British Land Company' (BRLAF) CEO Chris Grigg on Full Year 2018 Results - Earnings Call Transcript

British Land Company (The) PLC (OTCPK:BRLAF) Full Year 2018 Earnings Conference Call May 17, 2018 4:30 AM ET

Executives

Chris Grigg - Chief Executive

Jonty McNuff - Head of Financial Reporting

Tim Roberts - Head of Offices and Residential

Charles Maudsley - Head of Retail, Leisure & Residential

Analysts

David Brockton - Liberum Capital

Sander Bunck - Barclays

Michael Burt - Exane BNP Paribas

Bart Gysens - Morgan Stanley

Mike Bessell - Bank of America

Chris Grigg

Good morning, everyone, and welcome to Broadgate. This morning, I'll set out how our consistent approach of investing behind themes has driven our performance this year and positions us well to further evolve our business.

But first, I'd like to welcome Simon Carter, our new CFO. He's out there in the front row and starts on Monday, and no difficult questions for him, by the way. I'm also pleased to introduce Jonty McNuff, our Head of Financial Reporting, who will present the financial section today.

Let's start though with the results; profits were GBP380 million, down slightly on last year, that's despite asset sales though of GBP1.5 billion over two years. NAV is nearly 6% ahead, reflecting a valuation increase of more than 2%, plus the impact to our share buyback.

Our leasing activity has covered 2.4 million square feet. Pricing has remained firm, with deals 8% ahead of ERV and at 97% occupancy. We're once again effectively filling offices and retail.

At the same time, we are reporting some of our strongest ever financial metrics, and we have again increased the dividend. Jonty will talk more about that.

As usual, I will take our segments in turn; starting with Offices. Here, progress has been exceptional. Our activity has covered more than 1 million square feet, four times than what we achieved last year, that's a striking number. It reflects our strategic focus on our campuses and on delivering quality space. Our lettings to Dentsu Aegis Regent's Place, which was the largest west-end pre-let in more than 20 years, is our strong endorsement of our approach. Overall, terms were 5.6% ahead of ERV and we are under offer or in negotiation on another 0.5 million square feet.

We also successfully launched Storey; again, it was a strategic decision. To invest behind a growing theme in the market, but our offer is clearly differentiated. It is performing well, and I will talk more about that in a minute.

Of course, the market remains cautious; but one effect of Brexit, is that it has constrained London Office development, at a time when many feared oversupply. So actually, businesses who want high quality space, don't have a lot of options. So we are faced with what might be termed, an unconventional London cycle, which continues to reward sensible development at our differentiated offer.

Turning to retail; you are all aware of the environment we are operating in, so are we. Retail has faced a combination of long term structural challenges, principally internet related, as well as short term pressures like rising costs and fragile consumer confidence. So polarization is playing out, and indeed, it's accelerated. But as our operational performance demonstrates, we are generally on the right side of that trend. So yes, retail sales are down, but in a tough-tough market, we are a 130 basis points ahead of the index, and our footfall is positive. Here, we are more than 300 basis points ahead.

Our leasing activity again covered more than 1 million square feet, and we signed these deals on average, 10% ahead of ERV.

At Meadowhall, where we completed our refurbishment, there were over 13% ahead. Overall incentives remain stable, and as I said, the portfolio is virtually full. But we have all seen the recent news flow, and activity has slowed in the last couple of months. That said, across our portfolio, the combined impact with administrations and CVAs is around 1% of our total gross income. We know that to maintain our performance, we need quality assets in the right places.

Let me remind you, in the last four years, we have made GBP2.3 billion of retail asset sales, that includes GBP1 billion worth of super stores, and GBP0.5 billion of multi-let assets that don't fit our strategy. But we are also investing in assets that do, so let me give you an example; at Fort Kinnaird, we opened a new leisure extension in 2015, with a seven screen Odeon and a range of restaurants. We have improved the environment and extended the trading hours.

In 2016, we opened a purpose built store, the Primark. All this represented an investment around GBP30 million, of which, our share was just GBP12 million. This year, we have made 86,000 square feet of lettings, 17% ahead of ERV, and we welcomed new occupiers like Pure Gym And Wagamamas. ERV growth is nearly 6% this year, and is also ahead of IPD on a three and five year basis.

We have also maintained our disciplined approach to capital allocation. We completed on the sale of the Leadenhall Building, an iconic city asset, at a 24% premium, and we have made over GBP400 million of retail disposals. We have continued to invest in our development program, adding GBP200 million worth of acquisitions, primarily, mixed use opportunities. Finally, we completed our 300 million share buyback at an average price of 630p.

We have cut our interest bill from GBP200 million five years ago to GBP128 million today, and reduced our weighted average interest rate to an all time low of 2.8%, and that's without materially impacting NAV.

At the same time, leverage is now down to 28%. This all reflects our consistent approach to managing our finances, which has been very accretive to our long term performance.

I said I would set out how the consistent strategic aims we have taken over several years have driven our performance. Some of these actions are laid out here. First, we have invested in London. Today, it accounts for nearly 60% of our assets, up from around 40% in 2010, and we have shifted our focus away from the traditional city, so that the West End now accounts for some 60% of our office exposure.

At the same time, Broadgate, our only remaining city asset, continues to thrive. Banks exposure is now 6% of the whole portfolio, and this building represents around half of that. By contrast, TMT is up to 8%.

We recognize the importance of Crossrail early on. In 2013, we acquired Paddington Central and Ealing Broadway, and we recently added the Woolwich Estate. So today GBP4.6 billion of our assets, stand to benefit from Crossrail. And of course, our campus approach has been absolutely key to a lot of this. It's a real differentiator for us, and it plays to our mixed use skills. Almost 80% of our offices are now in our free London campuses. Here, we not only own the buildings, but the spaces outside too. So we can meet people's needs throughout the working day, and increasingly, at weekends. This approach is working. Our leasing activity this year, accounted for more than 7% of the Central London market, which compares with us owning about 2% of the stock. And we are attracting a broader mix of occupiers than ever before.

How are we doing this? Look at Paddington. Five years ago, we raised equity to buy Paddington Central. This was an estate, which frankly, had lost its way. Rents had lagged and there was little vision. Since then, we have invested in the public realm, thus made a huge difference, as you can see here and a number of you have seen it live.

We have let space to Pergola, a pop-up dining concert, which had brought nearly 180,000 people to the campus last year, and had just reopened for another season. We have nearly doubled the provision of restaurants and cafes, and we turned the canal from a barrier, into a feature. So we have really changed the perception of the campus.

The result for Kingdom Street was nearly 90% let, before it launched last summer. Today, our top rates are nearly GBP80 a square foot, back in 2013, they were below GBP60. We have achieved a total unlevered return of 12% per year. So it's a great example of how we allocate our capital well, and this year, Paddington was our strongest performing campus, with values more than 7% ahead. Crossrail opens next year, bringing further momentum.

At Broadgate, we are further ahead in that journey. Take a look around, you will see pop-up cafes, art installations, and a lot of blue sky above 100 Liverpool Street, at least for the next couple of years. Such a relief somebody laughed at that, you have no idea. There has been a lot riding on that, let me tell you, not all for me.

We are on-site at 1-Finsbury Avenue and 135 Bishopsgate. So including 100 Liverpool Street, we are delivering more than 1 million square feet of space, more than 30% of that is already pre-let. 15% of that space is F&B and retail. So we are really progressing our mixed use vision. This year, we are delighted to have signed Eataly, at 135 Bishopsgate. It's a world class Italian marketplace concept, and represents a real step change in our offer. They have got stores in 40 locations around the world, including New York and Boston, and this will be their first U.K. store.

This signing is clear demonstration of how our expertise in retail is really adding value, and it sparked interest across Broadgate from a range of other occupiers.

Storey is another example of investing in a theme, and it's delivering. It was a response to a clear increase in demand from all flexible space, from SMEs, as well as large organizations, seeking add-on space. We got a genuinely differentiated offer, because we own the buildings that have Storey. Our contracted lease term is more than two years, and the average size is over 50 people.

Equally important to our customers, they can brand their own space. They have their name on the door, and they really like that. So one year in, occupancy is nearly 80%, and we are achieving a premium of nearly 50%. That's an impressive start, but we think it will settle over time, at more like 20%.

We are attracting a lot more tech companies. Around three quarters of Storey space is let to TMT occupiers. So we are learning a lot about this part of the market, and that insight is helpful in our core space as well.

Before I hand you over to Jonty, I'd like to talk about development. It's an important part of how we create value. You may remember, that our 2010 program delivered more than GBP1 billion of profits. We have had another great year of progress. We have more than doubled our committed pipeline, 55% is pre-let or under offer. So our speculative exposure remains low, at under 5% of the portfolio, and future costs are substantially covered by residential receipts to come.

Looking further forward, we have a very significant opportunity at Canada Water. I am pleased with our progress here. We signed a Master Development Agreement with Southward Council last week, and submitted our planning application for the overall master plan and for three buildings in the first phase. That phase covers 1.8 million square feet, with around 650 new homes. That's really complementary to our mixed use model.

We are continuing to engage with the local community. 10,000 people have visited our exhibitions so far, and their views remain critical to our approach going forward. This engagement is part of our broader approach to sustainability. We are very mindful of our wider responsibilities, which include delivering places which are energy efficient and low carbon. So we are pleased today, our portfolio is nearly twice as efficient, as it was in 2009, and we have maintained our leading sustainability performance across a range of indices.

I will pause there, and hand you over to Jonty, for an update on our financials.

Jonty McNuff

Thanks Chris and morning everyone. Profit for the year was GBP380 million, down moderately by 2.6% following the successful sale of GBP1.5 billion of income producing assets over the last two years. EPS is down by just 1.1%, due to the positive impact of the GBP300 million share buyback, which added 0.4p. There is a further 1p of benefit to come on this next year.

As previously announced, we increased the dividend by 3% to just over 30p for the year. NAV is up 5.7% at 967p, with valuations up 2.2%. LTV has reduced by 150 basis points to 28.4%, as our sales were partially offset by the impact of the share buyback. Altogether, we have delivered a total accounting return of 8.9% for the 12 months to March.

Let's look at the income statement in more detail, and I will start with the rents. Net sales we have made over the last two years have reduced rents by GBP44 million. The impact of lease expirees and properties in our development pipeline, is largely offset by one-off surrender premia. Principally, the GBP15 million receipt from RBS at 135 Bishopsgate. Income from our completed developments, as well as like-for-like growth of 1.8%, takes net rents to GBP576 million for the year.

Turning now to financing costs; which we have reduced by a further GBP23 million. This is the result of thoughtful financing and debt management that we have undertaken over the last two years, as well as our net divestment. We successfully issued a GBP300 million unsecured sterling bond for 12 years, that's a coupon of 2.375%, that's the lowest for a U.K. real estate in this market.

Earlier this month, we extended our largest revolving credit facility at GBP735 million for five years, with an initial margin of 90 basis points. We are pleased with the support of the 12 banks in this syndicate.

On a spot basis, the interest rates on our debt is 80% hedged. This reduces to 60% on average over a five year look-forward, based on projected debt.

Bringing this all together, you can see the significant impact that our capital activity has had on this year's profits. As I have mentioned, we have largely offset this through NPV positive financing and debt management, as well as one-off surrender premia received.

Looking to next year, the usual guidance side is included within the appendices. But it's important to highlight, that we are not expecting any further significant one-off surrenders, and the annualized impact of net sales we have made this year on rent is GBP33 million, of which GBP25 million is included in this year's profits. We will obviously keep you update on future capital activity, as and when it happens.

Looking down the income statement, we have covered the significant movements in rents and financing costs. Admin costs are down GBP3 million to GBP83 million, as a result of lower variable pay. We expect next year's admin costs to be broadly in line with this.

In looking at the dividends for the coming year, we are proposing a further increase of 3% to 31p.

Turning now to valuation performance; valuations are up 2.2% for the year, with growth of 1.4% in the first half, slowing to 0.9% in the second. Overall, yields were stable, and we have delivered ERV growth of 1.8%. This performance reflects our strong leasing development and sales activity.

Our developments were up 9.6%, which is GBP112 million. This includes the profit release at Clarges residential, where we have made sales of GBP344 million, of which we have received proceeds of GBP231 million to-date. The remaining units will be formally launched in the summer.

Looking at offices in a bit more detail; overall, valuations are up 4.5%. Our West-End asset valuations are up 5.8% overall. At Paddington, values were up 7.3%. Our leasing success at 4 Kingdom Street accounts for two-thirds of this uplift, and we are seeing a washover effect on to the rest of the campus.

Over at Regent's Place, values were up 4.2%, as a result of achieving planning and pre-letting to Dentsu Aegis, as Chris mentioned earlier. City asset valuations were up 2.8%, in part, reflecting the Leadenhall building sale, which completed last May. And finally, Broadgate was up 1.8%, driven by successful pre-lets along with ERV growth of 1.5% on the standing investments.

In retail, valuations were up 0.3%, all of which came through in the first half, with values flat overall in the second. Regionals performed better than locals, with values marginally by 0.2% for the year.

Across retail, ERV growth has offset marginal outward yield shift. We have seen good ERV growth of 1.9% across the multi-let assets, which make up 81% of the portfolio. That's being driven by our active asset management and leasing successes. We signed 1.2 million square foot of lettings, at 10% ahead of ERV. This was driven in large part by the improvements we have delivered at assets, such as Meadowhall, where ERV growth was 2.8%.

Bringing the results together, NAV is up 5.7% at 967p. This is driven by the valuation increase of 2.2%, together with the positive impact of the share buyback, which added 15p.

Finally, looking at debt, we are again reporting some of our strongest ever metrics. Loan-to-value stands at 28% following net disposals. Combined with this, our weighted average interest rate is the lowest it has ever been at 2.8%, and our interest cover stands at four times, with undrawn debt facilities of GBP1.2 billion and no requirement to refinance until early 2021. The strength of the company's balance sheet and underlying business, is reflected in our senior unsecured credit rating, which was upgraded to A by Fitch, earlier this year.

And that external validation of the strength of our finances, seems a good note on which to hand back to Chris.

Chris Grigg

Thank you, Jonty. Earlier, I explained how identifying attractive market themes and then investing heavily, has changed our business and delivered value. Going forward, you should expect us to continue to evolve our business. Building on our strengths, we will focus on opportunities, which complement and enhance our model to build a more mixed use business. We will remain focused on high quality places, which reflect a broad range of needs, and which are properly embedded within local communities.

So they reflect modern diverse lifestyles, and are places where people want to work and to spend time. This focus drives enduring demand for our space.

I set out here, the future shape of the business. We are moving towards an increasingly mixed-use approach with three broad, but complementary areas. Just to be clear, this slide illustrates the direction of travel, it's indicative and not representing scale or exact size. The three areas are, our London office business, focused principally on campuses. A further refined retail business and a growing residential business, principally, built to rent. Our customer focus underpins this approach, and will only increase. The value we create for our operational expertise is part of that customer story.

I will take you through these elements in more detail. First, the London office business focused on our campuses, providing high quality, well located, and sustainable office space. As we delivered at 4 Kingdom Street, and we are developing at 100 Liverpool Street. We also offer the right mix of core and Storey space to cater for an even broader range of occupiers.

We have build out Storey. We have identified another 120,000 square feet across our campuses, that we will progress during this year, and over time, it could become 10% of our office business. Both on our campuses, and potentially, in some standalone buildings.

Secondly, on retail; let me be clear, physical retail has an important role to play in our business. But we recognize that the retail market is changing, and the types of assets which retailers need to succeed, is also changing. We are focusing on providing quality space in the right locations with the highest standard of customer service, or to put it another way, places for which there is more demand and supply. And we are already making significant progress.

I explained earlier how proactive we have been over several years selling assets, and in November we said, we will make GBP500 million of sales over the following 12 months. Halfway in, we are on track.

On balance, we are likely to sell more sellers [ph] or local retail, so that with time, although we see a role for both regional and local assets, our retail business will comprise a smaller number of on average, larger schemes.

Thirdly, as we build an increasingly mixed use business, owning more residential assets, principally as I said, build-to-rent, will play an increasing role. It's a complementary and structurally growing part of the market, which is highly fragmented. So we see a real opportunity here.

As you know, we already have a number of residential options in our portfolio. At Canada Water, where phase one includes a plan for 650 homes, and at Ealing, Eden Walk and Woolwich.

We have already got a strong track record in residential. For example, at the Hempel and Aldgate, and most recently at Clarges, albeit, that is a unique scheme.

There are a number of ways we can build scale in this market, starting with opportunities in our portfolio, site acquisitions, or bolt-on acquisitions of portfolios or operating companies. Providing to people's homes does come with a real responsibility, we are aware of that. So we will focus on providing those residents with high quality customer service, and that brings me to my next point.

Customer focus will become even more important to us. Increasingly, we think about real estate as a service, not just as physical space. So yes, we will continue to deliver great buildings, but we can do more than that. Our insights into our customers and the people in communities, who use our spaces, mean we can provide places, which reflect their evolving needs, whether that's through story, a residential business, a more focused retail business, or at our campuses. Customer service, insight and best in class operational expertise are real advantages for British Land; and will be fundamental to our continued success. Their way to create real lasting value within our business.

In all of this, we will remain committed to deploying capital in a disciplined and thoughtful way. As I have said already, we will continue selling retail assets and continue to extract value from office assets, which are mature and fully let. While at the same time, progressing our strategic agenda and investing in our business. We have got significant optionality embedded within our model, and on top of that, our current financial position is as strong as it has been for many years. Our leverage is low, and with committed development costs, substantially covered by Clarges' sales, we expect it to stay that way. And of course, as always, we are mindful of the importance of shareholder returns.

Looking forward, as I said earlier, we think that this office cycle is proving somewhat unconventional. Despite uncertainty, businesses are continuing to commit to London, and the supply of high quality new office space is relatively constrained. So we expect demand for the space we manage and develop to remain good. Meanwhile, we expect polarization in the office market, to gather space.

In retail, the market does remain challenging; occupiers face headwinds and polarization is playing out. But we are confident that the quality and range of our space meets the evolving need of retailers.

Today, I set out a clear plan for the future development of our business. As you'd expect, we are mindful of the current market conditions. But our unique strengths, including the scale, balance and quality of our portfolio, the opportunities we have created, and a strong balance sheet, all mean, we look to the future with confidence.

And with that, I will turn it over to questions. As usual, if you can kind of give your name and organization at the outset, it gives an advantage to the people. On the phones, we will probably take some questions from the phones at the end. Good morning. Now, can we get this to work?

Question-and-Answer Session

Q - Unidentified Analyst

Thank you very much, Chris. Very good presentation. I have two questions for you. The first one, is a technical one, is how appraisers are assessing the value of office building, in which you have a storey, i.e. massive premium to ERVs, what is the numerator, what is the denominator? And the other one will be, talking about smart use of capital, can we have a sense of what will be, over the next three years, the kind of big blocks you are anticipating in terms of investment? I think you have got GBP900 million still near term, as you call it, plus GBP3 billion longer term, so how does that optionality compare within those GBP900 million, so disposals and on the other side, dividend obviously. Thank you.

Chris Grigg

Okay. I will try and get through all that. I am going to start off with the valuation point, which nobody in the room will be surprised to know, that I am going to hand over to Tim, because that's what we pay him to do. Well, we don't actually pay him to do it. The guys at the back of the room gets to do the valuation thing.

Tim Roberts

Morning. What the values are doing, is they are applying a slightly higher yield on the storey income, because that income, they believe, is of short term in nature. And where the premium is particularly high, they do some top slicing. I think with respect to storey, as Chris has said, it has been strategically a fantastic success, because we are attracting new occupiers, new SME occupiers to the campuses, and a great example if I get my geographies 2 and 3FA, where we have got a FinTech cluster, but also, it's meeting the needs of our existing occupiers, who want core space, but they also like the idea of some flex.

Chris Grigg

Moving on to the kind of big blocks, to use your words, I would say the following; first of all, if we look at the committed program, which is principally, as you know, offices, then in terms of cash flow, that's principal as I mentioned in my remarks, paid for by the cash coming in from the disposals.

Looking forward, one of the things we really like, is the optionality; and I mean that seriously, because that gives us the choice, rather than having to make that now. How you should think about this, is that rent will build over time as the development comes to fruition. You know, these are big buildings, so it tends to be slightly delayed. So that's part one.

Part two, in terms of kind of medium term opportunities we have, then we will look at each of those, and they are all set out in the book. As over time, to just look at what the returns are, and we will balance that with other potential uses of capital, including -- I hope I was clear about that, including a possibility of share buybacks. But obviously, we are also minded of the importance of building for the future in terms of our business.

So those decisions will come up over the next few years. How will we finance them? You should expect, as I said in my comments, will be principally out of sales of either mature city offices, buildings, or alternatively, [indiscernible] disposal of retail assets, we don't think fit the future, for our view of the future.

So that's kind of where the cash goes. I don't know guys, if you want to add anything to that?

Tim Roberts

That's very nice. Well done boss.

Unidentified Analyst

Just to make sure, I understand correctly the valuation, what sort of premium we end up, on this Storey valuation? Is it the same type of valuation than a classic office building, or do we have a premium? And what sort of premium are we talking about, because you gave a sense that's a lower rent, high yield, but net-net, does it means premium?

Tim Roberts

At the moment, net-net on a 48% premium, at a valuation level that is accretive to the portfolio, irrespective of all the strategic benefits its offering. As Chris has said, we feel the story has really-really started off well. We don't expect to maintain that 48% premium. We are targeting more towards a 20% premium. But at a 20% premium, we still expect it to be accretive to the business and accretive to valuation.

David Brockton

Good morning. It's David Brockton from Liberum. I have got a few, but hopefully, they are relatively quickly quick, in terms of response. The first one follows on in respect to the story. The 10% long term aspirational or 10% potential, just interested to know, how you have derived that number? Is that your view of the latent market demand, or is it the extent of your risk appetite there? And then the second question, which covers a few is, with respect to the built-to-rent aspiration for the business, do you have any thoughts around what the achievable gross to net might be there? And also, when you talk about bolt-ons, can you give a feel for scale and the final attach to that, is how will you manage that? Is this a third division, the third executive director, or will it be managed from existing resources?

Chris Grigg

Gosh, I -- hopefully, someone can trim it all down, because I haven't. First of all starting with Storey, Tim, I don't know if you want to comment?

Tim Roberts

So in terms of the strategic view that there could be 10% of the office business; that is, because of our view of where demand is coming from, and I have talked already about that. It's two areas; structurally, demand is growing from SMEs, and it's an ability for us to attract a wide range of occupiers into our campuses, which helps us with demand and enlivenment and rental growth.

The other thing that we are hearing from nearly all our occupiers, is that they are really attracted to this core and flex approach. So we think that we will be providing our existing occupiers in the future, a degree of flex. And to put this into perspective, as Chris has said, we have got about 115,000 square feet in Storey. We are already committed to 230,000 square feet, and at the moment, the office portfolio is about 7 million square feet. So you could see it growing to 700,000 square feet, I think, relatively easily.

Chris Grigg

In terms of the BTR questions, I will take the ones on bolt-on and how to manage, and then Charlie will comment on gross-to-net. First of all, it's always difficult to be exact about bolt-ons, particularly when you don't know what they might be. But where we would see the opportunity, is to gain either incremental assets, a platform that has some assets, or some incremental expertise.

If you look at what we did in Storey; there, we really took existing talent from within our business and added a couple of people, who were -- we hired out of other operations. That has worked very well for us. So that's a kind of starting point, but certainly, if something came out that was incremental in terms of either people, where we know we don't have every skillset that we are going to require, or get us a bit of scale straight away to add to what we can build from our own resource, that would seem to us to be a unique way of doing it. It's not really feasible to give you a sense of size, until they show up. I am not dodging the question, it's just really hard.

So that's really how I would say, in terms of managing that, I could say a situation where we hired somebody who had some talent, they would be reasonably seeing you in the organization. But I wouldn't see us needing to expand the -- the most senior levels of the company. What I would say is, as an organization, we feel incredibly proud of the people that we -- I mean, if any of you don't see. I mean, just as an example, that was Jonty doing the hard day job, and we just said to him, why don't you come and present the results. So we have got people like that in the organization. We do lots of things. We did give him more than a couple of day's notice. But we should maybe pretend not.

So we have a lot of talent in this business, and we can reuse that talent in different places. But that doesn't mean that we would not look outside, if we thought it appropriate. Charlie? Gross-to-net?

Charles Maudsley

Just building on what Chris said; so you know, a lot of the themes that we see in built-to-rent are similar to the way we run retail places, so the skillsets are transferable. Obviously, you need experts as well, which we can build up that platform. There are actually two challenges to build rent, one is procurement of how do you build buildings in a cost effective manner, and with a development team with Roger and Nigel, we are sort of working out plans for that, for the schemes that we have got. And then the other side is, as you rightly point out, is the operations side. The market sort of norm is 25% gross-to-net and you need the scale to do that, and that means, you sort of need at least sort of 1,500 to 2,000 units to get to those sorts of efficiencies. But in all the development pipeline we have already got that sort of potential baked into the assets.

Sander Bunck

Morning. Sander Bunck, Barclays. Two questions on retail actually; first one, on the valuation; perhaps a bit surprising to see the retail valuation up, given that one of your peers just recently saw write downs in three of his assets. I know the retail woes going on currently in the market. Can you give a bit more feeling on why that valuation was up, and perhaps more bluntly, if you were to put the whole retail portfolio up for sale today, would you achieve book value? And the second one, would actually be then on Sainsbury's; knowing it's one of your largest tenants, and the recent merger announcement with Asda. Have you had conversations with them, and do you -- are you aware of any store closures or are they quite comfortable with where they are, at this moment?

Chris Grigg

I will get Charlie to answer some of the questions. I would say at the outset, we take a lot of pleasure in some of the decisions we have made over the last few years. Hands up, probably being good for performance, if we would have sold a few more retail assets and we already sold a lot. So we are always conscious of that. But look, it's always to see these things in retrospect.

So that's the overall environment. Charlie, if you just want to talk about valuations, I think that might be useful?

Charles Maudsley

Sure. First off, we are confident on the valuations. Independently valued as a sort of a side note this year, we did a value rotation, so nearly half the portfolio has been valued by a new valuer. I think the main thing on the valuations, is that they reflect our sort of proactive asset management and all the evidence that we have created, the 1 million square feet of lettings, and all the physical work to assets that Chris has talked about. So that's the positive ERV growth we have had, is sort of based on lot of transactional evidence in the portfolio.

On the sales that we have one and the GBP400 million plus in sales have been marginally ahead of book, which is another reference point. And I think you were sort of touching towards sort of Meadowhall valuation. Meadowhall valuation, Meadowhall has had a fantastic year, we have completed the refurbishment, and so the valuation sort of reflects the fact that there is no CapEx to go, but also we have done huge volume of lettings over the year, 30 lettings, nearly 30 new retailers to the center. Meadowhall is only 240 units, Bluewater is 330, Westfield is 450, so that's quite the amount of attention we have got is strong.

You have got nearly 50% of the retailers at Meadowhall, have the Meadowhall stores as one of their top two performers in the U.K. So it's a very strong -- in the operating metrics, very good.

And I suppose the last part on Meadowhall for me is, we have got the planning consent for the extension, but one of the great features of the asset is, it's effectively a very pretty metal box and we can upsize and downsize units very effectively, which is why we have been able to accommodate so many new retail spaces.

Sorry Sainsbury's yeah? It is too early to say what they will do. We have actually only got GBP360 million of standalone stores left in the portfolio, after all the disposals. We have actually had a very good run rate on selling standalone investments, and we just sold another couple in the last three months, about GBP70 million gross asset value, which we yield to sort of 5.2% to 5.5%. There is a lot of investor demand for it at the moment.

Michael Burt

Michael Burt from Exane BNP Paribas. I just had one on retail; it doesn't appear that units in administration are a significant factor for you at the year end. I was just thinking more specifically though, looking forward, about your exposure to Debenhams, the equity market seems to be quite worried about Debenhams at the moment, and I just wonder how you see it?

Chris Grigg

I mean, the number I gave was the current number rather than year end number. So we have done what we can in terms of disclosure at this stage. Debenhams specifically, remember that, quite a big chunk of that exposure which we disclose is the head office. Tim, it wouldn't be a disaster, would it, if you got that office back?

Tim Roberts

They -- god bless them, they're paying a rent in the mid-50s and Facebook have just taken their floors, paying a rate of GBP70 a square foot.

Chris Grigg

That helps to offset.

Michael Burt

And then, a couple if I may, on Canada Water; you have put planning in now, maybe you could just let us know, what you see is the milestones for that now, sort of between now and the end of the next financial year? And could you explain the master development agreement to us? These things are complicated, and it would just be nice to understand, your relationship -- the relationship with Southwark, it would be interesting just to understand that. We just had local elections, doesn't look like a lot has changed, but an update there would be useful.

Chris Grigg

For sure. Just to put it in perspective for you, in terms of the planning document Roger is sitting there with one of the -- half of the team at dotted [indiscernible]. We delivered 10,000 pages in that planning application. So giving you a précis of that is going to be a stretch in the few minutes available. The basic, but what I can tell you, it's very detailed work. We feel very good about it. The way that these things work with local authorities is, you only need to submit it when they want you to submit it, because obviously, it's a lot of work for them. So you can take from that, in conjunction with the signing of the NDA, that will -- it's very consensual, if you see what I mean. Your point about the elections is right, same team in place, same -- it has been consistently Labor, same leader in place, same Chief Executive in place.

In terms of the broad brush of the MDA, if you cross your mind back to how we assembled the site, there were several bits of ownership and some of those were freehold, some of those were leasehold. So what we really did, was put them all together and end up with a common agreement over the whole thing. As you can imagine, to make that work, it had to be equitable to both sides. We basically took all aspects of that, figured it out, valued it, and then had a bit of a haggle at the end, as you can imagine, which was kind of a pleasant conversation between me and the Chief Executive, which came to a satisfactory conclusion for both of us. So that's how it worked. Is that a reasonable summary, Charlie?

Charles Maudsley

[Answer Inaudible]. If they don't want, it can't slow us down for our aspiration. So we are in control of our own destiny, but very much working in partnership with Southwark, and they really want to invest with us, which is great for us to have, sort of the largest stakeholder as part of the plans.

Chris Grigg

Just to emphasize what Charlie said, if they decide not to put in money, then they just get [indiscernible]. So it's an equitable arrangement.

Bart Gysens

Bart Gysens from Morgan Stanley. First question on built-to-rent, it's something that gets a huge amount of attention from the press, from a huge amount of capital chasing it. The barriers to entry are significant or it takes a long time to get up to scale. How should we see it for British Land, at what point in one, three, five years time will this become a meaningful part of your business and the investment portfolio? Should we expect it to be 10% plus in three years time, five years time?

Chris Grigg

I think those are the numbers to think in terms of. So if you use 10% to 15% over three to five -- I tend towards the five years. And just to be clear, we see this as strategically important, we see it as very additive and complementary, as I try to make clear in my comments. Having said that, we will drive the same financial discipline through acquisitions of sites, buildout of rental versus other performance of home ownership in places like Canada Water. So we consider to be disciplined about it. But those sorts of numbers that you put out there, seem to us to be -- they are the kind of, when we do our financial planning, those are the sorts of number we use. But to be honest with you, one of the things we like about our model, is that we can flex these things originally, but if we get the opportunities at a different price. From our perspective, we have a bunch of advantages in this space about history, about how we can run mixed use ability over time to develop very efficiently, very well, or be it those, of course differences.

So that's why we think we can be meaningful in this space, and our approach to customers, again it's very complementary to this thing, creating communities. Those are the things you have been hearing from us for a number of years, and that we regard as very helpful.

Bart Gysens

And then one follow-up question for Charlie; we hear a lot about CVAs. Do you have some kind of watchlist of retailers that you think are potential CVA candidates, and what type of -- obviously I don't want you to give any names, but can you --

Chris Grigg

Nice try anyway.

Bart Gysens

No but, do you have kind of what do you think, what percentage of your portfolio is at risk of a CVA in the next 12 months, and what kind of discounts do you end up after a CVA process typically?

Charles Maudsley

First off, I don't think any of the businesses that have gone into CVA are of particular surprise to anybody. And to-date, the impact for us is actually 0.6% of the rent roll, is the rent that we have lost. So if you look at a lot of the CVAs at the moment, our assets are in the sort of category A assets, because typically in retail, it comes in as sort of three or four different categories they put them into.

Yes, we do have watchlist. I wouldn't, as you quite rightly say, name the retailers and, it's commercially sensitive, so I wouldn't actually give you a percentage of what percent we think are on the rent roll. I think what history shows is, we have got a very good track record of managing in that space, when it comes back to us. We start from a very strong position of 98% occupancy. So if you look at say BHS last year, we have now filled or sold all of that space, and in aggregate, we are at the high rent passing than the previous rent passing for BHS.

So as you'd expect for us, every asset has an asset plan, target list of retailers, etcetera. So we sort of deal with them, as and when they come up.

Mike Bessell

Hi guys. Mike Bessell from Bank of America. One very quick one on built-to-rent please, which is, given sort of the shift in the portfolio towards London, can I make the assumption that your built-to-rent will be exclusively London focused, rather than national play? The second question for me is on the ongoing shift towards being a more operational service business. Can I see this as sort of a further trend towards being almost more sort of an FFO focused business and leaving NAV aside slightly, or how are you seeing that asset value versus cash flow trade-off going forward?

Chris Grigg

Couple of great questions. I would say on the kind of FFO point first, we would regard that as one important measure, but we also know that for many of our investors, both are important in terms of sense of value. We all know that that trade-off between income and capital, in both directions can be quite complicated. I think the idea of just running, in terms of FFO is kind of weird in this business, to be honest with you. So we look at it under total return context. I do think that at the end of the day, this business around being able to offer a better service is likely to manifest itself in growing rents above all else. And we can see that with Storey if you like. People are effectively paying that premium that Tim talked about, not just -- of course, there's a bit of flexibility pricing in there, but it is this convenience, it's having everything there, when you show up. And remember, for smaller businesses who don't necessarily have a big property arm, that can be a particular attraction to them.

So that's kind of how we look at it. In terms of BTR and where we would go; I think we start with a natural view that as we have already pointed out, the existing sites that we have solidly in this part of the world, I don't think over time, we would absolutely [indiscernible] had to be in London, and there are clearly some signs that the economics are different in different parts of the country. But that I'd see more towards, when we have grown a business before we start doing that absolutely. And Charlie, I don't know if you want to add anything or Tim, to those comments?

Charles Maudsley

I think you know, just the -- you all probably notice sort of the macro trends as well as we do. But it is an exciting growth area, where there isn't much institutional capability at the moment. So you know, I think only 3% in the U.K. market is in institutional grade of PRS. That grows to 10%, that makes it three times the size of the retail market. So it's a good growth area with very few people doing it, which is why we see a lot of opportunity.

Tim Roberts

And the only other thing Mike, is that we have obviously got a big advantage because we are in Broadgate Estates. And Broadgate Estates is well versed dealing with buildings, both offices, retail and residential. So we have got a significant skilled operational business already, and you have read, with the sale to Savills, what we have strategically decided to do, is to focus that business purely on British Lands portfolio.

Chris Grigg

So, looking around the room, on the phone, do we have anybody? No. Looks like not. Very good. Thanks very much for your time.