Derwent London Plc (DLN) Earnings Call Transcript & Summary

Hopefully, we've all got mobile phone protocol and they're all on silent. Anyway, good morning, and welcome to Derwent London's full 2021 results meeting. I'm delighted to see so many of you here in person and let's also welcome all those online. Today, you will hear from me, Damian, Nigel, Emily and David, and then I shall wrap up and do Q&A. So let's turn to Slide 2. Despite 2021 in lockdown, optimism and confidence grew cost to London office market can pace throughout the year. And importantly, this is carried through 2022. Specifically for London, the employment and economic outlook are positive conditions which historically have been supported on rental growth. Occupiers are becoming more selective of their workspaces, which means offices need to be ever more sustainable adaptable and flexible. Our long life, loose fit, low carbon approach appeals to our occupiers, and of course, meets the environmental agenda. We are already effectively 2023 EPC compliant, and after a detailed external study are in a good place for 2030. Looking briefly at the financials, I'm pleased to say that there has been a clear return to our pre-COVID trajectory with NTA up 3.9% to 3,959p. Damian will cover the full EPC costs and the financial dynamics. Now we've had a very busy 2021 with more portfolio activity than for many years. As well as topping up our development pipeline, we also sold circa GBP 400 million, reposition the portfolio to align with our strategy of keeping the newer green Tier 1 buildings for longer. The flight to quality is gathering pace and we expect it to continue. Now we have to recognize that there are currently economic and political uncertainties, and I'm sure you've all seen the news this morning about the Ukraine. It remains to be seen what impact, if any, of these events will have on the London office market. Whilst the economy is facing inflationary pressures and the supply chain needs careful preplanning, having upgraded our 12-month forward ERV guidance through 2021, we are today further upgrading. So in 2022, we expect average ERVs to put our portfolios to grow in the range of 0% to plus 3% with a spread of performance between different assets. We also expect yields to remain firm of the year ahead, although those yields could compress to those buildings with a strong rental outlook. Now turning to Slide 3 and restocking the pipeline. Our acquisitions include assets where we think we can more than double the floor area or as we call them super sites. But those who have been around with us a long time, you recall the Derwent super sites. In total, and such its contracts being shared on Moorfields, we believe we can increase the existing floor area of these 3 new super sites you see on the slide from existing 600,000 square feet to more than 1.1 million square feet over the medium term. Now reshaping the portfolio. Our long-term goal for our portfolio is to be around 50% core income and 50% with future value-added potential. Development completions outweighing the acquisition of new schemes over the last few years, the portfolio was becoming more weighted to core income. The quality of our assets have gone up, supported by disposal activity. These buildings on the slide are typical Derwent assets where we see strong rental growth. Now let's talk about the key drivers for the changing workplaces. Firstly, let's recognize the hybrid working with some element of work from home is here to stay. Today, we have seen little evidence of reduction of space as these businesses continue to plan for peak occupancy. We're also hearing the substantial levels of recruitment across different sectors and [indiscernible] continues. The role for the office continues to evolve and has arguably become more important. Secondly, and related to this, there is a notable flight to quality. Many components now contribute to the overall quality that occupiers require to meet their employees' aspiration. And thirdly, dynamic leases and flexibility. It is important to be able to meet a number of different requirements for the market. We have long been a flexible landlord and have a well-balanced portfolio in this regard. But flexibility will mean different things for different businesses. A large well-established business will often be still be looking for long-term solutions whereas fast-growing businesses are likely to require more flexibility in lease terms. In addition, smaller business may prefer fully fitted solutions. And as such, we are delivering furnished and effective units as appropriate across the portfolio. Investment and London's global appeal. Notable in 2021 was a 25 basis point tightening in prime yields in both the West End to 3.25% and in the city to 3.75%. Despite this, the yield to London remain higher than the most other European cities, where yields are now materially below previous cycle lows. Demand is polarized with investors looking for either long-dated income streams or near-term value-added opportunity. London had many opportunities and has many qualities, such as its long leases, its liquidity, transparency and its legal system, amongst others. As levels of geopolitical inspecting rise, these qualities have become ever more important. Now Derwent London undertakes its ESG responsibilities very seriously. Sustainability has been embedded through our offices for many years. In 2022, we believe the S in ESG will become increasingly important. And in 2021, we achieved a number of tangible hurdles. These include us issuing our first green bond and the completion of our comprehensive external reported to EPC upgrade CapEx to 2030 compliance. We believe it is too early for environmentally stranded assets to emerge but expect this to occur with proposed changes to EPC legislation. Turning over and let's talk about our typically Derwent development pipeline on Page 9. Developments. Some of you would have spotted on the front cover is our wonderful new reception at Soho Place. Good timing. We had chain PC of that this week on time and on budget. And we will get you around it because it looks absolutely fabulous. The recovery I've spoken about in the occupation market gives us confidence in the development outlook. As our current major schemes complete over the next coming months, we are pressing ahead with the next round of projects at 19-35 Baker Street, on-site works commenced in October. Progress is being made at Network Building and Bush House. Taken together, these 3 schemes totaled 565,000 square feet. And looking further ahead, the portfolio have substantial opportunities. The 6 other schemes shown on the slide, we have the potential to double the floor area to a further 2 million square feet. Slide 10. Our development team will be busy with scheme completion through H1 with 450,000 square feet of space due to complete across 3 buildings. At Soho Place, as you know, we had good early leasing success with pre-lets on the whole of the office space secured in 2019 to G-Research and to Apollo. Whilst the London retail market was impacted by COVID and structural shifts, we remain confident in the prospects of the retail space we have available to let. Not only would it benefit from being #1 Oxford Street, it is above the Elizabeth line, which was going to finally open in the next few months. And we also expect the return of international tourism to give a welcome boost of optimism to retailers. Our smaller Francis House refurbishment were successfully pre-let towards the end of 2021 to Edelman at a healthy 16% premium to ERV. The Featherstone Building. Our business model is based on commencing developments on a speculative basis. Whilst we've not yet secured a letting at Featherstone, we are very confident of the product, which is a key location for us. Just like our successful white collar factory next door, our original expectation was it would be multi-let. It hits all the right spots being net 0 carbon, long life, loose fit, and it's going to be our first intelligent building. And I've already noticed the occupation market is firmly picking up. This part of the town has taken a little lot longer for people to return when compared to the West End. But since lockdown restrictions were eased in mid-January, we've seen a notable increase in both viewings and inquiries on the space, covering a broad range of requirements and sectors and have a number of negotiations ongoing. Turning to Slide 12 on Baker Street. Our recently commenced scheme at 19-35 Baker Street will deliver best-in-class space in a market where demand is strong, but Grade A supply is very limited. We are targeting delivering in 2025. Given inflationary concerns, we were delighted to fix 97% of the CapEx to the offices within budget, the benefits of repeat business and working with Tier 1 contractors with a strong supply chain. The Network Building. In 2021, we successfully secured a dual consent for Network Building for an office let or indeed a lab-enabled scheme, and we have an interesting decision to make. Now whilst we are mined to progress the office scheme, we received good early interest in both choices, including the lab-enabled scheme, the rise of life science, and we're now exploring these before we make a final choice. However, our plan is still to start through the second half of this year with completion in 2025. We think this will be a fantastic addition to our already successful and vibrant pictorial estate. Bush House. Now to facilitate our repositioning this building, we bought in a 7-year head lease in early 2021. A planning application will be submitted for an extension and refurbishment for approximately 130,000 square feet, and we should hear the outcome of that in early March. Subject to planning, our intention would start on site later in the year. Now our future projects on Slide 15. At December, 48% of the portfolio had repositioning potential. On this slide, we show the key projects that you will be hearing about more over the next few years. On the top slide are the 3 new super sites we've already discussed. With the 3 schemes at the bottom of the page are the smaller. This shows that we have significant opportunity within our portfolio will keep us responding to the evolving occupier requirements. And that is before we consider our smaller refurbishments and our EPC upgrades. So enough from me for now, we're going to pass over to Damian.

Thank you, Paul, and good morning, everyone. So the main financial headlines are on Slide 17. This shows a substantial recovery after 2020's COVID impacted figures. EPRA net tangible assets or NTA per share were up 3.9% to 3,959p after earnings growth and revaluation uplifts. With much lower impairment charges, EPRA EPS was up almost 10% to 108.79p and the revaluation surpluses helped us with a total return of 5.8% or 222p per share over the year. Refinancing activity in the second half increased cash and undrawn facilities of GBP 608 million, and interest cover was over 4.6x with a small increase in the LTV ratio to 20.8%. We're proposing a 2% increase in the final dividend to 53.5p, which takes a total dividend increase for the year to 2.8%, where it's 1.4x covered by EPRA earnings. Slide 18 shows the EPRA NTA movement for the year. We saw a 119p per share increase on revaluation for the main portfolio, but there was a short-term 13p fall in the value of our new Baker Street JV to include this in the results from joint ventures. This is explained when the transaction was announced. The 9p per share profit on disposal came mainly from the sale of Angel Square in August. EPRA earnings are set out on Slide 19. Gross rents fell but net rental income was up and administrative expenses and net finance costs were GBP 2.7 million lower than in 2020. Premiums and other income of GBP 9.1 million included GBP 3.6 million of surrender premiums and GBP 2 million from rights of light. Slide 20 rental income. The full year's contribution from 80 Charlotte Street added GBP 9.5 million in 2021. The disposals, breaks and expiries reduced gross rents by GBP 18.9 million. And the property acquisitions occurred later in the year so had little impact. On a like-for-like basis, gross rental income was down 3.9%, but net rental income was up 2.7%. And net property income, which includes the premiums, was up 5.9%. Slide 21. Rent collection rates accelerated quarter-by-quarter through 2021, with office rent collection now almost back to pre-COVID levels. We've now collected 98% of December '21 quarter-day office rents. Retail and Hospitality has also improved, now at around 83% so far for December, but this represents only around 7% of total income. GBP 0.6 million was drawn from tenant rent deposits in 2021, leaving a balance of almost GBP 18 million. Similarly, Slide 22 shows a much smaller impact of impairment charges on our results this year. The total charge booked in 2021 was GBP 0.8 million against GBP 14.2 million in 2020. All the rents where we agreed deferrals in 2020 have subsequently been received. This is shown by the reduction in net trade receivables down to GBP 6.9 million from GBP 27.5 million a year earlier. All this has brought down our EPRA cost ratio, now standing at 24.3%, including vacancy costs, and 21.1%, excluding them. They were a touch above pre-COVID levels. They're much lower than last year. Slide 23. We've already heard from Paul, what active year the group has had and the level of acquisitions and disposals is clearly demonstrated here. Cash from operations increased again and was up to over GBP 125 million for the year. Notably, the GBP 64 million investment in joint ventures relates to the new 50-50 Derwent Lazari Baker Street JV, and the GBP 53 million acquisition of the noncontrolling interest with the Portman Estate's 45% share of 19-35 Baker Street. Slide 24. We invested GBP 174 million in CapEx through the year with Network Building now a committed scheme and the 19 to 35 Baker Street project underway, future committed CapEx on major schemes has increased to GBP 469 million with around 2/3 of that at fixed prices. This increases further to GBP 540 million if we include smaller upgrade projects and fees. In 2021, we engaged consultants to provide detailed costings for the EPC upgrades required. This covered 38 of our older buildings, about 40% of the portfolio taking them to be or above. The total cost, including fees, was estimated at GBP 97 million, taking account of properties subsequently acquired as well. This average is around GBP 50 a square foot but varies very significantly from building to building. Part of this cost is already included in our existing program and some should also be recoverable from future service charges. And these detailed estimates are consistent with GBP 5 million to GBP 10 million a year that we previously estimated. But I think it's really important that we've made a significant progress in getting a much more precise figure. Slide 26. This shows our usual pro forma taking account of costs to build out the committed major projects, plus agreed acquisitions, disposals and pre-lets. The net spend is all covered by available facilities, and both interest cover and LTV ratio remain at comfortable levels. Slide 27. We arranged a new GBP 350 million 10-year unsecured green bond in November. The coupon was 1.875%, a level which looks increasingly attractive with interest rates and credit spreads moving sharply higher so far this year. This takes our total green financing to GBP 650 million. Both of our bank facilities were also extended by a year to new 5-year terms in late 2021. Slide 27 (sic) [ Slide 28 ]. We arranged a qualifying green expenditure on our 4 main projects. A figure assured by Deloitte was GBP 116 million in 2021, taking us to a total of GBP 563 million up to December. At the same time, green borrowings were GBP 360 million. And finally, for me, on Page 29. This presents a strong picture with increased cash and undrawn facilities, lower average interest rates, 99% of our borrowings fixed and extended weighted average maturities. Thank you, and now over to Nigel.

Thank you, Damian, and good morning. Valuation Slide 31. The portfolio returned to growth over the year with a capital value uplift on an underlying basis of 3.5%. Rental levels generally held up. Yields tightened on best-in-class product. Accordingly, there was good performance from our high-quality buildings such as Brunel, White Collar Factory and [ terminal ]. Also on sites, developments continue to deliver. They were up 9.2% as surpluses were released. Soho Place and The Featherstone Building saw good uplift ahead of completion this year. We've just commenced Baker Street, so too early in the development process for surpluses to come through. The London retail and hospitality sector, a small proportional portfolio began to see signs of leveling off after a tough couple of years. As you've heard, we were busy on the investment side, recycling capital and adding stock for the future. As shown on the table, acquisitions were valued at just over GBP 272 million. As expected, they were initially down for usual acquisition costs but also for the premium paid for the development opportunity at the new Baker Street joint venture. There'll be more on these from David later. Slide 32. The total property return was 6.3% against the MSCI London Index of 5.9%. A solid performance but underperformance against the All Property index where logistics and other alternative assets continue to drive forward on yield tightening and rental growth. Turning now to more detail on rental values and yields. Underlying ERVs were marginally down due to the retail element of the portfolio. But as already mentioned, these seem to be leveling offers. Their decrease was focused in H1. Our offices, the bulk of the portfolio, was slightly up. On the yield profile, the tightening of valuation yields with quality buildings saw our EPRA initial yield now at 3.3% and the topped up at 4.4%. The true equivalent yield tightened by 25 basis points helped somewhat by CBRE bringing their prime valuation yields over the year. This, together with rent-free runoffs, benefit our recently completed schemes such as 80 Charlotte Street and Brunel Building. Also, the acquisition of 250 Euston Road, a single-let property UCLH, contributed 7 basis points to the tightening. Finally, on Slide 34, we show how the cash income flows through to the portfolio ERV, which now stands at GBP 293.9 million. As shown on the bridge, there's GBP 115.5 million reversion with GBP 54.6 million locked in through contracted uplifts, rent freeze, fixed uplifts and rental indexation. This indexation is in leases such as [ 80 ] Charlotte Street, and the UCL lease at 250 Euston Road. Over the longer term, some of these will rise above current ERV, and this element stands at GBP 5.9 million in the contracted uplifts. As a value as value to ERV, there is a corresponding adjustment down to the end of the bridge. Moving across our developments have GBP 19.9 million of pre-lets. And with the commencement of our Baker Street development, there is a GBP 30.1 million of further potential. We have GBP 7.2 million to come from smaller refurbishments underway such as Tea and White Chapel building. Space ready to occupy and available is low, however, at GBP 3.8 million. Further details of the vacant and the refurbishment space is in Appendix 20. Finally, there is GBP 8 million -- GBP 5.8 million reversion from lease expiries and reviews. Now over to Emily to look at the leasing and asset management markets.

Thank you, Nigel, and good morning. 2021 saw the occupational market shift from being somewhat on pause today much coming back to life with occupiers now actively planning beyond the pandemic. Overall, market vacancy was high, 9.3% at year-end, but a significant improvement in take-up saw this level off in H2. Availability is not however evenly spread across London with the city comprising just under half of the total and West End vacancy lower at 5.2%. Space under offer at year-end was at 3.8 million square feet, 28% above the long-term average, a level which suggests a good level of pent-up demand and which bodes well for the year ahead. Turning over. It's -- there was currently 11.6 million square feet under construction and due to complete by 2024. 34% of this is already pre-let. With 8.3 million square feet of active demand, quality supply looks set to remain constrained. It would be unrealistic to expect no new development commitments over the next couple of years, but there's now good transparency on new deliverable supply up until 2026, which we can see remains limited. On the demand side, there is good momentum with a pickup in viewings as occupiers are very much reengaging with their real estate. Active demand is broad across the wide range of sectors. Not only do the tech giants continue to endorse London, witness Google's recent purchase of Central Saint Giles for circa GBP 750 million, but a number of occupiers are seeking to move back into London, having previously located out of town. London feels back to life. It continues to attract global talent as a leading city where people want to work and live. Slide 38. Delving a little deeper into those key market drivers and the flight to quality and following on from what Paul has already touched on. Companies are adopting different approaches to hybrid working and working from home. However, how any business uses its physical workspace and what this needs to provide continues to change, and the pandemic has arguably catalyzed the acceleration of a number of large preexisting trends. The role it plays is complex, but more important than ever as the return to the office gathers pace. The flight to quality comprises multiple drivers. Workspace needs to be well designed, high quality, amenity rich and inspiring. It should enable innovation, collaboration and collective productivity. It needs to be representative of a business' culture and brand with individuals well-being at the fore. From our discussions on the ground, we know this more holistic measure of overall quality is key for occupiers now, who continue to be more agnostic in respect of location and more products led. Curating future schemes to create the right product continues to be our focus in this regard. Turning over, it's worth highlighting a few important areas where we continue to push ahead. Firstly, our digital strategy, which is focused on reducing our energy consumption and improving both operational efficiencies and customer experience. Capturing the right and relevant data will enable us to respond with live and informed solutions. In addition, strong relationships, unrivaled customer service and proactive in-house property management are all huge contributors to that all-important overall quality. We have a portfolio-wide dedicated customer experience team, engagement with our occupiers, high-quality service and hospitality are embedded in our in-house property management. The last few years has demonstrated this more than ever, bringing us closer to our occupiers as we have adopted a very personal and bespoke approach throughout. Slide 40. Moving on to the all-important topic of sustainability. In no way providing sustainable space is a nice to have. It is essential for us all and occupiers increasingly want to partner with proactive landlords who can help them deliver on their own targets. Occupier and stakeholder engagement is key. The results of our recent net 0 carbon occupier survey clearly corroborated this. This focus on sustainability is reflected in all that we do. In our core business activity with a focus on renewable energy, in our new developments by focusing on both embodied and operational carbon, in our managed portfolio working with customers to improve operational efficiency and in the development and implementation of green leases. Finally, our Scottish land where as well as carbon credits from wooden planting, we've also submitted plans for a substantial solar park, which we forecast will generate approximately 40% of the electricity needs of our managed portfolio here in London. We believe this will be a significant business differentiator for Derwent London, and we'll show a clear route to others on how our sector can lead. Turning now to Slide 41 and on to our leasing activity over the year. In 2021, we completed 5 new lettings, totaling GBP 13.7 million and at 36% ahead of ERV, with offices 4.8% ahead. Our EPRA vacancy rate was low at 1.6%, 20 basis points lower than at the start of the year. As restrictions continue to ease, we're seeing activity improve across the board. The Featherstone Building remains our key availability ahead of completion over the next couple of months. And as Paul has mentioned, there has been a notable increase in viewings since the start of '22, and we are now in active negotiations with a variety of different occupiers across the building. Finally, our key asset management focus in the year has been dealing with the elevated level of brakes and expiries due in '21. At the end of 2020, 17% of portfolio income was at risk in the year ahead. As the year progressed, occupier sentiment shifted from taking a short-term approach to seeking longer-term solutions. Encouragingly, as we look ahead at 2022, we've already reduced potential income at risk from a peak of 13% at June '21 to 9% as a result of our proactive efforts to date. Thank you, and I shall now pass over to David.

Thank you, Emily, and good morning, everyone. The London office investment market came back to life as the year progressed, with GBP 10 billion of transactions completing in 2021. This was 1/3 higher than in 2020, albeit at 16% below the long-term average. The final quarter of the year was particularly busy, comprising 36% of deals by value, suggesting a high level of pent-up demand. The most active buyers at 35% were from the U.K., followed by North American and European investors. As travel restrictions ease, it's expected that levels of investment from Asia will recover. The outlook for 2022 is strong with CBRE expecting investment turnover to increase by 40% to GBP 14 billion. They continue to report total active demand at circa GBP 40 billion. Knight Frank is also positive, forecasting circa GBP 60 billion of investment transactions at the end of 2026. Either outcome represents an active market. Prime yields tightened in 2021, moving down 25 basis points in both the West End and city to 3.25% and 3.75%, respectively. Yet London yields continue to remain attractive when compared to other global gateway cities in Europe and further afield. The gap to the risk-free rate may have narrowed in recent weeks but remains over 200 basis point. Demand is strong, but supply is constrained at GBP 3.7 billion which, when combined with the other factors I discussed, has led to several agents forecasting further yield compression. Turning to Slide 45 and our buying activity. As you've already heard, we had a busy year, completing on GBP 370 million of acquisitions, excluding the Baker Street head lease restructure. This activity has continued into 2022 and with the completion of the purchase of our new development opportunity at 230 Blackfriars Road SE1 for GBP 58 million. Slide 46 sets out more of the detail on Blackfriars Road. The existing property is a tiered 1970s office building, which totaled 60,300 square feet. Here, we have acquired the 100-year leasehold interest, which has a low fixed ground rent of GBP 5,000 per annum. Our initial study suggests the site offers a substantial future redevelopment opportunity with potential for a new building in excess of 200,000 square feet on the 0.8 acre site. The Southbank is an exciting location given its strategic position in the South London innovation corridor, a market where occupier demand is strong and broad based. It's also a market we know well, having previously developed Wedge House, which some of you may know as the Hoxton Hotel. Our current expectation is a start on site from 2027, and we will asset manage the existing building to maintain the income until then. Slide 47. We spoke at length of our interim results in August about our new JV in Bake Street. However, it's worth refreshing some of the key points. The site, which currently extends to 122,000 square feet, is owned in a 50-50 joint venture with Lazari Investments. Early appraisal suggests that the site has the potential for a new building of around 240,000 square feet and the doubling of the existing floor area. Any redevelopment will be subject to full site assembly and a regear of the headlease with the freeholder, The Portman Estate. Our plans are making good early progress. Our current block date expectation is late 2024, which broadly coincides with the completion of our scheme just across the road at 19-35 Baker Street. Slide 48. Shortly before the year-end, we were selected as the preferred bidder for the redevelopment of the Moorfields Eye Hospital site on City Road, which we now refer to as the Moorfields Estate. This strategic 2.5-acre site is situated just to the north of our substantial holdings at Old Street Roundabout. These include White Collar Factory, Oliver's Yard and our on-site Featherstone Building development, which together totals some 600,000 square feet. Work has already begun on a planning application for what will be an exciting large-scale campus offering a mix of high-quality offices with potentially an element of cutting-edge life science space. Our intention is to submit a planning application later this year. The site could comfortably accommodates a substantial increase in density with our early appraisals again suggesting a near doubling in floor area to in excess of 750,000 square feet. The acquisition is expected to complete on vacant possession in the second half of 2026 following the hospital's move to its new state-of-the-art site in King's Cross. And turning the slide to our disposals. During the year, in addition to the 19-35 Baker Street restructure, we completed 2 major sales, Johnson Building and Angel Square. The combined consideration for these 2 buildings was GBP 250 million and was 3% ahead of book value. In both situations, we took advantage of strong investor demand to recycle capital out of assets where our view of potential returns was low into repositioning opportunities with more attractive prospects. Post year-end and continuing this theme, we've exchanged on the sale of our New River Yard estate for GBP 66 million. New River is a collection of 4 separate buildings totaling 71,000 square feet. They led to 13 tenants with average lease breaks within 3 years. The sale, which is due to complete in Q2, will free up further capital for reinvestment in future developments. As you can see, with such a deep pipeline of exciting opportunities ahead, we remain disciplined in our approach to capital allocation. I will now pass you back to Paul.

Thank you, David. Now London is a truly global and vibrant city. It's getting back to business and we see a real buzz around our portfolio. I'm delighted with the progress made with the reshaping of the portfolio, both with a good sales where we saw little prospect with significant growth, and more importantly, the acquisition of some very exciting opportunities for the future. With our strong balance sheet and a creative and focused team, we're in an excellent position to deliver on our ambitious development pipeline with that distinctive Derwent signature. I'm confident of our net 0 carbon pathway and [ worrying ] well on our way to becoming 2030 EPC compliant. We see a continuation of the flight to quality and an active investment market, which bodes well for 2022 and beyond. Now before I hand back to Q&A, a quick word about David, who in a few weeks' time is retiring from the Board. David, we will miss you. We thank you for your significant contribution to Derwent London for the best part of 20 years. During that time, we have seen many changes and much focus made. I think beginning with the [indiscernible] portfolio back in 2003, I think you and I will work in the street for about quite a few weeks, but it was very exciting through the merger with NMS and many other transactions along the way. So we wish you well for the future and thank you again for your contribution. Now I'm going to move out to Q&A.

[Operator Instructions] So who would like to go first? Osmaan?

Osmaan Malik, UBS. On -- I noticed The Moorfields Estate is included in some of the slides, not in others, for example, the pro forma LTV. So I guess it's because you're not completing until 2026. But when you make an adjustment, are you largely in terms of acquisitions now with the current balance sheet capacity now done? Or can we expect to see more of the last few months ahead in 2022?

Well, I would say Fridays are good and Mondays are better, so I'm never done, right? So I think if we find the right opportunity with LTV at 20%, now obviously, Moorfields will be a very substantial development, big end value. We expect to commit and change over the next few weeks. But if something came -- interesting came along, we'd certainly look at it. We've done a bit of recycling. We might do a little bit more where we think if we felt we could get an opportunity into some [indiscernible] would turn green, we felt there may be some assets that we didn't see some growth. So we've got plenty to do within the pipeline. There's a lot to do within the development, but I never like to say done. David, [indiscernible], did you?

Yes. I think it's several years away from completion. We haven't exchanged yet. If it was a committed scheme, we would put it in the pro forma. I think there's going to be 4 years of recycling to go before we buy that site. So it's very exciting, but it's way out there. So it gives us plenty of opportunity to buy other things if they come up in the meantime. I think we previously indicated we take our LTV up to the mid-20s. That's roughly GBP 300 million of additional expenditure on top of where we are now. So that gives you some idea of where you see the capacity. But given that we normally recycle roughly GBP 200 million a year, there's plenty of room for some churn before the Moorfields acquisition.

Okay. Good. Something else you said at the beginning on the spread of performance. There's going to be a spread performance in rental growth, 0% to 3%. I just -- could you give us a sense of the spreader performance because we're seeing prioritization in the market? And I just wonder how that would translate to...

It's very difficult to give particular numbers. I just think we -- you saw last year the change of strategy keeping nuanced change really, keeping the new buildings for longer. I think if you think about where ERV growth is for the Brunel Building and other things, it seems that would perform well. Obviously, retail, we haven't got much retail. It's, what, 6% or 7%, Nigel? We expect that to just remain pretty flat. But I think you will see a bit of a spread. Our new lettings, I think the offices were, what, 4.8% above ERV. So again, you'll probably see a little bit some exceeding the north of over 3% and some around 0%. I think it's an average ERV across the portfolio. So I would love to give you specific numbers for particular properties, but if you look at the early interest we've got at Featherstone, that looks very positive. Max?

Max Nimmo at Numis. Yes, just to maybe follow up on one of the comments you made at the beginning when talking about acquisitions and talking about stranded assets, and you said you still think it's still a little bit too early on that front. Maybe a little of a crystal ball moment, but do you think that's still a 2022 story? Or do we think that's pushed into 2023?

I think, first of all, is the way of money looking to buy into London. And not necessarily everyone as well as advised as we are or we know what we're doing. David, would you want to add something to your crystal ball?

I think as far as stranded assets, it definitely feels like something which is on the horizon. But whether it's 2022 or a bit beyond, I mean, obviously, the legislation really kicks in 2030. And I think as it gets sort of closer to that time, that's when it's going to start to get a bit more interesting for opportunities.

Great. And second question is we haven't mentioned anything about flex office. I know it's a big topic that a lot of people are looking at. It's something the customers clearly want and doesn't look like it's going to go away anytime soon. Does that change any of your view on the space? Has your view on that changed at all in the last 6, 7 months?

I think we decided we did with our own branded flex offer because I think the flex has got such a wide meaning to so many different companies and maybe Emily would add her bit. And we do our [indiscernible] flex. The fully paid has gone very well. We're very flexible as a landlord. If you look at the leases we offer Tea Building, it's 3 to 5 years, but Soho plays at 15 years. So I think you need to be careful what you mean by flex. And undoubtedly, companies want flexibility within their transactions to grow. But Emily, do you want to add a bit more to that?

Yes. I think our approach has been more cherrypicked in terms of what we hear the occupiers really demanding from that side of things. And as Paul says, I think we look at it on a more portfolio basis. So we do have operators such as [indiscernible] in the portfolio. On the smaller end, we're still delivering our furnished and flexible in the right spaces where we think the market is right for it. And then we obviously look at the enhanced amenity across the portfolio within buildings, but also now share the amenities such as DL/78, which -- in core villages, which we think provides the core aspects of what it is actually of that flex offer that the occupiers are after.

Yes, sorry go on.

It's Matt Saperia from Peel Hunt. The last few months, we've seen a more active debate around the environmental merits of refurbishment versus redevelopment. Do you think it gets harder to potentially knock down and rebuild buildings going forward? And then obviously, with a view to the 3 super sites, how do they fit into that sort of debate?

Well, I think, firstly, we do quite a lot of retrofitting. I think Bush House will be a retrofit. In fact, we're going to be using some of the steels from Network Building, we've taken that into that building. So actually, we went at it cleverly. Undoubtedly, the plan is once you look at sustainability in carbon, and you have -- I think the important thing is whole life. We've got -- we will be upgrading the portfolio as we go along. We just think what -- how will the building perform once it's done. And you need to -- there's other studies that we're doing there. Something like Moorfields, those buildings are beyond retrofitting, the same with Baker Street. But we'll go for a study, making sure that where we look at it, we look at the whole life, but I think also thinking about what sort of products people want. Are we over air conditioning buildings? Is the BCO standard fit for purpose? Or actually, are we going to start thinking about how occupiers really want to run their buildings? More mix, more natural ventilation, land is getting cleaner? So I think you'll probably see -- and in retrofitting and refurbishment, but also where appropriate, substantial redevelopment but in a responsible way.

Just a question on maybe London demand and what you've seen for requirements and the pickup in activity. How -- can you give us a little bit more color, maybe more Derwent portfolio of what have your occupiers been? Have you seen any change in your occupier's demand? And what have been the requirements? And also maybe on your pipeline with Featherstone that's still empty, what do you expect going forward? I think pre-COVID pipeline would be mostly pre-let before delivery and this is now changing. So what's your approach on that pre-let or future delivery?

Well, I think we'll answer the question in reverse, starting with Featherstone. We don't finish it till H1. We've been very fortunate over the last few years to do substantial amount of pre-let, 80 Charlotte Street, Brunel and also obviously 80 Charlotte Street and Soho Place. We always expected Featherstone to be multi-let given the size of floor plates. And I think some are also looking for very substantial pre-letting. That's what normally happens. You would expect that to happen. But actually, with a floor base of 20,000 square foot, 17,000 square foot, you would expect to be letting as a multi-let. Emily, do you want to just add where you're seeing demand from? Because I think people are coming into town and also a bit more on Featherstone, what people want for their assets.

Yes. I think as we have mentioned in the talk, I think a lot of it feels like an acceleration of changes that were underway pre-pandemic. I think, obviously, occupiers in the thick of the pandemic have been focused on well-being. I think now it's shifted very much to the hybrid working model, the peak occupancy, as Paul has alluded to and how you manage that. So we've also seen, in some practical cases, de-densification where occupiers who were max packed in, obviously, looking at the new world and looking to change that around. In terms of the sector demand, it really, since the announcement in the middle of January, we've seen a notable shift in engagement, particularly. There is the 8.3 million square feet of demand. I think a lot of that during the pandemic did pause as people were focused on other things other than real estate. There's been a notable shift in the last month or so of those occupiers really reengaging with their real estate, and we've seen that certainly in our portfolio. Encouragingly, it's also been across a mix of sectors. So we had -- over the last year, we've had a lot of activity from the legal sector from the professionals. We're now getting a mix across many sectors. The tech sector is still going, but encouragingly, new sectors, some of which embedded in the life science, fintech and others really coming through and started to show some growth.

What I find interesting as well is you saw this a few years ago, you're seeing it again, companies are coming back into town. If you look at what Microsoft is talking about, they're [indiscernible] in a great campus. But there's war for talent in this flight to quality. They want to be in town. They're not particularly rent sensitive. They [indiscernible] probably in the right sort of campus, the right sort of building. And I think the requirement was at one stage 250,000 square foot were now being targeted to 500,000 square foot. So I think it really shows the power and strength of London and how it attracts some global companies. So any more questions from the floor before we go to the lines? Do we have any questions online? Two? Can you please -- we'll go first and can you tell us who you are?

You mentioned the cost upgrades to EPC B are GBP 91.6 million. And a part of this is already included in existing CapEx plans. Could you give a number about how much of this is included in the existing CapEx plan?

Damian, how much is included within our CapEx plans?

It's a very good question. And the answer is we can't give you a precise figure today. We've only got the report through relatively recently. But it's going to be a substantial part of that. I would guess more than GBP 10 million, less than GBP 40 million, but I'm not going to give a precise figure today. We're going to be working through that over the next few months and we'll provide a better figure. But quite a lot of that cost is already in the CapEx forecast that we provided. And as I said in the talk, some of it should also be recoverable through service charges as well. So we'll provide a better figure as we go through the year.

It's probably just worth adding a comment on the valuation. I mean if you strip out all the development CapEx and for the big schemes, I think there's about GBP 80 million of CapEx already in the valuation. Now some of that is focused on sort of refurbs, Oliver's Yard and Tea Building and stuff. Some of that will be already -- it will come from the 97% we need. So there's a chunk in the valuation already. But as Damian said, this number came through post year-end. So I think we're doing a lot of forensic, but I'd probably say of the 70, probably about 1/3 of it is already in the valuation. And then some will be through service charge. And some will be a natural redevelopment of the building. So it's not a shop number by any means.

I mean what's interesting also is our tenants are very engaged with this. They want to see their -- the EPCs are greater. They want to see their own net 0 carbon pathways. So actually, when we talk to occupiers about expending a bit more money, they're sort of saying, yes, let's do that, let's work together. It's not really a pushback. Anyway, we've got one more question on the line, Robbie?

I think also may you upgrade building in this market, it's worth more. Now this is not dead money. This is investment that will give us good returns. So we welcome it, and we're expecting it to be a big part of our plans over this year, particularly with the refurbishment question that we've already discussed.

One more question from the lines?

There's another question from Sander Bunck from Barclays.

Two questions, please. First one is on your rental income. And obviously, second half looks pretty strong with good amount of letting utilities. I think new lettings ahead of ERV, vacancy declined. I was, therefore, maybe a bit surprised actually to see that you cross out rental income was down nearly 4% because the headlines basically suggested would be stronger than that. Can you give some further color on that? And I'll move on to my second question.

Well, let's do that first question first. That's a good question for you, Damian.

Yes. I think if you look at the bridge, I mean, essentially, it's largely down to the sales and the acquisitions. The sales were at relatively high yields. So we've given up more income earlier in the year. The acquisitions were at lower yields and they -- later in the year. So obviously, that has an impact on the rental income for the year. We've also...

On a like-for-like basis, it was down 4%?

Yes. I mean, like-for-like, that's really because we've been -- this goes back to what happened really in 2020 and early '21, when we were doing deals with tenants who weren't quite sure what their long-term plans were. Our focus and their focus is on extending existing leases at or around about ERV. And as a result, some of the income was down a bit. But the results are -- also the average vacancy through the year was higher than it was last year, although it ended at a lower figure at the end of the year. The average through the year was a bit higher. And we've also taken some properties out of rental income into refurbishment. So there's some more refurbishment schemes going on as well.

Okay. Okay. Yes. I mean mainly because, indeed, it looks like lettings were -- new lettings were ahead of ERV overall. So I'm just a bit [indiscernible] by the fact that ERV at the start of the year would have had such a negative impact on them.

Yes. New lettings were ahead of it, but they weren't as far ahead in 2020. And it comes through in '21 as well. And also, if you look at the activity, about 3/4 of the activity was actually asset management, where we're extending existing leases rather than letting new buildings. So you could say a big impact from that as well.

But that was all done in line with ERV and in line with previous passing. Is it fair to say the asset management stuff?

Yes, but it doesn't happen overnight. So there's a period between a tenant leaving the building and a tenant moving into a building. So this is a lag there, which obviously impacts on the figures.

Okay. Understood. The second question I had was on the super sites. And kind of the first one would be on that, like, would you be looking to do that 100% Derwent? Or would you be looking to seek JV partners? I know [indiscernible] there's been already a JV partner involved. And related to that, like, what is kind of the thinking around super sites? Is the main benefit from that, that you can, to a larger extent, increase the floor space, so there's just more offsets from floor space creation? Or are there any other benefits for you as well?

Well, I think also, firstly, I think we see a substantial increase in floor area. We'll obviously be able to create a destination where people want to go to. So if you've got -- if you're a big tech company or something like that to go to your own camp is going to be a great opportunity. Look, obviously, multis on its own is a very substantial asset. We'll have to make a decision at some stage whether or not we'd bring in a partner. We're not natural JV partners. We've got a very good partnership with our friends at -- with our investment of Baker Street. We had a successful partnership with The Portman Estate on 19-35. We normally like to roll our own boat but something as substantial as that, we may well consider that as an option in due course. But that won't be for some time. I think our focus in the near term will be exchange contracts, get a fantastic planning permission, work up a scheme that is totally flexible, adaptable, and then we'll consider what we do with that. Blackfriars, what we do with that, we should -- I'm sure that we'll do that on our own. And we've actually said we've got that 19-35 joint venture already. So look, we like flexibility within the business model. We tend to like to do our own thing. But I think this is something that things like that, we may look at options, but who knows. Question -- we've got one question. I have to be tech savvy now. So we've got one question on what's called the webcast or something. Robbie?

Don't worry, I'll read it for you, Paul. So it's from [ Armand Hendoja ] and it's, what is the percent of the portfolio leases which include CPI or indexation uplifts? And if assets are linked to inflation, is it CPI or fixed? Are you fixed uplift?

Nigel, that's a question for you.

I touched on a couple of them in UCLH, which is about GBP 5 million. Arup's around about the same. We have one other one, Doctors Laboratory, which is indexation. So those add up to about, I don't know, GBP 12 million to GBP 15 million on a percent -- on rent roll of -- valuation rent roll of [ 178 ] would give you sort of about 7%, 8%.

We generally have a bit of a relook after a period. So it's CPI for a period of time, then we have a relook. But some occupiers later slightly long-term leases [indiscernible] that actually has some good valuation upside for us. So he's getting that financial right. Are we done on questions? I think, firstly, thank you so much for attending today. Thank you all for coming in. Keep well and keep safe. We're all around later. If anyone wants to give us a call or talk to us afterwards, we're around. Please, please, please, come out to see Soho Place. Now we finish it, it is absolutely fantastic, and we'll be showing you Featherstone in the spring. So we're in a great place and feeling positive. Thank you very much.