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Edited Transcript of SHB.L earnings conference call or presentation 21-May-19 8:30am GMT

Half Year 2019 Shaftesbury PLC Earnings Presentation

London Jul 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Shaftesbury PLC earnings conference call or presentation Tuesday, May 21, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Bickell

Shaftesbury PLC - CEO & Executive Director

* Christopher Peter Alan Ward

Shaftesbury PLC - Finance Director & Executive Director

* Simon John Quayle

Shaftesbury PLC - Property Director & Executive Director

* Thomas James Chisnell Welton

Shaftesbury PLC - Property Director & Executive Director

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Conference Call Participants

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* Benjamin Paul Richford

Crédit Suisse AG, Research Division - Research Analyst

* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* David Brockton

Liberum Capital Limited, Research Division - Research Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property 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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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [1]

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Good morning, everybody. It's 9:30. Welcome to the presentation of Shaftesbury's results for the 6 months ended 31st of March 2019. I'm conscious that there are a number of companies reporting today, so we'll canter through this as quickly as possible, so you can get on to your next presentation.

I would just say we're having a live video stream of the session this morning as well as our audio streaming, and you'll see the cameras at the back of the room, so those in the audience needn't be too bothered that they're going to appear on screen. The stream will continue throughout the Q&A session, but we'll not be taking questions from those people who are dialing in either on the audio link or the video link. So please, if you have any questions, if you'll e-mail me, brian.bickell@shaftesbury.co.uk, I'll do my best to get back to you during the morning.

So moving on to today's agenda. First of all, you'll recognize that the Shaftesbury team, I'm sure, we've been doing this for a number of years, as you know. So Christopher Ward, our Finance Director; Simon Quayle and Tom Welton, our Property Directors. I'll give a brief introduction today and then they'll talk about -- Chris will talk about the results and finance. We'll then move on to a review of operational matters. And I'll wrap up with a summary and outlook.

But I think, really, just to set the scene and to remind everybody, as you know, our focus is on the West End of London. We have an exceptional portfolio on 15 acres now and 8,600 buildings. Most importantly, a forensic local knowledge and a very long experience in running this business. I have to say, over the years, we've had good times and bad times in the West End, but only relatively bad times, and that's why we stick to these locations because of their long-term resilience and the fact that there is a degree of insulation from what goes on in the national economy.

We now stand at 599 restaurants, bars, cafés, pubs and clubs across our 1.1 million square feet, and that now accounts for 2/3 of our income with 0.5 million square feet of offices and, just by coincidence, 599 apartments as of the 31st of March. That's the other third of our income. So we're obviously very different from the other listed companies in the sector and -- with this mix of uses and geographical location.

So we're going to cover, in today's presentation, the financial performance, but it's really about our -- the fundamental story here is resilience of our business in the West End. We are seeing growth in income, earnings and dividends. We've got strong, robust demand for our space across the portfolio. Our vacancy rate is in line with our long-term average, so no change there. And lettings and rent reviews are being settled above the ERV. And really, the story is one of great resilience. And of course, we had -- the competency is reflected in the fact that we have a number of schemes on across the portfolio now. We're not taking our foot off the pedal there. Whenever we get the opportunity to get back space and get in and do some value enhancing work, we know the demand is going to be good for that space, so there's no reason really to hold back.

Just a very brief reminder about why the West End is so special for our shops and restaurants. It provides them with probably 200 million visits annually to the West End, 7 days a week trading. Monday to Thursday is probably slightly more local. It's about the people who work locally, Londoners, huge working population are the regular customers for our shops and restaurants. But of course, as we get into the weekend, it morphs into more of a visitor economy and that's domestic and international visitors. Probably the common theme is there's a slightly more affluent customer footfall than you would see in most provincial locations. And of course, our visitors are sort of slightly less vexed by the issues we have around Brexit at the moment.

So this global appeal on these locations and the structural imbalance between the availability of the space and demand for the space is what underpins both the West End and our long-term rental growth and resilience.

Of course, you'll be very familiar with the strategy here. Very simply, the key ingredients to all of this are location, clustering, long-term estate management strategy, long-term curation, which is -- and buildings, which can adapt to changes. Our buildings' probably average age 200 years -- 150 to 200 years. They've had lots of different uses over time. It's ebbed and flowed, and that's all that's happening today. But the fact they've been around for 300 years suggest they're somewhat more adaptable than modern structures, which don't have this flexibility. And that's absolutely essential if we're going to keep these -- this portfolio adapting to how people want to use it.

It's all underpinned by some very sensible long-term financing arrangements and very modest levels of gearing, which we think is absolutely appropriate for long-term business like ours. And of course, a great team, very experienced people. And so we've seen a few ups and downs in the West End. So just a thing like Brexit is not going to knock us off course.

And again, the long-term track record -- long-term focus has always been about long-term rental growth. That's what underpins our values and everything about this business. You'll see today we're sitting there with a reversion of some 26% above current contracted income, so that's a potential GBP 31 million of additional income we would expect to be flowing over the next 3 to 4 years.

So with that very brief summary of today's proceedings, I'll hand you over to Chris. I'm sorry for going that way.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [2]

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Thanks, Brian. Good morning, everybody. Let's see if I can get the arrows right this time.

So you all have seen the results and I'm guessing you read them, but I'll give you the headlines, and it's all about growth in our contracted income and ERV, which is driving increases in income, earnings and dividend. So the net property income up just over 5% at nearly GBP 49 million. EPRA earnings per share 8.9p, 6% up. And the dividend, which we have increased by nearly 5% to 8.7p.

And that sort of growth in income and ERV is also underpinning our portfolio valuation. So portfolio valuation growth 0.3% like-for-like over 6 months, so 1.1% over 12 months, which then feeds into our NAV, up 0.4%, 4p to GBP 9.95, over 12 months, 1.2%. And then the NAV return if you add back the dividends over 6 months, 1.3% and over 12 months, 2.9%. A bit of a canter through.

So what's underneath that. So looking at the profit and loss account, you see what's really driving the performance in our profit and loss account is growth in rental income. And what we saw in the first half was 6.4% like-for-like growth in rents receivable. There are a couple of other things happening, but rents receivable, GBP 58.6 million compared with GBP 55.6 million last year.

The other things happening, we had some acquisitions. We sold a couple of properties, and Brian will talk about those. They had a net impact of an increase of GBP 0.5 million. And then 72 Broadwick Street, which we had income in the first half of last year and not in this year because we took vacant possession in September ahead of our scheme, had a 0.9% -- GBP 0.9 million impact. And this crystallizing of the portfolio reversionary potential is really what's driving the like-for-like increase in rents, and this is what we see time and again.

And then that drives EPRA earnings. So EPRA earnings are up 9.2% with earnings per share of 8.9p and as I said a dividend -- interim dividend of 8.7p, so fully covered by EPRA earnings. And you can see that the big thing that happens here is the growth in net property income.

There are a couple of other things going on in here. So a slight increase in admin costs, a slightly higher headcount now. But also, there was a noncash accounting charge to share options, slightly lower net finance costs, partly due to interest income. But actually last year also we had an accelerated writeoff of loan issue costs when we did our Lloyds and Wells Fargo refinancing. That was GBP 0.3 million, so that was a charge last year, not this year.

Longmartin EPRA earnings, GBP 0.1 million down, all about scheme vacancy, and Brian will talk about those schemes in a short while.

So before I look at the balance sheet, I think it's worth just looking at some of the operational metrics. We're seeing good demand for our space, and you can see this is delivering contracted income growth, we did GBP 16.6 million in leasing transactions in the first half. Commercial transactions, GBP 13 million, 2% up on ERV last September and 6% up on ERV from a year ago. This is great because this is proving great evidence for our valuers, but most importantly it's bringing through cash flow and income and earnings.

Our residential, GBP 3.6 million, just marginally above what our previous rents were. And you may remember last year, we were showing the rents had fallen in a small bit. So this is reaching parity.

And that all feeds into our occupancy -- or our vacancy, whichever way you like to look at it. And our vacancy has fallen over the last year from 5.6% to 3.3%. You can see on the chart at the bottom here. And actually, I've split that between the larger schemes and other vacancy. The larger schemes, we've -- we're nearly done on those now. And so we've let Thomas Neal's as we noted at year-end. And we're now pretty fully let on our Central Cross. We're 87% let or under offer.

At March, we have 0.7% of our ERV at Central Cross still. Half of that was under offer.

And then our other vacancy, this is the core recurring stuff, that just floats between 2.5% and 3%. We're bang on line with our long-term trend. And in fact, of 2.6% that was vacant at March, about half of that was under offer as well. So all good stuff.

So turning to the balance sheet. So as I said, NAV, up 4p. As always, earnings and dividends kind of largely offset each other. So really what drives the NAV increase is revaluation surplus, and actually we sold a couple of properties at a healthy profit as well. So that was 3p between them. And it's quite interesting, when we look at the valuation in a minute, the wholly owned portfolio and Longmartin are behaving differently. So wholly owned portfolio added 6p. Longmartin took off 3p.

So let's look at the valuation. So the portfolio now is -- combined is worth about GBP 4 billion. And you can see that Longmartin is -- well, it's 5% of the total, a wholly owned GBP 3.8 billion and 95% of the total. And they are performing differently. The wholly owned portfolio, good demand, still seeing growth in income. We're still seeing growth in ERV. We're still seeing valuation growth. So over 6 months, valuation growth 0.5%; over 12 months, 1.6%. And then growth in ERV, and we'll come onto that in a moment. Whereas in Longmartin, and this is entirely driven by its retail part -- the part of it that is retail, which is about 1/3 of Longmartin actually.

We've seen a decline in rental values on Long Acre and we've seen a small increase in yields there, and that's meant that we've got a valuation deficit of 4% on that 95% -- on that 5% of the total.

So just -- well, just talking about the Longmartin valuation. As I say, it's just 5% of the total. And you can split it into nonretail and retail. As I say, nonretail about 2/3. Retail, about 1/3. The nonretail, absolutely stable in terms of ERV and yield. The retail, and this is dominated by big High Street shops on Long Acre, it's a street which saw, I mean, magnificent rental growth between sort of 2012 and 2017. And -- but crucially, it's a fragmented ownership street, which means that you don't have that level of landlord curation control that we exercise over our other clusters. So -- and we know that sort of retail -- big High Street retail shops are pretty challenged at the moment. And I think you've seen that in the results that have been issued over the last week or so. And thankfully, this is our only exposure to this type of asset. And the behavior we're seeing on Long Acre is very, very different to what we're seeing -- in fact, it's the opposite of what we're seeing in our wholly owned portfolio where the shops are smaller and the rents are smaller. So that retail, the value -- there's a bit of increased availability down the street and the values have lifted the equivalent yield by 9 basis points. And they've taken 4.8% off of the ERV. That equates, for us, our share of that is just GBP 0.2 million.

So let's look at the wholly owned portfolio. As I say, we're seeing very opposite sort of behavior. So coming back to the supply and demand, I mean, I always say this. This hasn't changed. The supply and demand -- well, I suppose the supply is probably a bit harder than it was 6 months ago. But the demand for us, in our area, is absolutely huge for these sort of GBP 5 million to GBP 25 million lot sizes where you get investment security, reliable cash flows, high occupancy. And people like a bit of asset management activity or asset management opportunities. And this is all the stuff we like, of course. This is why we invest where we invest. And it's interesting that the -- on the supply side, if anything, with a bit of uncertainty, existing owners are even more reluctant to sell than they ever were. They like the same things as the people who want to buy. They like all the stuff we like, and they're kind of hunkering down at the moment. And why would they sell the crown jewels and some of the most valuable real estate on the planet, unless you need to? And we haven't got distressed owners. And these are all pretty much families, they're not institutional owners.

The yield, the value is attributed to our portfolio. It's pretty flat. It's up 1 basis point on September. And I must remind you, because the Cushmans remind us, they value this in parts and not as a whole. They don't attribute any value to -- or any worth, if you like, to sort of the once-in-a-lifetime opportunity to get your hands on a trophy portfolio of 15 acres in the West End.

And across the portfolio, we're seeing growth in contracted income, growth in ERV. So the growth in both of those over 6 months were 2.1%, over 12 months 4% in contracted income, 3.2% in ERV. And actually, the portfolio, as Brian said, is really highly reversionary. And you can see the elements here. We've got GBP 4.5 million, which is contracted. That's on rent freeze, that flows through pretty quickly. At per vacancy, where we talked a little bit about that, that kind of flows through pretty quickly because there's always this sort of churn. 72 Broadwick Street, which Brian will talk to you about a bit later, is a rather large scheme. That's got GBP 5.6 million of ERV, that we will see in 2, 2.5 years. We've also got a lot of activity, a lot of schemes, a lot of small- and medium-sized schemes at the moment, GBP 8.1 million of ERV. And I think, as we said at September, we weren't expecting these to be delivering much income this year, but we'll really see them next year. It's going to be really highly accretive to income, earnings and cash flow. Or that's our expectation.

And then there's a ramp of GBP 7.7 million, which is just the under-rented element, if you could get the whole thing back there and relet it at market values.

And finally, just a quick look at the balance sheet. As you know, we operate with a low-risk balance sheet, as Brian said. We spread our sources of finance, we have long maturities. We have a diversity of those sources at the -- where our drawn debt is fixed. LTV at September -- sorry, at March was 22.8%. albeit that we have GBP 91 million of commitments at the moment, including the purchase of 90-104 Berwick Street, the scheme we're doing at 72 Broadwick Street and all our other schemes on the go. Once that money is spent, that LTV rises to about 24.5% on a pro forma basis. And we've got resources available now to move in the market and invest, which is what we need. You need to be able to move very quickly. If you don't get something when its available, if and when it becomes available, you can forget it. You won't get it again.

Okay. With that, I will pass back to Brian.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [3]

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Thank you, Chris. Just talking now about the operating environment in a little bit more detail. So I've touched on the fact this is a pretty -- it is a unique location in terms of its volume and footfall. So it's unsurprising there is good occupier interest for our space.

We said at the last results, the larger the space, the larger the commitment, the larger the potential fit-out costs. Those deals do take longer to get over the line, but there are still people around for that sort of space. We do have this very flexible portfolio, so we are able to adapt the space we offer to people. So particularly, retailers at the moment are probably downsizing in the amount of space they need. That's partly because of the impact of the logistics that sits behind all retail businesses now, the fact that you don't have to carry massive stocks. Things can be delivered either to the shop or to your customer really quickly. So that's not really an issue for us. I have to say we've spent a number of years trying to deal with the fact that our buildings are quite small, the floor plates are quite small, making our shops bigger. So it's not too difficult for us if this is what the market wants us to put the walls back in, maybe to find alternative uses for the basements, taking first floors back to office use or possibly residential use. So we have lots of options in our armory, really, as to how to do this change. As I say, you really have to contrast this to a very modern purpose-built structure like a shopping center, which was built in a particular way, and it's very hard to introduce valuable new uses or different uses into that existing space. So again, this flexibility is going to be absolutely critical in the -- in future proofing the portfolio, I guess, you would say.

Our long established strategy has always been to have short-term, more flexible leases. As you know, our small shops in the West End have always been let on 3 to 5-year leases. Bigger shops, even if they're 10 years, we'll probably have a break of 5 or 7. That's not a problem for us. If you're not doing well, we'd rather you didn't hang around any of these areas. It's all about creating interest, and struggling retailers don't bring footfall, quite frankly. So that's always been our strategy.

And if we come -- if you come to us with a new idea, if you want to give it a go for 12 months or 6 months, that's absolutely fine with us because, frankly, if it works for you, you'll want to stay. And if it doesn't work for us, we would rather you moved on. That's the depth of demand that underpins that focus, really.

I would say, as part of this as well, the interest in tenants in coming to you is not just the footfall, it's the way we curate them long term. The tenants are buying into sort of Shaftesbury strategy, a Shaftesbury philosophy about keeping these areas different, keeping them fresh. So if you come to invest in one of our properties as an investment for your business, you're not going to get the wrong sort of people turning up next door to you and wrecking your trade and wrecking the footfall. That's not what this is all about. We're there to support our tenants. We do an awful lot, as you know, in terms of marketing, PR, even working with people like London & Partners in promoting sort of -- promoting tourism to London and our areas. It's absolutely critical that those businesses are profitable and they're going to make money. And that's what makes people want to come here.

Our business has never been about High Street multiples. We don't have department stores. We don't have supermarkets. And these are the general problem children, that you're reading about in the national situation. And the great advantage of having 599 shops, restaurants, cafes, bars, and pubs, that's a spread of risk across an awful lot of small businesses. So we don't have that focus on one particular covenant or balance sheet.

So our retail failures, well, there's always some coming and going in those 600. Not everybody is doing well at a time. And a lot of -- in terms of fashion and retail, that's a bit time-limited these days. Our retail failures are really just in line with our normal attrition rate. But the main thing is when people want to go, somebody wants the space and we're not having to have some fire-sale of rents. We're letting at or above current passing rents and meeting our ERVs.

Moving on to restaurants. Obviously, a big part of our business now. From 10 years ago when it would have been 27% of our income, we're now up to 35%. It's our largest source of income. And of course, these are not national chain restaurants, they're really very focused on this innovative mid-market idea that we have. That's what the West End is all about. So there's still plenty of demand for the restaurant space in the West End. Leases still attract premiums when people choose to move on. Where we've had instances of old national chain, like Jamie's who have gone through CVAs, they haven't put their West End restaurants into the CVA because they know that, actually, they're probably their most profitable site, so that's really important.

So it's very much business as usual in the restaurant scene, a EPRA vacancy that's all under offer. People are always looking, bringing us new ideas, new concepts and it's keeping this interesting. And that's what where people are spending their money these days.

Selection of our new restaurant operators here. And it's quite interesting that -- of course our largest concentration of restaurants and cafés is actually in Chinatown, and we've had a long-term strategy there to refresh the offer to make it a little bit more relevant to what people are looking for today. And the majority of those new openings there are actually in Chinatown, so we are making considerable progress there and broadening the appeal of Chinatown.

Moving on to retail. Of course our retail is mainly clustered in Carnaby and Seven Dials, but we do have retail elsewhere, and as I say, the attractions of these areas in terms of footfall and the curation and actually some very good -- as you know, very competitive rental levels and relatively -- well, a whole range of shop sizes. But even our large shops and not that big, frankly, compared to the Oxford Street, Regent Street and the big shops you get in, perhaps, a shopping center. So again, it's a much better offer for people there, coupled with the -- say the footfall. And this is how we market the business. And retailers know that, as I say, we bend over backwards to support them in their business. And a number of interesting new initiatives we're looking at, at the moment just in terms of better understanding, the demographic of people that comes to these areas, so we can demonstrate our long-term knowledge to potential takers of space. So this is about starting to mine big data, working with tenants. So it's a very interesting trend, which I'm sure we'll be talking about over the next couple of years.

And again, reminder there that this is where our rents sit in the spectrum of West End rents. Very much on the affordable side of the chart there. We've never really bought into the High Streets and the highest rents. We think the longest-term potential growth is coming out of those slightly more modest streets, which have great long-term potential.

And again, here are some of our new openings. Quite a few of these are overseas retailers, European retailers coming to the West End for their first stores. I think they're not too fussed about Brexit. This is still going to be probably the best retailing city on the planet. And if you're coming into Europe, this is where you're going to start. It's always going to be in London. And if you've got a cool brand, you want to be in the coolest parts of London, so that's going to bring you into our areas. So -- but again, a very interesting lineup.

Just moving on to our other uses now. I mean, offices are an important part of the mix. It's 21% of our income. But across the West End, the office population is an important element to the local economy. Not everybody wants to be in co-working space. Not everyone wants to be sharing everything. A lot of people like their own front door and their own discrete space. So we still fulfill that need. We're the largest provider of SME office accommodation of that sort of self-contained nature in the West End. And demand there is very good. Plenty of smaller tech media businesses want to be in these locations and all their staff certainly want to be here. Rental level is stable and incentives stable as well.

Our residential, now 12% of our ERV. Again, demand here is very good. We have had a few days where we've had absolutely no flats out of our 599 available. Generally, we're running at vacancy of less than 10 units, so a good churn there, but very, very reliable cash flow. We can't -- we're aware there is competition for the availability of residential space. So it's important we keep the specification up for our flats. Where we have slightly larger flats, where there are opportunities to break them into smaller flats, I think that's where the strength of the market is. It's studio, one beds that go the best. And beyond that, people are less inclined to be sharing their space these days.

Interesting development here. We talk about villages. That's always been a Shaftesbury's phrase. Well, we're trying to create an online sort of community now so we've just launched a Seven Dials Community Portal, which is a great source of bringing the business community together and is about to be rolled out to the residential community. But it's about information events and enabling people working in our offices to be aware of what's going on. So this is the first one. I'm sure we'll be rolling out into other areas, but again, it's getting that message out, to even the people on our doorstep, about what's going around our areas.

Moving on to the schemes now. And we remain busy. 9% of the portfolios is under refurbishment at the moment. But you can break that down into 46 small schemes we had on the go of over about 120,000 square feet. So these are our bread and butter schemes, none of them individually significant, but cumulatively, their impact is what's driving the business along creating better space, adapting space, responding to what people want. And as I said earlier, we're not easing up on the level of activity across the portfolio. We can see the demand for space as it comes off the production line remains very strong, and we carry on doing it. But of course, overall, our Capex is still very modest in relation to our capital value. Just remember that our commitment of about GBP 35 million, GBP 40 million a year is less than 1% of our portfolio value. So we don't have a huge commitment there to CapEx. But it's very effectively deployed. And as we always say, our tenants and our shops and restaurants probably spend far more on their buildings than we do, long term, so the obsolescence problem is more theirs than ours. Our largest scheme is obviously 72 Broadwick Street in Carnaby. The details of the scheme there pretty much as it was at the 30th September, but it has been reevaluated by Cushman's in terms of its ERV potential. So it's a very exciting scheme. We expect the planning application to be heard in mid-June, so there have been a few delays at Westminster City Council for various reasons, but we're hoping that the applications can be heard within the next few weeks. Scheme duration of about 2 years and potential cost of about GBP 32 million, so by Shaftesbury standards, it is quite a big scheme. But we've got some very exciting ideas if we -- about how we can use the space differently in the building within the existing envelope and an indication there of a building that's probably not the most attractive, stuck in the middle of Carnaby Street, will look considerably better over the next couple of years. Acquisitions and disposals, well, as Chris said, those existing owners are particularly reluctant to sell at the moment. I think we're not in the financial distress that we saw 10 years ago where people were forced sellers, people are generally hunkering down. If you don't -- this has never been a market you can trade in and out of very easily, but it's particularly difficult now. The revolving door is one-way, if you leave you're not going to get back in again. That's the reality. Of course, if the currency, sterling, is looking little bit weak at the at the moment, I'm sure that is going to create more interest from overseas buyers when they look at the value they can get in investing in London property and particularly the West End. So that would just give us more competition for the stock that's available. But we've always said that the buildings we buy have a particular long-term value to us, which an individual purchaser wouldn't be able to realize. And of course, they don't know quite as much about the market as we do. Very disappointing, our forward purchase of 90-104 Berwick Street has been further delayed. This is all due to vendors' scheme and construction problems they have there. We have no control over this situation. We have no interest in the building until it's been PC'd. It doesn't get handed over to us [till] then. And we're as frustrated as the local community as this project drags on, because we're absolutely certain, if we got space back now, because it's the retail we get back that we're very keen on, the upper floors are already pre-let, that the demand for retail -- modestly-priced, modestly-sized retail space in Soho will just fly off the shelves. So again, the sooner we get it the better really. One or 2 disposals, we always have, now 600 buildings, some that are not quite essential to us. But it's very interesting, the 2 we've sold have achieved 24% above book value. So it's an indication, for these individual nuggets of freeholds, there is considerable interest in them.

So I just now moving on to our outlook. Well, sadly, 6 months on from the last time I stood here, Brexit is no clearer to anybody. And that's probably the world we're going to be living in for some time before it ever gets sorted out. And you combine that with this structural change that's going on in the U.K.'s consumer spending habits, it really contributes to a slightly uncertain environment that is perhaps becoming the norm these days. None of these issues are going to disappear overnight. But we are underpinned by this fantastic global destination. This appeal provides us with a considerable degree of protection from what's going on nationally. West End has -- is always seen -- always has been seen for retailers and restaurateurs as the place they want to be simply because we don't have this national volatility and the other sort of -- national uncertainties really don't impact us because as the numbers continue to grow, the long term forecast for tourism into London are just as strong as ever, so around 3.5%, 4% per annum compound growth for the foreseeable future. We've got a very interesting project on with London & Partners, where we and another are -- a number of other interested parties are actually supporting a campaign by London & Partners, which is the mayor's tourist authority, to actually encourage domestic visitors to come to London. And that's very timely really, a weaker currency means it's more expensive for us to go abroad out of the U.K. So it's good to remind people of all the things you can do and how accessible the West End is and what a fantastic experience it is. And it is, at the end of the day, all about the experience of coming into the West End. Because our management strategy, which we've talked about previously, just to sum up, really this is all about the location. It's about the unique features of the West End. It's about a very flexible portfolio and a very proven long-term, very flexible management approach all based on making this a place that people actually want to come to. Whether you want to come here to shop or eat or work or to live, it's going to be a great environment, and that's what we deliver, and that's why people want to come here. Underpinned, of course, by stable financing, it's important that this business does not carry excessive debt. This is a long-term business, and we believe leverage is appropriate at the current sort of levels. And we're always mindful of that. But probably the most important thing we have is a really experienced team. We have been around long time. We've seen some difficult periods in the history of West End, but we understand this market better than anybody else. We can see the way it's changing, and we have a portfolio and a strategy that will adapted to that change. You might as well embrace it, change is going to be here forever. So that's really all I have to say. So I'd like to hand the floor back over now to any questions. I think we have some roving mics at the back -- somewhere in the auditorium. So if you could just introduce yourself if you have a question. And let's get going on the Q&A.

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Questions and Answers

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [1]

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It's Chris Fremantle from Morgan Stanley. Just wanted to go back to Page 15 in your slide pack where you talk about the valuation movement and the ERV growth, and just focus on the wholly-owned portfolio. You've given a very clear explanation of Longmartin. But just on the wholly-owned portfolio, you say you're ERV growth is growing at 2.1% and your values are growing by 0.5%. I know that's quite a small number, but clearly, on an annualized basis, a business that's growing at 1% annualized versus a business that's growing at 4% annualized is quite a big difference. So can you just help you reconcile, given that there's almost no yield movement, what the delta is between those 2 numbers, please?

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [2]

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Well, I think that's one for Chris, who is -- actually we spotted this, me and Chris. We asked ourselves, to make sure the valuers hadn't got it wrong.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [3]

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Yes. Actually, it's -- a lot of it is driven by 72 Broadwick Street, where we've seen ERV growth over the period, I think it's 1% or 1.1%. Yet where the valuers are valuing -- that ERV will come through once we've built out the scheme. So you don't get the valuation now. So that will come in the future. So if you strip that out, you come down to sort of 1% ERV growth and about 0.7% capital growth. The other difference is between the two. I mean, they're never going to be exactly the same, but it's about other schemes. We've got a lot of -- as Brian said, a lot of schemes on the go at the moment. It's about where we've let our space and there's some rent freeze in place. It's a mixture -- it's a whole mixture of things. And actually, within the yield to 2 decimal places, you can't see it, but there is probably a small increase as well, if you sort of -- a few bits of a basis point increase as well. So it's just a mixture of stuff. But 72 Broadwick Street, where the value is -- they are valuing it as a scheme. They are knocking out developer's profits. So you will see that all come through. So that is -- it sort of lags in a way, there's a timing difference.

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David Brockton, Liberum Capital Limited, Research Division - Research Analyst [4]

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David Brockton from Liberum Class. Can I ask 2 questions, please. Firstly, in respect of tenant trading, you've clearly given a sort of robust defense of how well tenants are doing within the wholly-owned portfolio. I was just wondering if you'd give a better flavor as to what's happening with turnover top-ups. Are those still growing? And I think you did mention that attrition was stable. I was just wondering if you can touch on sort of tenant churn. Are you seeing that pick up or you're just being able to replace it more actively? That's the first question with, I guess, several parts. The second one was about Soho. You've seen the strongest capital gain in Soho through this period. Was that any particular assets? Or was that across the board?

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [5]

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Simon, Tom, do you want to talk about the restaurant scene? Probably.

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [6]

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Firstly, on restaurants. Where we have turnover top-ups in our leases, we continue to see good growth. There's been no change. There may have been a slight drop off in January this year. But generally, the trading pattern has been as strong as it's been before. There's obviously going to be 1 or 2 restaurants which don't do as well as others, but that's just in the nature of business generally. As far as retail, we're not really suffered from any of the large chains' CVAs. How many have we had?

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Thomas James Chisnell Welton, Shaftesbury PLC - Property Director & Executive Director [7]

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We've probably had 2 or 3, which all stem from where you have tenants who have problems elsewhere, they don't stem from our locations. In fact, I think, in all cases, we're able to relet the space at better rents. So the impact is of no consequence really for us.

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [8]

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And the general churn is just a general pattern that we've had for many, many years. So with sort of shorter leases and especially in the fashion trade, fashion will go -- come in and out of fashion. So we're not seeing any great increase since before.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [9]

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Can I add on the turnover top-ups, we're now reaching the point where we're having our sort of rounds of rent reviews. And so, it would be quite interesting to see. At the moment, the value is, when they value the portfolio, they don't value all of the turnover top-ups. And where they do, they put a frothier yield on them. So it would be very interesting. To the extent some of that turnover top-up converts into hard rent, we should see a valuation boost as well. And on SoHo, David, it's purely a reflection of transactions. It's just the flukiness of the transactions that happened in the last 6 months. So far the ERV growth there was, I think, 3%, 3.1% and so was the capital growth. It's entirely by just the selection of transactions, but nothing individually material because, I guess, in Soho, we don't have anything that's individually material, it's all just bits and pieces.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [10]

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But it's quite interesting. So -- on particularly Berwick Street, the rents are much lower than they should be, really, for the volume of footfall on the street, the interest. So you're seeing a bit of a catch-up in those rents, I would say, which is why we're very keen to get the development on Berwick Street handed over, and that's 10 potential shops there which will let very nicely.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [11]

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It's Rob Virdee from Green Street Advisors.

A couple of questions. Number one, you say you have to be quite nimble with your acquisitions, your LTV has been quite stable. How willing or how able are you to push that? And how far will you push it? And I'm thinking more on, historically, you have done equity issuance in '14 and '17. If a large acquisition did become available, are you slightly hampered with all of your major shareholders now? It's a bit of a tough relationship there.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [12]

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I'd say, really, that most of our purchases are relatively small. The appearance of 72 Broadwick Street in 2017 was quite unusual. I think, Chris, our committed firepower is now about GBP 240 million, something around that.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [13]

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GBP 245 million, yes.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [14]

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GBP 245 million. And the reality is, I may know if we could find some nice big purchases, but it's going to be the very typical Shaftesbury stock, I think, over the next -- certainly as far as we can see of smaller purchases and probably a CapEx spend of around, well, somewhere between GBP 80 million and GBP 100 million a year including spending money on our properties. So we will make sure the gearing rate remains at a sensible level, but should we ever need to revert to the equity markets for a top-up, we still have the opportunity to do a rights issue. I mean, it's more expensive and more -- it takes you longer, but that's still a route that's open to us with a number of other potential equity options. So we're not closed off in any way.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [15]

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Super. And the second question was on ERVs. So just coming back to your question. If I look at it and strip out 72 Broadwick, we're about 0.6% you said. If I look at the trend of ERV growth, it's still growth, that's good, but it has been declining over the last few years below the 10-year average. Do I just have to get used to lower ERV growth for this portfolio?

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [16]

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I mean, I think, if you look -- we could have looked at this not on a 6-month basis, we're looking at it on a long term. We have very long investment horizons. And we've always seen this. In tougher times, the ERV growth falls a bit. So you end up with lower growth, but over the long term, we deliver 4% to 5% ERV growth compound, pretty much every time you look at it, it comes up about the same number. So you get the years -- and we had some years when things were really sort of motoring away just generally in the economy. And in probably, what, probably '14, '15, we're still seeing 6%, 7%, and then you see a few years at 2%, 3%. But what you don't see and you've never seen in the West End is a few years at 10% and a few years at minus 10%. You just don't get that volatility. So you get this pretty straight line, it undulates slightly, but yes.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [17]

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We had -- well, 10 years ago, we probably had 2 years of 0 rental growth in our shops and restaurants. Office rents did actually decline over that period. And we had a bigger exposure to offices in those days, but actually, it caught up with itself, really.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [18]

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It's all about making sure our tenants are trading prosperously, and as long as they are, they can pay more rent, ultimately.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [19]

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Sander Bunck from Barclays. And a couple of questions from me as well, please. First one is on the shorter term leases. You mentioned quite a few times that leases are going to be more flexible. You are willing to sign more flexible leases. Can you just say a bit about how those leases compare to ERV? Are they pretty much in line with ERV? And if not that just if they have any impact on valuations? Or is there just an increased amount of CapEx that you need to do as you just have more churn, which requires that you need to fit out the shop a bit more often?

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [20]

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We've -- actually, we've always had relatively short leases. We -- many, many years ago, we were the first people ever to start pop-ups with people to give them opportunities. And so I think, probably some of the larger shops, the leases have become shorter or, as Brian mentioned before, we may have sort of 10-year leases with 5-year breaks. But there's not been a huge change in lease lengths across our portfolio, and I think the valuers reflect that.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [21]

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And the lettings we're doing are above ERV.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [22]

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Okay. So there's no impact, basically, from that.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [23]

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No, no, no. And we don't fit out our shops, so there is no extra CapEx, and there might be a small -- if you -- shorter leases mean that you have -- you're turning them more often. And so there are -- let's say this, if you sit there with a 3-month vacancy at the end of a lease, but if you have a 5-year lease rather than a 10-year lease, you've got 2 lots of 3-month vacancy. But ultimately, it's not really about that. It's about the long term and it's about having interesting tenants. And that churn is really important for us. It's interesting, if you have a -- the short leases is not really an issue for us because, if people are trading well, they'll want to stay and we'll want them to stay because they're bringing footfall. And if they're not trading well, quite frankly, it's not -- in no one's interest they're there other than they're paying a rent check. And that's kind of a bit dull, really.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [24]

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Makes sense. The other question I had is on Longmartin. And I think you mentioned in the presentation a couple of reasons why the area there is quite structurally challenged. And it's look like the ERV decline may drag on a bit further. How do you think about staying there longer term because it doesn't really seem to have any of those angles that you have for the rest of the portfolio. How do you think about, for example, exiting that and using those proceeds to invest elsewhere in the portfolio.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [25]

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No, because Long Acre sits in our Longmartin joint venture, and our partners -- we're partners there with the Mercers for the next 164 years, I think, something like that. I lost track of it, we're -- it was 175 years to start with. So -- and it's the whole block, really. The retail is absolutely integral to everything there, the courtyard, the offices above. So I don't think we or the Mercers would have any interest in chopping it up. I think you'd destroy value by doing that. It's -- Tom, it's quite a different sort of profile really from the rest of the Shaftesbury portfolio.

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Thomas James Chisnell Welton, Shaftesbury PLC - Property Director & Executive Director [26]

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Yes. we've highlighted that the bigger shops in Long Acre are currently a sort of a drag on the valuation for Longmartin. I think probably the interesting thing to look at with that block at the moment is what we're doing in the courtyard. And in fact -- I think it's on Page 47 of the presentation, you'll see a photograph of the scheme where we're actually converting some of the retail space into restaurants with external seating. And actually it's those sorts of uses in that location which, I think, will offer some pretty good long-term rental growth prospects. So it's not all bad news there.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [27]

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And very last one, just on Berwick Street, the delayed acquisition. You mentioned that parts of it are pre-let. Is the potential tenant, is he already getting a bit nervous or annoyed with the fact that he just can't move in? And is he thinking about potentially canceling some of the pre-lets? And is that good or bad news given that potential rents may fall off?

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [28]

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Well, as far as we're aware because the upper floors have been let to Whitbread for a premiering hotel, which probably wouldn't have been Shaftesbury's choice, but it is what it is. It's a great covenant, but there are probably more exciting operators in that space. I'm sure if Whitbread chose not to take the space, but I think they seemed absolutely committed to it, other operators would want to be there. Now, Shaftesbury's view is it's not about the covenant, it's about the concept, really. And we might end up with something a little better, I don't know Simon, what do you think?.

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [29]

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I mean, they will be contracted. And I'm sure like those us -- I'm sure they're frustrated by the delays as will be the Co-op, which is the other pre-let that they've done.

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

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Robert here from Numis. Just can you remind us whether there's any contractual terms within the forward purchase agreement relating to delays. In other words, are you -- will you benefit from some form of damages, be it through a reduced purchase price, et cetera. And if not, can you just discuss your thinking there, please? Because I would have thought that would have been -- or should have been part of that agreement given how heavy delayed it's lastly become?

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [31]

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Of course, nobody anticipated this at the outset. This has come upon us gradually. As far as we knew, it was going to be delivered in last October, November, so nobody could have foreseen this. And we don't talk about arrangements in contracts that's -- there's privity of contract between us and PMB. But you can rest assured, Shaftesbury will always do the right thing to protect the interests of Shaftesbury shareholders. Having said that, when we announced this purchase, we'll be getting on for 2 years ago now, we pointed out it was absolutely core to our long-term strategy for Berwick Street. So we really want to own this building. And it's long-term value for all that we own around there is not -- is substantial really. So -- it's not a matter of money, it's the long-term value of owning this asset. The delay is frustrating for everybody. But we'll do all we can to protect Shaftesbury's best interests, but we fundamentally want to own this property whenever it's finished. And in the grand scheme of things, there's a 125-year lease here from Westminster City Council, what's another 12 months really. And that's what we're waiting for.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [32]

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Thank you. A second question. It's just around churn again. So I keep coming back to this point. Can talk about average letting periods, please? I'm not sure you disclosed it in the statement this time, but I think historically you have, and there'd been an increase over the last few years sort of from about 1 month to sort of 2, 2.5 months average vacancy. Could you talk about how that's evolved over the last 6 months, whether there's been any change?

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [33]

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Actually, Robbie, it's unchanged on last year. Things are letting well.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [34]

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We traditionally don't announce at the half year stage because you need a volume of transactions over 12 months to make it statistically valid. And we've been quite busy this year. But sometimes, if there are fewer transactions it may not be typical of what's going on, so we -- it's best measured over a 12-month period, which would have made it clear if something changed.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [35]

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Ben Richford from Crédit Suisse. I just wondered, with retailers having a more difficult time of things, whether you've adjusted your approach to the security of those tenants and whether you take bigger deposits from your retailers.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [36]

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Well, do you want to...

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [37]

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Again, it's not really changed from our standard practice. I mean, we look at the accounts and the profitability on the -- and the performance of stores and we take a view. We -- and it's a mixture of taking deposits or get -- accepting the covenant strength. So nothing really has changed.

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [38]

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Well, I think, for us, the covenant's in the land. We're not tying people up to 25-year leases on a covenant in a shopping center that you think was going to be great but, at 10 years down the line, it turns out the covenant is not really there. We haven't -- sort of 5-year leases, as long as people are trading okay, that's fine, and that's what we really want.

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Simon John Quayle, Shaftesbury PLC - Property Director & Executive Director [39]

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And again, it's the tenants who will be fitting out the units, so that's their commitment.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [40]

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Great. And just wondered, your values, what is the long-term rental growth that they assume in their valuation?

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [41]

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They don't. They use ERV's, which are based on today's proven rent returns. They don't factor in future rental growth. That's how the res book does it.

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Benjamin Paul Richford, Crédit Suisse AG, Research Division - Research Analyst [42]

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There's no DCF, it's just a capitalized...

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Christopher Peter Alan Ward, Shaftesbury PLC - Finance Director & Executive Director [43]

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Well it's a DCF but based ERVs at today's levels. So they're not saying rents next year will be another 3% higher or 4% higher or 5% higher. Just -- so there's a cash flow that goes initial income, ERV into perpetuity.

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Brian Bickell, Shaftesbury PLC - CEO & Executive Director [44]

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Of course, at the moment, valuers are rightly cautious about what's going on because they value nationally. So I think we probably have to provide them with more evidence about what a proven rental tone is than they necessarily immediately reflect in the valuation. They always need to see a few deals on the street at a particular level before they really believe that was the tone, and they'll probably need to see a few more now. So actually our -- the last 12-month ERV growth has been about 6%, but you don't see 6% reflected in the valuation. We've got to do a few more deals to convince them. That's the way it should be. I'm not criticizing valuers. They're right to be cautious.

Right. I think that completes then all the questions in the room. So for those who have been watching or listening in, do email with any questions. Some dates for your diary, summertime has arrived in the West End. So lots of things are going on. Busy day in Carnaby on the 8th of June. We've got -- we're celebrating World Ocean Day, and it's the biggest day of our whole month of activity for the Soho Music Month. 8th and 9th of June is also the Soho food feast, which is a really great day out in St. Anne's Garden just off of Shaftesbury Avenue, all in support of the local Soho Parish Primary School. We're the headline sponsor for that. So you get to try out loads of sample food from across the restaurants in the West End. 29th of June in Seven Dials we're working with the Seven Dials Trust to actually celebrate 30 years of the resurrection of the Seven Dials Monument, which had disappeared for many, many years till they bought it back again, and a really great day of activity across Seven Dials. And then on the following day, it's the 45th Soho Village Fete, and again, that's something we support, have done for a number of years. So these are all great activities, all part of the community and supported by Shaftesbury. So thank you very much for your time. As ever summer is here, so if you've got clients that want to come and walk around the portfolio, it's a great time to do it. Thank you for your time today and have a good summer. Thank you.