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

Great. I think we've got just about everyone into the call now. Thank you very much, everyone, for joining us this afternoon at this Investor and Analyst Flex session. We're really pleased to have the team from GPE here. Toby, Nick, Simon and Steven here to talk through and give us an update on the Flex portfolio within the GPE business. Just a little bit of housekeeping [Operator Instructions]. And so without further ado, I will hand over to Toby and the GPE team, and let's get going. Thanks.

Thank you, Max, and welcome, everybody. Thank you very much for your time this afternoon or this morning or wherever you happen to be. We are, as ever, incredibly grateful for the time that you give us to hear our story. And as I think you'll gather from the speakers this afternoon, this is a story about which we're very passionate. We're really excited about the positioning we're in. We've got really high conviction about our assets and the opportunities that we've created within them. And so we're going to give you a really good run-through of why we have that conviction. So what we're going to do is I'm going to give you a little bit of an update, first of all, just on the momentum that we're experiencing, not just in our fully managed and flex operations, but actually across all of the group at the minute. Nick will then have a look at the offer in flex and fully managed itself and in particular, touch on recent performance. Before he hands over to Simon, who will give you a really good sense of some specifics on the buildings that we've recently finished and that he and his team have been leasing. And then what's coming next in our fully managed pipeline. And then I'll wrap up at the end before we go to some Q&A, which I think Max, you're going to curate for us. So let's start then with just some key messages. And essentially, since we last spoke in any detail about the GPE story, we have seen a lot of strong momentum. And we're seeing new deliveries that we're finishing leasing faster and for more than we underwrote. So we're getting better rents across the piece. And we've been adding to our future growth. And you may have picked up in the press, we are believed to have another acquisition under offer, and I can touch on that in a little while. Our Flex offer is, of course, part of that momentum. It's unique. It's delivering premium spaces. It is not co-working. And as Nick will describe in a minute, it's a very different offer. In fact, we think it's a unique offer. It's full of quality customers. They are predominantly corporates. They're predominantly coming from Cat A or previously Cat A occupiers. We have built the team. We've built the infrastructure. Do not underestimate how much work is involved in doing that. It's definitely a barrier to entry. Our clusters are forming. You'll remember we talked about that in the autumn. And we're now beginning to see the early signs of economies of scale coming through in our returns. We're definitely delivering growing and outsized returns, and we can look forward to more of that. And as I say, that will generate income and quite a lot of value growth from here. And I would say we're closer to the beginning of the cycle than we are even to the middle of that growth cycle. Now just a couple of words on the GPE investment case before we get into that momentum in a little bit more detail. Those of you who know us well, this will not be new news to you, but if some of you don't know so well, it's worth spending a minute or two on it. 100% central prime London. We're not going anywhere else. We're not going to the edges of London. We've always believed and more now than ever believe that the core markets are the places that we want to be. And within that, a 100% premium spaces. So these are the sorts of spaces that customers tell us. Increasingly, they want to be in. They have a luxury quality field to them, not just in our HQ, but also in our fully managed spaces. And we can see the output from that, not just in rent but in the way in which our customers value us through our Net Promoter Score. We'll touch on that later on, but it is industry-leading, as is our customer retention numbers. We've got a very active cyclically led business model we always have. And those of you who studied us closely will remember that we raised money when markets are low, use it to invest both through acquisition and development and then divest when markets are strengthening. And we've been very clear on that this time around. We raised money last summer. I'll touch in a minute on where that's gone, and we will return to sales when it is the time to sell. As it stands at the minute, we've got good structural tailwinds and prime rents, as we will show you, are rising. A full 40% of our portfolio is in production. Again, contra cyclically, the highest returns from development are always made in the first half of the cycle, and that's where we are. So we've done that very much by design, and we're developing into a dramatic shortage of prime spaces, and we are getting rental growth through it. We're also innovating. We're shaping our product. Our fully managed product is one of the outputs of that innovation, but we're also doing lots in the circular economy. We're using steel, we're using glass, et cetera. Now our investment markets, we think, are still at an attractive entry point. It's pretty clear to us that we have now passed the trough. And we have been spending the last 6 to 9 months or so building on our successful contracyclical track record, always with a strong balance sheet and relatively low leverage, giving us that capacity. And as I say, from here, we expect some strong EPS and NAV growth, not just over the next year or so, but into the medium term. Let's then have a look at what that means in terms of some of our activities. And this momentum that I referred to at the beginning is really building quite well. Four points. Number 1, leasing. It's strong, and we're delivering for our customers. GBP 17 million of rents signed in the first 3 months beating ERV -- 3/4 rather, beating ERV by 11.5%. Q4 a full GBP 12 million. So we've been accelerating as this year has progressed in our leasing, again, handsomely ahead of ERV. And as we sit thinking about next year's rental growth, we're pretty confident that the last year guidance we gave, we will be well within that number. And actually, the best spaces that we've been delivering, we will be likely hire still when we come to report in May for the year ended March. And so you can expect to see some good rental growth coming out of our activities. I've touched on our Net Promoter Score, 26.1% overall against an industry benchmark of 13, so twice as good broadly. And within that, our fully managed spaces have delivered 48, which is an amazing result and testament to the skill of the team in keeping our customers happy. Point 2, premium developments, lots of leasing interest, 3 committed HG schemes, taken together the portfolio as a whole should deliver something around GBP 225 million of surplus using current ERV and as you will hear, we think that is looking very conservative. Aldermanbury is going well, finishes next year, circa GBP 27 million of surplus to come there. And on the other 2 HQ projects we have on site, both of them are either under offer fully to lease or have active negotiations on all of the space. So continuing this theme of the best spaces capturing early leasing interest and pre-leasing. We have 4 fully managed schemes. We've actually just delivered 2 of them. Simon will touch on those a little later. They've been leasing well ahead of expectations, which is a very strong result. And we have a further 2 finishing this summer. Point 3, beyond that, an exceptional pipeline, 3 big HQ schemes, Soho Square, you'll remember the acquisition of that done in 2023. The refined planning permission that we've been working on is expected imminently, and we're looking to start there over the next couple of months. Whittington House, our most recent acquisition in Alfred Place next to an opposite some of our fully managed schemes. We now have vacant possession, and we're expecting planning later on this year for an immediate start. And then, of course, St. Thomas Yard in Southwark, next to our other holdings down in that very interesting dynamic market where planning is now in and the economics of that scheme are building very strongly. So we've got high hopes for that. So 3 exceptional projects to follow on the heels of the three we're just on-site delivering today. We also obviously have quite a lot going on in our fully managed spaces, 3 imminent starts all of them in the West End. And if you add it all up, that's about 1 million in a bit feet and it's circa 40% of the book. So a huge amount going on early cycle into this supply crunch with good rental growth, we think, to shoot for. Now the fourth point behind our strong momentum is clearly our activity in the investment markets. We raised circa GBP 336,037 net proceeds last summer. As at the results in November, we had committed around GBP 200 million of that, including CapEx into 3 deals, 2 of which were for Flex, 1 for HQ development, all in the West End. And we have 1 further acquisition under offer, freehold, with income, development opportunity, best-in-class near cross rail, all of the characteristics that you would expect from us that we're very excited about. And if that deal closes, we will be circa all up GBP 320-odd million invested, including CapEx of the 336 net rights receipts. So by and large, we will have done what we said we were going to do, but ahead of plan, all in the West End and into some cracking opportunities, which if you add all that up, is why we remain very confident on our outlook, and we think we can look forward to accretive returns into the medium term. which is particularly interesting, given the discounted share price that we're currently trading on. Now I'm going to stop there. I think part of the story clearly is the money that we've been putting into our fully managed spaces. So I'm going to hand over to Nick now who's going to start by telling you why it matters to us.

Thanks, Toby. Hello to you all. We've been saying for a while that flex matters to GPE. And I think it's fair to say our conviction around that opportunity continues to grow. And for one simple reason, if you look at what customers are wanting from smaller spaces in Central London, they want flex and that's the way that you maximize return. We've been saying for a while that if you're offering sub-5,000 square foot spaces, it will become the default choice for customers. If you look at our own portfolio, 90% of those -- our customers have been taking that level of space on a flex basis. And if you look across the entirety of the West End, 77% of these smaller deals have been done on a flex basis. So it's become the default choice. The market is growing. As Toby touched on earlier, in particular, we are seeing the majority of customer demand from our flex spaces being from customers who were previously in Cat A spaces and more traditional spaces. And crucially, this is not just about one subsection of the market. It's not about SMEs. It's increasingly corporates, larger businesses that are taking Flex as part of their total office footprint. They may not be taking Flex as their global HQ space, but certainly, many of them are taking it as their central London base. They're paying a premium for these spaces. And you can see we're averaging north of GBP 200 per square foot through our fully managed rents. And we've been saying for a while, it will create income and valuation growth. I think it's fair to say it already is delivering income and valuation growth. Annualized NOI from our fully managed spaces is up nearly 60% over the course of the last 6 months. And I expect the trends that we've seen over the last couple of years, where some of our best ERV growth and our best value growth as being from fully managed. I expect that trend to continue. And so as a result, we absolutely maintain our strong growth ambitions. Today, around 20% of the portfolio is in flex. We expect that to grow to more than 30% as we deliver more space organically, and we undertake more acquisitions over the next few years. So flex matters to GPE, but it also really matters to our customers. It's underpinned by 2 important structural themes. As you can see on the left, number 1, customers are demanding premium workplaces. Location, location, location absolutely remains a buzzword, but in particular, being around key public transport interchanges, but customers are also wanting spaces that are amenity-rich. Both around the building and in the building, we're seeing more demand for outside space in the form of terraces and gardens, and we're delivering that and customers also want more flexible work settings, and we're delivering that. Within our flex spaces, we're delivering desk space, breakout space, meeting rooms, spaces to relax and socializing ever more important for our customers. And the second thing that our customers are ever more demanding is service. They want hassle-free experience. They want everything dealt with for them so they can focus on running their business, not on running their real estate. So as a result, we've been growing our footprint. But as Toby said, we're not looking to be everything to all people. We're absolutely focused on 6 targeted clusters. Three in the West End, being Fitzrovia, Soho and Mayfair and James's, Farringdon in Midtown around Elizabeth line station, around London Bridge Station on the South Bank and then in the city around Liverpool Street and Moorgate Elizabeth line station. And you can also see by the pie chart that the vast majority of the flex space that we're offering today is in the form of fully managed. Now on the next slide, we set out what fully managed is. I think it's important for us just to keep repeating the message. This is not coworking. This is us delivering spaces by the floor. We're not delivering it by the desk or by the room. Customer has their own floor and their own front door. We're fitting out the space, both from a furnishings perspective, but also from a technology perspective, so the space is ready for customers to plug in and play and get moving from day 1. And as part of the overall experience, we're trying to make the leasing process and this is a space we are leasing. We're not doing it by license or by membership, but we're trying to make that process as quick and straightforward as we can. We've got short form lease in place the customers can sign up to online through DocuSign. It's managed by an in-house GPE lawyer. And what we're seeing is customers being able to view space and moving quickly, fastest to date within 4 days from first viewing through to occupation. Crucially, what's our customers they're in, we're giving them a great experience. On Slide 10, we set out what we're offering. It's an all-inclusive offer. We're dealing with the [indiscernible]. So we're dealing with things like utilities, cleaning and maintenance, but we're also looking to offer a great service and great experience whether that's through our CX team, whether it's through our community managers or whether it's through our service partners. As I said, our customer base is continuing to grow. Frankly, it's growing by the day. It feels like we're doing a dealer day at the moment. In terms of who these customers are, you can see top right, some household names, people like Next, the FTSE 100 retailer, Bose, the audio guys. Financial Services and trading businesses, businesses you will be familiar with, Morgan Stanley, Talos. Businesses -- trading businesses that your kids will be familiar with, like StockX where they go to buy and sell their trainers and then also more traditional professional and business services firms such as accountants. Within all of this, and in Toby touched on this earlier, not only are we giving them great space, we're giving them a great experience and it's absolutely feeding through into our market-leading Net Promoter Score of plus 48.3% for our fully managed spaces. And as you can see on this slide, great feedback from our customers. Yes, they love the spaces, but also they love the people that are working in the spaces. Whether that's our community managers or whether it's our service partners who are delivering the daily cleaning or the security that they all need. This is all feeding into strong financial performance, and we talked about a number of these themes before. So top left of Slide 13, you can see that rents are growing faster for fully managed than they are for ready to fit, but crucially, they're growing in both areas. Top right, you can see our leasing momentum continues to build. We've done 35 deals year-to-date, on average, 9% and ahead of the March ERV. That includes 20 fully managed deals in the West End at an average rent of north of GBP 220 per square foot and an average beat of 8% ERV. All of that is feeding into strong performance, well ahead of our targets, and we've set out the history on the bottom half of this slide. We're delivering yields on costs in the high 6s, service margins well ahead of our 20% hurdle. The net effect of rent beat against the rent that we would be achieving on a more traditional ready to fit basis is north of 100%. We're delivering big cash flow beats. And whilst in our underwrites, we assume a 50% customer retention rates at the point of break or lease expiry. Our experience over the 12 months to September was 75% and for the 12 months through the end of February, 91%, so great customer retention. Last thing for me to cover before handing over to Simon. And as Toby touched on at the very outset, the platform is in place. It's driving efficiencies and economies of scale. The clusters are forming, customer retention is high and the prudent assumption that we make around GBP 5 per square foot per annum of refresh CapEx is proving particularly prudent. Our OpEx management is exactly where it should be. We're averaging around GBP 45 per square foot per annum. It's well managed. Economies are coming through and the breakdown of those costs, you can see at the bottom left of the page. We're capturing economies whilst also increasing the quality of our fit-out. Over the course of the last 4 to 5 years of the fully managed spaces that we've delivered, the average fit-out cost has been GBP 135 per square foot. We think it's going to have at least a 10-year life span. But it is fair to note that fit-out costs have been increasing. And today, would likely be underwriting around GBP 150 per square foot. On average, but clearly, it will depend on the micro-location and the building in which we're operating. And last but not least, the team and the expertise is in place, whether that's the design and delivery, whether it's the operations in CX or whether it's the leasing side. And all of these guys are leaning on all the wider experience that we have within GPE, whether that's on the development side, the acquisition side, the sustainability side or the reporting side. So talking of experts over to Simon, who is leading flex 24/7.

Thanks, Nick. And as mentioned by Toby at the top of the presentation, we've been really, really busy over the last few months, completing buildings and leasing them. So I'm going to take a few minutes to update you on progress at 2 of our recent schemes. I'm then going to cover 2 that are due to complete later this year before talking briefly about 2 that are on their start as orders. So beginning with SIX St. Andrew Street, which was our first building that we bought, developed and are operating specifically for fully managed. It's a building that sits in our Farringdon cluster, and there's space for 9 customers in this building, each with their own floor, but each benefiting from a range of amenities, including a lounge and boardroom, wellness facility in the basement as well as a rooftop meeting suites and cookery classroom that you can see in the image. Having launched the building in late November, we've already let 3 floors. The rents have averaged GBP 200 per square foot, well ahead of our valuers ERV. And when you net off the OpEx costs that Nick just mentioned as well as CapEx, head rents and head office costs, you can see that we are still being well rewarded over and above the ready to fit equivalent. The average lease length is also strong, and with 3 further floors under offer, yet again ahead of ERV, we are confident that it won't take long for us to let the remaining 3 floors in this building. Moving on to Alfred Place, where we've enjoyed similar success. This is a building we've owned for 10 years, it now sits in our Fitzrovia cluster. And of the 16 units, we completed in November we've let 11 of them so far, on an impressive average lease length at a rent that is comfortably ahead of ERV yet again. On which note, we've got a floor under offer at a rent that will exceed GBP 300 per square foot by the third year of the lease. It's good just to take a look at some of the logos at the bottom of the slide because we continue to see a good source of demand for our products from different sectors, but also from different origins. Both Toby and Nick have mentioned that a number of customers are now coming from Cat A. In fact, the majority are coming from Cat A. But some of these customers that you can see here have come from serviced offices. They're looking for a more premium product. They're looking for an experience and they're placing value on the self-contained nature of the space that we offer. Others have come from elsewhere in our Fitzrovia cluster, where we have managed to move to accommodate their changing occupational needs. But as I say, the majority of the floors in this building have been let to customers who are coming from a traditional lease who see value in the fully managed product and principal amongst those is Next. So Next are our largest fully managed letting to date, who we signed earlier this month. They're taking four floors from us at a rent that is ahead of both underwrite and ERV. They're also taking a 5-year term, which carries a valuation benefit for us. And interestingly, it was achieved by social media rather than through paying a broker fee, which is something that we would certainly like to see more of in the future. They decided that they would prefer to take space from us rather than taking a traditional lease and managing the fit-out and office operations themselves, which they could clearly do. It's yet further evidence that both Nick and Toby have alluded to, that corporates are turning to premium flex space to satisfy not just their short-term needs, but their medium-term office needs too. And this is a trend that we fully expect to continue when we launch 2 further projects later this year. So 2 schemes, 2 different clusters, both delivering best-in-class premium space for their submarket. First up, on the left, we've got 170 Piccadilly. This sits alongside five other flex buildings in our Mayfair and St. James's Custer. It's a building that provides bags of character. It's got a range of units that overlook the Royal Academy on one side and the new terrace that you can see in the image on the other. All the customers are going to get to use the club space, the boardroom and the meeting room suite, and we've got a range of unit sizes, which I really like. And we're expecting to beat the underwritten rent for this scheme when we complete later in the summer. Secondly, on the right, you've got 141 Wardour Street. This is positioned on the corner of two of the best streets in Soho, just a stone's throw from Dufour's place, which we also own. We'll be providing space for 6 customers here, 3 of them have private west-facing terraces, but all of them have access to the gym, the podcast studio, the rooftop terrace and a boardroom, which not to the sort of film heritage of this building also will serve as a screening room. We are already in pre-let discussions ahead of June at rents that I think, again, will significantly outperform the underwrite. And as those 2 schemes complete, we expect to be starting 2 others both in the Fitzrovia cluster, both being influenced by our learnings to date. We have been producing flex space for 6 years now, and we've built an operational platform and an experienced team who are bringing to bear their knowledge in both these schemes, how we design them, how we procure them and how we run them. On the left is Gresse Street, a building we purchased back in 2022. It sits close to the Elizabeth line at Tottenham Court Road. And it's got yet again, good range of unit size, good level of amenity and we anticipate receiving planning permission for this in June. At the same time, in June, we will be hopefully starting at the Courtyard building. We already have planning permission here. This is a building that sits directly opposite 31 Alfred Place, and that's a building that we've seen such strong interest in the last couple of months. This building, the Courtyard building, will contain a central covered courtyard space for customers to hold events and presentations, something that we are increasingly being asked for by our customers and something I think we will increasingly see being provided in flex spaces. Both of these buildings are set to add to our increasing flex portfolio. And specifically, they sit within the burgeoning fully managed component of that portfolio. This next slide, unfortunately, doesn't have any images. So a deep breath, has got quite a lot of stats on it. As you can see from the wheel on the left, our Central London flex portfolio is at 582,000 square feet today, of which the majority is fully managed in purple at 357,000 square feet. The reason for this, fully managed space is driving our returns. You've heard earlier that our NOI has increased by 60% in the last 6 months. And over the next few years, as our fully managed lease space organically rises to 538,000 square feet by 2030, we will reach a stabilized position of GBP 53 million of annual NOI, a 230% increase from today's level of GBP 16 million. With further acquisitions, the fully managed component will rise to over 3/4 of our 1 million square feet of flex ambition and produce an annual NOI of GBP 76 million. And remember, the services profit within that NOI when capitalized at our value as cap rate is producing GBP 200 per square foot of additional value over and above what we would have generated on a fitted basis from those same assets. So I think we're demonstrating that we are delivering a product that the market wants, the market is willing to pay for and that it's driving significant income and capital returns for us. Plus, we have opportunities to grow that in the very near future. So there's lots to look forward to. And with that, I'm going to hand back over to Toby to wrap things up.

Thank you, Simon. Thank you, Nick. So just a couple of concluding comments then before we open up to Q&A. And it's pretty clear to us, and I hope it is to you, too, that our positioning feels very strong. The flex spaces that we have been creating are now a core element of our offer. And there's a very simple reason for that, and it's because they're delivering great returns, and our customers are telling us that they want it. So if you're not in this game and you're in Central London, you're missing out because, as Nick said earlier, 3/4 of all deals done of less than 5,000 feet were fully managed or flex deals. So it's a key part of the offer. Great leasing momentum. We're beating our underwrite. I expect we're going to carry on doing that. If anything, you might see some of those beats increase, which is giving us really good confidence for the next round of the deliveries that Simon touched on. We've mentioned our team and the infrastructure. None of this would be possible without the quality of people we have in place. It's in-house, and it's taken us a while to build it, but they are a terrific team, and we're lucky to have them. So all of that adds up to significant income and value growth from here. As Simon has just touched on, lots of NOI growth to shoot for. And when we get to our 1 million feet, which we fully expect to, you'll see GBP 76 million of it, and lots of extra value in those spaces as well. As Nick touched on, our fully managed assets are some of our fastest growing capital value assets that we own. More to come as well, obviously, from our developments, significant capital going into those, but also significant surpluses. GBP 225 million, you may remember from the interim results is our base estimate for the surplus from our near-term schemes and on-site schemes. Were we to grow rents by between 5% or 10%, you can see that well into the GBP 400 million. And just to put that in context, that's 40% or thereabouts of our existing market cap. So a significant quantum of excess cash to aim for. We'll also obviously add to our future growth through more acquisitions. We said last year now was the time to buy not sell. Largely, we've done that, and you can expect to see sales to follow as this year progresses. So the cycle has turned. We are very excited about our prospects, and we think we are in the early stages of delivering some medium term of very accretive returns. A quick word on what's next? Well, the answer is lots of tours, lots of leasing updates, lots of conferences and of course, our results on the 21st of May, where we'll give you, as ever, a full download of everything that's been going on. And we are always more than happy to show anybody around any of the things we're doing, should you wish to outside any of these more formal events. So please do reach out to Stevie, to Nick, to Simon, to me and we can help you understand in a bit more granularity why we're so excited. But I hope you are as excited as we are. Over to you now for some questions. Max, back to you.

Great. Well, thank you very much. That was really comprehensive. [Operator Instructions]. Maybe I'll start with some of the questions I've been sent and then we can kind of jump between that and on the Q&A. And maybe a relatively straightforward one that we sent in, what's been the biggest learning that you've had from this? And has there been anything you've seen in the flex side of things that you've actually thought you know, that would be quite an easy quick win that we should be doing in our HQ portfolio as well?

Simon -- most jumped out for you? And then Nick, perhaps stuff that you think we might be able to apply to our HQ portfolio.

Yes. I think, Toby, one of the biggest learnings probably has been related to the second half of that question, which is that when we are the ones who are operating, managing this space, but also we are the ones who carry all of the costs. The types of finishes that we choose, the size of the tiles, all of these minute details become so much more relevant. And that, I think, has helped us refine our products from a fully managed perspective, but it is also influencing the way that we're designing some of our HQ developments, too. We have always felt that we are a responsible developer that we have the interest of all of our customers at heart, but when you are designing something where all of those costs come through our balance sheet rather than through a service charge, it means that I think we are putting far, far greater understanding towards how we are developing the HQ business.

The thing I would say is, look, the -- we've always had good relationships with our customers. But one of the things that's increasingly clear through the fully managed side is that our customers are demanding both great space and great experience. And part of that experience is their relationship with us at GPE. And so I think it's fair to say we've been doubling down on the level of dialogue and interaction we've been having with some of our HQ customers as well. Some of them are very happy for us to deliver the space and operate as their own, but many of them want to work with us around delivering their sustainability needs, how we can work together to drive employee footfall back into the office, which I think is now a topic of yesterday rather than today. But I think having this mindset within the whole of GPE around customer centricity is one of the reasons why we see the strong synergy between Flex and HQ. But I think one of the things we're also seeing is this ability to move customers not only between HQ and flex spaces, but within different assets within our flex spaces. We feel the synergy is super strong there.

And the only thing -- sorry, Max, the only thing I would add to that is it's a slightly different answer to a different question. But question, why did we not do this earlier? I mean it's now so obvious to us that if you look at the stickiness of our customer relationships, if you look at our retention numbers, our most recent retention figures are in the 90s, yet clearly, leases are marginally shorter. The fact is it's hugely popular with customers. So to me, it's a total no-brainer as to why we are doing what we are doing in the fully managed spaces. And I do expect to Simon's point, some of the design ideas, some of the service components of keeping customers happy, will find their way into H2 developments over time. I've got no doubt.

Great. That's helpful. And some questions coming in on the Q&A. Besides operational delivery, what can you do over the coming months to close the gap between the share price and the NAV. And maybe just related to that, because of another question that came in e-mail over yesterday, in light with one of your peers who sold a significant chunk of one of their key assets. And is that something you guys would think about one in the HQ space or in the flex space over time?

Okay. Well, I'm going to put that -- I don't know who asked the question, but I put it back to whoever did the fastest and best thing that you can do to close the gap is start buying some shares. And clearly, you're not going to do that if you believe the story we're telling you, and I hope you do. And if you don't, come and have a look at what we're doing, and we will see if we can persuade you. So that would be point number one. In terms of the sale, I mean, it's a really interesting debate this. I passionately do not think we should sell that asset just to please and prove evaluation. It may well be the right thing to do to sell an asset if it's the right point in that asset's life cycle, then yes, we will sell it and we will get, I believe, book value for it. But to sell an asset just to prove a point at the wrong point in its life cycle would be wholly wrong from a shareholder return perspective and doing what's right for shareholders, I believe. It's interesting if you're referencing the big trade made whenever it was earlier this week, was it even yesterday. That -- we have performed from a stock price since then, broadly in line with them, and yet we didn't make that sale. So it isn't clear to me that necessarily you get performance at the stock price level and okay, it's only 1.5 days later, but it isn't clear to me that necessarily, it solves the problem. We can only do the things that we can control, and we passionately believe that an asset is a cyclical beast, which is why we are so contracyclical, which is why we've been so firmly a net buyer when prices are in some way disrupted, and it is why we will transition to be a net seller as markets strengthen and recover. And we've said this very clearly. I think we will be quite a significant net seller over the next 24 months as we execute the plans just like last time, that we've put in place. And I don't see any reason at an asset level for us to change that nor am I seeing much evidence that sales of assets to satisfy short-term needs of equity markets will solve that problem fundamentally. Nick, is there anything you want to add to that?

No. I think I mean the other thing is a related question that we get quite regularly out to be fair when we're on the road about sales is selling fully managed assets. And I think the truth is we will, over time, but again, we will apply the same discipline that we always do is why don't you sell something if it's forecast to deliver returns, how do you cost of capital? And our fully managed assets absolutely are. At some point, there might not. Equally, at the point they don't, you've probably got a much longer track record of delivering income. So the stickiness around that income and the ability to retain customers will have gone up, which I think will make them more salable assets because they'll have a track record around them. And add to that, there's already many a provider in the market setting themselves up to not necessarily buy the assets, but to manage those assets to support the people that we think will want to buy the assets at a later date. But today, given the performance that we're getting out of fully managed will be wholly the wrong time to be selling out to them. We apply exactly the same approach to the fully managed assets as we do to the HQ assets, one of the marginal differences being you get some of the synergies between the individual fully managed assets. But none of that, by the way, is going to be reflected in the valuation. Each of the fully managed assets is valued as a stand-alone asset, in respect to the fact that actually we can share economies and also customers between them.

Got it. That makes sense Yes, absolutely. And here's a question that's coming in about tenants increasingly complex requirements, how realistic is your 10-year lifespan assumption? What kind of costs you expect to -- will be needed to refresh at the end of those 10 years? Maybe a question for Simon there. I know you talked a bit about actually your GBP 5 a square foot CapEx assumption, but maybe you could elaborate on that.

Yes. Okay. So I think when we're designing space, we're wise to the elements that are likely to be subject to trends. So there are things like accent colors in cushions, et cetera, et cetera, things like that, the dressing that we put into space, the work that we put into space. It's not particularly the most expensive stuff. The stuff, which is fundamentally consistent like flooring, desks, chairs, meeting rooms, et cetera. Those are things that we are making sure that we're putting in things which are robust and things which are likely to stand the test of time from an aesthetic perspective. Secondly, yes, there is a GBP 5 per square foot per annum allowance for refresh through our cash flows, but also in certain buildings, there's also a planned preventative maintenance budget as well. So we are being prudent in how we're looking at the refresh. And then the final thing I would say is that we are now predetermining where in a space customers can make changes. So if some -- if a customer wants an additional meeting room or an additional exec office, we're predetermining where that goes. So we're making sure the M&E is already kitted out for it to minimize the cost. That is a cost that the customer would bear. But if we reach the end of a lease and we wanted to relet the space with more meeting rooms because that was the way the trend was going, we're actually removing some of the sort of inefficiencies that would have occurred otherwise by actually thinking about that when we designed the space day 1.

And Max, just to add to that, kind of euphemistically put on my slide, enhanced customization management. What that really means is trying to reduce the amount of customization. But if the customer is prepared to pay for it, we'll actually deliver it. But we're seeking to reduce that. And if you go around our spaces, one of the things I think the team are doing really well is giving each of the buildings its own unique feel, but a lot of that unique field sits in the immunity common areas but start to generate some uniformity across the office spaces or consistency, I'd say, rather than uniformity so that we can then share to the extent that customers do want to set out the space differently. We can use some of those desks and tables and chairs in other of our spaces.

That makes sense. And maybe the question that's come in that's related to that and around the next deal and how that kind of came about? And this theme of more large corporates moving to this kind of model, was the 5-year term, was that their decision? Or is that kind of something that you came to an agreement on? And also the fact that there were no brokers in this process? And is that something that you could see happening more of in the future? I guess the question generally kind of framing around what's different about this kind of going into the larger corporate space and positives and negatives on that front?

Simon, do you want to go for that?

Yes. So next, at the moment, fairly anomalous insofar as that 5-year term is longer than we have granted to others. It was a mutual decision, but frankly, it was something that's tied in with their own expansion plans. They were under offer elsewhere to take traditional space. So they had already done some fit-out plans, but they were finding that the process with the other building was becoming increasingly frustrating. And we had accessed their requirement via social media, our Head of Retail had actually posted some of the work that have been going on in Alfred Place. And that's how we secured their interest. We then went through a process of just modifying the space that we had in the building, just mainly removing some furniture, adding a little bit of extra meeting room space for them, but very little in the way of customization, which means that they can move in next month rather than after 6 months, say. So for us, it actually works because over 5 years, we now know that we have no void. So we have no likelihood of any other agency costs, broker costs, et cetera. There's also some yield compression to reflect the length of term that's been granted. And so all of those things actually added up pretty well for us, and it worked well for them. So I think it's probably symptomatic of what we think will start to happen more often. This isn't the first corporate of scale to take flex space. It's just the largest one that we've done to date. And we've also seen traditional occupiers take space in the city on fitted basis for many, many years. So I think there is a degree of even though they have the capabilities and the wherewithal to do it themselves, the idea that the owner of the asset does this for them is really, really well valued, more so in many cases than the actual flexibility that people think is inherent in the word flex. It's actually the hassle-free nature, which is driving the most value, I think, in our customers' minds.

And Max, I think it's fair to say different customers want different things. We've got some space under offer in the city at the moment to another FTSE 100 business. They only want it for a year because it's going to be swing space for them, but they're going to be paying a -- the rent will be north of GBP 200 if that deal goes through. So different customers will want different things. But I do think that as Simon says, at the margin, we will see more of these kind of deals coming through, particularly as a lot of corporates are used to signing up to longer leases. They -- when they're moving their people, they want to know their people are going to be there for a decent period of time.

Got it. That makes sense. And maybe another one for Simon, I'm getting questions about coming from serviced offices. What are the sort of feedback you're hearing from these corporates that are saying that we've done service offices that isn't for us for these reasons, XYZ and what are those reasons?

Well, I think number one that we've seen is the -- very few of the serviced office operators actually own their assets. And it's that inability to get clear answers, get clear rectification of issues that has frustrated some of those customers. The second thing is this idea of maturity. For a long time, if you wanted your own space, but you wanted someone else to manage it for you and you wanted a bit of flexibility, the option just wasn't there. And so people sat in serviced offices, which quite often are boxes along a long corridor, where you share kitchens and you share meeting rooms, and they might not always be available when you need them. Whereas now you can take this kind of space from people like us. And I think that's the thing that people are really valuing really, really highly.

The other thing I'd add to that, Max, is that there's a maturity thing going on here. So we've tended to find the businesses who grow want their own presence, their own visible branding, their own front door. They become much more nervous about confidentiality about sharing space with others, which is why I mean, as Nick said up front, so emphatically, this is not co-working. This is floor-by-floor as we've always leased in these sorts of building sizes, floor by floor with your own front door, it's simply to Simon's point, we're making it hassle-free for you. So these are businesses that are growing up, and they are sort of elevating out of a few desks in a room to a floor, which by definition also tends to mean you're getting better covenants and a higher proportion of decent corporates, very similar to the customer base we've always actually had in these buildings. So I think that that's also very relevant. It's also why we're never going to go into the co-working model.

Got it. And a question here just on the slide where you're showing the performance on a net basis. I appreciate it might be difficult to quantify perfectly, but I'm still not clear on a truly net-net-net basis, i.e., everything you could possibly include there, what that differential is between the traditional HQ space over a 10-year basis versus the fully managed, is it that 127% figure? I think it's Slide 13, if you're able to go to that one, Steve, there we go. Yes, maybe if you could just kind of highlight to everyone what is the number that we should really be focusing on here?

I'll take that. So -- I mean the relative measure, the best one, I think, to look at is the relative cash flow beat rather than the net effect of rent be, they're both relevant. And the relative cash flow beat here is clearly post the fit out that we talked about and also post the refresh CapEx that we talked about. This is on a 10-year view. . And you can see there on average 88%. What we have shown later in the deck, and this is across the -- all of the leases done in the last 12 months, what you'll see we've done at the individual building level is taken a level further. And rather than doing it on a 10-year view, we're doing it as an as-at-today-view, so effectively taking the headline rent all the way down to a net effective rent post OpEx. From that, we're then deducting the circa GBP 135 per square foot, whatever it has been for that building. The GBP 5 refresh and an element of corporate overhead, and we're assuming that around anywhere between 10% to 15% of our corporate overhead is attributable to a fully managed and that gives you on this specific building a 44% relative beat to rate fit, not quite the same number at the ATA because they are taking a view on 10 years and there are clearly lots of assumptions around lease renewals, et cetera. But I think -- and this is analysis that we'll continue to share going forward with you.

And I think, Nick, correct if I'm wrong, but I seem to remember when we were looking at this the other day, across the whole of our fully managed portfolio, we're somewhere in the mid- to high 40s percent speeds.

Yes. Yes, if not a touch higher.

And that is 5x net, right? So it's the thing as you've just described. And the other interesting thing to say about that is that the downtime of the income that we are receiving through are fully managed is much less than one might naturally imagine given the average lease length of, say, 2 to 3 years because our retention rates are so high, our renewal rates are so high that actually, in effect, the stay time is a lot longer than the lease duration thus far. And in our last quarter at 90-odd percent renewal retention rate, that's a phenomenal number.

And I think one of the things that Simon touched on next being through social media, the -- as the clusters form, as our name becomes more known in this area, I think -- I don't think we're going to be able to dis-intermediate brokers and agents entirely, but if we can reduce the cost of acquisition and then have no cost of retention, then that will really drive through into some of the performance. And it's why the focus is equally on winning and bringing new customers, which is clearly very important at the moment as we're ramping up our growth, but also making sure that we look after them when they're in. One of the things that we've done of late, we've just got one of our team. He's now entirely responsible for one thing only, customer retention, retention, retention and his job is to keep absolutely focused on those customers, make sure I have a great experience. And if what they need is different to what they currently have, can we find them another home within the portfolio? And things I add, do move the needle. And the margins are good here. But if we can improve the margins further, particularly bearing in mind that rents have been growing faster than OpEx, we had a brief hiccup as it were in OpEx when you -- energy bills went through the roof for the reasons that we know early in the war. We feel as though we'll be able to maintain, if not push on the margins that we're generating.

I think a good example of this or evidence of this is Dufour's Place, our first building. The initial commitment was, on average, 2.25 years. the average length of stay so far up to today is 3.4 years. So good evidence of actually putting the customer first, giving them a great experience, having someone dedicated to making sure that you get that retention is really paying off. And every operator that you talk to would say the same thing. Retention is the key.

And just on the value, I think it's probably too soon to say, but are they giving you credit for that -- the fact that the lease length is relatively short, but the retention is extremely high. Is that something to come, do we think?

Yes. The answer is yes. I think other thing to say, Max, particularly coming back to this question about net-net-net, we will set this out clearly in the full year results. We thought it was quite a heavy thing to be doing at 3:00 on a Friday afternoon, but we'll absolutely do that as part of the results.

Mark, since you mentioned valuation, Nick, do you -- there's a question in here about how the managed -- or fully managed space is treated from a valuation perspective. It might just be worth touching on that as well?

Yes. I mean they've been relatively consistent around this for the last few years and our independent valuation is provided by CBRE, and we know it's very similar to that used by the same, the likes of JLL and Knight Frank as well. Put simply, they apply what you would view as a traditional yield on the fitted rent. So let's say, it's a building in the heart of Soho, it's probably a mid- to high 4s. If it's in the city, it's probably in the 5s. And then they have been applying an 8.5% cap rate to the service margin, and they've been doing that irrespective of where the building is. And so clearly, that is a much higher delta to a West End building than, say, a city building. I think that is one of the things that will evolve over time, particularly as the proof around the stickiness of the income, but also the consistency of that service margin comes through. And as I said earlier, I think that we will start to see more transactions in the market that will prove out the valuation of fully managed assets, whether that's at the individual asset level, or whether that's through corporate transactions. We know there are some -- there's clearly lots of M&A going on in REIT world, there's also a fair bit of M&A going on in the flex world as well.

Got it. And maybe just conscious of time as we are running out, but one last one, if I can ask you, what is the average introduction/agency fee or months of rent equivalent, please? I know you talked about the fact that Next didn't involve that, but for the others.

Yes. So that's -- it's worked out as a percentage of your net effective rent in year 1. And so it broadly equates to around about a month's rent free. But as Nick mentioned, we're doing more directly with the retention rate, the actual percentage of our total income that we are paying away in broker fees is probably more akin to 5% because of that average.

Got it. Got it. Okay. Great. Well, listen, I think we're getting -- I think we've just exhausted all the questions in the Q&A and the ones that have been sent into me. I've actually have -- there's one last one on here, which may be extremely short answer, I think Toby might be able to answer this one. Obviously, the London-based model is very successful. Is there any plans to expand this into the north?

Not beyond the North Circular, no. I mean -- and actually, just if I may wrap up, Max, I mean, one of the principal reasons for that is we have very strong conviction, as I started with, in the tailwinds that we're now enjoying in the London office market after some pretty great years that you guys will all be familiar with. But if you look at what's happening on the ground right now, the Street are busy, we're beating our underwrites left front center, and there genuinely is real momentum. So we don't feel the need to broaden away from our core operation areas. In fact, if anything, we are getting more concentrated in those markets than less. And I think that is probably the way to look forward from here. And indeed, as we look forward over the next few months, there's lots and lots and lots to look forward to. Our fully managed spaces are doing really well. We're expecting a lot more excitement out of them. Our H2 developments are doing really well, new business has been a great story for us. And as I say, we've got some interesting things under offer. So fingers crossed on that. And we've got real tailwinds in our leasing markets. So lots to look forward to there. We're doing what we said we were going to do. That's been a hallmark of this business for many years. And one day, one day, it will translate into performance at the equity level. And if it doesn't, we'll have to find other solutions as we've talked about before. But in an operating level, there's a lot more to come from us over the next few months. We've got plenty of opportunity to tell you about that, not least with the results coming up in May. And it just remains for me then to thank my colleagues, but also all of you for joining us today. And as ever, any more questions, we'd be delighted to take them offline. Thank you very much.

Thanks, everyone.