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Edited Transcript of CAPC.L earnings conference call or presentation 25-Jul-19 8:00am GMT

Half Year 2019 Capital & Counties Properties PLC Earnings and to Discuss the Intention to Demerge Covent Garden Call

London Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Capital & Counties Properties PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian David Hawksworth

Capital & Counties Properties PLC - CEO & Executive Director

* Mike Hood;Managing Director

* Situl Jobanputra

Capital & Counties Properties PLC - CFO & Executive Director

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Conference Call Participants

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* John Michael Cahill

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Keith Crawford

Peel Hunt LLP, Research Division - Analyst

* Maxwell Wilson Nimmo

Kempen & Co. N.V., Research Division - Analyst

* Miranda Sarah Cockburn

Panmure Gordon (UK) Limited, Research Division - Analyst

* Robert Alan Jones

Deutsche Bank AG, Research Division - Research Analyst

* Sander Bunck

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

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Presentation

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [1]

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Well, good morning, everybody. Thanks for coming on this very hot day. Delighted to see you all here, and welcome to everybody who's on the telephone. We're obviously here to present our interim results presentation. But first, I'd just like to talk about the agenda.

We're going to start with the update on the Board's considerations in relation to the structure of the group. We're then going to turn to the financial review. Situl will do the financial review itself. I'll report on Covent Garden. And Mike Hood, our newly appointed Managing Director for Earls Court, will take you through Earls Court itself. We'll then finish with questions.

So the Board and the company's advisers have been considering the structure of the group to ensure we're positioned to deliver long-term value for our shareholders. Today, therefore, Capco is announcing its intention to launch Covent Garden as a high-quality Central London-focused REIT and EC Properties as a land enablement and development company.

I'm absolutely delighted that the Board's long-term strategy of seeing Covent Garden become a strong, independent REIT is reaching fruition. After 3 years of exceptional income and capital growth, Covent Garden is now of a scale and quality to prosper on its own and compete successfully in one of the world's most exciting real estate markets, London's West End.

At Earls Court, we've worked hard to create this development opportunity, which has the ability to adapt to both the dynamics of the marketplace and the needs of London. As to be expected with an asset of this exceptional quality there has been a broad range of interest in Earls Court expressed to the company and its financial advisers.

In assessing proposals from interested parties, the Board focuses on value and deliverability. The indicative pricing received is at a range that discounts balance sheet value, and the proposals are subject to differing levels of further due diligence on a number of conditions, including third-party rights. As a result, there is no certainty of a sale transaction.

The Board believes that the separation of the 2 businesses is in shareholder's interests, and is therefore, announcing today its intention to proceed with the demerger. The demerger will create 2 independent businesses with distinct investment characteristics and opportunities.

With enhanced strategic flexibility and allow each business to pursue independent strategies to deliver long-term shareholder value with an appropriate capital structure. This provides an opportunity for shareholders to participate in both businesses and to determine their own weightings in the 2 distinct investment propositions. Capco expects to publish shareholder documentation and hold management presentations on both businesses in September, with completion subject to shareholder approval anticipated before the end of the year.

Covent Garden is a world-class estate in the heart of London's West End, and aims to deliver long-term sustainable returns underpinned by driving rental growth and securing income. Covent Garden London would be a REIT and pursue a progressive dividend policy. Following a demerger, as proposed, that Henry Staunton, will be Chairman of Covent Garden London, I'll be the Chief Executive, and Situl, the Chief Financial Officer; and Michelle McGrath, currently Director of Covent Garden, as an Executive Director. On an illustrative basis, the total property of the company is expected to be valued at GBP 2.8 billion, with a loan to value of 27%. This comprises the Covent Garden estate itself as well as Capco's interests in the Lillie Square joint venture.

The development of Lillie Square is very well progressed and much of that value has been secured. The target administrative cost base of the company is expected to be approximately GBP 20 million on a run rate basis by the end of 2020.

Earls Court represents one of the most important opportunities to deliver large-scale development to meet London's evolving needs. EC Properties aims to optimize and realize the value of its Earls Court land interest over time. It's proposed that Gerry Murphy, currently the senior independent non-executive director and chair of the audit committee of Capco, will be Chairman of the company; with Mike Hood as Chief Executive; Terry O’Beirne, currently the Director of Finance at Capco as Chief Financial Officer; and Alison Fisher, currently Group Legal Director as an Executive Director.

The target administrative cost base of the company is expected to be approximately GBP 10 million from the end of 2020. Total property of the company is expected to be valued at approximately GBP 426 million, principally comprising Capco's interests in Earls Court Partnership Limited and Earls Court peripheral assets. In addition, Capco's interest in respect to the Conditional Land Sale Agreement, carried on balance sheet of GBP 84 million. It's proposed that EC Properties would retain cash of GBP 145 million, resulting in a net cash position for the company of approximately GBP 100 million. Both businesses are capitalized appropriately to pursue their respective business plans.

In summary, Capital Counties intends to proceed with the demerger as the Board believes separation of its 2 assets is the most appropriate outcome to deliver value for our shareholders over the longer term. We very much look forward to presenting further details in September.

So turning to the results. We've had a very active first half. Covent Garden is firmly established as a leading global destination, representing over 80% of our property portfolio. Overall total property value decreased 2% like-for-like to GBP 3.2 billion. Unfortunately, the increase in value at Covent Garden was offset by the decline at Earls Court. Covent Garden increased in value by 0.5% like-for-like to GBP 2.6 billion primarily through rental growth as the equivalent yield remained unchanged at 3.6%. The initial yield increased 2.5% as a reversionary potential to the portfolio continues to be captured. Our investment in Earls Court Properties declined 11.5% like-for-like in the period to GBP 599 million, reflecting the value as adjustments to gross development value the potential cost of delivery and the developers margin. As a result of those movements, Capco's NAV declined by 3.3% to 315p per share, giving a total return for the period of negative 3%. Underlying earnings were 0.5p per share, and the directors proposed an interim dividend of 0.5p per share.

As I mentioned, it's been a very active first half as well as advancing preparations for the demerger, there's been operational momentum across both businesses. And despite the challenging national economic and retail backdrop, Covent Garden continues to deliver rental growth and capture income. Net rental income increased by just under 10%, 7% like-for-like against June 2018. Positive occupational demand across all uses resulted in 40 new leases and renewals that was completed in the period at 2% above the December 2018 ERV.

In turn, ERV increased 1% like-for-like to GBP 108 million. I'm pleased to say both sales and footfall recorded positive growth during the period, and the estate continues to attract and retain high-quality brands. We've also seen a healthy demand for our office and residential portfolios with high occupancy rates of renewal. The Floral resident -- the Floral Court residential collection is now substantially sold, and we've already partially recycled the proceeds with an acquisition on Bedford Street earlier in the year.

Turning to Earls Court. Land interest held by Earls Court Property Partnership -- Earls Court Partnerships Limited, I beg your pardon, are now available for development, which is expected to be brought forward through the introduction of third-party capital. The level of interest being shown in the land suggests capital is available to support activity on the site. And in line with the long-term strategy, the business will seek to realize the potential of this opportunity over time.

Development at Lillie Square is well progressed, with handover of Phase 2 expected during the first half of next year. So backed by a strong balance sheet with GBP 845 million of liquidity, Capco is well positioned to support the current capital requirements of its 2 businesses as it prepares for demerger in the coming months.

I'll now pass it over to Situl for the financial update.

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [2]

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Thank you, Ian, and good morning, everyone. I'll take you through the financial highlights for the period, starting with the income statement and the balance sheet as of June, followed by an update on cash movements and our debt position.

As a reminder, the numbers are shown here on a group share basis and a reconciliation to the reported IFRS numbers, is included in the appendix. On a recurring basis, net rental income has increased by GBP 2.9 million to GBP 32.1 million. This was driven primarily by sustained strong performance at Covent Garden, with a like-for-like increase in net rental income of 7% against June 2018, continuing the trend of accelerated reversion capture over recent reporting periods.

Underlying administration costs of GBP 17.2 million are GBP 2 million lower on a like-for-like basis. In addition, there's a charge of GBP 3.9 million in relation to the possible separation of the 2 businesses. Positive progress has been made in securing reductions in underlying costs. We will target annualized admin costs of GBP 20 million at Covent Garden and GBP 7 million at Earls Court on a run rate basis from the end of next year.

Finance cost was slightly higher at GBP 10.4 million due to the increased level of cash drawn during the period. This reflects the more prudent approach to cash management in the lead up to Brexit with an average cash balance for the period of GBP 75 million. These movements, taken together, resulted in underlying earnings of GBP 4.5 million or 0.5p per share, And as mentioned earlier, we are proposing an interim dividend of 0.5p per share.

We continue to narrow the gap between income and ERV. This slide highlights the key elements of reversion capture from contracted income of GBP 86 million to current ERV of GBP 108 million shown on the right. The sale of Floral Court residential units has resulted in a GBP 1.5 million reduction in absolute ERV.

Contracted income has grown significantly over the last 2.5 years from GBP 66 million to GBP 86 million, and now represents over 80% of ERV. We would expect the development component of GBP 8.1 million to be captured on a phased basis. This includes GBP 4.5 million in respect of the Wellington block on the southern side of the estate. In addition, GBP 0.8 million related to the remaining Floral Court residential units, which are likely to be sold. The GBP 10.6 million within the reversion bar will be realized over time through reviews and leasing activity.

The highlights on the net rent bridge is the positive performance from Covent Garden, with additional rental income of GBP 2.8 million versus the first half of last year. This represents an increase of 9.8% in absolute terms, which has offset the reduced contribution from Earls Court following the sale of Empress State. Over a number of periods, the Covent Garden business has demonstrated consistent growth in net rental income driven by asset management and repositioning initiatives.

Moving on to the balance sheet. Total value of property assets of GBP 3.2 billion declined by 2% on a like-for-like basis. Valuation growth at Covent Garden of 0.5% was driven by higher ERV and stable cap rates. The valuation of Earls Court Property declined by 11.5% as a result of changes in values assumptions around GDV, development costs, and margins. Net debt has increased by GBP 15 million to GBP 588 million, with loan to value now at 19%. EPRA NAV assets was GBP 2.7 billion or 315p per share, down 3.3%.

This chart summarizes the main movements in cash and available facilities over the first half. In particular, net proceeds from disposals of GBP 51 million, which relate primarily to residential sales at Earls Court, investment of GBP 43 million mainly CapEx and acquisition activity at Covent Garden as well as construction of Phase 2 at Lillie Square. Net borrowings drawn of GBP 42 million, reflecting our prudent approach to cash management during the period and operating and other items which include dividends of GBP 17 million. These movements resulted in an increased cash position of GBP 83 million, with access to substantial overall liquidity of GBP 845 million.

We continue to maintain a strong balance sheet, which is well positioned to support the current capital requirements of both Covent Garden and Earls Court. Loan-to-value is 19%, providing significant headroom against all debt covenants. The group has substantial undrawn facilities and cash of GBP 845 million, which compares with capital commitments of only GBP 49 million.

Following a demerger, both Covent Garden and Earls Court would be capitalized appropriately to pursue their independent business plans. On an illustrative basis, Covent Garden would have a pro forma LTV of 27%, and Earls Court would be in a net cash position of approximately GBP 100 million.

So to summarize the financial highlights, NAV per share was 3.3% lower, with value production at Covent Garden offset by declining land values at Earls Court. There would be continued focus on driving rental income, rental growth and income capture at Covent Garden as well as pursuing further cost efficiencies and maintaining a strong balance sheet with flexible low-cost debt, strong credit metric and access to substantial liquidity.

With that, I will hand back to Ian.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [3]

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Thanks. So Covent Garden. I think you all know that it's now a truly prime district in the heart of London's West End. It attracts over 40 million customer visits a year. The assembly is such an estate in Central London it has been delivered through very disciplined investment approach over time. And I'm pleased that in line with the Board's long-term strategy for the business and following a very successful repositioning and investment program, we've now created a platform for a strong -- strongly positioned Central London REIT.

The first half, as I said earlier, has been an active and positive period, with all components of the portfolio performing well. Retail and F&B continue to attract high-quality brands, the strong demand for offices and for residential. Our occupiers continue to be attracted to the overall offer at Covent Garden.

Our net rental income increased by just under 10%, 7% like-for-like against June '18, as we continue to capture reversions. The trading environment on the estate is positive, with sales and footfall recording growth which is very encouraging given the broader U.K. economic and political backdrop.

Covent Garden increased in value by 0.5% like-for-like to GBP 2.6 billion, ERV progressed 1% like-for-like to GBP 108 million, and that positive demand across all uses resulted in 40 new leasing transactions at 2% ahead of the December '18 ERV, which represents about GBP 30 million of contracted income for the period. And that means that total contracted income of the estate is in the order of GBP 86 million, which represents 80-odd percent of the estates June ERV of GBP 108 million.

Occupancy was 97% at the end of the period. We invested GBP 13 million in acquisitions as we continue to expand our ownership. You will be familiar with this slide, but I think it continues to underline that our strategy and the implementation strategy continues to work. It clearly demonstrates the rental growth achieved since launch in 2010 and as well as the continued potential for growth across the estate.

Capco's investment in assembling and transforming Covent Garden has created a leading global destination. And I feel that our creative asset management strategy continues to focus on delivering rental value growth across all of our streets over time.

The West End offers greater insulation from wider U.K. retail challenges, but obviously it's not immune. Retailers continue to be attracted to the high-quality footfall, particularly the high-quality footfall in Covent Garden and positive trading prospects for the Covent Garden estate, which offers a wide range of store sizes and appeals to a wide range of tenants.

The retail portfolio, which represents half of the Covent Garden's annual gross income, continues to deliver positive performance. Since the start of the year, we've seen healthy demand from high-quality brands including the signing of Polo by Ralph Lauren as well as the introduction of Lacoste. Apple, they recently confirmed Covent Garden as one of its top global locations. They carried out an extensive refurbishment. And during the period, they signed a new lease to extend their occupation.

In addition, Bucherer are upsizing to create a London flagship store. Capco has successfully turned Covent Garden into a great dining destination in London. Our restaurants are generally reporting growth in turnover. A number of new concepts have been introduced, including Santa Nata on Russell Street, Dominique Ansel Bakery, which will anchor the Western End of Floral Street as well as new signings, the openings continued across the estate. The casual dining restaurant Wahlburgers and the Italian concept, VyTA, both of which are U.K. firsts. These additions add to Covent Garden's reputation as one of the best dining destinations in the capital.

As a reminder, our office portfolio now comprises over 260,000 square feet. It represents 15% of total gross income. Covent Garden has now become a prime office location, which is underpinned by the overall appeal of the place, the excitement of the place and its unrivaled connectivity.

The repositioning of the estate presents an opportunity to increase office rents as occupiers continue to be attracted to the Covent Garden district, and we've had a number of office lettings during the period, most notably, the letting of 22 Long Acre to WeWork. Our residential portfolio is also performing very well with fully let, and recorded a high rate of renewals with rents above the previous passing levels.

We're very pleased with the successful sales program from our new build collection of Floral Court and the external recognition, which it has received recently. 24 of the 29 apartments released have been sold to date, with proceeds nearing GBP 70 million.

We continue to expand our ownership across the estate and target a number of properties for acquisition, the most recent of which was the purchase of 39-40 Bedford Street for GBP 13 million, which gives us an opportunity to consider repositioning an important entrance to the estate.

We will continue to invest strategically in assets across the estate, with the southern side offering a number of repositioning opportunities, including the Wellington block. And we're currently exploring opportunities there for what is a very important freehold Island site leading to the mixed-use refurbishment as well as a possible hotel and food and beverage scheme, which we believe will contribute to transforming the southern side of the estate.

So overall, Covent Garden continues to perform positively. Healthy demand across all user, good occupancy and positive trading indicators. The focus we have on attracting the best brands and concepts ensures that Covent Garden is positioned to meet consumer demand, capture that income potential of the portfolio and in the long term, grow ERV. So following a demerger, the business is well positioned to deliver long-term sustainable returns, underpinned by rental and income growth.

So I'm now delighted to hand it over to Mike, who is going to update you on what he's been doing at Earls Court.

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Mike Hood;Managing Director, [4]

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Thank you, Ian. Good morning, everybody. I'm delighted to speak to you all this morning as Managing Director of Earls Court, and to report on progress over the period.

At Earls Court, we've worked hard over many years to create this important development opportunity. Our vision for Earls Court is to create a place that London can be proud of. And in doing so to deliver value to our shareholders and other key stakeholders. As a reminder, our land interests at Earls Court are located amongst London's most desirable residential districts. Stretched across 2 boroughs, the Royal Borough of Kensington and Chelsea and the London Borough of Hammersmith & Fulham. There is limited competing supply and the sites already benefit from excellent connectivity. Our principal investment is the land held by Earls Court Partnership Limited, our venture with Transport for London, in which we have a 63% controlling interest.

ECPL's land interests are set across 26 acres. Our strategic approach to date has been to carry out land assembly, achieve and implement planning consent, form strategic partnerships and to undertake complex land enablement works.

What you see here on this slide and what you get a sense of when you walk around the site is just how far we've come in preparing and de-risking land for development.

The ECPL land is consented and implemented, which further underpins its desirability. The framework established by the Masterplan is flexible. It has the ability to adapt to both market dynamics and to address the needs of London. The business is now well positioned to focus on enabling development on ECPL land by attracting a wide range of potential investors and occupiers, with whom we will work to advance delivery. There are clear opportunities to realize value for our shareholders, our partners and through the delivery of the Masterplan.

The low level of activity in the residential market continues to impact valuation, as the market completes its adjustment to changes in residential taxation and monitors other political and economic factors. At ECPL, the independent buyers have adjusted GDV, the cost of delivery and the developer's margin, resulting in a net decline of 15.9% like-for-like during the period.

As we previously highlighted, we believe that valuations do not currently reflect the potential of our long-term investment. The reduction in land values, we believe, also presents opportunities to evolve the development and product mix. Capco has also paid GBP 90 million of the GBP 105 million payable under the Conditional Land Sale Agreement in relation to the West Kensington and Gibbs Green estates. We note recent political comments regarding the CLSA, and we continue to work constructively and collaboratively with all our stakeholders in order to seek positive outcome in relation to both the future for the estates and opportunities to evolve a Masterplan for London.

The agreed objective of ECPL is focused on maximizing economic value by enabling development of the Masterplan. On-site, I'm pleased to report operational progress continues. Various planning initiatives have been undertaken in respect to the consented Masterplan, including reserve method applications, which have been approved by RBKC.

Working collaboratively with our partners on-site -- on a site like Earls Court has been instrumental in enabling the site. Site works are ongoing to accommodate future developments. Railway track suppression works are currently being carried out by London underground, which is scheduled to complete in the autumn. Future development could be facilitated by the separation of the sites into smaller individual areas to attract a broader spectrum of interest. The reduction in land value could also present opportunities to evolve the development and the product mix to deliver additional density, which could include increased levels of affordable housing and other tenures.

Today, a number of approaches have been received for various parts of ECPL land, a selection of which we are exploring. The level of interest that we have seen from investors suggest that institutional capital is available to support activity on the site. This could include forward sales to end users, such as senior living or private for rent or land sales for the formation of joint ventures. Creating strategic partnership to facilitate investment has been one of our key strengths in realizing value from our interest at Earls Court as we've demonstrated at Lillie Square.

Moving on to Lillie Square. We are delighted to have already delivered more than 220 homes in Phase 1 and established a high quality and desirable place to live. The joint venture has received over GBP 250 million in proceeds to date with a further GBP 200 million contracted and expected from 2020. Development is well advanced, with over 80% of Phase 2 presold. Construction continues on schedule, and completion and handover of sold units is expected from the first half of next year. This will bring the total number of homes delivered at Lillie Square to 420.

In summary, Earls Court is a rare and transformative scheme with the ability to deliver significant number of homes, jobs and community benefits. Following a demerger, we will maintain a disciplined approach to capital, with a focus on realizing the Masterplan to optimize value for investors and for all of our stakeholders. Our ambition is to make Earls Court a district that London can be proud of, and I very much look forward to presenting further details about the business to you in due course.

I'll now hand back to Ian.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [5]

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Great. We're a long-term investor in London. And despite all that's going on in economics and the political environment, we believe that London continues to demonstrate that it's a truly global city, and it continues to attract investment and visitors from around the world.

And through the successful execution of our strategy over the last 9 years, we created 2 wonderful estates that could now stand alone as 2 strong and independent businesses with great potential. Covent Garden is firmly established as a world-class destination. Its scale and attractive income profile now positions the business for continued long-term success, ready to perform and grow as an independent REIT in one of the most exciting real estate markets in the heart of Central London, London's West End.

At Earls Court, we successfully implemented our strategy, creating one of London's most important development opportunities. It has the ability to evolve with market dynamics and bring forward much-needed new homes for London.

Covent Garden and Earls Court are 2 of the world's best estates, both of which have positive long-term growth prospects. And backed by our strong balance sheet, we're now able to create 2 great businesses. Separation of the 2 estates will enhance strategic flexibility and allow each business to pursue independent strategies, delivering long-term value for our shareholders. We very much look forward to presenting more details about that in September.

So that sort of concludes the formal presentation. We'll, as usual, take some questions. And a number of us will be around after the meeting as well if there's anything you'd like to follow up on, including the proposed management teams and the Chairmans for the 2 companies.

For those of you that are on the telephone, if you'd like to let -- I don't know why I'm speaking up, but for those of you that are on the telephone, if you like to, let the operator know that you like to ask questions, and we will come back to you.

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Questions and Answers

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [1]

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I'm going to take John first because he was first in the room to cool down I think, in all the excitement, John.

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John Michael Cahill, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

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John Cahill from Stifel. I got two questions please. First one for Situl. The admin costs, they're coming down, but they still it's a run rate of about GBP 34 million, GBP 35 million a year for the combined company and you are guiding to 20 plus 10 ultimately for the 2 new companies. Obviously, there will be some additional corporate costs associated with 2 entities. Just wondering how you will intend to get towards that combined number of 30? Second question, for Ian or Mike, at Earls Court, you had to navigate a period of goalpost moving from the politicians at the national level with the Mayor at the city level and the local level, if not in practice, then certainly in rhetoric. Now we've got a new prime minister, Mayoral elections not that far away. Is the landscape certainly in planning and politics may be moving a bit more in your favor?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [3]

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Can you do the first question?

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [4]

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Yes. Sure. So you're quite right, the run rate at the moment is around GBP 35 million, that's been brought down from around GBP 52 million 3 years ago. It's a good progress so far. The way that we thought about the 2 independent entities is they need to be resourced effectively, so that they can prosecute their business plans but equally, and for different reasons for each, they need to be run on a very efficient basis. So we said that there will be some time and cost in getting to those run rates, and we said that we'll get that by the end of next year as a target. And that will come from initiatives some of which have been activated already and some new initiatives, and we will look at the cost basis across the board, and that will include, for example, moving both of the operational teams and the businesses effectively to on site at Covent Garden and Earls Court. But across a range of other areas, we will find other efficiencies.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [5]

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Maybe I'll start on the second one. We've been invested in Earls Court really since 2007, so we've seen a number of political cycles. And as you quite rightly pointed out we probably are going to see another one. So long-term investments like Earls Court are about trying to find what is going to become the right place in development terms, and we worked very hard to create the Masterplan, the consented elements of that Masterplan and are now ready for development. And what we've really seen is the market has corrected across London in land values, the availability of capital really wants to support development on site. So I think the focus is all about creating long-term value and a wonderful place for London over many generations. Obviously, Mike sort of been working on this scheme really since inception, so he is probably in the trenches as it were of making sure that we release value for shareholders. So you want to add anything to that please.

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Mike Hood;Managing Director, [6]

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Of course, as I mentioned, a rare and a fantastic opportunity that we created from working closely and collaboratively with our partners. We talked today about the fact that there is some flexibility for the scheme to evolve and I will continue to work with my team in that way with our partners to release value for our shareholders but also to optimize value for our partners.

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Maxwell Wilson Nimmo, Kempen & Co. N.V., Research Division - Analyst [7]

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Maxwell Nimmo of Kempen. Just coming back to, when you guys halted the demerger because there was quite a lot of uncertainty, does it necessarily feel that we've kind of got any more certainty. I'm just trying to kind of understand what's changed in your thinking in the last sort of year or so since the first announcement of it. And how much of that has been driven by the potential investors that you're speaking to in terms of what's the kind of range of discounts that they've been kind of offering. I don't know if you're able to comment on that at all, but more just in terms of what's changed in your thinking and why have you not maybe waited till after Brexit, for example, if that happens.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [8]

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It's a good question. We don't feel as though we've halted anything. This demerger activity is a lot of work, actually I think I pleasantly forgotten how much work it was after the last one. But we've been making sure that all bases are covered. Clearly, the property market for residential and land has continued to correct, which is a feature. But this is all about long-term growth, long-term value for shareholders, and we've been invested in these 2 assets for a long time. It's been a long-term objective of the organization to establish Covent Garden as really first rate Central London REIT. It has come a huge way. I was looking at some of the original targets that we set for ourselves, GBP 1 billion in capital value, and now GBP 2.6 billion with further growth anticipated in the coming years.

And the income profile that we've seen on Covent Garden continues to deliver. And I think if you see Michelle should tell you about some of the sales densities that we are now seeing across the estate from the newer brands who are expanding. We think that there is significant opportunity over the long term to capture that in growth. Earls Court is ready for development, as Mike said. Lillie Square Phase 2 is complete really in the middle of next year, is largely sold with that scheme, there is a little bit more to do beyond that. But it's really about releasing the potential of Earls Court, and we hope that those opportunities will be delivered over time. We believe the best way of doing that is through 2 separate companies.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [9]

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It's Sander Bunck, Barclays. Two questions for me. One, have you thought about retaining a stake into the newly formed Earls Court business especially as you do continue to believe there is potential upside there in the future, so you can continue to benefit from that. And the other one is that you mentioned on the flexibility of the scheme of potentially evolving some of the product mix. Can you talk a bit about that and does it, for example, include more commercial, more retail, is it more PRS, and you are talking about nursing homes et cetera.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [10]

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We are demerging Covent Garden, and we believe Covent Garden is now of a scale and of an income profile that means it can stand alone as a really competitive vehicle in Central London. London's West End is a marvelous place to do business. We continue to see rental growth. We continue to see opportunities around our estate that we want to explore and we believe that's best served by focusing entirely our shareholders capital on that. Shareholders who own the company will also continue to own Earls Court and we believe that will be appropriately categorized. We got a great management team, one of the joys to me actually of running this business over the last 10 years has been seeing the development of such talented executive team, and it's fabulous that they're coming through now to run the businesses and run the opportunities that we've created over time. So we feel its best served by 2 strongly positioned independent businesses. And talking about the product mix, you've got a lot of opportunities I think.

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [11]

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Yes, we've got a great planning consent on site which you've implemented. That framework that is established by that planning consent is its flexibility to evolve over time. We talked about the need to evolve to address London's needs. We are encouraged by the interest we've had from a broad range of potential investors or occupiers on the site, we talked about senior living, potentially private for rent. The valuation places us in a good position to explore how we leverage that Masterplan to take advantage of market dynamics that interest, and we will do that with a focus on realizing the best long-term returns for our shareholders.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [12]

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Does that mean that there's more from to build-to-sale, more to built-to-rent? For example, is that the main change here?

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Mike Hood;Managing Director, [13]

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I think we will explore range of uses, but the Masterplan is, okay, where is the mixed use? Masterplan already has office, retail, and residential. There are some very interesting residential uses that allow us to potentially to bring in third-party capital to facilitate development on a de-risk basis, and that's something we will explore.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [14]

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Just one last one actually. Is there any progress on the potential densification from 7,500 to 10,000 units?

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Mike Hood;Managing Director, [15]

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I've to say that the Masterplan consent that we have we believe is good, and we've implemented it. I'm working closely with the team on working with our partners in the 2 Boroughs and with the Mayor's office to explore how one could evolve that Masterplan, and that's something we look forward to talking more about in September.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [16]

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Miranda? Anybody on the phone to talk?

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Miranda Sarah Cockburn, Panmure Gordon (UK) Limited, Research Division - Analyst [17]

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Miranda Cockburn, from Panmure. Just can you give a little bit more detail as to why you've moved the Leicester Square overall as well in the Covent Garden? Because I thought Ian pointed this to be very sort of clean separate Covent Garden and Earls Court. And I appreciate that Lillie Square is moving on, is nearing completion. But you still got Phase 3. And it just shows if it's going to be a bit of a distraction. And would you think about outsourcing the management of that to the Earls Court team? How will that work?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [18]

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It's a fair question. I mean I think our judgment is that the bulk of the value going forward to the Earls Court business is in the Earls Court partnership land. And there is a very defined business plan within the joint venture. And I think that needs 100% focus, and that's the decision that the Board has taken. Lillie Square is a fabulous project. I was down there over the weekend. I think people like living there. And it's great to see the first phase occupied. It's really encouraging as well, actually some of the rental levels that are being achieved there by some of the investors that are moving there are quite high, which comes to your point about possible demand for rental product in the area. Phase 2 is pretty much sold. If you go down to the site around that, down there lately, it's enclosed, I think the bathrooms are going in at the moment, and it will be done by next summer. And then really the balance of the land is not a significant -- it's a small component of value. So it's really about focus. And we think the focus is best placed on Covent Garden as we discussed and on extracting the full value over the long term of the potential place that Earls Court can become, which is really the Earls Court partnership with Transport for London.

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Keith Crawford, Peel Hunt LLP, Research Division - Analyst [19]

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Keith Crawford here. Well, this timetable is very welcome, not just the announcement but also the timetable, which is eerily similar to the U.K.'s own timetable including probably an election announcement, so quite interesting. And it is notably fairly short term. Given that investors are very keen on medium-term outlook and the direction of things medium-term at Earls Court, the large site numbered 1, which is the majority of the value in the book's ECPL. Are you saying that this is now subject to planning, which is agreed? And the reserve matters aren't large? Or awkward? Or sort of resolvable in the natural order of things?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [20]

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Yes, the site 1 is a joint venture land with Transport for London. All of that land is covered by a planning consent. And we have reserve matter approval for the vast majority of that land, which has been implemented. What we have recently secured from the Royal Borough of Kensington and Chelsea are some tweaks to that reserve matter application, which, as you would expect with any large phases of ours, and we would continue to do through the process.

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Keith Crawford, Peel Hunt LLP, Research Division - Analyst [21]

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So there is prospect to fractionalize this land as you suggested, which is all in Kensington and Chelsea or mostly?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [22]

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No. So the land lies across Kensington and Chelsea and Hammersmith & Fulham. And as I said in my piece, we think there's an opportunity to advance development through bringing forward separate phases with the introduction of some of the interest that we had.

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Keith Crawford, Peel Hunt LLP, Research Division - Analyst [23]

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Yes, for the existing investors, the prospect of news which involves realization of capital in one form or another or the provision of capital, let's put it that way, in the medium term from this.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [24]

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Yes. And that's something we very much like to talk more about.

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [25]

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Rob Jones from Deutsche Bank. Two questions, both on Covent Garden. Firstly, I quite like to think of things on a relative basis. When I look around me a lot of the gentlemen have got quite Happy Socks in relation to mine. And I saw on page 21 one of the new brands was Happy Socks at Covent Garden. Maybe you could tell us a little bit about the incremental appetite that we're seeing for new brands who continue to become part of the estate? And the kind of continued appetite for international brands you may have in Covent Garden as their first location in the U.K.? And kind of how that's evolved over the last kind of 6 to 12 months? And then secondly, you obviously said that footfall and sales growth was positive. Maybe you could give us some quantum in terms of how that's been over the last 6 months and maybe compared to say 12 months prior to that?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [26]

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Thank you. The pun on Happy Socks, for those who haven't picked it out, it is a brand that we put in recently, so for those of you that would like some colorful socks, there is a shop in Covent Garden where you can buy them. I think we've seen a number of trends. I mean Covent Garden is really established now for multiple categories of retail, and we've been very much focused on what's first into London, individual type brands, big emphasis really on British-related brands as well. And we've obviously been moving towards the introduction of luxury, which was a goal I set out 10 years ago.

So we're seeing there increased demand for luxury. I was really pleased to see Bucherer, who are a luxury watch retailer, there is Balthazar there, still we put Tiffany in on James Street earlier in the year. We got some other very high-quality brands as well as the luxury cosmetics that we got on site. That's a continuing trend and those sort of businesses actually have much higher densities and much greater margin, so we hope that over time that will translate into income for us. We're also seeing a trend where Internet brands, brands that have been Internet-only are now taking stores, and you're seeing that around the world. But they're only going into the places that have the highest profile, if you'd like, both in terms of traditional footfall, traditional spend, but also marketability. We're seeing this around the country, I think that's a trend that will continue.

So we're experiencing good demand. There are some categories obviously which you'll all be familiar with that aren't doing as well as others, but that's all part of the retailing industry. We focus on trying to attract the ones that we believe over time have the best range of activity in reaching their consumer whether it's online, physical, click or collect, however you might do. We want to be the competitive retailer to really appeal to our customer. And the customer make-up of the estate is completely different now from where it was 10 years ago.

We're seeing really good levels of spend. We're seeing a different type of international customers as well that's coming, and we're seeing the F&B really become adopted by people and their capital, and it is not just the capital. And the impact of that is as it grows as a place, the other user become very attractive. So we've seen a very significant increase in our office demand. Post demerger, we're actually going to be moving there.

We are struggling to find office space within our own portfolio, so that's good. And we're also seeing leisure come in, which is a big feature now of any place, but Peloton, as you know, have opened up or will open up shortly, they're filling out their studio, and they've also taken some office space. So whilst you can't ever be complacent in retail because it is such a fast-moving business. We're trying to present brands to the consumers that we want to attract to our estate once they shop in, and we're trying to work on the basis of what do they want in a year, what do they want in 2 years, what do they want in 5 years, and it changes, and so far we seem to be providing that place and it's translating into footfall and sales, so confident about the future.

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [27]

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And the figures for footfall and sales?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [28]

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We don't present those. And I think it's something we'll look at going forward. But we've got a good range now, base across the estate, probably as good as anybody else in the West End, and it's positive. Not everything is doing as well as everything else, but certainly, some of those critical components as I mentioned are significantly outperforming others.

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Operator [29]

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We have two questions from the webcast.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [30]

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Great. Let's go to that webcast, that's what I should say, not telephone lines.

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Operator [31]

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So Aaron Guy, at Citi. How have you calculated how much shareholder value could be created by the demerger versus selling the asset at discount to book value, i.e., where should each entity trade? And secondly, will Earls Court seek to reload the land bank like a traditional house builder or wind itself down over time?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [32]

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Well, look, we're obviously going to present a lot more detail in September about the future of these 2 businesses. What we're trying to do is create 2 competitive companies for the future, and we think both will be strongly positioned to take full advantage of their individual business plans and the marketplace evolves very different businesses. I don't think it's really appropriate to me to comment on where they might trade. Certainly, our view as a board is that the underlying value and long-term potential of these 2 wonderful estates is not fully represented in the current structure, and that's why we've taken this decision to recommend shareholders later in the year that we create these 2 wonderful businesses, and we've got every confidence that over the long term they will successfully deliver value for our shareholders.

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Operator [33]

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Secondly from Mike Prew at Jefferies. Number one…

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [34]

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There's a second part to the question that was asked, reloading the landbank.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [35]

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Yes. I think -- well, I'd say we can be specific to that. (inaudible) to that one as well. So (inaudible). Look, it's a big estate. There's a lot of land there, and there's a lot to do. And I'm sure Mike will be 100% focused with these very talented team on delivering value from what sort has been created. But like all businesses, they evolve over time. What was the next one?

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Operator [36]

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Mike Prew at Jefferies. What is the book cost of Earls Court relative to the residual value? And what is the breakdown to the developable acre, please?

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [37]

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Sorry, would you mind repeating the first one, again?

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Operator [38]

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What is the book cost of Earls Court relative to the residual value?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [39]

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Okay. We'll provide more detail on the full journey of the Earls Court investment when we publish transaction details in September. What I would say is that throughout our ownership of Earls Court, which extends back to 2007, there has been a lot of value realized along the way through the sale of the venues business, through rental and exhibition income, through the sale of Empress State and through the partial realization of Lillie Square and the development profits coming through from that. So I think you have to look at it in the round. So I can't give you an exact number today, but we will provide further detail on that in due course. I can get to that. It's a bit more involved than perhaps it looks from the outside. And sorry, what was the second part?

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Operator [40]

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Follow-up from Mike Prew.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [41]

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Price per acre, wasn't it. The price per acre implied by the current valuations at ECPL is around GBP 23.5 million an acre, and that compares kind of if you look back over time you can kind of track what that's done over the last 7 or 8 years, and it's really traded within the range of GBP 20 million to GBP 45 million an acre between -- since 2012.

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Operator [42]

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Lastly, what will Earls Court properties tax position be? Will that be off settable tax losses once demerged?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [43]

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Yes. And again, we will provide more detail on that. So we talked about Covent Garden being a REIT. One of the features of ECPL, which is the principal part of our investment in the Earls Court business is the tax base for that we will look back with reference to when the transaction with Transport for London, formed the joint venture back in 2014, '15, and we benefit from a higher tax base, significantly higher than the current valuation.

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Mike Hood;Managing Director, [44]

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Okay. Anyone else from the room? Anybody else on the webcast?

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [45]

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I'm going to hand it over to phones.

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Operator [46]

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(Operator Instructions)

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Mike Hood;Managing Director, [47]

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We have no other questions.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [48]

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Okay. Right. No audio questions. That's it for the webcast. All very excited. Thank you very much. Are there any further questions from the room? Or should we send you out into the heat of the day? Now if by the end of the day, you have some further questions, then please do ask us. We're all around for a little while if you any of you have anything burning that you wish to place to us. Otherwise, we look forward to seeing you in September and talk about the demerger in a little bit more detail and the opportunities that these 2 companies will present to our shareholders. Thank you very much for your attendance.