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

Well, good morning, everybody, and a very warm welcome to our interim results presentation. Thank you so much for coming along. We really appreciate the time you give us. And we're going to, I hope, give you plenty to think about this morning through the next 30 or so minutes of the presentation. You can see on the screen, there is a QR code. If you wanted to download the presentation directly onto your device, that is how to do it. And you can see that we're also going to have the full lineup of the executive team to help answer any questions you have later on. And we are taking questions online as well, I think, and the address will appear in a second. So let me start this morning by summarizing the key messages that we're going to be giving you over the next 30 or so minutes. And perhaps most importantly, our focus today is on executing our clearly laid out growth strategy, and we are on track. We're taking advantage of a compelling market opportunity in which the time is right to buy and not to sell. And we are 3 acquisitions for GBP 106 million pre-CapEx or circa 30% of the rights issue proceeds that we received back in June, adding to our already significant refurb and development program, delivering more of our appealing mix of sustainable HQ and flex offices into a serious supply crunch and a period of strong rental growth, all backed up by another strong operational performance in the first half and meaning that we're very well set to deliver long-term income and value growth. So as well as putting the meat on these messages, we'll also be covering our results and finishing at the end with our outlook. But before we get into all of that, let's spend a moment on our strategy and revisit what I said at our finals back in May because since then, we've made some very good progress. You'll remember this chart. It shows our long track record of contracyclical capital management, raising capital and buying when markets are cheap, selling and returning capital when they're not and once business plans are executed. In May, we said the cycle was at or around its trough. And today, it's clearly inflecting, but investment markets are still disrupted with asset supply up strongly. We said now is the time to buy and not sell, and we have. Since March, we bought 3 assets for GBP 106 million at a 61% discount to replacement cost and we will return to selling once markets have recovered. We said there was a supply drought of Grade A offices. There is, and we're delivering into it, 7 schemes on site, another 6 to start in the near term with big surpluses to come across the program. We said prime rents would rise and they are. We're leasing ahead of ERV and our own prime rental values were up 2.8% in the first half. We said we'd grow our flex offer. We are. We're now over halfway to our 1 million square foot ambition and just leasing our existing commitments will grow our net operating income from GBP 10 million to almost GBP 30 million. And we said we'd supplement our capital base with further debt financing, and we've done that, too, GBP 400 million raised since then, adding to the GBP 350 million of fresh equity. So I would say we're firmly on track to deliver both significant income and capital growth. Let's turn then to the half year results, and we have delivered another strong operational performance. Excellent leasing, GBP 10.5 million, 7% ahead of ERV with offices 8.9% ahead and space under offer today, a further 16% ahead. ERVs are up. Vacancy is low and customer retention is high at 75%. We started deconstruction on 2 HQ schemes, and we've made good progress at 4 flex refurbs. And we've also made strong progress allocating our GBP 450 million of investment capacity with circa GBP 300 million now spoken for, including prospective CapEx across 4 recent purchases. And our financials for the period are healthy, too. Our portfolio valuation was up 0.8% with fully managed spaces up 2.6%. Our rent roll was also up 2.1%. But as expected, our earnings were down with almost all of the decline being the result of us seeking and obtaining vacant possession ahead of repositioning activities. Remember, some 40% of our portfolio is effectively in production. And of course, our LTV was low at 23%. So as we think about what next from here, our clear and differentiated strategy gives us a fantastic platform for growth from 3 main areas. First, strong income upside as we create best-in-class spaces, delivering 330,000 square feet to lease over the next 12 months into a strengthening market. And simply leasing our on-site and near-term schemes will generate an increase in our rent roll of some 147% before any further market rental growth. Second, from material development surpluses of some GBP 225 million from these same 13 on-site and near-term schemes, assuming current rents and yields. And third, from our new business opportunities, where our pipeline is strong with circa GBP 1 billion under review in our A and B list. So more on these growth stories in a minute as we set about executing our strategy to accelerate GPE's growth. And whilst we may be assuming current rents in the leasing of our spaces, in practice, we think best rents will rise strongly from here. Top left, you can see that whilst take-up and space under offer across the city and the West End are both in line with the 10-year average, active demand is some way ahead and bang in line with what we saw in May. And history shows us that circa 2/3 of this demand is only interested in leasing prime or Grade A spaces. And yet, shown top right, as you work across the chart, you can see that prime vacancy in both the city and the West End is incredibly low, with the West End, our backyard at only 1.3%. And nor is this about to change anytime soon. We've rerun our analysis of new supply coming on stream, and it remains extremely tight. The bars show our estimates, the diamonds are CBRE's view, and you can see that they have reduced their estimate for '27 to much nearer to our level. Taken together, that's 2.9 million square feet of spec completions by the end of 2027, some 68% short of the long-run average take-up of Grade A space. So indeed, a supply drought. And as you can see on the right, this supply-demand imbalance will lead to continued rental growth across all of our core markets. And so these conditions, we think, play very well to our strength with 100% of our portfolio in prime central locations, 93% near Elizabeth Line stations and with Central London rents representing only 5% to 10% of London business' salary costs, we think this rental growth remains very affordable. Meanwhile, the investment markets remain disrupted, presenting us with a great opportunity here, too. Real capital values are inflecting from their lows, but they remain near GFC levels. Plus, bottom left, you can see that today's investment volumes are way beneath the long-run average and lower even than during the GFC. And looking bottom right, since May, there has been a sharp increase in assets available to buy, up some 26% to GBP 4.9 billion, of which we think more than 40% are debt motivated sellers. So even with the amount of equity looking to invest marginally up over the past 6 months, the equity to asset supply multiplier is down to 4.2x, some way beneath the 10-year average of 7x. So as I'll talk about in a minute, you can expect more acquisitions from us. Summing up then our view on the market, we think today's conditions provide strong support to our strategy. For rents, whilst business confidence has weakened recently, demand remains well ahead of supply, meaning we reiterate our guidance for rental values to rise for the year by between 3% and 6%. For yields, the picture is, we think, marginally better than at the finals in May and the prospect for some compression at the best and most liquid end of the market is real, as shown by the green arrows. So let's come back then to our main theme of today and look at the platform for growth we've given ourselves and start with our development portfolio. Our program is significant. It's all in the near term and time to deliver into the supply drought that I've outlined. 3 HQ schemes on site, 50% pre-let with strong interest in much of the balance. 4 fully managed conversions on site, all finishing within the next 6 months and a further 6 near-term schemes, including our recent purchases at Well Street and at Whittington House and more on these 2 in a minute. So 13 projects, all near term, covering some 40% of our portfolio. Looking first then at our 3 on-site HQ schemes, and we're making good progress across each of these prime exemplary buildings. Aldermanbury Square, top left, finishes in just over a year and where before any rental growth, we have some GBP 27 million of surplus to come off the current balance sheet value. At 30 Duke Street St. James's, we are now deconstructing ahead of rebuilding using steel from our own City Place House, creating column-free space that will be some of the best you'll see anywhere in the West End. Leasing interest is already strong. Our rents and cap rate are both undemanding and give us material growth potential from here. The same is true at Minerva House, bottom left. Deconstruction is pretty much complete. And with the quality of the space and its Riverside location, we expect to beat both our rent and our profit numbers. So taken together, these 3 schemes generate big area and ERV increases, as you can see bottom right, generating a decent development yield of costs that are 92% fixed with moderating rates of inflation and delivering an estimated surplus to come of some GBP 100 million of current rents. If you grow these rents by only 10%, as you can see on the sensitivity table, you're adding more than GBP 40 million to our prospective surplus, and that's just from these 3 schemes. So best-in-class buildings and with some good upside to capture. And following hot on these 3 heels are 2 cracking projects. On the left, Soho Square, our 94,000 square foot new build next to the Elizabeth line with some of the best amenity in the West End and where we are due to start early next year. And on the right, St. Thomas Yard, the renamed New City Court, next to London Bridge Station, where we are redesigning a 185,000 square foot major refurb and extension scheme that will be substantially more profitable than our previous tower scheme proposals. Again, best-in-class schemes also with upside to capture, generating significant surpluses from our HQ program, and that's before we add Whittington House and any subsequent acquisitions. On which note, let's turn to our second growth driver, new business. And we think the story remains just as compelling as it was back in May. You'll remember that back then, we set out our A list of acquisition targets, 8 opportunities with a quote price of GBP 244 million and a probability weighted value, including CapEx of some GBP 350 million. 4 months after receiving the rights proceeds, we bought 3 of them shown here for GBP 106 million or GBP 201 million, including our CapEx assumptions, all in line with our disciplined acquisition criteria, all West End, we paid an average 61% discount to replacement cost of only GBP 682 a foot. and 2 will convert well to our fully managed spaces, 1 for HQ with post-CapEx yields of between 6.4% and 6.8% and combined prospective ungeared IRRs of between 9.1% and 12.4%. So a strong start. Updating the A and B list to today, and we have 18 sites under detailed review totaling just short of GBP 1 billion, circa 70% off the market, 59% of which are for HQ, 87% in the West End or Midtown and with around GBP 125 million in active negotiations. Beyond that, we have a further circa GBP 950 million on our watch list. So as I say, still plenty of opportunity, and you can expect more acquisitions to come from us. Turning then to the largest of our recent deals, Whittington House on Alfred Place and which goes straight into our HQ refurbishment pipeline. Bought just a few days ago, we paid GBP 58.5 million or a circa 60% discount to replacement cost for the long leasehold 75,000 square foot building. It sits on Alfred Place next to and opposite our existing holdings on this really attractive pedestrianized street, just a few minutes’ walk from the Tottenham Court Road at Elizabeth Line Station. And it gives us a fantastic sustainable HQ repositioning opportunity. We'll transform the arrival experience, redesigning the ground and the lower ground floors. We'll add a communal roof terrace and a new pavilion at the top of the building as well as terracing to the first floor. And we'll upgrade all the space to our best-in-class design standard with some CapEx of GBP 27 million, starting in just over a year and prospective returns, as you can see top right, 6.8% stabilized yield, 16.1% profit on cost and a 10.3% ungeared IRR. So good numbers for a refurbishment where we're keeping most of the existing building. Also in the West End, we've added to our fully managed flex cluster through the acquisition of 19 to 23 Well Street. Bought last month for GBP 19 million at less than GBP 1,000 a foot with a net initial yield of 7.6% in a core West End location close to Oxford Street, and we paid a circa 45% discount to replacement cost for this refurbished gem. At the same time as buying the existing long leasehold interest, we regeared the head lease to create a longer term of 125 years and allowing us to convert the remaining vacant space to our fully managed product. Sitting near to many of our existing holdings, the building gives us a great opportunity to create a fantastic fully managed product in a wonderful location. We'll invest circa GBP 5 million upgrading the space and improving the building's amenity, starting on site in Q2 next year, and we expect to generate an ungeared 9.1% IRR and outperform against all of our Flex metrics, as you can see from the table at the bottom of the slide, with strong cash flow and net effective rent beats. Talking of beating our underwrites, let's go over now to Nick and look at how the rest of our Flex operations are getting on.

Thank you, Toby. Good morning, everyone. Now more detail on Flex, our third growth driver. As we've been saying for a while, the market opportunity is sizable and growing. And Flex is firmly entrenched as the default choice for customers with smaller space needs. Year-to-date, 77% of all sub-5,000 square foot lettings in the West End have been on some form of flex basis, up from 57% last year. And customer demand continues to be broad-based, too, with ever-increasing demand from larger companies. And as we said we would, we've been growing our flex offer, and we are more than halfway to our ambition of 1 million square feet. We're meeting customer needs with our occupancy at 96%, and we're also generating higher rents with net effective rents 127% higher than ready to fit, and we'll be driving income growth, too, as we target a sevenfold increase in our fully managed NOI. Our unique and differentiated fully managed offer is providing customers with an all-in-one hassle-free experience. We're providing high-quality office spaces with amenity in targeted Central London clusters in buildings that we own, we fitted out and we operate. The space is provided by floor, not by the Desko room with an average unit size of more than 2,500 square feet. We're letting on leases of nearly 3 years, not on licenses or memberships, and we're providing outstanding customer satisfaction with our NPS of plus 50 and 75% retention rate. We're still providing some space on a fitted basis or through our flex partnerships. But as you can see bottom left in purple, the majority of our 525,000 square foot flex footprint today is fully managed. And as we deliver on our organic growth and acquisition business plans at our 1 million square foot ambition, more than 75% will be fully managed. And with our operating platform in place, the team are busy delivering 140,000 square foot of new space this financial year, including completions this month at Alfred Place and St. Andrew Street. Crucially, our spaces continue to lease extremely well with 11 fully managed deals in the first half, securing GBP 5.5 million of rent, 9% ahead of the fully managed ERV, with our West End lettings at an average rent of GBP 238 per foot and our renewals generating a 16% rent uplift. And with strong retention, we're leasing the space quickly to well-established and high-growth companies alike. As shown top right, our strong leasing and operating capability are combining to deliver outsized performance well ahead of our targets. We're generating strong absolute returns with an average yield on cost of 6.8% and service margin of 41%. And relative to ready to fit, we delivered a 127% rent beat and 88% cash flow beat. And as I've already said, we've got strong customer retention and good lease duration, too. As well as successfully leasing the space, our operating performance is good, too. Our fully managed spaces are today generating GBP 20 million of annualized rent, predominantly in the West End. We're currently managing GBP 10 million of OpEx across the cost categories shown in the green bar. And with a gross to net of 50%, our NOI is GBP 10 million or just over GBP 100 a foot. And this will grow with our on-site refurbs adding GBP 19.4 million and upcoming refurbs adding another GBP 18 million, so a fourfold increase from organic growth alone. And as we execute more acquisitions to hit our 1 million square foot ambition, total NOI would increase to GBP 78.5 million, an overall sevenfold uplift. And with nearly GBP 17 million of annual service profit shown in the blue, we'll be creating additional value of around GBP 180 million, more than GBP 200 per foot based on the valuers' current 8.5% cap rate. So our flex activities remain a significant income and value growth driver. Now a few comments on our half year results, which provide a platform for growth. The group's property portfolio stands at GBP 2.5 billion, with rent roll having increased to nearly GBP 110 million. Shown on the right, property values were up 0.8% with positive ERV growth of 1.1% overall. Office rents marginally outperformed retail with our fully managed rents up 1.4% and 3% growth at our long-dated office properties. And our West End properties representing 72% of the portfolio performed well with ERV growth of 1.5%. Our opportunity-rich portfolio has an average capital value of just over GBP 1,000 per foot, and the investment properties were valued at around a 15% discount to replacement cost. We think that there will be growth from here, and that's before factoring in any potential yield compression with our portfolio equivalent yield today at 5.4% and our reversionary yield at almost 7%. Turning to the financials. Net assets rose to more than GBP 1.9 billion following the successful equity raise and EPRA NTA rose to 475p per share. As expected, and guided, income fell as we secured vacant possession for developments and refurbs to access higher rents in a rising market. Our team restructure and cost-saving activities reduced admin costs and overall, EPRA earnings were GBP 8.5 million. And as we said we would, we have declared an interim dividend of GBP 11.9 million. Finally, EPRA LTV fell to 23% and liquidity increased to GBP 670 million. So we have a strong balance sheet to invest with. And we're investing to deliver value growth. In dark green, there's GBP 394 million of CapEx to complete our 7 on-site HQ and fully managed schemes. And in light green, a further GBP 401 million for our near-term schemes. These CapEx estimates include appropriate inflation allowances, and you'll find the usual scheme-by-scheme detail in the appendices. These schemes collectively have a gross development value of GBP 1.9 billion and an ERV of GBP 134 million, which will deliver a surplus to come of GBP 225 million. As the sensitivity table shows top right, there's serious upside potential with an illustrative 10% ERV uplift and 25 basis points of prime yield compression, taking the surpluses to nearly GBP 500 million. And the dotted line on the left-hand chart prudently shows how these surpluses would accumulate over time based on profit release at scheme practical completion. But as you know, we have a strong track record of pre-letting and forward selling, which would accelerate the timing of these surpluses. We're also investing to deliver income growth, and we have a significant rent roll growth opportunity. Our rent roll today is GBP 110 million. And the bar chart shows how this builds organically to more than GBP 271 million over the coming years, an uplift of 147%, all else equal. As shown on the right, this would include GBP 94 million of fully managed rent roll or GBP 47 million of NOI. When we hit our GBP 1 million flex ambition, this would add a further GBP 31 million of NOI, bringing our total fully managed NOI to more than GBP 78 million. So lots of growth to go for, but we will also maintain our track record of recycling discipline, typically selling out of larger lot size properties once business plans have been delivered. And with more than GBP 500 million of long-dated completed office properties today, there will be more sales from us once investment markets stabilize, which will, of course, temper some of this rent roll growth. So what does this all mean for earnings? As we said in May, we expect FY '25 to be the inflection point as we deliver and lease up our extensive on-site development and refurb program. Overall, we expect EPRA earnings to be broadly stable on last year, although EPS will decline given the increased share count. And again, as we said in May, this year's total dividend payout will be no less than the GBP 31.9 million paid last year, and we'll maintain our progressive dividend policy going forward. Looking further ahead, we anticipate EPS progression towards full DPS cover in FY '26 and stronger growth thereafter from increased rental income and flex NOI, lower interest costs and ongoing cost discipline, including initially targeting a reduction in our EPRA cost ratio to below 40%. As we invest to deliver growth, we're doing it from a strong balance sheet, and our team has been busy proactively managing the debt book as we said we would. Given recent moves in market interest rates, our bond issue in September looks well timed, securing GBP 250 million of 7-year unsecured sustainable debt at less than 5.5%. Since then, from cash resources, we've repaid GBP 175 million of our term loan, which has a margin of 175 basis points, while supplementing our liquidity with a new flexible GBP 150 million ESG-linked RCF, which has a margin of only 90 basis points. As a result, we have further diversified and improved the laddering of our debt book. And as shown bottom left, we've increased our liquidity to GBP 670 million, extended our debt maturity to 7 years, maintained 96% of our debt on a flexible unsecured basis, 100% is now at fixed or cap rates and our weighted average interest rate has reduced to 4.5%. Finally, with LTV at 23%, we continue to operate within our 10% to 35% through-the-cycle target range. Looking ahead, we expect LTV to rise as we invest into a rising market, although this illustrative analysis is based on current rents and yields. With our 2 most recent purchases, LTV has risen from 23% by 2 percentage points. And it will, of course, rise further as we deliver our on-site CapEx over the next 3 years by around 10 percentage points, all else equal. As we've said, we'll continue to recycle once investment markets stabilize. And illustratively, we've shown the 15 percentage points downward impact of selling 2 large long-dated office properties. This would enhance our financial capacity to deliver our near-term schemes and with a resultant pro forma indicative LTV of sub 30%, we have the capacity to deliver the acquisitions for our 1 million square foot flex ambition. So summing up from me. We expect LTV to remain above the midpoint of our through-the-cycle range during this financial year, and we will maintain a diversified and flexible debt book along with healthy liquidity. With values inflecting, we expect a positive TAR in FY '25. And we maintain our expectation of 10% plus annualized TAR into the medium term before factoring in any potential yield compression. Our growth-focused business plans should deliver development surpluses of at least GBP 225 million with good upside prospects. And our Flex growth is on track to deliver 1 million square foot of space with our fully managed spaces to deliver an annualized NOI of GBP 78 million. And as you've heard from Toby, there'll be more acquisitions to follow, too. And we're maintaining our earnings guidance with an FY '25 inflection point, along with significant income growth to follow given the organic rent roll growth potential of nearly 150%. So with attractive prospective returns to look forward to, over to Toby to wrap up.

Thank you very much, Nick. So let's finish then with our outlook. And as you've heard throughout the last 30 or so minutes, we are relentlessly focused on delivering growth, and we're well set to do just that, supported by a strong market opportunity. London remains Europe's business capital with a serious shortage of Grade A supply. Rents are rising with the best outperforming. The investment market remains disrupted with low volumes and rising supply, although values have inflected and some grade A yield compression is a real possibility from here. And with these supportive market conditions, we are successfully executing our growth strategy. First, growing income through delivering on customers' needs for quality service, sustainability, amenity and delivering them flex spaces, all of which will combine to generate almost 150% growth in rent roll before further rental growth or acquisitions. Second, development surpluses through creating best-in-class spaces that customers want, 13 projects today, all on site or near term with significant surpluses to come of some GBP 225 million, again, before any yield compression or rental growth. And third, through smart acquisitions, building on our long track record of contracyclical capital discipline, and we're buying well at an attractive discount to replacement cost and with more to come, adding to our HQ and flex pipeline before we return to sales once markets have recovered. And of course, only in prime Central London with a preference for the West End and being near the Elizabeth line. So to sum up then, we're well set to capture this growth opportunity. Our operational infrastructure is in place with a deeply experienced team. Our balance sheet is strong and our prospective returns are attractive. So GPE is in great shape with all to play for, and we can look forward to positive prospects for the long term. That's the formal bit done. I'm sure we'll have some questions. We've got the team in front to help answer any of those. We've got some roving mics, I think, and we're going to take some off the screen, are we? Stevie, at some point maybe as well. A couple here, Miranda.

I’m Miranda Cockburn from Berenberg. Can you expand a little bit more in terms of your thoughts on yield compression? Given at the moment in the market, there's obviously very little activity, particularly at the large end, isn't the risk near term that we actually might see yields moving out when we get some evidence coming through from some of these larger deals completing, particularly given the sort of current interest rate environment we're in?

Dan, maybe you just want to think about some of the deals that we're seeing at the moment as evidence for what's happening. I mean we're not saying we think yield compression is happening now. We're suggesting that over time, we might see some compression at the prime end and at the liquid end. So there is definitely risk in large-scale assets where you need liquidity in scale. You need lots of investors coming back and saying, “We really love the macro backdrop. We think that the London story remains intact.†And in an ideal world, you get some competitive tension and then you're off and suddenly, you find compression happening quite quickly for long cash flows. And we saw that in 2014, '15 in spades. And at some point, again in the future, that will come back. But right now, for liquid size quality assets at the prime end of the spectrum, there are good deals happening. Look at Hanover Square, a great example of a family buying a building for many thousands of pounds per square foot, buying out the freehold GBP 150 million worth all in, so not small at pricing well ahead of our own valuation, 50 yards away for a long income, super well-let, high-end building. So there is evidence out there. The other thing I would say is that if you look at our in-place equivalent yield today, it's 5.4%. If you look at our reversionary yields, they're touching 7%. That's before you look at the share price discount and the read-through yields. So when you're worrying about yield expansion, I might suggest you look at where we're starting from because actually, you've seen a lot of correction. So I'm feeling relatively robust on that one. Dan, in terms of evidence in the market, how are we finding it?

I mean, part of the job of our acquisition team, some of whom are here today is to really keep a sort of finger on the pulse of what's going on, the direction of travel of assets because obviously, we want to get in and buy when we feel that we're either at or around the bottom of the market. So we're very conscious that that's a job that's ever present. And at the moment, I think you see that the quantum of capital coming back into the market and actually the players that are coming back into the market are starting to grow, starting to vary. So if you look at some of the recent deals that have been done in London, some of the [indiscernible] houses are back in. A lot of them are playing the game that some of the capital back in 2009 played, which was basically playing sort of a rent and yield game, minimal asset management. So you see what traditionally is value-add money coming and buying fairly stabilized assets. You got the likes of Ares coming back in. Elliott bought some assets using Oval as their asset manager. So you're starting to see much more activity from players like that coming into the market. So I think that from our perspective, that's increased noise, that's increased activity. And I think for us, that indicates that the yields have definitely got to a point where they've topped out. And the more players that come into the market like that, the more competition we'll see for assets and the direction of travel for yields, I think, will be in one direction. I think what's happened over the last couple of weeks, the budget and obviously, the U.S. election. You see what happened to gilts and swap rates over the last couple of weeks. That's probably extended the buying window. So whilst lots of people were glum, the acquisitions team wondering around with huge smiles on their faces because they've got a bigger window to get the capital that we raised over the course of this year into the market. And they've got a bigger chance to go out while -- the ever present uncertainty, I think, is perceived to be lasting longer. And that's given them a big chance to go and get that capital properly invested before yields start to accelerate.

Rob?

It's Rob Jones from BNP Paribas. I've got 3, 2 slightly picky, apologies in advance and then one on leverage. St Thomas Yards, substantially more profitable, I think, were your words, than the previous tower scheme. Maybe you can talk about how you define profit here. And if it is more profitable, what's the rationale for not opting for the refurb option first time around? Question 2 is about Slide 18. I think you said criteria for refurb returns of 10% to 15% ungeared IRRs. Then on Slide 19, 19 to 23 Wells Street is less than that. So why elect for a refurb? And then the final one was Slide 26, in terms of the sequencing of CapEx spend on current and near-term pipeline and obviously, the disposals of Newman and Hanover at some point prior to the end of FY '27. The question was, if you end up selling Newman and/or Hanover close to the back end of that 2-year window that you've touched on today, does that mean that you would need to delay some of that near-term CapEx spend to ensure that you remain within your target LTV range?

Nick, if you want to deal with the last one in a second. Simon, maybe you could talk about the fully managed opportunity that we have in Wells Street in a moment. Let me deal with the St. Thomas Yard, what we mean by profit. Well, bluntly, it's going to be worth more than it's cost us, first point. Second point is the scheme that we were shooting for, we originally designed back in 2016, '17, the tower scheme that we then didn't get consent for. We had a long debate with our friends in Southern Borough Council that ended up with us changing tack. And what you can see here is, in fact, a major intervention refurbishment. So we're building on top of the existing structure. So it is part new build, but a lot of it is retention. So it's got better sustainability credentials. It will be quicker to build, so faster back to market, IRR better, cost less per foot, so therefore, less need for higher rents. Tower buildings are much more expensive today than they used to be, and they take a long time to build. So the delta between what was on the cards to what is on the cards today is enormous. And we were going to struggle to make the tower building profitable in any event. We were going to have to go through -- once we bagged the planning, we'd hoped we'd bagged the planning to then go into a rationalization program of improving that project. This actually is a much better route. We always had this in our back pocket, but we wanted to get the planning sorted. It didn't get sorted. So we changed that quicker. And this will end up, I think, being a classic GPE refurbishment with new build attached to it, very highly amenitized, great location next to a mainline station. The rents will be good. The space works very well and so on and so on. So we're excited about it. We'll tell you more as time goes on. We only normally publish profit numbers once we have committed, and we're not yet committing here, as you can see. So we're due to start in 18 or so months' time. So a little way to go there. In relation to Wells Street and that profit margin, this is a building -- you may have heard me say it's a refurbished past tense gem. So the 10% to 15% IRR hurdle is for those schemes where we're taking on that refurbishment risk. In that case, the building has largely been refurbished, which is why our CapEx is only GBP 5 million in that building to refurbish what is still left to do being the ground floor and the lower ground floor. But it doesn't have the same risk characteristics of a normal refurbishment, which is why the IRR is just short of the lower end. Actually, for the risk we're taking here, an unlevered 9%, cost of capital in the 8s, not bad business, actually. Simon, do you want to just touch on the leasing prospects here because we've got the second floor vacant.

So this building, we look out of from our own offices. We've long admired the building. Location unquestionably fantastic, very close to Crossrail, but also very close to a number of our other fully managed assets. And as Toby mentioned, what we like about this building is that there is an opportunity for us to improve it. So it's not just taking over what was already there. There is an arrival experience that we can certainly improve in line with what we're doing elsewhere in our portfolio. But the floor plate sizes are very much in that sweet spot of around 3,000 square feet. It's exactly the kind of deals that we've been doing. It's the sort of size of units that we see a lot of demand for in the market. But it also has a roof terrace overlooking some of our other fully managed assets. And so we see a real opportunity within a cluster to be able to cater for different people's size requirements. And so we anticipate that potential customers in this building will be either graduating into larger spaces at Kent House, Elsley House, even Alfred Place, which we're just completing this month. But actually, the building itself has huge amounts of character as well. So all in all, it's an absolute gem, as Toby mentioned.

Quite hard to buy an initial yield of 7.6% in the core West End as well. And then Nick, on the sales question, CapEx to fund developments?

As I sought to say with the LTV walk, this is illustrative, first thing to say, pretty best this one Rich. And it's also based on today's rents and today's yield. So first thing to say is I think it's relatively conservative. The second thing to say is I think some of that development surplus that we have shown towards the back end will hopefully come a fair chunk earlier than that. I think the final perhaps most important thing I'd say is that each and every decision we'll make at the appropriate time. So when we think about those near-term schemes, Toby has just touched on 2 of them, the largest of them from a CapEx perspective is down in Southwark. That isn't a decision really that we need to make until late '26. We've got a full block date through until then. Actually, the most meaningful decision that we're making is the one around Whittington, which we just bought and the level of CapEx there is not significant. So I think I'm comfortable, I think that by the time we get to those commitment dates, we will have made further sales. Will those sales be just the 2 that we're showing here being -- which is effectively in that purple bar of GBP 15.2 million is effectively Hanover and Newman? There could well be more. Clearly, one of the big needle movers would be if we were to overlay a full sale or a part sale of Aldermanbury Square, the largest asset ultimately that we would own on completion. It's likely that will find its way into the investment market at the right time. But I think as we've been hopefully consistent all the way through, as it says on the slide here, now is the time to be buying not to be selling. Overlay on top of that, the 2 big sales that we are illustratively showing at Newman and Hanover are pretty reversionary, and we're going to want to capture that reversion before we execute the sales. So I'm very comfortable with the financial position that we are. Will it play out exactly like this? I'm sure it won't. You know how our business works. But the one thing that will absolutely play out is financial discipline, not just allocating capital to the right projects, but also making sure they’re allocating capital correctly at the group level as well. But I'm very comfortable where we are.

And just to put a bit more flesh on those particular bones, the Hanover reversion is circa 20% at least. The second fastest ERV growth we experienced in the first 6 months of this year was at Newman. So 2 very strong reasons why we're happy holders at the minute, aside from the now is the time to buy rather than sell argument that we've been making for now the last 12 or so months.

And timing of that?

Reviews starting next year.

Celine Soo-Huynh from Barclays. Two questions for you, please. The first one is about your ERV guidance. So you kept it at 3% to 6%, but your ERV is only up 1.1%. So how do you explain that? And how confident are you to reach that guidance by year-end? And your second point about Slide 26, again on your indicative LTV. You always say it's the right time to buy, not to sell. When do you think it will be the right time to sell? And also, what happens if you cannot sell?

Well, Nick, you might have to come back and have another go at that second one. On the ERV guidance, good spot on the 1.1 billion relative to our range of 3% to 6%. The first thing I'd say, Celine, is it's really tough to take a 6-month window and apply that as an average because things don't work in a linear fashion, if you like. You have individual deals that come along and make and suddenly change the valuer's view as to what the ERV should be. So it's hard to take one short period in time. I would say a couple of things. Firstly, are we confident about the 3% to 6%? We reiterated that this morning in print. So the answer is yes. Why are we confident about that? Because essentially, what we're seeing in the leasing market at the moment, if you look at our under offers, 16% ahead of ERV, that should, in time, feed into the way the valuers look at the ERV and they should, therefore, begin to reflect that in their judgment as to how those ERVs are moving. Where we end up at the end of the year when we next tell you about this in May next year is a very difficult thing to forecast, which is why the ranges are quite broad. If you look at the prime end of the spectrum, Nick touched on the best office space we have in the business was up 3% in the 6 months and 2.8% if you include our fully managed spaces, which are, by their nature, shorter income. So they are within that range already. And I expect that differential between the very best spaces and the rest of the market to continue to widen. We clearly own space that is in production or being prepared for production, which, by definition, will not attract the highest rates of rental growth because the space hasn't yet been settled and improved and turned into absolute prime. But I think when you look at the supply-demand balance of core markets that we operate in, in Central London, there is absolutely no question there is a shortage of space. People have stopped asking us about this. People have stopped worrying about vacancy. By and large, people have stopped worrying about the return to the office and the role the office plays in the world of work. Those arguments have been won. The question now is about the speed with which rents rise, and that is why we give a relatively broad range. On the CapEx.

So going back to the point on sales. First thing to say is I think should we wish to sell assets today, it's possible. Of course, it's possible. As Dan was alluding to, there is more liquidity coming back into the market and particularly when we think about Hanover and Newman, they're as good as it possibly gets. The reason that we're still holding them today is because the forward-look returns are ahead of our cost of capital because of that point around reversion. So once we've captured that reversion, it is likely that then the forward-look returns will be below our cost of capital and we sell them more --

Can I stop you here? Do you think you can sell at current valuation those GBP 600 million odd assets that you have mature at 4.2% net initial yield?

On the equivalent yield, so Hanover equivalent yield is 4.5%. Equivalent yield at Newman is higher than that. Would we be able to sell those at around book value? I'm confident that we will.

Today?

But the reason that we're not is that we feel we can generate higher returns through holding them through the rent review process. At that point, we'll sell them. In our own forecasts, we're assuming that we sell them in 18 to 24 months. As Dan was saying, now is actually a good time to be buying because there is broader dislocation in what I would view as the more complicated assets. These are less complex assets that we will sell over time. If we can't sell them in 2 years' time or if we think there isn't a market at all in 2 years' time, it's going to be a really interesting period between now and then. But I think we feel highly confident that we will return to more normalized investment markets on a 12- to 24-month window, which is why we're really interested in buying in these kind of more unusual investment market conditions.

Marc?

Marc Mozzi from Bank of America. Just wanted to clarify your 10% total accounting return, making sure we all get the definition of what it is. Because in my opinion, it's change in net asset value plus dividend yield, if I'm correct, in my understanding of things. So on the basis of your numbers, you're going to have or you're targeting GBP 225 million of capital return, let's call it, GBP 300 million, that's my number.

Of surplus.

Of surplus. Out of GBP 1.9 billion of equity, that's roughly 4% a year, 5% depending on the time horizon, plus 3% dividend yield. What are we missing here to get to the 10%? Is that ERV growth, yield compression, surplus from acquisitions or disposals, whatever was there.

Essentially, a combination of development surpluses, some rental growth through the piece off yields that we believe are -- we're pricing essentially as stationary today, but we could well see some compression at the best end, as we've been very clear to point out over the next few years.

I’m Adam Shapton from Green Street. Three -- and apologies, Nick, that you may have to get up again for this one, but it’s slightly different. First one is just on the like-for-like income growth of 0.4% and then one within that, which is the Flex partnerships, which I appreciate is small and not part of the growth story for Flex, but it looks as if the sequential revenue from that in the last 3, 6-month periods is 2.1, 1.7, 1.5 on a sort of same-store basis. So I'm just wondering what's happening there? And then the other one for Nick, just on ICRs, so the LTV illustration is very helpful. Could you comment on how that might look if it was an ICR chart rather than an LTV chart?

So why don't you do the second one, Nick. On the first one, Adam, what I suggest you do is connect with the team outside this call to get into that level of granularity, which we're very happy to do. Nick, do you want to just touch on the ICR?

The ICR under our covenants is at 3. -- I think it's in the back, which is at 3.5x. I think it broadly stays consistent with that over the course of the next couple of years and then increases relatively significantly. I think the thing that I would say is that the additional measure that we're increasingly focused on now having put our inaugural bond in place is that we have a fixed charge cover under Moody's, where we're currently at about 1.2, 1.3. We're looking to get that to north of 2x. We think we can get there within the next 3 to 4 years. So really, you will see that Moody's and fixed charge cover broadly moving in line as what we're seeing with the EPS growth. And hopefully, I've given on one of the early slides, some relatively clear guidance around what's going to happen to our earnings over the course of the next 3 years.

On the like-for-like income more generally, can you just comment on the moving parts that get to --?

One of the challenges, we have on like-for-like is there tends not to be that many assets that sit within the like-for-like, particularly bearing in mind that we've got 40% of the portfolio in production, to be honest. You probably found the number in the deck that I haven't got to it, but we can come back to you on it.

Jonathan?

Two questions, if I may. First one on construction costs. I mean, you talked about in your pipeline having made sufficient allocations for inflation. What kind of allocations have you made? And what are you seeing on the ground on construction costs would be helpful. And second question is on fully managed or, let's say, flex in general. How do you see the landscape in terms of competition evolving? Is there more competition from that?

So on construction costs first, Andy, do you want to just touch on what we're assuming in our current appraisals?

So just to put this in context. The scheme is currently on site, we're at about 93% cost certainty. So clearly, there, the allowances we've made for inflation and contingency are now much lower because we're obviously well through the program. On the schemes to come, we're into a comfortable double-digit allowance for what you see in the CapEx to come, and that's a mixture of contingency and inflation allowance. But clearly, with some of these schemes, we're at early stages of design. So some of the rates and the cost plans will also have contingency numbers in them. In terms of what we're seeing on the ground, I would say the recent budget announcement in terms of all of that public sector investment, that is starting to push that number up a little bit. So next year, we are at about a 3% inflation rate. It's 3.8% the following year and then it reverts to about 3.5%, whereas 6 months ago, we would have said, sort of the latter 2 years would have been at about 3% rather than 3.5%. What we're seeing on the ground, it's very specific at the moment. I think the big one for us to watch is labor. You've obviously got the NI change that's come through. About 50% of the workforce is self-employed versus employed. So we need to see that come through. You also have an aging workforce as well that's not being replaced. So I think for us, that's the key thing to watch. Generally, in the market, we are still finding that people are very active in bidding for our work. So we're comfortable where we are at the moment.

If I can follow up on that, do you think you need bigger contingencies now that you have indeed the budget, obviously, and a lot of labor is impacted by that, right?

I think it's something we will review as we go forward. As we get nearer to commitment, we will do it on a package-by-package basis. Given that St. Thomas Yard, that doesn't start for 2 years. So at the moment, we're comfortable with the allowances we've made in that. So we will review it as we get close to commitment.

Jonathan, we've tended to find even over the last few years that by and large, the contingencies we've allowed for have been appropriate, right, even with inflation being much more difficult to read than it is, we think, prospectively. And one of the reasons for that is when Helen goes into the market and prices our construction contracts, she's doing so as one of the best buyers in London, right? So the counterparty risk is materially lower for the mainstream contractors than it will be for much of the market, which means we can price better, which means as a result of the fact that our reach into the subcontracting market is very deep. And that's an important point, and it will allow us to keep those contingencies under control. If we felt those contingencies were not enough, we would have raised them by now. So we're pretty comfortable that they're appropriate from here. Your second question, Simon, just thinking about the fully managed competitive landscape from here in the context of the fact that our own product is, frankly, unique, but there is clearly a bit of a competitive landscape.

When we're looking at competition, you're thinking about where it is, who's providing it and what it is. So where it is, our portfolio is Central London only in the most prime locations, and that is clearly in demand. In terms of who is providing it, at the moment, our competition really has been coming principally from those serviced office providers who can provide an enterprise floor. So space that is large enough to compete with the kind of unit sizes that we have. They have a platform to be able to offer the kind of fully serviced experience that our customers are seeking. But then when you filter into what it is and the fact that we provide whole floors with your own front door, your own meeting rooms, your own kitchen and the fact that we own our assets, which most of those serviced office providers don't, you start to filter to a pretty unique proposition for the market. Going forward, we would expect that there will be more competition. We've talked quite often about the fact that this is a maturing market, and it would stand to reason that if the demand is there, that there will be more supply. But if you continue to apply those filters, most of the owners of real estate in those prime locations in Central London do not have a platform like we have built over the last 5 years. And they don't necessarily have the wherewithal or the interest to build one either. And so whilst there will be more competition, most of it will be outsourced to service providers. And then you are outsourcing the contact with your key sort of return provider, which is actually your customer. And so we feel that we still remain in a pretty unique position.

And it's why our NPS for our fully managed is at 50%, as Nick said, it's why our retention rate with customers is at 75%. I mean it matters and it works very well.

The unit size is really important. There's a flex business in -- more flex service at the moment. It's Central London only. Average unit size is less than 1,000 square foot. Ours on average, 2,500, 3,000. And that's a big difference because that is not only taking you into a different customer base, but it's also putting you firmly in the co-working world, and we're absolutely not wanting to go into that. And I think where we're seeing the strong -- on the chart actually that Rich had up earlier, what you're seeing is the broader market. Customer base is migrating more towards that, is becoming less demand from TMT, more demand from professional services, banking and finance, often not a whole hedge fund, but an offshoot of a hedge fund, wants a private equity firm, wants a bit of space in Central London. They've got 30 or 40 people. They'd much rather come to space that is owned and operated by the same people but where they've got their own floor. And that own floor is really valuable if we're in financial services because financial services would view that what they're doing is highly confidential. So having their own private space is super important to them. And I think it's something that we're seeing as Simon was saying, some of the operators are trying to move into the enterprise game, but it's harder to move into it if you're coming from a co-working place, having never been in co-working. We're just consistently doing what we've always done, just now providing a service.

And so how are your conversations with valuers progressing on this kind of space? And do you think this is going to outperform the rest of your portfolio in them?

Well, they have been. I mean if you look at the results, these buildings have been outperforming the rest of the portfolio since we began to generate recurring cash flow from them.

So you expect that to continue?

We do. I have to say, though, back to Marc's point, I do think we're going to see a strong catch-up on our development stock. So our more traditional HQ development stock over the next couple of years. I think you'll start to see that, which was always traditionally the driver of returns in the GPE balance sheet. I suspect we're going to come back to a bit of competitive tension there between fully managed on the one hand, where rents are growing very quickly and lease-up is very strong and development returns from HQ and refurbishments, which, as you would have heard this morning, we're pretty confident about. Max?

Just a quick one for me. Max Nimmo, Deutsche, Numis. Just leasehold versus freehold, I noticed you bought some leasehold recently. And I'm just quite interested to get your view on the kind of different risk profiles of the 2 at this point in the cycle and your thinking there.

So these 3 assets you can see here, all 3 of them leasehold. And this is the 3 deals that we've done since the rights issue in money in June. The interesting thing about a leasehold is it is naturally constraining your ability to do things. So you need to know who the counterparty is, the freeholder is. And you need to feel that you have a relationship there that you can work with. And if you don't have that and you go in blind, it's quite risky. Clearly, we have not gone in blind. And clearly, we have a relationship with the 2 freeholders here because the City Corporation have the freehold of Courtyard and Whittington, with whom we have long relationships. You'll understand. One of the things interesting about dislocated or disrupted investment markets is the differential between leasehold and freehold valuations widens. So in periods like we have just been through, the leasehold valuation looks much more interesting from an acquisition perspective, particularly if you can use your relationship to improve your position and by the way, improve that of the freehold, which in all of these cases, we will be doing through giving them a higher revenue essentially. So we quite like the leasehold story at the minute, so long as we have that visibility on the counterparty and feel that we can work with them. And over time, when markets get back to being liquid again and they recover some of their mojo, we think that margin narrows. So arguably, you will see more performance from a restructured leasehold than you will from a straight freehold as markets recover. We're running desperately short of time. There are other presentations going on in Citi today, and some of you will need to get there. If there's one more, if not, I'll wrap up. It doesn't look like there is. Thank you. Well, listen, thank you for coming. We haven't talked about our buying very much today. Look out for more from us in the next 6 or so months. We're very excited about that. And clearly, we believe strongly in our growth platform, as I've outlined and Nick has outlined this morning. And that is built upon a rental story, which we are optimistic about from here. So thank you very much for coming, everybody, and speak to you soon.