Half-yearly results for the six months ended 30 September 2020
10 November 2020
Strong balance sheet and new growth strategy ensure Landsec is well placed despite Covid-19 impact
Chief Executive Mark Allan said:
“While today's results clearly show the impact of the pandemic on our business, Landsec remains in a fundamentally strong position. Together, the high quality of our portfolio and low leverage of our balance sheet provide a solid foundation for executing our growth strategy and creating value for all stakeholders. This strength also means we have been able to take a proactive and responsible approach to the challenges of Covid-19, supporting our communities and customers.
“As we begin to look beyond Covid-19, I am confident the business is well placed to capitalise on opportunities as they emerge. The investment market for high-quality London office assets, such as those owned by Landsec, has remained robust throughout the pandemic and there is little sign of that interest waning. Access to this liquidity, coupled with the acquisition and development opportunities that are likely to arise as a result of increased obsolescence of older office stock, as well as the long-term need for urban mixed use regeneration, mean there will be ample opportunity for Landsec to create significant value. We look ahead with a clear strategic direction and are optimistic about the future.”
Financial results
¾ Revenue profit(1)(2) down 48.9% to £115m
¾ Loss before tax for the period of £835m (2019: loss of £147m)
¾ Adjusted diluted earnings per share(1)(2) down 49.0% to 15.5p
¾ Reinstated dividend of 12.0p per share (2019: 23.2p)
¾ Combined Portfolio(1)(2) valued at £11.8bn, with a valuation deficit(1)(2) of £945m or 7.7%(3)
¾ EPRA net tangible assets per share(1) down 9.5% to 1,079p
¾ Ungeared total property return(4) of -5.9%
¾ Total business return(1) of -9.5%
¾ Like-for-like net rental income, excluding provisions for bad and doubtful debts, down £31m or 10.3%
Strong financial position
¾ Resilient central London portfolio consisting of high-quality assets with good liquidity
¾ Low leverage with a Group LTV ratio(1)(2) at 33.2% (31 March 2020: 30.7%)
¾ Adjusted net debt(1)(2) of £3.9bn (31 March 2020: £3.9bn)
¾ Weighted average cost of debt at 2.1% (31 March 2020: 1.8%)
¾ Weighted average maturity of debt at 10.9 years (31 March 2020: 9.6 years)
¾ Cash and available facilities(2) of £1.2bn
Responsible and proactive approach to Covid-19
¾ £80m support fund launched for retail, leisure and hospitality customers impacted by the pandemic
¾ Measured approach to existing development pipeline, progressing schemes with the best risk adjusted returns
¾ Operational changes delivered quickly and efficiently to keep staff, customers and consumers safe across the portfolio, strengthening relationships with customers through collaboration
¾ £500,000 financial assistance made available for existing charity partners
Opportunities beyond Covid-19
¾ Investor interest in the London office market remains high, offering opportunities to recycle capital, as evidenced by the sale of 7 Soho Square in September ahead of March book value
¾ Increased occupier demand for high-quality office space with a focus on health and wellbeing is likely to further polarise the market, underpinning demand and values for Landsec's core office product and meaning secondary, outdated stock in the market will be ripe for redevelopment
New strategy, positioning Landsec for growth
¾ Core pillars of strategy focus on:
¾ Optimising central London portfolio; aligning portfolio to growth sectors and locations through targeted recycling and development
¾ Reimagining retail; based on sustainable rents, appropriate leasing models and a customer-centric approach
¾ Growing urban opportunities; applying our proven skillset to deliver urban mixed use schemes
¾ Realising capital; exiting subscale sectors over the medium term
¾ Emphasis on total return and value creation, recycling £4bn of capital over the coming years
Continued ESG leadership
¾ Delivered a 46% reduction in carbon emissions compared with 2013/14 baseline, keeping us on track to achieve our science-based target aligned with a 1.5oC scenario to reduce emissions by 70% by 2030
¾ Ranked 3rd among FTSE 100 companies by EcoAct for our ambitious net zero strategy and transparency of our sustainability reporting, improving from 5th last year
¾ Delivered over £3.6m of social value through our community programme in the first half of the financial year
Results summary
|
|
Six months ended 30 September 2020 |
Six months ended 30 September 2019 |
Change |
|
Revenue profit(1)(2) |
£115m |
£225m |
Down 48.9% |
|
Valuation deficit(1)(2) |
£(945)m |
£(368)m |
Down 7.7%(3) |
|
Loss before tax |
£(835)m |
£(147)m |
|
|
Basic loss per share |
(112.8)p |
(19.6)p |
|
|
Adjusted diluted earnings per share(1)(2) |
15.5p |
30.4p |
Down 49.0% |
|
Dividend per share |
12.0p |
23.2p |
Down 48.3% |
|
|
30 September 2020 |
31 March 2020 |
|
|
Net assets per share |
1,068p |
1,182p |
Down 9.6% |
|
EPRA net tangible assets per share(1) |
1,079p |
1,192p |
Down 9.5% |
|
Group LTV ratio(1)(2) |
33.2% |
30.7% |
|
1. An alternative performance measure. The Group uses a number of financial measures to assess and explain its performance, some of which are considered to be alternative performance measures as they are not defined under IFRS. For further details, see the Financial review and table 15 in the Business analysis section.
2. Including our proportionate share of subsidiaries and joint ventures, as explained in the Financial review.
3. The % change for the valuation deficit represents the fall in value of the Combined Portfolio over the period, adjusted for net investment.
4. For further details, see the Business analysis section.
Chief Executive's statement
Overview
We have had two main areas of focus during the first half of our 2020/21 financial year. Firstly, proactively addressing the challenges presented by the Covid-19 pandemic and, secondly, undertaking a wide-ranging review of our portfolio, markets and organisation to determine the longer-term strategic direction of the business.
The impact of Covid-19 has been felt throughout the period and that will continue to be the case for the remainder of the financial year as evidenced by the recent introduction of a second national lockdown. Our retail, leisure and hotel portfolios have been particularly affected, both operationally and from a valuation perspective, and while occupancy and footfall has also fallen significantly in central London, the valuation impact on that part of our portfolio has been much less marked, underlining its quality and resilience. We are, however, fortunate that we entered the year in a strong financial position, in terms of both low leverage and good liquidity, enabling us to withstand the impact of the pandemic effectively, and we remain in a similarly strong position midway through the year.
Results and dividend
EPRA NTA per share was 1,079p at 30 September, a fall of 9.5% over the six months attributable primarily to the effects of the global Covid-19 pandemic. Net debt was largely neutral over the period, with capital expenditure on our development programme offset by asset disposal proceeds and retained cash profits, which means that our loan-to-value ratio increased modestly, to 33.2%, largely as a result of capital value declines.
Adjusted earnings for the period were £115m (15.5p per share), down 49% on the same period last year. The decline was almost entirely attributable to Covid-19, either as a result of lower operating income (such as rent on turnover linked leases) or as a result of rent concessions granted and bad debt provisioning, where we have adopted a cautious approach given the ongoing uncertain outlook.
One of the first steps we took to manage the effects of Covid-19 was to suspend dividend payments in April in order to conserve cash in the face of significant uncertainty. Over the subsequent six months, we have seen trading conditions, particularly in terms of rent collection and outlook, begin to improve and consequently we are pleased to be reinstating our dividend alongside these interim results. We are resuming quarterly dividends commencing with a 12.0p per share payment on 4 January 2021, representing an aggregated payment for the first two quarters of the year.
Strategy
The outcomes of our strategy review were set out at our capital markets day on 19 October. Our strategy seeks to position Landsec for growth, leveraging existing areas of competitive advantage to add value and to focus and reposition the business towards sectors and opportunities that offer long-term, structurally supported growth potential.
It is built around a core purpose – sustainable places, connecting communities, realising potential – designed to ensure that Landsec delivers value not just for its shareholders, but for all its stakeholders. This is not intended to dilute shareholder returns but instead to enhance the quality of those returns.
Our strategy is based on four strategic priorities – Optimise Central London; Reimagine Regional retail; Realise capital from Subscale sectors; and Grow through Urban opportunities – and envisages recycling approximately £4bn of capital out of lower returning assets and sectors and into growth opportunities over the next few years. We expect both central London and urban mixed use projects to offer good potential in this regard.
Strategic objective – Optimise Central London
Our Central London portfolio is valued at £7.9bn and represents 67% of the Group's portfolio by value. It is defined by its quality, resilience and liquidity and each of these attributes was evident during the first half of the year.
Quality – Our Central London portfolio is characterised by well-located, well designed, modern offices let on long leases to financially strong occupiers. As a result, despite the challenges associated with Covid-19, valuations were robust, down only 3.8%, with the decline largely attributed to the complementary retail and F&B elements of the portfolio that are such a vital element of our overall proposition.
Resilience – Physical occupancy across the office estate was very low as a result of social distancing and work from home guidelines, but office rent collection was largely unaffected. 99% of rents due for the period have been collected, which falls slightly to 94% when non-office rent collection rates are taken into account.
Liquidity – Transaction volumes across the London office investment market have been very low by historical standards as a result of pandemic related restrictions but they have improved recently and investor demand for modern, long let offices remains healthy, as evidenced by our recent sale of 7 Soho Square for £78m, 4% above March book value.
The main elements of our optimise objective involve value creation through greater levels of portfolio recycling, increasing medium-term optionality in the portfolio and offering a wider range of propositions to our customers through asset management and development activity.
Over the next six months, we intend to take advantage of investor interest for high quality, long let assets through further asset disposals. At Dashwood, adjacent to Liverpool Street Crossrail Station, we are refurbishing space to offer a combination of our Myo, Customised and Blank Canvas products and we will also be continuing to progress key aspects of our development programme.
On development, we have been careful to preserve optionality on our speculative programme, retaining the ability to pause at any of our schemes. We are now progressing the speculative schemes that offer the best risk adjusted returns – Lucent and The Forge – in addition to our pre-let development, whilst retaining the remainder of our pipeline in a state of readiness to resume as and when the medium-term outlook for the market becomes clearer. This means our office development programme that we are progressing has a total development cost of £957m, and extends to 848,000 sq ft of which 67% is pre-let.
Longer term we remain confident in London's status and prospects as a global gateway city. While Covid-19 has instilled a fear of densely populated areas in the near term, it is also increasingly highlighting people's desire to come together, the challenges and limitations that emerge when they can't and the significant network effects of mixing commerce, arts, science and power in one place. Cities, and London in particular, have bounced back from many such crises in the past and will do so again.
As we emerge from the pandemic, the way employers and people seek to use office space will change as greater levels of remote working become the norm. Many of the trends of recent years – the importance of sustainability, greater levels of flexibility, the role of the workplace in a health and wellbeing context – will accelerate. Others, particularly the shift to higher occupational densities will slow or reverse. We believe this is likely to lead to a bifurcation in the market – demand for modern, adaptable, high quality space will increase; obsolescence of older, secondary stock is likely to accelerate. These are the sort of market conditions that should present opportunities for Landsec to create real value.
Strategic objective – Reimagine retail
Our reimagine objective refers to our Regional retail portfolio, comprising outlets (£0.8bn value, 7% of our portfolio) and regional shopping centres and shops (£1.3bn value, 11% of our portfolio). Outlets remain an attractive asset class with good growth prospects underpinned by a compelling consumer offer, but have been disrupted in the near term by Covid-19. Regional shopping centres are more challenged and the structural changes driven by the growth in online retail have been accelerated by Covid-19.
During the period, both our outlets and regional shopping centres were significantly impacted by Covid-19. All non-essential retail units were closed for the first ten weeks, until 15 June, and F&B for a further three weeks, until 4 July. These enforced closures placed significant pressure on our customers' businesses and we took a proactive approach to offer support through rent concessions and deferrals, launching an £80m customer support fund in April.
After re-opening, our outlets recovered particularly strongly and, in September, like-for-like sales across the portfolio were less than 10% down on last year despite ongoing capacity constraints. The performance in our regional shopping centres has been more varied, with the decline in like-for-like sales in September ranging from below 10% to almost 40% in areas where recently enhanced local Covid-19 restrictions were in place prior to the second national lockdown.
The outlets portfolio declined in value by 8.8%, largely as a result of the near-term impact of Covid-19, and we expect values to recover in due course, in line with strong trading. Regional shopping centre valuations were down 20.4%, exacerbated by Covid-19 but reflecting a structural shift to a lower rent model. We believe shopping centre ERVs across our estate will need to fall 35-40% from their 2017/18 peaks in order to reach a sustainable level with retailer total occupancy costs in the low teens. This would imply a further decline of around 15% from September ERVs.
The investment market for regional shopping centres remains difficult, which is likely to contribute to further valuation weakness across the remainder of the year. However, these assets only comprise 11% of our portfolio. Various asset sales are likely across the market, particularly following the administration of intu properties plc, and the ongoing sale of intu Trafford Centre by the administrator is being watched particularly closely.
Our reimagine agenda has five key elements; (i) understanding and monitoring sustainable rents, which will form a more effective basis for decision making; (ii) elevating the consumer experience, involving initiatives to increase footfall and dwell times; (iii) operational excellence and new leasing models, working collaboratively with our occupiers and focusing on delivering value where it matters most for them; (iv) maximising our vibrant outlets, leveraging the strong working relationship we enjoy with our occupiers; and (v) repurposing space to reduce the retail footprint and improve the mix. We have plenty of initiatives underway and expect to show clear progress in each area over the next six months.
Strategic objective – Realise capital from Subscale sectors
As part of our recent strategy review we identified three parts of our portfolio as subscale; areas that are not currently, and are unlikely to become, large enough to materially impact Group performance and where we have little or no competitive advantage. The areas concerned are hotels, leisure and retail parks, valued at a combined £1.4bn and comprising 12% of our total portfolio, and we intend to exit these sectors over the medium term.
Each of these subscale sectors has been significantly impacted by Covid-19 over the past six months, reflected in a combined fall in valuations of 12.4%. The majority of the hotel portfolio was shut for the first 15 weeks of our financial year and, although the majority did re-open in the summer, levels of trade were significantly lower than normal. Due to the turnover related leases, this translates into significantly lower rent. Our leisure portfolio was also closed for much of the period with trade after re-opening hampered by social distancing regulations and the slower recovery of leisure attractions such as cinemas. We are in close contact with our hotels' operator, Accor, and our leisure occupiers, and we expect trading to recover strongly as we emerge from the pandemic.
The assets in this part of the portfolio are high quality and the longer-term prospects of the relevant sectors are fundamentally robust. Our divestment intention is driven simply by lack of scale and the opportunities we see to redeploy capital into structurally supported growth areas where we have competitive advantage. We are under no time pressure to sell these assets and are focused on ensuring that we secure appropriate value when we do.
Strategic objective – Grow through Urban opportunities
One of the structurally supported growth areas where we intend to invest is Urban opportunities. The built environment is likely to undergo significant change in the years ahead as the way we live our lives evolves, be that as a result of technology, changing demographics or adapting to a post Covid world. This will involve different uses, and mix of uses, and creates a clear role for us in helping to shape and deliver the necessary change, bringing together development expertise and capital, leveraging reputation and relationships and doing so in a sustainable way. Landsec has proven expertise in delivering large, complex, mixed use developments and is therefore ideally placed to fulfil such a role — a role that could apply both to London and to major regional centres.
Not only does Landsec have the required skills and track record in this area, it also has a pipeline of exciting opportunities in the form of several suburban London shopping centres (value £0.4bn) that are ripe for regeneration in the years ahead. This regeneration would involve significantly increased density on these sites and a wider range of uses, particularly residential. With up to £4bn of combined investment potential, they therefore present a significant value creation opportunity in the years ahead.
In the near term, we will be focused on progressing and securing planning permission on these projects, with the first, at Finchley Road, on track for late 2021, while also seeking to add to the pipeline.
Culture, capability and organisation
The experience, expertise and capability of our people is one of Landsec's greatest assets. With the benefit of the clear strategy that we have set out and the framework it provides, we are now focused on ensuring that we make the most of this prized asset through promoting greater levels of empowerment and accountability at all levels throughout the organisation.
Our aim is to foster a leaner, more agile organisation that really understands how it creates value and is focused on leveraging its competitive advantage. We have identified five key performance drivers, strengths that will be at the heart of how we create and protect value: our development expertise; capital discipline; customer centricity; data driven decisions; and ESG leadership. These are all areas where Landsec already has, or can attain, sustainable competitive advantage and will be crucial to us delivering against our four strategic priorities.
Over the past six months, we have had to adjust to new ways of working whilst tackling significant, and in many cases unprecedented, challenges. The way in which the teams within Landsec have risen to the challenge is testament to the experience, expertise and capability I mention above; but also to their passion and commitment. I would like to thank them for their efforts and congratulate them on their achievements.
Outlook
The near-term outlook for our business, as for all businesses at the present time, is dominated by Covid-19. The path out of the pandemic – through higher testing volumes, more effective treatments and ultimately a vaccine – is increasingly clear, although the length of that journey and the related economic cost less so. The second national lockdown is clear evidence of that so, in the meantime, we will continue to work collaboratively with our customers to support their businesses where necessary and ensure that our portfolio emerges in a strong position.
We will also remain focused on preserving our financial strength – low leverage and healthy portfolio liquidity – and using that to our advantage as opportunities emerge. Our approach to our near-term development pipeline, progressing the two speculative schemes that offer the best risk adjusted returns while keeping the remainder in a state of readiness to resume, is evidence of this.
Looking longer term, we believe there are reasons to be positive. The investment market for high quality London office assets, such as those owned by Landsec, has remained robust throughout the pandemic and there is little sign of that interest waning. Coupled with the acquisition and development opportunities likely to emerge as a result of increased obsolescence of older office stock, as well as the long-term need for urban mixed use regeneration, there will be ample opportunity for Landsec to create significant value in the years ahead.