British Land Company's (BRLAF) CEO Chris Grigg on Q3 2016 Results - Earnings Call Transcript

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British Land Company (OTCPK:BRLAF) Q3 2016 Earnings Conference Call November 16, 2016 4:30 AM ET

Executives

Chris Grigg - Chief Executive

Lucinda Bell - CFO

Tim Roberts - Head of Offices

Charlie Maudsley - Head of Retail and Leisure

Analysts

Bart Gysens - Morgan Stanley

Ben Richford - Credit Suisse

Robbie Duncan - Numis Securities

Remco Simon - Kempen & Company

Marc Mozzi - Societe Generale

David Brockton - Liberum

Osmaan Malik - UBS

Hemant Kotak - Green Street Advisors

Alan Carter - Stifel Nicolaus

Chris Grigg

Good morning, everybody, and welcome. Yet again, the front row is relatively unoccupied. It feels like being back at school.

Look, it's been an eventful few months since we last spoke. I'm pleased, therefore, that we're presenting a good set of results, with profits materially ahead and valuations only slightly down. It's early days in the process of the UK's exit from Europe and there's clearly a great deal of uncertainty out there, but the occupational and investment markets clearly feel in better shape than some have been suggesting. What continues to give us comfort is first, the quality of our assets; second, the resilience we've built into the business; and third, our strategy, which positions us to benefit from long-term trends, but also gives us options to make tactical decisions in the light of the Brexit vote.

Our results this morning reflect the quality of our portfolio. Underlying profits are up 16% to £199 million. NAV is only modestly down, 3% to 891p. And our LTV at 31.6% is lower than it was in March. The increase in profit reflects our strong leasing activity, with like-for-like income up 3%, and our discipline in managing our finance and admin costs.

We've also made nearly £700 million of non-core sales in the half. That's almost 10% of the retail portfolio, on average 3.6% ahead of March values. That means we've been a net seller of nearly £1 billion worth of assets in the last 18 months. The fall in NAV reflects that value's down 2.8%, with bigger falls on those assets with near-term expiries. Lucinda will provide more detail.

So what are we seeing on the ground? It's obviously early days, but there is some good news out there. Offices first. We're still seeing demand for good buildings in good locations, albeit below the levels of 12 months ago. We've completed nearly 70,000 square feet of lettings in the half, 5% ahead of March ERVs.

Two-thirds of this contracted after the referendum, including at Leadenhall, where we've continued to set record rents and completed lettings of the final floors. We've got a further 33,000 square foot under offer, including space at our recently completed West End developments at Clarges and Yalding House.

Bear in mind that we were virtually full at the start of the half, with less than 200,000 square feet of available space and we've let or put under offer half of that. So far, what we've seen is headline rents flattening out with rent-free periods moving out by two or three months. On the very best space, like Clarges, there's been no movement. More broadly, we're mindful of increasing supply and uncertainty, as we look further ahead.

But we're encouraged by the interest we've seen in pre-let. Although discussions did fall away after the vote, we're very pleased that almost all of them have returned. It will take time, of course, for these to reach a conclusion, but all in all, we're currently in discussions or responding to RFPs on eight significant space requirements, spread across all four campuses. In retail, we're also conscious of potential headwinds, but what we're seeing today is continued demand for good space. In short, we've done more deals on better terms, with a wider range of occupiers than a year ago. That's a real endorsement of our approach, in positioning our assets and engaging with occupiers.

In total, we completed over 650,000 square feet of lettings and renewals. On multi-let, we completed nearly 90 long-term leases; half since the referendum, including deals with newer additions to our lineup like Joules and Nespresso. That's 370,000 square feet of activity, on average, 12% ahead of ERV. We've got a further 290,000 square feet under offer, also ahead, which is encouraging for near-term rental growth. As you know, for the market generally, footfall and sales were both down for the period, but our portfolio continued to outperform. This slide here highlights the different activity we're seeing at our regional and local businesses.

At the larger regional centers, we're seeing people make fewer visits, but spend more when they're there. Our local centers on the other hand, are attracting more visits, reflecting their convenience. Here we've seen in-store sales marginally down, but Click & Collect is really boosting activity and that's greatly valued by the retailers. All that helped drive ERVs up by 1.3% across both parts of our multi-let portfolio. As you know, residential is only 2% of our portfolio but I thought you would be interested in the progress we've made over the last six months.

Sales at Aldgate have continued at a good rate, above valuation, while at The Hempel, sales have been below valuation. At Clarges, as you know, active marketing for the remaining 12 units will recommence as we approach practical completion in late 2017. But we've received inquiries lately supportive of current valuations. Our residential exposure is now £230 million. Turning to retail sales. We're really pleased with what we've done in the last six months, exchanging £690 million of non-core disposals, that's almost 10% of the retail portfolio, at an average yield of 4% and 3.6% above March valuations.

Most of these were transacted after the referendum, including Debenhams on Oxford Street. Multi-let is now 76% of the retail portfolio, bang in line with strategy. In the investment market more generally, we're seeing three things: continuing strong demand for long, secure income; clear evidence of falling values in secondary locations; and few transactions on large lot sizes. Volumes are about 50% lower than last year. But at the same time, the fall in sterling has prompted renewed interest in high-quality assets.

As elsewhere, it's early days, but we're expecting polarization to continue. Quality and income will be key drivers of pricing from here. So that's the market and our performance. Let me now move on to how we are positioned for the future and the tactical decisions we are making in the light of the Brexit vote. At the full year, we talked about three aspects of our approach: our strategy to create a portfolio suited to current and future needs, the resilience we've built into the company, and optionality in our development pipeline. Let me take you to these in turn, starting with strategy.

As we've previously said, our strategy is based on long-term trends. So it's just as relevant today as it was in May. We're focused not only on great buildings but creating and operating places that are aligned to modern lifestyles. That's places people prefer. These principles apply right across our business; at our campus and campus-lite assets and across our regional and local multi-let centers. In each case, we're employing our place-making skills and, increasingly, our mixed-use expertise to expand the appeal to a broader range of occupiers and drive long-term performance. Let me turn to resilience, which is founded on secure income streams.

Our portfolio is 98% let today to a diverse range of high-quality occupiers with average lease lengths of around nine years. The diversity of the occupiers is shown over here. No single occupier accounts for more than 6% of our income. Financial services provides 17% of our income today and as you can see from the box on the right, 12% comes from banks, including 5% of upcoming expiries, and 3% with UBS at Broadgate, which leaves us 4% exposure with other banks. Like the rest of us, the banks don't have a clear view of what Brexit will mean. We're aware of contingency planning, but also, that our occupiers like being in London. In that context, we agreed terms with Credit Agricole last week to extend their lease at Broadgate until 2025.

Overall, we've got high-quality secure income today. But I do want to spend a few moments on expiries and at Broadgate in particular, linking them to our optionality. As we've flagged for some time, UBS will end their double occupation as they complete their move into 5 Broadgate, giving us space back across three buildings in December. This migration is a critical part of our plan to upgrade Broadgate. Today, the campus has great location, catchment and connectivity. We're adding a wider range of uses with more retail, more leisure and more flexible accommodation. Over time, this will attract a greater range of occupiers and make Broadgate a truly world-class mixed-use destination. Our next step is 100 Liverpool Street. Here, we and GIC are committing to an important redevelopment. We're adding 140,000 square feet to the building, 90,000 square feet will be retail and F&B. That will provide almost one-quarter of the income.

In total, we expect to more than double the rent. Current passing rent is around £42 a square foot which leaves plenty of room for upside. We expect 100 Liverpool Street to be a great success. It will complete in 2019, shortly after the arrival of Crossrail, further enhancing Broadgate's connectivity. We're already seeing interest from occupiers attracted by the quality of the building and its location.

We've talked before about the optionality in our pipeline. For us, that means flexibility in the timing of our commitment and choices on the nature of works we undertake. A good example of this is 1 Finsbury Avenue. Although we've got consent to add two extra floors, we are now likely to pursue a quicker, lower-cost refurbishment, providing space that will be differentiated from 100 Liverpool Street in both specification and price, further accelerating the delivery of flexible work space and more retail to Broadgate.

This combination represents a better development mix in the current environment. Looking further forward and on the right-hand side, you can see that we've got a wide range of valuable opportunities right across the business. We have choices to make over time, but we've got flexibility on when to commit. Importantly, nearly 85% of these assets are income producing today. Again, Lucinda will take you through the detail.

On each, we're focused on progressing planning and engaging with potential occupiers, but right now, we don't expect to increase our speculative exposure much above its current level. Just a short comment on Canada Water. We've now assembled a very strong team who are having encouraging discussions with a wide range of potential occupiers. We're working on our master plan, with a view to submitting planning in 2017. In the meantime, we're generating income at a yield of almost 3%. Canada Water represents a really exciting opportunity for British Land.

And with that thought, I'll turn it over to Lucinda.

Lucinda Bell

Thanks, Chris. And good morning, everyone. Our results show that the business is operationally and financially strong. I'll take you through our numbers and performance and draw out the drivers of our valuation, and the range of impacts we've seen across the portfolio.

I'll show you how our development commitments are modest today and take you through the impact of our upcoming expiries and development opportunities within the portfolio. We've got a quality portfolio, with secure income and robust finances. And we manage it well. And that lies at the heart of our resilience.

Starting with the results. Profits are up by 16%, earnings per share are up by 21%, NAV is down 3% to 891p, with the valuation down 2.8%. These metrics include the impact of no longer treating the 2012 convertible bond as dilutive, as the share price is now below the conversion price. This change in treatment has contributed 0.7p to EPS in the period and 10p to the NAV. Despite the fall in values, LTV is marginally down since March, to 31.6%, reflecting the impact of our disposal. As we announced in May, we're increasing the dividend by 3% this year, which gives 29.2p for the full year; that's 7.3p a quarter. Altogether, this gives a total accounting return of minus 1.5%. Looking now at profit. We have increased profits by GBP28 million in the half. This is a consequence of the decisions and actions we've taken. Rental growth, including letting of developments, has increased profits by GBP13 million and you can see, we've also significantly reduced our financing costs, and achieved a reduction in our admin expenses.

All of this means underlying profit stands at GBP199 million for the half. Rental income was up GBP3 million, to GBP312 million. Our high-quality portfolio is practically full, and we have an average lease length of nine years. Net sales, over the last 18 months, have reduced rents by GBP11 million this half. Like-for-like growth is 3%, excluding the impact of surrender premia. Retail like-for-like growth was 1.7%. The BHS administration had a negative 0.4% impact, but I'm pleased to say that we have now let or under offer 80% of this space. Offices like-for-like growth of 6.7% includes positive rent reviews at Regent's Place, and the letting out of completed developments that are now in the like-for-like portfolio at Marble Arch House and Leadenhall.

Letting of developments was also an important driver of profit growth. The GBP6 million increase in rents in the half includes the benefit of UBS's index-linked lease at 5 Broadgate. Turning now to our financing costs. I'm pleased we've brought these down again. The weighted average interest rate is down by 10 basis points to 3.2%. The reduction in finance costs is a result of last year's financings, such as the zero coupon convertible bond, as well as the actions we've taken in the half. Our liability management, which has been NPV positive, has reduced NAV by 2p. Of the GBP18 million reduction in financing costs, GBP5 million is attributable to our decision to have a higher proportion of debt at floating rate.

Currently, 52% of our debt, on average over the next five years, is fixed. So bringing this all together. Profits are up by 16%; admin costs are down by GBP6 million. Here, we've made good progress in managing costs. And this also reflects lower accruals on management incentives. We expect to keep admin costs at this lower level in the second half. I've included the usual profit guidance slide in the appendix. Let's look now at the valuation performance. The valuation is down 2.8%. The fall has been moderated by our actions. The valuation performance reflects an outward yield shift of 19 basis points. And our actions have offset about one-quarter of that.

Most notably, ERV growth, as a result of our place making and asset management in retail, and the benefit of completing our sales ahead of March values. As Chris indicated, there's been a wide dispersion in valuation performance across the portfolio. What we've seen is investors attributing greater value to long term secure income streams, and more caution on assets with short term income. This has been particularly noticeable in our office portfolio, and I'll come back to that. You'll see that development valuations are only down by 3%. Here, we've seen developments under construction benefit from profit releases, as we approach completion. As you can see, Canada Water has decreased by 2%. This represents a value of 6 million an acre. And as Chris mentioned, it yields nearly 3% while we progress our plans.

Let's look at retail in a bit more detail. Valuations are down 2.4%. We've continued to see good leasing activity across the multi let portfolio. That's driven ERV growth of 1.3% across both regional and local. Investment activity in retail, since the referendum, has been focused on smaller retail centers, where the UK funds, in particular, have been net sellers. This is reflected in the relative yield movements between the regional and local assets. To give you a bit more color. Yield movements in regional have been in the range of 7 basis points to 41 basis points; and for local, the range has been 12 bps to 84 bps.

Our single let assets benefit from long leases. During the half, we re-geared 8 Homebase leases onto 15 year terms. And as you know, we also sold Debenhams Oxford Street well. Superstores are down 3%, due to lower ERVs. We've continued to sell during the half at terms ahead of March values, and our holding is now below 700 million. Overall, the retail portfolio has outperformed IPD by 60 basis points.

Turning to offices and residential. Valuations here were down 3.3%, with the West End falling 2.4% and the City 4.9%. Included in this is Broadgate, which was down 5.5%. This reflects the dispersion in performance I spoke about. Properties with lease expires in the next 18 months are, on average, down 15%. And that's been the main driver of our 50 basis points IPD underperformance. On the other hand, UBS's new headquarters at 5 Broadgate was up 3.6%; reflecting both the 17 year unexpired term and the benefit of RPI linked increases. It's a good time to remind you that nearly 20% of our office portfolio benefits from fixed and index linked uplifts.

In the West End, we've continued to capture reversion through rent reviews at Regent's Place. Overall, ERV growth of 0.1% includes the impact of more modest refurbishment assumptions, such as at 1 Finsbury Avenue, which Chris just spoke about, with lower corresponding cost. On a like for like basis, ERV growth is higher, at 0.5%.

As you can see, residential hasn't changed in value. This reflects a modest reduction in development end values, offset by profit releases, as we progress to PC. Bringing this all together, this translates to an NAV which has decreased by 3% to 891p. As you can see, the adjustment for the 2012 convertible is 10p.

Turning now to our debt metrics. These continue to be a strength for us. As I mentioned, our loan to value has decreased by 50 basis points since March, and stands at 31.6% today. We've already talked about the weighted average interest rate at 3.2% and you can see that interest cover now stands at a very comfortable 3.5 times. The group has undrawn facilities of over GBP1 billion and our average debt maturity is 8 years. The group has no requirement to refinance before 2020. So now, let's look at our developments. Our commitments on developments under construction today is low, at GBP620 million, as shown on the slide in the first column. Of this, we've already sold GBP250 million of residential. Adding in 100 Liverpool Street, in the middle column, takes our speculative commitment, shown in dark blue on the slide, to GBP660 million, that's just 5% of the portfolio.

Costs to go on the committed program, including 100 Liverpool Street, are GBP280 million, so, comfortably less than the value of the residential receipts we expect to generate. The last column shows you our near-term projects of GBP150 million, including 1 Finsbury Avenue. The costs to come on offices is GBP25 million and GBP50 million on leisure extensions on our retail assets. Chris talked about what we mean by optionality in our medium-term pipeline, flexibility on when and how much to commit. To put this in context, the assets in our medium-term pipeline are valued at GBP780 million. You can see the components of this on the slide. GBP320 million is income-producing at Canada Water and Eden Walk, with a yield of just under 3%, and we're managing these sites to maintain income. GBP330 million is on assets where we have upcoming expiries being 2 and 3 Finsbury Avenue, 135 Bishopsgate and 1 Triton Square.

Our plans for these assets are well progressed, but we're likely to proceed with significant redevelopment only with the benefit of pre-lets. Without these, we would pursue lower cost or interim options. I'll explain the potential impact of these expiries in a moment. Finally, the last column on the slide shows you our non-income producing sites which includes 5 Kingdom Street. I'm now going to look at our future income profile. Current contracted rent is GBP685 million. That's the same as at March despite GBP500 million of completed sales, reflecting the strength of our underlying business. Letting of Clarges, just completed, and 4 Kingdom Street, under construction, will add GBP17 million.

I'm pleased that we already have one-third of our office space at Clarges under offer on terms ahead of March ERV. You can see that this more than offsets the lease expiries of GBP9 million at 100 Liverpool Street and GBP7 million at 1 Finsbury Avenue. The letting of 100 Liverpool Street and near-term developments would add GBP30 million to rents. That's a near doubling of rent on these buildings and provides an important offset to the medium-term expiries of GBP21 million. I have put further detail on this in the appendix.

Together, all of this could take rent to over 700 million. We also had the upside at the time we choose to activate the medium term pipeline. Even without Canada Water, this could add rental income, of more than 100 million. So, to conclude, the business is continuing to perform. It's operationally strong with long income and levels of activity reflect the quality and appeal of our portfolio. Development commitments are modest today and we can activate other opportunities when occupier demand justifies it. Our capital structure is robust and with moderate leverage and long, low cost debt, coupled with a lean operating model.

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

Chris Grigg

Thank you. As we all know, the events of the last few months have increased uncertainty. That isn't going to change any time soon, but since the Brexit vote, we've seen good levels of activity and inquiry. You've seen the good results we're delivering today. It's our actions and the quality of our portfolio which are driving these numbers. We've completed more than three quarters of 1 million square feet of leasing, 12% ahead of ERV, and restocked our leasing pipeline. We've continued to focus on our cost base, which means that more rent is dropping to the bottom line. That's why profits are ahead by 16%. We've made almost £700 million of sales, progressing our strategy and lowering our LTV.

On developments, we've committed at 100 Liverpool Street, and made real progress on planning elsewhere. As Lucinda said, our pipeline provides a big source of future value. So looking ahead, the quality of our portfolio supported by the activity we've seen in the half, plus our robust financing and lean operating model, all underpin our resilience. Our strategy is based on long term trends and will endure through this uncertainty. Quality of space is becoming ever more important, which means continuing polarization.

We're positioning our assets to capture a greater share of demand. We will of course, continue to review how we deliver value. For example, where we see a compelling case to develop, we will commit, as we have done at 100 Liverpool Street. But more broadly, we'll proceed with some caution. Together, these factors give us confidence that the business will prove resilient and is well positioned to capture upside in the future.

Thank you for your attention. We'll now turn it over to questions.

Question-and-Answer Session

Chris Grigg

The usual rules apply. There's a bunch of people on the phones. If you could just give your name at the beginning, that makes it easier for the people on the phones to hear who's doing what to whom. Bart, you get the first question.

Bart Gysens

Good morning, Bart Gysens, Morgan Stanley. You've sold quite a bit, you have a very strong balance sheet and you are trading at a wide discount to net asset value. You have a very resilient behavior in your portfolio.

Chris Grigg

Thank you so much. Thank you.

Bart Gysens

So, therefore, a key debate amongst a lot of -- a big part of investors in this space is at what point will a company like British Land use some of the proceeds of disposals to buy back shares? The return on some of these shares could potentially be better than some of the other investments that you're making.

Chris Grigg

Well look, the first thing to say is this is a matter that we review regularly at the Board. In fact, as it happens, we reviewed it formally in our last Board meeting which was this month, and we'll do that regularly but we're not going to look at it every couple of months. Our conclusion at the Board and the view of the management team as well is what we like at the moment is the flexibility we have, and that feels a good thing to have in today's environment. The reasons for the gap between the two markets, so dislocation if you like, are quite hard to pin down. Share buybacks tend to deliver short-term benefit but a question about long-term value. For us, we're running a long-term business and we're focused on long-term value.

When we look at the portfolio, and Lucinda I think gave a great description of what's there, we see that there's real potential for high return in our business, different parts of it. You have seen us commit on 100 Liverpool Street and that's the approach we'll be continuing for now. But we'll keep reviewing it.

Bart Gysens

And then my other question is for Lucinda. You have been building up dividend cover quite strongly and I appreciate that you only review your dividend policy once a year, but dividend cover is now quite high, particularly in a REIT context. What level of dividend cover are you targeting in the long term and therefore, what we should read into this for the next dividend review? Thank you.

Lucinda Bell

Yes. Thanks, Bart. Yes, well, as you've seen, we pre-announced the dividend for this year at 3% for the year, and as you say, we review it annually. What we have been doing is improving our cover and getting ourselves to a position which is in the mid-80. We're obviously at the moment slightly below that and that's something that we will take into account when we make our decision as to the dividend in a year's time when we review it again in May.

Bart Gysens

Thank you.

Ben Richford

Ben Richford from Credit Suisse. Just wondering, 1 Finsbury, just the change to do a refurb there; what is the difference in targeted rents and is that partly a reflection of a sense of affordability from occupiers that people are looking for cheaper space?

Chris Grigg

Well, Tim will give you the detail, but as we thought about all of Broadgate and as I said in the formal presentation, we think that being able to deliver a mix of space and a mix of type of occupation just feels right in London right now. So when we actually looked at the combination of the two propositions, we've got one very, very high-quality building right at the door of the estate, if you like, right next to the Crossrail station; that feels like a good place. As I said, we've already got interest. And then that mix with other things feels a good mix. It also means we can do some of the things we really want to do quicker. Tim.

Tim Roberts

Yes, the main thing with 1 FA is that we are looking to spend less money on it. Lucinda talked about the CapEx that we're spending on it at 25 million. That means we will be looking to rent just a different price point to 100 Liverpool Street, which means we won't be competing with each other. But it still means that we'll be able to attract occupiers to Broadgate, different occupiers than we've seen before. Also, we'll be able to enliven the ground floor, put some interesting retail uses in there. So, in a nutshell, it's in empathy with our plans on 100 Liverpool Street; and it's in line with our vision of Broadgate.

Ben Richford

Thanks. And just one other question. It seems like you've had quite big value decline in shorter lease-term office. How do you assess at what point that part of the market becomes attractive for you to go and invest capital?

Chris Grigg

Well look, the first thing to say is we've never been out of the market, right. So, if you look at just in the last period, didn't get a great deal of publicity, but we bought a block down in Plymouth. It's exactly aligned with our strategy in that town or city, depending who you're talking to. And it's also just a join. So there's a lot of wash-over value potentially for us near and long term, so we're not out of the market.

What we do is we look at the whole market, and we'll see where opportunities arise. The one thought I would want to leave this group with in that particular context is we don't feel under any pressure, because we've got a lot of opportunities in the existing portfolio. We talked about them today. So there's not some sense that we've got to wait for values to fall before we can reload. That's just not how we've run the business over the last few years, as you know.

Ben Richford

Thank you.

Robbie Duncan

Robbie Duncan, Numis. Just one question from me. Obviously, Rathbone Place, not one of your developments, completes in March. It's got Facebook, one of your larger tenants. Could you just comment on potential conversations that are ongoing with that particular tenant, and how you can see that potentially evolving over the next few years?

Chris Grigg

Tim, do you want to,

Tim Roberts

Yes, yes. Facebook, we've got Facebook in 175,000 square feet at Regent's Place and they love it. So we're still hoping that they're going to maintain a decent presence at Regent's Place, and that's what they're leading us to believe.

Remco Simon

Remco Simon, Kempen. A question following on from Bart's question earlier. You sold about GBP700 million in the first half of the year. You still have another GBP700 million, GBP800 million of single-let retail. I presume you're not, don't want to comment on press speculation about a certain office tower?

Chris Grigg

This is going well. The number of questions I'm not having to ask is terrific! So yes, it's very easy.

Remco Simon

But to your point on flexibility, at which point, say, if you continue to sell, and I'm not sure what your intentions are for the second half, but at which point do you feel you've got enough flexibility? How low do you want to get the loan-to-value that you say, well, actually, that's low enough, we have enough flexibility now? Can you just elaborate a little bit on how you see that?

Chris Grigg

Sure. And look, to answer the implicit question, do we expect to be a net seller this half, or this year overall: yes, we do and we're very comfortable with that. What we've tended to do, as you know, is set certain parameters within which we run the business, and I hope we've been very clear over time, in terms of max LTV and how we think about that, providing that buffer against volatility.

And in today's market, I feel comfortable if we add a little bit to that buffer, and I don't feel like setting a specific limit. Absolutely continue to reassess, but the idea of setting really hard-and-fast limits in today's environment just doesn't seem to me to be the right way to run the business. I understand why people outside the company would like that sort of incentive, but just in terms of, remember, my job's to run the company and it's with the team. And it feels to us collectively, individually, and by the way the Board is very supportive of this, that decent amount of flexibility in today's environment's just a good place to be. And we'll continue to figure out what exactly that is, what the right use for our capital is. But hopefully, I was explicit with respect to Bart, in terms of where we're going on that topic over the next six months and beyond.

Remco Simon

Thanks.

Marc Mozzi

Marc Mozzi, SocGen. Essentially two questions, and the first one is related to 100 Bishopsgate, sorry, 100 Liverpool Street, and in regard to what sort of rent are you targeting here? And how do you see the competition of the 22 Bishopsgate in that context? That's the first question. And the other question will be for Lucinda. Could you remind us what sort of benchmark rate is attached to your circa 50% floating debt? Thank you.

Chris Grigg

Do you want to, yes, Tim. You go first.

Tim Roberts

Yes, okay. Yes, first of all, in terms of the rent, we're targeting a market rent. I'm going to be slightly coy about the exact rent that we're targeting, because as Chris has said earlier on in the presentation, we're talking to interested occupiers. The important thing with 100 Liverpool Street is it's a first-class building; it's the next step in our vision of Broadgate; and of course, we're looking to complete it shortly after Crossrail. So in terms of your question on 22 Bishopsgate, I think that 100 Liverpool Street will appeal to a different market. It's going to appeal to a far wider variety of occupiers, both in terms of sector and in terms of size. 22 Bishopsgate, as we will have experienced with a lot of the development that we've done there, is going to be very financial services and insurance sector orientated.

Lucinda Bell

In terms of our floating rate, some of our floating rate debt is at three-months' LIBOR, which is about 40 bps at the moment, but we also do have some at one month's LIBOR, which is at 30 basis points and obviously, we've got the margin on top of that, which is, order of magnitude, just a little bit under 100 basis points.

Marc Mozzi

And you feel still comfortable with this portion of your debt floating in the current environment?

Lucinda Bell

So that 52% is on average over the next five years. What you've seen us do over a period of time is work hard and keep that interest rate low. We'll take advantage of opportunities where we see them. Although interest rates in the longer term have increased recently, if you look at them where they are compared to before the referendum, they're very much at the same level. But short-term rates are lower than they were before the referendum. We've managed this well. And I'm confident we'll continue to do that.

Marc Mozzi

And you've got no issue with a mismatch in duration between your long-lease term on the one side, and your short debt side on the other side?

Lucinda Bell

In the very near term, if you look at us on a spot basis, the percentage fixed is higher. And we run at that higher level recognizing the commitment that we have to pay the dividend and other costs out of our rents. So that 52% reflects a five-year view. As I say, we do have rather higher level in the short term because of wanting to have certainty over cash flows in the near term. But we also want to keep flexibility.

Chris Grigg

Don't forget that from a mismatch perspective, we tend to think about the mismatch as being the term of the debt as opposed to the interest rate exposure. So, if you look at our term debt and the average lease, it's much more it's very closely matched. And actually, if you think about what we were telling you about the amount of turnover we get on the leasing side of our business, particularly on retail, to think of it as a kind of fix forever is just not the right way to think of it. So we think about all that stuff.

Marc Mozzi

Thank you.

David Brockton

David Brockton, Liberum. Two quick questions on the development pipeline. How much of the spend is locked down? And do you think there's a scope for you to better the costs you've budgeted against 100 Liverpool Street? And the second question, just in respect of Clarges. Given the demand that you're seeing for it at the moment, are you tempted to sell pre PC. I'm not making an offer, but.

Chris Grigg

I'll see you afterwards if you are.

Tim Roberts

So in terms of obviously the committed and well, in terms of the under construction, we're 100% secure in terms of construction price. In terms of 100 Liverpool Street, we will have locked down probably 75% of the price early next year. In terms of Clarges, we've had a tremendous run in terms of selling 60% of it at record prices. And I said at the end of last year that we were then going to put our foot on the ball. And what we want to do is we want to show Clarges in all its splendor, with all its views, overlooking Buckingham Palace, show people around and that's really when we will get the best price for it. And we're very, very, comfortable that we will get a good price for it.

Osmaan Malik

Osmaan Malik, UBS. A specific question for Lucinda. Then maybe a broader one for you, Chris. Lucinda, on one of the drivers of the good gain in EPS was lower admin expenses. I just wondered is there a material impact of that from low performance measures because NAV was down, share prices were down. Or is it a high quality underlying reduction?

Lucinda Bell

Yes. So of the 6 million reduction, half of it was due to the way that we've managed and controlled our costs. And half of it was lowering accruals on management incentives which is a view of the prospective level at which they will vest.

Osmaan Malik

Chris, you mentioned something quite interesting. You said that you've seen some banks making contingency plans. Could you just give us a bit more of a sense on what you've seen? Are they thinking about wholesale moves; just small marginal moves; unclear at this stage?

Chris Grigg

I think the last is probably the best summary. We've seen different things from different people. But quite a lot of them are early stages. And I would say there is I want to be quite careful here, because there are a lot of different views circulating. But the conversations we've had have tended to be around people saying, what are the pieces of our business that we're going to be forced to move? And can we do that in an effective way? And typically, those conversations have been smaller rather than larger intent. But those conversations are at very early stages. You've seen the public pronouncements of different banks to a different extent. It's also hard to know how much of that is a negotiating stance with the government and so on and so forth. So we're aware of it, but I would just say that trying to draw too many conclusions at this stage is just hard.

Osmaan Malik

Still interesting. Thank you.

Hemant Kotak

Hemant Kotak, Green Street. A question for Charlie on retail please and then a broader question as well.

Chris Grigg

You're going to make Charlie. Charlie's going to be so happy about this I think. I think. We shall see.

Hemant Kotak

So, Charlie, you're having to work pretty hard in terms of what the national average is doing. The national averages are down a couple of percent. We're getting used to seeing these types of numbers. And clearly, your team is working very hard to beat these numbers and you're doing a good job of that. How sustained do you think that's going to be in the future? Do you expect that to continue for the next two to three years as the Brexit negotiations unfold and the impact of that is felt more widely in the UK economy?

Charlie Maudsley

I think a couple of things. The most obvious part is the leasing activity and the continued leasing activity. And as Chris mentioned, if I look at the deals that we've done post Brexit, and the deals we've got under offer, there's still a lot of leasing activity right across the spectrum, F&B, fashion. So that gives us some comfort that people are still planning for growth. I think though what you will see, and certainly, the conversations we're having with most of our customers, is that polarization is going to accelerate, so there's a sort of rush to get into the best space. And I think you'll see that accelerate as I say. I think also on the figures, the figures we reported for like-for-like in-store sales, added to that is obviously all the Click & Collect sales online and how it all integrates. And I think the retailers are getting much greater clarity how that all fits together, which is why the locals, for example, have performed so well. 30% of people who go to a local asset are using Click & Collect, and on average, they spend twice the amount. But as we all know, there are headwinds out there. Next year, it will be a little uncertain.

Hemant Kotak

Okay. Thank you. And, Chris, just going back to a point that you made on share buybacks and the idea that they're short term gains. I just wonder if you can explain that a bit more because I would think a lot of your investors, hopefully, take a longer-term view on things. Your equity is perpetual. So why is it short-term gains, do you think?

Chris Grigg

Well, first thing to say is that the in and out cost of equity transactions is quite high, right. So we're not trading at the margin. So you may be able to buy at the margin but when we sell as you know the discount depending on the size, is quite big. So in that sense, you've got to be very careful that you don't need that equity at a time, because you may not have access to the capital markets any particular time. I think one of the reasons we've seen more buybacks done in the States is because the equity capital markets are more liquid and lower cost of entry and exit. That' my first point.

The second point is when we see our business in terms of, as I said, the long term investments, we know that there are going to be opportunities that come up where we're going to want to have that capital available today. And we don't want to put ourselves in a position where we have to break some of the limits. So we don't want to have to, this is a movie that ran before in this industry. With people being forced or encouraged to raise their LTV, to take advantage of what appeared to be opportunities and then things going wrong. What Lucinda, I think very clearly, set out was the size of the medium-term development opportunity that is out there. It'd be a hell of a shame not to be able to take that. When we look at the prospective returns in that portfolio, when we look at the returns historically that we've seen in the development part of our business, they do endure; they add a lot of value. So I would be very reticent about taking those opportunities away.

Similarly, we don't know exactly where the market is going to go. So there may be opportunities in the market. The point was made just now about short leases coming down. You will see some activity, I don't know how much that's going to be. But in the near term, I would prefer that flexibility than squeezing down on what may prove to be a different view on risk as opposed to a dislocation of valuation. That's the thinking.

Hemant Kotak

Yes, I think the idea of taking a one-way bet and increasing leverage doesn't make sense; you can get it wrong. But the idea of selling assets in the private market, proving out values, using that in a leverage-neutral way to buy back some shares, I think that's where some of the -- that's where my suggestion is going anyway.

Chris Grigg

Look, I understand. And it always makes me smile, having been beaten up consistently for having higher gearing. Now we're being told that we're haven't geared up. That seems a bit strange, but hey that's the joy of the job. And as I say, we'll -- I get the point about leverage neutral. So we're not hiding behind, oh we'll have to gear up. What we do think, though, as I come back to is long-term business and we will have opportunities in this business. And we would like to take those because they will add long-term value, so just to take a very small example. Remember that purchasing down at Plymouth will have an effect on that whole asset not just the 60 million that we've spent. So those sorts of benefits are disproportionately beneficial over and above the apparent return. So that's what's in our mind and the Board is very supportive of that approach. I've tried to set the sort of timescale, to be clear to people, upon which we're thinking. If there was a real change for some reason, of course, we would look at this again. But I don't want you to walk away with thinking, oh, they're going to think about it again next week because that's -- I'm trying to be as clear as I can be about what you should expect from British Land over the next six months and beyond.

Are we done? Questions on the phones? Oh all right, sorry. Is that Alan?

Alan Carter

Alan Carter from Stifel. I'm intrigued. It's a minor point but you let 0.75 million square feet - or re-let 0.75 million square feet in the first half, roughly 80% of that in the retail sector. Is there anything within the space that you let or re-let in the first half that makes the rent you've achieved relative to ERV make the March ERV from the valuer look negligent because 14% -- or 13%, above ERV is quite extraordinary?

Lucinda Bell

It's a great deal.

Chris Grigg

They're all looking at me; that's terrific. Thanks for that, team. And if you share my pain, one of our valuers is sitting in the second row. No, absolutely not. I don't think it's about negligence.

Alan Carter

Well, if there's a valuer here, I'd be -- I would love to hear.

Chris Grigg

Yes, obviously but we're here. Take it with a -- it's not his job to answer questions that are directed to me. But look, what I would say is I think there's, understandably -- look, first of all we don't let, we never get an exact match of the entire portfolio right, so there will be opportunities. And that's what tends to be. In other words, we will do deals because they're great deals to do. Charlie, you might just want to talk about what you did with your big Solus deal, because that's a great example to me of what can sometimes really make a difference.

Charlie Maudsley

I was only just thinking which confidentiality clause I signed on that deal. But I think the general theme is that because we've got 98%, 99% occupancy we have managed to drive the competitive tension into all our leasing transactions. That's why you're seeing good progress. That takes longer to get complete wash-over to the whole portfolio because there's all the technical side between unit sizes, etcetera. But because we've had this consistent run of six months' performance on leasing activity, that's why we've seen the positive ERV growth right across the regional and the local. So it takes time for the two to catch up.

Alan Carter

What I'm getting at is there isn't a BHS store that was never going to be re-let as far as the valuer was concerned that did let. There's nothing in there that distorts the figures over this six-month period.

Charlie Maudsley

Nothing in particular, no. It's pretty evenly spread the regional and the local. There were more lettings in the regional than there were the local but the percentage increase was broadly the same. I think from memory, and Lu will correct me in a minute when she kicks me under the table, I think there were only 15% or 20% of the lettings that were below the March ERV. So it was pretty consistent. And then on the multi-let portfolio, 90% of the assets saw flat or positive ERV growth, so it was pretty consistent. And that's actually something that's really encouraged us about the quality of the leasing demand that we have had in the last six months.

Lucinda Bell

I'd just add that only 14 of the transactions on what you had, 89 long-term lettings, were below ERV. But you always get a very large range. You had particularly good transactions this quarter. So I would say that just general line-by-line outperformance against ERV was a shift up from what we have sometimes seen but as we say, 89 transactions.

Alan Carter

Thanks very much.

Chris Grigg

Anybody else in the room? On the phones?

Operator

[Operator Instruction]

Chris Grigg

It looks like no -- sorry, it's very hard for me to see at the back. Okay, so no questions on the phones. Thanks everybody, very much for coming here this morning. Thanks a lot.

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