Derwent London Plc (DLN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Derwent London Interim Results 2020 Presentation. My name is Haley, and I will be the operator for your call this morning. [Operator Instructions] I will now hand it over to Paul Williams. Please go ahead.

Good morning. Thank you for listening into our recorded half year presentation. I hope you're all keeping safe and well. Given the present circumstances, we have a stem down team presenting today. I'm joined by David and Nigel. He will take you through the financial and property details. I should then wrap up, and we'll be joined by David and Simon, together with other senior members of Derwent team, for Q&A. There's also a link on our web page to fill, we have released on 80 Charlotte Street. We completed this, our largest-ever scheme during lockdown, and there are occupiers now fitting out. Please find time to freely will when you can, and we hope we could show you around a finished building in due course. Slide 2, first half activity. This year will be remembered for the arrival of the global COVID-19 pandemic in the U.K. and ensuing government lockdown. This has had tragic and severe consequences for many people and businesses. Looking at our business, we started the year with a strong market, a low vacancy rate and a positive outlook. In mid-March, we've pivoted to focus on our operational activities, particularly the health and safety of our employees, our occupiers and other stakeholders. The lockdown has stalled momentum, and London's economy today is some way short over the confidence and vibrancy as shown earlier in the year. Our results reflect this with a virtually flat total return in the first 6 months. All our offices, however, remained resilient, whilst you saw an expected fall in retail values. Nevertheless, we've had an active first half, completing 80 Charlotte Street W1, which is already 91% let; disposing of 40 Chancery Lane; maintain a low vacancy rate at 1.1%; increasing our interim dividend by 4.8% to 22p per share; and in July publishing our Net Zero Carbon Pathway to 2030. Turning over, and our response to COVID-19. We have already published details of how we've responded to COVID-19 and how our teams have been helping our occupiers and supported those most in need. We have a long-standing collaborative approach with our occupiers and took an early decision to offer a 25% discount across the board on the March and June quarter service charges. This policy helped our June collection rates, which are proven to be very similar to March. The retail and hospitality sectors, which represent about 10% of our income, have been most affected. We will continue to support these occupiers on a case-by-case basis. Turning over, our wait-and-see market. The lockdown was reflected in market activity with occupier and investment activity falling sharply in Q2. Total H1 activity is running around 40% below last year's levels. The Central London vacancy rate has risen from 3.9% to 5.3% with the West End remaining a tighter market and the City. This compares to the long-term average of 5%. Demand for good quality space continues to be strong, but with more tenant and secondhand space come to market, we're beginning to see a 2-tier market. We see this rising particularly in the City & Docklands. Although letting activity was significantly lower, there has been limited evidence of falling office rates, but we have seen rent freeze moving out slightly. Active demand has also fallen by 20%, but at 7.9 million square feet, it's still substantial, especially while the supply of new space remains constrained. We have seen some occupiers put their comments on hold, but we expect to see some companies renewing their existing leases, which, we believe, will play to our strengths with our strong customer focus. There continues to be inquiries for large space requirements, such as from [indiscernible] and Netflix, with a number of prospective occupiers progressing their due diligence. Investment activity has also fallen, but where transactions have taken place, prices held up. London remains high on most investors buy list with good demand for WELL Air buildings. Slide 5, the return to offices. Last few months have seen commentators question the future of offices. Some have argued that the success of working for home means that office demand will fall significantly. We have remained confident about offices' future and about Central London as an important global city. We recognize we cannot be complacent when faced with potential demand shifts. With that in mind, we recently surveyed our top 50 tenants and spoke with senior managers on their thoughts of going back to the office. We show some of the results here. This may be a small example, but engagement was positive with no great surprises. A strong and repeated message was that occupiers miss most the social interaction and collaboration for not being in their offices. Encouragingly, they also missed their working environment in our buildings. However, top the list of concerns was public transport and general health. Given the importance we place on getting London working again, it was also interesting to recall their target occupation levels. Based on this sample, occupation levels could reach 50% the last quarter, but full occupation is unlikely until some time later. This will have a knock-on effect on the ancillary restaurants, gyms and shops that service these workers. Slide 6. One question we are exploring is how the pandemic may change how offices are used in the future, whether that changes demand. Some elements of homeworking are here to stay, but we see COVID-19 as an acceleration of trends already underway rather than trigger for change. The workplace has changed and will change further. There will be more focus on well-being, more agile working and less sedentary desk space. This is like to increase demand for more breakout areas and collaboration space. Trends that have already established in our office design are now like to be reinforced. We believe that our recent developments have anticipated much of this, particularly with our generous volumes, reception spaces and other amenities such as communal terraces. Going forward, we expect more of the same, but even more emphasis on amenities, sustainability and relevant technology to enable the smarter use of space offering occupied choice. We also see our phased and flexible offer being in greater demand, responding to our customers' requirements. Learning lessons arising from the pandemic is important to ensure our partner remains fit for purpose. Adaptability will be the key. Now turning to page, Slide 7. Whilst the pandemic persists, many occupiers will be understandably cautious about the risks associated with social distancing in the workplaces and particularly public transport. In addition, in the short term, we are still to see the impact of government withdrawing furlough sport and the terms by which the U.K. leaves the EU at the end of 2020. There will be further job losses and business failures, and we expect vacancy rates to rise, albeit from a low base. This is like to put pressure on office rents, particularly for poorer quality space. Investment values looked more defensive for the right office properties, let on the right terms. Interest rates remain low, and London's office yields are still looking relatively attractive compared to many major European cities. This view has been supported by recent market transactions. We have seen no distress in the investment market, and certainly, there are no bargains available. We believe that Derwent London creates the buildings that will prove resilient in this market as well as embracing most of the attributes discussed earlier. They are managed by customer-focused asset managers and building staff. In addition, they are located in the West End or Tech Belt location, which benefit from mixed-use, a broad occupier base that brings creativity and collaboration and with few tall buildings. Our own portfolio only has 7 out of 83 buildings over 10 stories, or put another way, circa 4% of our office area is above the 10th floor. Our presale of 2 and 4 Soho Place W1 at GBP 2,200 per square foot in July is a clear demonstration of the continued appetite for good quality model offices. Retail rents will remain under pressure. We see retail and hospitality and it is important amenity for our offices. We expect rents will fall and vacancy increase, but we continue to offer support, again, on a case-by-case basis. Turning brown buildings green. In February, we committed to becoming a net-zero carbon business by 2030. We recognize that there will be a cost involved and challenges along the way. However, if anything the pandemic has reinforced is our resolution to promote this agenda. Our business model is based on improving London's office stock, and it means ensuring we are improving our portfolio's climate resilience. In the first half, we completed our first net-zero carbon development at 80 Charlotte Street. And 2 weeks ago, we've published our pathway, which sets out how we achieve our 2030 target. We're already seeing larger occupiers focus on the building's green credentials. And in more detail, and we expect to see the same in the investment market. As a result, we believe that there is a financial as well as a moral imperative to continue to reduce our climate impact. Slide 9, Derwent London's opportunity. The business is reversing, even with slowdown in momentum, as we have built in growth from our pre-let as well as significant opportunity to capture additional rents from space under construction, notably the Featherstone Building EC1. Going forward, we are progressing on number of new projects with a focus on 19-35 Baker Street W1. We expect to start this game in 2021, creating 293,000 square feet for delivery in 2025. This will double the existing space. The current outlook leads to expect to temper some of previous ambitions. One of our hallmarks is the ability to run our income, whilst retaining flexibility for the future. We've already achieved some success regearing leases, we expect to extend these profiles in buildings such as Holden House and oxford Street, whilst retaining the flexibility to commence other schemes, such as in Network Building and Angel Square, both of which could begin in early 2022. We're in a strong financial position, both to meet the GBP 337 million of capital expenditure needed to complete our current program and also to take on fresh opportunities, either from within the existing portfolio or from outside. I shall now pass on to Damian.

Thank you, Paul, and good morning, everyone. Financial highlights for the half year are on Page 11. Our total return was broadly flat at minus 0.1% in H1 2020 due to a revaluation deficit of 59p per share. And the new EPRA net asset metrics were down 1.4% over the period. EPRA net tangible assets, or NTA, which replaces EPRA NAV was GBP 39 per share at 30th of June and EPRA net disposal value, or NDV, which is equivalent to the old EPRA triple net, was 3,792p per share. Full details are in Appendix 3. EPRA earnings have taken the dip too, down 4.8% compared with H1 '19 after impairment of receivables and landlord service charge contribution and a delayed rent start date at 80 Charlotte Street. However, gross rental income is higher than in H1 '19 with more to come in the second half. And we have raised the interim dividend by 4.8% to 22p per share. Our debt and liquidity position remains very solid. The interest cover, whilst still strong, shows the impact of the impairment charges. The loan-to-value ratio is now at 17.3%, slightly lower than June '19 and only a few decimal points above December 2019. Slide 12. This shows the 6-month movement in EPRA net tangible assets. Our developments showed a positive contribution of 18p per share, and the revaluation deficit of 59p came mainly from our investment portfolio, which fell by about 77p or 1.7%. Nigel will provide more color later on. Dividends paid in H1 were up 10% on last year. All the other amounts shown here being close to the equivalent figures last time. The profit on disposal of investment properties came mainly from 40 Chancery Lane, which completed in February. EPRA earnings are set out on Slide 13. Again, most of the figures are very close to H1 '19 with non-COVID property expenditure, admin expenses, net finance costs and tax, all within GBP 1 million of H1 '19. Gross rental income was up by GBP 4.7 million, but GBP 6.5 million of direct COVID-19-related costs have been included in property expenditure, more on which later. Headcount has risen a little in H1, but accruals for bonus and incentives have fallen and are expected to be lower for the full year than in 2019. The makeup of the rise in gross rental income is on Slide 14. Previous developments continue to fuel income with a GBP 6.7 million increase in rents from Brunel Building compared to H1 '19. A further GBP 1.5 million of the increase came from rent commencing of 80 Charlotte Street in June with about GBP 11 million expected in the second half. Disposals reduced rental income by GBP 4.1 million and breaks and expiries by GBP 2 million. The main portfolio is showing slower rental growth in recent years with like-for-like gross rents up 1.5% compared to H1 '19 but down 0.3% compared to H2. Like-for-like net rents have been affected by impairment charges and is shown in Appendix 8, both with and without the impact of direct COVID costs. Slide 15. We published our June rent collection figures on the 7th of July, and an update of both March and June quarters is provided in the table here. Office collection rates continue to be much higher than retail and hospitality. It is good to report that those tenants where we agreed that rents could be paid later in the quarter have so far paid these in full. Assuming all the monthly amounts received in the next few weeks, June quarter collection rates would be slightly above March, which is rather better than we expected. Cash collection has become a much bigger focus of the business in 2020, and this is likely to continue through 2021. Our credit committee has been expanded and meet several times a week to consider new lettings, arrears and requests for help from tenants. We have only drawn GBP 1.4 million of tenant rent deposits so far, leaving GBP 21.9 million of deposits remaining, which are not included in our balance sheet. Slide 16 shows the direct impacts of COVID-19 on our rents and property costs. The GBP 2.5 million of rents waived in Q2 were targeted on those tenants most in need, many of whom were retailers or restaurants. IFRS 16 requires these concessions to be spread over the remaining lease terms, which reduced H1 rental income by GBP 0.2 million. We also provided a 25% service charge waiver across the portfolio for the March and the June quarters. The first of these cost us GBP 2.1 million in H1, and there will be a similar charge in H2 for the June quarter. Service charge collection rates for both March and June quarters are currently running at 99% and 94%, respectively. We have impaired or written off GBP 4.4 million of receivables and accrued lease incentive balances. This followed a detailed look at our largest 50 tenants, who make up about 2/3 of the rent roll. Specific provisions for those on our tenants' at-risk list, with the balance dealt with according to their sector. The EPRA cost ratio has risen to 28.9%, including direct vacancy costs and direct COVID costs. If the latter were excluded, it was 22.2%. Slide 17. Borrowings increased in the first half as we elected to hold high levels of cash, but net of cash only increased by GBP 9.2 million. This was helped by GBP 126 million of investment property disposals, mainly for the Chancery Lane and GBP 3.4 million of trading sales at Asta House. The cash from operations fell to GBP 30.1 million, but this excludes cash from the property sales and has been impacted by our agreements to defer rents until later in the year or 2021. Slide 18. Now that 80 Charlotte Street has reached practical completion, we thought it was a good moment to take a look at the returns from our largest development to date. The annual rental income, net of incentives, will be GBP 22.2 million. Up to June 2020, the development profit on cost was 27%, and we have booked GBP 162 million of revaluation surplus in the accounts with a further GBP 65 million fair value expected as the rent-free periods burn off. Slide 19. The lockdown slowed CapEx spend in H1 by about GBP 10 million to GBP 67 million, plus GBP 6 million of capitalized interest. Allowing for social distancing, but assuming no major interruptions, we expect CapEx in the second half to reach about GBP 115 million. There is optionality in our pipeline, and future CapEx would increase by about GBP 250 million once committed to Baker Street. As usual, more details of our pipeline are in Appendices 35 and 36. Slide 20 shows the pro forma position taking account of the remaining payments to tenants and contractors of 80 Charlotte Street, but assuming no further valuation uplift. It also allows for committed CapEx on all other schemes, the Soho Place disposal and contracted rent increases. The CapEx is all covered by available facilities, and both interest cover and loan-to-value ratio remain at comfortable levels. Slide 21. This is the first full 6 months for our green revolving credit facility. So we have provided updated figures for green qualifying expenditure to date, which must exceed amounts drawn under that part of the facility. At GBP 43.8 million, green expenditure in H1 was about 2/3 of the total CapEx spend. The figures are all independently assured by Deloitte on an annual basis, and they issued a clean report in February 2020. This is included within our responsibility report and on our website. Our key debt stats are in Slide 22. The higher drawn amounts have reduced our weighted average interest rate with LIBOR-linked marginal rate of borrowing down to 0.83%. Our weighted average maturity remains long at 6.8 years after GBP 875 million of refinancing in 2019. In conclusion, our balance sheet continues to be very strong with low leverage and over GBP 500 million of cash and undrawn facilities at the 30th of June. Thank you, and now over to Nigel.

Thank you, Damian, and welcome to everybody listening in. Slide 24. The start of the year saw a buoyant market with yields coming in and rents moving forward. Things are now somewhat different with low take-up and a wait-and-see investment market. However, there were some transactions, and here, values held up well on quality product. This fed through to the valuation. On an underlying basis, our portfolio was marginally down 0.9% over the first half. The developments were positive, delivering 4% capital growth, and this was despite a 2-month site closure. The balance of the portfolio was down 1.7%, mainly due to the impact from our retail elements. We completed 80 Charlotte Street, releasing the final development profit. As Damian mentioned, there's still valuation upside to come, as the rent freeze run down. At Soho Place, there was the positive from the presale of the offices, but also the negative from the 10% decline in retail ERVs. Our other development, Featherstone Building, is progressing well, and rental values here held firm. Turning now to the valuation detail on Slide 25. ERVs were marginally down by 0.7%. Within this, offices were flat. And retail, which is about 10% of our rental income, declined 7.7%. The portfolio yield profile was unchanged over the first half. However, it is worth noting the impact of 80 Charlotte Street. Following its completion, this is now included, and due to its size and quality of income, has a positive impact on the average yield. Excluding this property, the equivalent yield would have moved out 4 basis points. This reflects the outward yield movement on the leasehold properties and the retail space. On Slide 26, we show the usual buildup of ERV, a couple of points on the chart. The contracted rent of GBP 180.8 million was up GBP 11.7 million over 6 months, as several step rents came through. Our on-site developments dropped to GBP 31.1 million as Charlotte Street moved into contractual uplift. However, this still represents 70% of reversion that will impact earnings. Moving across, the vacant space available increased to GBP 3.1 million, representing the 1.1% vacancy rate. Space under refurbishment rose from GBP 0.5 million to GBP 4.7 million, as we started with several projects, notably, 6-8 Greencoat Place, Victoria. If we assume none of the refurbishment work is let by completion, our vacancy rate would rise to about 3%, still a low level. The balance is the reviews and expiries, which was impacted by modest ERV decline. Overall, the portfolio's ERV is now just under GBP 296 million. This is lower than the GBP 300 million at year-end, mainly due to the ERV loss from the disposal of Chancery Lane and the presale of the offices above the theater at Soho Place. Now our total property return. The income yield outweighed the valuation decline to deliver a positive property return of 0.7%. This was comfortably ahead of both our benchmarks. Turning to the portfolio activity on Slide 28. It was a quiet period, but we did not have much space to let. Lettings totaled GBP 2.6 million, and we're above ERV. These included the ground floor unit at 80 Charlotte Street and a couple of transactions with existing occupiers, Buckley Gray Yeoman and Expedia. We've already touched on the vacancy rate. And as the graph shows, we have a good track record of managing this. Slide 29 looks at the potential lease events in the first half. These totaled GBP 9.1 million of income. After adjusting for the GBP 2.1 million taken back to refurbishment, principally Greencoat Place, we retained or re-let 76%. The balance equates to only GBP 1.7 million of income and is across the portfolio. Overall, our asset management activity for H1 increased income by 8% to GBP 5.7 million. Now looking ahead at future expiries on Slide 30. This is a table not found in the appendix, but we show more detail for '21, as expiries are above average. A couple of points here. First, the calculation is conservative, as it is based on parsing rental income. However, if we were to use top-up rents, which allow for pre-lets and rent freeze, the impact on expiries is less significant. Second, for '21, nearly 60% of the expiries relate to potential projects such as Baker Street. This gives us optionality. The balance includes great core income properties such as White Chapel Building and Tea Building. These buildings have always seen good demand. So what progress is being made with the '21 expiries, which total about GBP 44 million in rent? Slide 31 provides an update. The feedback from our asset managers is generally positive with several early discussions in hand to extend terms. Good progress is being made. So far, of the expiries due next year, we've agreed terms or in advanced discussions on over 25% of this. This reflects about 200,000 square feet. The most recent example is the regear just signed with UCL, who had a '21 expiry. They increased their space by 60% at a new rent of GBP 2.2 million per annum. This transaction also illustrates how we expect to achieve our net-zero carbon. As part of the renewal, we are providing improvements to the building, and this includes converting the heating from gas to green electricity. We will be able to fund this using our green finance facility. This is something Damian touched on earlier. A small transaction, but it shows the Derwent team mindset on this carbon journey. Turning now to our investment activity. We have previously reported the Blue Star House acquisition and now in the appraisal and design stage with architects. We also acquired a small residential asset in Fitzrovia at a location earmarked for Crossrail 2 station. We've been assembling assets here when opportunities arise. A very long way off, but we're adopting the same approach taken over 20 years ago to create a major Soho Place development. On disposals at Soho Place, we recently announced the presale of the offices above the theater. This was signed during lockdown and represents GBP 2,200 per square foot. It helped de-risk the project, but also shows the demand for quality product. The other sale was Chancery Lane, which was a mature asset where we had done our job. Now on to the development, Slide 33. Damian covered our success at 80 Charlotte Street. And under the circumstances, this was a big achievement to obtain practical completion in the first half. We are also making good progress on the disposal of the adjacent apartments. Looking at the other projects, Slide 34. Soho Place and Featherstone are progressing well with delivery for early '22. Then we have optionality for the future. The current intention is to start Baker Street next year but defer Holden House due to the difficult retail market. The latter is, however, fully let, and we can run on the income. Paul talked about the future of offices earlier, and we structured the design team to undertake COVID-19 project reviews. The brief, what can be learned from the pandemic? And how does this impact our design going forward? We critique not only our next major development at Baker Street, but also our on-site projects, Soho Place and Featherstone Building. The next couple of slides focus on Soho Place. We showed the pre-COVID design, but also our plans for improvement. First, what we designed. Providing generous clear spaces, volume in reception and the office floors has always been part of our DNA. This has evolved to a wide provision of facilities, including terraces, cycle stores, shares and lockers, all positives for the occupier and wrapped around good design and architecture. Soho Place already has all of this. In addition, the base scheme incorporates several touch-free facilities such as access and lifts. These will enable analytics going forward, a step closer to smart buildings. So what are we adding? This is highlighted in green. Generally, the building came out well from the review, but several minor changes will be implemented to improve health and the experience. For example, more flexibility around the air conditioning, allowing greater control between zones. Then add central controls to washrooms and even a greater provision of facilities for cycles and storage. Finally, the pipeline, Slide 37. We have touched on Baker Street as the next development, that has shown there's potentially a pipeline of 648,000 square feet that could start in the next few years. All have optionality, so we can deliver appropriately. On all our projects, we continue to progress and challenge the design, so our buildings remain at the forefront of office space. Quality and differentiation will now count even more. I will now pass you back to Paul to summarize.

Thank you, Nigel. Before moving on to the conclusion and Q&A, you have seen another important announcement today. Simon Silver, our long-standing Creative Director, has decided to retire with effect from February next year. However, it is not goodbye as we agreed that as Simon will take on a consultancy role for another 2 years as our special adviser. Simon will continue to be heavily involved in the design of our next phase developments and assisting with the Derwent brand. We have established an excellent team around him. It will continue to create best-in-class offices for the occupiers of the future. Thank you, Simon, for all you've done. There will be an opportunity to say more at our finals. Your contribution will be long-lasting. It is not possible to provide rental guidance yet given the current uncertainty. It is still early days. All depends on the impact of the recession and how quickly the London economy recovers. Against this background, we expect office rents to fall, although good quality, adaptable space should prove more resilient. Development activity and hence supply may reduce as margins come under pressure. We expect investment years to remain firm for the right product, but here again, we expect to see demand becoming more selective. Retail business models will remain under pressure. So what are we doing? We are staying close to our occupiers looking to extend income and minimize vacancy. This is the core part of our business. We are spending time and resources on considering how COVID-19 will impact offices, and it showed that we continue to build the best space for the future. I have seen first-hand the benefit of being in the office. London is a great global city, and we're encouraging people back. More needs to be done. The portfolio has plenty of reversion to capture. We're looking to 19-35 Baker Street and continue t scour the market for fresh opportunities. We remain committed to being net-zero carbon neutral by 2030. And also, and most importantly, we are determined to maintain our strong financial base. Thank you, and now over to questions. [Operator Instructions] Thank you.

[Operator Instructions] The first question is from the line of Marc Mozzi of Bank of America.

I'd like to start with the statement of Burberry, which has declared that it's going to have a plan to reduce office costs. And I would like to know if it might touch is -- building lease renting to -- they are renting you guys? That will be my first question. Maybe we can go one by one, and then I'll go through the another 2 after that one.

Thank you very much, Louis. As you know, Burberry have a couple of buildings with us down in Victoria. We extended the lease on Horseferry House quite a few years ago. So they've got a long-term commitment to this for 20 years. They have another building with us. And they have a break clause for another 3 years. So we're in close dialogue with them. We'll see what happens with them. We've got a very strong relationship with them. It's very collaborative. We've had no signal from them as to any particular intention on those buildings, but we will let you know in due course. Of course, [ paytree ] is not let at particularly high rent either. So it's only let at, sort of, GBP 48, GBP 50 per square foot. But no news to tell you. But obviously, we're always in dialogue with our occupiers, and asset management plays an important part of our business.

That's clear. The -- my other question will be around how do you see CapEx or maintenance CapEx evolving in the future for existing buildings in this post-COVID world, where, as you mentioned, well-being will be a key part of what occupiers will be asking for. And I'm partially thinking about air-conditioning elevators, which are the 2 things, which is potentially in the need to be adapted for post-COVID world. What are your thinking right now on these CapEx requirements? And how do you think that will potentially impact your portfolio?

Good question. I mean obviously, our approach generally in the portfolio is long-life loose-fit. We like very adaptable buildings. And a lot of our existing stock have opening windows or mix mode. And we have an ongoing process of upgrading space, upgrading receptions, et cetera, trying to make them as generous as possible to make sure that, in the post-COVID world, they're accessible as much as possible. Obviously, we are to replace lifts or place access to lifts, then that will probably be a service charge matter. But we've got a wonderful dialogue with our occupiers is what we're doing in respect of COVID. We've just done a survey with them and asked them to their response on operations in COVID, I think, with an accrual rate of 99%. With respect to actual numbers, Damian?

Yes, Marc. Just to point out, if you look at the Appendix 35, which summarizes the spending on our current projects, if you look down to about the fifth line, it says other. There's GBP 60 million of CapEx there between now and -- well, it's GBP 22 million plus. It's basically all the committed CapEx today. That is the CapEx on both our new schemes that are yet to go to things like Baker Street, is in that, sort of, category. It also covers those other buildings. So we've got it all worked through. And as we go through the planning for the next few years, we expect to upgrade quite a few of our buildings. It's all part of our Net Zero Carbon Pathway. And we've got 10 years to upgrade those buildings. And some of that will go through service charge. Some of it will be CapEx. But we'll keep you posted, as we go through the next few years. But it's included in our CapEx forecast.

We, obviously, thought about it carefully when we're looking at our Net Zero Carbon Pathway, which we've just announced. But -- and it's a dialogue with our occupiers with ongoing improvements. Of course, one of the benefits we've got is only 4% of our portfolio is above the 10th floor. So respective access to lifts, et cetera, at the moment, it's less of an issue. But it'll be an ongoing process, but we're always upgrading the portfolio. We don't stand still anyway.

And a final one on my side, if I may. What makes you confident? And what are the early signs you've been seeing for you to be confident to launch your Baker Street developments in the current environment? Is there any specifics you would like to share with us, which make you consider that there is no risk attached? Obviously, there's risk but minimum risk...

No. It's -- actually [indiscernible] I think it more than doubles the floor area that we've got at the moment. We did actually a COVID review. I think Nigel was hinting at that. From -- going forward, very little changes needed to be made. Terrace compart is going to be mixed-mode escape, long-life loose-fit, so we'll be able to have opening windows. And start, probably, I think the intention would start in 2021, into '21, doesn't finish therefore till 2025, some way apart. And interesting, the pre-let market still is quite strong. There's a lot of inquiries for big moves looking out. So I think we're pretty positive about starting Baker Street. So good flow to see the height of the building, all the rest of it. It's sort of a really, really interesting building. It's currently a joint venture, as you know. So from 2021 onwards, it will be a [indiscernible] scheme, and we will come out of our joint venture partner with the Portman.

The next question is from Sander Bunck of Barclays.

A couple of questions. I'd like to start off with the expiries in 2021. And the first one is, maybe, a slightly more technical question, and I probably should have asked this a lot earlier. But why are the topped-up rents included in the expiry profile because I assume this has all been contractually agreed and there's no risk to that?

I'll pass it over to Nigel for that question. I am just going swap you to Nigel.

Yes. Thank you, Paul. Yes. We based the -- on the EPRA basis, it's income. It's an income calculation. So our contracted rents, if the tenant's in rent-free, it wouldn't be included. So we've given you the see-through on that. And it's partly because, I think, we've done quite a lot of development, and therefore, there's quite a bit of rent-free there. So I mean our average lease length is 8 years. So you'd expect round about 10% each year vacancy rate. But I think it just gives a bit more clearer picture. I mean roughly, our ERV on the portfolios, I mentioned, was just under GBP 300 million. So 1% of that would be about GBP 3 million. And that's where you get the current vacancy rate from.

Okay. Understood. And so it's not as the GBP 17 million, there's any risk of that not coming through? That's not necessarily an expiry profile number?

Sorry, what's that?

So in the 2021 number, there's GBP 17 million included. But that's...

I mean that's another why are we...

Yes. It's the contracted uplifts are baked within the lease. So there's no reason why they wouldn't come through as tenants meet their obligations.

Okay. Understood. And in terms of the remainder, I think you said that you're making decent progress on 25% of the leases. Can you say something about like the various leases that are coming underway because, obviously, a lot of those renewals that you highlighted below are not necessarily in the West End, but more closer to the City, where you're saying that actually you're a bit more concerned about vacancy rates and availability of space. Plus, like what are these -- what are the tenants looking for? Are they taking back the same amount of spaces that they've done previously? Or is there a larger variability in terms of -- that they want to have earlier rate classes, rental tones and anything that would be quite helpful.

I was just stepping back from that question. First of all, our asset managers are very busy. We've got very close connection with them. There are good active discussions with them. When you look at the vacancy, we've got potentially at the Tea Building, probably one of the most successful buildings we've ever had, lots of inquiries there. And there are always opportunity to run on if we want to. Another building, I think, you're referring to is probably White Chapel building. Again, a building not particularly, let at a huge rent, I think just under GBP 50 per square foot, good inquiries there, very good floor plates, and with break clauses as well as expiries. It may well be that tenants will look to seek to extend. In respect to your wider conversation about what are tenants looking, well, we've got renewals standing with a similar amount of space that they want. They're just probably extending leases for 2 to 3 years just to think about where their long-term plans are going and there's no sort of discussion about we're renewing half. It's generally a similar amount of space. And we're encouraging people to stay. And if you look at the UCL deal we did in Whitfield Street, a new 10-year lease with a 5-year break, a bit of extra space. So I think that's typically sort of discussions we're seeing.

I mean a couple comments that I would just make on that. These reviews are spread throughout the year. So just because it's '21 doesn't mean it's January '21. Quite a lot of it actually is in the second half of '21. So you -- with what's been going on, it's probably only just about now you'd be discussing that on these floors. They're not 100,000 square foot lettings. They're floor-by-floor lettings. I mean a couple of the tenants, Paul mentioned, the Tea Building, you've got the likes of TransferWise there, and that's a growing business. At White Chapel Building, you've got the government services, digital services, which again is part of a -- it's main -- the government's digital site. So that those are businesses, which need to be -- need to have office space. So it's just very much a snapshot 18 months ahead of the end of '21. But we're quite encouraged with the discussions we're having. And we'll keep that...

There's good engagement.

Yes.

Okay. So you probably expect then most of those tenants to re-lease those -- renew those at similar terms.

Yes. I mean if you asked me question the other way around, which ones do I know are going? I don't think I could give you -- I'd try and struggle at the moment to give you a name there.

I think there've been a good dialogue. I hope that they'd stay. And if they stay for a bit longer, we might get a better rent-free to encourage the deal, but that's what good asset managers do.

Understood. Understood. And any light on ERVs for those -- for that space?

As I said, they're not particularly held, they are particularly high rent. So I think we do what we did with Baker's or White Chapel, it was letting at about GBP 50 a square foot. I suspect that offer is quite good value for London at the moment. Expensive...

So anything ahead of that number, probably?

Let's see what happens. As I say...

Yes. I mean, we showed the rent there, Whitechapel, the average rent passing on those is just is GBP 48, which is not demanding. Tea Building is GBP 53. And I think the best letting in Tea Building is probably over GBP 60 a square foot. So these are not over-rented spaces, where you'd expect to cut the rents. They're actually probably under rented. So for the tenant to move, it's probably going to be quite expensive. But they're not going to move from a rent point of view.

No. Understood. Okay. Fair enough. And then lastly, and a kind of follow-up from Marc's question on development. And I understand totally that the space that you're looking to build and to offer is fit for purpose, long life, loose fit, it's all well understood. But it's -- at the same time, it's not only the product that you're delivering, it's also the demand for that. Kind of how are you thinking more broadly about development in the current market? And is this something -- not just for Baker Street, but more generally, is it that the space that potentially could be coming back? Are you now looking to rather re-let that on temp leases? Or are you willing to pull the trigger on more developments just more generally across the portfolio?

I think we're planning. I mean, Baker Street, as I said earlier, is a very excellent planning for mission one, doubling the space. I think we're seeing an emergence of a 2-tier market. Certainly, people are looking for the quality and particularly looking for green buildings. I think our Net Zero Pathway is a good timing. So we are seeing people looking to move into a good, adaptable space. So I think from that point of view, it's good. We are looking at optionality. We've got other potentially both Network Building, which will be a new building, but it's also Angel Square, which I think will be a better repositioning. So there's optionality within the portfolio. As we said in the presentation, we're probably running on the income for Holden House. But again, that's not let at a great rent. It's only letted to GBP 40s and GBP 50s. If you want space at the West End, sort of, roll on that income. But as I said, I think, in respect to demand, I think it would still -- you still see strong demand for a really good, well-designed, green flexible buildings. And that's what we're -- therefore, we will keep challenging the norm and creating good buildings.

The next question is from Max Nimmo of Kempen.

I think some of them have been answered already, but maybe just a slightly higher level one, if I can. And London seems to be a little bit behind the rest of Europe when it comes to this back to office. And I'm just wondering what your take is on that, if it's to do much more with timing with the government only really rechanging its stance on work from home if you can, in August? Or how much do you think is actually a structural difference here? And I think you pointed to the fact of reliance on public transport. And do you have concerns from that point of view?

Well, I think 3 or 4 weeks ago, that was quite quiet. We were back 4 or 5 weeks ago, but we are noticing it's getting back more. If I look at our own portfolio, occupation levels are increasing. I think we're up to about 15% and as of yesterday. We're mid-of August, and we're expecting occupation levels back up to 50% over the next couple of 2 to 3 months. So I think you're right. London is a bit behind the curve. I think there has been a fear of getting on to public transport. But we create fantastic buildings. And I think there's been, what came from a survey from our occupiers, that they want to be back in our buildings. And we also look at our tenant base, about the need for creativity, collaboration. So I think it's more a change for the tall buildings. If I was being honest, as I said earlier, only 4% of our portfolio is above 10th floor. So I think the very tall buildings maybe the top floor is more of a struggle. But as I say, things are getting busier. We obviously need government support. We need some good guidance from there and good guidance from the mayor. But hopefully, things go back. And intel on the ground, that we talk to our occupiers all the time, is there's a strong desire to get back. They need to get back with their people. They're just going to get through the fear of getting on the tube. It's a bit like diving into deep end of a swimming pool. But once you've done it, once you're fine. So I think that's what people will be doing, getting back. And I think we're encouraged, particularly, over the last few weeks.

Next question is from Matthew Saperia of Peel Hunt.

Matthew Saperia from Peel Hunt here. Paul, I think in your closing remarks, you talked about scouring the market for opportunities. I was just wondering about the other side of the coin and disposals. Looking at Slide 63, you still got 20% of the portfolio with 10-year plus income. Given some of the transactions that have gone through in the, sort of, post-COVID period, could we see more selling activity from you in the months ahead?

Well, I would ask Damian to add to that. But firstly, if I had a preference, I'd look to acquire. I think if there was some opportunity in a moment, there's no distress, and I know there's certainly no bargains. But I think going forward over the next year or 2, there may be, particularly, on the opportunity side, opportunities. We've been pretty disciplined in respect to buy and selling. But Damian?

I think that's right. Thanks, Paul. Yes, Matt, the current focus for bars is very much on sort of the well-let, long-dated income. And there hasn't been a lot of activity. But the activity there has been, you've seen the prices have very much held up to pre-COVID levels. And as you say, we've got, I suppose, a richness in our portfolio of those sort of assets. And we do look at it. We do consider it at all times. But I think, as Paul said, our main focus at the moment would be to try and buy and to try and buy opportunities and gains, as we said, there isn't any distress. We haven't seen any opportunities yet. It feels like it's going to be later this year, maybe into next year and even '22. But we have a very strong financial position. And we've done a lot about our great buying actually coming out of previous recessions, and we certainly hope that we do the same this time as well.

We rule nothing out, Matt. But I think at the moment, it's a focus of buying. But if we've sold well with Chancery Lane, we presold, as you saw, so hopefully, at a good price. But I think the view would be to acquire if we can. But if we felt an asset was, we could get a good price when it was -- we couldn't add any value to it, then we would look at it. But it's not necessary. No news soon. Let's put it that way.

[Operator Instructions] The next question is from [ Ken O'Sullivan ] of Goodbody.

Just a quick question from me on the rental side. I was wondering what proportion of the direct COVID-related rental costs do you expect to be recovered over the second half of the year?

With respect to the deferments?

Yes, to deferments of rent and alternative payment plans.

I will still reply, but I'll have Damian talk to you on the rents. Well, firstly, the positive thing about it when we had some monthly payments in March, all of those have been received. And I was really encouraged by the fact of the collaboration, both from us, but also our occupiers, those have been paid. So deferments have become well paid monthly, both for the March quarter and June quarter. They have been coming in. Damian?

The numbers are, in relation to the March quarter, we're expecting 4% overall of those rents to come in, in the balance of 2020. And in relation to the June quarter, we've got about 6% of those rents due now in the end of September. And then another 1% through the balance of 2020. So that gives you an idea of what we're expecting to recover. And at the moment, as I said in my presentation, all those who've agreed deferred payments have paid those in full. So the record is very good so far. We hope that continues.

And this concludes our question-answer session. I would like to turn the conference back over to Paul Williams for any closing remarks.

Thank you, everyone. Thank you for listening in. We're all around here today. We've got Emily with us as well, our Director of Leasing. We've got Richard Baldwin. And we've got the whole Board around. So if you got any supplement, any questions you want to raise, please phone. I hope you're all keeping well and safe. And thank you for listening into it, and we'll be in touch. Thank you very much.

Ladies and gentlemen, the conference has now concluded, and you can disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.