, writing I know. Look, I'd say that what we - first of all, we feel that the optionality we've got is very powerful because we think these are very - as I said, 70% of the business is within our campuses, and that broader sense of people - us being able to control and people wanting to pay, if you will, for the environment is quite a big deal for us.

I think the second thing is to think about - well, obviously we'll be looking at the overall term. We’ll also be looking in some cases for pre-lets, and at this stage we've got some interesting conversations going on. Tim?

Tim Roberts

Yes, I think, Mike, first of all, if you look at the office portfolio, it’s in good shape because we are pretty full and we are pleased with what we've got. And as Lucinda talked about, our committed development program is going well and we've been thoughtful about how much risk we've got at this stage. So in essence we are getting ourselves ready to undertake the near-term development program.

One of the things that we will take into account, obviously we'll be looking at the occupational markets. If you look at the moment at the market it's a healthy market. You can see that through our rental value growth, but I think the other thing is what's interesting is that we are clearly looking for people to take some pre-lets across our portfolio and we've got good interest. We've got interest from corporates. We've got interest from TMT. We’ve got interest from financial services and professional services.

So they are the sorts of things that we’ll be taking into account. I think on 100 Liverpool Street, also it would be big step forward for the vision of Broadgate and we're excited about that.

Mike Bessell

And just coming back to the campus them and one of the risk factors you mentioned at the beginning of three things, one is where are we in the cycle. How with three large campuses do you actually manage your risk profile as the London cycle starts to turn? Does that give you a material disadvantage in sort of ability to sell down and reduce exposure at the right time?

Chris Grigg

The short answer, Mike, is no. I don't think it places us at a disadvantage. And the reason I think it doesn't put us at a disadvantage is risk of too many negatives in here. But I think the advantages we gain is visibility to control is the ability in particular to flex the individual occupiers, how much space they want and where they want it within our campus and we’ve consistently seen that benefit over time. And we see it just in the way that we are able to talk both to existing tenants but also to potentially new tenants, who in this world aren’t quite clear where they want to be in three or five or seven years. And so some of that advantage is very real and shows itself in occupier demand.

And if you look at our overall business, what our intention has been, has been to put our finances in a strong position, whereby, at 32%, as Lucinda said, well within our risk limits. We are comfortable at that realm. We want to run the business at those sorts of levels, rather than really working hard to cool the cycle, as I’ve said at the outset. We think that's a very hard thing to do in the current environment. We think while we put - by working ourselves into this position, we can run a medium to long-term business in a very effective way and that is what we are out to do.

And then we’ll come across - and that one if you.

David Prescott

Good morning. David Prescott from Barclays. Just two questions. First on Retail. It feels like in the last few years big dominant regional centers has been a lot of people's focus. It looks like today you’ve presented the case that local can actually be more interesting in terms of lower OCRs and similar sales. Can we expect to see you move more towards that in your portfolio?

Chris Grigg

The short answer - and I'll get Charlie to give you some more detail, but the short answer is that we like both and we think that both have their position in our overall business. And that's driven by what the occupiers are telling us and by the way the people in this country shop, which is actually quite local a lot of the time. But it's not that we don't believe in big regional domination, if there is such a word, but we do believe is this is mix. Charlie you might want to...

Charlie Maudsley

You’ll be pleased to hear. I heard this question. Sorry, Mike, for the first one. I mean, it’s as Chris said, all the data we collect now got much better insights of how to continue shopping and when we discuss that with the retailers, they have a very similar strategy of a flagship store and then a local store and it’s how you pick up all those different consumer missions. So as you say, both can be profitable and it's making sure that we are clear how an asset is performing in its local environment.

David Prescott

But at this point in time, the more interesting acquisition opportunities would be in which one?

Charlie Maudsley

I think is it the asset by the asset [indiscernible] is that both work, whereas historically people could absorb just about big. Now we’ve seen that with - as retailers get more confident about click-and-collect about how journeys are interlinked. When you go to shop, you also go to eat. Both now work. So we think there is potential in both.

Chris Grigg

To give you a little fact, we are actually now able to show retailers when they open a store in a particular locale, how their internet sales are impacted within the catchment area. Again, I don't want to overplay it, but in the sense so I'm not saying that regional is there, anything like that. What I'm saying is that this is driven by the customers and it’s driven by what the retailers need. And if I were to look at the change, that for us, it's been how we can understand that - and I actually mentioned in my speech this point about marketing, we can actually now deliver to the retailer quite a fine-grained understanding about what's going on and why and how they can change that.

David Prescott

Interesting. Just a second question and more of a big picture one. You talked about how lower-for-longer seems to be consensus for rates now, particularly in the U.K. How do you think about U.S. rate rises and the impact that they have on U.K. real estate, especially given the amount of foreign buyers in the market?

Chris Grigg

Look, I think that there are a wide range of factors going on. I mean, I think what we have definitely seen is from a bunch of foreign buyers has been focus on exchange rates. And so I think if you were to try and sort it all out, which is quite a hard thing to do as you know, I would say that we've saw a period where overseas investors were starting to worry about the strength of sterling and therefore what the value for money and therefore having that’s turnaround. I suspect that would be as important as anything else. You’ve heard Connie [ph] pretty clearly say what he thinks is going to happen to interest rates and I think to some extent people will be - to a large extent, people will be driven by local rates.

David Prescott

Okay. So the local rates is the key focus?

Chris Grigg

Yes. Well, look, it's not like we can control either, right.

David Prescott

Sure.

Michael Burt

Michael Burt, Exane BNP Paribas. Just coming back to this point on optionality and the development pipeline. If you didn’t pursue within intended development pipeline for any reason, what would you be looking to do with the space that you are expecting to receive back from UBS?

Chris Grigg

Sure. Tim, do you want to just comment on it?

Tim Roberts

Yes, okay. First of all, if you look at what our intentions are for 100 Liverpool Street, we are excited about the scheme and we are getting ourselves into position to commit to develop. So that's kind of our central case. And if you think of some of the benefits that Cross Drive [ph] will have, and if you also think about the occupational market that seems to be a reasonable central case. If in the unlikely event we don't progress with it, if you look at our history in the past, we've been very successful at taking buildings back, refurbishing them cost effectively and then filling them up. And I can give you two examples of that, 1 and 2 Broadgate, which we did probably four years ago, and actually 4 Broadgate, which was the building that we kept going which eventually was going to make up the site for 5 Broadgate, the UBS building.

Chris Grigg

I guess that would apply to the other buildings as well, Tim, in terms of the approach.

Tim Roberts

Yes. So again, generally we managed to keep our buildings pretty full.

Michael Burt

And then just one, if I may, on the balance sheet. It’s been very clear previously that you are going to gear up into yield shift. It could be that we don't have much more yield shift. What's your view on how you manage the balance sheet from here? Should we use that you to be a net seller, will you be investment neutral as you were last year or where do you take it from here?

Chris Grigg

Sure. Lucinda may take up on the detail again, but you should expect us to be broadly in line with what we've been saying for the last 12 months. That is roughly speaking, that amount is big portfolio, so sometimes £100 million, but within that caveat you would expect us to be selling assets, roughly speaking, to fund out the new purchases or more development spend.

Oliver Reiff

Oliver Reiff from Deutsche Bank. Could I ask on demonstrating the impact of store opening on online sales? Just how much visibility you have on that impact, and how much data as you receive from retailers, or is it more just verbal feedback that you get?

Chris Grigg

Well, again Charlie will give you the detail, but the slightly cute answer but still the truth is a bit of both. And so sometimes you’ll find that retailer is a bit reluctant to give you information. There are ways of finding that. Sometimes they give you very full disclosure. So it's bit of both. But Charlie you might want to comment on the internet stuff in particular.

Charlie Maudsley

Yes, all that said, Chris is talking about, that's all that we've developed in an organizational where we can - we try and forecast what's a retailer’s web hits will go up by in the post codes, and then once they’ve opened up a store, we go back and say to them three months later what did your web hits go up by. And from the 20 stores that we monitored over the last six months, on average, the web hits went up by 55%. So it’s showing to people the whole halo effect of in-store and online.

Oliver Reiff

Thanks.

Remco Simon

Remco Simon, Kempen. You indicated that you see the added value mostly in software business mostly in multi-let assets. You've got about £2 billion of single net retail assets. What is the future for those? Sorry, and as we leading out from that, most of your £1.5 billion near-term pipeline is in London. I’m presuming that you are going to sell more in the retail and develop in London, are you comfortable increasing your exposure to London offices at this point in the cycle?

Chris Grigg

First of all, over time, as you know, we were very clear that we wanted to increase our exposure to London, and I think that's something we did pretty successfully over the last few years. I think at this point, as you alluded to, this is still a balance feels fine to us. We will end up selling in a measured way non-multi-let but in many cases there are better opportunities by waiting a bit and then by doing it eventually. So don't expect it to be kind of overnight. And that's not - that's principally because we think it will add more value for our shareholders by that measured approach one way or another.

Charlie Maudsley

I mean the £1 billion of department stores leisure, most of those got fixed up. So the good short-term performance and then we’re still selling some superstores. We sold another superstore on Friday £64 million 4.2%, so there is still good demand for some of those - for those assets.

Chris Grigg

As you say, there is quite a decent proportion of the overall development pipeline is in offices, but look, we've shown an ability to manage those well too. So don't assume that pan-for-pan [ph], it will be in that order. We are confident in our capacity to balance those things reasonably sensibly.

Hemant Kotak

Good morning. Hemant Kotak from Green Street. Chris, it’s difficult to see the impact on if you were about to leave and I think that’s - most people will agree with that obviously. But your wealth of exposure to city and financials is high relative to your peers. Does that cause you concern or how do you think about that in terms of in the unlikely event if you were about to leave?

Chris Grigg

Sure. We look at all of those exposures in the random specifically. I mean, technically we've only got a couple of banks in the top 20, so just to put it in perspective. And actually what we've clearly seen, for example, I mean, if you look at the Leadenhall Building, you’ve seen financial sector but that's an industry that there is not regard itself as particularly subject to Europe. And if you look at how many sales typically the insurance business does in Europe, it's relatively small and that relates close to strong position of some European insurers. So if I look at some of the space both in the financial sector and elsewhere, including at Regent’s Place, I mean, these are exposures that feel like they are global businesses or businesses running domestic business and our largest single exposure is obviously UBS which has committed for long, long time. Tim, I don’t know if there is anything you want to add to that?

Tim Roberts

Yes, I think also if you think about how we've moved the portfolio weighting over the last five years, we have now 60% in the West End. And in doing that, the rent that we get from financial services customers has definitely reduced. I think that it's fair to say that when we talk to our customers, it is the financial services that are most cautious and most worried about the EU referendum. But again, if you look at the type of people who are looking to take space across the portfolio, in particular in sense of pre-lets, as I’ve said earlier, there is a good mix including financial services. And when you talk to these people, are they worried about the referendum, they might have concern but their overarching ambition is to get a place for that business over next 10 to 20 years. And you know what? They still think London is a special place to be.

Hemant Kotak

Thank you very clear. Just one more, if I may. With regards to Canada Water, how might the impact of a new mayor - what might that be for the affordable element - clearly the new mayor is wanting a lot more affordable - is he likely to get it?

Chris Grigg

Look, I think the reality is that we've seen two mayors who have been very good for London, who have come from very different political persuasion. I think one of the things that has driven that is the reality of wanting to continue London's journey as a great city. I think there will be a period where the mayor words have what he can and can't do and what's deliverable. And actually the early statements we've heard I found to be very encouraging. Now we'll see how it goes. But we've always planned that Canada Water, like the rest of our business, has to integrate fully into the community. That's the whole thing we've been talking about in this realm amongst other places about TAM Center [ph] about an integrated approach but not just being a dormitory suburb. I think all of those things would go into that mix, but per se we didn't wake up in the morning afterwards. That's going to have a huge impact, but we'll see.

Hemant Kotak

Thank you.

Chris Grigg

Anybody with a microphone gets to wave twice. Go ahead.

Miranda Cockburn

Miranda Cockburn from Stifel. I know Residential isn't a large part of your portfolio but obviously it's quite an important component of your near-term development pipeline. Just wondered if you could run through your three schemes to just give us a bit of an update on sales? And also a note on Aldgate Phase 2 is due to start this year. Is that still likely to take place or could that be postponed?

Chris Grigg

Tim?

Tim Roberts

Yes. So Miranda if you look at the level of sounds that we still got to achieve in the committed residential development program, it's £290 million. So to your point, it's not big. It’s less than 2% of the portfolio. And actually in the £290 million, we've got £80 million of profits still to come. So we are in a good position. If you look at the three schemes, we've got Clarges which, let's call that Super Prime, where we've sold nearly 60% of it, and I think that as far as that market is concerned some of the volumes have fallen and some of the pricing of some schemes where they are not providing the [indiscernible] the values have fallen. But equally there are examples where you’re getting it right and these are recent examples where pricing is still very firm.

And I believe very much that Clarges is in that. And I kind of like stood on the ninth floor last week looking across the Green Park across the Buckingham Palace, and you know what, I still think we’ll do very, very well at Clarges. And as Lucinda has already said, it's being very profitable scheme for us so far.

Then we've got the Hempel, and let's call that prime, where maybe prime, the market is between say £1,500 and £3,000 a square foot. As I alluded to at the interims, the volumes have gone down. Actually the pricing has gone down there as well, but it's again putting into perspective we've got £75 million of sales to do at Hempel. And I still think that we will do them better than the underwriting case when we acquired which £1,900. The valuation might soften a bit, but in terms of the acquisition, I think that we will still make money.

The third is Aldgate, and let's call Aldgate mainstream. So mainstream maybe between £500 and £1,500 a square foot. And then you know what? The market is still pretty good. In terms of sales of Aldgate, we are achieving the prices that we're set out to achieve. There is no softening of prices. And if you look at other schemes either side of [indiscernible] they still seem to be showing well. So pleased with that market.

Phase 2, we are going through the process at the moment of looking at the market, looking at the pricing. But I think that generally residential, especially in the mainstream areas is something that British Land wants to be in, because London seems to have demand that significantly and consistently adds strip supply, and of course that will put us in a good position for Canada Water.

Ben Richford

Ben Richford from Credit Suisse. Just a question on superstores. Do you have a sense of what the in-store attended sales declines are for the very large grocery stores that you own, and can we expect you to exit that sector entirely under multi-let strategy?

Chris Grigg

Sure. Well, in terms of strategy, at the risk of repeating what I said before, the focus on our strategy is a multi-let, but therefore you should expect that proportion to increase over time one way and another. And then in terms of the detail of superstore disposals, that will go on at sensible pace. Charlie, I don't know would you want to comment on with respect to.

Charlie Maudsley

It’s the one area we get less visibility on in terms of the sales ratios, but I mean they have got poorer over the last couple of years. But on the investment side, we still seem a reasonable demand, so with two sales that we've got under offer will be down to about £700 million within the next three months I would imagine.

Ben Richford

Thanks. It seems like looking at some of the Tesco’s numbers that the sales are declining for these stores, even including internet fulfillment, which between the in-store must be pretty bad?

Charlie Maudsley

Yes. And again we don't tend to get those figures at that sort of level, so probably not for us to comment on that one.

Ben Richford

Okay. Thank you.

Marc Mozzi

Good morning. Marc Mozzi from Soc Gen. Just one brief question for me. It seemed that your dividend is - proposal for this year is 1% below consensus. Is there any reason for that?

Chris Grigg

Yes, I've been looking forward to the opportunity to hand a question over to Lucinda because she has had little opportunity so far. At the risk of killing me afterwards, I will hand that over.

Marc Mozzi

I’ve got a little one for her as well.

Lucinda Bell

Well, as you’ve seen the current dividends, we’ve announced as well, so we are growing the dividend by 3% for the forthcoming year. And then second, on the level of the dividend. We look at our long-term view in terms of profitability of the business. But if you remember, we’re just being safe some time that we wanted to get the dividend payout into the mid-80s, and we’ve now achieved that medium-term ambition. So we’re pleased with that. And as I say, that 3% reflects our long-term ambition to grow the dividend in line with the profit.

Marc Mozzi

And just to make sure, in your guidance for rental income in the next five years, you’ve got the impact of UBS leaving its current building - or do you have net effect of the new building, the new letting on the - while you’re assuming that it will relate to the UBS building.

Lucinda Bell

So on the last slide that I’ve put up, what I showed was the uplift that we’ll get. There is £24 million of income running off at the end of this forthcoming financial year. We will then, as we talked about, we have choices in terms of what we choose to do with those assets. And then of course I showed the uplift of £69 million being the total amount of the near-term development pipeline to be uplift in rents if we were to develop all of that out.

Marc Mozzi

Thank you.

Chris Grigg

One up there.

James Carswell

Good morning. James Carswell from Peel Hunt. Just a quick one for me on city office yields. I know it’s a very small move but it looks like they moved out slightly in H2, and I just wondered, is that market move or is that you potentially had the predevelopments buildings at Broadgate running up?

Chris Grigg

You’ve done a great job of answering your own questions but which I was fine reassuring. If you stand up here at the front, it’s quite good when that happens. But, Tim, if you want to just come up on the data?

Tim Roberts

Yes, I’m very impressed that you spotted a four basis point movement in yield. Well done. First of all, it's a bit of a rounding error. And then secondly, as you can imagine, we are on eve of getting buildings back from Broadgate - from UBS on Broadgate, so that accounts to some of the movement in the yield, and then also we've had rental value growth in the city but sometimes the value is value of initial yield, so you take your rental value growth and it just moves by high margin.

Chris Grigg

There we go. Anybody else from the room? If I look at the back. Have we got any questions from? Why don’t we do that one?

Operator

[Operator Instructions]

Chris Grigg

So it’s exciting moment for me.

Operator

A question has come through. It’s from the line of Mark Christ [ph] from BMO. Please go ahead.

Unidentified Analyst

Good morning, ladies and gents. Many of all, the £60 million that you’re spending, could you give us a bit of more breakdown of how that’s split to the new part, and basically just CapEx of the existing scheme?

Chris Grigg

Charlie?

Charlie Maudsley

Yes. I don’t think we split it out quite like that. And then the £60 million is sort of a complete overhaul in terms of core penetrations. We are zoning it in different ways. This is going to have a different look and feel to it. So I think it’s hard to split it up between sort of income and non-income producing activity. Throughout the refurb, we’ve actually had a very good year and we’ve done lot of lettings, 23 lettings above ERV and its outperformed the market this year.

Chris Grigg

What we did do is we had a relatively small-scale refurb just a few million quid, but what we saw before this and what we saw that do very clearly was improved tone was allow us to attract some occupiers who haven't historically been a better hold, and so we expect that impact again in that sense of having more occupiers who won't become that driving more rental growth is very much a story right across our business.

Unidentified Analyst

So to be clear, it's impossible to work out what are effectively the split between the two and you make no attempt to do so because just a collective response to an improve environment, a better shopping experience, rents are going to rise but if you don’t - it's difficult to tell it before and after. But you would can see that part of this is embedded defensive CapEx as required by all these paging centers?

Chris Grigg

Look, there is no question that you have to invest in these large centers to make them ever more relevant to the consumer and therefore to the retailer. One of the points that I was making in my speech was this point around the combination that we have of local and regional and that is that basis. When you look at the whole retail portfolio that we do have this benefit that relatively small amount in some of our centers can have a big impact, so you can drive the combination to be very effective in terms of rental growth and how do I get myself relaxed about that, if that's the right word, how do we get ourself comfortable, how do we as an executive team get ourselves comfortable, because we look at history where we've seen investments make a difference. We look at what's going on elsewhere in the world, and we look at what goes on across our portfolio as well as in the individual buildings. And if I look at that and combine that with ERV growth we've seen over the recent years, the performance we've had in the multi-let is that combination that gives us a lot of comfort in the business.

Unidentified Analyst

Thank you. And last question for me on the same subject. The £300 million extension of new leisure, what - is there a loss of income? Is there something on the site now or is this - sorry, I haven't really got up to speed on this, and where is that going relative to the scheme and then more importantly, yield on costs, just a rough idea, or too early for you to say?

Charlie Maudsley

On the second part first, it's too early to say on the yield on cost. The design is we’ve got at the moment is, as you come into the main entrance of the scheme, there is some decked car parking and we are going to redevelop that deck car parking, so we are taking out virtually no existing income to add on to this - to add the extension on.

Unidentified Analyst

Okay. Thanks, Charlie.

Operator

Thank you. [Operator Instructions].

Chris Grigg

Okay. That looks like everything. Thank you very much indeed for your time. Much appreciate it.

Operator

Thank you for joining today’s event ladies and gentlemen. You may now replace your handsets.

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