Conference Title: Q1 IMS Call. Wednesday 24 th July h00 UK

Transcription

1 Company: The British Land Company Plc Conference Title: Q1 IMS Call Presenter: Date: Chris Grigg, Lucinda Bell Wednesday 24 th July h00 UK Operator: Good day, ladies and gentlemen, and welcome to the Q1 IMS call. For your information, today s conference is being recorded. At this time I would like to turn the conference over to Mr. Chris Grigg. Please go ahead. Chris Grigg: Thank you. Morning, everybody, and welcome to our first quarter conference call. Lucinda is here with me as well. We ll both be making some brief remarks before opening the call up to questions. We ve had a good start to our financial year. Our confidence in the future of the business is reflected in our decision to increase the quarterly dividend. So why has it been a good start to the year? In short, there are four main reasons. First, we ve remained active on the investment front. We ve acquired over 500 million of properties since the beginning of the year. The largest of course was our investment in Paddington Central. Paddington plays to all our strengths in the management of London estates and in development. Importantly, it means that the investment of the placing is now accretive to earnings in the current year. Second, we ve continued to replenish our development pipeline which is, as you know, one of our key aims. Again, Paddington has obviously been pivotal in this regard. It has 430,000 square feet of development, most of which has planning consent. As a result, our near term developments and by that we mean projects we expect to start over the next months now stands at around 780 million. And this figure excludes the Shoreditch estate. Here, we re very close to signing a development agreement with the Corporation of London. As many of you know, Shoreditch is a two acre site just outside the City with potential for 1

2 around 300,000 square feet of mixed use space. All of these development projects have IRRs in line or ahead of the low double digit ungeared target I talked about at the time of our placement. So we expect developments to continue to be materially accretive to our performance. The third thing behind our good start is progress on our current developments. In offices, we ve pre let or have under offer 130,000 square feet of space, with good levels of letting interest, particularly in the West End. We re on track to complete all of our West End developments by the end of the year. 10 Portman Square PC d in April and we let an additional 9,000 square feet to Saudi Aramco in the quarter. This means the offices there are now over half pre let. By the end of this week, all the current developments at Regent s Place will be complete. Here we ve sold all but the final few penthouse apartments at 20 Brock Street and we ve only just started marketing those. At 10 Brock Street, we have a further 26,000 square feet let or under offer, so that building is now over 60% pre let or under offer, with strong levels of interest from the TMT sector. In retail, our new shopping destination at Whiteley has opened very successfully and we have around 0.75 million visitors in the first months of opening. And last but certainly not least, our occupational metrics remain robust. We continue to see encouraging demand from a broad range of tenants. Our occupancy is slightly higher on a like for like basis over the quarter, and that's mainly reflecting the letting of units in admin in retail. In total we've agreed 462,000 square feet of lettings on average 4% ahead of ERV, and we have over 550,000 square feet of lettings in the pipeline. In retail, where the market remains tough overall, we signed 330,000 square feet of lettings 3.6% ahead of ERV, and those lettings are also ahead of previous passing rent. We re particularly pleased to see administrations fall from 0.9% of our total rent to 0.5% at the end of the quarter. By the end of the quarter, we had active discussions on 34 out of the 54 units currently in administration in the portfolio. In offices, the most significant lettings outside of the development portfolio were in the City at Broadgate. Here we re seeing interest from a much broader range of occupiers than has been the case historically. This is particularly true at 199 Bishopsgate which we completed only late last year. We've already let space to an oil company, a legal firm and a technology business there. As well as that, we've agreed a shorter term let to Royal Mail at 1 and 2 Broadgate. 2

3 So with that, let me turn it over to Lucinda. Lucinda Bell: Thanks, Chris, and good morning, everyone. I d like to start by highlighting our continued access to low cost finance. So far this year we ve raised 410 million of new finance and we continue to see good appetite for British Land credit, especially at the longer end. Our recent activity continues our focus on diversifying our sources of finance by both sector and by lending entity. I was pleased that our recent revolving credit facility, which closed at 310 million, we had a broad mix of North American, Asian as well as UK and European banks. The debt markets have improved over the last year so overall we re raising new money at tighter spreads that we were 12 months ago. At the end of the last financial year, our weighted average interest rate was 4.6% and as I indicated in May, following the investment of the placing proceeds in Paddington Central, it s reduced to 4.2% today, the same level as before the placing. Turning to our balance sheet, on a pro forma basis, so including the acquisition of Paddington, our loan to value is 43.3%. This compares to just over 40% at our March balance sheet, and we re comfortable with this level of gearing. Our ongoing development commitments will take us up towards the midpoint of our 40 50% range. As we said in May, we expect our future investment activity to be focused on our retail portfolio. We will be buying and selling and have a number of properties currently in solicitors hands. Our purchases will be focused on properties with good economic fundamentals and returns. Turning finally to the dividend, the dividend for the current year will be 27p, an increase of 2.3%, which is a quarterly dividend of 6.75p per share, up from 6.6p per share. We said at the full year that our decision to increase the dividend was pending the investment of the placing proceeds. With the acquisition of Paddington Central, we've now achieved this and in aggregate, the investment of the placing proceeds will now be accretive to current year earnings, ahead of the target we set at the time of the placing. Before I wrap up, it s worth noting, and it may be helpful for your models, that post the placing, we have around a billion shares in issue. So in round numbers, the dividend of 27p per share has a total cost on current shares in issue of 270 million; it s the same for the earnings calculation. 3

4 So in summary, we ve had a good start to the year. We re delivering in line with our strategy and we continue to look forward to the future with optimism. And with that, we d now like to open the call to questions. Operator: Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. If you would like to ask a question, please press the star or asterisk key followed by the digit 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing *2. Once again, that s *1 to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Marc Mozzi of Société Générale. Please go ahead. Marc Mozzi: Yes, good morning, everyone. I have just one question. What is the size of divestment overall you are targeting this year or in the coming years? Chris Grigg: Hi, it s Chris. We re not really setting ourselves a specific target. What we re looking at is where we see the opportunity to sell assets where we believe either a) the long term prospects for those assets is modest in terms of future growth, or where we get bids which we think are substantially in excess of where we believe true value to be. So there's a little bit of well, a great deal of very careful contemplation of the existing portfolio but then on top of that, the judgements of value. Marc Mozzi: Okay, thank you. Is it fair to assume that the mid range loan to value post development pipeline is excluding divestment? Lucinda Bell: We expect to be recycling, so making both sales and purchases. As we often say, you can t these can be lumpy at times but broadly I would expect over time that to be balanced. Marc Mozzi: Okay, thank you very much. 4

5 Operator: Ladies and gentlemen, if you would like to ask a question please press *1. We will now take our next question from Tim Leckie of JP Morgan. Please go ahead. Tim Leckie: Hi, good morning, guys. Just some more detail, if you can, on the shopping centre and retail park investment market. You made the comment that there's an improvement in activity and sentiment. Could you just give some more details on that? Are you seeing more products being brought to market? Is there more competition? Do you expect to see increased transaction volumes, or how do you see this playing out? Chris Grigg: As far as we can tell, what's happening is that and this comment applies principally to non London retail what we are seeing is more bank finance coming available generically and that is allowing more buyers to contemplate buying away from absolutely prime. So that's kind of the investment theme that we see going on, bearing in mind in London typically there's a very high proportion of equity involved. So we re seeing more debt in these markets outside London and outside absolutely prime. So we will, in our view, that will from time to time give us the opportunity to sell those assets, to sell into a rising market those assets that we judge don t have as good growth opportunities as other things in the portfolio or other things we may be able to buy. Tim Leckie: And just as a follow up, I think it s probably too early but have you seen transactional evidence supporting an improvement in values on the back of that debt availability or is it too early to tell? Chris Grigg: I think, I mean look, as you know, some of the indices are suggesting that there has been some improvement in some markets of late. It s a mixed story, in all conscience, but I would say that the tone and the it feels like levels of activity are going to go up, if you see what I mean. Tim Leckie: Thank you very much, so very clear, thank you. Operator: We will now take our next question from Hemant Kotak of Green Street Advisors. Please go ahead. Hemant Kotak: Good morning, Chris. Good morning, Lucinda. 5

6 Chris Grigg: Morning. Lucinda Bell: Good morning. Hemant Kotak: Just a question on Central London office please. All the established Central London office players appear to consistently beat ERVs on lettings on, you know, over a number of periods now, including yourselves. Whilst this is very welcome news, I was just wondering what the reason for this is. Are ERVs just simply too low or are rents rising over these periods? Or is there some other reason please? Chris Grigg: I think it s well, I can t speak for the others but I would say our experience has been that rents have been moving up. Bear in mind that we've been doing a lot of development and typically valuers will be a bit conservative on what, the ERVs that they put on a building when it s new or refurbished, and understandably so. So I think if you put those two things together, a little bit of inbuilt conservatism and a generally improving tone, that's what's doing it for us. Hemant Kotak: That s very helpful, thanks. And one question on retail please. You mentioned that on retail, the rent reviews have resulted in 5.3% above previous passing and superstores led the way. Can you just give us the split between the various components, so shopping centres, retail parks and superstores please? Lucinda Bell: In terms of that move, the rent reviews were, as you say, 5.3% ahead. They weren t a particularly large volume of amounts but were very much focused on the superstore side. So in terms of that, the on the rent reviews, I think that's, I mean it s not a vast sum of money but it was very much driven by the superstores. Hemant Kotak: Okay, thank you. Operator: As a reminder, to ask a question please press *1. We will now take our next question from Robert Woerdeman of Kempen & Co. Please go ahead. 6

7 Robert Woerdeman: Good morning, this is Robert Woerdeman from Kempen. A follow up question on that one of Tim. What are the typical buyers for non London retail? Could you give us a bit more colour here? And on top of that, what kind of spreads do you have to pay for loans on non London properties versus London properties? And perhaps as a third question, you indicated that your spreads, your loans would drop a bit. Could you give a little bit of colour there as well? Many thanks. Chris Grigg: Okay, we may if we don t answer all three, you get to repeat the question. In terms of the buyers for non retail sorry, for retail outside London. Robert Woerdeman: Yes. Chris Grigg: I d say it s, at the moment it feels as if there's a combination of UK institutions and some slightly levered buyers. So whether that be, we've seen some, a bit of kind of opp fund type interest as well. So those two groups typically, opportunity funds who do need a bit of debt and the UK institutions who probably need less. In terms of, it s hard for me to tell you exactly what those rates that those guys are achieving because at the end of the day, it s not our, it s not to us. So I don t have a good sense. What I do know is that there is just, because so many of the London guys are actually non levered buyers, there's not so much need for debt and I think what you've seen is that what's gone up in bank debt generally is availability away from people like us, as much as anything else, has been availability in terms that you've gone from very, very hard to raise any finance on a project by project basis to a real improvement in that. And what that spread is is broadly less important because you've got core rates very low, so obviously if you're paying a margin of call it 3%, you're still down at sub four on a floating basis or at a percent for fixed. So even at quite big margins, it still enables people to lever their equity tighter than that. To give you more accuracy would probably be a bit spurious away from ourselves if you see what I mean. Robert Woerdeman: Okay, perhaps as a follow up question then, what would be your best estimate year to date that the yield compression is on non London retail? 7

8 Lucinda Bell: I think what you're seeing at the moment is you're seeing an increasing pipeline of transactions, some of which have happened, some of which haven t yet happened. There's a certain amount of providing transactions which are confirming valuations but if you've seen some of the benchmark indices, there's also a view that things are improving. But I don t think one can get too specific about exactly what it is because I do think the retail market is a very mixed market and where you sit in the retail hierarchy is key to your pricing. Chris Grigg: I think if you want evidence, a clearer cut evidence of this happening where the evidence is actual is you've definitely seen a tightening in the, as I understand it, in the regional office market. I think that market had got very bombed out and as you see some distressed buyers coming in, it s tightening. I don t have those figures in my mind but the big agency firms quote numbers on those, that spread tightening. Retail hasn t seen that but it s, I think it s the same phenomenon at an earlier stage. Does that make sense? Robert Woerdeman: Okay, well that's all very helpful. Many thanks for this. Operator: As we have no further questions, I would like to hand the call back over to Mr. Grigg for any additional or closing remarks. Chris Grigg: That's thank you all for your time and if there are any questions that have come up subsequently, do give the IR team a call and we re happy to answer them. Thanks a lot, bye. Operator: That will conclude today s conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect. 8