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

Goodness me, you're prompt. That's brilliant. Well done. Thank you very much, everybody, for coming along this morning, and welcome to our annual results presentation. Great to see you. As ever, we've got an enormous amount to get through, so let's get straight into it. And as you will have seen, we announced earlier today a fully underwritten rights issue to take advantage of what we see as an exciting market opportunity to accelerate our growth. So in a minute, I'll explain why we think our timing is right to be buying and not selling. I'll give you an overview of the compelling investment opportunities we're working on, explain how this rights issue fits with our established raise and return strategy and how it will help us deliver long-term income and value growth. Nick will then provide more detail on the capital raise, look at the full year results and give you an update on all of our Flex operations before I summarize our development activities and finish with our outlook. We'll then, of course, open it up to you, and I'll have the full team on hand to help answer any questions that you have. And I think there's a website on the page for those not here. So turning first then to the key messages from our results, and this has been another strong operational performance with more excellent leasing as customers seek out the best spaces in the face of an increasingly severe shortage. We signed GBP 22.5 million at a 9.1% premium to March '23 ERVs, and that's the highest beat for 12 years, with offices the outstanding performer at 11.9% ahead. And we have another GBP 4.8 million under offer today at a 4% premium to the March '24 ERV. Meanwhile, our rental values were up 3.8% over the year, 5.2% across our fully managed spaces and 5.8% across our long-dated assets, and that's in the top half of our November '23 forecast range. Now we leased less than last year because we had less vacant space. And today, we are effectively fully let with our vacancy rate at only 1.3%. Our Flex growth remains on target. We added more than 100,000 feet during the year, taking us over 500,000 feet. Our customer-centric approach has delivered another industry-leading Net Promoter Score or NPS, and our retention rate remains high at 83%. We started 2 new HQ developments into a supply drought set to deliver attractive returns of an average 21% profit on cost and an ungeared IRR of 13%, meaning we now have 3 schemes on site covering 0.5 million feet. And we've been a net buyer of new opportunities for the first time since 2013 as we've unearthed value triggered by higher rates, that's GBP 152 million bought since March '23 at an average discount to replacement cost of a full 42%. Not surprisingly, those same higher rates have forced yields up and pushed our property valuations down 12.1% over the year, but at a much reduced rate in the second half of 2.4%. Consequently, NAV was down to 624p per share, in line with consensus. And whilst rent roll was up, higher interest costs pushed earnings down to GBP 17.9 million. LTV stood within our target range at 32.6%, and our balance sheet remains strong. As you know, we watch conditions in our markets very closely. You will remember at our interims in November, we talked about the tighter monetary environment triggering the return of the cycle. And 6 months later, we think these macroeconomic changes are delivering us an attractive market opportunity. Central London offices are now trading near 2009 real capital values as investment markets have been heavily disrupted. We know that the severe supply shortage of quality space will drive real rental growth, and we've identified an increasing pipeline of accretive opportunities today at around GBP 1.4 billion. And so we have this morning launched a fully underwritten GBP 350 million rights issue to enable us to take full advantage. We're targeting attractive prospective returns and helping the group to deliver more than 10% per annum based on prudent assumptions and before any yield compression. And we think we are well positioned to deliver with our deeply experienced team. The 3 EDs alone have more than 92 years of London real estate investing and developing between them and supported, of course, by our best-in-class operational teams. So before we look at the GBP 350 million capital raise to accelerate our growth, a quick word on our clear strategy, which has delivered a long and successful track record of contracyclical investment and divestment. You'll remember the main pillars set out on the left. We remain strong believers in London. Its GVA is expected to outperform the wider U.K. as it has for many years, and its current business activity, PMI is both positive and well ahead of the U.K. overall. Our model is built on repositioning properties, both HQ and Flex to create the best spaces, providing for customers' changing needs, and we've delivered 2.4 million square feet since '09, generating an average 22% profit on cost. And today, we're creating new returns through our Flex operations with big ambitions to grow from here. We will always put customers first. Our massive NPS beat shows it works. And our focus on sustainability remains an imperative as we lead through our circular economy innovations. We'll always run low leverage and we'll always maintain discipline in our capital management, matching risk to the cycle, raising and returning equity in tune with accretive investment and divestment opportunities. So as you can see from the chart at the bottom, we raised a total of GBP 304 million in weaker markets, allowing us to buy well in the early years of the last cycle, investing GBP 1.6 billion, delivering business plans before making GBP 3.2 billion of profitable sales in much stronger markets and returning GBP 616 million of excess capital back to shareholders and in the process generating strong returns. And as you can see on the right of the chart, real capital values, as shown by the gray line, have fallen materially over the past years and are now, we believe, at or around the market trough. As a result, we've turned net buyer once more, as shown by the purple bar, above the line for the first time since 2013. And of course, having completed our asset sales in much stronger markets, we will return to disposals once investment markets recover. So let's turn then and look at this opportunity in more detail and answer the question, why raise now? Well, the first reason is that investment markets are heavily disrupted following both a significant yield and, therefore, value correction. In fact, as you can see top left, real capital values are now pretty much in line with 2009 values, down some 58% since the 2016 peak. Even in Mayfair and St. James's shown top right, real values per foot are almost 40% down. And you can see why bottom left as yields have corrected aggressively in the face of rising interest rates. All of this has not surprisingly fed into the investment market shown bottom right, where turnover for the past 12 months was below 2009 levels and some 68% down on the post COVID peak in 2022. Plus, shown on the table, equity looking to buy is way down from a peak of GBP 41 billion in 2021 to stand at GBP 19 billion today. Meanwhile, however, the opportunity in Central London occupational markets continues to grow, and we think best rents are set to rise strongly. Shown top left, whilst take-up is in line with the long-term average, both space under offer and active demand from companies looking to move in the next 12 months are up, particularly demand. And many of these businesses will struggle to find the space they need. As you can see top right, the West End prime vacancy is only 1.1%. Even the average West End rate is 4.7% lower than all other principal European cities and less than 1/3 the rate in Manhattan. We also know that the supply side is not going to loosen up anytime soon. Bottom left, you can see our projections shown by the bars with CBRE's estimate of the total that could be built, shown by the diamonds. And notice that for 2025 and '26, they've moved dramatically in our direction since the November '23 survey. And with planning as difficult as we have ever seen it, we think only 3 million square feet of speculative space will be delivered each year over the next 4 years against a new space take-up average of 4.9 million feet per annum. So to meet that demand, we need to build 60-plus percent more new space than we are every year, and there is literally no chance of that happening, which, of course, means that rents will continue to rise in prime spaces as shown on the right. And we think, given the demand/supply imbalance I talked about earlier, they'll rise by more than Savills are suggesting here. Either way, these conditions play to our positioning with our high West End weighting and 93% of our properties near the Elizabeth line. And remember, Central London rents remain structurally affordable at only 5% to 10% of the average London business's salary costs, down from circa 40% in 1974. So bringing these market thoughts together, we think the timing is right to capture this opportunity. For rents on the left, conditions have strengthened since November, as you can see from our traffic lights. And for our own portfolio shown at the bottom, we delivered rental value growth in the top half of our forecast for last year and have upgraded our guidance for the year to March '25. Offices overall up between 4% to 6% with prime 5% to 10%. Retail rents will also be up by between 1% and 5%, meaning the portfolio overall should see growth of between 3% and 6%. For yields shown on the right, the weight of money looking to buy is now the only red. But as you can see at the bottom, with yields having stabilized and the expectation that interest rates will fall later this year, we think the prospect for yield compression has increased, particularly for the best assets. So within the context of disrupted investment markets and positive leasing market dynamics, let's turn and look at some of the compelling acquisition opportunities we've identified and starting with a quick reminder of what it is we're looking for. For Flex, shown on the left, our criteria are well-defined and focused on 5 main central clusters around our existing holdings. 30,000 to 60,000 square foot buildings with divisible floorplates to create units of 2,000 to 6,000 feet with the potential for a great ground floor entrance experience and more from Nick in a minute, but we're targeting a minimum 6% stabilized yield with big cash flow and net premia beats to a traditional Ready to Fit model. For HQ, no change to our tried and our tested formula, looking for time-expired buildings in great locations where we can add square footage and buying off discounts to replacement costs and totally repricing rents. And here, we're targeting big development yield premia and healthy ungeared IRRs. And as we scour the market across Central London, our conviction is growing on the opportunity opening up. Bottom left, vendors' aspirations are softening. In the 12 months to May '23, only 6% of the deals that we tracked traded at prices representing fair value in our view. Jump forward to the 12 months just ended and 6% has grown to 31%. 5 deals in total, and we bought 4 of them, GBP 152 million at an average of a 42% discount to replacement costs. And as we think about what next, you can see bottom right that there has been a sharp increase over the past year in the targets we have under review now GBP 1.4 billion, 96% off-market and equally split between HQ and Flex. So let's look at these opportunities in a bit more detail. And in the table, top left, we've broken them down into an A list, a B list and a watch list. As are opportunities where we have good information and a reasonable chance of securing a deal at a sensible price, with Bs being less clear at this stage and the watch list being assets we're tracking closely and to which we've already applied a quality and a strategy fit filter. Taking the As and the Bs together, we're working on 27 deals with a face value of about GBP 1.4 billion before CapEx, 8 are As, which including CapEx totaled some GBP 735 million to which we've then applied a deal probability weighting to give GBP 350 million, include the weighted Bs and we're at more than GBP 600 million, all in line with the acquisition criteria that I outlined earlier. And here, you can see the breakdown of where these opportunities lie. 74% in the West End and Midtown, evenly split between HQ and Flex across the 27, although in the West End, 71% are Flex versus only 5% in the City. And digging into the As a bit further, within the GBP 350 million are 3 likely near-term acquisitions, GBP 250 million face value, including CapEx or around GBP 170 million probability weighted, majority in the West End, all of them off-market, all adjacent to existing holdings and all Flex. And of these 3, last month, we exchanged contracts to buy the Courtyard on Tottenham Court Road shown here as a fantastic Flex opportunity in one of our key West End clusters. As part of a property swap with the City Corporation, we bought the Courtyard for GBP 28.6 million or GBP 462 per foot and an almost 70% discount to replacement cost. We sold 95/96 New Bond Street, a stand-alone period retail and office building for GBP 18.2 million or more than GBP 2,000 a foot and in line with book value. Having entered into a new 155-year headlease with the City at a peppercorn, our plan is to invest circa GBP 62 million to convert the existing sustainability stranded buildings into a best-in-class fully amenitized Flex campus, fronting onto the pedestrianized and landscaped Alfred Place and opposite our existing holdings on the street. Our underwriting is conservative, but even so, we'll deliver attractive returns with the development yield substantially ahead of our required hurdle. We've also recently acquired our freehold Soho Square site, adding a substantial opportunity to our HQ development pipeline. Bought off-market for GBP 70 million at a 27% discount to replacement cost. We will demolish most of the existing time-expired buildings and build back circa 100,000 feet via the inherited planning permission, which we are in the process of improving. CapEx of circa GBP 106 million will deliver a best-in-class office and retail building with an expected start in Q1 2025 and aiming to beat our underwrite of a 21% profit on cost, again, conservatively based on current rents and yields. So plenty of opportunity, both organic and new business for us to dig into with supportive market dynamics and over now to Nick to hear more about the rights issue.

Thank you, Toby, and good morning, everyone. So as you've heard, we've identified an attractive new opportunity set and the rights issue will allow us to deliver further long-term value and income growth, including an additional GBP 55 million of near-term development surpluses to give total surpluses of GBP 175 million as we grow our well-timed CapEx program and deliver more than 800,000 square feet of prime sustainable space into a supply starved market. These surpluses include GBP 69 million from the schemes that we were committed to back in November. Since then, we've committed to 3 further schemes, including our HQ project at Minerva House and 2 Flex schemes, which will together add GBP 51 million of surpluses. And with today's rights issue, we expect to commit GBP 168 million of further CapEx on our 2 recent West End acquisitions, which should conservatively deliver another GBP 55 million of surpluses. This gives a total near-term CapEx program of GBP 666 million with total expected surpluses of GBP 175 million, and that's before factoring in any further schemes. And you'll find the usual scheme-by-scheme CapEx timing profiles in the appendices. The rights issue will also accelerate NOI growth to more than GBP 75 million from our fully managed Flex offer. Today, our committed fully managed spaces generate GBP 9 million of annualized NOI, which will rise to GBP 27 million once all these spaces are delivered and customer occupancy has stabilized. Our existing organic pipeline of further upcoming conversions will add GBP 10 million. And as we invest the proceeds of the rights issue, we will add around GBP 14 million of NOI, including GBP 5 million at the Courtyard. And once we've delivered our current ambition for our fully managed spaces to represent more than 75% of our targeted total Flex footprint of 1 million square feet. They'll be generating NOI of GBP 76 million, an uplift of 7x today's level. And as you can see on the right, this NOI is way ahead of what we generate on either a Ready to Fit or Fitted basis, and the expected service profit of GBP 13 million per annum will deliver significant incremental value of around GBP 150 million based on the value as 8.5% cap rate. Now pulling this all together to show the group's significant rent roll growth opportunity. Our rent roll today is GBP 107.5 million and our existing business plans should almost double this to more than GBP 210 million, including another GBP 49 million from current onsite HQ schemes and GBP 27 million from current Flex projects. Today's equity raising will advance things further, with our Soho Square scheme adding GBP 12 million and the anticipated rights issue funded Flex acquisitions and conversions should deliver nearly GBP 27 million of gross rent roll or GBP 14 million of post OpEx NOI. This is based on an assumed 6% plus stabilized net yield on cost, consistent with our recent experience and current underwriting. In sum, rent roll would rise to GBP 249 million, an uplift of 132%, and that's before factoring in rent roll growth and ensuing acquisitions. At the same time as driving rent roll growth, we will maintain our track record of recycling discipline, typically selling out of longer, larger lot size properties once business plans have been developed. And with more than GBP 660 million of long-dated HQ properties, there will be more sales from us once investment markets stabilize. So what does this all mean for returns? We expect to deliver an annualized total accounting return of 10% plus into the medium-term, which should be higher still as and when prime yields compress. The majority of this return will come through development surpluses and rental growth capture. In addition, we expect earnings to inflect over the next year as we deliver and lease up our extensive onsite development and refurb program. Looking further ahead, there should be strong earnings growth from increased rental income and Flex NOI, lower interest costs and ongoing cost discipline. As a result, the FY '25 total dividend payout will be no less than GBP 31.9 million paid in FY '24. And we expect subsequent dividend growth in line with our progressive policy, given our medium-term earnings outlook. Last but not least, given recent financing activities and post receipt of the rights issue proceeds, we will have total available liquidity of just under GBP 600 million and pro forma LTV of 18%. Once the proceeds have been deployed, we expect LTV to return towards the upper end of our through-the-cycle 10% to 35% range as we invest into a rising market and as we seek to maintain our financial leverage whilst increasing our operational leverage. On the right, you can see the key terms of the GBP 350 million fully underwritten, fully preemptive rights issue, which will add around GBP 450 million of total near-term investment capacity based on our disciplined approach to leverage. As we've said, this will be deployed into new acquisitions over the next 12 months to 18 months, along with development CapEx on 2 recent acquisitions. The issue price of 230p represents a 33% discount to TERP, with admission of the new shares expected on the 12th of June. And GPE directors will be personally investing around GBP 2 million into the fundraising. So to recap on this exciting opportunity to accelerate growth through attractive new investments across HQ and Flex. The timing is right, with Central London office values at or around trough and down to near 2009 levels in real terms. We've identified a compelling and deep acquisition pipeline, and we will be committing CapEx into 2 recently acquired prime West End properties. Occupational market dynamics are favorable, too, which will further accelerate real rental growth. And we're uniquely placed to take advantage with the rights issue bang in line with our raise and return strategy and proven track record of disciplined capital management. Looking ahead, our activities will deliver long-term value and income growth with a prospective TAR of more than 10%. So lots for us to look forward to. Now looking back for a moment, starting with the headlines of our valuation and financial performance with the numbers clearly impacted by the higher interest rate environment. The group's property portfolio stands at GBP 2.3 billion, with rent roll having increased to GBP 107.5 million. The 12.1% like-for-like valuation decline was the principal driver of the fall in EPRA NTA to 624p per share with the vast majority of the decline in the first half. EPRA LTV increased to 32.6% at year-end, predominantly driven by our investment activities, with our debt financing activities, ensuring our liquidity remains strong. And whilst net rental income rose by 1.9%, as expected and guided, EPRA earnings fell by 25%, given higher interest costs, as you can see on the chart. We also maintained total dividends for the year at 12.6p per share. And there's plenty more detail on our financials in the appendices. Now a bit more detail on the valuation. ERV growth was again attractive at 3.8% overall, including a rebound in retail ERV growth to 4.4%. With yield expansion of 56 basis points, overall, property values declined by 12.1%. Office values, which represents almost 80% of the portfolio fell less than retail with our Flex spaces the strongest relative valuation performer, as our fully managed spaces fell only 4.4% with 5.2% of ERV growth. As shown on the right, the portfolio equivalent yield has risen to 5.3%, well above the 20-year average. And given continued rental growth, our reversionary yield is now almost 7%. Bottom left, a breakdown of today's portfolio, which is latent with value. 24% is currently under or being prepared for development and refurbishment, offering significant upside potential as we transform these sites into prime, modern, sustainable spaces. You can see in gray, 28% of the portfolio is long-dated properties, which are already prime, which we've created and are all in the West End. As I said earlier, they will be attractive recycling opportunities for us once investment markets stabilize. Finally, the best continues to relatively outperform at both an ERV growth level in purple and by valuation shown in green. By EPC rating, our A and B spaces again outperformed as did our higher capital value per square foot spaces. And our West End properties representing nearly 3/4 of the portfolio outperformed 2 with ERV growth of 5.3%. And as you've heard from Toby, we expect these trends to continue. Now a quick debt update. Shown top left, both pre and post the rights issue, we continue to operate within our 10% to 35% through-the-cycle LTV target range. Given our debt financing activities over the year, liquidity was GBP 633 million at year-end. Since then, we've repaid GBP 175 million of maturing USPPs and we'll be canceling our GBP 200 million short-term facility. And on receipt of the rights issue proceeds, liquidity will rise to more than GBP 590 million. Bottom left and looking ahead, you can see the earliest maturity across our diversified debt book is not until late 2026. And we have extension options for this flexible GBP 250 million ESG-linked term loan. And as shown bottom right, 96% of our debt is on a flexible unsecured basis, the weighted average interest rate of our drawn debt is 4.9% and 90% is at fixed or capped rates. So with our strong debt metrics and credit market conditions expected to further improve, we anticipate more accretive debt financing activity in the year ahead. Finally, from me, a quick update on our unique Flex offer, which continues to lease extremely well. Our GBP 13.7 million of lettings in the year includes 17 deals in H2, securing GBP 7.2 million of rent. The majority was in fully managed spaces, 11% ahead of ERV. And in the West End, where we secured average rents of GBP 238 per square foot. We're leasing the space quickly to well-established and high-growth companies alike, and our customers are in good health and paying on time too with no delinquencies. As you can see top right, our Flex leasing momentum continues to build in terms of volumes, the beat to ERV and the average rent achieved on our fully managed deals. And we have strong customer satisfaction, too, reflected in both our market-leading Net Promoter Scores and retention rate of more than 75% for our fully managed spaces. This retention is reducing friction costs, whilst we're also capturing strong rental uplifts of 40% on our fully managed renewals, with rents now averaging more than GBP 250 a foot at Dufour's Place, up from GBP 191 in 2021 when we launched this as our first dedicated fully managed building. Taking this together, this is driving our excellent Flex financial performance. You can see in the middle column of the table, all of our fully managed key measures have improved since the half year and are well ahead of our targets. In particular, relative to Ready to Fit, we delivered a 117% rent beat and an 82% cash flow beat, producing a yield on cost of 6.3% and service margin of 43%. And as shown in the bottom row, we're getting good lease duration too, more than 5.5 years on Fitted deals and 2.5 years on fully managed, a clear differentiator to serviced office operators. So our Flex activities remain a significant income and value growth opportunity. Now back to Toby for a development update.

Thank you, Nick. So then turning to touch briefly on our development and major refurb pipeline. And as you can see from the boxes on the right, we now have 3 committed HQ schemes, up from 2 at the half year, having started works at Minerva House since then. And taken together, they're already 50% pre-let. Our Flex refurbs shown in light green are also up 1 to 7 with the addition of the Courtyard. Plus, we now have 2 near-term HQ projects with our updated plans at New City Court shaping up nicely for a part newbuild part refurb scheme. So in total, we have 13 major schemes covering 1.1 million feet or 49% of the portfolio, the vast majority of which is either on site or will be in the very near-term. Turning to look in a bit more detail at our 3 committed schemes where there is significant profit to come, as you heard from Nick earlier, each is prime, each with exemplary sustainability credentials and with strong pre-let potential. Indeed, at 2 Aldermanbury top left, we are now 100% pre-let following Clifford Chance's decision not to hand back space. We're on budget and we expect to finish in Q1 '26, with returns now recovering following the circa 100 basis points of yield shift against us, and we now have around GBP 30 million of profit to come from the current valuation. At French Railways House on Piccadilly & Jermyn Street, demolition has just started, and we're currently forecasting off today's rents and yields, a 24% profit and a 6.4% development yield for this column-free absolute best-in-class St. James's building. And given my comments on the market earlier, we clearly have upside potential here. The same can be said of Minerva House down on the Southbank, where we've just started our major part refurb part newbuild scheme to create a 143,000 square feet of Grade A space, up 56%. Again, off today's rents and yields, we're forecasting a 19% profit on cost and a 7% development yield. So 3 great schemes, generating a big area increase of 65%, a sizable ERV increase from the buildings they replace of 161% and generating a healthy development yield of 6% with a further GBP 103 million of profit to come even before any rental or yield compression. So a strong best-in-class HQ development program with lots of upside to capture. So let's wrap up then with our outlook. And as we think about what next for GPE, we see plenty of opportunity for us, and we feel well set to take advantage. 3 reasons. First, we have a crystal clear strategy, Central London only an economy expected to outperform 74% West End, 93% close to the Elizabeth line, delivering only best-in-class HQ and Flex spaces and our pipeline and ambition are significant, always focusing on customers' needs and on sustainability and of course, keeping to our contracyclical capital discipline whilst maintaining our strong balance sheet throughout. Second, we think today's markets are increasingly supportive. We know we're staring down the barrel of a serious Grade A supply shortage, meaning that rents are rising with the best continuing to outperform the rest. The cycle has returned with real Central London values now near 2009 levels, meaning that for the first time since 2013, we are finding attractive, accretive acquisitions in scale and have turned net buyer. Plus, we think Grade A yield compression is possible over the next 12 months or so, and all supporting the launch of our fully underwritten rights issue today to enable us to take full advantage. And third, our portfolio is well positioned to deliver both income and capital growth. In HQ and Flex, we have significant profits to come. We expect to grow our rent roll across the business by about 100% before any acquisitions, both of which will combine to deliver accretive prospective total returns of more than 10% annualized based on prudent current underwriting assumptions. And of course, before any further asset sales, which we will resume once market pricing has recovered. So we feel well set with GPE in great shape and some exciting times ahead. Our operational infrastructure to deliver these returns is all in place, led by a deeply experienced senior team. And from here, we can look forward to positive prospects for the long-term. Okay. There's a lot to chew on there. I hope it all made sense resonated with you. I'm sure there'll be lots of questions. And if there are more than we can cope with this morning, we'll be very happy to answer them later in the day. But who would like to start? Yes. We've got some microphones doing the rounds, I think, and we've got the team here to help answer them, and there were some microphones here. I guess they'll be running around. We've got them there, okay. Brilliant. Yes, far away.

Ben Richford from Bernstein. First question, just on the rights issue quantum, GBP 350 million, GBP 450 million of capacity to create nearly GBP 600 million of liquidity. And you've outlined GBP 1.3 billion of CapEx and acquisition opportunities probability weighted. Will this be sufficient?

Yes. Well, could we go to the cycle? Thank you, Rich, read my mind already. Good question, Ben. I mean, let's see. We don't want to over equitize the business today. We've outlined very clearly that we think there is around about GBP 350 million of near-term opportunities, risk-weighted, if you like. But if you remember, last cycle, we did come back a few years later, having invested significantly more than we raised then. And the other thing to remember, of course, as Nick outlined, is we have circa GBP 660 million of sales. We're likely to make once markets have stabilized. As I said, we don't want to make them now. And they, of course, that cash will come back into the investable pipeline, if you like. So we don't have to call it today into the middle distance, but we're pretty comfortable that the GBP 350 million we're raising gives us that right balance between relatively quickly investable quantums and given the opportunity we're seeing in the market.

Second question, just on interest cover. I think your covenants exclude the capitalized interest, but can you just discuss how banks look at that on a number, including the capitalized interest, please?

Nick, there's a microphone there. You got this. Yes.

So the -- to be clear, Ben, we haven't actually put where we are with regards to our debt covenants in the deck because you'll find them in the back of the announcement, frankly, because they're not a concern. And the -- but to specifically answer your question, the ICR covenant that we have is at 1.35x. Today, cover is at north of [ 3.5x ]. We do get the benefit of capitalized interest within that. And so that's always been the case with our financing. But it's clearly one of the reasons, why on the one hand, we're coming to the market today is because we want to do more. This is not about us reducing our leverage. This is about us maintaining our financial leverage. It's about increasing our financial capacity but it's also about us increasing our operational leverage. So when we look at the -- our debt metrics on a go-forward basis, of course, we look at LTV, we look at NAV gearing, we look at ICR, we look at debt-to-EBITDA, but our main focus tends to be on the balance sheet for the simple reason that a large proportion of the returns that we generate often don't find their way into the P&L, particularly given just under half of our prospective TAR is going to come through development surpluses, a lot of that value may never find its way into the P&L because we'll sell those assets on to somebody with a lower cost of capital than we currently have. Just to come back to Toby's -- your earlier question, Toby's answer. We've got a slide in the back which just gives a bit more color about financial capacity, I think [ is Rich ] on 57. And the thing I would add here, and this is really all about the point of wanting to keep financial leverage broadly where it is in the low 30s. And as I said earlier, the reason it's already in the low 30s is a little bit because value has declined, but it's principally being driven because we've been investing it through acquisitions, but also through development CapEx. As Toby referenced, this is our forward look, and we've got in there GBP 660 million of prospective sales. Those sales are existing stabilized long-dated assets that I think we will sell likely in 2025, 2026, as we set out on the bottom of the chart. But what it clearly doesn't factor in is our onsite committed developments today, which as yet are not long-dated. They're not yet shiny, they're not yet prime, but they will be when they're finished. And the same discipline that we've always committed around capital recycling, look at forward-look returns would suggest that over the course of the next 3 years to 4 years, there could be more sales than this. But equally, there could be a bunch more acquisitions than we've shown here. And in sizing at GBP 350 million even as GBP 450 million, we are very clear in our commitment. We're looking to deploy that within the next 12 months to 18 months to get right on the front foot in a market where it's absolutely the time to be buying, not selling.

And just to follow up on the ICR, including the capitalized interest is what, it is [ 1.4x ] or something?

The cover is at [ 1.35x ]. The -- yes, if you were to strip out capitalized interest, it would be in the 1s.

Okay. And just a final question. What is the EPRA cost ratio? And where can we expect that to trend?

Yes. So the -- our EPRA cost ratio is in the 50s. It's come down a little bit. It was in the 60s. Again, as you know, EPRA cost ratios looks at your costs relative to your rental income. And again, as you know, a lot of the rental income we create doesn't find its way into the P&L. Our aspiration over time is to bring that down. And my intention is for us to push to get that down to sub [ 40% ] over the course of the next 3 years to 4 years as we grow from here. And clearly, within that, ongoing cost discipline remains absolute, but we have been building the infrastructure so we can take advantage of the opportunity that we're talking about today, doing more development and doing more Flex.

Yes, one over there. Thank you.

Callum Marley from Kolytics. You guys have a good track record of recycling capital, judging turning points in the market, and assuming that this is one of those. Just looking at the numbers for the rights issue, you're raising quite expensive equity, you are trading at a material discount to GAV about 20%, which is very much in line with your current development profit on costs and the historic ones. So can you just help us understand the rationale there? And as a follow-up, how you'll be able to clear the high cost of capital bar that you set and any additional transaction costs you might incur?

Yes. Very good question. The first thing to say is the beauty of the rights issue process is that it gives all existing shareholders the right to participate. Now if you think about it, let's see you got a holding of GBP 10 a day, and you're given the chance to put GBP 4 in tomorrow, you're still the day after that, worth GBP 14. So you've seen in pound terms, irrespective of the issue price, no dilution, if you take up your rights. If you don't take up your rights, you have for a well-positioned rights issue appropriately sold into the market by good brokers and banks, you have nil paids which trade at their value, which allow you to make yourself hold if you choose not to participate. When we thought about the cost of the rights issue relative to our business plans, we've also considered alternative business plans and judged as to whether or not one will be better than the other. So we began thinking this through in the autumn last year as we could see markets were moving in our direction, as we could see opportunities were growing. And we asked ourselves the question, is it better for shareholders for us to sell assets than at a deep discount to what we believe is their fundamental worth and use that capital to employ into new opportunities or is it, in fact, better to offer all shareholders fully preemptive the right to come into the new opportunities, hold back the sales for when we can make a better return from those sales. And if you look at the total accounting returns or indeed the IRRs, the latter is better than the former. That's the math that we've done, and we've looked at it in great detail. The real issue here actually is the speed with which and the quality of the investments that we make from the raise, right? So that's the thing that matters most because we're asking shareholders to put their hands in their pockets to back those acquisitions in essence. And our judgment, I hope made clear this morning is that we believe the pipeline is good, is accretive and can be executed as Nick said within 12 months to 18 months. It is an expensive process. Granted, we get that. It involves lots of people. It's quite a binding process. It takes a while, et cetera. But as I say, we've done the math. We think it's a better accretive, more accretive return for investors than the alternative, which is either not buying these opportunities or selling assets at a deep discount to pay for those opportunities. So that's been the basic thinking. Obviously, lots more behind it. And time will tell whether we got it right. I think we got it right last time. Let's hope we've got it right again this time, and we think we will. Nick, anything you want to add to that?