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Edited Transcript of BLND.L earnings conference call or presentation 15-May-19 8:00am GMT

Full Year 2019 British Land Company PLC Earnings Call

London May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of British Land Company PLC earnings conference call or presentation Wednesday, May 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Grigg

British Land Company Plc - CEO & Executive Director

* Simon G. Carter

British Land Company Plc - CFO & Director

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Conference Call Participants

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* Bart Gysens

Morgan Stanley, Research Division - MD

* Benjamin Paul Richford

Crédit Suisse AG, Research Division - Research Analyst

* David Brockton

Liberum Capital Limited, Research Division - Research Analyst

* Hemant Kumar Kotak

Green Street Advisors, LLC, Research Division - MD

* Robert Alan Jones

Deutsche Bank AG, Research Division - Research Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property Analyst

* Sander Bunck

Barclays Bank PLC, Research Division - VP of Real Estate Equity Research

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Presentation

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [1]

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Good morning, everybody, and welcome back to our event space here in the heart of Broadgate. I'm joined on stage by Simon, who will cover the financials. In the front row, we have some of our wider team. You'll hear more from them in September at our Investor Day.

Earlier this year, as you know, we combined our Retail and Offices businesses into a single real estate team under the leadership of Darren Richards. That's a very practical illustration of how we see the future of British Land as an increasingly mixed-use business focused on 3 core elements: our London campuses, a smaller Retail portfolio and Residential. Today, you'll hear how our business and our strategy are delivering. I'll also make some specific comments about how sustainability and community engagement are integral to our approach.

This year, our financial performance has been robust, to use a phrase, and we've made further good progress on our strategy. That's in the context of an uneven market where London offices were healthy, but retail was challenging. We sold GBP 1.5 billion of dry or off-strategy assets, overall ahead of book. And our leasing performance was again excellent. With 2.7 million square feet let across the business, 1.6 million of that was in Retail. Strikingly, that's the most in the last 5 years. So we've kept occupancy high on both sides of the business, and we've effectively de-risked our development pipeline, which is now 3 quarters pre-let or under offer, securing substantial future income. We've invested in our campuses and created more opportunities like 1-2 Broadgate where we achieved planning in March. In Retail, we've continued to deliver operationally and to reshape our portfolio. In Residential, I'm delighted with what we've achieved at Clarges. We have plans to create 3,000 homes at Canada Water and have further opportunities.

Importantly, across our business, we've been increasing our focus on the services we deliver to our customers. Storey Club, which I'll come back to, is the latest example. We're also leveraging technology to build smarter, more efficient places. We're using our customer insights to create spaces that help businesses succeed.

Underpinning all of this, we've continued to manage our capital well. We completed a further GBP 200 million share buyback, bringing the total to GBP 500 million over the last couple of years. That's exploiting an arbitrage between the price at which we're selling assets and the discount implied in our share price. Today, we're extending the buyback by GBP 125 million. We're also proposing an increase in next year's dividend of 3%. This signals our confidence in the future, and Simon will talk to you about the earnings trajectory that underpins that.

Before I hand over to him though, I'd just like to take the opportunity to thank our Chairman, John Gildersleeve. He's made a considerable impact on the business over the last 10 years. He was appointed Chairman back in 2013. I'm delighted but he'll be succeeded by Tim Score, who's somewhere here. Where are you, Tim? There you are, near the back.

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

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Simon G. Carter, British Land Company Plc - CFO & Director [2]

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Thanks, Chris, and good morning.

As you've heard, we've made a lot of progress across the business this year. Clearly, it's been a tough Retail environment in which to operate, and to an extent, you see that reflected in our results today. Valuations are down nearly 5% for the full year. But, we've continued to work hard not just to mitigate these impacts but to position our business for future growth and maintain financial strength. We've sold GBP 2.3 billion of property this year, that's GBP 1.5 billion last year, at terms just ahead of book value, making us one of the largest sellers in the market.

We've maintained our balance sheet strength. We've kept LTV low at 28% and raised GBP 1.4 billion of new finance in the year. We are 76% pre-let across our current development schemes with low speculative exposure. And that's really important point for us as it reduces our risk and locks in future income. Looking ahead, we have created opportunities to generate long-term value for the development program as well as further buybacks including our GBP 125 million we have announced today. And all this is underpinned by a strong balance sheet.

Let's look at the key financials. EPS is down for the year primarily due to sales activity and the one-off surrender premia which contributed nearly 2p last year. As previously announced, the dividend for the year is 31p, up 3%. NAV is down 6% at GBP 9.05 as valuation reductions in Retail were partially offset by more resilient Office values with particularly strong performance in our developments.

Looking at EPS in a bit more detail. Earnings per share were 34.9p, down 7% on last year. However, setting aside the surrender premia, earnings were only marginally down despite material sales. We saw strong like-for-like growth of 4.9% in Offices, which more than offset the impact of CVAs and admins. Capital activity, primarily sales, has lowered EPS by 1.7p. And looking ahead, net sales would decrease next year's EPS by a further 2.4p. Importantly, we are actively recycling the proceeds into share buybacks which added 1.2p in the year. Including the GBP 125 million extension, these will add an estimated further 0.7p next year.

Of course, the sale proceeds are also funding value-accretive developments. Our developments provide compelling returns with yield on cost around 6%. We've let almost 500,000 square feet of space across our schemes this year. Our latest free lettings announced in March were 13% ahead of our initial expectations. This is a clear demonstration of how our campus strategy is delivering. And it's an important area that Chris is going to cover later. We've let 3/4 of the space in our committed program. And once fully let, we expect them to add 4.5p to annualized EPS. Of course, this income won't be immediate, so I've shown here the phasing of the committed program. Looking ahead, we have ample opportunities within our portfolio. In the right-hand column, you'll see the potential rents of GBP 39 million from our near-term pipeline. This is at Norton Folgate as well as 1 and 2 Broadgate, where we achieved planning commission this year. There is a further 4 million square foot of schemes in our medium-term pipeline, including the first phase of our exciting opportunity at Canada Water.

Looking down the income statement. The reduction in rents of GBP 44 million is roughly evenly split between one-off surrender premia and net sales we've made over the last 2 years. Sales have also contributed to a GBP 7 million decrease in financing costs. Admin costs are broadly flat, and fees and other income have come down due to the sale of our third-party property management business. Looking ahead to next year, we are proposing a further 3% increase in the dividend, reflecting income to come on our committed developments, of which 3/4 is already locked in. The payout ratio currently stands at 89%. However, we are likely to see it increase temporarily from the full year impact of sales prior to the delivery of developments. I've included the usual guidance slide in the appendix.

Turning to valuation performance. While overall values are down 4.8%, Offices have increased 1.1% driven by excellent leasing at our developments, which are up 11%. On the standing Office portfolio, yields have remained broadly flat and with ERV growth of 1.4%, reflecting specific asset lettings and resulting wash-over effect. For example, we have leased an additional 175,000 square foot at Brock Street to Facebook. This is a space to be vacated by Debenhams and takes Facebook's occupancy of the building to 290,000 square foot, a strong endorsement of our campus. At Canada Water, values have been stable as costs incurred have been offset by the progress we have made. Retail values are down 11%, reflecting outward yield shift of 37 basis points and ERV decline of 3.8%.

I know you found this slide useful at the half year, so I've included it again. Retail performance has been varied, reflecting different occupational experiences in the market. We've continued to transact across a range of asset types. In particular, we've been able to capitalize on investor demand for single-let assets, offering us limited potential for further asset management. The market evidence that we are creating is reflected in the valuation movements on the left-hand side of this chart. You saw that again with our recent sale of 12 Sainsbury's superstores, just ahead of book value.

Looking at our larger multi-lets. Although rents have declined across the wider market, our top 5 assets by value, which account for over 1/3 of the Retail portfolio, saw flat ERVs driven by strong leasing in the year. The average valuation decline was 8% for these assets and was driven by yield shift. These are in the middle of the graph.

Where the operational market continues to face pressures, we've not been immune to this, and it's having an impact on valuation performance, as you can see on the right-hand side. Over 80% of rent loss through CVAs and admins are at assets which have fallen more than 10% in value. These are typically smaller multi-lets in weaker demographic areas.

Here you can see a bit more detail on our exposure to tenants in CVA or administration and the steps we are taking to manage this. CVAs and admins over the last 2 years have reduced annual contracted rent by almost GBP 17 million. Of this, GBP 1 million is at assets we have already sold at book value. GBP 5 million is where rents have reduced under CVA. A majority of these now have annual landlord breaks built in. And we are using this opportunity to restructure leases and drive income. The remaining GBP 11 million is at stores that are due to close. Encouragingly, we have re-let or are in negotiations on 42 out of 61 store closures, replacing GBP 6.5 million of rent. We have been proactive at managing situations where we were impacted. We've been nimble and pragmatic to re-let space at the right price. And that sometimes means letting at a lower rent to drive footfall and keep occupancy high.

On the right-hand side of the slide, you can see that the rate of CVAs and admins over the last 6 months has slowed. For many retailers, Christmas trading was actually better than anticipated. However, since March, as we expected, another high-profile CVA was launched by Debenhams and others will follow. But we expect CVAs and admins to have a negative like-for-like impact of less than 3% on Retail rents in FY '20. So yes, that is continued uncertainty, but our experience suggests that we are fairing better than the market, and we are proactive at managing situations and reducing exposure to retailers we consider at risk.

This is a good example of our expert teams at work. You can see this in the bigger picture of our operational resilience. In a tough Retail market, it's been a really busy year. We've leased more space this year than in any of the last 5, with 1.6 million square feet of lettings and renewals, 3% ahead of previous passing rents, increasing to 11% for long-term deals. We've kept the portfolio virtually full as well as completing almost 1.8 million square feet of rent reviews. While long-term deals are in line with last year, we've also seen a higher number of temporary deals. Across the multi-let portfolio, lettings were in line with ERV. Importantly, retention rates remain strong at 78%. In particular, Meadowhall has had another good year. We've signed 22 long-term deals.

And footfall has increased over 9 consecutive months. That's a really positive response to our refurbishment. Across the year, footfall and sales have declined, but our assets have once again outperformed. The second half of the year saw an improvement. And encouragingly, Q4 sales growth was positive for the first time in 2 years.

Turning to NAV. It's down 6% at GBP 9.05. This is principally a result of the negative valuation movement in Retail. Financing activities reduced NAV by 7p in a year but delivered savings and is NPV neutral. Partially offsetting these movements is the impact of share buybacks in the year of 10p. Over the last 2 years, we've bought GBP 500 million of shares, meaning we've added 25p to NAV over that time. Having sold almost GBP 650 million of Retail assets this year, we're announcing a GBP 125 million extension to the current program. This is equivalent to buying our properties at a 6% yield and will add around 6p to NAV of the current share price. That's the arbitrage Chris mentioned.

Looking at our debt. Our LTV is 28%, and our weighted average interest rate is 2.9%. These strong metrics are particularly valuable to us in the current environment. On a spot basis, 87% of our debt is hedged, and 63% of projected debt is hedged over 5 years. We've raised GBP 1.4 billion of new finance this year, and we have GBP 1.5 billion of undrawn debt facilities with no requirement to refinance until late 2022. We're maintaining capacity to progress opportunities.

So to summarize, we've got a strong balance sheet, and we've substantially de-risked our developments. We're in great shape. And looking ahead, we have some really attractive opportunities in our development pipeline and we're well positioned to progress these.

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

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [3]

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Thanks, Simon. We have a really clear strategy focused on 3 core elements: London campuses, a smaller Retail portfolio and Residential.

We've also set out some of the key highlights of the year on this slide. What underpins all of this is our focus over many years on large-scale, mixed-use places. It's a clear differentiator for us, and it's delivering results. It's why we signed the likes of McCann, the global advertising group, at Broadgate. They were in the West End, and Broadgate wasn't a part of town that they would have considered historically. It's why Facebook are expanding at Regent's Place. And it's why we signed Dentsu Aegis at 1 Triton Square, the biggest pre-let in the West End in over 20 years. It's why our development pipeline is already so well let and why we've achieved 90% occupancy at Storey. So today, I'll set out the way this creates long-term value, what we're delivering and why our approach is so powerful.

How does our mixed-use approach deliver long-term value? Fundamentally, it drives leasing. This year, we let more than 1 million square feet in offices. That's 8% of the Central London leasing market but we own some 2.5% of the stock. That's a pretty remarkable performance, and our momentum continues. We're currently in negotiations on close to 0.5 million square foot more space.

Not only are we taking more than our fair share, but we're generating higher rents. Here at Broadgate, our most recent letting was at GBP 80 a square foot compared to City prime rents of GBP 71 and GBP 49, 5 years ago. Those numbers are all comparable.

Our approach also enhances development profits. It keeps our leasing velocity high, so development voids are shorter. To take one example, at 100 Liverpool Street, we are already let 63% of the office space, 11 months ahead of PC. I'll come back to that shortly.

So how are we delivering? I've set out on the Slide 4 features which really define our campus approach. First, it's the combination of scale and connectivity. It's really key and very hard to replicate. In total, we manage more than 100 acres of the best connected parts of Central London, meaning we can do things other property companies simply can't because we own really large places, in the right part of town, with the ability to control the space inside and out. That's how we meet the broader needs of today's occupiers.

Secondly, it's about providing the right mix of uses. We think of mix as a series, if you like, of building blocks. Our skill is in combining them in the most effective way. So Canada Water will look and feel very different to Paddington. Equally, Broadgate is different to Regent's Place. But the underlying approach is both codified and similar.

My third point is that our campuses are located in vibrant London neighborhoods which appeal to our customers, businesses and employees alike. Businesses benefit from being located around complementary organizations. Take Regent's Place, it's in London's Knowledge Quarter; or here at Broadgate, we have Shoreditch and Old Street, Spitalfields market and Europe's financial center, all on our doorstep. And over at Paddington, the area is regenerating ahead of Crossrail. By the time Crossrail actually arrives, it will be almost unrecognizable. For employees too, working in interesting parts of town, with the range of restaurants, shops and gyms, within a vibrant community is really attractive.

And finally, flexibility. That's something we increasingly provide at our core space. Today, bigger occupiers want a combination of core and, if you like, flex to accommodate their needs as they evolve. Storey is an important part of this. That's why existing occupiers account for some 35% of the space we've let at Storey. At the same time, Storey appeals to smaller businesses looking to scale up. So we're serving new markets as well. We're now extending the concept to Storey Club, which provides the highest quality meeting and events space for our campus occupiers. Here it's early days, but feedback from our customers and usage are already both very encouraging.

So how have we got to this point? By spending a lot of time listening to our occupiers. That's the businesses and the people who use our space. We've been doing that for a long time across a lot of space, so we've got pretty good understanding and also are implementing what people actually want.

For employees, a key trend is the way work and socialize are blurring. Today, people expect to be able to exercise, socialize and be entertained before, during and/or after work conveniently in high-quality, safe environments which are well connected and where they enjoy spending time.

For occupiers, the war for talent has brought these demands sharply into focus. Increasingly, they use the quality and location of workspace to attract and retain the best people. So it's a real driver of property decision-making and why we believe our mixed-use approach is the right one.

Let me now talk about 100 Liverpool Street which you passed on your way in. It illustrates a lot of these points. Here we're delivering a world-class building with exceptional office space. That requires a range of skills. First, we were thoughtful about design. The building connects the station with the campus, and the Crossrail entrance is just outside. It will have big floorplates, but they're easily divisible, giving occupiers and ourselves considerable flexibility. We're putting in 90,000 square feet of retail and dining, more than 20,000 square feet of terraces on 5 levels, and we will incorporate Storey into the building. We're also targeting the highest standards of well-being and digital infrastructure.

Second, we are skilled at working with a range of stakeholders. We've had to balance the requirements of city planners and the transport authorities, with elite needs of local communities to deliver a building that really works and minimize disruption for the 26,000 people working here every day.

Third, we've got a great leasing team. So not only have we let the space quickly, but we're achieving rents more than 10% ahead of initial expectations. And the team are generating, as they already said, a lot of interest on the remaining space.

Finally, a sustainability mindset has been integral to this process. The building will be BREEAM Excellent rated, we're retaining over half of the original structure, and with efficient design and the use of low-carbon materials, we're saving 11,000 tonnes of embodied carbon, equivalent to heating and powering almost 3,000 homes for a year.

Sustainability and community focus have been high on our agenda for more than a decade. For example, we've more than halved our carbon intensity over that period, and our portfolio is 44% more energy efficient. We'll be similarly ambitious going forward. We're looking at the use of lower carbon materials, for example. At our Storey building in Haggerston, we're using cross-laminated timber, and we'll use that again. Clearly, sustainability and corporate responsibility in its broadest sense have moved up the national agenda. And I know it's a growing priority for many of our shareholders, our occupiers and, frankly, our own people. So let me assure you it will continue to be a key area of focus for us because being considerable -- considerate about the environment and local communities is part of how we run every aspect of our business from our developments to the way we manage our properties.

We've set out some examples on this slide. To be clear, we've been publishing detailed sustainability accounts since 2002, and our reporting has been commended by EPRA for 7 consecutive years.

Turning now to Retail. In November, we set out a clear long-term plan that implied around GBP 2 billion in Retail sales over time. We've made good progress. We've sold nearly GBP 650 million of Retail this year. That includes a range of different asset types and as we've taken advantage of pockets of demand. A good example is our recent sale of 12 superstores, as Simon mentioned. It's to a U.S. purchaser who had never before invested in the U.K., indeed outside the U.S. Today, we only have 6 stand-alone stores left. That's around 1% of rents, down from 11% in 2014. And overall, that means we've reduced Retail from 2/3 of the portfolio, at its peak, to less than half today. Clearly, there's more to do, but we'll remain patient and opportunistic because we're strategic, not forced sellers. For example, during the year, we've had opportunities to make further sales, but we chose not to because the terms or the structure of the proposal did not make sense for our shareholders. Finally on Retail, I take comfort from the strong operational performance Simon talked about. That's not easy to deliver in this market, and it's a reflection again on the quality of our assets and of our people.

Turning now to Residential. And before I talk about Build to Rent, I'd like to reflect on our significant achievements at Clarges. That's our super-prime residential and office development, as you know, in Mayfair. Overall, we've delivered a profit of some GBP 200 million. That's an IRR of 18.5%. We completed on 23 sales in the year. That's 25 in total. We've exchanged or are under offer on another 5, so we've only got 4 units left. Clarges reflects many of the operational strengths I talked about earlier: excellent design and construction; a great outcome on planning; a complex arrangement to rehouse an occupier who had been part of the site; a high-spec fit-out tailored to the most demanding standards; and a sophisticated but discrete marketing plan.

Of course, looking forward, we will focus more on Build to Rent. Back in November, we said we were in exclusive negotiations to acquire an operator. That didn't result in a deal, but Residential remains an important part of our strategy.

As you know, we've got a number of opportunities in our portfolio. Canada Water, where we have plans for 3,000 homes, is the largest single part of that. Here we were very pleased to submit outlined planning for our master plan a year ago. We and our partners at Southwark are targeting a July planning meeting. But as you'd imagine, there are still some moving parts there. As you know, Canada Water represents a substantial opportunity for British Land over the next decade, working with the local authority to deliver a truly mixed-use neighborhood, a fourth London campus, if you like. It's also another way to bring to bear the skills and capital and the relationships I've already talked about.

So stepping back, what's very clear to us is that we've made a lot of progress across our business over the last 12 months, notwithstanding an uneven market.

On the other hand, a year ago, I must admit, I expected we'd have more clarity on Brexit by now. Obviously, that's not the case. And faced with an extension to October, we've concluded that the last year is probably a decent guide to the near future for now at least.

So in that context, I'd make a number of observations with respect to our outlook. Starting with London, the unconventional cycle I talked about last year has continued, with supply constrained as a result of Brexit. Around 30% of the space predicted to be delivered in 2020 is not yet under construction, so we'd expect the pipeline to move further out. At the same time, businesses remain focused on the right type of space. That's why leasing volumes for us continue to be healthy, and we'd expect that trend to continue.

At the same time, this combination is very constructive for our business. On top of that, from a global perspective, London office yields are now higher than in places like Paris, Berlin or Zurich, which means that the right assets remain attractive to many investors around the globe. What's also clear is that there is some pent-up investor demand, so subject to a reasonable resolution on Brexit, I would expect demand for London assets to be good.

On top of this, there is a renewed sense that the lower-for-longer phase of the interest rate cycle has further to run. And again, that's positive for us. But as I said at the start, this year, our markets have been uneven. And while the London market remains active, Retail has been more challenging. On the occupational side, while CVAs have been disappointing, and they've had an impact on us for sure, they were not unexpected. On the other hand, we are now at a point where some of the more troubled operators have been shaken out. And on our portfolio, for the first time in a while, elements of our operational performance are stabilizing, albeit against weak comps. Simon has talked to you about that.

On the investment side, as you know, the market for multi-let assets this year has been very thin. We certainly don't expect that to change overnight. However, it's recently become apparent that for some invest -- assets, I beg your pardon, there's more investor interest. But to be clear, we are very conscious that structural headwinds in Retail remain, so we expect the Retail market will continue to be challenging operationally, and valuations will remain under pressure.

So I'll finish where I started. We have a clear strategy to build an increasingly mixed-use business focused on our London campuses, a smaller Retail portfolio and Residential. That indicative split on a 5-year view is set out on this slide. Looking forward, we have the balance sheet and people to deliver, we will remain committed to our strategy, but we'll aim to be thoughtful yet nimble across our business every day.

And with that, I'll hand it over to questions. Can I just remind everybody to make sure you name yourselves when you start the question. In that way, you get -- people who listen to the transcript know who you are.

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Questions and Answers

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [1]

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Ben Richford from Crédit Suisse. It's really interesting hearing about the Q4 in Retail. I just wondered if you've got any further data points for us how are Retail sales trending into your Q1.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [2]

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Yes. Simon, do you want to pick up on that one?

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Simon G. Carter, British Land Company Plc - CFO & Director [3]

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Sure. We don't have data for April yet. But as I've mentioned, the Q4 sales were ahead for the first time in 2 years. And that's like-for-like sales. But we also have a metric which is total sales, which was even further ahead. And footfall was also ahead then. But as we -- as Chris mentioned, that is on the basis of relatively weak comps in the prior year, but I think it's encouraging at this stage.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And just the buyback, how did you think about the size of that? And related to that, with the persistent NAV discount, is this attractive for the directors to be buying some shares?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [5]

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Well, I think you can look it up. I have a decent number of shares. I'll take you back to what I said in the comments with respect to what we see is the arbitrage opportunity. So that's the first thing to remember. We do look very carefully at assets we've been sold. We look at our leverage. We don't intend to leverage up to do this. And we see this as part of a disciplined approach to capital. So we want to make sure that we have enough capital available to continue to invest in this level of pipeline. That's been a good business for us. As you know, it tends to be very additive in a campus context to everything else we're doing, so there's that nice effect. When we look at size, we try and just make judgments about all of those things. We were particularly mindful with respect to the sale that we announced just recently. We'll never do exactly as much as we do on the sale because we have to pay down debt to keep the percentages the same. Simon, I don't know if you'd add anything.

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Simon G. Carter, British Land Company Plc - CFO & Director [6]

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No, I mean exactly those points about sort of capital allocation and the different alternatives that we have. And I think if you saw from my presentation on the buyback, it's a 6% book for yield. It's the same kind of yield that we'll be delivering on the new developments, and so that's a great use of our capital at the moment we're selling those properties.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [7]

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And just one final question then. Canada Water was expecting a third-party valuation now and that there might have been a bit of upside coming through. Can you help us, just a bit of guidance as to what that might look like in future reporting periods?

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Simon G. Carter, British Land Company Plc - CFO & Director [8]

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Sure. Sure. It is a third-party valuation that we've got on Canada Water. But at the moment, it's valuing the site according to the various components there rather than as an integrated master plan site. There's a small element of hope valuing the valuations to reflect the progress we made on planning in the period, but clearly, the receipt of planning and the drawdown of the head lease will be an important value driver.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [9]

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I guess it's that point that the master plan basis for the valuation, when do you -- when do the valuers switch to that?

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Simon G. Carter, British Land Company Plc - CFO & Director [10]

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Yes. So at the moment, actually, the valuers are basing it, as I mentioned, on the different components, but they already have started to run a master plan valuation which is effectively a DCF. And so at a point at which we get planning but also draw down the head lease, which will be probably a couple of months after receipt of planning, that's when they will start using that master plan model as their main basis of valuation.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [11]

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Think of it almost as a shadow methodology today, that will flip, as and when we get planning.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [12]

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So it's just the timing, again, that's -- when are we expecting that?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [13]

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Well, look, as I've said in my comments, we're hopeful of a July type planning meeting, but there are still some moving parts there. As you might imagine, I mean it's a massive endeavor. It's very important to get the whole thing agreed in advance, and that really means down to a degree of detail. I'm looking at Emma Cariaga, who spent the last few years of her life working on that. So Ben, I think July is a reasonable best guess, but it is a best guestimate, it's not a certainty. But the one thing I would draw out in particular, as you know, we are partners of Southwark. They end up with the 20% share as we draw down. So there's quite a nice community of interest although, obviously, they have to fulfill their planning obligations.

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David Brockton, Liberum Capital Limited, Research Division - Research Analyst [14]

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It's David Brockton from Liberum. Can I ask 2 questions, please? The first one, just technical, so I can understand. The way you weigh your sort of valuation declines in the Retail portfolio are weighted to those of CVAs, I just wanted to know whether the value included at the year-end expand the CVAs and potential CVAs that were announced in respect of Debenhams and potentially Arcadia or whether that would be an impact for this year. That's the first question. The second question I guess ties back into the buyback and use of capital. Where you do have surplus capital, you are seemingly buying back into your existing assets, as you've said, there's sort of 6% yield, rather than prioritizing your aspirational growth of Built to Rent. Is that because sort of the implied return you can get from Build to Rent at present is less than 6%? Or is it a lack of opportunity?

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Simon G. Carter, British Land Company Plc - CFO & Director [15]

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Sure. So taking your first question around what we're -- so the way to -- I guess the way to think about that in terms of the valuation is that Debenhams is a really nice example because, actually, on Debenhams, the CVA, if you think of the timing of that, Debenhams -- I think obviously with the rumors, I don't think it had quite ended in administration at that point, and the CVA hadn't been launched at the 31st of March. So we'll have 4 stand-alone stores. What the valuer did was they thought where would likely rent be under a CVA scenario. And they made some assumptions on that. They've put in haircuts there. And then effectively, they applied the yields according to that. And actually what we've seen is the CVA ended up being a bit better than what the valuer had assumed. So I think it's fair to say that's fully reflected there. And then Arcadia, we've got 26 units there spread around our portfolio, and the valuers would have made assumptions around those as to how they might be impacted in a potential CVA in the future. And then I guess around sort of use of capital and Build to Rent, the observation I would make is that we've mentioned the 6% yield on costs that comes today. And then really, it's a Build to Rent strategy. So it's going to be about delivering ourselves. That's where we think we get the most compelling returns because not only do we benefit from delivering an attractive yield on cost, at somewhere like Canada Water, we're going to get a regeneration effect as well. So we're not taking capital away from that because we're reserving it, also because we've only done GBP 125 million of buybacks, so we've reserved capital for the near-term and medium-term pipeline to take advantage of those opportunities. So it's a balancing act, and I think we're doing a good job with that at the moment.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [16]

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Yes. The other thing I'd add is we really always saw Canada Water as the key way into that market and -- for the reasons Simon has just described. But I'll take you back to the comments on capital discipline. There are quite a lot of people looking for sites right now, and we don't want to overpay in the name of strategy. It has to make sense overall. That's tough right now. And bear in mind that there's a degree right now of legislative uncertainty, so you just have to put that into your appraisals. And so we are in the relatively relaxed position of having the Canada Water piece and some other opportunities in the portfolio, but we will keep our capital discipline. And we'll not take what we -- might be considered undue risk at any point whilst we wait for some of those issues to play out.

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [17]

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Rob Jones from Deutsche Bank. So 3 questions. Just following on from David's one on CVAs, I'm quite interested in terms of what or if any provisions you have taken going forwards with regards to CVAs such as Arcadia potentially. Secondly, on further Retail disposals going forwards, in terms of magnitude for FY '20, I appreciate you've given the medium-term guidance in terms of where you want to get your Retail exposure to at current valuations but maybe give a bit of detail for this coming financial year. And then thirdly, interesting to see the comments around early signs of kind of some of the operational pressures easing. I've not seen that from other people in the market. Maybe you can give a bit of detail in terms of what those signs you are seeing. And actually, sorry, just a final one, in terms of the Office portfolio capital value performance ex developments, maybe you can give a figure for that.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [18]

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Where do you want to -- we're not going to remember all 4 of those.

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Simon G. Carter, British Land Company Plc - CFO & Director [19]

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Should I start with the provisioning? So actually, in the preliminary announcement in [May] , we've laid out the provisions that we have against future credit events and, in particular, tenant incentives. So we've got total provisions of about GBP 20 million at the moment: GBP 15 million for tenants' incentives; GBP 5 million is for bad debts. I think that's a prudent approach to take. And the way we've looked at it is we've looked at our risk register, and we have provided effectively in terms of tenants' incentives against about 50% of the high risk. And that positions us in a strong place. And then I think there's a question on Retail and the disposals.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [20]

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Yes. I mean, look, Robert, you won't find us trying to give an in-year guidance. I think I've tried to set out pretty clearly why the multi-let market has been pretty thin. We think we've done a good job of being nimble, fleet of foot. I mean I think it's fair to say that we -- if you look at the superstore disposable just as an example, I don't want to keep on coming back to that except that it is relevant to this piece. We had somebody come to the U.K. for the first time. You just can't predict that sort of certain emergence of demand, and we felt we were in a great place to take advantage of that. They came to us. They came to us first. We were able to do the deal quickly. And it's actually quite complicated in terms of the execution. We pride ourself on that stuff. But I think therefore, trying to pin ourselves into a box around intra-year activity, it's just -- frankly, the truth of the matter is that's not good for us because then people imagine that they know which way we're always going to be set. By actually turning deals down, it does improve your negotiating perspective.

And look, the other thing we've got to bear in mind that there are other sellers out there, and some of them may feel any more pressure than we do. I'll come back to what I've said about being strategic, not forced. And so we're going to have to take all of those things too into account. What I would point you to, though, is where we have had plans over time, we've been pretty good at executing them at the moment in time. And that gives me comfort. It comes back to the point I made about combination of strategy and people.

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Simon G. Carter, British Land Company Plc - CFO & Director [21]

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On the operational pressures easing, I mean to be clear, we do still think it's going to be very challenging in Retail. Clearly, the structure, it's here to stay, and the cyclical has been challenging and will continue to be so. And really our observation is one in two parts, really around those footfall and sales, which to some extent the main data we have as leading-type data; and then the other aspect is around the CVAs and administrations because I think post-Christmas was a bit better than people had feared. Clearly, we've had Debenhams. That was expected. But we feel that probably some of the more challenged retailers have been shaken out, and so when we look ahead, the sort of pipeline of potential future CVAs looks a little bit less. But there will definitely be further CVAs going forward.

And then there's sort of 4 aspects to your question around capital performance, I think it was capital performance on Offices, wasn't it? So basically, our Offices on the standing investment portfolio were virtually flat. You saw that. We had the ERV growth of 1.4%, a tiny bit around with yield shift to 2 basis points. So our 1% improvement in valuations was driven almost exclusively by the leasing successes, because of that space that we're leasing ahead of time and ahead of ERV. That's driving that valuation uplift there.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [22]

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It's Robbie from Numis. Just one from me, please. You talked about the higher level of...

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [23]

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Robbie, that's quite nice for us. Simon is running out of paper because he's writing all the questions.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [24]

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I try to help however possible.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [25]

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And I appreciate it.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [26]

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Just on the high level of temporary lettings, can you talk about the discounts being given on those versus sort of valuers' ERVs. Clearly, they're not longer-term lettings. Therefore, do they also fall outside of the valuation evidence when the valuers are thinking about the ERV? So I'm trying to work out, is there more downside essentially? That's -- let's cut to the chase.

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Simon G. Carter, British Land Company Plc - CFO & Director [27]

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Yes. Sure, that's a great question. So in terms of the leasing volumes, 1.6 million square feet for the year, and that was roughly 50-50 between long-term and temporary deals. So temporary -- sort of long-term deals were in line with what we've previously done in years. And so those temporary deals are a little bit about us being pragmatic at leasing space. You've seen we've had space come back through for the CVAs and administrations. And certain assets, it's right to bring in a strong occupier, keep the pot full, reestablish the occupancy driver for, say, some of those deals we will be prepared to take bigger discounts. But equally, there's assets where we're leasing space at a premium, maybe Inverness is a good example. So at Inverness, we had a Homebase store. That store closed. We've put the range in there, and we've taken a sizable discount to bring them in. So that's been a kind of 40% type discount. But equally elsewhere in our portfolio, we're leasing space at those kind of premiums to ERV. So what you're seeing in our metrics is that, that's an average, but there's a lot of activity either side of that. But I think probably the trend you need to look at, the averages. But in terms of being reflected in the valuation, yes, the valuers absolutely take account of the short-term deals and the long-term deals. They take account, and it's been a really important point for our audit committees that the valuers are taking account of all the evidence that's out there because, obviously, there's limited investment evidence. And so they're absolutely focused as always on all of the occupational evidence as well.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [28]

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And they're also faster results on the portfolio, on the Retail size of it?

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Simon G. Carter, British Land Company Plc - CFO & Director [29]

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Yes. Yes. Yes. That is right.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [30]

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That's where all the short term, temporary lettings are fully reflected in those.

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Simon G. Carter, British Land Company Plc - CFO & Director [31]

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Yes. Yes. That's right.

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [32]

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Hemant Kotak from Green Street. Just to take up on a point that you made, Chris, just with regards to the -- you said that you had the opportunity to make further Retail sales, but you chose not to.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [33]

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Yes.

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [34]

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Maybe if you could just provide some more color on that because the context of the question is I'm just looking at Slide 65 and looking at your multi-let portfolio where your EPRA initial yields are 5.1%, and the topped up yield is 6.2% (sic) [5.2%].

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [35]

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Yes.

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [36]

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So in that context and with -- and the context of the comments that Simon made about being able to reinvest that 6%, whether it's developments or share buybacks, and also the fact that you mentioned that the market is structurally challenged, right, so there's an element of chasing the market lower. Can you provide us some color as to why you chose not to?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [37]

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Yes. And we did do multi-let sales this year, so it's -- or last year, depends on how you look at it. But I -- to give a little bit more color, I want to be a bit careful for all the obvious commercial reasons. But yes, we've seen proposals which are not full sales. You'll have seen some of those other player. We got no interest in those, as an example. And the second one is where we've seen people trying to write contingencies into contracts with respect to future leasing events with big top-ups. And then it's in our judgment, we have to decide whether when that contingency doesn't come through, where the value delivered is sufficient. And in other words, to put it another way, have you really offloaded the risk or do you own the risk really, and you just normally made a sale. So that -- does that make sense within the context? We're not trying to kind of say, hey, at this asset, this is what happened, but...

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [38]

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No, that helps. So in the context of deals where they're structured in a more normal way, given that your shares are trading at maybe 25% discount to asset value, that you would consider those.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [39]

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Yes. And I think it's really -- we've talked about the arbitrage. And I think that's one important part of this, but it's not the whole story. I mean obviously, if we've -- what we have always tried to do as a business, I'm not saying we've always got it right, but the approach has always been consistent, which is look at the future expected performance of the asset versus the sale price, right? I mean that's the kind of basics on how the, if you like, the investment committee tries to run things and the business more generally. And in that context, even if we saw a bigger discount to valuation, but we really thought in our heart of hearts, we couldn't make that asset make the return, then we'd sell it. And I think that is generally a healthy way of doing it. In that narrow way, obviously, the arbitrage helps, but we shouldn't let that drive our decision-making and our view.

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [40]

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Yes. That's very clear. Just one more on Canada Water and just the old Resi platform. I think you mentioned that you weren't able to execute on the operator that you wanted to acquire. But when you think about your platform that you're trying to build and specifically with Canada Water, there's a fair amount of value. I think it's about GBP 300 million as the value. How do you think about returns in the context of if you can deliver it within, say, 10 years or 5 years, are you and Southwark really incentivized to deliver it much quicker because of the economics?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [41]

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I mean to some extent, we can only build that at a certain rate, and we've got to figure that out in terms of both the physicality of the uptake and all those things. So I think there's -- on the one hand, there's the financial model that I can tell you lots of really interesting things, which may or may not bear a lot of it. There are a lot of assumptions in any development appraisal. And the bigger the scheme, those assumptions become -- it becomes more sensitive to those assumptions. And so what we're trying to do is balance the maths of it against kind of the judgment of the team, important part of our overall business, so it's -- a bunch of people will be taking judgments as to what likely takeup is both on Residential built -- sorry, to sell, to rent and also, obviously, the Offices space rent.

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Simon G. Carter, British Land Company Plc - CFO & Director [42]

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Yes. And I think Emma was going a little pale in the front row when we mentioned the 5 years. Just to be clear, going full speed at Canada Water is a 10- to 12-year project. It's a very large project for us.

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Bart Gysens, Morgan Stanley, Research Division - MD [43]

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Bart Gysens from Morgan Stanley. You talk a lot about capital discipline. You talk a lot about your focus on reducing Retail. I think that's all very well received. Yet you found GBP 100 million or close to GBP 100 million to buy a department store anchored shopping center. Can you walk us through what yields you underwrite at -- on your vaunted acquisition as, how much development CapEx you'll have to spend on that asset, whether you worry at all about the signaling of such a deal?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [44]

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Yes. Look, to start with the last part of that, I think what I would say is that, yes, we've always said clearly that we want to reduce the portfolio, but we're not exiting Retail. And so there is going to be always an aspect of finding assets within that which we think add to the quality of the overall portfolio. So I don't think it's -- I don't make any apology for having bought an asset that we think over time will perform well, which fits what we think will be successful over time in terms of location, affluence. It scores very highly on the kind of modeling that we use. So that's the first thing to say. A part -- therefore, just to bring that into kind of strategic perspective, simultaneously, to be reducing overall the volume and increasing the quality feels like a good thing. And you should see that particular transaction in that context and, as I said, it scored highly. We use the usual sorts of metrics in terms of returns, expected rents, and it fitted just fine in that context of the framework we use. I think having said all that, for the reasons we've just described in terms of alternate uses of capital right now, you should regard that as a relatively unusual event for us.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [45]

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Sander Bunck, Barclays. Two questions from me, please. You may have mentioned it, but just to confirm, the proceeds of the Retail sales, GBP 1.5 billion over the next 5 years, is that going to be used for deleveraging or for development/buybacks?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [46]

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I think you should consider us to be toward the bottom of our range of leverage. So we don't wake up in the morning and think we need to reduce leverage further. I would say that we've done a decent job of getting that leverage down and timing that reasonably well. As you know, we were late into that though, Sander, because we took the view that post the crisis, the values were going up a lot. We did not want early on to kind of having, if you will, investors having to suffer the pain of over-leverage on the way down, pre-crisis, take all that benefit on the way up. But we have later on in time, as you know, brought that leverage up. We're very comfortable with that. Therefore, you should logically expect us to be doing -- we think we've got a big potential pipeline here. Simon touched on that. And we will take the sorts of judgments we do around what to do. But equally, if this sort of discount were to persist, then equally, it's an efficient use of our capital to buy back stock.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [47]

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And the other question I had was on the London Office market. I think you mentioned in the statement that you saw some -- that the beginning of 2019 has been very quiet.

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [48]

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From an investment perspective.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [49]

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From an investment perspective, yes. And that you saw that some secondary markets within the London Office market are performing a bit weaker. You see that a -- deals are widening. Does it open up any opportunities for you? And would you potentially be willing to acquire outside of your campus strategy just because it actually implies that there's somewhat interesting angles there?

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Christopher M. Grigg, British Land Company Plc - CEO & Executive Director [50]

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Yes. I mean if you look at our business today, about 80% of our -- of the London assets are held within the campuses. That 20% has actually been good for us if you think about some of the transactions we've been able to do. Strategy clear, but can we be tactical within that? Yes, we can. I mean I think one of the features of the London market over the last, frankly, 5 to 7 years has been there've been very few cheap transactions there. And I think what we did a good job on, if I'm honest, if you think about buying into Paddington 5 years ago, I mean there haven't been very many opportunities to do that at large scale. Of course, we'd look at things, and we do look at things. And we will probably find 1 or 2 around the place. But I wouldn't -- we have, for example, bought a building -- or effectively a development halfway through in order to take Storey off campus because we're up in Haggerston. That would be a good example. I don't think that we'll get -- I could be wrong. I'd be happy to be wrong, but I don't think you'll see a huge number of those. That's why I think it's so important to have the opportunities we do have in the existing portfolio rather than betting that you can just find acquisitions. That's not been a characteristic of that market. That comes back to low interest rates, unusual cycles and other stuff we talked about historically.

So that looks like nearly all the questions. Just to check, have we got anything on the phones by any chance? Okay.

Before I call a formal end, as it were to proceedings, just to remind you 2 things. We will be doing an Investor Day or investor session in September. That's likely to be in our new -- or will be in our new Storey Club space at Paddington. So we'll be getting those invites out in, hopefully, relatively quickly. And second of all, just to let you know that we'll do the half year. For the first time, we're going to do that as a webcast. We just think that's the way of the world going forward. It saves us a bunch of money. I think it saves some time for you all. And of course, we'll be doing questions and all that, but it will be on our live webcast come October. Thanks for your time.