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

All right. Well, I think -- actually, there's a few more just joining. I'll give it a few more seconds to let everyone join. Excellent. Okay. There we go. I think we've got most people into the room now. Thank you very much, everyone, for joining us today. We are really pleased to have the team from GPE here to present on the Flex office market and in particular, in their portfolio and how that market is evolving and what they're doing on that front. And we're very pleased to have Toby Courtauld, CEO; Nick Sanderson, CFO; Simon Rowley, Director of Flex Workspaces; and Stephen Burrows, Head of IR. And just a little bit of the format to run you through here. We have a presentation which probably take around 25, 30 minutes or so, followed by Q&A. So if you would like to ask questions, please use the Q&A function at the bottom of your screen there. You can ask questions throughout and we'll gather them and I will put them to the team when the presentation is over. Either that, you can e-mail me on [email protected]. And I will -- I'll be keeping an eye out for questions there. Final thing I was going to say was we will have a recording of this. It is being recorded. Again, please just e-mail me if you would like a copy of that recording and I'm told it will be up on the GPE website shortly after as well. So without further ado, let me please pass over to the GPE team. Over to you, guys.

Thank you, Max. Thanks very much. Welcome, everybody. Good afternoon, and hope you're having a good week, and I hope we're going to enthral you for the next hour or so by giving you lots of interesting information and an interesting way to cap off your week. So what are we going to do? Let's have a quick look at the agenda. Thanks, Stevie. So couple of comments from me, first of all, by way of introduction and a business update. Simon is certainly going to dig into the market in a little bit more detail, explain our offer and touch on some of our leasing progress recently. And then Nick is going to look forward from that and look at the opportunity as we see it over the next few years from here before I wrap up and then open the floor to you guys. So first of all, just a couple of comments on our business and how we're doing. And I hope you got a chance to look at the document we published last week, which gave a bit of an update. But these are the summary points. Leasing, really good. We're still seeing strong interest in our spaces from across the spectrum of businesses that we typically lease to in Central London, GBP 16 million of deals, beating ERVs handsomely over the last 9 months by 10.7% and about GBP 5 million in the last quarter, 5.5% ahead of ERV. And that gave us the confidence to reaffirm the rental value guidance that we gave at our interims, up 2.5 to 5, but with this idea of the best spaces outperforming the rest, meaning that we think best bases in our portfolio will do better still. And you may remember, we talked at 3% to 8%. And when we published in November. And I would say that feels around about right. So great leasing. And we think that's going to continue. And as you'll hear from Simon in a minute, it certainly is in our flex spaces. We've got 2 committed developments progressing well. Aldermanbury on site, obviously, just about coming out of the ground now anticipated completion there Q1 26. We gained vacant possession at French Railways House. We're committing to that, nearly 70,000 of the best square feet in St. James's and some profit of nearly 25% unlevered and a good development yield as well. And then next after those 2 come Minerva House and Soho Square both profitable, both circa 18-or-so percent unlevered, both good development yields of around about 6%. And again, both will be absolute exemplars of the quality spaces that we deliver in their local markets. Beyond those, we are clearly committing to a substantial program of investment into our flex spaces. Wardour Street, we've committed to nearly 30,000 feet and a cracking location in the West End, again, good surplus and great yield on costs. So plenty to look forward to and a confident outlook maintained. Now talking of flex, why are we in flex? Why do we think it matters? Well, there are 5 -- 6 points here, actually. Number one, it is without doubt becoming the default choice for customers of around and beneath 5,000 square feet. 57% of all lettings done in the 12 months to the back end of last year of spaces beneath 5,000 square feet, we're done on a flex basis. We've been saying for years that we felt it was going to become the de facto form of leasing in smaller spaces, and it clearly is now becoming so. And that market, we think being both sizable, it's also growing. CBRE think that it will get to about 50 million feet by '28, and we would not disagree. And its customer base is often assumed to be essentially full of SMEs. That's not the case at all. If you look at our own customer base, it's very similar to the customers we've always had in our smaller spaces but they're coming to us on this basis because it makes their lives easier. CBRE again, reckoned that something like 57% of all customers will have more than 10% in flex by '28. So it's going to become even more ubiquitous than it already is, particularly at the smaller end as we're showing. For the privilege, they're clearly willing to pay us a handsome premium for having the hassle removed from them. And you can see we're generating 103% net effective rental beats and Nick will go into this in more detail. We're generating cash flow beats of more than 70% compared to a ready-to-fit traditional basis. So it's clearly paying us to do the extra effort involved. It's going to create income and valuation growth for us, 195% net operating income growth by 2028. That's just from the spaces that we already own and are in the process of converting. And beyond that, we've clearly got strong ambitions for further growth. And we've previously said that we would like to get to 1 million feet in flex, and we'll do that through further acquisition. So lots to go for. We think it's a prerequisite for maximum returns, certainly from smaller London spaces, and that's essentially the summary of why we're in this business. Simon, would you like to talk about the market as we see it?

Yes. Thanks, Toby. Afternoon, everyone. I'm Simon Rowley, Director of Flex Workspaces. And as Toby mentioned, I've got a few minutes to give you a brief snapshot of the market, a reminder of our Flex products and the key themes and trends that we've been seeing in our leasing progress. So first to the market, and there are a few things here to pick out. The first is, as Toby mentioned, and as we outlined at our Capital Markets Day 4 years ago, Flex is becoming the default for how customers want to acquire smaller workspaces. And serviced office operator health is variable with WeWork fresh in people's minds landlords are naturally more cautious about leasing offices to operators, and that is impacting supply of new flex workspace at least in the short term. On the flip side of that, customers are far more discerning about the identity and health of their office provider, and we have already benefited from this in our leasing. In fact, that arbitrage model of serviced office operators trying to leverage long leases and sell short is less attractive for both of them and the property owners who increasingly recognize that flex is becoming mainstream. So we think you're likely to see more management agreements with more owner participation, which should lead to more valuation evidence and therefore, more trades with flex is a key component of an asset. And this, in turn, will lead to a more mature market in due course. And that maturing supply is going to be needed because demand is coming from more mature companies. As you can see from the stats on the right, the size of inquiries is growing. And now the majority of inquiries that we're seeing are for 20 to 50 desks, which corresponds to about 2,000 to 5,000 square feet, right in our sweet spot. And we have continued to attract interest, as Toby mentioned, from a wide range of sectors, as you can see from our stats bottom left, and those customers are seeking best-in-class space. And this plays into the GPE Flex portfolio. So as a reminder, our Flex portfolio is split into 3 products. The first is Fitted Space. This gives customers their own front door that's designed and delivered by us, business ready for them to move into straightaway. The second is Fully Managed Space that has all those benefits of the fitted space but GPE take care of everything right down to emptying the dishwasher, all contained in one simple bill. And then finally, the third one, is Flex Partnerships. This is operated by a partner typically targeting businesses with requirements for less than 10 desks, acting as an incubator for future GPE Fitted or Fully managed customers and providing overflow space for our ready to fit customers. And we partnered to deliver this final product because we are not a co-working business. We are not WeWork. What we concentrate on is providing whole floors and well-located, high-quality buildings across London that are designed, delivered and operated by a credible, reliable owner of that asset, and that is a huge differentiator in this market. As you can see from the pie at the bottom, we are majority focused on the fully managed product because it's where demand principally lies, and it's also where our greatest returns are generated. As you can see on the top left, flex leasing performance is strong. We're beating ERV by a healthy margin, and we are now averaging over GBP 200 per square foot for our fully managed lettings. Lettings, which as you can see from the table top right, are generating a net effective rental beat in excess of 100% and on an all-in cash flow basis, a beat of 76% to ready to fit. And things have continued in the same vein since the half year. We had a record level of inquiries in November, which preceded a high volume of fully managed lettings in December. And our occupancy is now at 95% with more space under offer at similarly high rents, and we're letting this quickly across all our major locations. St. James' to Mayfair, from Southwark to Soho. Attracting customers is one thing, but ask anyone in the flex market, and they will tell you that customer retention is key to the success. As you can see from the fully managed numbers in the stats top left, there is a strong alignment between our high Net Promoter Scores for fully managed spaces and our customer retention. And through retention, we've reduced friction and vacancy costs while also lowering our refresh CapEx spend. And as we grow, we think we're going to see benefits of GPE scale as customers are able to grow within clusters, and we are able to drive enhanced OpEx management, along with pricing power. We will access additional fit-out CapEx economies whilst also leveraging the Flex team capability that we've already established over the last 6 years in areas like design and delivery, operations and customer experience and leasing. And that's a clear barrier to entry for others in the market. As you can see at the bottom, with the new customers we are attracting, there are some familiar large institutions, not just SMEs, proving the point that Flex is becoming mainstream. Some of our long-standing ready-to-fit customers are also moving into flex, and retaining our existing customers, either in their current space or by moving them through their growth phases is a key focus for us. And Synthesia, who are highlighted just there, they're a very good example. Synthesia are an AI video generator. They joined us from the office group and within a year, had doubled in size. And so we moved them to our Kent House assets just up the road. They gained unicorn status in June last year and doubled their space again. Their rent roll has increased over 350% in the short time that they've been with us. It's yet another great example of the power of clustering. We want to create pockets of assets in prime locations, which can cater for customers' growth like this. And now to talk about our own growth opportunities, I'll hand over to Nick.

Thank you, Simon. Good afternoon, everyone. A bit like Synthesia who are growing. We are growing, too. And as we've stated previously, we are looking to grow our Flex footprint from just over 400,000 square foot today to north of 1 million square feet in the medium term. As Simon has touched on, not only will this deliver economies of scale for us and put us in the top 5 of London providers, the route for us to get there will be through creating 5 or 6 key clusters across Central London, ideally with 3 or 4 properties in each cluster, which will give our customers the opportunity to grow with us and achieve their optimal scale in the same micro location. So how are we going to deliver this growth to 1 million square feet? Combination of targeted disciplined acquisitions, which I'll come back to shortly, and through organic growth as we invest in and convert existing GPE properties. As you can see bottom left, we have about GBP 171 million of CapEx to invest over the coming years, predominantly into West End fully managed space. This will help us grow flex to nearly 650,000 square feet by 2028, which you can see top right. You can also see the bulk of this growth is for our fully managed spaces, shown in purple. Today, it's 189,000 square feet which will rise to just under 400,000 square feet. And as Simon explained, this is the most profitable part of the market. So turning to the next slide. The organic growth of our footprint will deliver both income and value growth. And I'll slowly walk you through how focusing on our fully managed offer. As the pie chart shows in purple, our fully managed offer already represents the largest proportion of our flex offer. And as the bar chart shows, the 75,000 square foot of currently let fully managed space, is delivering GBP 13 million of annualized rents or GBP 7 million of NOI post OpEx. And you'll see in the foot list the breakdown of this OpEx with rents being the largest operating cost followed by cleaning services and our provision of customer amenity and catering. Once our space that is currently under refurbishment is delivered by 2025, our fully managed rent roll will rise to GBP 32 million and our NOI to GBP 17 million. And by 2028, when our fully managed footprint will be 381,000 square feet and representing more than 20% of our office portfolio, these spaces will be delivering GBP 70 million of rent roll and GBP 36 million of NOI, a nearly 200% increase on the current net income from the space. And that's based on today's ERVs, which we expect will materially grow and of course, before we factor in any further acquisitions. As you can see on the right, this NOI of GBP 36 million is way ahead of the rent achievable on a ready to fit basis and will deliver a beat to fitted rents of GBP 7 million effectively our services profit. And based on the value as cap rate of 8.5%, this service profit would deliver additional value of more than GBP 200 per square foot, a material incremental uplift when you remember the capital value of our portfolio averaged just over GBP 1,000 per square foot. So lots of organic growth for us to capture, and I expect we'll deliver even more through acquisitions. As you can see on the next slide, we have clear acquisition criteria along 3 key themes. Firstly, location. We're targeting amenity-rich locations with excellent transport links. And as I mentioned, we're looking to create a number of clusters in markets in which we already operate, and we're seeing strongest customer demand. There are 3 Westend clusters in Fitzrovia, Soho and Mayfair, St. James's, plus clusters in the suburb around London Bridge Train Station and in Midtown around Farringdon, Elizabeth Line Station and potentially in the future around Liverpool Street 2. The second theme, we're targeting mid-scale buildings of 30,000 to 60,000 square feet with divisible floor plates and where through judicious investments, we can offer best-in-class indoor and outdoor immunity space. And thirdly, and perhaps most importantly, we won acquisitions priced at levels from which we can deliver attractive financial returns, both ahead of our cost of capital of the mid-8s and with a 6% plus stabilized income yield. Over the next couple of slides, I'll show you 2 acquisitions made in the last couple of years. Both of these acquisitions were fully managed. Both of them were purchased off-market, both hit our acquisition criteria, both were purchased with VP and strip-out ready for refurbishments and both are set to deliver attractive financial returns. So starting with St. Andrew Street. It's a great location, opposite Goldman's HQ and a short walk to Farringdon Station. It's currently on site, and we're enhancing the building through the addition of 2 extra floors. We're on track for completion later this year, targeting total NOI of just under GBP 5 million and expected to deliver a profit on cost of 15% and a yield on cost of 6.5%. Turning to 141 Wardour Street in the heart of Soho. It's around the corner from Dufour's Place, our first fully managed building, which many of you have seen, and too many walk to the Titan Court Road Elizabeth Line station. Having bought it for GBP 39 million last year, we committed last month, as Toby mentioned, to a full refurb including rooftop space and indoor immunity. We expect the building to deliver more than $3.5 million of NOI a profit on cost of nearly 20% and a yield on cost of more than 6.5%. So, attractive expected financial returns. And as we commented in our recent trading update, we are seeing early indications that further attractive acquisition opportunities will emerge as the year unfolds. Now back to Toby to wrap up before opening to Q&A.

Thank you, Nick, and thank you, Simon, as well. And just some summary points then to bring it all together. Firstly, our positioning, we think, is very strong. We have a flex product that we think is going to deliver maximum returns from smaller spaces. You sort of need to be doing what we're doing if you're going to get anywhere near maximizing returns. And what we are doing is almost unique. There's virtually nobody else who is taking the line that we are taking in flex spaces. And the barrier to entry is, in fact, higher than most people would imagine. And we, of course, have been working on this for a number of years. and have put the infrastructure in place to allow us to maximize returns. We think there will be some synergies with our HQ repositioning activities. I wouldn't be at all surprised to see flex space is emerging in some of our larger buildings as well as it becomes more established as an offer. But even if it doesn't, the market in smaller buildings is growing, and we are seeing a widening customer base as well. So plenty to [ wane ] for there. We're delivering income growth, 195% before we buy anything, as Nick described. We think it will add to value. We suspect the values of being perhaps appropriately cautious in the yield that they're applying to the -- as we described, services income to generate that GBP 200 a foot. And over time, as it becomes more normalized, it would be a fair assumption to make that, that yield comes down. And as we add through acquisition, we're shooting for 1 million feet. Again, over time, I wouldn't be at all surprised to see us increase that, but let's see how we go over the next couple of years. And as Nick has described, and Simon has showed us, we've got plenty of organic opportunity for us to dig into certainly between now and 2028. So I hope that was helpful. We've now got a good amount of time for any questions you'd like to ask us. Max, I think you're going to be our capable compare, if I'm not right.

I'm going to try my best. [Operator Instructions] And maybe just talk a little bit because we had a few questions just talking around the sort of barriers to entry. And I think you talked a little bit about you do expect to see more of these management agreements. I have a question here saying how big is the moat? Will it naturally erode as landlords across the sector increased service levels and customers treat it as an expectation, not an additional service. So maybe you could just talk a little bit more about how you see that evolving?

Well, let me just give an overview and then perhaps Simon, you might want to touch on who you're seeing coming into the market a little bit. I mean I think if you look at the yields that Nick referenced of 6-plus percent for -- post all of our OpEx in these various buildings, whilst we're making a handsome return, I'm not sure there's an enormous amount of erosion that we should expect because it clearly is higher risk than a traditional 10-year lease and it requires higher management effort and input from us. And it requires greater and better management of supply chains and so on. So 6.5% relative to a prime West End yield in the fall today, feels like a handsome margin. But I'm not sure we'd want to see it eroded too much from that. Firstly. Secondly there are very few organizations at the minute who are capable of doing what we're doing. It isn't as easy as just turning up and having a go, bluntly. Because I think you need to build track record and you need to build capability and that takes time. You need to build customer trust, and that takes time. And there are very few organizations anyway who built customer trust in traditional forms of real estate. And you can see that from the difference between the Net Promoter Score we've been delivering at 44 across the whole organization and an industry average of 3.8. And as you know, in our fully managed basis, it's north of 60%. So it isn't easy just -- you can't simply turn up and assume you're going to be able to deliver. But Simon, who are we -- I mean, are we seeing lots of organizations try this?

No. I mean, principally, obviously, Landsec and British Land have got what I would call a serviced office operation in both Myo and Storey, respectively, where they are chopping up large floors and letting them to smaller companies who share communal spaces so it's not what we are providing. As I mentioned earlier, it's -- we are providing whole floors, which ostensibly look like our customers' own space. It's just that we've taken all that hassle away. I think in the future, we have to expect that others will do this. It will be proof of our conviction in this market. And it's also frankly, what they will need to do to access customers. That's what you mentioned earlier. But I think they will predominantly have to do it through third party. So partnering with people, that is starting to take place. They do not have necessarily the scale of portfolio, the time or the team to manage that. And you're absolutely right, Toby, about the trust part of this. A lot of our customers are represented by brokers. And brokers like to do business with companies they can trust and that they know can operate at the speed that they and their customers expect. And that is not something you can just switch on overnight. So I do think there will be more, but I think they will find it hard to break through that barrier. And just on the other point about affordability and the erosion, I think the much of the fully managed rent is actually taken up by cost that the customer has to bear anyway. So you think about business rates and things like that, but also CapEx, which actually we can deliver more effectively. So we amortized CapEx over 10 years as opposed to the 2- or 3-year term that our customers are taking. So -- and that's even before the opportunity cost that you were alluding to in terms of taking away that hassle. Far better for our customers to concentrate on their own business rather than dealing with 15 contracts to run an office. So I think like you that, that margin is fairly well protected.

The other thing I would add just pick up on one of Toby's closing comments about the synergies with HQ repositioning, which we absolutely think are real. The other thing that we have relative to some of the other operators is that, yes, we have some dedicated personnel and overhead cost associated with this. But it's already sub GBP 10 per square foot, which many other operators can't get anywhere near because they don't have the broader platform to leverage off. So we leverage -- we don't have a separate team delivering sustainability for our flex offer. We have a separate team on the marketing side. We're going to have a separate team on the HR side. So the synergies at HQ are real as well. Now clearly, there's a cost associated with this, but as you see in the analysis that I showed -- we go back to -- if you go back to Slide 14, where we've showed the comparison in the NOI versus the ready to fit. If you look at that on a per square foot basis, you're broadly GBP 94 per square foot fully managed NOI versus GBP 66 per square foot on a ready to fit NOI. And we think there's about GBP 10 per square foot of admin that in addition that you're incurring because they're still a nearly GBP 20 per square foot of margin that you're taking even once you factor into the additional overhead that we have. And that is way lower than our peers would have unless they've already achieved very material scale and there aren't many that have that.

It's not -- can I just also add, I think, Simon, I remember you telling me that our quickest start to finish letting in fully managed was 3 days. if I remember right. And that is not something that you do unless you're set out to do it. It's really -- that's a tough ask to be able to satisfy our customer really properly and get it done in such a short window. But it speaks volumes about when you do have the right setup and the right infrastructure and the ability to trade quickly, how valuable it is.

Certainly, I think you've answered quite a few other questions within that there, questions around the cost base that this is going to carry and I think you talked a bit about your results as well. in terms of -- you've scaled this up already so you're in the position to go on that. One of the question was around kind of capacity to grow inorganically from here given you're also still making acquisitions on the HQ side, and we obviously saw that with Soho Square and that traditional questions around where do you get to an LTV if you're still buying on both sides here, on the flex side and on the traditional HQ side.

Well, what I'd say, Max, it all depends how much you buy, how quickly and how you fund it, and that's even before you start overlaying recycling, which is pretty core to our model. So I think what I would say is to reiterate our 10% to 35% through the cycle leverage range. Clearly, we've guided that in the very short term, we would expect LTV to tick up a little bit from where it was when we last reported because of the investment that we're making in our portfolio. But over time, I don't think we'll be materially changing our leverage targets. And one of the reasons is, and we've always run with low leverage because we run with quite a lot of operational risks in the business. I think it's fair to say, yes, there's some more operational capacity and activity that you need to deliver on the flex side but I think the level of operational risk that you're taking is lower than in our development business. So particularly when you factor in, of course, we're doing these lettings on a fully managed basis on 2 years, which are never going to match a 15-year deal to a KKR or Glencore maybe, but it's not that dissimilar to what you would get on smaller spaces. And as Simon ran you through, one of the reasons we're investing so heavily and to ensure our customers have a great experience. So they stay with us. And that's why that Net Promoter Score is so key because that will feed into customer retention. And that customer retention does 2 really, really important things. One, you see the benefits, there are no friction costs, no, vacancy costs, lower refurb. All of those things are really valuable. But the other thing is to keep the customer and you're able to capture the rental reversion much more quickly than you would do on a traditional lease basis, you can really drive your income returns more aggressively in the short term.

Yes. I think, Nick, just to add to that, the -- we've got under offer this week on space in Soho at a rent which is over 40% higher than the rent passing. So the rent that we've just enjoyed for the last 2 years. So you're right, that ability to mark back to the market faster is actually a real benefit.

And Max, the other thing I would say is that we are really excited by the prospects here of building our offer in Central London because the demand for that offer is, as Simon has just illustrated, the demand for that offer is running really strong. And however, we're never going to go and put this business into place in a position where were squeezed from a leverage perspective. Nick mentioned our rotating business model, and that won't change either. And we've got enough, as you know, coming out of the ground in our ready to fit HQ product over the next 4 or 5 years, which will give us plenty of really high-quality assets that typically we would look to move on once the forward return has dropped to a level that isn't productive for us. And so that won't change at all. And that will be a key source of financing for some of the growth that we hope we will find in the flex space. And I really hope we can do more Wardour Streets because as you guys will see when we finish it and you can come and have a look. It's a fantastic product, and I'd love for us to do more of that.

Absolutely. And I've got a few questions coming in around flex partnerships that you kind of touched on there. Perhaps you could clearly kind of go through that in a little bit more depth what's the average rent for the Flex partnership versus part of the other portfolio, how do the revenue share agreements, this kind of thing. So a little bit more detail on that would be great, if you can.

Simon, do you want to have a go with that?

Yes, no problem. So at the moment, we've got 2 partnerships in place. They're both with a company called Runway East. And the one that we put into the Hickman, which was our new development in White Chapel was very much on the basis of looking to add amenity to the building. And as such, we entered into a revenue share agreement with them there. So they, through the revenue cover the operational costs, and then we receive revenue in lieu of rent and then we share upside to ensure that they are incentivized to push through and to generate rents which will ultimately be beyond the ERV of that space. We see that as not only a driver of revenue, but also, as I mentioned, it's an amenity for the whole building. We've got Flex direct flex customers of our own in that building, who when they need more space, have it on tap directly beneath them. But it's also an ability, as I mentioned earlier, to have an incubator to actually try and capture some of the customers who as they grow out of Runway East have an immediate place to stop in and that's where we can capture them.

Can I ask on the average rent in that, do you have a figure for what that would be? I assume it's obviously different in the building.

But we can come back certainly with further detail. But the rent that I mentioned that we capture after operational costs is at about 80% of the which then gives us something to go forth with the froth that comes through beyond that. So that's kind of roughly how it is. But if we need more details, certainly, we can follow up.

No, that's great. That's really helpful. Yes, still getting quite a few questions in that hopefully some saying you need to do more is 1 million square feet is not a lot of the overall London market share based on CBRE's forecast. What does GPE think its market share will be in 2028 in its chosen clusters?

That's an unanswerable question because it depends on what happens to the denominator, I would suggest. I mean, I think the related but perhaps more valuable question might be what do we think of our existing infrastructure, we could end up managing. We've gone for 1 million because we felt that, that was a sizable target for us to aim at. I would think we've got an infrastructure in place already that will handle 1 million and probably could handle more than 1 million. But we aren't going to add to that to our portfolio of particularly fully managed offers unless we think the buildings are good enough in the right locations and are capable of being converted to the quality that we think you need -- you're going to need to have to persuade customers to come and pay the sort of rates that we have thus far pursued them to pay. And that's a theme that GPE has always lived by, looking for quality, focusing on the spaces that are going to work best. And I couldn't -- I'm not sure I could tell you yet what the endgame of that looks like for us. But I would hope we will, over time, grow it to beyond 1 million, but we've just set ourselves what felt to be an ambitious target a few years back or last year, and that's what we're going to hit. Nick?

The only thing I was going to add is, look, well, generally, we have 1.5% market share across our broader business, and that's partly because we don't want to be in every bit of the market. And the way we came to the 1 million square feet was through a number of drivers, one of them being when we really felt you get the economies of scale. But the other one was, as I said earlier, because initially, we're really in a focus on 5 clusters. We may well broaden that over time. And in each cluster, we want to have 3 or 4 buildings. And as we've described, each building to where between 30,000 to 60,000 square feet. Over time, that will evolve that will enable, but it will be very much driven by where the strongest customer demand is. The other thing to bear in mind is your ability to drive margin is easier in a higher per square foot rental area because your OpEx doesn't delta that much across Central London. Clearly, the rate element will do but the cost of the fit-out of the amenity provision, the power doesn't really move very much where we are. But also I think the propensity for customers to pay a bigger overall rent per square foot it's easy when they know that on a more traditional basis, it's going to be pretty high anyway. But I also -- I'm pretty confident that the numbers that we showed you in terms of how our NOI grows over time are on the prudent side because one of the things that if you look to what we've shown is that there is no real change in the margin that we're assuming on the next slide on here. And I would hope that over time, that split of rent roll effects between NOI and OpEx will improve to the benefit of NOI because we'll start to get some real synergies through on the OpEx side. But we felt it was premature to be modeling that versus -- and equally, as I said earlier, this is all based off today's rents, and we think there's going to be good ERV growth in this segment of the market, particularly the markets in which we're operating.

But only you're absolutely right, but only you're only going to get real NOI growth as in like-for-like NOI growth if you're in the right quality of buildings. And the one thing we simply will not do is make the mistakes that some of the co-working players have made. And as Simon said, we're not doing coworking for one of them, many reasons being it doesn't make -- we don't think it makes enough margin. But the mistakes that some of those guys made was they just bought assets and spaces that were never of good enough quality, and we will not do that. There are a bunch of players out there you could buy tomorrow if you wanted to. If you wanted to go for volume growth as quickly as possible. That is in our business, nor will it ever be. And we will keep that discipline of focusing on quality where the underwrite is really believable and from which you can grow.

And just related to that, that NOI point and how that drops through to EPS, I have a couple of questions coming in around how should we be thinking about GP, perhaps more in the longer term when you are up at 1 million square feet in terms of this capital versus income split? Should we expect that this will be a bit more of a balanced model in that it would be a bit more capital and income rather than more focus on the capital side that you have been traditionally associated with? So maybe that's one for Nick, perhaps.

I think the answer to that, Max, is yes. I mean the game plan is to remain a total return play, which we think is the right way to operate in Central London, particularly given where yields are. But I do think that over time, we will have a slightly higher proportion of that return coming through in the form of income. And I think one of the reasons you're not seeing it yet come through in the P&L. Simply, as you can see on this slide at the moment, we only have 75,000 square foot of up and running fully managed space. That will grow aggressively. But to get to that growth, you need to take existing income out and you need to invest in the portfolio to get there. But I think over time, yes, there will be. A higher proportion of the return coming through the income side. But we're not going to turn into an income stock because we just don't think you'll be able to deliver our cost of capital purely on income alone.

A question from -- on the cap rate applied that I think Toby is mentioning, the 8.5%. Do you think valuers and importantly, investors, will ever fairly reflect the income upside in asset values? Will a failure to do so make these assets ultimately more difficult to trade?

Well, if you take the view that the idea that smaller spaces, in particular it will become the norm even more than the 57% already than it is. It will become the norm that this is the basis upon which they are leased. Then you should find over time that, that basis of leasing finds its way into the investment market because assets will trade where they have this form of income within them. And once you start to get evidence of them trading and investors get themselves comfortable that a fully managed contract does not equal vacancy risk every 10 minutes, but actually is rather more solid, rather like a hotel business, then there's no reason why that margin of basically 100% difference between a long-dated cash flow and a fully managed cash flow doesn't narrow. And however, we're not underwriting that. We never have. And so it's not in our assumptions as at the minute. But it wouldn't surprise me if over time, it doesn't narrow once an evidence starts to build, and that evidence will inevitably build as fully managed contracts, find their way into more and more buildings.

I read a question around the tenant base, and it's actually I've got a couple here that hopefully kind of tackling together. What size client and tenant do you target, SMEs or larger operators? And kind of associated with that, how much are you like or not like workspace? It's a direct one for you.

Simon, was this your slide?

Well, yes, this is my slide. So in terms of who we're targeting, I think, Steve, we could also go to the logos of who we've recently attracted because I think the answer to the question is that we've got a broad spectrum of space. It's in different markets. and therefore, it will attract different types of customers. And so Piccadilly, where we've got a number of fully managed units has unsurprisingly been attracting quite a lot of the financial services markets. they are finding their way into our Soho assets as well and some in Fitzrovia. And it's no surprise, therefore, that you can see people like Morgan Stanley and Aggreko amongst our customer base. Where we are providing space down in Will Yard, which is in Southwark is where you find that we've got recruitment companies and various other companies who are slightly smaller, but even in Will Yard, just one asset. We've got units of 500 square feet up to units of 5,000 square feet. So you've got a broad range of sizes. Our largest flex customer at the moment is over 20,000 square feet. And we've said for quite some time that it stands to reason that customers will expect the property owners and providers of office space to do more. And so people like -- also Godard have taken HQ space in the city on a turnkey basis. So I don't think there's necessarily a size limit. And in terms of the lease lengths that really can change. You've got quite a lot of corporates in fairly short leases and WeWork, for instance, have got HSBC down on York Road as an example. So we don't particularly target a very specific size or sector. It's really very much specific to the nature of each asset.

That makes sense. And in terms of that range there, maybe just a little bit on that on the -- going up to size 20,000 square feet, how do you think about that trade-off in terms of lease length to the size of the floor plate that they're taking? Is -- have you got a simple formula for that? Or do you -- is it on an individual case by case?

It's a case-by-case basis. But as Nick mentioned earlier, there is some incentive for us with this Flex product to not go for particularly long leases because it gives us opportunities to mark-to-market all of our fully managed leases contain an ability for us to reprice if there is a valuation, a ratable valuation change. but it also provides escalation in the rents, which is on the gross rent, which covers us for inflationary rises in utility costs and things like that. So we could go long on the leases, but actually shorter leases so far in this market has actually suited us very well.

So I guess just sticking with that, I guess, the flip side, of course, is that if things turn, you get 20,000 square feet walking out the door quite quickly on quite a short-term lease, that's obviously a bigger risk as well. So just, I guess, in terms of how you think of it that way?

I think -- I mean we've talked internally about how does Flex perform in recessionary environment. And the truth is that in those kind of environments, people are likely to want capital-light entry to space. They'll want shorter, more flexible leases and therefore, you'll probably find that this kind of space lets faster than conventional ready to fit space. And so I don't think that is a significant concern to us. It's also worth remembering.

But the customer in question has been a customer of ours since 2009, if I remember early, the 20,000-foot customers. So the -- and Nick mentioned as well, I think a retention rate that's running in the 70s or 80s at the minute for our fully managed customers. So whilst the lease contracts may be 2 to 3 years, they are -- that is broadly something around 50% to 60% of what they would have traditionally been because these are not spaces that would have had 15-year leases, they would traditionally have been around 5 years. So they are shorter, but not materially shorter. In practice, actually, these customers are staying with us on average for a lot longer than the lease duration in the contract.

Good stuff. Great. Well, I think in the interest of time and we'll maybe move towards the last couple of questions. I have maybe a quick one. Who are the other players in this space and who will be doing the transactions that will give the valuers, the evidence they need to reduce those cap rates?

Good question. Simon?

So we -- historically, we would have kind of thought of our peers amongst a fairly sort of small group of HQ developers. Our peers very much now are the likes of Fora, who obviously merged with the office group not that long ago. A couple of the other REITs that I've mentioned who are able to deliver at scale to quality. And I think those we see very much more as our principal competition for this kind of space now.

The only thing I would add to that, I mean, you're not -- I think that's right, but I do think their product is different to the product that we offer. So if you look at our direct peers and what they've done in the flex space, they've typically played in the co-working arena. We aren't doing that. We're going to be leasing space by the floor. We're not going to be doing it by the room and we're not going to be doing it by the desk. So we're really going to be leasing it in the same configuration of the size of units is very similar to that, that we've always leased. It's simply that we're providing more for the customer than we used to, and they're paying us handsomely for that. And as I say, we're just not going to get into co-working because all of the evidence to us suggests that it actually is a risk-reward balance that is in balance and doesn't work.

Absolutely. And Okay, well, I think we have broadly answered most of the questions there. I'm just a lot of questions asking, will the slides be available? I'm fairly confident.

They're already are.

They're already there. And as I said at the beginning, the recording will be up on the website as soon as we can get that turned around as well. Maybe just leaves me to say thank you very much indeed to the GPE team and for everyone who joined the call today. It's been really, really interesting, fascinating to learn more about this. and we really appreciate your time. Maybe any last words to you guys, but just to thank you from me.

Of course, Max, thank you for hosting so well and everybody for joining. Hope you have a wonderful weekend. And as you reflect on what we told you this evening, just remember this, this is a growing market. We've got a great position in this growing market. We're going to stick to our knitting of Central London. We think there's good money in it, as we have been showing you already because the leasing is working as strongly as it is and we're looking to the future with a lot of confidence around this and expect to hear more for us over the next 6 or so months.

Excellent. Thank you very much indeed. Have a great weekend, everyone. Thank you.

Bye-bye.