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Edited Transcript of HMSO.L earnings conference call or presentation 25-Feb-20 8:15am GMT

Full Year 2019 Hammerson PLC Earnings Call

London Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Hammerson PLC earnings conference call or presentation Tuesday, February 25, 2020 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David John Atkins

Hammerson plc - CEO & Director

* Jean-Philippe Mouton

Hammerson plc - MD of France

* Mark Richard Bourgeois

Hammerson plc - MD UK & Ireland

* Richard J. Shaw

Hammerson plc - Group Director of Finance

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Conference Call Participants

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* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Colm Lauder

Goodbody Stockbrokers, Research Division - Real Estate Analyst

* Jonathan Sacha Kownator

Goldman Sachs Group Inc., Research Division - Financial Analyst

* Marc Louis Baptiste Mozzi

BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team

* Maxwell Wilson Nimmo

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

* Rubinder Singh Virdee

Green Street Advisors, LLC, Research Division - Analyst of Research

* Sander Bunck

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

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Presentation

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

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Good morning, everyone. Thank you all for joining us slightly earlier than usual this morning, so I appreciate that. For those of you who don't know me, I'm David Atkins, Hammerson's CEO. Now I'm going to start off this morning summarizing the key messages I believe you should take away and my perspective on progress against strategy. We'll then walk through the numbers in detail. Now this was due to be presented by James Lenton, our new CFO. Unfortunately, he has had a very recent bereavement in his family and cannot be with us this morning. However, Richard Shaw, our Director of Finance, who many of you will know, will step into deal with the finance section. So thank you, Richard.

Finally, I will dive deeper into our strategy and operational performance. I should also let you know that I'm joined here at the front today by my other senior colleagues in the business, including Mark Bourgeois, MD of the U.K. and Ireland; Jean-Philippe Mouton, MD of France; Simon Travis, our Investment Director and MD of Premium Outlets; and Simon Betty, our newly appointed MD of City Quarters.

Now I'm not going to linger on this overview as we'll pick up the key themes throughout the presentation. What I'd like you to take away is a number of points. We have sold close to GBP 1 billion of assets in the last 12 months, substantially exceeding our 2019 target. Net debt is down by 1/3, delivering on our key strategic priority. Earnings are down but mainly impacted by disposals. And you'll note, our group like-for-like NRI is actually marginally up.

The dividend for full year 2019 is maintained and will be rebased to a prudent and sustainable level going forward. Now this is an important topic which Richard will cover in more detail later on. But I like to draw your attention right upfront to the fact that we'll be departing in the near-term from our recent practice of linking the dividend closely to earnings.

Now as you're aware, we've seen severe valuation declines in the U.K., but our diverse portfolio is providing some balance. Finally, we've made good progress on both our leasing strategy and repurposing space, with brands and consumers seeing the benefit. Importantly, footfall is up in all of our regions.

Now again, you can see here what we've done on disposals and we've been very active here since 2016, averaging more than GBP 500 million per year. As I've just mentioned, over the past 12 months alone, we've delivered almost GBP 1.1 billion of disposables and GBP 1.4 billion over the last 18 months. These include the largest retail disposals in France 2019 and the largest U.K. retail park portfolio deal in over a decade. However, our desire to create liquidity will continue, and more of that later. Our strategic decision to exit retail parks now allows us to solely focus on our best-in-class flagships, Premium Outlets and City Quarters.

Now let's take a moment to review progress made against the 3 key pillars of our strategy in a bit more detail. Starting with capital efficiency. We committed to reducing LTV, and debt, as I've said, is down significantly below our GBP 3 billion target for 2019. Our major strategic developments are being reviewed to establish future City Quarters opportunities.

On optimized portfolio, our additional investment in bigger outlets means that we now have greater ownership and control in the valuable outlet sector. And we have successfully secured 3 planning consents for City Quarters in the year.

Finally, operational excellence. We're continuing to improve the way we plan and run our venues. We focused on leasing to the right brands to enhance customer experience and support long-term income generation.

And the focus on these key strategic pillars will continue throughout 2020. Reducing our level of indebtedness remains a priority. This will also provide liquidity for future investment purposes as markets stabilize. Further disposals will again be pursued across the portfolio. On optimized portfolio, we can now focus resolutely on the highest quality opportunities across those 3 areas of Premium Outlets, flagships and City Quarters, including starting on-site with our first residential build-to-rent scheme in Dublin later this year.

Continuing to focus on leasing to the right brands and repurposing our destinations to ensure relevance, as I've said, is high on our agenda, and it will be a priority for the foreseeable future.

Now let me end this introductory section on a very important topic and one which increasingly is front of mind for all stakeholders. 2019 was the year that climate change really came to the fore. For Hammerson, it's been a priority for 10 years. We were the first property company globally to set out our ambition to become net positive by 2030, with our first milestone occurring at the end of this year. And we're well on the way to achieving our goal, supported by a clear 3-phase plan.

Now on to immediate progress, and let's keep it simple here. On net positive strategy is fully embedded across the business and culture, enabling us to deliver continued reductions across carbon, electricity and water over the past 12 months. As you can see, these have generated close to GBP 1 million in energy savings for the business and our tenants.

With that, I'll hand over to Richard, who will provide a breakdown of our numbers.

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Richard J. Shaw, Hammerson plc - Group Director of Finance [2]

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Thank you, David. Good morning, everyone. First off, let's take a look at the headline financial numbers at the balance sheet date. Net rental income was down 11.2% due to disposals, mainly due to the sale of Highcross in Leicester, which completed in late 2018. A weaker like-for-like performances in the U.K, and Ireland were diluted by a stronger performance in France. This translated into earnings down 8.5%, again, largely due to the disposal effect, countered by strong contributions from outlets and reduced interest costs following the bond -- Eurobond repurchase in 2018.

Despite further earnings decline anticipated from disposals and continued weakness in the U.K., the Board has recommended no change to the dividend in 2019 and our return to the dividend on 2020 building guidance a little later.

On the balance sheet, portfolio values were down 9.8%, predominantly driven by yield expansion, with a larger income decline in the U.K. In addition, the impairment of retail parks portfolio to the transaction value completed post the balance sheet date knocked off 12p per share. Meanwhile, net debt at year-end was GBP 2.8 billion. This is below our GBP 3 billion 2019 year-end target. More detail on credit ratios and performance for the participants of the retail parks shortly.

To earnings. So as mentioned, earnings per share declined from 30.6p to 28p. Here, you can see the main driver was disposals, accounting for a decline of 3.1p. Lower like-for-like net rental income accounted for 1.5p, and there was a small increase in net administrative costs. On the positive side of the ledger, there was an increased contribution of 0.6p from Premium Outlets and lower interest costs added 1.5p.

Looking at like-for-like NRI movements. U.K. flagships were down 6.7% in the year, a similar run rate to H1. France was up 2.1% and had a strong second half. Ireland showed some improvements in H2, down 5% for the year versus 7.4% in the first half. Meanwhile, Premium Outlets was up 11% for the year. Overall, I would draw your attention to group like-for-like NRI being 0.5%. This reflect the benefits of our diversified portfolio.

Next, we show the like-for-like NRI breakdown of each of the flagship geographies in more detail. We've included the first half breakdown in the additional disclosures in the back of the pack for easy comparison. Tenant restructuring and void costs make up much of the drag in the U.K. and the impact worsened in the second half. France had a strong second half with good leasing, including the positive effect of indexation. Whilst in Ireland, the impact of House of Fraser and Hamleys withdrawal from the market continued, albeit with a softer impact in the second half, and leasing was positive throughout.

Over the next 3 slides, I'll walk through the valuation deficit for the year. Here, you can see the valuation breakdown and capital returns in 2019. This excludes the post balance sheet impairment of retail parks. It's worth contrasting significant declines in flagships, particularly in the U.K. to Premium Outlets, which had another strong year. The negative revaluation of the portfolio, excluding outlets, was equivalent down to GBP 1.34. This was a major moving part of the NAV per share decline, as you can see here. The increase in value of Premium Outlets added 26p; the impairment of retail parks deducted 12p. Combined, these give an NAV per share of GBP 6.01.

Turning now to the components of the valuation change. In the U.K., the 20% decline in flagship destinations were driven by yield expansion, although you can see that 8 percentage points came from ERV decline, which I'll come back to shortly. In France, yield expansion accounted for 3 quarters of the 10%. The balance was income-related despite positive leasing versus ERV in the year. In Ireland, the valuation deficit was predominantly due to yield expansion, whilst ERVs were on the increase. Meanwhile, in Premium Outlets, the increase in value was driven by growing income.

Development valuations have been written down, the majority of this of this related to Cergy. We revised the scheme in early 2019 to increase the proportion of leisure and F&B. This was based on changing consumer requirements. Overall, the group's capital return of minus 9.8% is around 3/4 driven by yield expansion.

The disclosure on this slide is new and drills into income over a slightly longer time period. On the left-hand side of the page, you can see the breakdown of ERV movements by unit type since they peaked in the U.K. in December 2017. ERVs in the U.K. flagships are down 10% over the 2 years shown. As you would expect, anchors and MSU space, both more exposed of challenged high street fashion sector, have taken significant hits, and now average ERVs of GBP 6 and GBP 24 per square foot, respectively.

There is, however, a wide range of performance within the categories shown. Again, space exposed to high street fashion has shown the largest declines. For anchor stores, it's by more than 1/4, slightly less in MSU space and around 10% in smaller units. In contrast, in a more stable French market, ERVs are broadly flat over the period. You'll note the more positive headline leasing stats elsewhere in the disclosures.

Meanwhile, Ireland has grown just over 4%. A key attraction of our entrance to Ireland was the opportunity to grow ERVs in this prime portfolio, where vacancy is less than 0.5%. We do, though, expect further rental and valuation declines. David will come on to this and the market dynamics in a bit more detail later.

Lastly, I would highlight that we retendered our valuation appointment as announced this time last year, the result being a broader panel of JLL and CBRE alongside Cushman & Wakefield. This change will be in effect for the half year, providing an even broader perspective on the market.

Moving to credit. We are pleased to have surpassed our 2019 net debt target, and you can see the moving parts here. Net of selling costs, disposals brought in GBP 536 million of cash. Net cash inflows from operations contributed another $174 million, whilst favorable exchange rate movements added a similar amount. Distributions from Value Retail brought in GBP 27 million, while we spent GBP 37 million on the acquisition of the minority stakes in VIA and investing for growth in this vehicle. Cash CapEx was GBP 110 million, while dividends were just under GBP 200 million.

Adjusted for the sale of retail parks on a pro forma basis, net debt has reduced to GBP 2.4 billion. This is a decrease of just under 1/3 from this time last year. Here, you can see the key credit metrics. At the top, I would highlight the significant liquidity available of more than GBP 1.6 billion. This includes the proceeds from retail parks. Below, you can see the covenants on the group debt, and we also include both LTV metrics, where I would remind you, we have no covenants.

As you can see on a pro forma basis, all metrics have improved with the disposal of retail parks. The key message of this slide is the ample headroom, both to our internal guidelines and group debt covenants. And values across the group would have to fall by a further 30% to break group covenants and close to 50% for the U.K. alone, holding all else constant.

Just a reminder, we have no significant maturities until 2022. I would also highlight the opportunity on this chart, given our current liquidity and ambition to continue to make disposals. Debt repayment will be earnings accretive. While we have a low weighted average interest rate of 2.6%, this includes higher coupon debt such as our legacy 2026 and 2028 sterling bonds with coupons of 6% and 7.25%, respectively. Even our private placement notes have an average interest cost of 2.5%, which is predominantly in euros. This is our most expensive euro debt and would result in significant interest savings if repaid.

Moving to guidance for 2020. We're doing something different here, which I hope is helpful for your modeling. Overall, we're planning for another challenging year. For rent -- net rental income, we expect the U.K. to be negative, broadly in line with 2019, with a weaker performance in the first half. This is as we continue to suffer from the heavier weighting of tenant restructuring in that part of 2019. We anticipate a return to growth in Ireland, supported by stronger leasing trends and having rolled the negative impact of House of Fraser and Hamleys. France is expected to be remained a more stable market, broadly growing in line with indexation. Further growth is forecast for Premium Outlets.

Looking at the earnings impact of prior disposals here on 2020. The disposal of Italie Deux, which completed in December last year, knocks off around 2p of earnings. The disposals of retail parks in 2019 and the recent portfolio sale will knock off around 5p. For information, the sale of the portfolio is due to complete on 23rd of April 2020.

As previously guided, we anticipate around GBP 140 million of CapEx in 2020 and there is the usual disclosure in the back. It would be prudent to assume weighted average cost of borrowing is in line with 2019. And whilst further cost savings have been identified, I would hold admin costs roughly flat for 2020. Now clearly, further disposals will have an impact on earnings. The high level table on the right guides you regarding the in-year effect of varying scales of disposal at different yields. This assumes a completion of midyear and proceeds held is cash only.

Given our confidence in further debt reduction and to help clear out our REIT and SIIC tax obligations, the Board is recommending a final 2019 dividend of 14.8p, meaning a full year dividend of 25.9p, unchanged from 2018.

On those tax obligations, the recent disposal of Italie Deux generated an obligation to pay out approximately GBP 230 million of profit, or roughly 30p. This needs to be cleared by 2022 but can be declared concurrently with the PID.

Moving on to 2020. An output of everything I've said about the impact of disposals alone is that a 2019 level of dividend would become uncovered. Consequently, the Board has taken -- has decided to take a highly prudent and disciplined approach to cash distributions. This is over and above the effect of disposals and rental declines on earnings, whilst at the same time, recognizing the importance of a credible, sustainable dividend to our shareholders and also meeting our tax obligations.

The Board, therefore, expects to recommend a 2020 full year dividend of 14p, a 46% cut from 2019. For clarity, as David mentioned, this is a distinct departure from our recent practice of linking dividends to earnings. Our intent is to cut once to a sustainable level from which we can grow. Cash savings will be used in the first instance to pay down debt, which remains our #1 priority, and then to invest in the business.

In 2021, growth from this reset level will be dependent on the scale and yield of future disposals, a realistic view on the rental income trajectory, the strength of balance sheet, capital requirements for investment in our business not leased in City Quarters, and the health of the broader capital markets and real estate sector.

Now back to David for a strategic and operational review.

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

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Thanks, Richard. So I would now like to use the rest of our time to take an in-depth look at what's been happening across our diverse markets and how we're proactively managing through the change.

So the diversity of our portfolio is one of our key strengths. The pie chart on the left shows that the majority of the current portfolio is across flagships and Premium Outlets, with 51% of the portfolio now outside of the U.K.

The bar graph on the right provides absolute transparency on our key metrics across the portfolio. You can see performance varies by market, reflecting varying macroeconomic factors, online adoption rates and differing leasing dynamics. The recurring theme, though, is that the U.K. market continues to be tough. Unsurprisingly, this is reflected in the performance.

In France, we've delivered positive numbers, while the leasing metrics in Ireland are both -- are being temporarily impacted by House of Fraser at Dundrum, as mentioned by Richard. The underlying picture in Ireland is positive. Once again, Premium Outlets performed very strongly.

Now here's some new disclosure for you on how we are well positioned to deal with income risk from potential tenant failure. Tenant restructuring has, of course, impacted us over the past couple of years. However, from the bar graphs, you can see that our top 10 retailers account for only 17% of our total rent. And only 2 retailers account for more than 3% of our rent each.

When looked at by individual market, only one brand contributes to more than 2% of the rent in that country. Now contrast this with our U.K. peers, who have a more concentrated risk. There's more detail on this important topic in the additional disclosure at the back of the presentation.

Now let's move on to our flagship assets. The differences in our flagship markets also impacts the effects of tenant restructuring. On this chart, we examined group trends over the last 2 years. That is since December 2017, the period over which we've seen high levels of tenant distress. The U.K. has endured the most significant impact with fees and weaker leasing. Of course, dealing with some tenant restructuring is part of retail life. The French and Irish data shows more typical and modest impacts.

Let me walk you through the data in the bar chart. In red, you can see the annualized rent lost due to the restructuring as at the end of December '19. Remember, again, this is over a 2-year period. In blue, you can see the current rent received, post the restructuring from these units. Now of course, there is a level of pain here. However, in comparison to the wider market, we are less affected by tenant restructuring and have a greater number of stores that remain trading and paying rent, as shown in the box on the right.

Now on to some more granular detail on leasing. The bar graph represents the percentage of income of all leasing during 2019. Again, this illustrates the tough operating market. But it might surprise you to learn that around 70% of leases across the group was still signed at or above rent passing. You can see the relative strength of France and Ireland here.

Now this slide offers a deeper dive into the leasing versus passing rent at U.K. flagships by category. The data on the top right shows that what we've highlighted for some time now, that high street fashion is constrained. This is a continuation of the pattern from half year where we saw downward pressure on rents.

There is, however, continued growth across our target markets, consumer brands, aspirational fashion, F&B and leisure, which is where we are focusing our new leasing efforts. For the half year, we provided a clear picture of temporary or flexible leasing, which, to remind you, is a lease of up to 3 years. This flexible leasing approach helps us to maintain occupancy and cash flow as well as the ability to test new brands so that our destinations remain vibrant and engaging.

At the end of 2019, our percentage of flexible leasing in the U.K. reduced slightly from the half year to 23%. In absolute terms, this represents just 1.8% of our rent passing and 7.1% of group ERV. The potential upside versus previous passing of converting to principal leases is significant, and there is some more detail on progress in this area, again, in the additional disclosure.

Before I come on to some of our bigger repurposing projects, I want to update you on progress we're making across the U.K. portfolio on stepping up the brand mix. This is a slide you've seen before, and it's important to our flagship transformation. As you can see in the middle column, all our new leasing during the past 12 months has been to target categories, led by F&B, nonfashion and consumer brands.

On the right-hand side, you can see the average ERV and passing rent per square foot and how that compares with the leasing in 2019. As we've said before, high street fashion rents are falling, as evidenced in the leases signed this year at GBP 21 a square foot. Other categories, though, show less evidence of overrenting, and there's been a good leasing performance in the year. For instance, nonfashion and consumer brands are now bringing in an average of GBP 62 a square foot versus the U.K. portfolio average of GBP 53.

Now in any 1 year, of course, it is a relatively small sample size and we're by no means calling the bottom just yet. However, the simplistic view that all rents are falling is simply wrong. And the current evidence underpins our strategy of shifting the mix towards higher-value categories. Of course, this is a long-term project and this doesn't include opportunities available to us within City Quarters.

And finally, whilst we didn't sign any department store leases in the U.K., the sector is clearly going through a structural change. But some numbers here show the opportunity to increase rents after repurposing this space. So let's look at that opportunity in more detail.

Simply put, repurposing department stores improves our income and delivers new brands that consumers want. They occupy a lot of space but pay significantly less rent than many other categories. So while there is obviously an upfront cost, these projects deliver an attractive yield on cost, as you can see here.

Ireland's leading luxury retailer, Brown Thomas, is to open a flagship store at Dundrum, replacing part of the House of Fraser store. Now Brown Thomas, obviously, is a department store, but like its sister brand, Selfridges, is right at the top of its game. We're also progressing plans to repurpose the House of Fraser store at the Oracle. Here, we are looking to create a new riverside destination with leisure and F&B operators and a flagship retail unit, and we continue to look at other department store repurposing opportunities.

Now with footfall the most transparent currency for our destinations, how we stack up against the market is more important than ever. Here, you can see across the flagship portfolio, our footfall performance over the past 2 years in the blue versus the national indices in gray. For the U.K., on the top left, we've outperformed the index for a number of years, and that gap has widened during 2019 with footfall growth in positive territory, demonstrating the continued polarization towards flagship venues. Footfall in Ireland is tracking the national index. And in France, we've recovered from the protests last year where our prime and very much urban portfolio was more affected than the national average.

Now we've actively worked to generate these improvements in footfall. We know that experience makes all the difference and our flagships have a material advantage here. The great event can be the tipping point in a customer choosing to visit our flagship over choosing to do something else. The more unique and Instagrammable the event, the greater the attraction. This is demonstrated in the footfall numbers we've seen during our events programs. And we're not only seeing footfall rise during these events, we're also seeing people traveling from outside our normal catchment area to visit.

Now the events program provides the wow factor, perhaps, but getting the basics right every time the customer steps through the door is absolutely vital, from making parking frictionless and easy to creating welcoming and comfortable family rooms help to drive both dwell time and loyalty. And on the innovation side, we are looking at pushing our venues even further. As you know, we're well placed in the center of thriving cities, and this space isn't just valuable to retail brands.

Logistics and delivery companies are seeking strategic city center sites to facilitate last mile fulfillment to consumers. We're working with some big names in this space to turn some of our back of house areas into commercial opportunities, and our first partnership is expected to launch later this year. A final example, as you know, we are always looking to support our retailers. Ongoing labor supply is a key challenge for them. We've entered into an industry-first partnership with a flexible labor platform called Catapult to provide a pool of experience and flexible labor for our brands as required. And obviously, many of these opportunities can provide valuable income streams to the business.

Now we all know that the retail customer journey is no longer simple and linear. Shoppers want to be able to transact seamlessly across channels and retailers have had to adapt their models accordingly. The good news is that omnichannel retail can be profitable if both online and physical stores work in partnership to manage rising marketing costs and other cost pressures around fulfillment and returns.

Stores deliver higher sales conversion rates. They're an important marketing tool, driving loyalty and online traffic. Stores provide a less expensive fulfillment and returns option. So let's take a look at some of these costs on both sides of the equation in more detail. And we've deepened our understanding of omni-channel costs. This is not intended to be a model; rather, it's an illustration of some of the key cost components in today's retail journey.

This analysis uses market data combined with that of enhanced footfall trials at one of our major flagship destinations, designed to drive an understanding of traffic in and out of individual shops. Our initial findings help to dispel the myth that stores are always expensive and loss-making and that digital is always cheap and easy. If the store is a marketing tool, then we can now compare full occupancy costs with online marketing acquisition costs or, if you like, online rent on a per visitor basis.

In addition, as you can see, conversion rates, as I said, in physical stores are much higher than online. And if we follow this analysis, the overall acquisition cost to a retailer of a store sale in locations with good footfall is significantly less than that of an online sale. Payment, logistics and return costs are also significant pressure points for online. Now we're obviously not trying to play down the importance of online here, but this analysis demonstrates that stores offer a really important, cost-effective channel in a retailer's omnichannel offering.

Now I'm sure you'll agree that both today and over the past couple of years, we've been very transparent and open about the challenges facing U.K. retail and about the knock-on impact to our business. You can see the reasons for this at the bottom of the slide.

There's no doubt that rents in the U.K. remain challenged, and this will continue in the near term. But there are strong, common-sense reasons why the right type of physical space in the right places will remain an essential component of a brand's omni-channel offering, not the least of which, as any media buyer will tell you and as I've just illustrated, being the increasing cost of online marketing in a largely duopolized market.

Stores are strong drivers of brand awareness, arguably the strongest. Consumers are social animals. They want places to be social and enjoy themselves in real life. And destinations like ours help them to do this. Our footfall performance proves this. Now these things are valuable to retailers and deliver returns, which, in turn, with improved consumer confidence, will drive a return of rental tension, but only for the best locations. As a result, we remain confident that our flagships will continue to offer the best space to the best-performing brands at rent levels that recognize the interests of both sides.

Now let's move on to Premium Outlets. Our investment in Premium Outlets continues to be successful, with impressive growth across all key financial metrics of capital return, sales and NRI. And in line with our flagship performance, footfall also grew at both Value Retail and VIA outlets. The numbers continue to impress, and this is reflected in the very impressive 22% per annum return on our capital over the past 8 years, a period in which we stepped up our investment in this key sector.

Now I know many of you will be thinking that the travel bans imposed on Chinese travelers will have a significant impact on trading. We wanted to provide some color on this. And just for context, as you can see from the pie chart, the majority of sales across the outlets portfolio come from domestic and European visitors.

Tax-free sales at Value Retail villages account for 26% of total sales and allow us to understand sales from our -- from non-European customers. Only 9% of total sales come from Chinese guests shopping tax-free. Across the VIA portfolio, the comparable figure is less than 1%. And from this graph, you can clearly see one of the reasons why we've achieved that 22% IRR. However, we're showing it here for a different reason.

Tracking out the sales over the period since the late 1990s, we've highlighted a series of global external events, including the financial crash, SARS and swine flu. Now you can see that these events did not cause a dent in performance over the long term. And whilst there's inevitably been some impact in the past few weeks, driven by reduced travel from China as a result of the coronavirus, overall, year-on-year footfall and sales growth have remained positive in the year-to-date.

Now like many business, we'll need to keep a very close eye on the situation as regard this virus, but we remain confident in the long-term future of the business.

Now let's move to important future growth area, City Quarters. Our business will continue to evolve and, in the future, will look quite different to the shape of our current portfolio. The recent sale of retail parks is a key enabler to this. City Quarters will provide an additional growth driver and takes us from pure retail to creating vibrant neighborhoods where people can live, work and play. And it's the scale of this opportunity that is unique to us, both in terms of the mix of uses and the cities where the potential exists.

Now in order to realize the medium-term value of City Quarters, we need to put in hard work now. We're working quickly and have, over the last 12 months, secured 3 major planning approvals. In Birmingham, where HS2 has recently been given the final go-ahead, we have the potential to create a 7.5 acre city core right next to the new Curzon Street station. The Dundrum approval is a major milestone and will see us deliver our first Irish residential scheme. And in Leeds, we're expanding the mix of uses at Victoria with a new hotel.

So let's wrap up. In conclusion, you've just seen from our 2019 results, we're operating in a difficult environment. However, we are delivering on our strategy, not least beating our ambitious disposal program to deliver balance sheet strength. Related to this is a prudent reset to a sustainable dividend in 2020 and beyond. Having successfully exited retail parks and supported by our ongoing priority to reduce debt, we will further evolve our spaces and realize opportunities beyond retail. We now have a focused and more concentrated portfolio of flagships, Premium Outlets and City Quarters. We have a clear plan to deliver over the short term and create value for the long term for shareholders.

With that, let's move to your questions.

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Questions and Answers

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

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I think we've got some roving mics. So who would like to go first? Chris?

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [2]

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Chris Fremantle from Morgan Stanley. Just a couple of questions. One is on the outlets. I think I'm right in saying that you had talked about some disposals in outlets. I just wanted to ask where you are with that? And how confident you are that you can crystallize those values that have risen in the period?

And then secondly, on -- I mean you're clearly now over half or at least half non-U. K. How concerned are you that the non-U. K., the French and the Irish businesses particularly, are just at an earlier stage of value decline relative to the U.K.?

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

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So firstly is regarding outlets. I think I'd just reiterate that point. We've made GBP 1 billion worth of disposals in 12 months, GBP 1.4 billion over 18 months, far exceeding our targets. That certainly gives us more discretion on disposals going forward. But let me be absolutely clear, we will continue to sell assets, we want to further strengthen our balance sheet. What we're not doing at this point is being any more specific on individual targets, but we will be looking at all parts, continue to look at all parts of our portfolio, nothing is off the table as before, and you should expect material disposals in the current year. And I think that's as far as I want to go in terms of individual disposals, Chris.

I think in terms of evolution of markets across Europe, look, it's very difficult to speculate. But I'll say a couple of things. If you look at the valuation weakness in Ireland and France in the last 12 months, specifically, that's been down to, in Ireland, an increase in stamp duty and the interruption in our business of the restructuring of House of Fraser. We think very quickly, and as I've shown with the returns we're going to make from Brown Thomas, we're going to correct that position, and the underlying market remains strong.

In France, again, some weakness specific to us. As you know, we sold 75% interest in Italie Deux. That did read across to our values, didn't read across to other companies' values in quite the same way, maybe it will going forwards. But elsewhere, we've seen a strong leasing market, rents growing. And I think, structurally, on things of online, there are very different dynamics working out in Ireland and France, much lower rates of conversion. Most commentators believe it's not going to go anywhere near the rate of conversion in the U.K., and I think that, that market, those markets are far more stable.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [4]

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Sander Bunck from Barclays. A couple of questions from me as well. Just getting quickly back on the French comment, and you're noting that other European peers saw less weakness than you did. Did the values give any explanation as to what exactly the differences was between why peers in Europe didn't see as much of a value decline in France versus you? Or was it really just the Italie Deux disposal?

And the other one is on VIA. I think the recurring income is down around 3% year-over-year. And it looks like you've increased your stake and like-for-like NRI growth is positive. Can you just square the difference for me, please? And just last one, how are you thinking about LTV and disposals going forward? Obviously, we're in a situation where it's very difficult to forecast what's going to go on. Is -- are disposals the way going forward? Or are there any other options on the table as well at some point?

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David John Atkins, Hammerson plc - CEO & Director [5]

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So discussions with our value is very much concentrated on our business, so we don't really talk about what they're dealing with other companies, and that's really, I think, a question for other companies. But we do have a very concentrated portfolio in France now, maybe 90% is focused on 3 assets. So it is quite sensitive, to be frank. Very high quality.

Second question was around VIA. You're right, sales and like-for-like NRI is positive, but the absolute NRI is slightly down. That was really down to repurposing where we've been taking space back before we expand some retail, so it's a very short-term impact in that regard. Rich, any other reasons that VIA...

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Richard J. Shaw, Hammerson plc - Group Director of Finance [6]

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Yes, I think it's -- there's a cost element to it as well. I think with the internalization of the management, obviously, we -- you're right to say that we bought out the stake this year, increased from 50-50 JV with APG. That's had a little bit of frictional costs whilst the team there have been internalized. That's fully up and running now, and we're very confident about its growth in 2020.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [7]

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And do you expect that to be in line again with NOI going forward effectively?

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Richard J. Shaw, Hammerson plc - Group Director of Finance [8]

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It's certainly more -- yes, absolutely, growth in the structure.

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David John Atkins, Hammerson plc - CEO & Director [9]

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And your final question is this company is focused on strengthening its balance sheet, and the way it's going to do that is through disposals. That is it.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [10]

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It's Rob Virdee from Green Street. Just a couple of following up. So firstly, on the disposals, I appreciate you're not going to give color on where you're going to do it, but maybe about your thinking on unlevered IRRs and targets for where you look at disposals. Some of your peers have talked about that recently. Number one. Secondly, just on LTV, I noticed you say a target, absolute level of GBP 3 billion. Do you have an LTV target? And how do get ahead of the valuation declines in trying to strengthen your balance sheet there?

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David John Atkins, Hammerson plc - CEO & Director [11]

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Yes. Well, obviously, our net debt now on a pro forma basis is GBP 2.4 billion. I think you should assume it will start with a 1 going forward. I'll certainly say that, and that's our ambition. In terms of looking at disposals, as I said, we have far more discretion having cheaper disposals and reducing net debt by 1/3 in the year in looking at those disposals. I think what I would say is that we have a hierarchy of assets, return profiles, so we are tending to look at not only what should be sold, but equally, we are squaring that off in certain markets. There's no doubt there's very weak demand. So we're having to look equally at what we can sell. That still remains the case in the marketplace to be completely open and upfront about that. But because of the diverse nature of the portfolio, we do have options, as we've seen this year, to continue selling.

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Richard J. Shaw, Hammerson plc - Group Director of Finance [12]

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And what about the -- and on the LTV point, Rob, I think we've set out internal guidelines for LTVs on a headline rate, 40% fully proportional, 45%. We're within those following the disposal of the retail parks. We've said in the past, clearly, further disposals will bring those down. So that's what we're targeting for this year.

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David John Atkins, Hammerson plc - CEO & Director [13]

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Here we go.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [14]

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Colm Lauder, Goodbody. Just maybe a couple of questions to move on to the development side and just touch on the City Quarters side of the business now, given the sort of the prominence that's being focused on that. In terms of looking down the road of sort of PRS developments, intensification of sites, are these developments you would expect to develop out yourselves and then hold as income plays? Or are you looking at perhaps capitalizing on some of the strong prices being paid for PRS in the market? That's my first question.

My second question, I think, is on the longer pipeline major developments, obviously, given significant softening and sentiment for retail development at some of the joint ventures, like Croydon-Westfield. And in terms of sort of the appetite in terms of driving those forward from the joint venture partners, so thinking Westfield's appetite, and then with Goodsyard being reconfigured to be more commercial space and residential through Ballymore, are there -- are your joint venture partners' appetite as strong as they were 6 months ago for those schemes?

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David John Atkins, Hammerson plc - CEO & Director [15]

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Yes. So the first part of that question around how we're going to bring forward City Quarters and the nature of the funding, I think it will be a mix. As we've set out very clearly, we intend to start on-site our first PRS scheme at Dundrum, over 100-unit building later this year, and we're funding that with our joint venture partner, Allianz, directly. Equally, we may, in some cases, dispose of a site with the benefit of planning and permission and achieve an uplift and profit from that scheme. Equally, we may joint venture or forward fund. I think it really will be a flexible, nimble approach to development and funding. But what you should think of it is, one is a means of generating very substantial development profits over the next 3 to 5 years. And when you think about our market cap, that could be quite a material amount, but also retaining an element of that development pipeline to further provide income growth going forward. So a real blend, but also, our priority is getting planning now. That's what we should do because that in itself creates the option and the uplift.

In terms of our joint venture partners, I think we're very aligned. We meet with them all the time. If you look at our Brent Cross and Croydon projects, those are being reworked at the moment. Clearly, what we have planning and permission for, which is almost purely retail, we need to shift, so there will be a lower quantum of retail in those schemes, but a higher mix of use absolutely in line with our City Quarters strategy, working with the local authorities in those areas. And there will be more news in due course. But we want to create sustainable developments, both from the use and the returns. And I think we're absolutely aligned with our partners.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [16]

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Jonathan Kownator, Goldman Sachs. So just to follow on City Quarters. Can we have an idea for these 3 schemes that you're highlighting about the total budget and sort of any sort of return that you could achieve, assuming that you would keep it, even though it may not be the case?

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David John Atkins, Hammerson plc - CEO & Director [17]

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Yes. So the smaller schemes, the PRS scheme in Dublin and the hotel in Leeds, are relatively modest. So our share, around GBP 50 million. Return yield on cost, you should expect exceeding 6%. In terms of the larger scheme we've highlighted, we achieved planning permission, outline planning permission at Martineau Galleries. That will have a budget of well over GBP 1 billion. But that is more likely to be a scheme where we would use external capital in some form to bring forward. But again, development returns, mid-single digit, which we think is attractive to not only us, but other particularly longer-term capital in the market.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [18]

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Perhaps one more question. I'm not sure you'll be able to comment, but obviously, on John Lewis in Birmingham, any comments on performance? And should there be any negative scenarios there into how you can repurpose that space?

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David John Atkins, Hammerson plc - CEO & Director [19]

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I wouldn't particularly focus on any one department store. I think our department stores as a whole, we are looking right across the business because there's no doubt that the use of those department stores, the size of them probably is now inappropriate in many cases. You've seen what we've done in Dundrum and we're doing in Oracle. We're very engaged with all of our department stores. I'm very, very confident, though, when you look at the draw or footfall the department stores now create, which is much lower to our centers than it used to be, look at the mix of uses we're creating, look at the relatively low levels of rent that those department stores provide, any downsizing of department store for us is a relatively low drama event. Makes good returns, and in the process, we're going to increase the vibrancy and appeal of those centers. So we're working with all of our department stores.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [20]

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And so does that mean that you're looking proactively yet?

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David John Atkins, Hammerson plc - CEO & Director [21]

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We are as much going to them with proposals as they are coming to us. Yes. And in many cases, you take House of Fraser, they will be very happy to stay in our shopping centers. But we're taking proactive action to, in 1 or 2 cases, remove them and replace them with a more vibrant retailer.

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Maxwell Wilson Nimmo, Kempen & Co. N.V., Research Division - Analyst [22]

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Max Nimmo at Kempen. Just a quick one follow-up. You're mentioning about e-commerce penetration on the continent and the fact that you think -- well, some people are saying it won't nearly as bad as in the U.K. where kind of, say, 20% of retail sales in the U.K., some say that kind of steady state, maybe up 35%. So I'm trying to understand, why do people think it won't be as bad on the continent?

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David John Atkins, Hammerson plc - CEO & Director [23]

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Well, some of it is simply how it evolved and where we are today. So postcodes, which are a very, very key fundamental part of delivery, don't exist in Europe or Ireland, as they do in the U.K. In Ireland, postcodes only were actually rolled out 5 years ago. Before that, you had to know the name of the person you're delivering to, or the name of the house. Someone said, everyone knows everyone in Ireland, so maybe that wasn't too difficult. But in Paris, Jean-Philippe, there are 15, 20 postcodes in total?

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Jean-Philippe Mouton, Hammerson plc - MD of France [24]

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20.

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David John Atkins, Hammerson plc - CEO & Director [25]

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20. There are 20 postcodes for the whole of Paris. So delivery is much harder than it is in the U.K. I think the other point, the flip side of this is think of the leasing market in Continental Europe. Most leases have a 3-year tenant break. Rents are tagged to indexation. So the ability for retailers to rightsize their portfolios and the occurrence of over-renting, frankly, just doesn't happen, hasn't happened in the way it has in the U.K.

So the ability for retailers to work with the physical space and online in an omni-channel way is almost happening far more seamlessly. And I think all of that comes to our belief that the impact on physical retail in Continental Europe will be far lower.

Any more?

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Richard J. Shaw, Hammerson plc - Group Director of Finance [26]

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I think we've got someone on the phone.

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David John Atkins, Hammerson plc - CEO & Director [27]

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I think we have some questions over the wire. So if we can go to those now.

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Operator [28]

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(Operator Instructions) The first is for Marc Mozzi from Bank of America.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [29]

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I just wanted to share with you, your thinking about this allegation, you're saying that people would love -- I mean logistics people would like to have sites on your mall. Do you think they're going to be ready to pay the same rents that you are currently offering to retailers for logistic use of the space?

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

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I'm not sure I fully got that question. About repurposing? Marc, can you just sort of maybe ask it slightly different? The sound quality is not great. Sorry, just go once more.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [31]

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Sorry. You're saying that some logistic operators are willing to use your shopping center space.

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

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Right. I think...

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [33]

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My question is...

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David John Atkins, Hammerson plc - CEO & Director [34]

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Yes. Yes, I got you. Okay. Mark Bourgeois, who's on the front here. Mark, do you want to cover that question?

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Mark Richard Bourgeois, Hammerson plc - MD UK & Ireland [35]

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Yes. Thanks, Marc. The areas we're talking about are typically in our service yards, which sits below the traditionally rented space, and they currently carry essentially nil value for us. So we're seeking these opportunities out. They sit right at the center of our -- of these city centers and these budget destinations. But I think the important point, to answer your question, these are essentially 0 value. So 0 rent to a 0 value. So anything we get is upside. And so we think these are some quite interesting opportunities that we can deliver.

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David John Atkins, Hammerson plc - CEO & Director [36]

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And Marc, we are in negotiation with all the major delivery and logistics companies. So we're pretty confident that we will be able to roll something out later this year on this and provide a very nice revenue streams. I don't want to say what that is right now, but it's quite material.

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [37]

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Okay. Interesting. And do you think the reason for retail park disposals which are 20% below book value, is that something we should have a read across for the rest of the U.K. flagship centers?

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David John Atkins, Hammerson plc - CEO & Director [38]

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Well, remember, that was a 22% discount to our midyear 2019 values because at the time, we haven't published our results today. Now we have done that. So in effect, it -- looking at the 12 -- 10% write-off in values in the second half of the year mean that's more like a 12% write-off and reduction in value to our published year-end numbers.

Now the way I would look at that is that there's no doubt that with the size of this deal, it's the largest transaction in retail parks for over 10 years, there is definitely a discount for quantum. Anyone's guess what that is, but that might be 5%, 7%, 8%. And inevitably, in a declining market, and also taking account the fact this deal will complete in April, any buyer is pricing forward, if you like, the value. So I think it's explainable. I think you sort of read across in percentage terms into other parts of our portfolio which might be declining, well, yes, I think -- and we're not denying that we think that values, particularly in the U.K., will continue to fall during 2020.

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Operator [39]

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There are no further phone questions.

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David John Atkins, Hammerson plc - CEO & Director [40]

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Okay. So no further questions. Any last question in the room? Otherwise, I know many of you have got another appointment to meet, so I'd like to say thank you for coming along today. And we'll see you all soon. Thank you.