Great Portland Estates Plc (GPE) Earnings Call Transcript & Summary

Hello, and welcome to the Great Portland Estates Results Conference Call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Toby Courtauld, to be controlled to begin today's conference. Thank you.

Thank you, Val, very much, and good morning, everybody. A very warm welcome to this slightly unusual conference call for our results. It's a shame not to see you in person. But once we're out of this lockdown, I promise you, we'll make every effort to come and engage with you in any way we can. We've had a lot of press release out this morning, as you would have seen, and I hope you've had a chance to look at our short video of the results, which was put up on our website this morning at 7:00. It will be there for the duration. So I'd encourage you to go and have a look at it when you get a second. I'm also going to refer this morning in the first opening comments to the presentation itself. You can find that on our website. And if you haven't got it open, I'd encourage you to do so. And there's a lot of information in there that we may well use to help answer some of your questions when we get to it. So the releases we have out this morning, in addition to the results; one, the pre-letting to Exane which I hope you've seen, 40,000 square feet at Oxford House, GBP 100 a foot, 15-year letting with a 33 months rent free. Secondly, the launch of our sustainability statements of intent. The time is now, and I'm going to cover some of that in a second. Thirdly, the creation of a new community fund ceded by the Board and Executive Committee GBP 280,000 raised already. We're opening that to GPE staff today, and we expect that to rise further. And that is to help those most in need in London as a result of this COVID crisis. So a really good effort by the team there already. So the plan for this morning is a few opening comments from me and then from Nick, and then we'll open the floor to you guys. And as per usual, we have the full lineup of Marc, Steven, Andy and Robin to help us answer any questions that you have. So let's get into it. A couple of comments then from the slides. I'm on Slide #3, heading solid results. And as you've seen, these are decent numbers they, I think, reflect confidence, the fact that we have maintained our dividend up 3.3% over the year, gives you that sense of confidence looking forward. And a great performance again by our developments, up 11.9%; and rents over the year, up 1.4%, and we have beaten the MSCI quarterly index handsomely. Over the page, Page 4, we are planning for a recession. There's not a great deal of surprise in that. And the recession length and depth of which is a moot point. I don't think there's much point in second guessing what is exactly going to look like. But the important point is that we do so from a position of great strength and built on solid foundations. LTV, 14.2% only, even after having given back GBP 616 million to shareholders since 2017. Plenty of capacity for investment of the liquidity of GBP 411 million without even trying. Average interest rate low. Lots of opportunity for us to invest across the portfolio. You know that. 13 schemes are in the lineup. And I think a really interesting opportunity for us to do what we do best which is going into the market and finding opportunities. And I expect that we will be a net buyer over the next 12-or-so months. Meanwhile, really good leasing successes continued throughout, GBP 14.4 million over the year, beating ERVs almost by 9%. We're still leasing, GBP 12.3 million under offer as at yesterday afternoon, that's now down to GBP 8 million, after GBP 4 million of it converted into a let with Exane taking 40,000 feet, as I've said, GBP 4 million coming from them. Overall, 2.5% ahead of ERV. And crucially, almost all of it agreed since the lockdown. So it is not the case that life has stopped, and we are still letting good quality space. Last point on this slide, really strong culture at GPE, most of you know that. Our values are never more in evidence than at the minute, and it's really pleasing to see 94% of GPE people saying that we are a great place to work. So growth potential, very well placed to capitalize on it. And London, we think, remains a key global city long term, yes, short-term volatility but once we have that out of the way, we think the strength and the magnetism of London persist for the long term. Nick, do you want to touch on any highlights from the numbers?

Yes. Thank you, Toby. Morning, everyone. I hope you're then keeping well. Perhaps if you could just start on Slide 6. What I'm trying to do is give you a quick run-through of the details of our resilient financial performance, run through the proposed recommended final dividend of 7.9p as well as giving you an update on rent collection, how we're using rent deposits and our delinquency position and then briefly touch on our extremely strong financial and liquidity position. I'll cover each of the headline numbers as we move through the deck. So if we jump to Slide 7, you'll see our EPRA NAV per share growth of 1.8% was mainly driven by 2 things: one, good EPS growth, meaning that we have a very well-covered dividend; and two, an enhancement to NAV from completion of the share buyback. You can see that with regards to the property valuation, it hardly moved in the year. It was down 0.3%, but it's probably worth giving you a little bit more color behind that. And you can see in the blowout that offices performed better than retail with both office values and ERVs increasing. Clearly, retail was hit by falling ERVs, but also CBRE appropriately reflecting COVID-related red holidays and yield expansion on some retail units. At a more granular level, you can see in the burgundy bar that our committed developments were the best performers, up 11.9%, and that was even after the values had reflected a 3-month completion delays given lockdown. At the other end, as expected, the weakest performance was across the shorter income development pipeline, and that was in part driven by yields being softened to reflect weaker investor sentiment on short leaseholds. But as you all know, these assets offer some of the greatest potential upside going forward. And we've included plenty more valuation detail in the pack appendices for you to digest later. I touched on our earnings growth a moment ago. And you can see on the left-hand chart of Slide 8, the drivers behind our EPRA earnings increasing to GBP 57 million in the year. And on the right, you can see that this fed into earnings per share growth, given our earnings growth and reduced share count, with EPS up 13.4% and cash EPS up 4.7%. As a result of this and given our very strong financial position, we're again paying a final dividend of 7.9p, taking total dividends for the year to 12.6p, up 3.3%. Now Slide 9, a full update on our rent collection stats for the March quarter date. You'll see that our collection rate has gone up since our April trading update from 63% at working day 7 to 71% now. You'll see details in the footnotes that we've collected 84% from our office space occupiers and 41% from our retail unit occupiers. I don't think it's a huge surprise. And we do expect this distinction to persist at the June quarter date. And as you can see, unsurprisingly, more than 2/3 of the unpaid rents is due from occupiers in the retail, leisure and hospitality sectors. Steven Mew, along with his portfolio managers, our finance and credit control teams are busy working with these occupiers to try and find the optimal routes to receive the balance as we understand more about each of their challenges and also their respective financial positions. But one of the things you can see, we have been doing is drawing down rent deposits as shown in orange in the 2 pie charts, which will allow us to collect a further 9% of the quarterly rent. In addition, we expect more than 20% of our rent roll will have moved to monthly payment terms by the next quarter date. And in total, we hope to ultimately collect around 11% of the March quarter's rent through deferrals, whilst the remaining 6% will likely need to give rent holiday concessions. Looking ahead, we are preparing for the likelihood that the June quarter collection rate will be lower than March, given both the economic backdrop and the lockdown along with the government moratorium before the JV nonpayment of rents. As you can see at the bottom left of the slide, we do have GBP 26 million worth of rent deposits, which typically provides 6 to 12 months rental cover for our less established or robustly capitalized occupiers. And so far, we've only needed to draw 3.8 million of them. And to date, delinquencies have been pretty minimal and again dominated by retail, hospitality and leisure. Now Slide 9 covers our -- sorry, Slide 10 covers our robust debt metrics. As shown on the left, we still have the lowest LTV in the U.K. REIT sector at 14.2%. And as Toby touched on, that's even after having returned more than GBP 600 million of surplus equity in recent years. The weighted average interest rate that Toby touched on of 2.2% falls further to 1.9% if we fully draw down on our new ESG-linked RCF, which has a headline margin of only 90 basis points. And if you see bottom left, our debt is predominantly unsecured, which gives us great flexibility. We've got a weighted maturity of 5.8 years and no imminent maturities. And bottom right, you can see we have available liquidity of more than GBP 400 million. As a result, no current plans to access government COVID funding facilities nor have we furloughed any of the GPE team, whilst we have been expanding our community support and contributions to charity causes. Turning to the last slide for me. You can see on the left, we have significant headroom over our group debt covenants, providing us with the ability to withstand value falls of more than 70%. And interest cover remains unmeasurable. And you can see on the walk on the right that our LTV rises to only 16.3%, once we factor in our existing development and refurbishment commitments and that's without taking account of any surpluses. So as and when new accretive investment opportunities emerge, we do have the capacity to take advantage with an illustrative GBP 1 billion of acquisitions, leaving LTV below 40%, assuming constant property values. So with this financial resilience and strength, we feel extremely well positioned for the current situation and all market eventualities. On which note, back to Toby for a few comments on the market.

Thank you, Nick. I hope you're following on the slides. We're going through them at a rapid rate, and let's finish them off now. So I'm on Slide 13. As I said at the beginning, we are planning for a recession. Some interesting observations that we think about the market conditions of the minute. We're not seeing, as you can see top right, active demand yet having fallen as a result of the lockdown. We think it probably will. We think, however, we're still going to see quality space letting. I've referred to the under offers already. Within that, though, we think we'll see less demand for expansion space. We think we'll see more demand from occupiers for flexibility. And crucially, we think we'll see more differentiation between good space and poor-quality space, both in willingness to lease and also in eventual rent. On the investment market, a key question is, are we going to see significant amounts of distressed assets for sale? As it stands at the minute, not at all, quite the opposite, the amount of assets for sale has fallen by 50-odd percent since November '19, the last time we produced those numbers. So question, are we going to have a short window of opportunity or something longer? Who knows? We'll see. The crucial point, though, for us is that London still has many attractions shown on the right-hand side. And we, of course, have a very strong and long track record in the acquisition world and that will not change. We will identify opportunities, I'm sure of it. Over the page to our market outlook. You may have seen this morning, bottom left, that we are not providing our usual guidance on rents for obvious reasons. However, we do think that in the near term, at least, overall the market, the direction is likely to be down. For last year, as you can see, we were at the very top end of our guidance, which was down 2% to plus 1.5%, and we ended up delivering plus 1.4%. On the right-hand side, we think the yield outlook is up in the very short term. We do, however, think, medium term, the attractions of London remain. We know there's a bucket load of capital still looking to invest in London. It may go up the quality curve as a result of uncertainties of today. But nonetheless, we think that long-term London remains a very strong investment story. A couple of points on Slide 15 about portfolio management and the nimble management of risk and crucially matching product to customer needs, something we do very well and is going to be even more important as customer -- customers work out what it is they really want in the next few months. All of our properties have remained open throughout the lockdown. Our extensive engagement has been not just with occupiers, but also with freeholders. And we're getting ready for our occupiers to return to work with our playbook drafted. And again, you can see bottom left, our relative performance is good. Our Net Promoter Score is terrific, and it's about twice the rate of the industry average. Again, experienced team is key here. Last couple of comments from me before we open up for questions. Slide 16, I think the point on the development program, you're all familiar with its extensive square footage and where the projects fit. The most interesting thing, I think, is that we have 3 near-term projects with circa 800,000 square feet, with start dates next year and the year after, circa GBP 600 million of CapEx, GBP 55 million of rent. We're working hard to get those ready to start. And I fully expect that we will. I'm going to jump over the sustainability statement of intent other than to say we have no option. This is a really important part of our business. It's no longer just moral. It's now social and economic. We are going to see bifurcation between tenants who -- or rather buildings where sustainability is at the forefront, occupiers will pay for that. I think buildings that are not paying attention to sustainability and well-being questions will suffer. So we're working hard on that as well. Where Next? An outlook, Slide 18. You know we match and have done successfully for many years our view of net investment or divestment to the market conditions very well. And you can see from the chart on the left that we have been serious net sellers since 2016. As I say, I think the next 12 months, we may well be a net buyer for the first time in 7 years, which I think is inevitable in a sense, but is also a strong positive. And with our liquidity positioning and gearing where it is, we clearly have the ability to expand quite quickly. Quite a lot of that gearing capacity and capital that we have access to, Slide 19, will go into our developments. You can see 22% on site, another 34% in gray in our pipeline, 56% all up. That is as near as a high for us over the last 10-or-so years. So plenty for the team and Andy and his group to be getting on with. And then last slide, Page 20, prepared for the near-term, long-term opportunity. Really important point. We're looking through COVID. We're looking at a business with strong defensive characteristics prepared for a near-term recession, experienced senior team, and we're looking out into the medium- and longer-term where we believe strongly we can exploit growth. I've referred to our development. 92% of our assets next to Crossrail stations, very focused acquisition strategy, very clear priorities across our strategy more broadly, focused, deep knowledge, demonstrable capital management discipline, strong belief in London as a global capital city, strong culture, great team, clear purpose, unifying values, supporting our occupiers and communities and exceptional people engagement scores really tied all together. Near-term challenges, definitely, but GPE in great shape with a confident long-term outlook. So well, if we may, please, let's open it up to questions. Thank you.

[Operator Instructions] And we do have a few questions in the queue. The first question comes from the line of Peter Papadakos from Green Street Advisors.

I had 2 questions. So one for Nick and one for you, Toby. Nick, with regards to the rent collection for the June quarter and then potentially also for the September quarter, are the most of the rent deferral request that you have had and you are having, are they for income to ultimately be received in the 12 months to March 2021? I'm sort of trying to understand a little bit also what's the potential impact to EPS for the following year if some of those discussions mean that you only collect the rent beyond the next 12 months? And if you can get -- give some sort of a feel for what type of collection rates should we be expecting? I know it's a difficult question, but anything that you can say? And then just for Toby, a little bit, if you can help us understand, Toby, with regards to the -- whether you would think to be turning the development dial back a little bit, just more medium term? Obviously, the business model that you have works best in an environment of positive net absorption as opposed to potentially flat net-net absorption. And then also into consideration, the discussion that you have around HMRC tax changes as well. So how do you think about how much do you have over the medium-term in some sort of a development form?

Thanks, Peter. Nick?

Yes, Pete, thanks for the question. So I think there are 2 elements to the rent collection. One is expectations for June, September; and then two, when the income should come through from the deferrals. I think in terms of expectations for June and September, I don't think we can give much more guidance at the moment other than we expect it to be lower than it was in March. It's clearly going to be dependent on a number of things. How deep the recession is, how long lockdown continues for and that's clearly going to be particularly relevant for our retail hospitality and leisure occupiers. And also if the government extends the moratorium. In terms of the length of the deferrals and their potential impact on our earnings, I may ask Steven to come in and provide a bit more color, but we're dealing with them all on a case-by-case basis. Some of them, we have been come -- will come through over the course of this financial year. Some of them, it may take a little bit longer. How that feeds into earnings will, in part, depend on the deals that we ultimately do with them. I don't really want to get into the detail on this call, but I'm happy to take it offline around the complex accounting for new rental agreements and whether we get into the lease having been modified or not because clearly, that does have a little bit of an impact on the accounting for the earnings. But our aim is to try and get the cash in through the door as quickly as we possibly can, whilst at the same time, working with our occupiers and understanding their financial position as to what isn't achievable -- it is not achievable. I don't know, Steven, if you want to just add a few comments on what you're seeing in terms of the likely length of those deferrals.

Yes. I mean if we can get repayments back by the March '21, great. What I would say, as Nick just explained, dealing with on a case-by-case basis and the sort of payback very much depends on the financials of the individual business, plus also the lease term over which we've got to capture that deferral. I'd also just say that what doesn't come out from the pie is there are other conversations going on as part of any sort of support that -- where we can open up, and it's not always us opening up these conversations, sometimes occupiers are opening up those conversations to secure longer-term benefits. So we may trade as part of that sort of deferral rent-free package. Other sort of advantages for ourselves in terms of taking out compensation on block date buildings or we may well reprofile leases and extend leases out. So it's a case-by-case, I suppose, in the summary.

And thank you, Steve, and thank you, Nick. And I think the characteristics we will always display are commercial realism and pragmatism, and we will always seek to help occupiers where genuinely help as needed. And we will always take a tougher line where we conclude that, in fact, health is not necessarily needed in the way it's being asked for. And that's a balance that we seek to maintain throughout all these discussions. In relation to your development question, Peter, and whether we should dial it back? The answer is no, I don't think so. If you look at the development pipeline across the market as a whole, we are looking at a very tight supply pipeline of new build. I think if anything, COVID will put some schemes back into the cupboard, so to speak. I think various investors will run scared of risk. And so we might find that the pipeline goes from being tight to being even tighter, which means that those willing to push the button and do what they do best, and clearly, we're a long-standing quality developer, should come out of it smelling of roses. And I don't see why we shouldn't do that. It's interesting to note that on the 3 large schemes that we are in preparation, as I've already referred to starting, we have had inbound on all of them from prospective occupiers, even though we do not yet have planning permission. And that to me is a very strong sign of one of the characteristics I was referring to earlier, where quality space is attracting interest already across the market. And I think that's a theme and a trend that we shouldn't forget. Val, back to you.

The next question comes from the line of Max Nimmo from Kempen.

Just on the 11.3% of rent deferrals. Just given what you're seeing in terms of June and September likely to be worse, I'm just wondering, was there any discussion around making a provision for that already? The obvious answer is perhaps. No we think we're going to get all of that back, I mean, therefore, didn't need to. But when you see, for example, Landsec last week, taking a GBP 23 million provision already in last year's numbers. Was there a discussion there for you guys on that?

Thanks, Max. That sounds like one for Nick.

Yes. Max, we absolutely did have that discussion. And actually, you'll see clearly in the accounts that we have an expected credit loss allowance of around GBP 2 million at the group level, circa of further GBP 1 million at the JV level. I would describe that as a very prudent assessment of collectibility. It's predominantly only 90% from our retail, hospitality and leisure occupiers. So the provision has been made. In terms of its impact to date, we've taken a small write-off of about GBP 0.2 million in this year's earnings give relating to the 6 days of that rent, which relates to the financial year, i.e., from the quarter date through to the 31st of March. The balance of it sits as a provision in the balance sheet. And the approach we've taken, which is a common sense approach, but importantly, also, accords with the view of the Lloyds technical team such that it would have been taking that write-off of the full GBP 3 million today through the earnings, we'd have effectively be taking a hit to this year's earnings for next year's prospective rental income, which didn't seem right. I know that across the industry, some of our peers have been advised to take a slightly different approach. Our expectation is the accounting standards will come and provide some clearer guidance around this. But to be clear, yes, a provision has made in totality, including the JVs, it's around GBP 3 million. We hope that ultimately, we've been prudent, but hopefully, that provides you the color Max that you are looking for. Thanks Max.

Val?

The next question comes from the line of Christopher Fremantle from Morgan Stanley.

I just wanted to ask you a general question. I mean lots of question marks about structural changes in office usage. Given the sort of homeworking experiment that most of us have been making over the last few months. How do you assess that potential for a structural change in office usage, as we sort of start to come out of the recession and what that could mean for the underlying market? I appreciate that's a probably big and probably too difficult to answer question, but I'm interested in your thoughts on that. And then just one more specific question. What are your intentions on the dividend going forward? Are you -- I know I appreciate it's a small number in the grand scheme of things, but are you intending to just to gradually continue that growth going forward? Or -- yes, any indications that you can give on that?

Okay. Thanks, Chris. Nick, in a second, if you wouldn't mind addressing the dividend question. And Marc, if I could ask you just to give us a little bit of color on some of the demand for space characteristics we're seeing at the moment, that might be helpful in answering Chris' question, too. More broadly, Chris, structural changes in office usage, I think one of the issues that I've been observing over the last couple of months is this -- the sense from the commentary that we've been reading that, that takes a short-term issue and extrapolates it all into a long-term trend. And I think there's a real error in a lot of that. It isn't the case that offices are dead. It is not the case that dominant city centers like London, like New York, like Tokyo, the global capital cities lose their magnetic appeal. There is certainly going to be some short-term volatility and bumps in the road and all the rest of it. But long term, and by long term, I'm really referring to post-COVID, and who knows when that starts, but it's medium to long term, I don't see there being ultimate damage in the way that some of these reports suggest at all. And in fact, quite the opposite. I think the need that we all have as humans to collaborate, communicate and create together means that we are going to want to be back in front of each other rather than virtual meetings all the time. Yes, we may spend a bit more time working at home, but that was happening anyway. Flexible working as a trend has been running for a while and is already being incorporated into the way good developers are designing offices. I'm sure your own offices are changing as a result of all of that certainly ours are, and the buildings we're building have to be flexible. They have to be able to cope with some of those changes. They're much more alive to the well-being needs of today's workers. They're much more alive to sustainability. They're much more alive to retrofitting and changing of internal fit-out to accommodate the changed working patterns of flexibility and so on, and so on, and so on. But just look at our pre-lettings. Just look at the interest we're getting already in schemes we don't yet have planning for. And I think it is true to say a consequence of some of these short-term impacts from COVID will be a bifurcation between the great space and the really not great space. And I think the former massively outgone the latter, and rents will grow in the former long term, whereas they may not so much in the latter. But that's, I think, been going on for a long time. It may just get accelerated and is accentuated a little bit as a result of what's happening at the minute. Marc, any comments on what you're seeing in demand at the minute, where it's coming from and perhaps we know it's coming off a little bit at the minute, but your thoughts.

Thanks, Toby. And thanks, Chris, for the question. Yes. I mean, I think that where we are at the moment, active demand is anywhere between 8 million to 9 million. There hasn't been a lot of downturn in that demand. And under offers are holding stable at 3.5 million square feet as well. In terms of where we're seeing the structural demand, law firms themselves, they're definitely going to be driving the demand this year. They are normally well capitalized, and they are, for the most part, recession proof. It's about 32% of demand currently. Covington and Berlin at 22 Bishopsgate, high-profile deal that was announced during lockdown, 86,000 square feet paying rents in 90s. Baker McKenzie are under offer at the moment at 280 Bishopsgate. And as Toby has alluded to, we've got a number of conversations ongoing on schemes that we don't have planning for yet with a number of these law firms that are seeking to find the best space, best quality space for their staff. Next is banking and finance. About 27% demand out there. We just announced Exane which is a fantastic deal for us. And we've had 2 parties bidding, fighting over Medici Courtyards, and we went under offer last week on one of those parties. And we've got the lives of Rabobank and Lazard still progressing with their deals. I think where we will find the greatest amount of change in the very short term, and this is more of a wait-and-see than a permanent hold, and that's with media and technology. They are more used to working from home. There's younger staff, and they've been doing it much longer than we have. High-profile pauses from Salesforce and Amazon only. They were announced last week that they want to wait and see what happens over the next 6 months. But there's plenty of live requirements out there at the moment. So net Flex gains who are under offering Golden Square. So we've got quite a lot of activity there.

Good. Thank you, Marc. Really helpful. Nick, over to you on the dividend.

Yes. Chris, I mean I think you highlighted this morning. We've gone into this, I think you described it as a thunderstorm in a very strong position. Clearly, for this year, we've kept the final dividend flat, given our strong earnings dividend cover strong liquidity despite we're not accessing government support, not furloughing our people and crucially are continuing to support our occupiers and communities. So I think the final dividend reflects confidence in the strength of the business. But it also reflects that we're not naive about the market outlook. I mean as you identified, the total payout historically has been circa GBP 30 million, so it's not big in the overall scheme of things. However, we have consistently run a low and progressive dividend policy. And as you also know, there have been periods where we haven't had a full cover in the past. It's too early to -- in the same way, it's too early to give guidance around where rents would guiding, it's probably equally too early to give guidance around where earnings will go. But what I will commit to is that this business is known for its capital discipline. We have had a consistent dividend policy. We have also when we found ourselves with significant surplus equity, giving it back to shareholders as demonstrated through the GBP 606 million over the last few years. But equally, we are mindful that the -- as we touched on earlier, the rent collection stats could be weaker going forward for the rest of the year.

Thanks, Nick.

The next question comes from the line of Colm Lauder from Goodbody.

I have more of a sort of broader question, but perhaps you can relate it back to some of your post-crisis lettings and maybe a question for Marc. I was curious to see how tenant incentives have evolved for those post period end lettings, obviously, you have the BNP Paribas, letting on a 33-month rent-free. And just to understand, are you noticing changes, extensions and rent frees, increased our move forward for break clauses in some of those post period end lettings versus what you would have noted 6 or 9 months ago?

Marc, one for you?

Yes. The simple answer is, not at the moment. But I think it would be too optimistic to say that there won't be rental movements. I think as far as Exane is concerned, it is bang in line with what we would expect on a 15-year term, where rent frees have remained stable between 33 to 36 months.

Okay. And perhaps just one further question as well. Just on the rental collection rates and the tenant delinquency as you know, there's 7 occupiers who are delinquent in the current period, I was curious to understand what level of tenant engagement there has been for those tenants who have not paid or have not engaged? You -- are you seeing a situation where some of those delinquencies are simply not engaging with you with the landlord are they proposing options, which were not agreed or not favorable from your perspective? And what sort of alternatives have been offered around that? So again, a broader tenant to landlord engagement question.

Steven, would you just like to expand a little bit on what we've been doing in engagement?

Yes, sure. I mean just in -- just the specifics of the delinquency. The last delinquency we've had and, I suppose, the only one post-COVID has been Cath Kidston down at Piccadilly, where that's been phoenix'd out although the NewCo business. And there, it continues to be interested in that store from the market in general. But just outside of that specific and the engagement we've had, I mean, we've had heavy engagement with all of our occupiers. I'd say there's probably 120-odd discussions going on across the portfolio with various occupiers. The engagement has been more difficult with the larger high street retailers who generally have sort of U.K. wide portfolio approach. But across the office portfolio, generally, very good engagement. I think that's testament to the longer-term relationships we have with these guys over time, which has obviously helped. So hopefully, that answers your question.

And I think it's worth adding, Colm, that longer-term relationships and long-term contracts in the Maine. So we know that in the Maine they are going to want to come back into these buildings, and they recognize that relationships really matter in the long term.

The next question comes from the line of Paul May from Barclays.

Just a couple from me. I'm just following on the development question and sort of allocation of capital. Notice there's quite a material reduction in the last 6 months on the expected total profit committed schemes, down from sort of GBP 125 million to GBP 98 million. Just -- I presume, this is unexpected exit yield expansion. Just wondered if you could give some color on the expected profit on the pipeline schemes at the current stage? I'm sure it's difficult because who knows where you would be in a number of years' time, but anything you can give would be appreciated. I'm just wondering how that sort of follows on from decisions with regards to buybacks or other uses of capital? As you know, I'm not usually a big fan of buybacks just because you're at a discount, just wondering how the thought process has evolved over the last 2 months. And then I'll ask my second one.

Okay. Thanks, Paul. Just, Andy, if you wouldn't mind talking to the development story, just touch on the 3 committed, what happened there to the profits percentage and some color on the longer-term schemes. In relation to buybacks and capital more broadly, Paul, we -- when we come up the issue of returning capital to shareholders, we come at it from one aspect, from one perspective only, which is that it's surplus to our needs. We then decide how best to get it from us to investors. And we will -- as you've seen, we've used 3 different methods in the last 4 years, and we will choose the method most appropriate to the speed with which we want to return it and the efficiency of getting it back at the lowest possible cost. And it so happens that the buyback for us was the right one at that moment in time because it gave us flexibility to turn it on and off, depending on how conditions unfolded, and that was really important at that point in time. So we will choose the right method of return should we have surplus equity that we don't have a need for. At the minute, I don't think there's any suggestion that even with gearing at 14%, we have surplus equity. I think, as I said earlier, net buying is quite possible over the next 12-or-so months. Andy, do you want to touch on the profit margin on the short-term 3 and then a reflection on the pipeline?

Sure. Thank you, Toby. I'll talk to Slide 65 and give you a quick update on each of the 3 developments. So starting with the Hickman. The profit there has actually gone up since November, and that's as a result of the office ERVs increasing. Generally, in terms of construction, this is actually one of our sites where we were able to remain open whilst we carried on making some site adoptions to the working practices there. Then, if we turn to 1 Newman Street, the profit there has reduced and that is because of CBRE applying some slightly longer retail voids, reduction to the ERV and also a softening of the yield. There, the office ERV actually increased. So the number you see on the slide there is pre-Exane. The profit on cost increases to about 10% with Exane. This side, it's shut on a short-term basis while we made the adoptions to the site and welfare facilities and work is continuing on that one now. And then thirdly, dealing with Hanover Square, the profit has actually stayed sort of broadly level, and that's because the office ERVs have increased. And that has been just marginally offset by a slightly longer retail void and a slight softening of the retail yield. And for that site, as well, there was a short-term closer where we made some adoptions to the site whilst it's continuing there. I think between us and our project management team, there's been great collaboration in keeping the sites working. At the moment, worried about sort of 50% to 60% labor levels back on site, and that's increasing week on week. In terms of the near-term development, it's a bit harder to give a profit number there. Because clearly, these schemes are still in planning, and I think it would be a bit premature to actually nail down a number, but you would expect similar levels to where we are on some of our committed schemes.

I appreciate it. Might be a bit early. And then just on the second, I think I fully agree with you that offices remain a key part of the occupation requirement, not everyone is going to be working from home 5 days a week. I think most people haven't particularly enjoyed the experience on a permanent basis. I just wondered how you've seen the impact on the Flex part of the business? I appreciate it only a couple of months ago and kind of how fast-moving things have been, this was a key part of the growth strategy, not just for yourselves but for others as well, it's what occupiers who were wanting that level of flexibility. Just wondered how your sort of conversations have progressed on that? I appreciate things probably slowed down quite materially over the last 8 weeks, but where you see that going, going forward? And is it still a key part of the growth strategy for the business as we sort of come out of the lockdown situation?

Thanks, Paul. Good question. Steven, perhaps in a second, you might just talk to what's been happening in our partnerships and of our Flex business at Runway East and with Knotel. More broadly, Paul, I think the really important point to make here is that I think -- and I think we as a team think that occupiers increasingly are going to be looking for flexibility, full stop. It's a trend that we've observed for a while now. If anything, COVID probably accelerates that trend, and I -- and as we say in the press release this morning, we think there is an opportunity to -- for us to capture some of that demand. We think there is going to be strong demand for more flexibility and our product is very well suited to providing that because, as you know, a lot of the space that we have is relatively smaller units and has the ability to -- for businesses to expand and contract in and out of. So we think that there is still a good business model there, particularly when it's managed by a landlord like us that owns the buildings and can move people around, has long-term relationships with occupiers. So we think Flex is here to stay. If anything, is going to grow. Within the co-working space, there are clearly going to be some short-term issues for that sector of the market to address. We've only accessed that bit of the market through our partnership relationships ahead of development as a good way of generating extra revenue. And actually, the story there is not as negative as you might imagine. Steven, do you want to touch on that?

Yes. Sure, Toby. Yes, just as a reminder, the partnerships, that's where we're working with experienced operators in revenue share agreements at City Place House, where we have Knotel and then New City Court, where we have Runway East. Very simply, we put in the building, the operator brings in the expertise and then we share the revenues. I mean it's -- you can split into 2 really. I mean the Knotel story, very much enterprise occupiers, established businesses, longer terms through to the sort of development block date 21. The experience at City Place House for Knotel has been very positive. They've collected rents. They've not seen any delinquencies. Then down at Runway East, it's very different type of business, very much focused on tech start-ups. Typically short-term license agreements, where those occupiers are able to break on, say, a couple of months' notice. And the Runway East have to -- have been, a, proactive; but b, also had to work quite hard to maintain occupancy in that building, which just pre-COVID was around 99%; post COVID, and as we sit here today, around 74%. So you can see that's sort of the difference between the 2 types of business. Hopefully, that answers your question.

The next question comes from the line of Marc Mozzi from Bank of America.

Yes. Just only one question for me, which is a bit of a general one. But in a post-COVID world, is it likely that new health and safety norms and that new tenant requirements in term of quality of air, antimicrobial furnitures and potentially touchless fixtures will require for new guys higher level of CapEx. And if you have any thoughts on that, by how much should it increase the targeted CapEx you have typically on your next near-term development?

Thanks, Marc. Andy, that feels like in relation to construction and building of buildings, one for you, please.

Yes. Thanks, Marc. I think it's 2 points to make here. The first one is that, as Toby referred to earlier, a lot of the trends that we were seeing before COVID are accelerating. So fresh air chimes very well with wellness. So we are looking at increasing ventilation rates. What we then have to think about is balancing that against sustainability because if you're pumping more air around the building, you're using more energy. On the sustainability side, it's about how we deal with the embody carbon side of things as well. So I think at this stage, it's very hard to give you a number on what the percentage cost increase is likely to be. I think it is fair to say there will be some increase in cost. But as Toby talked about the bifurcation of properties that I think if we have exemplar sustainable buildings, exemplar wellness in our buildings, service amenity, we'll be able to charge premium rents for that as well.

And in addition to which, Marc, I think it's important to remember that rent as a proportion of salary costs of a typical London business is between 7% and 10%. So when your -- if you have to put more CapEx into a building to comply with latest measures on health and safety, whatever it may be, the decision-makers taking that space will never have rents right at the top of the list of considerations. At the top of the list is going to be, does that space work for their people? Does it give them the environment that is the environment they're wishing to create, be it productivity, be it wellness, be it layout, whatever, is the micro location what they're after, transport infrastructure, all those considerations would rank in the Maine above rent, given that rent is a relatively small proportion for an office user in London of the overall salary cost. And that's really important to remember. Okay. Thank you, Marc. Val, how are we doing? Have we got any more?

Currently, we have no further questions in the queue. [Operator Instructions]

Okay. Well, look, I think we've been going for about an hour. You've given us some good broad questions. So thank you for those. There's lots of material to digest in the various announcements that we've made this morning. As ever, we, as a management team, are available all the time for your questions. I'm sure you'll have more. And I think unless there are further questions, we should draw it to a close now. It just remains to me to thank you all for giving us your time. As I say, lots of information to digest. This is a business that we think, as I said at the beginning, is in great shape and has a very exciting future and is prepared for short-term volatility and potentially, as we say, a recession. But fundamentally, is looking through that, into a period where we fully believe we can exploit our balance sheet strength, both internally and externally in the market. Very focused on our clear priorities and with a very strong team and a culture wrapped around that will enable us to perform long term. So thank you, again, for listening. Thank you for the home team for dealing with the questions and the hospital passes I gave you. And back to you, Val.

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