British Land : Conference call transcript

British Land

Full Year Results Webcast

27th May 2020

British Land

David Walker, Head of Investor Relations

Chris Grigg, Chief Executive

Simon Carter, Chief Financial Officer

Darren Richards, Head of Real Estate

Questions From

Robbie Duncan, Numis - via webcast

Pranava Boyidapu, Barclays - via webcast

John Cahill, Stifel - via webcast

James Carswell, Peel Hunt, via webcast

Peter Papadakos, Green Street Advisors

Max Nimmo, Kempen Capital

Sander Bunck, Barclays

Tom, Liberum - via webcast

Introduction

David Walker, Head of Investor Relations

Thanks. Morning, everyone. Thanks for dialling in today. I'm David Walker, Head of Investor Relations at British Land, and I'm on the line today with Chris Grigg, Chief Executive, Simon Carter, our CFO, and we also have Darren Richards, our Head of Real Estate, on the line.

Before I hand you over to Chris, could I just remind those of you joining us by phone that the slides are available to download now atwww.britishland.com.You are able to register questions on the conference call at any time from now during the presentation.

For those of you listening through the website, slides will appear automatically, and you can submit written questions via the website, which I will read out following our prepared remarks.

With that, I will hand you over to Chris.

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Key Highlights

Chris Grigg, Chief Executive

Thank you, David. Good morning, everyone.

First, I hope you're all well. We really appreciate you taking the time to dial in in what are highly unusual circumstances. We had planned to be with you in person for today's results. Obviously, that's not possible, but it's certainly our plan for the half year, and, as usual, we'll be speaking with as many of you as we can in the coming days.

Before I start, I'd like to take a moment to thank our team. COVID-19 has presented unprecedented challenges, not just for our business but for our people. They've had to adapt to new, and often challenging, working conditions, whether at home, on our campuses or at our retail centres.

One of our core values is being smarter together, and, when I look across the business, that's been very much in evidence in recent months, and I'd like to thank everyone for that.

Today, Simon and I will update you on our Full Year 2020 performance, and, while it's still early days, we will also set out some of the ways in which we've been affected by COVID-19, how we're responding and our initial thoughts on what this could mean for us for long-term.

Simon will also set our ambitious new sustainability targets. They build on the progress we've made over the last 10 years, and will be critical to the long-term performance of our business.

We'll finish with questions, when Darren Richards, who, as you know, is responsible for the whole Real Estate portfolio, will be joining. He's got some great insights into what we're seeing on the ground right across the business.

Starting with the results, as you know, all of our operations are in the UK. So, for the first 11 months of the financial year, we were unaffected by the outbreak.

In Offices, we leased nearly 950,000 sq. ft. over the year - on average, 9% ahead of ERV - with a diverse, high quality range of businesses, including SMBC and BMO. This demonstrates the real strength of our campus propositions.

Our developments are nearly 90% pre-let, so they're effectively de-risked, with £54m of future rents locked in. They were up nearly 8% in value, contributing to an uplift of 2.3% across our London Office portfolio. Strikingly, this included a 5% increase at Broadgate, demonstrating that the transformation we've delivered there is really paying off.

As you know, the Retail market was very tough, even pre-COVID. So, throughout the year, we, were pragmatic in our approach to leasing. We leased 1.4 million sq. ft. of space - That's not far off the previous year - but deals over a year were on average 4% below previous passing rents because we had collected lower rents to keep the portfolio full, supporting footfall and sales. As a result, occupancy remains high, at 96%.

Inevitably, valuations have been affected. Ongoing structural challenges were exacerbated at year end by the early effects of COVID-19. So, Retail was down 26% over the year, and our portfolio was down 10% overall.

The 6% decline in EPS reflected the impact of £1bn net sales of income producing assets as well as the tougher retail market.

Turning to COVID-19, how we've been affected so far and our response, clearly, the current situation is unprecedented. There is very little certainty over how deep or how prolonged the impact will be on economic activity, and how people's lives will be affected, near and medium-term, but there are certainly lessons to be learnt from past crises, which I and the team have worked through.

We realised that fundamental, long-terms changes will emerge, and we do expect, based on past experience, that this crisis will accelerate a number of key trends, like the more flexible ways we're all working and the further shift to online retail. Our strategy has been informed by that.

It means that the progress we've already made on our campuses, modernised our buildings, to be more customer focused in our offer, provide additional flexibility through Storey, positioned us well for the changes which will, inevitably, come out of it.

Our customers are telling us they need space which is cleaner, healthier and well-managed, so our campuses, in particular, our ability to control the environment, with the support of our Property Management Team, is a real differentiator for that.

This strategy has underpinned our leasing space. Here, we accounted for 7.5% of Central London leasing, with just 2.5% of stock. And, looking forward, we think our approach will continue to deliver, but, clearly, Retail is more challenging, and here, again, we'd expect existing trends to accelerate.

At the same time, when the full impact of COVID-19 becomes apparent, and we get a fuller picture of what that means for our business, and the sector more generally, it may be that we adapt elements of our strategy, or evolve our approach.

As we move through this, we really benefit from the work we've done over several years to really strengthen our balance sheet. Our debt remains low, with leverage at 34%, and we have £1.3bn of undrawn facilities and cash.

March, we were pleased to agree a new ESG-linked revolving credit facility, so we have no need to refinance until 2024.

And, as you know, we announced a temporary suspension to the dividend. That's despite our financial strength, and profits are some £300m. It wasn't a decision the Board took lightly because we recognise the importance of the dividend for so many of our shareholders, but with so little clarity on the outlook, we felt it prudent to retain the cash within the business, so we will look to resume dividends at an appropriate level as soon as we can, and Simon will tell you more.

Importantly, this decision gave us extra flexibility to support our customers who have been hard hit. Simon will also set out the details of our rent collection and some scenario analysis we've done. The key takeaway is that we have a lot of a headroom. We could withstand a further fall in asset values of 45% without taking any mitigating actions to satisfy debt covenants. So, of course, we continue to activity manage our liabilities.

So, our financial strength stands us in very good stead, and, frankly, that's very different to 2009.

Going to the impact we have seen across our portfolio, in Retail, all but two of our assets are open, providing access to essential stores, such as supermarkets and pharmacies. Overall, that's about 15% of our units.

Our campuses are open. Every office building is accessible, but virtually all of the F&B, retail and leisure units remain closed.

As you'd expect, physical occupancy is very low, but there are a few exceptions.

With restrictions starting to ease, we're now in active discussions with customers about returning to work.

We initially suspended work at our developments to ensure the safety of the people working there, but we've been working closely with our construction partners, and, today, all our major sites are open, albeit with a smaller workforce, in line with social distancing guidelines.

135 Bishopsgate has completed, and is being fitted out. We expect 100 Liverpool Street to complete in the autumn, and 1 Triton to complete in spring 2021.

Throughout this period, our focus has been on our customers. We have a broad range of occupiers, and we recognise their ability to weather this storm will vary, so we've tailored our response accordingly.

In March, we released smaller retail, food and beverage, and leisure customers from their rental obligations for three months, and we allowed others experiencing financial challenges due to COVID-19 to defer March quarter day rent and spread repayments over six quarters. Simon will give you the detail.