14 November 2023
LAND SECURITIES GROUP PLC (“Landsec”)
Results for the half year ended 30 September 2023
Further operational growth across the business; well positioned for new market reality
Mark Allan, Chief Executive of Landsec, commented:
“Our high-quality, differentiated portfolio and focused capital allocation mean we continue to benefit from customers concentrating on best-in-class space. In London, our well-located, sustainable offices in vibrant, amenity-rich areas continue to see growing occupancy, growing utilisation, growing customer space requirements and hence growing rents. In retail, sales in our locations continue to outperform brands’ overall sales growth, also driving further growth in occupancy and rents. Despite the challenges in the general economic outlook, we see no signs of these trends abating.
“Since early 2022, we have been clear that we expected interest rates to remain higher for longer and that asset values would have to adjust to this new reality, which they have. We were decisive in acting on this view by selling £1.4bn of single-let HQ offices, mostly in the City, at prices ahead of today’s values. Investment activity remains thin, but we expect this to pick up in 2024, which should start to support values for the best assets. We will continue to recycle capital where our ability to add further value is limited, but having been a net seller when prices were higher, we are well-placed to take advantage of opportunities that will no doubt arise as the new higher-for-longer reality is now more widely accepted.”
Financial highlights
| 30 Sep 2023 | Prior period (1) | 30 Sep 2023 | Prior period (1) | ||
| EPRA earnings (£m)(2)(3) | 198 | 197 | Loss before tax (£m) | (193) | (192) |
| EPRA EPS (pence)(2)(3) | 26.7 | 26.6 | Basic EPS (pence) | (24.4) | (25.7) |
| EPRA NTA per share (pence)(2)(3) | 893 | 936 | Net assets per share (pence) | 899 | 945 |
| Total return on equity (%)(2)(3) | (2.4) | (2.9) | Dividend per share (pence) | 18.2 | 17.6 |
| Group LTV ratio (%)(2)(3) | 34.4 | 31.7 | Net debt (£m) | 3,572 | 3,348 |
¾ EPRA EPS(2)(3) stable at 26.7p, in line with FY guidance, as positive leasing, margin improvement and 2.8% LFL income growth offset impact of deleveraging through asset sales during prior year
¾ Total dividend up 3.4% to 18.2p per share, in line with guidance of low single digit percentage growth
¾ Total return on equity improved to -2.4%, with loss before tax of £193m (after a £375m, or -3.6%, adjustment in portfolio value) resulting in a 4.6% reduction in EPRA NTA per share(2) (3) to 893p
¾ Maintained sector-leading balance sheet strength, with AA/AA- credit rating, 7.2x net debt/EBITDA, Group LTV(2)(3) of 34.4% and weighted average debt maturity of 9.3 years
¾ Continue to expect EPRA EPS for full year to be broadly stable vs last year’s underlying 50.1 pence and low to mid single digit percentage growth in rental values in London and Major Retail
Operational highlights: well-placed due to focused execution of clear strategy
Delivered further growth in operational performance, underpinned by continued customer focus on best-in-class space, as decisive positioning for higher-for-longer rates through well-timed £1.4bn of disposals during prior year leaves Landsec well-placed to capture new opportunities and drive future growth.
Central London: strong customer demand underpins further growth in ERVs and occupancy
¾ Capitalised on continued customer demand for high-quality space in best locations, with £17m of lettings completed or in solicitors’ hands, 3% ahead of valuers’ assumptions, and overall Central London occupancy up 60bps to 96.5%, with West End portfolio effectively full at 99.6% occupancy
¾ Recorded 10% increase in office attendance vs prior six months, reflecting appeal of our well-located portfolio, with 27 of 35 lettings in last 12 months seeing customers taking more or same space
¾ Delivered 3.3% ERV growth on account of strong leasing activity, comfortably on track vs full year guidance of low to mid single digit percent ERV growth, as rise in valuation yields led to 4.5% softening of values
¾ Started two new developments in West End and Southwark, with expected 7.3% gross yield on total cost and c. 12% yield on incremental investment, as recently completed schemes are now 83% let or under offer, with lettings 12% ahead of initial assumptions
Major retail destinations: brands’ focus on best stores drives growth in occupancy and ERVs
¾ Continued to drive positive leasing momentum, as key brands increase focus on fewer, bigger, better stores, with £24m of lettings signed or in solicitors’ hands on average 6% above ERV, renewals on average 2% above previous passing rent, and current occupancy up 100bps vs March at 95.3%
¾ Facilitated +4.0% YoY sales growth for brands, with like-for-like sales +5.4% above 2019/20 levels, as online non-food sales fall for 26 months in a row whilst in-store sales continue to grow
¾ Delivered 1.4% ERV growth, on track vs guidance of low to mid single digit percent growth for the full year, with high income returns underpinning resilience in capital values (-1.3%)
Mixed-use urban neighbourhoods: preparing for first potential development starts in 2024
¾ Secured detailed planning consent for first phase of office development at Mayfield, creating optionality for potential earliest start of first c. £180m investment in first half of 2024
¾ Progressed further planning and land assembly workstreams at £1bn Finchley Road scheme to unlock potential start on site in first half of 2024, whilst optimising preparations for rest of long-term pipeline
Underpinning our strategy: strong capital base, operational efficiency and focus on sustainability
¾ Strong capital base, with AA/AA- credit rating, modest 34.4% LTV, low 7.2x net debt/EBITDA, long 9.3-year average debt maturity, £2.1bn undrawn facilities and no refinancing needs until 2026
¾ Sold £85m of smaller and non-core assets, on average 6% ahead of March book value, as further planned capital recycling will further increase existing headroom to capitalise on new opportunities
¾ Improved operating margin, as review of operating model in prior year and focus on cost led to reduction in overhead costs, despite persistent UK inflation
¾ Starting imminently with retrofit of air source heat pumps at first two sites as part of net zero transition investment plan, with 44% of office portfolio already EPC ‘B’ or higher vs 23% for London market
¾ Launched Landsec Futures Fund to invest £20m over next 10 years to enhance social mobility in our industry, empower more people towards world of work and deliver £200m of social value
1. Prior period measures are for the six months ended 30 September 2022 other than EPRA NTA per share, net assets per share, Group LTV ratio and
net debt, which are as at 31 March 2023.
2. 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 14 in the Business analysis section.
3. Including our proportionate share of subsidiaries and joint ventures, as explained in the Financial review. The condensed consolidated preliminary financial information is prepared under UK adopted international accounting standards (IFRSs and IFRICs) where the Group’s interests in joint ventures are shown collectively in the income statement and balance sheet, and all subsidiaries are consolidated at 100%. Internally, management reviews the Group’s results on a basis that adjusts for these forms of ownership to present a proportionate share. These metrics, including the Combined Portfolio, are examples of this approach, reflecting our economic interest in our properties regardless of our ownership structure. For further details, see table 14 in the Business analysis section.
A live video webcast of the presentation will be available at 9.00am GMT. A downloadable copy of the webcast will then be available by the end of the day.
We will also be offering an audio conference call line, details are available in the link below. Due to the large volume of callers expected, we recommend that you dial into the call 10 minutes before the start of the presentation.
Please note that there will be an interactive Q&A facility on both the webcast and conference call line.
https://webcast.landsec.com/2023-half-year-results
Call title: Landsec half year results 2023
Forward-looking statements
These half year results, the latest Annual Report and Landsec’s website may contain certain ‘forward-looking statements’ with respect to Land Securities Group PLC (the Company) and the Group’s financial condition, results of its operations and business, and certain plans, strategies, objectives, goals and expectations with respect to these items and the economies and markets in which the Group operates.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’, ‘may’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘targets’, ‘goal’ or ‘estimates’ or, in each case, their negative or other variations or comparable terminology. Forward-looking statements are not guarantees of future performance. By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Group’s ability to control or estimate precisely. There are a number of such factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the political conditions, economies and markets in which the Group operates; changes in the legal, regulatory and competition frameworks in which the Group operates; changes in the markets from which the Group raises finance; the impact of legal or other proceedings against or which affect the Group; changes in accounting practices and interpretation of accounting standards under IFRS, and changes in interest and exchange rates.
Any forward-looking statements made in these half year results, the latest Annual Report or Landsec’s website, or made subsequently, which are attributable to the Company or any other member of the Group, or persons acting on their behalf, are expressly qualified in their entirety by the factors referred to above. Each forward-looking statement speaks only as of the date it is made. Except as required by its legal or statutory obligations, the Company does not intend to update any forward-looking statements.
Nothing contained in these half year results, the latest Annual Report or Landsec’s website should be construed as a profit forecast or an invitation to deal in the securities of the Company.
Chief Executive’s statement
Well placed for a new reality. Ready to capitalise on future opportunities.
Since we launched our strategy in late 2020, we have consistently focused on two key principles of sustainable value creation: focusing our resources where we have a genuine competitive advantage and maintaining a strong balance sheet. The external context has changed materially since then, but this clear focus and our decisive actions mean we are well-placed for the future.
A year ago, we clearly stated our view that the ultra-low rate environment over the prior decade was the aberration, not the increase in interest rates we had seen at the time, and that markets would have to adjust to a new higher rate, higher yield reality. We also said we expected the price adjustment in real estate to continue as a result, which it has. Whereas many last year paused activity in the hope that rates would fall back, we chose instead to prepare for this new reality and sold £1.4bn of assets; 86% of which were single-let City offices, where our ability to add further value was limited. In March, we also seized the opportunity to issue a £400m Green bond at 4.875%, so our average debt maturity is over nine years.
This meant we started the current financial year knowing that we could focus on driving operational results and preparing for future growth opportunities, rather than having to worry about how to reduce leverage or refinancing risks. This is precisely what we have done over the past six months. Although the economic backdrop remains uncertain, demand for the best-in-class space has remained strong, hence we delivered further growth in occupancy, like-for-like income and ERVs across our portfolio. We also completed our recent development programme, which is now 83% let or in solicitors’ hands, with rents 12% ahead of initial expectations. And on the back of the latter, we started two new, low carbon office schemes in the vibrant, supply-constrained West End and Southwark sub-markets.
Our focus remains underpinned by three areas of competitive advantage: i) our high-quality portfolio; ii) the strength of our customer relationships; and iii) our ability to unlock complex opportunities through our development and asset management expertise. As interest rates begin to stabilise, we expect investment activity to improve in 2024, which should start to support values for the best assets. Our balance sheet remains strong, with a 34.4% LTV and net debt/EBITDA of 7.2x, so we are well-placed to capitalise on opportunities which will no doubt emerge, as the higher-for-longer reality has now sunk in more widely.
Delivering consistent growth in operational performance
Building on the growing momentum across our business, operational performance remains positive. This is supported by our high quality portfolio, as people choose to spend time together in inspiring places, be it to work, shop or spend their leisure time. Recognising this, the focus from customers on the very best space to attract their staff or customers is now deeply embedded and we expect this to continue.
Reflecting this, we delivered 2.8% growth in like-for-like net rental income, offsetting the impact from our £1.4bn of disposals and significant deleveraging during the prior year. As a result, EPRA EPS for the half year of 26.7 pence was stable vs the prior period, in line with our guidance for EPRA EPS for the full year to be broadly stable vs last year’s underlying 50.1 pence. Our dividend for the half year is 18.2 pence, up 3.4% vs last year in line with our guidance and reflecting a dividend cover of a healthy 1.5 times.
The marked rise in bond yields since the start of the year put further upward pressure on valuation yields, although the impact of this was partly offset by our strong leasing activity. This drove 2.5% ERV growth, with positive growth across all segments of our portfolio. As a result, the reduction in our portfolio value slowed compared to the second half of last year, to -3.6%. Similarly, the reduction in EPRA NTA per share slowed to 4.6% to 893 pence, reflecting an improvement in total return on equity to -2.4%.
Table 1: Highlights
| Sep 2023 | Sep 2022 | Change % | |
| EPRA earnings (£m)(1) | 198 | 197 | 0.5 |
| Loss before tax (£m)(2) | (193) | (192) | (0.5) |
| Total return on equity (%) | (2.4) | (2.9) | 0.5 |
| Basic (loss)/earnings per share (pence) | (24.4) | (25.7) | 5.1 |
| EPRA earnings per share (pence)(1) | 26.7 | 26.6 | 0.4 |
| Dividend per share (pence) | 18.2 | 17.6 | 3.4 |
| Sep 2023 | Mar 2023 | Change % | |
| Combined portfolio (£m)(1) | 10,146 | 10,239 | (0.9) |
| IFRS net assets (£m) | 6,728 | 7,072 | (4.9) |
| EPRA Net Tangible Assets per share (pence)(1) | 893 | 936 | (4.6) |
| Adjusted net debt (£m)(1) | 3,524 | 3,287 | 7.2 |
| Group LTV ratio (%)(1) | 34.4 | 31.7 | 2.7 |
| Proportion of portfolio rated EPC ‘B’ or higher (%) | 41 | 36 | |
| Average upfront embodied carbon reduction development pipeline (%) | 45 | 36 | |
| Energy intensity reduction vs 2020 (%) | 19.4 | 16.6 |
1. Including our proportionate share of subsidiaries and joint ventures, as explained in the Presentation of financial information in the Financial Review.
2. Loss before tax of £193m as a result of a -£375m, or -3.6%, movement in portfolio value.
Our strategy in a changing market
The environment we operate in has changed markedly since we launched our strategy three years ago, yet our strategic focus remains the right one. Each of our three key areas – Central London offices, major retail destinations and mixed-use urban neighbourhoods – continue to benefit from growing demand for high-quality, well-located, sustainable space, which is driving rents higher for the best assets. What binds these areas together is the importance of a sense of place, as even though the proportions of use vary, the lines between where people want to work, live and spend their leisure time are blurring.
The surge in inflation and interest rates since early last year has had a material impact on asset values globally, be it for real estate, equities or bonds, but positively, inflation has come down markedly from its recent highs. Still, we expect UK inflation to remain relatively sticky, so whilst interest rates may now be close to their peak, it seems optimistic to us to assume that they will come down sharply anytime soon.
Our strategy in 2020 was never built on a view that the ultra-low rate environment at the time would last and our actions over the past three years reflect this, as we focused our investments where we have a genuine competitive advantage that enables us to create long-term value. As such, we acquired further stakes in Bluewater and Cardiff at yields of 8-10%; we sold £2.2bn of London offices at an average yield of 4.4%, 83% of which were single-let buildings, mostly in the City and in line with our view that HQ buildings would be more at risk from changes in ways of working; we unlocked future optionality in mixed-use schemes at Mayfield and Finchley Road; and we reduced our borrowings.
In this more normalised rate environment, we continue to target a total return on equity of 8-10% p.a. over time, comprising a mix of income and capital returns, driven by rental value growth and development upside. Starting with an income return on NTA of c. 5.5% we are in a good place to deliver on this, although short-term fluctuations in valuation yields, which are outside of our control, mean our return on equity is unlikely to be exactly in that range every individual year. We are seeing this in the current year, but this target remains what we base our medium-term decisions on.
In this context, it is critical that we continue to think carefully about capital allocation decisions in terms of risk and return. Major retail destinations, for the right assets, offer high single digit income returns plus the prospect of a return to sustainable rental growth, as evidenced by our own portfolio. Such opportunities continue to look appealing. Similarly, the yield on incremental spend for our near-term developments in London looks very attractive, at c. 12%. In general, development returns are naturally more challenged, as values are down and costs have gone up, although build cost inflation is now beginning to moderate. As such, we have been focused on realising design and cost efficiencies to maintain healthy returns and have made important progress on this, to preserve the valuable optionality of our longer-term pipeline.
Funding this investment activity will continue to come primarily from two sources. Firstly, from existing balance sheet capacity, which remains healthy as a result of our proactive asset disposal activity since early 2022. Secondly, from further capital recycling, with the focus of this activity now likely to shift increasingly to our £1.2bn subscale portfolio. Still, the extent of opportunity in our pipeline, and for accretive external growth, is such that over time this is likely to exceed our own balance sheet capacity. As capital discipline remains our priority, we continue to explore opportunities to enhance our own investment in future growth with other, complementary sources of capital, to accelerate our overall growth, capitalise on the platform value we are creating, and to enhance our overall return on equity.
Creating value through our competitive advantages
In executing our strategy, we continue to focus on our three key competitive advantages: our high quality portfolio; the strength of our customer relationships; and our ability to unlock complex opportunities. We have seen customer demand bifurcate further over the half year, as demand for modern, sustainable space in areas with the best amenities in London remained strong, even though overall office leasing across the market slowed. In retail, the focus from brands remains on fewer, but bigger and better stores in key locations. Supply of both is limited, which continues to drive rental value growth across our assets.
In London, 76% of our portfolio is now located in the vibrant West End and Southwark markets, up from 58% in 2020, whilst our City exposure is down to 24%. Our recently completed schemes are 83% let or in solicitors’ hands, up from 60% six months ago, with rents well above ERV. Office utilisation continues to rise and 77% of our lettings over the last year have seen customers grow or keep the same floorspace. Across our existing portfolio we signed or are in solicitor’s hands on £17m of leases, on average 3% above ERV. Occupancy is up 60bps to 96.5% and at 99.6% our West End portfolio is effectively full – both well ahead of the London market. This drove 3.3% growth in ERVs over the first six months, which is comfortably on track vs our full year guidance of low to mid single digit percent ERV growth.
Across our major retail destinations, we completed or are in solicitor’s hands on £24m of lettings, on average 6% ahead of ERV. For the first time in years, uplifts on lease renewals have turned positive, on average 2% above previous passing rent, whilst occupancy is up 100bps since March to 95.3%. We have seen 1.4% ERV growth over the six months, which is on track vs our guidance of low to mid single digit percent growth for the full year. Similar to London, this growth very much reflects the high quality of our portfolio, as we maintain our long-held view that demand for generic retail and office space will remain lower than before the pandemic.
This is supplemented by our ability to unlock complex opportunities, such as in London, where we completed three projects over live Underground stations featuring highly bespoke engineering solutions, combined creating c. £215m of value; in retail, where we are exploring further opportunities to leverage our leading platform, post the discounted purchase of the debt on St David’s from two lenders in early 2023; and in mixed-use, where we are progressing planning and land assembly at Finchley Road, following the resolution to grant consent to build 1,800 homes in March, and at Mayfield, where we obtained detailed consent for the first phase of development late summer.
Delivering sustainably
At the start of the year we updated our carbon reduction targets to align with the Science Based Targets Initiative’s (SBTi) new Net-Zero Standard, as we remain committed to following a science-based net-zero pathway that ensures our actions respond to the urgency of the climate crisis. We committed to a near-term target of reducing our direct and indirect greenhouse gas emissions by 47% by 2030 from a 2020 baseline and committed to reach net zero by 2040 from the same baseline year. This target covers emissions from all sources, including all of our reported Scope 3 emissions, such as the emissions from our development pipeline, supply chain and customers. Our emissions have already reduced by 26% compared with baseline.
To align with our revised carbon reduction target, we have updated our energy intensity target to reduce energy intensity by 52% by 2030 from a 2019/20 baseline. We are already tracking a 19% reduction, having achieved an energy intensity reduction across our portfolio of 3% vs last year during the period.
We continue to progress the implementation of our net zero transition investment plan, which will ensure we meet our near-term science-based carbon reduction target and stay ahead of the proposed Minimum Energy Efficiency Standard Regulations. This requires a minimum EPC ‘B’ certification by 2030, yet 44% of our office portfolio and 41% of our overall portfolio is already rated B or higher, up from 38% and 36% in March. We are about to start retrofitting air source heat pumps at our first two office locations and are progressing design work for a further four buildings. The benefit of this in terms of improved EPC ratings will be visible from 2025 onwards, when these become operational. In addition, we continue to focus on reducing upfront embodied carbon from our development schemes and improving energy efficiency, expanding the work with our largest customers to help them identify ways to save energy.
Earlier this year, we also launched our Landsec Futures fund, which is aimed at improving social mobility in the real estate industry and will see us invest £20m over the next decade. This will ensure we deliver on our target to create £200m in social value and empower 30,000 people towards the world of work by 2030. This is built on our strong track-record of investing in our local communities, which has already seen us create £27m of social value and empower 7,925 people to work since 2020.
Outlook
Since the start of the year, the reduction in inflation, return to real wage growth for consumers and better than expected resilience in UK GDP have been encouraging. Still, we remain mindful that the ongoing transition from a decade of free money and excess liquidity to a higher interest rate world could continue to create its dislocations and that higher-for-even-longer rates could eventually start to impact consumer and customer demand, even though we are not seeing any signs of this yet. Nevertheless, our strategic decisions over the past three years mean we are in great shape for any eventuality:
¾ our portfolio quality is high, which has increasingly become the decisive factor for our customers;
¾ our balance sheet is strong, at 7.2x net debt/EBITDA and a 9.3-year average debt maturity;
¾ we have sold £2bn+ of assets most at risk of repricing, creating capacity for higher-return investments;
¾ we have created an attractive pipeline of opportunities, with flexibility on future commitments.
Investment activity remains subdued for now but the combination of recent relative stability in long-term rates and greater economic resilience so far means that we expect activity levels to pick up in 2024. The refinancing of cheap debt issued before 2022 across the sector remains a challenge, but the apparent availability of new equity and mezzanine finance to plug gaps in the capital stack means that we see the risk of disorderly sales putting significant pressure on the value of high-quality assets as lower than six months ago. As a result, for the best assets we expect values will start to stabilise during 2024, although secondary assets where the sustainability of cashflow is questionable will likely continue to fall.
From an income perspective, higher interest costs and cost inflation are a headwind across every sector, yet the sustainability of our earnings remains underpinned by our long average debt maturity and growth in like-for-like income, reflecting the strong demand for our high-quality space. For this year, the upside from this is largely offset by our significant disposals last year and the c. £10m impact on earnings from the start-up cost of opening three new Myo locations, the last over-rented retail leases resetting and the investment in our systems we outlined in May. As such, we reiterate our guidance for EPRA EPS this year to be broadly stable vs last year’s underlying level of 50.1 pence, before returning to growth next year. As our dividend cover is at the high end of our 1.2-1.3x target range, we continue to expect our dividend to grow by a low single digit percentage per year over these two years.
Whilst macroeconomic signals remain mixed, with long-term rates seemingly beginning to stabilise and occupier demand for the best assets remaining robust, the outlook for values for best-in-class assets should start to improve. We have made considerable progress in executing our strategy over the past three years hence Landsec is well placed for long-term growth. We remain excited about the future.