Hammerson PLC

LSE:HMSO

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[Rita-Rose Gagne, Chief Executive]

Good morning, everyone, and thanks for joining our 2022 Full Year Results.

As usual, I will give you an overview of the year. Himanshu will run you through the numbers, and I will come back and talk about the continued execution of our strategy and what to look for over the next year.

Before I start, there are three key points I'd like you to take away today: As you will see, this is a very different business from the one I jumped into at the end of 2020. In the last two years, we have driven significant change and strengthen our operational grip on the business against a very volatile economic backdrop. Today, we are a better, more agile and more resilient business. Secondly, we have a unique asset footprint in some of the best cities and are well positioned to benefit from the positive trends we see emerging in the constantly evolving consumer landscape. Third, there is substantial deeper repurposing and development value to unlock in our portfolio.

So, let's dive into the year that just passed. Let's start with what we said and what we did. We said we would stabilize our core cash flows, and we have done just that by enlightening and reinvigorating our assets, introducing new occupiers, uses and concepts. More focus has been put on placemaking and a strategic partnership mindset with occupiers. This is reflected in underlying top-line growth of 8%. I am pleased with the 29% underlying growth in NRI, as it reflects the constant work of the teams to sharpen operations and minimize voids and irrecoverable outgoings. We also delivered a 60% increase in adjusted earnings.

We had our strongest year for leasing since 2018, signing 317 leases, representing £45 million of headline rent, well ahead of previous passing and ahead of ERV. This continues into 2023. We have continued to see a flight to quality from occupiers and consumers and that is reflected in a tight occupancy at 96%. We said we would optimize that cash flow further by unlocking value on the existing estate. We have completed and are progressing key repurposing projects while working up other opportunities. We said we would create optionality by hitting key development milestones, and we have. I'll talk to specific examples of all the above later.

We said we would generate capital to reduce debt and recycle to the highest returning opportunities. We made £195 million of disposals and remain on track for a further £300 million. This enabled us to reduce debt. Notwithstanding downward revaluations at the end of the year, we have maintained a stable balance sheet.

Now, over to Himanshu to run you through the numbers.

[Himanshu Raja, Chief Financial Officer]

Thank you, Rita-Rose, and good morning, everyone.

Turning to the full year 2022 financial performance. Let's jump right in. The numbers are testament to the significant progress we have made over the last two years. Adjusted NRI was £175 million, and that was after the loss of earnings from the disposal of Silverburn and Victoria Leeds in the first three months of the year. On the like-for-like portfolio, GRI grew by 8% as a result of the strong leasing performance and improved occupancy in 2021 and 2022. Like-for-like NRI was up 29%. This was, of course, in part a function of the lower 2021 opening position from taking COVID-related concessions into that year. But even stripped to this, the underlying NRI growth was strong, benefiting both from the growth in the line and better rent collections with an overall gross to net margin of around 80%.

Adjusted earnings were £105 million, benefiting from the improvement in like-for-like NRI, lower admin costs, a reduction in finance costs and a strong recovery in Value Retail. Our total portfolio is valued at £5.1 billion, down at 5% during the year, which is a function of the disposals and the £282 million revaluation deficit, 96% of which was at the end of the year. Our total return was a minus 0.7%, with capital returns of minus 5.8%, somewhat mitigated by the strong income return of 5.3%. Our NTA per share has reduced £0.11 during the year to £0.53. Net debt stands at £1.7 billion, down 4%, and our resulting headline LTV is 39% with LTV on a fully-proportional basis up 47%.

Turning first to the adjusted earnings walk, starting with the £80.9 million reported earnings for 2021. We see a £15.4 million reduction in the opening balance due to the IASB change in accounting in relation to concessions. More information was provided on this in our release on 22nd of February. The effect of this was to take COVID-related concessions into the year in which they were granted, and therefore, provides a much cleaner basis for going forward. It also has no impact on our future earnings and cash flow. Our restated earnings were, therefore, £65.5 million for 2021.

From that base, NRI grew by £20.7 million on a net basis. Like-for-like NRI growth was £32 million, as shown in the callout box. This was from the flow through of the strong leasing performance in 2021 and the 2022 improved collections. 2022 collections are at 95% and this compares with 90% when we reported this time last year. It's fair to say that after disruptive years of COVID, rent collections have pretty much normalized, and we continue to retain a strong operational grip in this area. Collections for the first quarter of 2023 are already at 90%. The NRI growth and the like-for-like portfolio was offset by an £11 million decline in our development portfolio, which was largely due to the prior effect of surrender premiums.

Moving across the page, net finance costs reduced by £17.8 million from the 4% reduction in net debt from the active cash management of cash on balance sheet to take advantage of higher rates. Our gross administration costs were down £11.9 million as we continue to reset our platform. We have more to do here and more opportunity, a topic I will return to in a few moments. I'll also come back to the £11.5 million year-on-year recovery in Value Retail. Finally, there was a loss of NRI of £20.3 million and £3.3 million on property fee income from 2021 and 2022 disposals, which brings home the adjusted earnings walk to £104.9 million.

So, turning to Value Retail. This slide shows the continued strong performance from Value Retail with earnings of £27.4 million, a 72% increase year-on-year. Value Retail rents comprise a minimum or base rent and a turnover element, and in some villages, these are principally turnover. Income was further underpinned by inflation-linked clauses in the base rents for the majority of the villages. You see this coming through in strong growth in gross rental income of £51.4 million.

Value Retail footfall and brands sales bounced back, approaching 2019 levels. Spend per visit was up 5% on 2019 levels, and this was the result of targeting high net worth domestic customers, an increase in European tourism and the return of some tax-free shoppers, particularly at La Vallee and Las Rozas. We anticipate a further recovery in Value Retail in 2023, with the return of the long-haul international traveler. Early, indications of sales for 2023 show that international travelers are significantly up year-on-year. Occupier demand for space remains high with 332 leases signed in the year, and occupancy at 94%. Collection rates are at 100%. Strong operational and financial control saw the benefits of GRI drop to the bottom line.

With regards to refinancing, Value Retail have completed more than £1 billion of refinancing in 2022, the large two elements of which was the refinancing of La Vallee in the first half and Bicester Village in the second half, both attractive all-in rates. Finally, we expect Value Retail to return to cash distributions in 2023.

Now to look at the gross administration costs, which reduced 17% year-on-year. We took decisive action in 2021 to reset our operating model, and we saw the flow-through of this in 2022. We also saw further headcount reduction, down 25%. We've performed root and branch review of all our costs every year, which Rita-Rose will cover in more detail. Today, we've guided that we are targeting a further 20% reduction in gross administration costs, inclusive of inflation by the end of 2024.

Turning to valuations. The chart at the top and middle show the changes in yields and rental incomes. Let me first cover yields. Yields of prime shopping centers had been stable since Q2 2021. In the fourth quarter, with the continuing sharp increase in inflation and a hawkish start on interest rates, we saw a market-driven change in values approach to yields with an outward yield shift in the UK of 50 bps, in France of 10 bps and in Ireland of 20 bps. Values also took a more conservative view of ERVs. In the UK, like-for-like ERVs reduced 3.8% with a more modest 1.6% reduction in France. ERVs in Ireland were marginally up 0.3%. Of the overall decline in valuations, 96% was at year-end.

The cumulative valuation effects in each of the territories are shown at the bottom of the chart. In the UK, we've seen a 330-bps outward movement in net equivalent yields with valuations down 65% from their peak and ERV's rebased 36%. You can see the net equivalent ranges from 7.2% to 9.5%. In France and Ireland, we know the value's approach looks more transactional evidence. Again, we've seen outward yield shift of 80 bps to 4.7% to 6.4% in France, and 110 bps to the range of point 5.3% to 6% in Ireland.

Moving now to the obligatory movement in NTA per share. As the walk shows, NTA per share has reduced £0.11 during the year. We saw a £0.02 per share growth from the growth in adjusted earnings, offset by £0.6 loss relating to the valuation losses and £0.7 per share dilution from the scrip.

Turning now to the balance sheet. We continue to simplify our portfolio and we generated £195 million of gross proceeds in 2022. Our resulting net debt is 4% lower year-on-year at £1.7 billion. I've already covered the LTV earlier. Gearing is 68% and is comfortably below our covenant thresholds. We have ample liquidity in undrawn committed facilities of £1 billion. During the year, we maintained our IG credit rating on both Moody's and Fitch, both changed their outlook from negative to stable.

Looking at our liquidity and debt profile in more detail. On the left-hand side, the total liquidity of £1 billion comprises £660 million of committed and undrawn facilities and £336 million of cash. The first chart shows the group unsecured debt maturity profile with the secured debt on the right-hand side. On the unsecured debt, as you can see, there are no maturities in 2023. Of the £113 million of 2024 USPP maturities, this is more than covered by the cash available. The secured debt is held either against Highcross, O'Parinor as a non-core asset and Dundrum. On Highcross, we wrote-off our equity interest in 2021 and the asset went into receivership in February 2023. Consequently, both the asset and the matching loan will be written down at the half year. On a pro forma basis, the result in 2022 headline LTV will be 38% and on a fully-proportional basis 46%, while net debt EBITDA improves to under 10 times. O'Parinor is in flight, and we expect to refinance Dundrum in the ordinary course in 2024.

Let me now move to my closing slide on 2023 guidance. The starting GRI, stripped of 2022 disposals and surrenders, is rebased £211 million. We expect to see mid-single digit growth in GRI in 2023. The key variable will then be timing and exit yield on the targeted £300 million of disposals and the associated loss of fee income that goes against gross admin costs. Assume a resulting GRI to NRI margin of 80%. We are targeting a 20% reduction in gross administration costs by 2024. The disposals of £300 million will benefit finance costs, which we expect to be 15% lower. On CapEx, we expect 2023 expenditure of around £110 million, balanced equally between the reinvestment in the core estate on repurposing, placemaking, stewardship and ESG and land acquisitions and promotions. The Board anticipate a return to cash dividends in 2023.

To close, like-for-like top-line growth, lower costs, a strengthened balance sheet and a positive outlook, which Rita-Rose will cover in more detail. Rita-Rose, over to you.

[Rita-Rose Gagne, Chief Executive]

Thanks, Himanshu.

Before I run through the operations from the year, I just want to take a step back and highlight the tangible results delivered over the last two years under our familiar strategic pillars shown on the left.

We have simplified and focused the portfolio disposing of £628 million of assets in challenging markets, stabilizing the balance sheet on the way and generating capital to recycle. I'm really pleased that the rapid progress we have made on the transformation of the platform, particularly during a very critical period of operation delivery. There is more to come. We are creating exceptional spaces and experiences for our occupiers and customers. We have also increased our focus on ESG, which remains at the heart of everything we do. We have redoubled our efforts this year and now have fully costed net zero asset plans for all our destinations. We have brought a sharper focus to the development pipeline. We are creating value and optionality by getting on with smaller projects that are integral to our estates and hitting key milestones on the larger ones. We are delivering tangible results across all areas of our strategy. We have a strong grip on the operations backed by disciplined financial management.

Let's now dive into a bit more detail in some areas of the strategy and operations, such as the platform, leasing and our development opportunities. You will remember the left-hand side of the slide when I explained our vision has changed for the organization in early 2021. We took decisive action back here and in the first half of 2022 to shift from a top-heavy geographically-oriented and siloed organization to a simplified asset-centric operating model.

As mentioned, we have reduced headcount, but we also prioritize investment in the right talent for the future at all levels. It's about continuing to future-proof the organization. For example, we increased speed of leasing and collections. We consolidated our property management suppliers in the UK, which formally started in February '23. And we continue to implement more integrated, connected and automated systems to drive further efficiencies. This all underpins our 17% cost reduction in '22 and further program for '24.

Finally, an agile platform isn't only about how we work internally, but also how our assets are structured, including the partners we select and invest alongside. We were delighted to expand our partnership with CPPIB, forming a new cleaner 50-50 joint venture in Birmingham following their acquisition of Nuveen stake in the Bullring. We continue to explore simplifying our structures.

Let's now talk about leasing. A better, more agile faster organization underpinned our best leasing performance since 2018. The 317 leases represented £45 million of headline rent, £25 million at our share, that's up 10% like-for-like year-on-year. That's more deals, more value, fewer people on a focused portfolio. Permanent deals were signed 34% above previous passing rent, representing an additional £6 million on the rent roll and 2% above ERV on a net effective basis. Over a third of deals represented renewals with key occupiers and the balance were new lettings, including many expansions and new entrants.

The trend for occupiers returning to longer leases also continues, with leasing in '22 having a WAULB of eight years and a WAULT of 9.5 years. Importantly, occupiers are growing and investing with us. Of new leases, around 40% or nearly 44,000 square meters of space involved a new concept and/or a significant upsize to a flagship offering from the occupier, approaching a quarter of renewals representing about 10,000 square meters of space involved wholesale refurbishments by occupiers. Leasing remains diversified: best-in-class fashion 43%; food and social 21%, where we are seeing increasing sales; and the balance to non-fashion and services.

We engage with the best occupiers strategically and across the portfolio, leveraging the quality of our locations and relationships. I'd call out Apple regearing four locations with us and Inditex taking more space with a broader mix of brands. We leverage our relationships to introduce new international brands to enhance the wider portfolio. For example, we brought Watches of Switzerland to Ireland for the first time and Victoria's Secret entering the French market with their first store in Marseille.

As I mentioned, we have had a wealth of strong new entrants and concepts this year. A couple I am excited about are Nike opening two new concepts in Bullring and Dundrum, while Gym+Coffee, an online startup, took permanent space in Ireland following an incubation period.

Our leasing in 2022 has also had much greater focus on placemaking. Selecting the right mix of occupiers to create enticing environments for consumers and occupiers is a part of this, but equally important is the right approach to commercialization and marketing, as well as driving footfall and supporting strong leasing, these efforts generated income up 13% like-for-like. This year, three highlights for me on this front were: our sponsorship of the Commonwealth Games with events and pop-ups across the Birmingham estate significantly increased global brand awareness and attracted incremental footfall of 1.8 million; our Super Car Weekend in Dundrum, which attracted more than 30% additional footfall; and our refreshed and digitized Christmas marketing campaign. This is an area where we have already invested in new talent, and we went again this year, attracting a senior leader in a newly created role, who has already brought a greater focus to our efforts. In particular, we shifted our approach from reliance on traditional media to digital channels. You can see on the bottom right already the improvement in some of our statistics and this will be a continuous area of focus.

Let's now talk about repurposing our spaces to evolve with changing demand and address supply. Repurposing underutilized spaces away from obsolete formats is also essential to creating exceptional places. This year, we completed the repurposing of the former House of Fraser unit in Dundrum to Brown Thomas and Penneys, that's Selfridges and Primark, both upsizing into flagship space with new concepts. This move also enabled us to bring to Dundrum for the first time Dunnes Store, a brand heavily requested by consumers and the largest retailer in Ireland. Meanwhile, we are progressing at pace the repurposing of the former Debenhams in Bullring to a flagship M&S grocery-led offering and TOCA Social. Importantly, the reactivation of that end of the asset underpinned a flurry of leasing interest. Looking ahead, we have opportunities at the Oracle, Cabot Circus, Westquay, and Brent Cross.

All this hard work has resulted in robust operational trends. Occupancy remains high, reflecting the flight to quality in our portfolio. Rents are at an affordable levels, with further benefits to come from the revaluation of business rates in the UK. On a pro forma basis, OCRs in the UK are now in the mid-teens. Footfall improved by 11% through the year in all territories to end the year at about 90% of 2019 levels. Group sales remain above 2019. Our customers are engaged and loyal with increasing spend and dwell times. Importantly, the early trends for 2023 are encouraging.

Let me take a moment to walk through our [Technical Difficulty] these are capital-light. Next, in the medium-term, we have complementary opportunities on adjacent land. These are about enhancing scale and diversity of the holistic estate. In other words, the whole is more than the sum of its parts.

We also have stand-alone opportunities, which are exciting, but are not connected to any existing assets. These tend to be longer-term in nature and eventually more capital intense. In the near-term, we remain focused on capital-light initiatives to unlock value and create the optionality to take developments forward. This could be by partnering with relevant sectorial expertise or aligned capital on those projects with the highest returns and impact on our retained estate or, to seek liquidity. In the meantime, this portfolio delivers a 7% yield.

Let me bring this to life with a few examples. In terms of the integral in Birmingham, we have submitted planning for Drum, an amenity rich workspace-led proposal, directly served by the UK's most connected rail station. At the Oracle, we have submitted planning for residential-led project Reading Riverside targeting around 450 apartments. Now turning to complementary. In Ireland, key initial planning permissions have been granted at Dublin Central and we have commenced discussions with potential operators and occupiers. In the 15 acres of Southern lands at Brent Cross, we are working on activation options in the near-term that will generate additional income and attract a broader customer base. Longer-term, we are assessing a range of uses. And then, turning to the stand-alones, at Bishopsgate Goodsyard, we have signed the Section 106 agreement and we expect to complete the remaining land drawdowns in 2023.

Let me step back for a moment and talk about why we have been able to deliver the performance we have and what gives us the license for our forward ambitions. Our portfolio performance is, of course, underpinned by our increased operational rigor, but it's also underpinned by our unique city center footprint and the convergence of positive underlying trends. Let's talk about a few.

We benefit from 216 million visitors a year, an affluent catchment of over 25 million customers. We have 1,800 occupiers who generate £5 billion of sales each year notwithstanding the halo, service, brand engagement and experience benefits. We are at the heart of our communities and we support more than 30,000 full-time jobs. Moreover, our assets are ideally placed to benefit from the convergence of several emerging trends. Let me tell you about them.

One, cities remain the engines of economic growth, and even in tough times have the most affluent catchments that are resilient. Two, rents and rates have rebased to more affordable levels and the flight to quality continues as both occupiers and customers want fewer, better stores and experiences. Three, we are taking a partnership approach with our occupiers to deliver an integrated customer journey regardless of whether it starts online or in-store. Four, physical space is about far more than a point of sale and fulfillment, it's about brand engagement, service, advice, marketing, community, events and logistics.

So, why are we confident we can capitalize on these trends? Well, it's because our portfolio is focused on leading European cities. London, Dublin and Paris are ranked as the three cities with the highest potential in Europe. Bristol, Southampton and Birmingham all have more than 50% of their population under 35-years-old, and our other cities have over 40%. London and Dublin are projected to have huge growth of living and workspace and high investments from overseas. We have dominant positions in these cities, which will continue to drive strong demand for the best physical space of all uses. And you don't just have to take our word for it. You can see on this slide, we are fully aligned with the best-in-class occupiers.

So, as we look ahead to the next phase of our strategic execution, we think of ourselves as a city's business. As we complete the reinvigoration of our existing assets and hit further key milestones on our development opportunities, we are increasingly thinking holistically about reinventing our assets. We strive to be the leading owner and asset manager of city center multiuse assets. And, as we complete the realignment of the portfolio, we are delivering a stable and diversified income stream with option value still to unlock in the development portfolio. So, clearly, there is a huge amount of opportunity in our portfolio.

Let me remind you of our approach to capital allocation. First, in terms of sources of capital, we remain focused on maximizing cash flow, but we also have further disposals to do. Turning to uses, as a REIT, our cash flow must underpin a dividend and the Board anticipates returning to cash in 2023. Second, we will reduce absolute indebtedness and deploy capital commensurate with keeping within the guide rails of an IG credit rating. Next, we prefer organic investment in our existing assets and estates. We remain opportunistic, particularly if there is potential to consolidate our ownership in our core assets and markets. We are total returns focus. We select the best returns for shareholders. We are mindful of our own cost of capital. Naturally, we will consider all options for funding and capital deployment, including debt retirement and distributions for shareholders.

In summary, let me remind you, everything we do is underpinned by our strong grip on operations and disciplined financial management. We have simplified and focused the portfolio, generating £628 million from non-core disposals since the start of 2021. We remain confident in delivering a further £300 million this year. We have had our best leasing performance since 2018 and a strong pipeline in front of us.

We remain focused on cash. As we diversify and bring in new occupiers, we do not lose sight of the importance of strong covenants. We are getting to our ambition of an agile platform, having already delivered significant realignment and cost savings early and we expect to deliver 20% more by 2024. As just mentioned, we will continue to be disciplined capital allocators, with a total return growth and investor mindset.

With that in mind, as we look at the potential of our estates, in the near-term, we focus on capital-light integral opportunities to unlock the value and create enhanced optionality. Our commitment to a conservative and resilient capital structure is absolute. The balance sheet is stable and debt reduced, and we have de-risked our pension fund obligations. We have ample liquidity, no immediate refinancing needs and have maintained our IG credit rating.

In conclusion, we have had another strong year of progress. While we are very mindful of the still uncertain and volatile backdrop, we are well positioned to deliver another year of robust underlying earnings and cash flow. Going into 2023, we have a strong momentum. Group footfall and sales are both up double-digit year-on-year, while the occupier demand remains strong. We signed 30 deals representing £3 million of headline rent with a further 90 deals or £15 million in solicitors hands. In the medium-term, we will unlock deep value in the portfolio.

As we say at Hammerson, more to do more to come. I thank my colleagues, stakeholders and Board for their support, and I thank you for your attention.

Now over to your questions.

[Operator]

Thank you very much, ma'am. [Operator Instructions] At this time, we'll just take a short break. Ladies and gentlemen, please stay online. Welcome back, ladies and gentlemen. [Operator Instructions] Today's first question is coming from Colm Lauder calling from Goodbody. Please go ahead. Your line is open.

[Colm Lauder, Goodbody]

Good morning, Rita-Rose, Himanshu. Thank you for taking my question. Maybe just to sort of start off on sort of capital management, balance sheet management, obviously, you got £200 million or so of disposals completed last year, and you're guiding towards £300 million of disposals for this year 2023. Could you perhaps give us some sort of color in terms of expectations on the timings? What might be in train already? And obviously, anything on assets and particular areas of focus for those disposals? And that's my first question.

[Rita-Rose Gagne, Chief Executive]

Thank you, Colm. So, good morning, everybody. So, on your first question about the disposals program, we are reaffirming as you saw in the guidance, our guidance of achieving the £300 million by the end of the year. So, I am confident of achieving that target by the end of the year. Obviously, I can't and I won't discuss about the specific transactions or even timing, but we already have some assets in train. As you know, all the assets we have our high quality, including those that are strategically non-core for us and they are held at sensible valuations that will attract buyers. So, we have -- you know, we have a strong track record of delivering in challenging times over the last two years. So, I am very confident.

I would also add that, that level of confidence goes with the fact that we do have interest at the moment in train and also bear in mind that we're not forced sellers. So, this is not a question of sell at all price, but it's really a carefully planned and executed program for the year. So, I remain -- I am confident.

[Colm Lauder, Goodbody]

Okay. Thank you, Rita-Rose. And maybe just on the operational side as well. So, obviously, it's encouraging to see such a volume of lease events concluded over the course of the year and also to see sort of overall portfolio, WAULT ticking upwards. Could you perhaps provide some detail in terms of, one, I suppose, how the WAULT on the unexpired lease terms trends are across each component of the portfolio in terms of UK, France, Ireland destinations? And is there a divergence in terms of your WAULT trends there? And then, also on the same sort of point, are you seeing any evolution or further evolution in terms of the leasing types? So, again, more traditional lease terms or increased turnover-linked, inflation-linked structures? Thank you.

[Rita-Rose Gagne, Chief Executive]

Okay. Thanks. So, on the WAULB and WAULT, it's a general trend that we're seeing across the portfolio. Obviously, France has a bit of a different construct, as you know, [369] (ph). But if you look at the UK and Ireland, this is representative of the portfolio. And it's also a sign of confidence and, obviously, these occupiers that we're seeing come into the portfolio are renewing or injecting additional capital also. So, it goes with that investment. So, better long-term income flow.

Now the structure of the -- our portfolio is mainly guaranteed rent. So, we do have a relatively small portion of turnover rent and that the trends are not changing on that front. We are seeing some structures and some leases, we're starting to be able to talk about, for example, achieving higher -- some inflation earlier or some higher levels of readjustments in rent. So, you're starting to see that flow in.

Just coming back to the turnover we have, it's -- again, it's about 6% of our GRI. And again, that is staying pretty much in line at the moment.

I think, that pretty much answers your question, Colm. Did I miss anything there?

[Colm Lauder, Goodbody]

Yeah. No, that's perfect, Rita-Rose. Thank you.

[Operator]

Thank you very much, sir. We'll go now to Max Nimmo calling from Numis. Please go ahead.

[Max Nimmo, Numis]

Good morning, guys. Thanks for the update and presentation. Maybe just following on from Colm's question on the capital structure side of things. And appreciate that net debt EBITDA has come down a decent amount. But just where in terms of your thinking -- and appreciate it's a bit of a moving beast with where valuations are still going. But where are you kind of broadly targeting to get leverage in the medium-term? And related to that, would you consider selling off some of the longer-term stand-alone projects to maybe accelerate some of that medium-term projects that you have?

And then, the second question was actually just around the French valuation side of things. I mean, I think the UK has clearly been a lot more front-footed in terms of [borrowing] (ph) more on sentiment and transactions, having only seen 20 bps of that would shift in France, should we be expecting this will be much more of a kind of slow bleed in terms of the valuation correction, because risk free rate has gone up to 200 basis points and the rest? So, just any kind of comment on the difference really between the two that would be great. Thank you.

[Rita-Rose Gagne, Chief Executive]

Okay. Great. So, three parts to your question. For -- first question is around the leverage. So, as you probably saw, headline leverage is at 39% and fully consolidated, including the Value Retail piece, at 46%. When you look at that leverage given where we are in the market at ultimately close or at the bottom of the market, that leverage is fine. At the same time in the sense that we don't see -- I don't see risk to the balance sheet. But at the same time, we fully -- again, we're very committed into a resilient and conservative balance sheet.

So yes, we are working to deleverage. And if you do the math, of our disposal program that is £300 billion -- million, you end up at a leverage of 34%, 35%. And I think given where we are, that's a very good place to be. And just remember also that in the fully consolidated side of life on the Value Retail piece, the leverage is very low, it's non-recourse loans. So, again, there is no -- we don't see risk there. But we do want to manage more value for the shareholders, decrease our financing costs and get to that level of leverage.

Now, when you say that, would you sell some stand-alone projects, as you saw in the presentation, we've evolved our thinking with regards to our development opportunities. And yes, you may see us as we refine the thinking, as we scope up the sites, and see how we can create maximum value, you could see us doing some disposal on that side, but it's not necessarily embedded into this £300 million program at the moment.

In terms of France, I think you pointed up some good points for the UK side. Obviously, in the UK, over the year in 2022 we saw stability. It's just at the very end of the year, 96% of the losses at the very end in Q4 really sentiment driven. And as you know, we have taken a lot of pain on the portfolio. You look at the UK was 65% downward and 30% in France, ERV is 36% downward in the UK. So that's -- we're now at 400 basis points of spread to the risk-free rates. So, the UK is I think is in a pretty strong base, I would say, at this point in time, enabling us to look forward positively in terms of with all the leasing activity we're seeing in the portfolio, looking forward to returning to value creation.

Now, if you look at France, first of all, just remember that our portfolio in France is effectively two marquee assets and they're owned 100%, totally under our control. So, TDP, which is a top three assets in France. So, it's difficult to read too much about the broader market because our assets are so specific. So, I'm going to talk about our specific exposure here and I think it's important more and more in the environment that we be specific when we talk about asset valuation.

So, France is fundamentally a different market to the UK. It has less retail space per capita. The leases are different, more flexible, therefore, there is more stable cycles in France. And our ERV, if you look at Slide 9, in the presentation. Our ERVs haven't really moved in France. So, the valuations stand logically within that. So, the overwhelming majority of French leases more than 90% are linked to the government indexation clauses, so capture inflation each year.

Our leasing trends in France at the moment are positive. We're leasing 49% above previous passing and we're achieving over 4% above ERV. So, our yields have moved out more than others if you look at statistics. So, they have moved out 30% declines. So -- and again, it's really about those two marquee assets that are in the [fives] (ph). So, if you look at that and the spread we have with the risk-free and as rates normalize, I think that's a reasonable place to be with all these specific points for the French portfolio.

[Max Nimmo, Numis]

Great. Thank you very much. It's really helpful.

[Operator]

Thank you very much, sir. [Operator Instructions] We'll now go to Eleanor Frew calling from Barclays. Please go ahead.

[Eleanor Frew, Barclays]

Good morning, team. Thanks for the presentation. First question on the dividend. Can you give us some sort of guidance on the level of dividends other than your classified requirements [indiscernible] quite late payments?

And then, the second question. You mentioned you're committed to investment-grade rating. But can you give us some sort of color on how you plan to maintain it?

[Rita-Rose Gagne, Chief Executive]

Okay. So, I'll just very broadly remind a few things on the dividends and I will pass on to Himanshu to talk a bit more about the IG rating. But just remember that we were committed to a scrip dividend in 2022 and that program has completed, and we have -- we're up to date on all our PID and SIIC obligations for 2022. And we anticipate satisfying our PID obligations with our cash dividends for 2023 and that final policy will be determined at the half year. But considering the underlying strength of our portfolio, the leasing we have in train, all the activities we have in train, we're confident with that anticipation.

Now, Himanshu, do you want to give a bit more color on the IG rating?

[Himanshu Raja, Chief Financial Officer]

Thank you, Rita-Rose, and good morning, Eleanor, and thanks for your question. Look, our commitment to maintaining IG rating is absolute. It's central to the strategy, and it's central to the way we think about cap structure. And you'll know that when the rating agencies consider these things, they look at the security and resilience of the income stream, and Rita-Rose talked in our presentation about how that has been rebased.

And, of course, when you look at metrics, it's the focus on both LTV and net debt to EBITDA. And when you do the math from the reported numbers this morning for the £300 million of disposals, depending on your yield assumptions on those, that gets you to an LTV of around 34%, 35% and net debt to EBITDA around 8x to 9x, and we think those are good numbers, both in terms of capital structure and in terms of maintaining the IG rating.

[Rita-Rose Gagne, Chief Executive]

Thank you.

[Eleanor Frew, Barclays]

Thanks very much.

[Operator]

Thank you very much, ma'am. We'll now go to [indiscernible] calling from Kempen. Please go ahead.

[Unidentified Analyst]

Yes. Good morning, team. Thank you for taking my questions. I got disconnected from the call. So, apologies if the question was already asked. But could you please comment on the rationale for suspending the final dividends for 2022?

[Rita-Rose Gagne, Chief Executive]

Well, as I mentioned, maybe that was in the disconnected part. So, again, we were committed to a scrip dividend in 2022. And we have -- we are up to date in our PID and SIIC obligations and that program has completed. So, now we look at 2023 and we anticipate return to cash dividend.

[Unidentified Analyst]

Okay. Thank you. That's very helpful.

[Operator]

Thank you very much, sir. We do not have any further audio questions at this time, ma'am.

[Rita-Rose Gagne, Chief Executive]

Okay. Go ahead.

[Josh Warren, Investor Relations]

We have a couple of questions coming on from the web, I've grouped them into three parts, but we'll go one at a time. The first, could we give some more color on the Value Retail refinancing? How that went? Anything we can give in terms of terms and whether on a forward-looking basis Himanshu's guidance includes a higher interest cost?

[Rita-Rose Gagne, Chief Executive]

Okay. So, on the Value Retail piece that the refinancing -- so Value Retail has indeed achieved about £1 billion of refinancings in 2022. We won't go into the detail of that because it does involve the partner, but very successful financing I would say.

Himanshu, do you want to add something on the guidance?

[Himanshu Raja, Chief Financial Officer]

Yeah. So, we've given clear guidance in my guidance slide on financing costs for 2023. Just to remind you we have no refinancing needs till 2025, and therefore, there's plenty of runway in '24 and '25 as we access the capital markets to give you the guidance at that time. Thanks, Josh.

[Josh Warren, Investor Relations]

Next one, and again it's a number of different questions, but on the theme of the Highcross receivership. So, maybe some detail on how that process went whether it took a significant portion of management time, and a recap of the effect it has on the numbers?

[Rita-Rose Gagne, Chief Executive]

Yeah. Thanks, Josh. So, well, first of all, Highcross is [own] (ph) use basically, because as you remember, last year in 2021, we had addressed the situation in the annual report very specifically saying there was a default on the loan and that we would engage with banks for discussions and we wrote-off the asset. So, what you're seeing today is just the natural process, natural evolution of that process and it's just -- it's a handover. So, I think it's in line with what we want to achieve and it's also for us, it's a question of capital allocation.

[Himanshu Raja, Chief Financial Officer]

And on the numbers part of that when you run the math through the -- both the asset and the loan will be written down at the half year. It's a circa 1% benefit to LTV both headline and FPC and is a benefit of about half a turn on net debt to EBITDA.

[Josh Warren, Investor Relations]

The third group is coming back to this bit about capital allocation specifically. We've talked about disposals or any acquisitions on the agenda for 2023. And when you think about that in a wider context, how do you balance thoughts on the dividend and distributions to shareholders versus reinvestment in the business?

[Rita-Rose Gagne, Chief Executive]

Yeah. So, in the presentation, we talked about specifically capital allocation at the slide -- on one of the slides, just because there's a lot of potential on this portfolio. And one thing we've decided is that we want to invest in our portfolio because it has a lot of organic growth opportunity. So, there is a mention in there that capital could go to consolidate ownership in our core assets, core markets, which would obviously increase earnings and ultimately be accretive for the company, but also in line with our strategy of city assets. So, we will time that appropriately as we go along and as the disposal programs executes. So that is effectively in the plan.

[Josh Warren, Investor Relations]

And the last one is, could we give a little bit more color around the targeted cost reduction out to the end of 2024, the constituents of that and how we will achieve them?

[Rita-Rose Gagne, Chief Executive]

Yeah, sure. So, this is a continuation of the work we've been doing. So, as I said in the presentation, early in 2021, a full root and branch review was done turning every stone in the company. And we've achieved -- we've been able to do that fast enough so that it flows through this year with the 17% cost reduction that is composed of some, obviously, headcount reduction, but also a lot of other hard costs in the company that has to do with the revision of our operational model.

So, Himanshu in his section talked about the offices in London and Paris that gave us a big cost reduction year-on-year this year. And we have reviewed our complex web of suppliers in the UK and simplified that and that yielded a lot of efficiencies reviewed contract, old contracts just cleaning up. So, there has been that.

And then, there is the digital platform. Our technology platform was not efficient, so was creating enormous work and inefficiency, so that -- we have worked on that and continue to work on that. And obviously, there will be disposals in there. So, it's going -- it's continuing that program. So, it's a mix of the type of expenses that I just talked about to get us to that future-proof organization.

And bear in mind that we're also in the meantime hiring also different talents to align us to the new trends and new expertise we need in the platform. So, it's not just about a cost-cutting exercise, it's really a realignment of the platform, solidifying and making the platform more agile and that's going to continue into '23 and '24 to deliver the additional cost reductions.

[Josh Warren, Investor Relations]

We have no further questions online we haven't covered elsewhere, so I'll hand back you to close.

[Rita-Rose Gagne, Chief Executive]

Well, thank you very much. Thank you to everybody for being on the line this morning. And we will most certainly meet a lot of you in the next days and we'll be happy to take any questions over the next weeks.

Again, thank you, and see you soon.