Derwent London Plc (DLN) Earnings Call Transcript & Summary

Good morning, everyone. Sorry for the slight delay. Obviously, a lot of people getting through. Thank you for joining our 2019 results presentation today, either in person or on the webcast. I know you've had a busy day with other REITs reporting so I'll get straight to proceedings. We'll follow our usual format with presentations from Damian, Nigel, David and Simon, and then I'll open up for questions. There are other members of the Derwent team here today, so please feel free to ask them questions, too. Slide 2. 2019, another very successful year. Damian will talk you through our financial performance in detail, but I'm pleased to report a total return of 6.6% for 2019, another 10% rise in the dividend and NAV growth of 4.8%. Now there was improved sentiment across the Central London office market and we had a strong operating performance. We achieved GBP 34 million of new lettings, nearly 7% above ERV. We have 3 major developments on-site totaling 790,000 square feet, of which 72% is pre-let. And we announced today our route map to net 0 carbon, more of which to follow. Turning the page and capturing our reversion. At the year-end, our ERV had risen to GBP 303 million, which includes both Soho Place and the Featherstone Building. 91% of this is made up for contractual rents, contractual rental uplift such as half rent and, of course, our pre-lets. We have a further GBP 68.2 million of reversion to impact future income, of which GBP 40.9 million is baked in and GBP 27.3 million is still to capture, which is before our next phase of developments. The current development pipeline runs through to 2022 and is 72% pre-let and involves GBP 334 million to complete. Simon will provide you with his usual update. Slide 4, plenty to come. It's been incredibly busy 3 years for the group but it doesn't stop us being asked the question, what next? The answer, of course, is we have plenty of opportunities within our portfolio. Looking at either space consented or under appraisal, this comprises approximately 569,000 square feet, which could increase to 893,000 square feet, should be successful at planning. You will note, however, that we have 50% that's already obtained planning permission. The largest of the 2 schemes is Baker Street, which comprises 293,000 square feet. We signed a conditional agreement in 2019 with our JV partner, the Portman Estate. And upon commencement of the project due in H1 2021, we will own an outright long leasehold interest. It will be a top-quality office retail and residential development and will have that special Derwent signature. Simon will give you more flavor. Holden House is close to our successful Soho Place scheme and it's likely to benefit from when Crossrail opens. It's a further opportunity that could start in 2021. And additionally, we have -- we're working up 3 further opportunities, which could lead to over 300,000 square feet, again, possible starts in 2021. There is still 1/5 of the portfolio, some 1 million square feet, which has potential for future development. Our strong pre-letting success over the last year or so, together with the strength of the London office market, means that we're encouraged to push ahead with our next phase of developments. Our customer focus is on Slide 5. Strong customer relations is fundamental part of the business is something we're passionate about. We believe in offering good quality office space with great amenities and a wide range of lease terms and further believe there's something special about Derwent's buildings, they're different to the norm. Through our design, our quality and our creativity, we appeal to a broad range of occupiers who are paying -- are willing to pay good rent for great buildings, attracted to their customers and, more importantly, their talent. We often talked about this war for talent, which is a key feature of tenant demand, and where historic drivers such as the actual rent have become less of an issue to the decision makers. I should now talk to you about our response to climate change on Slide 6. We have long recognized that our sector has an important part to play in responding to climate change. Our previous schemes have included biomass boilers, passive concrete core cooling and groundwater energy storage. Sustainability and how we deal with it is embedded within our business whether through the revolving green credit facility, our commitment to joining the better building partnership or being invited to be one of the London Mayor's 11 Business Climate Leaders. Net 0 2030 on Slide 7. We've now taken an important decision of brought forward our net 0 carbon target on the current portfolio by 2 decades to 2030. This is bold but achievable. It also brings us in line with the 1.5-degree centigrade climate change scenario as set out in COP21. Now the initial route to achieve this goal will focus on 3 elements: our 3 on-site and future developments will all be net 0 carbon buildings; the balance of the portfolio is talked to be net 0 carbon by 2030; and finally, we aim to safeguard our sources of renewable energy. Although any residual carbon will be like -- need to be offset, we'd like to keep this to a minimum. Turning now to a bit more detail on Slide 8. The 3 existing developments of 80 Charlotte Street, Soho Place and the Featherstone Building will all be net 0 carbon buildings. They will be operated using renewable energy and indeed, 80 Charlotte Street will be our first all-electric building. Indeed, this is part of our original design brief back in 2016. Any embodied carbon that was produced in the development process will be offset, and all future schemes will be subject to carbon appraisals just to ensure that they, too, meet this exacting standard. Slide 9, achieve a green portfolio. As mentioned earlier, we are targeting that our current portfolio will be net 0 carbon by 2030. But to do this, we will need to reduce energy consumption and use renewable power sources. This would involve increased collaboration with our tenants, together with more focus on property management and, of course, some retrofitting to our existing buildings. But we believe this approach ties with that of our occupiers who have similar aims. Of course, there are some buildings that we do not directly manage such as the single lets. We will have to work with our occupiers then. But again, with our good customer relationships, I think we can be successful. Future-proofing our green utilities is outlined on Slide 10. The third element of the route map relates to the use of LNG for renewable sources. We already buy green electricity, and we'll also -- we will look to buy green gas. We're also considering other opportunities, including self-generated renewable energy. We've been monitoring our carbon intensity for many years. And since 2013, we already achieved a 44% reduction. We aim to reduce further. So what's the impact on our business? The strategy is expected to come with some financial costs, but we firmly believe that greener buildings would attract the best tenants and, therefore, will command higher rents and higher values. Over time, however, payback should come from extending a building's useful life, and we will continue to design buildings which are long-life, loose fit and a reduced obsolescence. Going forward, we will also continue to buy buildings that are less carbon efficient, but we believe this plays to our strength. After all, our business plan is to turn brown buildings into green ones. Moving back to the market on Page 12. The Central London office market looks well placed at the beginning of this year. 2019 take-up was 7% down on 2018, but in line with the long-term average. Development and completions were just under 5 million square feet and the EPRA low vacancy rate of 4%. You'll see from the slide, there is considerable active demand with new names being added all the time. Tenants are looking further and further out for the best building and pre-letting becomes an even more important factor. Slide 13, outlook. Investment activity during 2019 was much lower, but there was a strong final quarter post-election results. Yields to remain firm and still offer good value compared to our European neighbors and our assets remain in demand. There was a noticeable improvement in business confidence following the general election, although the outlook for economic growth remains relatively subdued. Our future relationships with the EU, together with the rest of the world, will remain a major focus during 2020, but we're encouraged by the strength of the London and its resilience. We're also conscious of the impact of other emerging global issues such as coronavirus. Despite these challenges, we currently expect to see the Central London office market fare better this year. And with this in mind, we are upgrading our rental growth forecast between plus 1% and plus 4%. We're also expecting a strong investment market and with yields likely to tighten a little, again, reflecting the reduced domestic political uncertainty. I'll now pass over to Damian.

Thank you, Paul, and good morning, everyone. The financial highlights are on Page 15. Our net asset value per share was up 4.8% over the year to 3,958p, driven largely by development uplifts. Adding the dividend gave a total return of 6.6%, taking total returns through the last 3 financial years to 20%. Earnings were also up after stripping out the previous year's access right premium. Underlying earnings per share were 4% higher at 103.1p per share, with net rental income increasing by 10.5% to GBP 178 million, even after substantial property disposals. We have raised the final dividend by 10.1% to 51.45p per share, which means the total dividend for the year was over 1.4x covered by EPRA earnings. In a very busy year, we invested over GBP 200 million in project CapEx and made further acquisitions, but our loan-to-value ratio fell slightly to 16.9%. Slide 16 shows the NAV movements for the year. The revaluation surplus was up significantly, our developments providing strong contributions against an otherwise flat landscape. 80 Charlotte Street, Brunel Building and Soho Place together added 140p per share, with plenty more to come. The disposals were all above book, Premier House and Buckley Building providing 12p per share, and the Prescot Street buildings held in a joint venture adding another 2p. The midyear refinancing of convertible bonds largely netted out in NAV terms, and we will look at that in more detail later. Ordinary dividends paid in 2019 were up 10% to just under 68p per share, but are lower than the total in 2018, which included a 75p special. Earnings are set out on Slide 17. We received GBP 15.6 million of exceptional premiums in 2018, and last year, we presented an underlying position that reverses these out. Growth in underlying earnings was 4.2% in the year, reaching GBP 115.1 million. Rental income increased substantially, but costs were up, too, our administrative expenses having been impacted by an increase in headcount, staff bonuses and incentives. The variable pay, which was GBP 2.8 million higher than in 2018, comes from an exceptional relative performance against IPD indices and our peer group as well as a substantial bounce back in our share price. And variable pay being at an average level, earning would have been about 3p per share higher. These increased overheads have taken our EPRA cost ratio up 6 basis points to 23.9%, but it's worth noting again that we capitalized no overhead costs. Slide 18. Gross rental income was up GBP 16.6 million over the year to GBP 191.7 million, mainly from 2019's lettings. Brunel Building added GBP 6.3 million alone out of a total of GBP 12.3 million. There was also good asset management activity, taking like-for-like net rental income up 4.7%. With a full year's contribution to come from Brunel in 2020, plus the income starting to flow from 80 Charlotte Street in a few weeks' time, we expect another substantial rise in rental income in 2020. The cash flow movements are shown on Slide 19. Net borrowings increasing over the year by GBP 37.8 million. Cash from operations was GBP 97.1 million, giving 1.3x dividend cover on a cash basis, even though the new lettings were within rent-free or half-rent periods. Net cash invested in the investment portfolio was GBP 72.8 million before taking account and GBP 30.3 million cash returned from our Prescot Street joint venture. Slide 20. We spent GBP 204 million of CapEx in our schemes in 2019 and expect a further GBP 224 million in 2020. The solid bars here represent committed CapEx only, and the 2021 estimate will increase substantially once we commit to Baker Street and other potential schemes. As usual, more details of the pipeline are in Appendix 40 and 41. Slide 21 shows the pro forma position. The first pro forma takes income at Brunel Building up to a full 12 months and also shows the sale of Chancery Lane and the Brixton acquisition completing. On the right-hand side, we complete our committed schemes. This CapEx is all covered by available facilities. And based on contracted rents only, both interest cover and loan-to-value ratio remain at comfortable levels. Slide 22. There were 4 refinancing transactions in 2019. First, in January, we drew the GBP 250 million U.S. private placement notes arranged in 2018. Next was to repurchase the 2019 convertible bonds. The repurchase incurred a premium of GBP 8.5 million, giving an effective interest rate paid over the 6-year life of 2.1%. The new convertible bond issue was also well received, raising GBP 175 million and a cash cost of 1.5% and a conversion price of GBP 44.96. The 37.5% premium is the highest achieved to-date by a U.K. REIT and the documentation allows for 7% to 10% of annual dividend growth before the price is adjusted. Bifurcating for accounting purposes, gave an IFRS interest rate of 2.3% and an equity uplift of GBP 7.5 million. Finally, in October, we extended the group's main GBP 450 million revolving credit facility with a fresh 5-year term plus 2, 1-year extension options and which includes a GBP 300 million green tranche. Slide 23 highlights the main features. As Paul said, our industry is now aware of its climate change obligations, but needs to raise the bar, finding consistent and meaningful green criteria to measure up to. In particular, we wanted to meet the new LMA green loan principles. They were set in December 2018, and all our reporting is independently assured. We have published a comprehensive green finance framework on our website, which was also externally assured. This refinancing can only be used for projects meeting the strict rules within our framework, and therefore, helps ensure sustainability is embedded throughout our business. Finally, on Slide 24 is a debt summary after all this activity, showing worthwhile increases in available facilities, weighted average maturities as well as marginal borrowing cost. Thank you, and now over to Nigel.

Thank you, Damian, and good morning. Slide 26, the valuation. In what was an uncertain 2019, we delivered a very strong valuation performance of 3.9%. This comfortably exceeded the IPD index of 0.6% and the 2.2% we achieved in 2018. It was our on-site developments that shined, up over 21%, as profits were released. There was the completion of the fully let Brunel Building and good progress at Soho Place where most of the offices were pre-let. With the valuation themes of relatively flat yields and some rental growth, the balance of the portfolio saw a modest 0.4%. On to total property return. The valuation uplift led to a total property return of 7.4% against 6% last year. This was a significant outperformance against the IPD of 4.1% for Central London. It justifies our earlier decisions to progress and maintain an important development program in what is a constrained market and one that continues to seek good quality and interesting buildings. Over the last 5 years, our compounded total property return is over 50%. Slide 28 and yields. Whilst the political uncertainty fed through to a wait-and-see 2019 investment market, there was a big swing in Q4 activity following the general election. This quarter alone represented over 44% of activity and helped keep office yields stable over the year. However, there were a couple of themes that impacted our values. Yields moved out slightly on shorter leasehold properties, and there were some valuation declines on the retail elements at several of our buildings where they have important ground floors. So properties impacted included our Baker Street estate where the head lease is about 70 years, and the retail elements at Holden House, Oxford Street and those on Tottenham Court Road such as Stephen Street. Overall, this contributed to the 4 basis point outward movement to 4.77% on the equivalent yield. With the recent change in investment sentiment, increased activity and relatively attractive London yields against other European cities, the outlook feels more towards an element of yield tightening going forward. As the chart shows, our equivalent yield currently stands comfortably 25% -- 25 basis points higher than a pre-referendum. On initial yield -- our EPRA initial yield remained at 3.4%, but our letting activity helped boost our topped up yield by 10 basis points to 4.7%. Rental Value Growth. Rent freeze granted on our lettings were generally in line with the valuer's assumptions. And at the last space of Brunel, they came in a couple of months. Overall underlying ERVs were up slightly. They're not a strong change. It is worth noting the second half reversed the slowdown seen over the last couple of years as pre-lettings are holding back space at completion and this, coupled with a low vacancy rate, is seeing limited choice. In the tech belt, we are seeing continued demand for good quality space. A couple of examples. We pushed rents on to over GBP 65 a square foot at Oliver's Yard. And the valuers are now marking White Collar Factory rents passing reversionary. Our average rent, excluding on-site development continues to be attractive at GBP 38 a square foot, rising to over just GBP 54 after rent freeze. Finally, portfolio ERV. As Paul mentioned, this now stands at over GBP 300 million. Of the GBP 133.9 million reversion, 49% is locked in through contracted uplifts, and this includes the Brunel, which was completed during the year. On-site developments will add a further GBP 56.6 million, of which 72% is pre-let. Available space is only 2.1 million, and there is only 0.5 million under refurbishment. These are exceptionally low levels and gives us the confidence to progress more asset management initiatives such as being proactive in taking back some space for refurbishment. Finally, there is GBP 9 million reversion from rent reviews and lease expiries. Now over to David, who'll put a little more color on this.

Thank you, Nigel. Good morning, everyone. Slide 33. We had an exceptionally strong year of lettings last year, completing just under 500,000 square feet at a rent of GBP 34 million per annum. These were, on average, 6.9% above ERV. Our 2019 lettings were our second highest year of letting activity on record and take our total letting since the Brexit referendum vote to GBP 117 million worth of rent, covering 1.9 million square feet. This demonstrates how the need to attract and retain talent is increasingly translating into more discerning occupiers be that around design, location, amenity or sustainability, all of which plays to our strength and supports our customer-focused strategy. Turning over. Last year's performance was donated by pre-lets at our major schemes, mostly on 12- to 15-year leases. This slide highlights the importance of lettings to Apollo and G Research at Soho Place, Splunk and Paymentsense at Brunel Building and BCG at 80 Charlotte Street, which together add up to approximately GBP 27 million worth of rent, almost 80% of last year's income creation. On the existing portfolio, notable contributions came from 90 Whitfield Street in Fitzrovia, where we've let a number of furnished and flexible suites, and the Tea Building shortage where we recorded a record rent of GBP 65 per square foot. Turning to Slide 35, Asset Management. We talk about our substantial reversion. Here, we set out our activity last year capturing that reversion. During 2019, we completed lease renewals and rent reviews, covering just under 550,000 square feet or 10% of the investment portfolio. Our activities increased the income on those properties by 24% to GBP 26.8 million or GBP 5.2 million net. This growth was marginally ahead of ERV. During the year, our vacancy rate fell from 1.8% to 0.8%, further confirmation of the strong demand for our brand of property. Slide 36 sets our view of the key deals completed by our asset management team last year. Highlighting 2 of them. At Oliver's Yard, a substantial uplift in rent on the Sage Publications deal reflected a restructure and upgrade of the space of this tenant who has been in our portfolio for the past 17 years. At Charterhouse Street, we linked to restructure with the rent review which not only resulted in an increase of over 50% on the passing rent, but also gave certainty on the expiry of the lease, unlocking what will be an exciting future redevelopment scheme, opposite Farringdon and Crossrail station. Earliest possession here is early 2025. Turning now to our investment activity, Slide 37. Our overall strategy is to dispose where we believe we've taken the building as far as we can, looking to recycle into higher-yielding developments or future opportunities. This is all in the context of maintaining a balanced portfolio between core income and future stock. 2019 was a busy year in terms of disposals. We exchanged or completed on the sale of 5 commercial buildings, with gross proceeds of just over GBP 300 million. These were, on average, 5.1% above December '18 book value. Our sales demonstrate the strength of demand from both core and opportunity-driven buyers. Premier House became vacant in the first half of '19 and we were able to sell it at a premium, reflecting the regeneration potential. The 2 Prescot disposals represented the tidying up of 2 smaller holdings that were held in the joint venture. And we've already completed a refurb and regear over a significant portion of the larger building. At Buckley, we just completed our first rent review cycle. And at 40 lane, we deemed that the building did not offer as much reversionary upside as others in our core portfolio. In terms of buyers, we saw a wide mix, demonstrating London's continuing broad appeal to a range of investors. And we see this depth of demand from buyers continuing into this year, with circa GBP 33 billion chasing London stock. Slide 38, advancing the pipeline. Our aim, of course, is to recycle our disposals into new opportunities. We've discussed Bush House before where, as freeholders, we received the sum of 23p per square foot. The building is let to Mapeley and occupied by HMRC on a lease expiring in 2028. Here, we're in advanced negotiations to provide early possession in 2021. This will give us time to bring forward our plans, which should include additional floor area to the current 108,000 square feet for what should be an exciting near-term redevelopment. Turning to Slide 39. As well as opportunities from within, we remain extremely ambitious to acquire. We're looking at a number of interesting off-market opportunities, and we're particularly excited to be buying in a new village with our recent purchase in Brixton. It ticks a lot of our boxes. The area is emerging. We're attracted by its excellent connectivity into the heart of London, only 11 minutes by tube from opposite circuits and it's vibrant feel while still being an underdeveloped office market. The building is let for a low rent of GBP 14.50 and a capital value of GBP 710 per square foot. And crucially, there is substantial potential for a major redevelopment with the building sitting on an underutilized 0.7 of an acre site. The majority of the building is currently let with some available space. So we will look to improve the income in the short term, whilst we work up our plans for the future. Our very preliminary study suggests that we could more than double the floor area here. Possession is currently 2025, but there may be opportunities to bring this date forward. I will now hand you over to Simon to discuss our projects.

Thank you, David, and good morning, everyone. Slide 41. 3.5 years ago, we made an important decision, that was to proceed with our development program despite a backdrop of some uncertainty at the time. Looking back, it turned out to be the right decision, unlocking some exciting schemes that have delivered some stellar results. Projects are an important part of our DNA, so we have continued to concentrate on maintaining a long pipeline of schemes. Currently, we have an overall development pipeline of circa 1.8 million square feet, including those currently on site, which amount to 790,000 square feet. Slide 42, an update. The 3 major projects on-site are 80 Charlotte Street and 1 Soho Place, both in the heart of the West End. And then there's the Featherstone Building, which is adjacent to our White Collar Factory on Old Street Roundabout. We also have 2 further projects planned in the West End, both with planning permission and containing great potential. 19 to 35 Baker Street are predominantly office-led scheme of 293,000 square feet, and Holden House on the corner of Rathbone Place and Oxford Street that will offer 150,000 feet of retail and offices. We're also progressing several potential schemes within our existing portfolio. These include Bush House, which David has already mentioned; the Network Building in Fitzrovia; and our office complex at Angel Square, Islington. Our Brunel Building in Paddington was extremely successful and completed in May with all the offices and ground floor restaurants, totaling just under 0.25 million square feet pre-let. This produced a gross rent roll of GBP 17.8 million per annum and has returned the company a handsome profit of circa 60% on cost. Slide 44. It is interesting to note that due to the increasing importance of brand awareness amongst the larger office tenants in London, the level of fit-outs has noticeably improved over the last few years. This slide is an example of one of the high-level fit-outs by Alpha FX, one of our 7 new tenants in the Brunel Building. Slide 45, 80 Charlotte Street. The development of the substantial island site in the heart of Fitzrovia is nearing completion with 100% of the 320,000 square feet office element predominantly pre-let to Boston Consulting Group and Arup engineers. Two smaller tenants, Elliott Wood engineers and Lee and Thompson listers have now also taken pre-lets of the office element of our 2 ground floor units on Whitfield Street. We are also pleased to report that we have already presold 13 of the 22 apartments in Asta House, which forms part of the overall scheme. Practical completion is on target to complete within the next few weeks. This slide hopefully illustrates the excellence of our new facades, one of shattered concrete complementing the other, which is finished with a beautiful Kolumba brick and which helps our building sit comfortably within the village scale of Fitzrovia. Soho Place on Slide 47. Another substantial and dynamic development in the heart of the West End. This one above Crossrail and on the corner of Oxford Street, adjacent to Soho Square. Once again, a majority of our office content of 220,000 feet has been pre-let. This new travertine-clad building will also offer 36,000 feet of high-class retail space, which will include the enviable address for some lucky retailer of #1 Oxford Street. Completion of this very special project, where we are also building the West End's first new theater in over 40 years is anticipated in the first half of 2022. Total ERV for this project is GBP 23 million per annum. This is an aerial of the progress on-site to-date, and where on the left-hand side of the slide, you will see the structure of the new theater already in place. On the right-hand side, our shop and office building are now progressing with the main core visibly coming out of the ground. Slide 49, the Featherstone Building. Traveling east to Old Street, construction is now well underway for this 125,000 square foot project that sits adjacent to our White Collar Factory. The building emulates the White Collar Factory in as much as floor-to-ceiling volumes of well in excess of 3 meters on all the 12 floors. The structure itself strongly references the multitude of warehouses that were present in this location in the early 20th century. Here, we have an ERV of GBP 8.1 million per annum with this particular location enjoying both popularity and continuing rental growth. Slide 50. A good shot of the site, which shows the full extent of the plot from City Road and returns back down Featherstone Street, adjacent to the low-rise buildings at the White Collar Factory. Slide 51, back to the future. 19 to 35 Baker Street is one of 2 valuable planning permissions secured in the West End and that I mentioned at the outset. It has been designed as an office-led scheme of just under 300,000 square feet, which will include 35,000 feet of retail and restaurants, together with 52,000 feet of prime residential apartments, all with the George Street address. The development will crucially feature a unique pedestrian court that runs the whole length of the site from Gloucester Place through to its main frontage on Baker Street. This has given us a one-off opportunity of creating a vibrant destination for people to eat, shop, live, work and visit. This scheme could start in the first half of 2021. Holden House. Holden House is the other West End project where we have won another valuable planning consent. It will offer a combination of prime retail units fronting Oxford Street and top-class offices with their main entrance on Rathbone Place, and together, totaling 150,000 square feet. Another extremely exciting opportunity and this scheme could start towards the end of 2021. [ Slide ] 53, projects under appraisal. It's important to note that Derwent has numerous buildings currently under appraisable that should substantially increase our development program going forward, buildings like Angel Square and the Network Building as well as Bush House and the recently acquired Blue Star House all contain exciting prospects. All the buildings shown on this slide have an existing total floor area of 424,000 square feet. Assuming all goes well on the planning front, this should comfortably increase by over 100,000 square feet and undoubtedly keep our development team fully occupied in the immediate years ahead. Thank you, and I'll now pass you back to Paul.

Thank you, Simon. We've been very successful [ down in London ]. But over the last 3 years, Central London rents have remained relatively flat. We recognize that there remain some wider issues such as the global economy and the ongoing EU negotiation. But post-election and with the strength of the occupier market, together with its limited supply, we see a stronger Central London office outlook. Therefore, we propose to push forward with our next phase of developments, which we're sure would appeal to our ever-demanding tenants. We remain very customer-focused and are setting out our ambitious net 0 carbon targets. But with our strong financial position and our excellent team, we're ready for the next stage. I now open up the floor for questions. Thank you.

Kieran Lee from Berenberg. First one is on Brixton House. Historically, you've been very much in -- sorry, it's Brixton asset. You've been very much focused on the West End, moved across to Old Street and Whitechapel. Why Brixton? It's a pretty big departure. I know you touched on it, but some of the risk and some of the potential rewards you see.

Well, I'll start and then I'll pass over to David. I don't think it's a huge departure. If you look for the last 30 years, we've been finding new villages and new areas for a considerable period of time. I think we're in shortage very early on beyond anyone else. What I liked about Brixton, and Dave will give you a bit more flavor, is when I went down on the tube, it was literally 10 or 11 minutes down there. It's a new area. It appeals to all our dynamics of the existing rents, low capital value and opportunity to create a really interesting redevelopment. So we see it as a new area. But David, do you want to add anything to that?

Yes. Thanks, Paul. I think what Paul kicked off with is it's connectivity to the West End. So Oxford Circus is just over 10 minutes by tube. It's connectivity is excellent. And the vibrancy of the location, it really does -- we're always thinking about our customers and it really does feel like a location that our customers will go to. And the crucial thing with it is it sits on this very underdeveloped site. So although the existing is circa 50,000 square foot, we think we can more than double the square footage there. So in a nutshell, we think we could put a very special Derwent building that's going to be very attractive for customers at good value as well.

Is there a microphone there?

Max Nimmo at Kempen. Just, I guess, in terms of -- in life, slightly more bullish stance that you guys are taking on the market. Does that change the way you think about LTV? Obviously, where the -- as you bring more projects on, that will naturally change anyway. But has your thinking around where you are and the range you're in, has that changed at all?

I don't think it's dramatically changed. I think it's obviously relatively low at 16.9%. I think we're happy to push it up a bit. My CFO will want me to make sure I don't push it up too much. So if it went up a bit, I think we're just looking at the market and think to ourselves, letting market is really strong. Tenant demand is strong. We've got lots of opportunities within, let's gear up a little bit. So I don't think -- I don't think there's a change of policy or such apart from the fact that we think we can push it a little. David, do you want add to that?

I think that's absolutely right. I think we have been rolling on quite a low loan-to-value over the last 2 or 3 years. With the sales we've made also this year so far, the LTV is now probably around 16%. There's quite a lot to go for in terms of CapEx but I think we'll be quite comfortable to see the LTV move into the low -- perhaps even up to the mid-20s, but probably no further than that.

It's Sander from Barclays. A couple of questions. The first one is on the ERV growth, the new improved target there. How do I look at that? Is that for the overall London office market? Is it from new deliveries or for prime new buildings, especially given if you look at how FY '19 has developed, it was broadly flat? I mean, it was mainly delivered through some development. So how are you thinking about ERV growth in terms of which buildings or what areas where you expect that?

Yes, I got. The figure we quote is basically the ERV movement, but CBRE provided on the various buildings. So it strips out the development. It's the EPRA ERV growth. So the GBP 1.4 million last year is taking all -- essentially taking our existing buildings, looking at CBRE ERV last year and to CBRE's ERV growth this year, and that gave us the GBP 1.4 million. And as Paul said, we're more optimistic on that going forward. Now if you've got a competitive competition on a new building, you compare that with poker and I'd be very surprised if we don't let any of our space. Those sort of levels we get 5% to 10% above ERV. You can pay more poker, if you got 2 potential tenants.

So basically, if we were to assume a 5% to 10% for prime new developments and 1% to 4% as a broader average?

As a sort of...

Our new lettings were 7% last year, up. So that gives you...

Right. Okay. And just what is driving that change? Because, obviously, tenant take up was very strong already in FY '19 and FY '18 more broadly. What is it exactly at this moment that you see the increased tenant confidence coming through? Obviously, the elections have taken some of that uncertainty. But actually, if you look at the underlying market, tenant takeup has already been pretty strong. So what is it exactly that you think is driving...

I think London is still very much in demand. I mean, look, newer cars are coming out, and we were looking at this morning, I think there's something like 2.5 million square feet of active demand just for lawyers. And I think the business confidence is there. I think London is doing very well. People want to be in great buildings. So I think there has been a big uplift in confidence. But we've had a great 3 years. So -- but we'll see, with limited supply and low vacancy rate of about 4%, I think we feel confident that tenants want new space.

Right. Okay. And the last one, on the -- following up from Max's question on potentially gearing up or acquiring. Given that you're getting more bullish on the market, do you -- further investment activity, do you expect it to be largely around development pipeline that you have? Or can you also be more aggressive with your underwriting assumptions for acquiring new buildings?

I think we'd like a bit of both, but I suspect David will say the market is going to be as tough to buy this year as it has been for the last 2 years. I mean, you look at yields, they're obviously -- they are higher than Europe. But I mean, there's a lot of demand. You talked about GBP 33 billion of investment demand. But we've got plenty for within. We're not forced buyers. We're disciplined buyers. If we can find a few assets to buy, we'd certainly be delighted to do that, but we want to also invest in our portfolio. We'd look to spend some of that GBP 200 million this year. We'll probably be spending something similar next year on the development pipeline. So we're happy to invest both within. But if we find something interesting that's got that Derwent signature, we'll certainly do it.

Yes. I mean, the only thing I'd add is, as I said, that most of our portfolio was bought off-market. Blue Star was off-market. We are looking at a number of interesting things. But it is a very tough -- it's a tough market to buy in, but we're hopeful. We remain hopeful.

So no change to the underwriting assumptions basically?

No, I think we're disciplined buyers and we know what we look for. When we see something that we really believe in, we go for it. And that's the way we buy.

I think you made the comment that we see -- potentially, we see yields maybe slipping down. We would potentially apply slightly tighter yields to buildings compared to, say, 12 months ago.

Have we got one, Tim?

Tim Leckie, JPMorgan Caz. I just want to have a bit of a discussion from you guys on yields, if I may. I know the developments in your own sweat and effort drove the valuation result for the year. Your -- excluding developments, you were flat at 0.6%. And just looking at Page 71 in the appendix, the second half, despite all the talk about this investment surge post the general election into London, the yield, the equivalent you had actually ticked up 4 basis points in the second half versus 2 in the first or 2 in 1 for Central London. So IPD was flat in December, flat in January. Your own results don't show this investment way of translating the yield compression, but the whole market seems very bullish on yields compressing and your own commentary points to some yield compression. I know it takes a while before transactions show up in the data, but just some more color on that. I guess, in the comments as well, that the high yield mentioned in London versus the continental markets, but the funding costs were also significantly higher. So I just -- I'm struggling to understand why yield is going to come down so much. And I thought just some more color on that would be, if you can provide it, useful.