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Edited Transcript of HMSO.L earnings conference call or presentation 6-Aug-20 8:30am GMT

Half Year 2020 Hammerson PLC Earnings Call

London Aug 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Hammerson PLC earnings conference call or presentation Thursday, August 6, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David John Atkins

Hammerson plc - CEO & Director

* James Alan Lenton

Hammerson plc - CFO & Director

* Mark Richard Bourgeois

Hammerson plc - MD UK & Ireland

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Presentation

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David John Atkins, Hammerson plc - CEO & Director [1]

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Well, good morning, everyone. My name is David Atkins. I'm CEO at Hammerson. I'm joined by James Lenton, my CFO.

This morning's presentation will be different to normal, not least because obviously, we can't be with you in person, but also because of the significant transactions we're marking today. I'll provide the headlines of today's announcement. James will then pick up on our half year performance and the financial impact of the transactions. I'll then conclude with an update on strategy. And as usual, there'll be time for questions at the end of the presentation.

Now as you'll be aware, there have been senior management changes announced over the past few months. And after nearly 11 years in the role, I made the decision to step down as CEO, and the search for my successor is underway. In the meantime, I remain fully committed to the business and will remain with Hammerson until spring 2021 at the latest.

And the Board and I would like to thank our Chairman, David Tyler, for his significant contribution to the business over many years, and we very much wish him well for the future.

The new Chair, Rob Noel, hasn't officially joined the business, but he will be in post by the start of October at the latest. He's been kept updated on the planning for these results and is fully supportive of what we are announcing today.

Now the significant transactions we've announced this morning aim to not only strengthen the balance sheet, but also position the business for growth over the long term. We have a high-quality portfolio of assets that are well placed for an omnichannel environment, but we need to further strengthen our capital position to give us greater flexibility. We are proposing a fully covered rights issue and the inter-conditional disposal of VIA Outlets to our JV partner and largest shareholder, APG. The 2 are expected to raise gross proceeds of around GBP 824 million.

Now it's necessary to undertake these transactions today due to the impact of COVID-19. That impact has been seen on our operational performance, investment markets generally and our valuations and the need to further respond to structural changes in the U.K. retail market. You can see the impact on our half year numbers.

But along with significantly strengthening the balance sheet, these transactions also allow us to proceed with a wider strategy of repositioning the company. Now this includes a new leasing approach in the U.K. and recycling capital from across the portfolio. In short, we think the participation in the equity raise offers the best proposition for shareholders at near trough income and values.

Now it's important to consider the background to these transactions. Prior to the pandemic, we were on track to deliver against our strategy, progressing disposals and making significant steps to shift our brand mix to better reflect customer demand. Make no mistake, though, the past 4 months have been unprecedented. Alongside the obvious short-term impacts, the structural shifts we are seeing in the retail market have meaningfully accelerated. That has heightened the challenges we and the sector are facing: falling rents, increased tenant restructuring and higher leverage to name a few. There are 3 core elements to our response that we'll go through today, and you can see them on the screen.

So clearly, strengthening the balance sheet is a primary focus and more on that later. But you can see that these transactions take us to comfortably within both our covenants and our internal guidelines.

Now let me now briefly expand on the new U.K. leasing approach and the future direction of the business. The U.K rents have been rebasing since the end of 2017, and we flagged at the full year, we thought there was another 15% or so of rental decline to come.

At the same time, in this increasingly omnichannel market, the lease structures in the U.K. are based on 1950s legislation. They are just not fit for purpose. So we're introducing a new leasing approach based on our recent experiences with occupiers in the U.K., Continental Europe and Premium Outlets and more on that shortly.

In terms of the direction of the business, we're being more specific today about our intention to focus on our highest quality flagship destinations. Many of these contain City Quarter developments, which offer attractive returns in their own right, but also support our flagships. Of course, as we dispose, we will continue to make cost reductions. At the end of 2019, we've saved around GBP 8 million, half of which we've reinvested, and these further cost reductions will be targeted over the next 12 to 18 months.

As I said earlier, our half year numbers were extensively impacted by COVID-19. Our income and earnings are substantially lower as a result of delayed rent. The group saw a like-for-like reduction in NRI, excluding Premium Outlets, of 27%, and adjusted earnings came in at 2.3p.

Capital value decline was also exacerbated by the pandemic, with the group capital return falling by 11.7% in the first half, which was the primary driver of an EPRA net tangible asset decline of 21% to GBP 4.58 per share.

The strength of our destinations saw group occupancy remain high, though, at 94.2%. And despite the very challenging conditions, our leasing team successfully delivered GBP 6.5 million worth of new deals in the first half.

Rent collection rates across the portfolio were, of course, impacted by the pandemic, but following the positive collection rates for Q1 and a concerted focus on reaching agreements with our retailers, we have collected 72% of the rent due in the first half. And this is in line with expectations given the government policy on rent moratoriums in France and the U.K. Importantly, we are now seeing positive momentum in collection rates, and we expect both Q2 and Q3 collection rates to improve materially.

On the dividend, while discussions with HMRC are ongoing, the Board anticipates recommending a scrip dividend in the second half of this year, following completion of the transactions, to remain compliant with our REIT obligations.

And with our flagships in England and Ireland only opening on the 15th of June, and our French assets in May and early June, it is still very early days, but we can provide some color on recent trading. I'm pleased to say that following the reopening of Highcross in Leicester following the local lockdown, all of our destinations are now open. France, Ireland and retail parks are recovering well, and they're in line with outperforming national footfall benchmarks. Consumers are clearly there to shop as sales performance is ahead of footfall.

The U.K. flagships, the portfolio is weighted towards city centers, so the pace of recovery has been slower, and footfall was initially subdued. However, with the lifting of restrictions, including those on public transport, we've seen some positive momentum over the past few weeks. U.K. footfall for July is at around 50%, but this is a 22 percentage point improvement since our flagship opened in June. Again, sales performance in U.K. flagships is ahead of footfall. We expect further recovery as more people return to work in city centers from September onwards. All our Premium Outlets have reopened and spend per visit since reopening is ahead of 2019 at most locations.

With that, I'll now pass over to James, who will go through the half year financials and the detail behind the transactions we've announced today.

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James Alan Lenton, Hammerson plc - CFO & Director [2]

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Thanks, David, and good morning, everybody. So before going through the proposed transactions, I'll run through the first half results.

It has been a very challenging and unprecedented half year with net rental income down 44%, predominantly driven by increases in tenant failures and allowances for arrears, both unsurprisingly related to COVID-19. The numbers also reflect disposals over the past 18 months, principally retail parks and the sale of a 75% interest in Italie Deux.

For transparency, we have also shown Premium Outlets separately. This portfolio was particularly badly impacted by the pandemic. In the main, this was due to the high turnover element of rent as well as rent abatements whilst the outlets were closed. While this was partially offset by cost savings, it resulted in a movement from a profit of GBP 18 million last year to a loss of GBP 7.4 million in the first half of 2020. As normal, in the additional disclosures, there's more detail on the 2 outlet investments. Group adjusted profit is, therefore, down 84% at GBP 17.7 million.

Moving to the balance sheet. Portfolio values fell from GBP 8.3 billion to GBP 7.7 billion and more detail on that a little later.

Next, we show the new measure, EPRA net tangible assets per share or NTA, which was down 21% to GBP 4.58. This replaces the EPRA NAV. A reconciliation of this and other EPRA net asset measures is in the additional disclosures. Our net debt increased to just over GBP 3 billion, largely due to GBP 130 million of adverse foreign exchange movements.

On this slide, you can see the decline in net rental income, the largest element being like-for-like NRI, which, as I've said, was impacted by the pandemic. The fall in Premium Outlets earnings reduced year-on-year EPS by 3.3p, with recent disposals resulting in a further decline of 2p. Developments and other account for 1.8p, and this includes a GBP 9 million impairment for unamortized lease incentives. So taking all of these factors into account, the first half adjusted EPS was, therefore, 2.3p.

On the next 2 slides, I'll give you a little more color on like-for-like NRI. As you can see, it was negative in all segments and down 27% for the group or 35% if you include Premium Outlets. You can see that Premium Outlets was impacted particularly badly, while Ireland and retail parks were less affected.

Looking then at flagships in more detail. The main hit has been due to increased tenant restructuring and a rise in arrears provisioning. Car parking income has also been badly impacted owing to lower footfall while the centers were closed. In the U.K., these factors account for 23% of like-for-like NRI decline. By contrast, Ireland had very little impact on tenant restructuring, although provisions for arrears were higher. Arrears provisioning is also an issue in France, and this combined with some tenant failures.

Unsurprisingly, with lower footfall came less income from commercialization in all territories. And from a leasing perspective, after a positive first quarter, leasing volumes declined in the second quarter, leading to a lower overall performance in the first half.

So as I said, one of the key factors causing the adverse NRI performance in the first half was provisioning for the increased level of arrears. This slide charts the drop-off in collections since lockdown. You can see that Q2 collections are half their normal level. We are being really transparent here. So let me navigate you through as there are a number of different ways in which this data can be interpreted.

From left to right, we show the total amount of rent payable per quarter, then the total amount of the rent per quarter that is either not yet due, for example, on the 1st of September, or has been formally deferred based on negotiations with occupiers. The next column shows the amount we have actually collected as at the 31st of July, so this is cash in the bank. And then finally, we show the percentage collected as a proportion of the total amount due in the quarter.

So as you can see, based on this measure, we're making steady progress, but there's no doubt that this is a challenging situation. In order to unblock this, we have already reached agreements on 776 leases, where we've given an average rent waiver of just over a month, with deferrals averaging just under 1 month. Our leasing team continues to focus their efforts on reaching agreements on the remaining leases as soon as possible, but at the latest by the end of this year.

So now looking at net assets. Unsurprisingly, the largest impacts to NTA came from property revaluations, which accounted for GBP 1.14 of the reduction. For clarity, this includes the reversal of the 12p impairment to retail parks taken at the full year. On the other hand, this is balanced out by the VIA write-down of 13p while outlets revaluations deducts further 18p.

On this slide, you can see the breakdown of the capital returns. The largest decline of 21% or GBP 495 million was in U.K. flagships while France saw a negative return of 9.4% and Ireland, 9.9%. U.K. retail parks, adjusted for the write-back of the GBP 92 million impairment taken at the full year, was down 13.3%. Due to the faster recovery in footfall and sales, Premium Outlets showed severe valuation deficits -- less severe valuation deficits of 5.3% for Value Retail and 4.2% for VIA.

So now let's look in more depth at the transactions we've announced today. Gross proceeds would be in the region of GBP 825 million, with net proceeds of around GBP 794 million. They comprise a straight to rights issue to raise around GBP 552 million of gross proceeds and the inter-conditional disposal of our 50% of VIA for headline price of EUR 301 million. For the avoidance of doubt, these are Class 1 and related-party transactions that require shareholder approval and are inter-conditional upon each other, and we will temporarily retain a small interest in its Zweibrücken outlet.

We have the support of our 2 largest shareholders for both transactions, accounting for just under 20% and just over 15% of the equity, respectively. We also intend to undertake a share consolidation immediately prior to the rights issue to avoid any technical problems of issuing below nominal value. And on a pro forma basis, gearing and the unencumbered asset ratio tests are comfortably within their covenants, while fully proportionally consolidated LTV is also within our internal guidelines. This strengthens the balance sheet and of course also underpins our investment-grade credit rating.

Turning to the financial implications of the transaction and the strengthening of the balance sheet, in particular. As mentioned earlier, the main driver of the increase in net debt in the first half was adverse foreign exchange movements. And now on a pro forma basis, the transactions announced today reduced net debt to GBP 2.2 billion.

So I've given you the headlines, but let's run through some of the detail on the balance sheet. Pro forma liquidity increases and remains strong at just under GBP 2 billion of cash and undrawn facilities. Gearing, shown here on the covenant basis, falls to 57%. We have significant headroom against the tightest covenant of 150%. The unencumbered asset ratio strengthens to 2.2x, also showing comfortable headroom against the 1.25x covenant. As a reminder, we reached agreement with the noteholders to relax this covenant down to 1.25x until and including the June 2021 test period. On a non pro forma basis, you can see the ratio became tight against the original covenant level of 1.5x, emphasizing again the importance of these transactions. We have no group covenants on an LTV basis, but we do appreciate it is a useful shorthand for the market. These transactions bring us back inside our internal guidelines, particularly as we look to deliver more disposals.

This slide shows options available for using the proceeds from the transactions. For clarity, we have no material maturities in either 2020 or 2021. And first, we assume that we would fully repay the RCFs with the proceeds of these transactions. These currently stand at GBP 568 million. After this, the next significant restructurings, the 2 bonds of EUR 500 million each, shown in blue here, in June 2022 and in 2023. The pro forma liquidity of GBP 2 billion I've just referred to, therefore, covers our group debt maturities until 2024.

Under the terms of the covenant relaxation we recently agreed on with the private placement note holders. We're obliged to make an offer to repurchase 30% or broadly GBP 240 million of the notes at par. This offer is attractive to us, if accepted, and it is, of course, our most expensive euro-denominated debt. Of course, depending on market conditions and progress on disposals, we may look at other early debt repayment options.

Finally, it's worth highlighting in these uncertain times that in early July, we accessed the Bank of England's CCFF scheme by drawing GBP 75 million, with the option for a further GBP 225 million, increasing maximum liquidity available today to just under GBP 1.5 billion.

Finally, from me, I'll now run through why the Board believes these transactions represent best value. First, I would emphasize that from peak, group asset values have already declined by around 25% or 33%, excluding Premium Outlets, with the U.K. most heavily impacted. As you can see from the table, even allowing for some material write-downs to GAV across the entire group, the key balance sheet metrics remain within the covenant levels. These figures also assume no further disposals. So clearly, releasing significant capital from Value Retail and/or Hammerson France would further strengthen our position, putting us on the front foot with fire power to deploy into the City Quarters opportunities, which David will reference shortly.

Here, we pro forma the December 2019 NRI and adjusted profit numbers for the proposed disposal of VIA and the full year impact of disposals made in 2019 and the first few months of this year. Putting the option value of City Quarters to one side, the table gives you a simple idea of the attractive implied earnings yield to investors, even allowing for some very bearish rental declines, again, across the whole portfolio, and therefore, the potentially significant cash flows available to shareholders investing at these levels.

With that, I'll now pass back to David for a strategic update.

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David John Atkins, Hammerson plc - CEO & Director [3]

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Thanks, James. So we talk you through the results, highlighting the impact of the pandemic. James has provided details on the transactions announced today, but I want to be clear that we're taking decisive action, continuing to adapt our strategy to the rapidly changing market conditions and managing our portfolio to ensure relevance now and in the future. And our portfolio is well placed to succeed. You can see here the independent assessment shows that 90% of our assets are at the most prime end of the quality spectrum. The space remains in demand from retailers as evidenced by the continued high occupancy and recent new lettings. And one of the main drivers for why brands continue to take the space is our high footfall.

Now we've a long-established reputation as a best-in-class operator of retail assets. On the left-hand side, you can see we have had a raft of national brand first over the years. In the middle, you can see that we are an operating partner of choice for blue chip institutional investors. And we're also able to leverage our investment in digital infrastructure to be one of the first to bring to market dynamic digital tools like the recently announced Crowd Checker. This provides customers with live information on how busy a center is in real time.

And sustainability is absolutely at the heart of everything we do. We were the first real estate company globally to launch a net positive strategy. And that net positive ambition is central to the development of City Quarters.

We talked about the importance of physical in omnichannel retail environment before, but it's worth emphasizing again that physical stores in the best locations are an essential channel for successful brands. At the full year, we showed some data about how physical has attractive cost dynamics compared with pure play online. Taking this up one level, you can see on the right-hand side that the best omnichannel retailers have far stronger operating margins than those only trading purely online.

Now that's because along with providing a channel for sales, physical locations drive brand awareness and customer acquisition and provide an option for fulfillment and returns, the costs of which are significantly higher online than in store. As you can see, we're hearing this loud and clear from some of the most successful omnichannel retailers.

On this slide, you can see why we believe our assets are well positioned for omnichannel retail. First, they're located in thriving catchment areas with affluent and growing populations. Second, whether by private car or public transport, these are assets with high connectivity. Third, we remain focused on optimizing the brand mix, increasing vibrancy and driving footfall. And finally, our prosperous City Quarter neighborhoods will support our flagship assets as well as deliver attractive returns in their own right.

To recap, City Quarters represent over 100 acres of land with the potential to deliver 6,600 residential units, 1,600 hotel rooms and over 300,000 square meters of workspace.

Now earlier on, I mentioned the new leasing approach in the U.K. On the left-hand side, you can see the outdated weakness of the current framework which just does not fairly recognize the role stores play in omnichannel retailing. On the right-hand side, we're showing the high-level principles of a new U.K. leasing approach. We'll offer flexible leases with more regular breaks for tenant and landlord. Rents will be rebased to an affordable level, probably 10% to 15% lower than today on average and in the region of 30% lower peak to trough.

The adversarial rent review system is replaced by simple indexation. And there's a top-up element based on store performance on appropriate omnichannel metrics. A closer relationship between occupier and landlord should also lead to reduce costs for both sides. Finally, a new leasing structure could allow a shift in valuation models towards a more holistic cash flow based approach, which would allow true choice for landlords when selecting occupiers. Now to be clear, we don't have the full and perfect answer today. The final model will likely have some rather than all of these elements, but we are convinced that this is the right approach to deliver a leasing structure that works for everyone. And it will provide a sustainable, growing income stream to our shareholders, which, in turn, will stabilize asset values. And our trial has already started in Aberdeen in collaboration with our retail partners. And the feedback to date has been very positive, and we expect to roll out the final model in 2021.

As I mentioned, the new approach is based on our recent experience across the portfolio. So we've put a few examples here of where this has been effective.

And moving on. Here, we've shown some more detail on a recent deal with Brown Thomas, Ireland's premium department store part of the Selfridges Group. They're taking part of the repurposed House of Fraser store in Dundrum. The deal illustrates the continued appeal of Hammerson's assets for the very best occupiers and the attractive economics of repurposing. On a per square foot basis, the new rent is around 25% higher than the pre-administration House of Fraser rent. And the lease brings in a number of the elements we talked about: an indexed base rent with profit sharing top-up and significantly a turnover top-up on omnichannel sales. So to be clear, this can and does work. As I've said, we're committed to rolling out the approach over the next 12 months.

Let's now turn to the future shape of the portfolio. The recapitalization of the group represented by these transactions is not where our plan ends. We will continue to recycle capital appropriately from across the portfolio, and there are attractive options for us in France, Value Retail and retail parks. The strengthening of our balance sheet also helps our negotiating hand when it comes to pricing and deal structure. We're clear that in the future, there will be a greater focus on the U.K. and Ireland, the asset base with the best City Quarters opportunity, they're furthest along the journey to omnichannel retail, and therefore, we believe through the worst of the disruption and with proven potential for repurposing of department store space. However, we will inevitably make disposals from the U.K. and Ireland over the time to reshape the portfolio around only the very best retail and mixed-use locations.

On this slide, as a reminder, you can see on the left, we have a strong proven track record of executing disposals with over GBP 500 million on average every year over the last 5 years. James has already run through most of the detail on the VIA disposal, but you can see it laid out here on the right for clarity.

The immediate recapitalization we have announced today provides us with the flexibility to move forward with conviction with our City Quarters strategy, which will deliver growth and support our existing flagship destinations. Among the 100 acres of urban land bank, we have 4 priority projects, which are mainly focused on residential and workspace and represent a significant opportunity for the business. All 4 are located in thriving cities where we expect to see significant growth. Importantly, as these developments progress, we can tailor the offer to match local demand and market cycles and shift the uses as trends and habits change.

And here's some additional disclosure on the 4 priority projects both in terms of time lines and the expected returns. All 4 are expected to deliver profit on cost of between 15% and 20%: Dublin Central, a fantastic opportunity for workspace, hotels and retail alongside world-class public realm; Martineau Galleries, a 7-acre site in the heart of Birmingham, adjacent to the proposed new HS2 terminal; Dundrum Village will be primarily residential and more on this on the next slide; and finally, Bishopsgate Goodsyard accounts for 10 acres of land in Shoreditch, adjacent to the city of London, a perfect opportunity for a profitable mixed-use development.

Now it's important to look at how City Quarters' developments will impact the overall mix of Hammerson's portfolio. They offer a real opportunity to shift away from predominantly retail to a mix of uses across residential, retail and workspace. Dundrum is a great example of what that will look like in practice. On the left, you can see that Dundrum is currently focused on prime retail. In the middle, you can see the impact of our 2 City Quarters projects. The first, The Podium, a 100-unit PRS building, where we're expecting to be on-site in the first half of next year. Then secondly, the largest 7 acres of Dundrum Village also primarily residential. You can see that this transforms the estate as a whole over the next 6 years to the mixed-use City Quarters that you can see on the right. We would expect to see a similar transformation for Hammerson's entire portfolio as additional City Quarters developments come forward over the medium term.

So to summarize, as I've made clear, the backdrop is enormously challenging. However, we strongly believe that the 2 proposed transactions announced today will affect an immediate recapitalization, enabling the business to reposition over the medium term and safeguard it for the future. We're also making significant changes to the way we operate our business. Our new approach to leasing recognizes the structural changes in the retail market, and we're directing our focus more towards the U.K. and Ireland, which will create a more relevant and mixed-use portfolio. We believe this represents the best proposition for shareholders to maximize the potential of our high-quality portfolio with sustainable future income streams and the upside of City Quarters to come.

Now thank you for listening. We're just going to pause for a minute or 2 to give you a chance to submit your questions, and then we'll return on audio only to answer them. Thank you.

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Questions and Answers

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Unidentified Company Representative, [1]

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Good morning, everyone. I'd just like to bring us back into the Q&A session. David and James have been joined by Mark Bourgeois, MD of U.K. and Ireland; and Richard Shaw, our Director of Group Finance. I've grouped some of the questions together under themes, so I will read them out, and then David, James and the team will respond.

So there's a number of new questions on the new leasing model. Colm Lauder from Goodbody says, "How will U.K. values interpret the new model? Does this mean there are further capital write-downs to come? And what are the implications for lease length?"

And what similarly, Marc Mozzi asks, "Is there any reflection in the June valuations of the new leasing model?"

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David John Atkins, Hammerson plc - CEO & Director [2]

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Okay. Thanks. So it's David here. Well, firstly, it's worth saying that we have discussed the new leasing model extensively with our valuers. But just to be clear, we have not implemented it yet, so it's not reflected in the June valuations. But in terms of our discussions with the valuers, it's very clear that they recognize limitations of the current U.K. traditional valuation approach like us. The new approach, I believe, will favor specialist operators such as Hammerson of the ability to demonstrate income solidity, and there's no reason that there should be any negative impact to the U.K. from shorter leases if the underlying income is robust. And those are exactly the sort of comments that our valuers are providing us.

I'd also reinforce the fact that our Premium Outlets are valued in effect in this way today. And the leasing model on the outlets has a similar element to it. It's not the same as we're proposing and would remind our shareholders and analysts that values on those outlets are worked off key yields currently than our traditional U.K. and Irish assets.

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Unidentified Company Representative, [3]

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Okay. We have a question similar on the new model from Rob Jones, which is just can you give a little bit more color on the new leasing model. "Do you see it that the majority of leases will end up as part turnover? And is this something you're offering to all tenants? And maybe a little bit of color on how this rolls out over time."

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David John Atkins, Hammerson plc - CEO & Director [4]

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Yes. So look, why don't I hand over to Mark Bourgeois, our U.K. MD, who's been very much driving this model forward, just to answer that question. Mark.

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [5]

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Yes. Thanks, David. Yes, I mean, as David outlined, there's 4 key components to the new lease, flexible leases, more regular breaks. Secondly, rents rebased to an affordable level, and we think that's around 10%, 15% lower than today on average. Removing the competitive rent review system and replacing it by a simple indexation I think part answers the question there, Rob, and then introducing a fourth element, the top-up based on store performance.

We would envisage -- fair to say that right now, we are testing this out. We've not got the final model, but we certainly envisage all those elements being part of leases going forward. Lots of conversations with retailers, particularly around that fourth area, really interesting as to what that performance metric top-up looks like, generally a recognition that traditional store sales alone don't work and an appreciation that footfall click-and-collect omnichannel sells or have a feature to play.

And interestingly, CACI, who are a leading retail data analytics business, doing a lot of work on this right now and themselves absolutely recognizing they're putting some numbers associated with those different elements of performance top-up.

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Unidentified Company Representative, [6]

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A follow-up kind of from Oliver Carruthers rather, Goldman Sachs. “What gives you confidence that the new rents under the U.K. leasing plans will only be 10 to 15 percentage points lower? Is this space rent? Or does this include any element of profit sharing top-up?”

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [7]

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Okay. Well, let me take that one. We've taken a number of clearly the reference points in coming up with that number. Firstly, we look at our own pipeline and with all the conversations we're having with retailers right now, leading up to COVID and actually during COVID as to where we see some of those deals settling. We look very closely at affordability. And certainly, when we're testing out our model in Aberdeen, we've looked at every occupier on the basis of affordability, and they broadly come out in line with that 15% reduction from here.

And thirdly, there's clearly external sources such as PMA that we are referencing who take a wider market and economic perspective.

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Unidentified Company Representative, [8]

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Okay. A couple on the transactions themselves. Two from Marc Mozzi here, first one for James, I think, which is, “Is the disposal of VIA conditional on the success of the rights issue?” And then the second one, probably for David to comment on is, “Any indication of shareholder support from meetings we've had so far?”

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James Alan Lenton, Hammerson plc - CFO & Director [9]

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Yes. Thank you. So the short answer is yes. So the 2 transactions are inter-conditional on each other. The intent really was to provide a holistic recapitalization for the company. The rights issue, as we mentioned earlier, enjoys the support of our 2 largest shareholders, in the form of APG and Lighthouse, who've provided irrevocable letters of commitment. That's 35%, and it's, of course, subject to the shareholder vote, given the scale of that particular transaction.

VIA is also subject to a shareholder approval. Naturally, given it's a related-party transaction with the sale being to APG, our largest shareholder, they will be excluded from the vote. It's also subject to antitrust clearances, albeit our confidence level is very high with regard to those.

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David John Atkins, Hammerson plc - CEO & Director [10]

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Just worth saying and adding to that in terms of shareholder support. Obviously, we've announced the irrevocables from Lighthouse and APG, representing 35% of our equity. We can't be precise, I'm afraid, for regulatory reasons on other conversations we've had with shareholders. But as is usual in these situations, we have spoken to a number of shareholders, and I think it's fair to say that we wouldn't have announced the transaction today if we were nervous about that support.

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Unidentified Company Representative, [11]

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Staying on the transactions, just a quick technical one again for James to comment on from Anchor Capital. “Were APG and Lighthouse paid any fees as part of the transaction?”

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David John Atkins, Hammerson plc - CEO & Director [12]

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So I will take that. No, they're not. They're being treated as a shareholder and a normal acquisition.

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Unidentified Company Representative, [13]

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And then a question from Tom Musson at Liberum. “Are there any implications for the sale process or the valuation of Value Retail from the VIA value?”

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David John Atkins, Hammerson plc - CEO & Director [14]

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Yes. So look, I think what is very clear at the moment that -- and you can see it in valuations posted, that it is pretty difficult in a unprecedented markets we have at the moment. And particularly with Hammerson, in a position where, to some, we're seen as a foreseller to achieve pricing close to NAV. I think also the fact is that under Red Book regulations, our valuers are valuing independently each asset, whereas in the same way with the retail parks portfolio, the VIA portfolio is a much larger transaction, and there is a discount for size.

And in the case of the VIA transaction, again, there is a illiquidity resulting in the pricing from a lockup agreement with APG, which was mutual, that was in place until the end of 2021. So the reality is unfortunately, we can't sell -- couldn't sell VIA to anyone else, and that did again have a bearing on the pricing, but we still maintain in the current market. And looking holistically at the equity raise and APG's participation in that, we think the VIA transaction is a fair deal in the current market.

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Unidentified Company Representative, [15]

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A question on the -- and it's a common one, but I'll cite it to [Lochman Hamid from 91]. “Is the quantum enough? And what is your thinking behind coming to this number for the rights issue?” David, you'll probably take that?

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David John Atkins, Hammerson plc - CEO & Director [16]

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Yes. Well, look, what we've announced today is clearly 2 very significant transactions, raising just under GBP 800 million in net proceeds. And as I said, we have the support of our 2 largest shareholders.

I think one has to look at this and ultimately is a judgment. In combination with the relaxation of the key unencumbered asset ratio test we had and as James has set out, the very clear headroom that we now have on a pro forma basis going forwards on all of our credit metrics. And that gives us enormous confidence that the business is in a position of safety.

Having said that, we will continue to sell assets, as we've said. It's been part of our business model for a number of years. And we remain confident based on the conversations we continue to have on potential buyers on the success of future disposals, which would further strengthen the balance sheet.

But also I think -- and I know many of the analysts use LTV as a handy guide to the strength of our balance sheet. I'd remind you, we don't have any LTV covenants, but a 42% pro forma, we genuinely believe with the majority of valuation declines behind us that at this point in the cycle, that is absolutely a fair point for LTV to rest. We won't stop there, and we will wish to move it forward, as in down, but there is no point in our view pushing actively and quickly for disposals now to push LTV further down effectively nearing the trough of the cycle.

So rest assured, we will continue to work on our LTV and a more measured disposal program will assist with that. But for the time being, we are very comfortable with where the business is from a balance sheet perspective.

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Unidentified Company Representative, [17]

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Thank you, David. In terms of use of proceeds, a question here, “What are the priorities for debt repayment?”

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James Alan Lenton, Hammerson plc - CFO & Director [18]

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Yes. Thank you. So initially, our working assumption is we will repay the RCFs. Those, as I mentioned, are over GBP 500 million. And secondly, in successfully achieving the support from the U.S. private placement note holders. A condition of that was as we raise capital, either in the form of the rights issue and indeed the disposals as well, that we make an offer to those debt holders to repay essentially in proportion to their debt -- of our total debt, 30% of the proceeds to repay that debt at par. That, from our standpoint is very lucrative, given the current pricing of that debt. So our intent will be to make that offer. Clearly, it's subject to whether or not they take us up.

With that then done, what that leaves is we have no material maturities, as I mentioned, in either 2020 or 2021. So in truth, our focus then becomes the EUR 500 million bonds in both '22 and '23. In reality, we'll judge market conditions. We'll look at the disposals that David mentioned as well to see what the most appropriate options are at that point in time. But to be clear, the intent will be to pay down the gross debt with RCFs and private placement holder debt in the first instance.

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Unidentified Company Representative, [19]

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A few common questions coming in around investment markets and disposals from Rob Jones, among others. “Where is the most investment market liquidity?” First question.

And then from (inaudible), among others, “Can you give any time lines or any confidence around when you might be able to achieve further disposals?”

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David John Atkins, Hammerson plc - CEO & Director [20]

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Well, I think to be fair, the most liquidity is outside of the U.K. at the moment. And we continue, as I've said, to continue discussions with potential buyers in 1 or 2 situations. I think it is too early to give any sort of time line on those, but rest assured that we are motivated to continue those discussions. And in an orderly way, as I said, if we can bring them 2 ahead in the near term, we will. Otherwise, then I would expect those discussions to move into 2021.

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Unidentified Company Representative, [21]

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A couple of specific questions on France from various analysts. “Why have values fallen faster than peers in your French portfolio? And then more generally, can you comment on the outlook for France in terms of valuations and income?”

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David John Atkins, Hammerson plc - CEO & Director [22]

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I'll take that. We have a very concentrated portfolio in France now. Our 3 largest assets account for about 98% of the capital value. So it is enormously sensitive to variations. And the current -- we're currently undertaking a major development in Cergy. And as is quite common through a development, with the lettings slowing, particularly during the pandemic, the values have reflected that, particularly in the valuation, and we saw a slightly bigger impact than others. But I've maintained that those 3 assets are of Grade A quality. We're seeing really strong footfall rebounding now at about 80-plus percent of normal and sales approaching a normalized level. And I think that if one looks over a longer period of time, then we anticipate that the valuation movement and performance from those assets would be very much in line with the Grade A assets that others may own.

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Unidentified Company Representative, [23]

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A couple of questions coming back to the new leasing model and how it might impact valuations. (inaudible) asks, “When are values likely to move to a new DCF approach if centers are likely to be a mix of new and old lord leases for some time?”

And in a not dissimilar vein, Paul May at Barclays queries, “You mentioned Premium Outlets are valued in a similar way to the new leasing model, yet [offer] had to be sold as an 18.7% discount. Do the valuers really know what they're doing?”

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David John Atkins, Hammerson plc - CEO & Director [24]

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So in terms of timing, and if you take Aberdeen as an example, we're confident that about 25% of the leases would be transferred to the new model within the first 12 months by the end of 2021 with the remaining over the following 2 years. So this is fairly rapid. Our valuers, and we have discussed the transition, we think that there is a ability to move to a DCF fairly quickly, and the valuers believe that they can take on that dual model for a period of time.

In terms of the stabilization of values, I would just make the point that whilst we are defining that rents would fall by 10% to 15%, in many cases, the valuers are or have already written down ERVs by that sort of level. And therefore, the impact from valuation in the very near term would be very modest, if not nonexistent, for that reason.

And in terms of the point about VIA, look, I think this is, as I've mentioned, a situation about where Hammerson is today a motivated seller at best and the portfolio impact of the size of that transaction versus the individual valuations. So I think there will be that mismatch for a period between asset value and realizable prices. But I'm firmly of the view that these transactions put Hammerson on a firmer footing and begin to improve our negotiating position on any disposals.

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Unidentified Company Representative, [25]

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A couple of questions on income. Chris Fremantle from Morgan Stanley says, “You talked a lot about the pro forma balance sheet. Where does the pro forma income NRI likely settle?”

Miranda Cockburn from Panmure Gordon says, "Regarding the new leasing model, I know it won't be used across the whole portfolio, but is there any indication on the reduction of NRI that is likely to come as it is implemented?"

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James Alan Lenton, Hammerson plc - CFO & Director [26]

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Yes, certainly. Thank you. So as you can see, we're not explicitly guiding with regard to income. But nonetheless, let's try and give you a little bit of flavor here.

David has obviously mentioned with regard to the outlook in the U.K., clearly, it's been the most challenged leasing environment. And we've previously said broadly, the income levels have reduced in the order of about 15% over the course of the last couple of years and with an expectation as we earn into the new model that David mentioned that broadly the same dynamic will repeat. That said, what we do expect after this is a far more sustainable income base in the U.K. We reset at a lower level. But as David mentioned, we're very much of the view we'd like to approach this with an indexed mindset for the future. So the intent is to start to provide some growth, albeit from a lower base in the U.K. with a turnover top-up upside to it as well. And the intent is very much that the base will be, by far, and away, the larger part of the income.

When we then look across to France and indeed Ireland as well, as we're all aware, it's been a far more moderated leasing environment over the course of the last few years. A number of the features of the U.K. model that's given rise to this [bow wave] in the U.K. don't exist. Now clearly, we have challenges ahead of us in terms of settling into this new world order with COVID, but it's a far more ventilated structure. And indeed, we're quite pleased by some of the leasing deals that have been done over recent months, indeed, with the example of Brown Thomas moving into Dundrum as well. So I'd say, a far more moderated environment there.

With regard to the outlets, as you've seen, ultimately, as I mentioned earlier, it's the business that by far away has essentially taken the biggest hit through Q2. We have a far more partnership style approach to taking a share essentially of the turnover. So consequently, as you've seen, our income levels have rapidly reduced over the second quarter. That said, it's also the business that's been responding most quickly. We generally as a rule of thumb seeing basket sizes actually increase across many of those centers and footfall being quite encouraging in terms of the pace at which it's restoring. So clearly, there are headwinds for some of those centers that are more dependent on international travel, given business travel, in particular, is likely to be suppressed for quite some time owing to COVID. But nonetheless, the outlook is still promising. And indeed, that's part of the reason why ultimately, APG view the purchase of our 50% in VIA to be quite attractive.

So I think that the headline is it's difficult to guide on the specifics, but in terms of the range of outcomes across the different parts of the portfolio, it hopefully gives some color. And obviously, a benefit of the portfolio is we do have diversification in our earnings by virtue of having those different types of businesses within the group.

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Unidentified Company Representative, [27]

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A question from Robbie Duncan at Numis. “What level of CapEx is required for the City Quarters strategy? And is there an indication of how this would be the future deployment profile, please?”

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David John Atkins, Hammerson plc - CEO & Director [28]

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So if you look at our CapEx requirements over the next couple of years, then -- and there's disclosure on Page 63 in our book, we're expecting about GBP 110 million in full year 2020 of CapEx, with about GBP 140 million next year. We've disclosed it's about GBP 10 million to GBP 15 million a year in terms of work up costs for City Quarters. So in the very short term, it's very modest. Going forward and over a 6-year-or-so period, then the figure is in excess of GBP 2 billion.

Now clearly, that is a very large sum. It partly drives our desire to continue to dispose of our assets in our business. But equally, in almost every one of those City Quarters, we already have a partner in the form of our flagship JV partner, and we're also very much aware of the high demand in investment markets for mixed-use products. So we are very keen to ensure Hammerson invests a significant proportion of its own capital in those projects. But equally, we wouldn't hesitate to bring in third-party capital if we felt that was necessary but also remind everyone that they are there to provide additional support for our flagships themselves.

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Unidentified Company Representative, [29]

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Staying with developments. Andrew Gill from Jefferies asks, "Could you provide an update on Brent Cross and Croydon? Is there the opportunity to completely redesign these SKUs with a lower retail weighting? Or are these potential sites here marked for disposal given the ownership structures?"

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David John Atkins, Hammerson plc - CEO & Director [30]

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So as you're aware, we've been working on the development and expansion of Brent Cross and Croydon for some years now. We announced about a year ago that we were shifting tack, and we're bringing forward a more modest retail expansion in both of those projects with a more mixed-use approach, very much in line with our City Quarters strategy. And it's fair to say those plans have not yet landed or evolved to a point where we wish to go public on them, but they continue to be work in progress. But I think if one looks at them in terms of their locations, the catchments, we still believe in the future of those projects. But undoubtedly, yes, they will have a far greater mixed-use content rather than the original retail expansion we were planning.

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Unidentified Company Representative, [31]

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A common question coming through from many, but at from [Allison] at Green Street Advisors as well. “Is there any update on CEO succession?”

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David John Atkins, Hammerson plc - CEO & Director [32]

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Well, I'll take that. What I would say is that I announced my departure which will take effect at the latest in spring of next year, in May of this year, and the Board very much got on to the CEO succession planning, working with a headhunter. Rob Noel has taken on that search from the middle of July and very much leading that search now, and he is hoping to bring forward this to a resolution towards the end of Q3 or early Q4. So progress being made and an update will be made in due course.

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Unidentified Company Representative, [33]

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Another follow-up on the new leasing model from Tom Musson at Liberum. “How do you expect online sales to be measured and credited to a store? And does the retailer have much discretion on what constitutes an online sale relating to a specific store?”

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [34]

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Yes. I'll take that one. So I mean online sales attributed to the store. Clearly, the retailer has a sense of -- or knowledge of the store sales they're doing within a catchment. They also got a very clear view of click and collect sales from a particular store. And certainly, we have examples of that now in our portfolio, which proving this concept. Brown Thomas, and David ran through in the presentation, where there is an element of online sales that will be included in the turnover top-up. And I'd also refer back to the CACI point I made earlier whereby we have some leading analysts now working across the industry, both with retailers and landlords, to really bring forward this measurement and putting a true value on this element of the store.

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Unidentified Company Representative, [35]

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A couple of questions on leasing. First from Rob Jones. “High Street fashion, what has the leasing versus previous passing been in the first half of the year?”

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [36]

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Let me take that one. We -- without -- I got the specific data on high street fashion. But what I can say is that leasing to ERV in the U.K. was down about 7% in previous passing, 9% of our leasing this year. As we talked about in previous updates, there's an element associated -- smaller element associated with temp leasing, where there was clearly a bigger discount, and others relating to permanent. But fair to say, the volumes have been pretty low. And certainly, since COVID, very low, albeit in the first couple of months, we saw some reasonable comparable levels to previous year.

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Unidentified Company Representative, [37]

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And then a related question, “Have you seen any net space takers?”

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [38]

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Probably fair to say at this stage, most retailers are reviewing their portfolio. Clearly, we're really encouraged by the conversations that we've been having across the board with certain occupiers. And we have opened up a brand-new Samsung store in Bristol, which looks absolutely fabulous. And certainly, our conversations with Apple, whilst there's been some headlines around Apple, we're having some quite encouraging conversations in a couple of locations about upsize. And of course, there's certain various retailers looking to capitalize on the opportunity from the department stores. And we announced earlier the work we're doing with Next on their beauty concept. So yes, there's certainly encouraging signs out there.

And then from our leasing team's perspective, whilst the conversations have been predominantly around agreeing COVID deferments and abatements, there are plenty of retailers looking to the future and understanding what their portfolio is going to look like. And we come back to the conclusion that we have done in previous updates that the best locations will continue to be well occupied, and you can see that underpinned by whilst they've gone down, still very robust occupation statistics, not just in the U.K., not just across the board, but in the U.K. as well.

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Unidentified Company Representative, [39]

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Thanks, Mark. We're just about out of time, I'm afraid, everyone. So we will draw stumps at that point. I'd just like to say I understand a number of you are having some technical issues during the presentation in terms of getting access. We do apologize for that. Of course, we're operating quite unprecedented times, and we believe the strain on the system was just a little bit excessive from the demand of people trying to join at once. Nonetheless, a recording will be available, including this Q&A session very shortly after the event.