Derwent London Plc (DLN) Earnings Call Transcript & Summary

Well, good morning, everybody, another lovely day. Welcome to Derwent London's interim results presentation. Today, you will also hear from Emily, Damian and Nigel. I will then wrap up before Q&A. So introduction and guidance. First of all, London has got its buzz back. The flight to quality is ongoing, with businesses recognizing the important role office play in retaining and attracting talent. Grade A buildings are in short supply, and following a wait-and-see approach during COVID, large occupiers have reengaged and continue to enter into early pre-let discussions. While the outlook has become more difficult, Derwent has a differentiated product that puts our customers first. This has contributed to our preletting successes at 80 Charlotte Street, Soho Place or Francis House. New leases, including our recently completed Featherstone, were agreed at more than 9% above ERV. The business remains very active. In addition to increasing our pipeline with the acquisitions in future supersites, we completed developments at Soho Place and The Featherstone Building. More on these later. We have further reduced our exposure to buildings with limited upgrading potential, and we're particularly pleased with the sale of Bush House in July, where the substantial premium achieved matched our anticipated development profit. Our financial results reflect the stable property market conditions seen for most of the period with a total return of plus 3% and leverage remains conservative at just under 24%. Now turning to our outlook. 2022 started well, with investment volumes and take-up in H1 both above long-term trends. In recent weeks, however, the outlook [ hum ] has become less certain as the macroeconomic situation has weakened, and there has been an increase in both financing costs and inflation. This brings greater pressure on property yields. However, London continues to have a global appeal, and we expect higher quality buildings to outperform. Our portfolio is well placed for the retention of good quality buildings and the disposal of more secondary assets. In February, we updated our 12-month rental guidance for full year 2022 to 0% to plus 3%. We are maintaining this guidance following a 0.9% ERV growth in H1 and continue to expect a spread of performance between the assets. I'll turn you now to the occupational market and market themes. Occupational demand is healthy for the right products such as ours. Businesses are returning to long-term occupational strategies with a mix of new requirements and expansions in the market. Take-up was 16% above the 10-year average. Occupiers are demanding more from their space and from their landlords in the flight to quality. Environmental credentials, adaptability and amenity are all moving quickly up the list of requirements, and space needs to be well located with good transport links such as the long [ last but waited ] Elizabeth line. Flex is important, but longer leases of 10 to 15 years remain in demand from larger occupiers. All the sub-10,000 square foot scale, which is typically [ asserted ] with greater flexibility, occupiers are still request a 5-year lease for our furnished and flexible units. Turning now to the investment market. The high investment volumes in H1 [ marked ] strong performance in Q1 and the subsequent slowing down we're now seeing. However, London is a safe haven and remains an attractive market globally, with yields relatively higher than Continental Europe. Investors are paying closer attention to income quality and sustainability credentials, with risk being priced more keenly. Many properties continue to trade at keen prices, but a number of recently withdrawn where bids fall below ambitious vendor pricing expectations. With no pressure to sell, vendors are retaining their assets. CBRE's estimate of potential investment demand is still high at GBP 37 billion, with only GBP 5 billion on the market, although decision-making is taking a little longer. Now upgrading the portfolio and the flight to quality. Capital recycling is central to our business model, helping us increase our portfolio quality, whilst maintaining conservative leverage. Our long-term target is [ too ] for disposals to largely finance CapEx. Now over the last 3 years, we have taken an active approach to those assets where we saw limited growth, with over GBP 700 million of sales. We believe occupier and investor demand will remain strong for our long-life loose-fit, low-carbon buildings, and consequently, we have invested over GBP 1.1 billion in our development CapEx and the acquisition of new super sites. This is our stock for the future. Creating value responsibly on Slide 6. We're making good progress with our Net Zero Carbon 2030 pathway. We have achieved further substantial reductions in energy intensity and operational carbon ahead of our science-based targets. We have set clear imported carbon targets, and we're working hard to achieve. The proportion of our portfolio with an EPC rating of A or B increased to 62% and expect further progress in H2 and beyond. Interesting, the group also owns 5,500 acres of land in Scotland, which is a key differentiator and provides a number of exciting sustainability opportunities, including our plan for a 107-acre solar park, which would generate substantial green electricity for our portfolio. Our balance sheet and financing structure are also strong and Damian will provide full details later. Now turning to development on Slide 8. Our job is to create -- keep creating fantastic offices and to stay ahead of the curve. We have a deep development pipeline, which has the potential to deliver more than 2 million square feet of best-in-class space over the next decade, which would nearly double the existing area. The already constrained central London development pipeline is likely to be further curtailed by schemes being deferred or put on hold given current market conditions and limited access to capital. Now 2022 completions. We have completed 2 projects since the start of the year at Soho Place, a new destination and we've been involved for over 15 years. The headlease payment has now been made to TfL. The offices at One Soho Place were fully pre-let to Apollo and G-Research in 2019 on long leases at an average rent in excess of GBP 90 per square foot. These are best-in-class net zero offices that offer all the amenities for which we are well known. The 34,000 square foot retail element has been launched. The recent opening of the Elizabeth line has already positively impacted the footfall in the area, and we're very confident in the outlook of this high-quality space. At 2 to 4 Soho Place, this is the first new build theater in the West End for over 50 years, together with the new public square, which we finished in late June, and the building was forward sold. Now the Featherstone building, the first tenants of these space taking it to 22% net at 10% ahead of ERV. We remain very confident in the quality of the building and the Old Street area. We continue to receive inquiries for the remaining space with ongoing viewings. Finally, the refurbishment of Francis House, which was prelet to Edelman at double-digit premium to ERV will complete in a few weeks. This is a great example of our repurposing activity. Turning now to 25 Baker Street. Good progress is being made with this on-site development, which commenced quarter 4 2021. The occupational market in this area is good, with little competing Grade A supply. Demolition would have now completed in line with budget and groundworks are underway. Build cost inflation has become elevated but we are pleased that we have fixed 97% of construction costs on the office element, which is 80% overall. Completion of this 300,000 square foot Grade A scheme where the main retail element is presold is due in H1 2025. Network. The occupation market in Fitzrovia is strong, and there is very limited supply availability of Grade A space. Consequently, the strategic decision was taken in H1 to proceed with the office-led scheme. Demolition commission commenced in June on a fixed price [ but ] package and our preferred contractor for the main construction contract has been selected. Again, we are targeting completion in H2 2025. Now both these buildings have been designed by world-class architects and will have that special Derwent signature. Now to our future pipeline on Slide 12. This slide shows a selection of projects that we expect to deliver over the medium to long term. We have optionality on these projects, which are either income producing or where we have not yet invested meaningful capital. We are working up exciting plans for Old Street Quarter, formerly the Moorfields estate and we look forward to updating you all in due course. Together, these opportunities represent 1.3 million square feet of prime space with high sustainability credentials, 100% uplift. As you can see, we are well placed to continue creating value for our investors through delivering inspiring and innovative space which is in demand. I'm now going to hand over to Emily, who will take you through the occupational market in more detail.

Thank you, Paul. Turning to our occupational market. Through COVID, many businesses put real estate strategies on hold, but there's been a real reengagement, demonstrated by the rise in the number of companies looking for longer-term space solutions. In terms of the occupational market backdrop, take-up across London of 6.4 million square feet in H1 was 16% above the 10-year average. Market vacancy remains above long-term levels at 8.2%, but is now starting to reduce, down 0.6% since December. Beware of averages, however: West End vacancy has fallen for 5 consecutive quarters, now at 4.3% and is back in line with its long-term average. City vacancy, by contrast, remains at nearly double its long-term average at 12.3%. Market bifurcation continues and there is a clear preference for Grade A space which is in already relatively short supply, particularly in the West End. Space under offer is high at 4.3 million square feet. In the West End, 1.7 million square feet is under offer, 49% above the 10-year average. Turning now to the development pipeline and active demand on Slide 15. Committed development completions over the next 5 years are below average at 13 million square feet. 35% of this is already pre-let or under offer, and this is continuing for best-in-class product. The planning backdrop is getting tougher and rising build and finance costs are combining to increase the likelihood of deferral of at least some proposed schemes. London continues to attract a wide range of businesses of various sizes across multiple sectors. As you can see on the slide, CBRE and others estimate active demand in excess of 5 million square feet. Slide 16. Looking now at our own leasing activity. We've seen a good level of transactions in H1 with 24 new leases agreed, totaling GBP 7.1 million, 9.3% above ERV. At Featherstone, which completed in H1, 22% is now let. The first leases were signed with Dept Agency and Marshmallow for a combined rent of GBP 2.2 million. Momentum continues. We remain confident in the product and area with further occupier discussions underway. Limited supply and the flight to quality, alongside the important role real estate has to play in retaining and attracting talent, means many businesses are prepared to pay premium rents for space that meets their requirements. Our leasing activity reflects this, with leases agreed 10% ahead of ERV both on newly completed space at The Featherstone Building and on secondhand but still high-quality space at White Collar Factory. Other examples include strong lettings at 90 Whitfield Street, the cafe space to Michael Kors and 2 lettings have furnished and flexed in Q1 at 42 Whitfield Street, on average substantially ahead of ERV, taking into account CapEx for fit out. As you can see on the chart, non pre-leasing activity over the last couple of years has recovered to close to long-run average. Over to our asset management activity. Our asset management team have been very busy over the period. During COVID, we saw many companies seeking short-term extensions as longer-term decisions were put on hold. Encouragingly, there's been a shift in this pattern, and we've seen positive engagement for our occupiers planning much more for the long term. In H1, 30 regears, renewals and reviews were settled. In a further endorsement for the Old Street area, long standard Oliver's Yard occupier Morningstar having extended its lease for 12 months last year, have now agreed a renewal to '27 on a rent 14% of ERV and 19% above previous rent. Vacancy. In line with our expectations, our EPRA vacancy rate increased from 1.6% to 6.5% in H1. Recent development and refurbishment completions comprise 72% of this. Slide 18. The role the office plays is complex. Its centrality, however, remains unchanged, especially given the challenges that increased [ fan tral ] working is presenting to many businesses. 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. Flex has become a post-COVID buzzword, and the term is often used generically to describe anything nontraditional in terms of leasing. We understand the true complexity of the subject and the focus on a more bespoke approach across our portfolio. [ This is ] a portfolio-wide and proactively addresses the needs of London's diverse and broad occupier base. Occupiers want to engage with a landlord who is prepared to take the time to understand their specific requirements, be it small, high-growth businesses requiring more flexibility or larger, well-established blue-chip companies planning their U.K. or European HQs and looking for long-term solutions, allowing them to business plan more effectively. The top chart on the slide shows that despite the high profile, space occupied by Flex and service office providers remains a relatively small, albeit important part of the London office market at sub-6%. The bottom chart shows the relative stability in our average lease length profile. What the chart does not show is the percentage of breaks that are actually exercised. Our relationship and ongoing customer engagement has helped us deliver high retention rates over many years, and this remains a focus across the portfolio. Finally, turning to Slide 19. Key occupier demand drivers and the importance of amenity. Occupiers' needs increasingly extend beyond just the space covered by the lease itself. The credibility of the landlord, the overall service level provided and the portfolio offer are all ever more important. Integral to our product offering is amenity. At asset level, we provide generous space at ground floor and roof level as well as high-quality ownership facilities, setting a high bar in line with our occupier requirements for their workspace. At the portfolio level, we opened our new members club space at DL/78 in October last year, and it is already a huge success. This exciting initiative came about from being proactive and listening to our occupiers. On this slide, you can see some of our occupiers have specifically referenced DL/78 in their leasing negotiations. These discussions cover over GBP 5 million of income. We've also seen a tangible benefit in many asset management transactions in this regard. DL/78 is a real differentiator for Derwent as part of the overall offer, and we are currently exploring the potential to open a second space [ in lease ] in due course. Thank you, and I'll now hand over to Damian, who will take us through our financial position.

Thanks very much, Emily, and good morning, everyone. Financial highlights for the half year are on Slide 21. EPRA net tangible assets per share were up 1.6% to 4,023p per share, giving a total return of 3% after adding back dividends. Gross and net rental income were both up around 4% compared to H1 '21, but EPRA earnings per share were marginally lower, impacted by lower surrender premiums this time. Dividends for the year remained around 1.3x covered by EPRA earnings, and we are increasing the interim dividend by 4.3% to 24p per share. As announced last year, our borrowings have continued to rise, but are still modest with the newly defined EPRA LTV ratio at 23.7% compared with 22.3% at year-end. Note that the EPRA definition adds in net payables and receivables from the balance sheet, increasing the LTV by about 1% compared to our previous definitions. Full details of the old and new calculations are in Note 25 to the statement. Interest cover has fallen a little on these higher borrowings, but remained strong at around 4.2x for the first half. Now with a focus on rising inflation and interest rates, Slide 22 sets out our debt position. It also includes a summary, a pro forma taking account of the GBP 126 million proceeds in July from the sales of Bush House and 2 and 4 Soho Place, bringing our EPRA LTV down to 22%, with undrawn facilities and cash up to GBP 578 million. After last November's GBP 350 million Green Bond issue, the weighted average maturity of our borrowings is just over 6.5 years, with our first debt maturity in October 2024. Green qualifying expenditure at the 30th of June was up to GBP 597.6 million, GBP 142.6 million above amounts drawn. But this amount has also increased following the recent property disposals. Slide 23. Interest rates have been rising from their very low base. So let's look at our protection from rising rates. Over 90% of net debt at the 30th of June was at fixed rates, on top of which, we have a 1 point -- we have a GBP 75 million interest rate swap of 1.36% available until April '25. Our debt covenants are very well covered with both income and valuations capable of falling by over 60%. Now looking at the debt profile, in order of maturity. The secured loan expiring in October '24 has a rate of 3.99%, close to current market, so refinancing this would not significantly impact our earnings. The convertible bonds mature in June '25. And again, even if refinanced today with another convertible, would not have a material impact on earnings. Our 6.5% secured bonds, a legacy from the LMS merger in 2007, mature in March 2026. One benefit of rising rates is that any break costs have reduced significantly over the last 6 months. Finally, both our private placement notes and the recent green bonds have long-dated maturities of 8.2 and 9.4 years respectively. Committed CapEx is on Slide 24. After GBP 70 million of CapEx spend in the first half, we're forecasting a similar amount in H2 with a further GBP 183 million in 2023. These amounts include part of the retail and residential of our 25 Baker Street site, which is due to be sold and is therefore classified as trading activity. In the first half, we also incurred GBP 72 million on acquisition of the Soho Place head lease from TfL, together with associated SDLT. Note also that future CapEx shown as other in the light blue includes 2030 EPC upgrades. As usual, more details are in appendices 44 and 45. Slide 25. The pro forma financial position after future committed expenditure on major schemes is indicated here. Helped by the recent property sales, it shows good headroom on all our key financing figures. Committed expenditure of GBP 359 million is comfortably covered by available facilities. As usual, this pro forma only includes income and disposals already contracted. Note that we have not included the GBP 239 million long-term acquisition cost in relation to the Old Street Quarter site, as this will not complete before 2027. Slide 26. The EPRA NTA movement is shown here, the increase coming from a revaluation uplift of 64p per share, with other earnings almost matched by the final 2021 dividend paid. On Slide 27, we show EPRA earnings. Rental income was GBP 3.6 million higher than a year ago, but EPRA earnings were affected by net surrender premiums GBP 3.2 million lower. Rent collection, shown in Appendix 8, is now running very close to pre-COVID levels, with few requests for financial help, and we've seen a small GBP 0.6 million reversal of impairment charges in H1. Property expenditure was slightly higher in the first half, but admin expenses were lower, the latter due mainly to reduced management incentives. Finance costs increased to GBP 18.5 million on higher average borrowings and lower capitalized interest, following completion of the schemes at Soho Place and Featherstone. Slide 28. Gross rents were up 3.7%, with Soho Place adding GBP 3.7 million post lease commencement, but with other movements fairly flat and the higher vacancy rate at the 30th of June. The growth in rent has come mainly from the new developments. Average rental growth was modest across the rest of the portfolio, with like-for-like gross rents up just over 1% and net rents up 2.5% compared to both H1 and H2 '21. More details are in Appendix 9. Thank you very much, and now over to Nigel.

Thank you, Damian, and good morning. Slide 30, valuation. First, turning to the valuers. CBRE has been the group's main valuer for several years. This year, we began the process of transitioning to Knight Frank and in H1, the valuation was undertaken on a shared basis. This followed an earlier 'shadowing' exercise which did not reveal any material differences in either approach or outcome. At the full year '22, Knight Frank will become the principal valuer. Now looking at performance, both the leasing and investment markets were active, especially the flight to quality buildings for rents and long-term income for investments. This translated into a 1.7% valuation uplift over the half year. Developments were the main driver, up 8.5%. We completed Soho Place and The Featherstone Building, and they produced a combined profit on cost of 27%. Our next development is 25 Baker Street, and their work are well underway. Excluding developments, the balance of the portfolio was up 0.6%. We continue to see a greater focus by the valuers on obsolescence and the potential CapEx required to meet the evolving EPC requirements. A lot will depend on the building's business plan, such as refurbishment or redevelopment to improve rents and value. But as a ballpark estimate, there is GBP 50 million embedded as a cost in this valuation. Slide 31, property return. Our total property return was 3.3%, and this was above the MSCI benchmark of 2.5%. It was driven by several factors: supporting values were yield compression on quality assets, the release of development surpluses, uplift at Bush House prior to disposal, continued rent-free runoffs from our development program and leasing and asset management initiatives above ERV, whereas longer void assumptions on shorter lease properties, some outward yield movement on secondary properties and the EPC costs held values back. Rental values and yields. Slide 32. ERVs were up 0.9%, slightly ahead of the index and retail is stabilizing. At the top end, there was some yield compression over the first half, mainly on new high-quality buildings such as 80 Charlotte Street and Brunel. These, and the inclusion of Soho Place following its completion, resulted in a 4 basis point tightening in our equivalent yield. Looking now quickly at the buildup of ERV, Slide 33. The chart show -- chart on the right shows the change since the year-end and just a few points on the chart. Contracted uplifts rose to 68.1% as we completed the leases at Soho Place, which included Apollo and G-Research. On-site developments now include Network, with The Featherstone Building and the retail at Soho Place moving into vacant available. This has taken the ERV of the vacant space to GBP 17.3 million, equivalent to 6.5% vacancy rate. Overall, the portfolio ERV has risen to GBP 303 million. Now more on our activity, Slide 34. Following a busy '21, activity levels have remained high. Acquisitions since the first half totaled GBP 130 million and includes the head lease payment to TfL for Soho Place following completion. Disposals to date are GBP 189 million. There was the sale of New River Yard in the first half. Since then, we've completed the disposal of Bush House and 2 to 4 Soho Place, which is a theater and offices above. We continue to review further disposals. Looking at activity in a little more detail, Slide 35. Both Blackfriars Road and Old Street Quarter are significant additions to our long-term development pipeline. Our Blackfriars appraisal suggests the site can cope with probably 3x the floor area, given the substantial surface car park at the rear. In the meantime, we have let the vacant space and achieved above ERVs on acquisition. At Old Street Quarter, we exchanged conditional contracts to acquire 2.5-acre, this 2.5-acre site. This will complete once the new eye hospital in St. Pancras has been delivered, which is expected in 2027. Studies remain at an early stage, but engagement with the planners suggests the potential for more than 750,000 square feet. We will keep you updated with our plans on this significant project. Major disposals. New River Yard only had limited scope to be upgraded, with 13 tenants on short leases across 4 buildings. We have other opportunities where higher returns are expected. So we chose to recycle. At Bush House, the disposal price reflected a premium of more than 40% to the December book value. This allowed us to effectively crystallize our expected development returns early with no risk. Now a couple of slides on sustainability. Slide 38. In 2020, we published a pathway for a net 0 carbon company by 2030. Our targets are aligned with a 1.5% -- sorry, degree climate change scenario. Our carbon emissions fall into 3 scopes and subdivide into operational and embodied, which are set out here. The 2 charts show how the progress from the 2019 baseline. On the left, our energy usage has reduced by 24%. Our operational carbon footprint on the right has dropped by 33%. Looking now at the progress in more detail. Our energy reduction pathway is shown on the top chart. And this is to reduce, by average, 4% per annum from the 2019 baseline. Achieving this will deliver a 33% reduction in 2027 and 44% by 2030. Our progress is shown below. While there'll be some distortions from COVID and the easing of lockdowns, we're on the right path with a 17% reduction in energy intensity between 2019 and '21. Performance in the first half of '22 suggests we are on course for this year. To achieve our aims, we monitor performance of building specific targets. We have improved our green lease clauses to allow more collaboration, and we have a program of occupier engagement to help reduce energy usage. Lastly, we've committed to rolling out intelligent building infrastructure over -- across 50% of our managed portfolio, using Johnson Controls to enhance our data and understanding. Embodied carbon, Slide 40. Our developments are a key source of value creation, but they are also a major contributor to our carbon footprint in the form of embodied carbon. Occupiers have a clear preference for net 0 carbon buildings with high sustainability credentials but are also key to reduce embodied carbon. This is aim shared by local authorities, which have also set formal targets. These align with our own targets of 600 kilograms or less carbon per meter squared by '25 and 500 kilograms or less by 2030. The chart shows the progress at our projects. We're on target. Our first net 0 building, 80 Charlotte Street was delivered in line with our 2030 target and both Soho Place and The Featherstone, which completed in the first half of this year, are within our '25 target. To help achieve this, we have a responsible development framework. This covers areas including design, use of low carbon materials and construction methods. Finally, a little bit about Scotland. Our target is to have our electricity and gas on green tariffs. We've been -- for electricity, this has been the case since 2018. In 2021, 23% of our gas was on green tariffs and we're looking to address this as the contracts renew later this year. On the electricity side, an initiative we are undertaking on our Scottish land. To take our electricity sourcing a stage further, we're looking at self-generation. This is an important differentiator for Derwent. In July, we received a resolution to grant planning consent to build an 18.4 megawatt solar park on 107 acres, comprising of about 60,000 panels. To put this into context, we could self generate about 40% of the electricity used across the London managed portfolio. Now back to Paul.

Thank you, Nigel. The flight to quality continues to gain pace, and we are seeing companies engage with long-term occupational strategies, with expansion against a backdrop of low supply of high-quality space. Now for the right product, occupiers are prepared to pay a premium rent, as demonstrated by our leasing activity. Our portfolio has substantial reversion of over GBP 50 million, excluding contracted uplifts, which we expect to capture through ongoing leasing and asset management activity. We spent the last few years reshaping our portfolio, retaining better building and investing in the pipeline, leaving us well placed in the transition to the greener future. Recent acquisitions, including several super sites provide great opportunities supported by a strong balance sheet and no gearing. We have an experienced management team that has worked through many cycles. Derwent London is very well placed. So I'm going to hand over now to Q&A. Thank you. Osmaan.

Osmaan Malik from UBS. in your statement, there was quite an interesting paragraph where you mentioned that you have been retaining recently completed developments for longer, given the flight to quality. And I just wanted to dig into that a little bit more, if I can. So there are 3 broad questions. One is, how much is left with this recycling? Are you looking to sell more product that you don't think meets or you can refurbish to prime over the medium term? So the first question, how much is left? Second question is, has something changed around your definition of prime? Presumably you thought you could get a reasonably prime refurbishment of these properties before. So has something changed? That's the second question. And then I guess the final part is, I think previously what we were expected was that once you get a completed development, it's reasonably dry, you've fully leased it on long-term letting, you then sell it, recycle the capital into something you see a better return on. Is that changing? Are we expecting a structurally lower level of forward return here? Could you just discuss a little bit more around why you're retaining some of these assets for longer and what that means for the return profile?

Three good questions. Firstly, turning to sales. I think we're doing a bit more again this year. We've got a few smaller buildings on the market. And actually, we're getting some very good bids for that. So I think we might look to sell sort of GBP 100-odd million this year. I think we've had a really good run of saying what we would consider the weaker project, getting [ John Cern ] and Angel Square into this year, both [ per shares ] and [ gross revenue ]. So you'll probably see a little bit more recycling. But some of the stuff that we're keeping back we might call slightly less prime is our stock for the future. Our job is to turn brown buildings into green buildings and see some opportunities. So the sales have really been probably mostly focused on those buildings where we don't think we can add much area, where we think planning might be very difficult to secure a big uplift. So I think you'll see a little bit more selling. We're delighted with what we've sold so far. I'm going to ask Nigel to add a bit of comment on that, to what we see.

I mean on the recycling and holding the better buildings longer, you take something like Brunel. There's rental growth there as well. So we may have done our asset management, we may have done our development. But there's asset management within those buildings and there's rental growth potential. So it's not a case of that dry. You've also got rent-free burn offs, which will give you some valuation uplift over the few years. So they're performing better and that's another reason why we want to hold them. I mean roughly, the portfolio is split 50% core income, 50% added value. And I think for us, it's clearing out some of that smaller added value stuff where you can add a bit of value, but it's so small, it takes a lot of management time.

I mean it's very difficult to sort of define prime because actually what is in demand. If you look at our wonderful Tea Building in Shoreditch, it's constantly in demand, and we bought that many years I wouldn't say that's a new flashy building, but it's the right product for that particular area. Similarly down -- if we look down at Greencoat House in Victoria. We've got an old depository there we've pre-let to Edelman. It's I think 16% above ERV. So I think it's coming down to what is the right product. And we announced last year [ a change of strateed ]. I would say nothing is forever because obviously if something came along, we thought we couldn't add any more value, but we thought we got an amazing bid we would look at it. But I think that's where demand lies, both in respect of the investment market and also letting market. And we are -- despite core income being just core it's not dry. There's a lot to do. I mean Paddington [ evidently is ] in strong demand, isn't it?

Yes. Paddington is a submarket itself, and within our own Brunel building there's a lot of growth story there. And as Nigel says there's definitely [ beyond ] movement to come.

So Emily complains that we were too successful at preletting, we should have kept some space back. We would have got some [ of your maker ]. So we've continued a bit of recycling, but we've got ourselves into a great place for the balance of the portfolio. And you can see the evidence of what rents could be paid for really great space, 9.5% above ERV. Max?

Max Nimmo at Numis. Maybe firstly, just on the occupier side of the market. We're obviously starting to hear a little bit more about some tech companies laying off workers. Are you seeing any of that kind of change in sentiment in terms of some of the occupiers and what they're looking for? I'm thinking of Microsoft, who are looking for 0.5 million square foot in the city. Is that still the case? This kind of stuff. And secondly, a slightly technical 1 on the yield. You saw 4 bps of yield tightening, but I think that included, as you said, included Soho Place and Featherstone. If you took them out, what would be your kind of like-for-like yield movement, if you have that?