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Edited Transcript of CAPC.L earnings conference call or presentation 27-Feb-19 9:30am GMT

Full Year 2018 Capital & Counties Properties PLC Earnings Call

London Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Capital & Counties Properties PLC earnings conference call or presentation Wednesday, February 27, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gary J. Yardley

Capital & Counties Properties PLC - MD, CIO & Executive Director

* Ian David Hawksworth

Capital & Counties Properties PLC - CEO & Executive Director

* Situl Jobanputra

Capital & Counties Properties PLC - CFO & Executive Director

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Conference Call Participants

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* Benjamin Paul Richford

Crédit Suisse AG, Research Division - Research Analyst

* Hemant Kumar Kotak

Green Street Advisors, LLC, Research Division - MD

* John Michael Cahill

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

* Maxwell Wilson Nimmo

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

* Osmaan Malik

UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director

* Robert Alan Jones

Deutsche Bank AG, Research Division - Research Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property Analyst

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Presentation

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

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Okay, good morning. It's 9:30, so I suggest we crack on. I know you've all got a busy day. I think there's 1 or 2 people joining a little bit later from the U+ I results, which I think are over the rate. So a very good morning to you all. Welcome to our annual results.

Today, we have a reasonably full agenda. I want to start with an update on the possible demerger. We'll then take you through the results. Situl will present the financial review. I'll report on Covent Garden. And then Gary will run through Earls Court and we'll finish with questions.

So I think you're aware that through 2018, we've been considering the most appropriate structure for the group. And the board took the decision to consider a possible demerger. And I'm pleased to say that preparations are now well advanced and the demerger could be implemented promptly.

We've also received various proposals in relation to the sale of certain of our interests in Earls Court. And we've held a number of discussions with parties in this regard. The board will evaluate the merits of these various options, having regard to market conditions, long-term shareholder value and prudent capital management.

Capco is in a position of real financial strength with 2 very important London estates and limited capital commitments. Now in an uncertain economic and political environment, the board intends to carefully decide upon the most appropriate and timely evolution of strategy.

So to the results. We've had a very active year. We continue to focus on Covent Garden, which is firmly established as a leading global retail and dining destination. It now represents 80% of our property portfolio. Through creative approach to managing the estate, it continues to deliver strong income and value growth. Earls Court is one of the most important mixed-use development opportunities in Central London. And we've continued to realize significant value from our investment.

Capco maintains a strong financial position with an LTV of 18% and access to liquidity of over GBP 850 million. Our total property value decreased 2.4% like-for-like to GBP 3.3 billion. Unfortunately, the increase in value of Covent Garden was offset by a decline in Earls Court.

Covent Garden increased in value by 1.6% like-for-like to GBP 2.6 billion, primarily through rental growth. The equivalent yield remained unchanged at 3.6%. The initial yield increase from 2.1% to 2.4% as the reversionary potential of the portfolio continues to be captured. Our investment in Earls Court property declined by 16% like-for-like in the year to GBP 658 million, which is 9% which occurred in the second half.

The independent valuers made a number of adjustments to the component parts of the valuations, reflecting a more conservative view on gross development value, cost of delivery, together with a higher developers' margin. As a result of the movement, Capco's NAV declined by 2.4% to 326p per share. Total return for the year was, therefore, negative 2%. Underlying earnings were 0.9p per share. And the directors will propose a final dividend of GBP 0.01 a share, giving the total for the year of 1.5p.

Now despite the rather challenging national economic and retail background, Covent Garden has had another good year and continues to deliver rental growth and more importantly, captures income. Net rental income increased 17.5% or just under 10% like-for-like against December 2017. It means that over the last 2 years, net rental income at Covent Garden has increased by GBP 16 million as we capture the embedded reversion. Positive occupational demand across all uses resulted in 103 new leases and renewals completing in the year. That's 7.5% above the December 2017 ERV. ERV increased 3% like-for-like to GBP 108 million.

2018 has been a record year for new store openings across the estate. We welcomed such brands as Tiffany and SushiSamba. Both sales and footfall have recorded positive growth throughout the year, particularly on Henrietta, King and Russell Streets. A number of larger capital initiatives were successfully completed, including Floral Court, where substantially all of the lettable space is now contracted or under offer.

Our land interests held by the Earls Court Partnership Limited, ECPL, which is our investment vehicle with Transport for London, are now available for development. And in line with the long-term strategy, Capco will seek to realize the potential of this opportunity over time. Value realization is expected as development is brought forward through the introduction of third-party capital.

We're very pleased to have completed the sale of the Empress State Building this year, which combined with the sales of the Venues business last year as well as proceeds from the Lillie Square joint venture, have realized over GBP 670 million. Development at Lillie Square is well progressed with close to 2/3 of the total units presold. And we have limited remaining available inventory. To date, the joint venture has contracted over GBP 450 million of sales and established a new high-quality address in the location.

So we're backed by a very strong balance sheet and are well positioned to support the current capital requirements of our prime Central London assets. And we continue to aim to deliver long-term shareholder value.

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

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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 year, starting with the income statement and the balance sheet as at December, followed by updates on cash movements and our debt position. As a reminder, the numbers are shown here on a group share basis and include rental income from Empress State during the first quarter of 2018. A reconciliation to the reported IFRS numbers as well as the breakdown of selected metrics between the first and second half is included in the appendix.

As you can see, net rental income on a recurring basis increased by GBP 10 million to GBP 59.6 million. This was driven primarily by sustained strong performance at Covent Garden with like-for-like increase in net rental income of 9.6%. We expect to see continued growth in net rents at Covent Garden as reversion is captured.

Underlying admin costs of GBP 36.7 million was GBP 2 million lower on a like-for-like basis. In addition, there was a charge of GBP 4.9 million in relation to the possible demerger as well as discussions around the potential sale of Earls Court. Having taken cost down from a run rate of over GBP 50 million 2 years ago, we will continue to target further efficiencies in 2019.

Finance cost was slightly lower at GBP 19.2 million. And when taken together, these movements resulted in underlying earnings of GBP 8 million or 0.9p per share. As Ian mentioned earlier, we are proposing a final dividend of 1p per share.

We continue to narrow the gap between income and ERV. This slide highlights the key elements of reversion capture from contracted income to current ERV of GBP 108 million shown on the right. Contracted income has grown significantly over the last 2 years from GBP 66 million to GBP 83 million and now represent 77% of ERV.

We would expect that the development components of GBP 8.4 million to be captured on a phased basis. And I would note that this amount includes GBP 2.2 million in respect to Floral Court residential units, which are likely to be sold. The GBP 13.4 million within the reversion bar will be realized over time through reviews, renewals and new leases.

Moving on to the balance sheet. The total value of property assets of GBP 3.2 billion declined by 2.4% on a like-for-like basis. Valuation growth at Covent Garden of 1.6% was driven by higher ERV and stable cap rates. The valuation of Earls Court Properties declined by 15.6% as a result of changes in value assumptions around GDV, costs and profit. Net debt has been reduced to GBP 573 million principally as a result of the sale of Empress State with loan-to-value now standing at 18%. EPRA net assets were GBP 2.8 billion or 326p per share, down 2.4% over the year.

This chart summarizes the main cash movements over the year, in particular: net proceeds from disposals of GBP 302 million, which relates primarily to Empress State, and completed residential sales at Lillie Square and Floral Court; investment of GBP 109 million, mainly CapEx and acquisitions at Covent Garden and construction activity at Lillie Square; Net borrowings repaid of GBP 166 million; and operating and other items of GBP 29 million.

Our balance sheet has been strengthened further by the sale of Empress State of GBP 250 million. Loan-to-value has been reduced to 18%. And there is significant headroom against all debt covenants. The group has substantial undrawn facilities and cash of GBP 854 million, which compares to a capital commitment of only GBP 53 million.

So to summarize, NAV per share was 2.4% lower with value growth at Covent Garden offset by further declines at Earls Court. Over the last 2 years, we have grown net rental income at Covent Garden by GBP 16 million. There will be continued focus on driving rental growth and income capture at Covent Garden with investment continuing to be weighted towards that part of the business. And the balance sheet has been strengthened further through our activities. We have flexible, low-cost debt and access to substantial liquidity.

With that, I'll 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 we'll now go through Covent Garden. I think you're all aware of the strategy for Covent Garden: creative asset management and strategic investment. And over the years, we've created what we believe is a highly attractive destination in the West End. It attracts over 40 million visitors a year. And our emphasis on the customer ensures that the estate thrives as a leading destination for Londoners, domestic visitors and international visitors to the capitol.

As I mentioned, 2018 was another active year, delivering positive performance. The retail portfolio continues to flourish with good demand, also for the offices and residential as occupiers are attracted to the overall offer at Covent Garden. Our larger capital initiatives are successfully completed. That contributed to a record number of openings across the estate.

Net rental income increased by 17.5%, 9.6% like-for-like against December 2017. Both sales and footfall have recorded positive growth, which is very encouraging, given the broader economic backdrop. Covent Garden increased in value by 1.6% like-for-like to GBP 2.6 billion. ERV continues to progress, a 3% like-for-like increase in the year to GBP 108 million.

As I said, we continue to see positive demand across all uses. 103 new leasing transactions in the year at 7.5% ahead of December '17 ERV. That's GBP 12.9 million of contracted income for the year with a further GBP 1.6 million of income converted since the 31st of December. And that means that the total contracted income now for the estate is GBP 83 million, which is about 77% of the year-end ERV of GBP 108 million. Occupancy was 97% at the year-end. And we made a number of acquisitions, about GBP 30 million, including one recently on the corner of Bedford Street and Maiden Lane.

I think this slide underlines that the strategy we've been implementing and continue to implement is working. It demonstrates the rental growth achieved since launch in 2010 as well as of the continued potential for the growth of the estate, which is underscored by the lighter colors on the map.

Our investment in assembling and transforming Covent Garden has created a leading global destination. It's a remarkable London estate. A growing number of global retailers and restaurateurs choose the estate as their first or only London presence. And we continue to see increased footfall and tenant sales. The creative asset management strategy aims to deliver rental growth across all of our streets over time. Now new rental terms were achieved in the year, most notably GBP 800 Zone A on both King Street and in the Market Building, which I think is evidence of the continued strength of demand from retailers for Covent Garden.

Covent Garden's global positioning and commitment to delivering a strong customer experience continues to appeal to brands as highlighted by the record year for openings and the ongoing strength of leasing activity. We're very pleased to welcome high-quality brands to the estate, including Tiffany's concept store on James Street as well as the introduction of fitness concept, Peloton, which has taken a 20,000 square-foot unit on Floral Street for their European flagship studio. These signings complement recent openings, which include The Shop at Bluebird at Carriage Hall and the Mariage Frères flagship store on King Street.

Now reflecting the positive trading prospects, a number of tenants have also invested in their space across the estate this year. Apple has selected Covent Garden as one of its top global location. And they've carried out an extensive investment and refurbishment in the flagship store. Also existing tenants, Oystermen, Whittard and the Henrietta Hotel, have all upsized their offering and they expanded into neighboring units.

Now scale and comprehensive management of the estate allows brands to succeed and grow. And there continues also to be good demand for the office portfolio. This year, we completed lettings of all the floors at Regal House, setting new rental terms for the estate. Occupancy of the office portfolio also remains high at 97% across the portfolio.

I think we've managed to turn Covent Garden into one of the best and liveliest dining destinations in London. 10 new restaurants were added this year, including SushiSamba, which opened on the Opera Terrace as well as the New York restaurant, RedFarm, which has opened alongside Balthazar. That brings modern Chinese cuisine to the estate.

Our F&B concepts are trading well and generally reporting great in turnover, which is in contrast to some of the well-documented issues being experienced in the broader U.K. market. The estate's transformation has been very well-received. And I think it's recognized by consumers and it's now promoted by the global media and influencers as one of London's best dining destinations.

During the year, a number of the larger capital investments and developments across the estate successfully completed. Covent Garden's largest developed estate, Floral Court, opened its new connecting courtyard located between Floral and King Street. This enhanced the pedestrian flow on the northern side of the estate. Substantially all of the commercial space is now contracted and under offer, including recent signings of ba&sh and The Alkemistry. For the residential component, 16 heritage apartments have been leased at ERV. And of the 29 new-build apartments, 11 have been sold, representing GBP 32 million of GDV.

We continue to expand our ownership across the estate and continue to track a number of potential acquisitions. The most recent, as I mentioned, was the 39-40 Bedford Street, just shown here. This is an interesting repositioning opportunity on the corner of Bedford and Maiden Lane. The Wellington block, which is located on the southern side, is an excellent long-term investment opportunity. We're currently exploring options for this site, which include mixed-use refurbishment as well as a hotel, which we believe will transform the southern side of the estate.

I think this slide clearly demonstrates the momentum from brands arriving in 2018 has been continued into this year. Overall, Covent Garden continues to perform positively. A very resilient demand for our space, good occupancy and positive trading indicators. By attracting the best brands and concepts, Covent Garden is positioned to meet the consumer expectations, drive further rental growth and continue to capture its embedded reversionary income potential.

Now I'll turn over to Earls Court.

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [4]

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Thank you, Ian. Good morning, everybody. I want to take you through the progress we have made at Earls Court and Lillie Square and the unique investment opportunity that the site now represents. Through a successful implementation of our strategy, we have created one of London's most important development opportunities at Earls Court.

It already benefits from excellent connectivity and is located amongst London's prime postcodes. We have deployed our expertise to carry out land assembly, achieve and implement a planning consent, form strategic partnerships and undertake land enablement works, including demolition of the former exhibition centers, which competed in early 2018. And as you can see from this image on the screen there, it now represents interest held by the Earls Court Partnership Limited, or ECPL, the investment vehicle that was created between Capco and Transport for London. The land now is available for immediate development.

As a reminder, our interest at Earls Court are located across 2 boroughs: the Royal Borough of Kensington and Chelsea, RBKC; and the London Borough of Hammersmith and Fulham, LBHF. 2/3 of our interest sit in ECPL within RBKC as demonstrated by the railway line on the map here that also represents the borough boundary. The area designated 1 obviously is RBKC.

Now the independent valuers have made a number of adjustments to the component parts of the valuations that make up Earls Court Properties, recording a value of GBP 658 million, a decline of some 16% on a like-for-like basis over the year. At ECPL, the independent valuers' more conservative view on gross development value and the cost of delivery, together with a higher developers' margin, have resulted in a net decline of 12% like-for-like in the second half or 20% over the full financial year. As we have previously highlighted, valuations represent a point in time and do not reflect the long-term potential of this unique piece of London and the underlying inherent value and investment opportunity that is now available.

However, the current political environment presents challenges as underlined by the recent political commentary reported in the media. Whilst many difficult milestones have been achieved over the life of the investment, we note the hardening political sentiment towards development activity, which provides the backdrop for the evolving housing policies of the GLA and many local authorities across London. Capco will nevertheless continue to take a constructive and creative approach to all stakeholders to advance this important scheme for London whilst protecting the commercial interests of the company and bring forward the existing planning consent.

So despite the current economic and political challenges facing the London residential market, Capco remains focused on ensuring we maximize the opportunity from this important site. The ECPL land, which represents the main component of value for Capco, is now available for development. The objective of ECPL, the vehicle with TfL, is focused on maximizing economic value by enabling development of the consented master plan with development expected to be brought forward through the introduction of third-party capital. To date, a number of approaches have been received from potential investors and occupiers, including senior living, diplomatic, educational and institutional uses in respect of certain individual land parcels of the ECPL landholdings.

Earls Court's planning consent, high-quality location and connectivity underpins its desirability for multiple uses and its future prospects for value realization. Creating strategic partnerships and introducing third-party capital has been one of our key strengths in creating value within our investment holdings at Earls Court as demonstrated by Lillie Square. Capco, together with its partner, TfL, will continue to seek to realize the value from the ECPL land over time.

So moving to Lillie Square. Development is now very well progressed. We have created a high-quality product and a wonderful place to live. The joint venture has now contracted over GBP 450 million of cumulative sales across multiple phases. Delivery of Phase 1 is substantially complete. And Capco has received GBP 129 million of cumulative proceeds for this phase. We're delighted to have now welcomed the residents of more than 200 homes to the scheme, the majority of which are in occupation.

Over 80% of the 186 apartments in Phase 2 have been presold, including the presell of 49 apartments through consortium of investors for approximately GBP 66 million. The construction of Phase 2 is progressing well with completion and handover of sold units expected in 2020. Pricing achieved for Phase 2 continues to be at a modest premium to comparable units in Phase 1. We're delighted that development has received external recognition in the year, which is testament to the quality of the address we have created.

Now Capco maintains a disciplined approach to capital management and continues to realize value from its investment to Earls Court. We're pleased to complete the sale of the Empress State Building to its long-term occupier, the Mayor's Office for Policing And Crime, for GBP 250 million, a GBP 30 million premium to the valuation of GBP 220 million. This disposal, combined with the sale of the Venues business last year as well as the proceeds from the Lillie Square joint venture, have realized over GBP 670 million, demonstrating delivery of our strategy of realizing value at Earls Court over time.

While the environment for large-scale residential development remains challenging, Earls Court's planning consent, high-quality location and connectivity underpin its desirability and prospects of future realization.

I'll now hand you back to Ian.

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

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Thanks, Gary. So just looking forward and to conclude, our aim is to deliver long-term value creation for shareholders. Our capital investment is increasingly focused on Covent Garden, which now represents 80% of the property portfolio. Value will and has been realized at Earls Court.

Covent Garden is firmly established as a world-class retail and dining destination, is well positioned to continue to deliver rental growth and capture income over time. And as our new tenants open across the estate, the pedestrian flow and consumer demographic continues to positively evolve. And this, in turn, facilitates further repositioning opportunities.

We continue to focus on the enhancement of the customer experience and environment. And we will invest strategically in assets that drive value creation. Now the estate is positioned for continued long-term success, capturing the embedded income potential of the portfolio and growing ERV over time.

As Gary says, Earls Court is one of the most important mixed-use development opportunities in Central London. And whilst the environment for large-scale residential development across the capital is challenging, the implemented planning consent, location and connectivity of Earls Court underpin the site's desirability and prospects for future value realization.

Through 2018, the board has been considering the most appropriate structure of the group, including a possible demerger and other options for Earls Court. We are in a position of financial strength. And the board intends to decide carefully on the most appropriate outcome, focusing on delivering long-term value for our shareholders.

So that completes the formal presentation. I will take some questions. Anybody on the phone, if you would like to ask a question, just go let the operator know and we will come to you. There's an eager hand up over here.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [2]

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Rob Jones from Deutsche Bank. I've got three question. Just firstly, on Earls Court, so you said you had a number that expressed of interest. But obviously, no bid has been accepted so far. If I was to assume that the interested data has been at a material discount to the current book value, from your conservative -- from your constructive discussions with various different interested parties, what do you think the main differences are between their assumptions for Earls Court and your valuers' assumptions?

And then secondly on the CLSA land, what's the worst-case scenario here? Is that you lose it through a CPO at book value? Or is there, I mean, something, extra color you can add to that? And then thirdly, on Earls Court, Gary, I'm an analyst, I really like numbers. So if you could give some kind of color around the extent to which there has been these changes in terms of the valuers' assumptions, maybe some detail on how that development margin has been changed. And indeed, I'm thinking obviously going forward if that could further deteriorate?

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

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Let me start and Gary can fill in on -- I don't think you can expect us to talk about conversations that are ongoing with third parties. The valuation is an independent valuation. Jones Lang LaSalle do it. So they're fully aware of what's going up as of the year-end. I'll let Gary talk about what may or may not happen on the CLSA and thoughts on the valuation.

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [4]

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Okay. On the first point, obviously we've always had lots of interest in Earls Court. We still have lots of interest in Earls Court. It's never changed. And we highlighted last year that, as we did have that, that's always been at levels that we thought was probably represented by the valuations that we've got another independent valuations. And so those discussions are ongoing with various different parties. In terms of the CLSA, your second question, the CLSA and CPO aren't really interrelated. Comments about CPO, we've had no discussions with Hammersmith and Fulham about that. So I'm not really sure where they're getting that or what they can do with that. But I'm sure that, that will sort of pan out over time. The CLSA is a value contract. We still have that, there was a [prebuy state] sometime ago. And there's no issues, there's no reason to question the validity of that contract's arrangement. On the valuations, as I said in the presentation, at this point in time, I don't think the valuation currently reflects the long-term value of it. But we are where we are in the market today. We've always been happy to work with our valuers to make sure they understand exactly what's going on, exactly what's going on in relation to any potential interest we have within the site.

Clearly, where we are today, the market is moving as we're moving in a downward direction. The valuation is made up of a series of component parts in terms of the assessment they make, which range from the greatest development value, the units that could get sold, costs, profit, et cetera, all of those things come into the mix. And all those things are considered properly with the valuers. And clearly, it's a hostile market. It's difficult. And so many of those have moved against us. I won't go into the detail around the gross development values. But you can see what we've done at Lillie Square. You can see the values that we've created. They range from GBP 1,200 to GBP 2,800 a foot for the penthouse apartment and valuate our sales prices, where we've undertaken transactions and continue to be maintained. So that's the basis really of where the valuer is coming from. In terms of the specific question you asked about profitability, clearly the market -- the valuers have taken a harsher approach on that. And we're now at 24% of their assessment. So I'd say that, in historic terms, it's a pretty negative perspective, but it's a reflection of the market.

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

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Okay. Next question. Max? Sorry, Robbie. Robbie's got the -- Robbie, you have the mic, so...

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [6]

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Yes, I've got the mic, so I'll just start -- Robbie at Numis. Two questions for me, please. One is on the valuation of Earls Court again but more around -- and I think I asked this question the last time. So it's just to see whether there's been a change. But clearly, on Slide 26, some of the conversations you're having are not to do with private for sale residential, they're for other uses, which you're going to have a low GDV. So I'm just wondering whether the reduction in GDV was linked to -- on the valuers' assumptions linked to that or the valuers are still valuing on an extend planning basis, i.e., private for sale residential. Therefore, can we expect further declines in GDV to come should they switch the base of valuation, if they haven't already? So that's the first question. The second one is on Covent Garden, so...

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [7]

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Oh, good. You don't want to start with that one first? Okay, well, look, the valuers are valuing the planning consent. When we refer to interest from other users, that's interest that's being registered by us on behalf of the Earls Court company, which is the joint venture with Transport for London. And remember, that planning consent is a mixed-use planning consent. So there other -- there is flexibility within that for the other uses. But it is reflective that there is demand for various uses across the holdings. And as you would imagine, a relatively large piece of land with the connectivity that this has, attracts some interest. The valuers are valuing though the planning consent, which has been enacted for Earls Court. It's a detailed planning consent, as you know. And as Gary said, they basically look at the GDV, the costs and the developers' profit margin. The developers' profit margin, as Gary says, has moved up 24%. It's not real -- they're obviously aware of interest has been changed. And I'm sure they take that into account.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [8]

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Okay, understood. And then on Covent Garden, clearly a successful development in northwest corner around Floral Court. You referenced The Wellington block as being a potential CapEx scheme at one point. Is there anything else that we're missing there in terms of other large-scale projects? Or is it kind of focused attention on Wellington to extract that value on top of kind of the organic opportunity through capturing reversion?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [9]

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The Wellington, we completed the assembly of the block this year. You'll notice on one of the maps shows the corner block that we obtained. And we've got VP most of the building now. And we've got a number of interesting options. Great site, and I think we can do something really transformative on that part of the site. We really just haven't pressed the button on the investment as yet. We want to see what happens broadly in the economic environment and work out some detail around the options, which includes a hotel option, which would have more rooms in the consent that we've got at the moment. But that's south side of the estate, Robbie, there's a lot to do the south side. Most of our activity really has been repositioning King Street, creating Floral Street, which wasn't a retail street at all, and repositioning the Opera House Arcade and introducing luxury to that. Now that's meant that the north side of the estate has got some great brands in there. There's plenty of potential rental growth as we scroll up through those brands over the coming years. The south side of the estate, Henrietta, we have done some work on. There's now a few destinations. So we've got a whole range of new brands there. And not just our own estate, but there's other restaurateurs coming into the street. So if you want a good night out, I suggest you go to Henrietta Street. You've got a choice of pretty much every food that you might wish.

But I think over time, we do see opportunities on the southern side of the estate. Those of you who have been around long enough remember me talking about this sort of 8 years ago, 9 years ago, whenever it was, I said we'll start with the Market Building. We'll transform King Street. We'll deal with the Opera House. We'll drive James Street. And then we'll come back to the southern side of the estate when we're ready. And I think we're now ready. So the focus of investment is probably on that side. There's also work that we can do, I think, on presentation of the estate. And I think Westminster and the (inaudible) are supportive of that. And that includes pedestrianization. We pedestrianized King Street. Sales have obviously increased as a result of that. But there's some investment work that we need to do on that. Over time, we'd like to do the same on Henrietta and Russell Streets. So Michelle and the team have got their hands full at the moment. This year has really been about finishing the investments that we've made, getting stores open. It's no mean achievement, the number of openings we've had, driving their sales, marketing the estate fully and sort of developing the brand as well. We've got 400,000 followers now across various social media platforms, which is very high. And I think that's something as well which the retailers recognize and want to get involved in. So I think there's a lot of opportunities across the estate. But remember, if you do the average retail rent across the estate at ERV, it's GBP 150 a foot, which in global terms, the type of brands that we've got coming into the estate, the footfall that we've got in the demographics is relatively modest.

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Maxwell Wilson Nimmo, Kempen & Co. N.V., Research Division - Analyst [10]

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Max Nimmo at Kempen. Just a quick one, there's no mention of the GBP 125 million ERV target by December of 2020 for Covent Garden. Is that still the case? Or should we be reading more into that with ERV growth slowing a little?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [11]

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Well, the focus this year has really been on income capture. It's a theme that I've been talking around now for 2 years. We've had 4 reporting periods now, where we've had double-digit income growth. And I think that really is the key for us is to convert that ERV growth into gross income and then to convert that into net income, which allows us, over time, to distribute more fully. And I think that's very successful. On the transactions that we've undertaken this year, of those 103 deals that Michelle and her team has done, the ERV improvement is 7.5%, which I think demonstrates that there's positive growth across the estate. The 3% ERV growth, I think, is a reflection of where we are at the moment in the economy, frankly. There are headwinds out there. I don't -- you don't need me to recount them. But against that, we've had very positive performance. And the GBP 125 million remains an aspiration. And I think the key for us is to continue to deliver growth over time, and as I say, convert that into net income.

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John Michael Cahill, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [12]

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John Cahill from Stifel. Two questions, please. First, at Covent Garden, I mean, in 10 years, you've increased the ERV there by threefold, more actually, and there's this considerable reversionary potential. What sort of timescale are we looking at to capture that? And I'm guessing maybe 3, 4 years?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [13]

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Some of it depends on the development. There's a slide in the chart -- I think Slide 11, is it?

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Situl Jobanputra, Capital & Counties Properties PLC - CFO & Executive Director [14]

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Yes.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [15]

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Which sort of gives you the bridge towards capturing that value. The development projects, I think, will extend the ERV. But obviously, some of that GBP 108 million does include those projects actually coming to fruition. Some of that is The Wellington itself. The contracted income is now GBP 83 million, which tends to be what we focus on. And that should convert relatively quickly because that's really just rent freeze and other things rolling off. And then the rest is capturing the reversion. So if you just follow through in a normal market environment and just did the rent reviews and lease renewals, theoretically that could take up to 5 years, which is really the review cycle. We hope to accelerate that.

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John Michael Cahill, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [16]

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Okay. Second one at Earls Court, Hammersmith and Fulham have made a few statements about compulsory purchase orders and the like. I'm not quite sure what basis they can really make that statement on. But can we remain confident that the legal framework is sufficient protection for you as you sort of tread delicately around this socialist encroachment on all of our lives, really?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [17]

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Yes. Now, well, look, we've heard about that in the media as well. I mean, the first thing I should say, we've had no formal indication of what that might consist of. And if you speak to our planning advisers and the planning lawyers who sort of came up with the original planning consent, they're sort of slightly mystified as well. But it's clearly something that we've got to take into account of and we'll respond accordingly. I don't know whether you...

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [18]

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Well, I think, as Ian said, we've had nothing from Hammersmith and Fulham to say that. There's obviously a very specific approach that they would have to follow if they want to go anywhere down this road. But let's be clear. The vast majority of the value of our site lies in Kensington and Chelsea. They've got no jurisdiction on Kensington or Chelsea whatsoever. They're not comparing Kensington and Chelsea. And I'd like to see them CPO the Tfl, they're perfect -- its an operational depot, got another state of body. I think that says it all really in terms of what's going to happen in the future.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [19]

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Okay, a question over here. Get to Os first and then Hemant.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [20]

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Osmaan Malik, UBS. Just one question for me. Just relating to these proposals for disposal of pair of properties around Earls Court, could you just give us an idea of how Brexit is featuring in those discussions and whether this is the main sticking point? Because this thing has been going on for sometime and yet there's been no disposal. So perhaps I'm just wondering whether...

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [21]

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Well, look, there have been a lot of mixed disposals. We sold GBP 450 million of that in Lillie Square. The most recent transaction there was a GBP 66 million sale of the final block in Phase 2. So that's good. So we sold them Empress State, GBP 250 million, which is a GBP 30 million premium to book. And shortly before that, we sold the Venues business, GBP 300 million. So that's GBP 670 million of sales. We've got 2 pieces of land effectively left. One is a joint venture with Transport for London. We're very pleased with our joint venture there. As Gary mentioned earlier, there's a number of potential opportunities within that landholding. But there has been interest for that site and there has been interest for the CLSA. That's GBP 500 million for the -- our interest really in the joint venture with Transport for London. How does Brexit impact anything else? I mean, it's an uncertainty. And I think that sort of generally gives 2 impressions. It's a bet on the future. How do people feel about the future of the economy, the future of the environment, the future of land values in London?

So I think some people see that positively. It depends who you talk to. Some people have got a very positive view on scarcity values of such prime assets over time. Some people are more negative. But I think everybody understands the quality of the opportunity and the quality of the site, which bear in mind only finished demolition in February of this year. So it might feel as though the investment has been around for a while. But actually, the land has only been available for actual development since February. And we're working very closely with TfL to bring forward their existing master plan, and introduce [body] capital. So look, I think the quality of the site, as Gary said, is undoubted. But yes, there are various uncertainties about Brexit. And hopefully, we'll have a resolution on that in the coming months. We were hoping that we'd have a resolution on that towards the back end of last year. But as I understand from yesterday, it's now another 2 months potentially. So it was originally November, if you remember, we were supposed to get a resolution on that.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [22]

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I guess, just as a follow-up, I hear you, you made a number of sales in various other parts of Earls Court. But if I look at the numbers on Lillie Square, I think just one unit has been sold since the half -- the last half year report. So maybe you could...

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [23]

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Well, I mean, Mike's here. Mike can tell you about that one. I mean, I don't think that's representative. I mean, it's not -- I mean, we wouldn't comment on a resale of a particular issue -- of a particular party.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [24]

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I suppose the question really is to what extent is that strategy you think actually now is not a good time to be selling these new -- you just held off versus actually the market...

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [25]

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Sorry, held off from the remaining units?

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [26]

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Yes, just held off.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [27]

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No, there's a very limited inventory. So what we found -- and we found actually at Covent Garden interestingly is that once product is finished, the demand is much greater because domestic consumers tend to buy once the product is finished. They tend not to buy off plan. So for instance -- I mean, we put the Covent Garden units at Floral Street on the market in October, I think, when they just finished, which everybody says is not a great market. And we sold 11 apartments. And I think several more are under offer. And their prices are well above our anticipated levels. And the same really is the case at Lillie Square now. I think we just will crack on and finish Phase 2 and then we'll go on and sell the remaining units.

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [28]

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Yes, I think the Lillie Square story is a fantastic story. Phase 2 is finishing this year, as I said, and 2020 when we hand over units. We've done 80% of sales. And the blocks that we did, we didn't do at discount. People love living in Lillie Square. It's a very successful development. And Phase 1 has gone incredibly well as well. The rental market is very strong there for the price you bought. And the resale market -- one specific example which is very specific, for their own personal reasons, is also holding up very well. So if you look at Lillie Square in the context of the overall market, it's done incredibly well. So the location speaks for itself and the product speaks for itself.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [29]

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Yes. So Mike's here. I'm sure you'll have a chat with him later. He'll give you more details. Anything else? So Hemant?

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [30]

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So just following on from that, I guess, it feels like you're not really going to get any of these big partners that you're talking about really pulling the trigger before Brexit. So it just feels like if we have the extension of Brexit and Article 50, then it feels like that's going to drag on for a bit. Is that a fair assumption? Just to manage expectations a little bit.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [31]

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We're actively engaged in looking at the options that we've got. And I mean, it depends on when Brexit is, isn't it really? But there's plenty of interest, both in the land that's in the joint venture. There's interesting people coming in to invest in that. And as a result of us announcing that we're considering separating these 2 great assets, we've had a number of approaches. So we're engaged in trying to make sure that we make the right decision, both in the short term and the long term. And as I think it should be a -- it is very clear that we're doing that from a position of financial strength. And we will consider all those options and we'll sit down with the board when we've come to a conclusion and we'll crack on.

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

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Yes. No, absolutely. And then with regards to, I guess, the people who are potentially interested in buying the apartments, I mean, there's an argument to be made, right, that actually that could ramp up a bit if we have a no-deal Brexit or if the pound suffers more. So it feels like there's some counterbalancing forces here. So is there an expectation that, that could pick up a little bit in terms of pace?

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [33]

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It could be. I mean, that's one of the unknowns, isn't it? And everybody has their own view on what the medium-term outlook is. I think if you look at the analysis that's coming out from the estate agents, they're generally expecting things to be relatively flat over the next couple of years than for them for things to pick up. But certainly, if there was a perception of an increased demand for off-plan sales, then the Lillie Square venture can react quite quickly and bring forward the remaining unbuilt units. At the moment, we're concentrating on Phase 2. Mike has just put up the planning, I think. And we're looking to hand those units over in 2020. So at Covent Garden, we've had -- we've got, I think, another 16 or 17 units left. And a lot of that demand so far has been domestic demand, actually. So the market is functioning. It's just people are uncertain about the outlook over the next 18 months, I would say.

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

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Yes, I guess, my point is it feels natural that there would be a pause at this stage.

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [35]

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Well, if you put in context now, our shares of remaining inventories is between GBP 30 million and GBP 40 million. So it's not a big thing for us if it's not having any impact on sale. I feel that the products is good quality products. And we've got a year to sell of remaining units, so I'm very comfortable.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [36]

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But it could pick up very quickly. I mean, if you remember 2010, there was virtually no market. And then by 2012, it had picked up quite considerably. And then by 2014, things were very -- there was a clear undersupply. So markets kind of change very quickly. But we are in a different market environment than where we were in 2010 in the residential market generally. You've got much higher rates of taxation. It's much more challenging also to bring through developments. And you're seeing that across London at the moment that -- so the supply side could get constrained as quickly as it sort of increased.

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Hemant Kumar Kotak, Green Street Advisors, LLC, Research Division - MD [37]

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Okay. And then just one more question. So as you shift your focus towards more build-to-rent rather than build-to-sell, though the valuers are, Gary, you said that, raising their margin requirement to 24%. You said that's pretty -- I think you alluded to the fact that was pretty elevated. What's the typical range on that? And is that a reasonable consideration, given that you've highlighted all these different uses and actually the look-forward model actually probably will be going towards more build to rent -- the emphasis shifts there a bit more?

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [38]

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Well, it's early. On the build-to-rent issue, obviously Lillie Square has sort of proven that there's an incredible market for rental product in that part of London. So I think that speaks for itself. Whether that's the right approach for some or all or part of the [all Square] site will remain to be seen. So as to your point about the range of developers' profit margin that the valuers would adopt, we don't -- it's best to talk about the scheme itself and what we've experienced over the last project to come between 17% to 24%. And we're the outlier, of my professional experience, of where that usually gets to. 25% is probably the maximum [number] on our projects. So it gives you a feel.

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

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Can we get one question on the phone? So maybe we can go there and then we'll come back to the room.

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Operator [40]

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(Operator Instructions) Okay. And our first question comes from the line of Ben Richford from Crédit Suisse.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [41]

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I just wanted to ask you, you had a couple of board changes. Just wondered whether that is likely to lead to a broadening of your strategic horizon for Covent Garden.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [42]

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I think you're referring to Jonathan Lane, who joins the board on the 1st of March. I mean, we're delighted that Jonathan is joining the company. He's got a huge experience in the West End market. In fact, when we first invested in Covent Garden, he and I had long conversations about the future of retail in London and the possibilities for the shift in retail patterns in Central London towards Covent Garden. So we're delighted that he's joined the board. And that strengthens -- further strengthens an already strong board. We have the Chairman here today. So if any of you have any questions about that, I'm sure he'd be delighted to answer them. We're looking forward to his input.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [43]

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Great. And one extra question, what's the update on densification of Earls Court?

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [44]

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Ben, it's Gary. We continue to explore both densification, revised planning with the relevant stakeholders, the GLA, et cetera. That's something that's ongoing, will always be ongoing. The latest iteration of the London Plan talks about Earls Court growing and becoming a bigger opportunity area with the ability to house more density. So that's never going to be off our radar and it's something we're going to continue to look at.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [45]

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Is there a milestone or a date when you might hear back on your proposal for actual density?

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Gary J. Yardley, Capital & Counties Properties PLC - MD, CIO & Executive Director [46]

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Well, no, it doesn't really work like that. It's an iterative process, where we're working with them. And obviously, the debate around not just densification but the makeup of the offer that's available at Earls Court in relation to affordable -- different forms of housing. Someone mentioned earlier whether there's any period of settlement, et cetera. So it's a discussion which involves all of those subjects and all of those issues. So we can't give a definitive time frame.

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Ian David Hawksworth, Capital & Counties Properties PLC - CEO & Executive Director [47]

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Any other questions on the phone? No? Anybody else in the room? Is there any questions? No? Okay, well, thanks very much for coming. I know you've got a busy morning. If there's anything that you'd like to follow up on, please do track us down, I'd be delighted to answer your questions. Thanks very much for coming.