Great Portland Estates Plc ($GPE)

Good morning, everybody, and welcome to our results presentation. There are a few seats scattered around. If you don't want to stand at the back. Do -- there are 4 in the front over here, if you wanted. Thank you, everybody, for coming. Great to see so many of you, and we've got a lot to get through. So I'll crack straight on. But I, first of all, want to welcome Jayne. Many of you will have met Jayne. Jayne took over as CFO about 5 weeks ago. She's had a cracking start, but these are her first results, so go easy on her. Okay. And what I'm going to do, first of all, is start by summarizing the key messages we'll be giving you over the next 30 or so minutes. And this year has been all about us executing on our growth strategy. We'll tell you about our excellent operational performance, delivering record leasing well ahead of target, with acquisitions made at discounts and sales at premia, and creating more prime spaces into a Central London market starved of such quality. And as we think about the next few years, we'll explain how we have both strategic and financial flexibility, should we see a macro-driven downturn. But absent that, we are well set to deliver both strong income and value growth across our portfolio, and we fully expect to deliver accretive total accounting returns. So as ever, we have a full agenda for you this morning to help tell this compelling story. I'm going to start with a reminder of our progress against our very clear strategy. Jayne is going to take you through the results and what to expect next. And I'll then address our market opportunity, look at capital allocation and conclude with our outlook before opening the floor up to you. And as ever, we have the full senior team here to help answer questions. So let's start then with our growth strategy. And you will remember, our key strategic themes shown here on the left, and we've made excellent progress against each throughout the year, doing exactly what we said we would do. First, Prime Central London. It remains the largest city economy in Europe, and is growing faster than the U.K. overall. But to really benefit, you need to be in the center, which is where 100% of our attention is focused, and we concentrate on the best only, where the outperformance against the rest is accelerating. Second, we create and manage premium HQ and Flex spaces. Their quality has enabled us to deliver a record leasing year with deep demand for our space, signing up customers at rents well ahead of ERV. Our rents are still rising. And even after substantial growth, we argue that they remain affordable, especially given the price inelastic nature of many premium customers. Third, contracyclical capital allocation, never more important than in volatile conditions such as we have today, and delivering on the promises we made at the time of our rights issue. We've continued to buy well, almost GBP 500 million, including CapEx since our rights issue at a significant 60% discount to replacement cost. We've been developing some of the best spaces anywhere in Central London, delivering into a market starved of such quality, and their valuations were up 22%. And we've sold out of completed business plans, as we said we would, GBP 490 million at a 2% premium to book value. Fourth, driving innovation, leading the market with world first in our circular economy activity and with our award-winning CX teams, delivering exceptional experiences and an industry-leading Net Promoter Score. And all of this activity, always supported by a strong balance sheet and low leverage. Liquidity today is high and LTV is where we want it to be. As we well remember from the many macro crisis we've navigated through over the years, having financial flexibility gives us the luxury of strategic options. However, the macro story unfolds, investing for growth and/or returning excess capital to shareholders. Finally, strong EPS and NTA growth. We're delivering here, too, with both measures ahead of consensus, and we've raised the dividend. Looking forward, we are on target to deliver 3x EPS growth over the medium term and a 10% plus return on equity this financial year, along with a 3-year annualized ROE well ahead of our cost of capital. So a strong strategy that is right for today's volatile world and a business delivering on its promises. Turning briefly then to our excellent operational performance. And as you can see on the chart, our leasing has been outstanding with a record GBP 70.9 million let, 10.3% ahead of ERV, with the fourth quarter, the strongest, at a 15.8% beat. And we are maintaining last year's run rate into Q1 this year with no discernible impact from the current hostilities in the Middle East. Rent roll was up 46%. Rental values were up 5.8%, led by prime offices, up more than 7%. Vacancy was better than forecast, as was our fully managed customer retention, at 64%, where AI-led customers now account for some 27%. We made attractive acquisitions at a 70% discount to replacement cost, added only GBP 590 a foot, whilst our GBP 490 million of premium sales closed at more than twice that at over GBP 1,200 a foot. And we made strong progress against our development and our refurbishment activities, finishing 380,000 feet on time and on budget. From here, we've given ourselves a great platform for further growth. We will be crystallizing sales of more than GBP 1.2 billion of stabilized assets, developing to generate organic surpluses of between GBP 260 million and GBP 430 million, and generating significant organic income growth, up 95%, with a 2.1x increase in our fully managed net operating income, all of which will, of course, combine to deliver significant NTA and earnings growth from here. More on all of these opportunities in a minute, but first, over to Jayne to look at our financial results.

Thank you, Toby. Good morning, everybody. Thank you for joining us today. I'm pleased to be presenting my first set of results for GPE. I'm very much looking forward to taking you through our numbers and what has been a great year for the business. So I've been with the business now for a couple of months, and I've received a fantastic GPE welcome, a great business with great people and an outstanding product. What has particularly stood out to me over this period is the discipline with which the strategy has been executed and the consistency of performance, driving both earnings and value, supported by the quality of our portfolio. We are focused on long-term returns, but also have the strategic optionality Toby referenced earlier, which emphasizes the resilience of our business. So turning first to our financial results. These are delivering upon our growth strategy of driving both income and value. Our earnings per share is up by 63% to 8.5p, ahead of consensus. This, in part, is as a result of our record leasing year and growing our fully managed space, including the leasing of 100% of Wardour Street within 2 months of completion as well as the full year benefit from Alfred Place in SIX St Andrew Street. Our dividend was 8.2p per share, an increase of 4%, which is a reflection of the confidence in our earnings growth, and this is fully covered. Moving on to our value growth. We saw a like-for-like valuation increase on our portfolio of 4.3% as our assets continue to outperform the wider office market. Our focus on high-quality buildings continues to support the demand for well-located, high-specification office space in Central London. All this hard work has increased our EPRA NTA to 524p per share, an increase of 6.1%, which is also ahead of consensus. We have maintained our financial strength. And as we set out last year, we have transitioned to a net seller with GBP 490 million worth of sales, which included 1 Newman Street and Wells & More. This has contributed to the reduction in our LTV from 30.8% to 28.6%. Liquidity increased to GBP 412 million, an improvement of GBP 36 million, providing good headroom across our facilities. With strong ERV growth of 5.8% in the year, we continue to make progress towards our objective of delivering a return on equity in excess of 10%, achieving 7.9% this year. If we turn to our property valuation in more detail, you can see from the table on the left that overall, we have seen both valuation and ERV growth of 4.3% and 5.8%, respectively. If we dig a little deeper, you will see that offices, which are 87% of our portfolio, have seen the highest valuation and ERV growth. Whilst our retail assets have not fared quite as well, this represents only 13% of the portfolio. The fully managed assets have seen valuation growth of 4.4%, whilst the stabilized portfolio grew by 3.6% and the development saw strongest growth at 22.2%, with an GBP 82 million development surplus captured within the valuation, which is not easy when construction costs are still rising. Today, our top initial yield is 4.8% and our true equivalent yield stands at 5.6%. On a reversionary basis, this rises to 7%. But as you can see, much higher at 9.8% on a share price implied basis. As you'll hear many times today, it's the best versus the rest. 73% of our portfolio is at an EPC of A or B, which saw valuation growth of 6.4%. However, the assets that are not in the 73% are buildings which are being repositioned, and they will ultimately have an EPC of A or B and their value will realign accordingly. In addition, 73% of the portfolio has a capital value in excess of GBP 1,000 per square foot, and it's these assets that have also seen the highest increase in valuation at 5.9%. And the West End continues to outperform the rest of London. The 66% of our portfolio here saw a valuation increase of 6%. All of these demonstrates that we have a portfolio positioned for growth, which as you can see is reflected in our impressive organic rent roll growth of 46% over the last 12 months. The rent roll now stands at GBP 153 million. Absent sales, we expect this to continue to grow by around GBP 42 million over the next 12 months, with the leasing of vacancy and capturing of reversion adding around GBP 16 million, and then our development and refurbishment program delivering a further GBP 26 million. Looking further ahead, with the completion of our on-site developments, including The Delft and Whittington House and 10% rental growth, our potential rent roll would almost double from where it is today to GBP 299 million. But as you know, we are also recyclers of capital. And once our business plans are complete, we are often keen to move them on. Therefore, assuming GBP 1.2 billion of sales over the medium term, rent roll would reduce by approximately GBP 60 million over the same time period. So what does this mean for our earnings? Ahead of market expectations, our earnings per share have grown by 63% from 5.2 to 8.5p. We expect further growth over the next 12 months, targeting an EPRA EPS of around 10p, an increase of 20%. Beyond this, whilst the journey may not be linear, the growth in rents shown below shows that we are well on our way to tripling our earnings from April 2025. And as you can see from the purple bar, fully managed is set to become a major contributor to rent roll. And it's this part of the portfolio that continues to go from strength to strength. Looking at the chart, you can see we have grown our net operating income over 3x in the last 2 years, from GBP 9 million to GBP 28 million. This is ahead of our target time frame due to the excellent work of our team to complete refurbishments and lettings in short order. Our recent completions, including 170 Piccadilly and Wells Street will deliver a further GBP 6 million. Beyond this, we're on site with 5 fantastic schemes, including The Howlett and The Courtyard, and these will grow our NOI by GBP 16 million, with a further pipeline of 6 refurbishments, including 175 Piccadilly and the completion of Kent House providing a further GBP 8 million of NOI. This organic growth over the medium term will more than double our NOI to GBP 58 million. The service profit on this growth is also generating additional value on the portfolio of around GBP 150 million as the space is completed and let. This remains a fantastic organic growth opportunity for the business. Our ambition is to continue to grow this product, and we are targeting a GBP 100 million NOI post future acquisitions of around 375,000 square feet of space. And indeed, as you can see from the blue circles that fully managed is becoming a much larger contributor to our P&L, rising from just 8% of gross profit 2 years ago to 28% today, and we expect this to be more than 40% in the future. We also continue to drive value growth from our developments. We have a GBP 590 million CapEx program with a gross development value of GBP 1.6 billion, mainly in the West End. Highlighting the dark green bars, we are currently on site with 6 schemes at various stages of completion, with a further GBP 223 million of CapEx to come. The light green bar show our pipeline of a further 3 schemes, which have a CapEx of GBP 367 million. If you assume 10% rental growth, we expect to deliver surpluses on these schemes of GBP 260 million. There is also the potential for further growth from this program. For example, if we see further rental growth over the next few years, 20% growth would equal a surplus of GBP 330 million, and illustratively, if yields were to compress by 25 basis points, the surplus would increase to GBP 427 million. Our growth is underpinned by our financial strength. Our team have been busy putting in a new GBP 525 million ESG-linked RCF and extending our existing GBP 150 million RCF with our partner banks. These facilities give us liquidity certainty and no refinancing needs until October 2028, particularly relevant during these volatile times. Moody's reaffirmed our Baa2 investment grade rating, and we have significant headroom against our covenants. Looking at the top right, our robust debt metrics highlight the strong position we are in, with a low LTV at 28.6% and available liquidity of GBP 412 million. And this means we can be agile in an ever-changing market. Our weighted average debt maturity has increased to 5.4 years, and our weighted average interest rate has reduced to 4.3%. Altogether, this puts us in a great position as we move forward through 2026 and beyond. This chart is an illustrative pro forma of our loan to value through the cycle of our existing and pipeline activities. Our on-site CapEx, near-term sales of approximately GBP 200 million, and development surpluses show that LTV would fall to 28.1% in the next 12 months. And whilst the further pipeline CapEx, development services and rental growth pushed the loan to value up to 32.5%, we would expect to realize sales of a further GBP 1 billion over the medium term. This reduces our LTV and gives us flexibility and options around further acquisitions and/or the return of excess capital to our shareholders as we have done previously. Bringing all of these components together, as we look forward, we are excited about the opportunities it presents. We expect to deliver a further 20% earnings growth in the next 12 months as we capture our 95% organic rent roll growth potential. As we grow, we will deliver -- we will drive both operational and corporate efficiencies through economies of scale and technology. Our developments will deliver surpluses of GBP 260 million. And as we expect to remain net sellers of assets, we will crystallize these surpluses with anticipated sales in excess of GBP 1.2 billion over the next few years. Supporting this will be our disciplined approach to capital and liquidity management. We have a flexible debt book with the ability to support future growth, and we will maintain our 10% to 35% LTV range through the cycle. As we capture the prime rental growth opportunity and complete our development pipeline, we are on track to deliver an above 10% return on equity and maintain our progressive dividend policy. So in summary, this is a business well placed to continue with its growth strategy despite a backdrop of macroeconomic uncertainty, and I'm very much looking forward to being a part of it in the years to come. And with that, I will hand you back to Toby to talk through the market.

Thank you, Jayne. So let's turn then and look at our market opportunity. And the first point that I want to make is despite all the macro uncertainties around today, leasing conditions in our core markets remain strongly supportive, and we think that best rents are set to rise further. Let me tell you why. In short, it's because demand for space is materially outstripping supply. In fact, demand is at record levels today, perhaps driven by the expectation of further growth in office jobs, shown by the blue box on the right, expected to grow by a further 170,000 by 2030 and remarkably up 33% since Brexit in 2016. The green bars show how this jobs growth has been converted into increasing take-up, now well ahead of the 10-year average, as well as much stronger levels of active demand shown on the right, up 13% in the last 12 months. And today, it's circa 40% ahead of the long-run average, and more of these companies are looking to expand than contract, 47% versus 15%. And all this demand is colliding with a supply drought of new offices that remains acute. Bottom left, the bars show the history. And as has been clear to us for many years now, this situation is not going to change anytime soon. Indeed, if you take the annual average speculative supply for the next 4 years, divided by the long-term average take-up of new space, we are some 53% short every year out to 2030. And remember, the vacancy rate of Grade A space in the core is already virtually 0. It's only 0.3% in the West End. So it's no surprise then that we think there's more rental growth to come, shown on the chart, bottom right, with prime space to continue outperforming strongly as it has done since the end of the pandemic in '21. And despite this growth, we think these rents remain affordable, as they still represent only a fraction of the average London businesses salary bill, some 7% on average. So growth in prime, absolutely playing to our strengths, with our 100% core locations and 91% next to a [ Lizzy ] line station. Turning then to look at the investment markets, where the story is a mixed picture and a little less clear cut, although we are seeing liquidity for prime assets despite macroeconomic volatility. Looking at the chart, top right, you can see that overall, real capital values have been flatlining since our '24 capital raise, with the nominal up 6%. Our own assets have been faring rather better, up 8.1%, driven by our focus on the best locations and the rental growth I've just described. Meanwhile, yields in both the city and the West End, shown bottom left, are stable, although we would argue that this hides the widening bifurcation between, on the one hand, prime liquid assets, where there is some downward pressure, and poorly located ex growth assets on the other that simply aren't selling and remain overvalued. Hopefully, there are signs of a recovery in investment volumes from 2024's lows, shown by the green bars, with '25 up 50% versus '24 million. And as shown by the pink bars, the number of larger transactions was also up strongly last year by 118% for deals of GBP 100 million or more. And we expect this momentum to continue as equity demand for London assets is up again, now standing at more than GBP 25 billion, and this matters to us as we prepare some of our larger prime stabilized assets for sale. Plus, of course, with our healthy liquidity, we stand ready to take advantage of these volatile conditions, to acquire future pipeline opportunities at discounts as we have been over the last 2 years. So to sum up then with our market outlook, which strongly supports our strategy of focusing on the best assets and in prime locations only. For rents, whilst macro uncertainties have increased since our interims, affecting confidence and business investment, the combination of decent demand and the continued supply drought have enabled us to deliver office rental value growth at or above the range we set out in November, as shown by the middle column, bottom left. Now these conditions also allow us to maintain our guidance of plus 4% to plus 7% for offices this year, still with a notable outperformance of prime versus secondary quality space. Looking at yields, heightened political risk and a less accommodating interest rate environment will continue to have a dampening effect on yield compression in the near term. But beyond that, it's clearly hard to read at present. That said, evidence of deals transacting right now supports our long-held view that the best, most liquid assets will continue to attract more downward yield pressure than the rest. So in this context, let's turn then and look at our capital allocation over the past year and consider what's next. Now you'll remember this, our contracyclical capital allocation model. The blue line shows the long run of real office capital values in Central London, the green bars are net acquisitions above the line, net disposals beneath. We raised capital, the green circles, to acquire discounted opportunities when markets are distressed, as was the case in '09 through to '13 and again in 2024. We then repositioned these assets into the inevitable supply crunch before selling completed HQ business plans as markets recover, and returning excess capital to shareholders, shown by the pink circles. Last cycle, following more than GBP 3 billion of realizations, we returned in excess of GBP 600 million to shareholders, more than twice the capital that we raised from them. Now looking at the current cycle, as you can see on the right of the chart, we transitioned over this year from a net buyer to a net seller, shown by the green bar. We've been selling stabilized assets, benefiting from rising prime rents, shown by the blue dotted line. But we've also bought well, taking advantage of market weakness for nonprime buildings in prime locations, buying, repositioning opportunities of the orange line at sizable discounts. So our model then is alive and well, and we are successfully exploiting the best versus rest bifurcation that we've talked about. What next? Well, as Jayne highlighted earlier, we expect to be a net seller this year too, and let's turn and look at some of the detail, but I'm going to start with acquisitions. Six deals done since the rights issue in '24, all in the West End, for a total of GBP 231 million or only GBP 756 a foot, and at an average discount to replacement cost of more than 60%. Including CapEx to deliver the business plans brings the total to just short of GBP 500 million. And once completed, we can expect them to deliver stabilized yields of up to circa 7% and ungeared IRRs of up to 15, and that's before any market yield compression. So plenty of opportunity for income and capital growth. Now here you can see our Alfred Place cluster. I spoke about The Gable acquisition in November, adding to our pipeline, since which we bought South Crescent for GBP 51 million, paying only GBP 708 a foot or a 67% discount to replacement cost, and giving us a running yield of 7.1%, with the offices let at only GBP 67 a foot until August 29. The business plan has optionality, either to regear with the existing customer expiry, or undertake a full refurbishment to create a prime HQ building, adding area and radically repositioning the space to a much higher quality, only some 400 yards from the Elizabeth line and, of course, hitting all of our target return metrics in the process. So attractive deals at decent discounts and with good upside to come. We've also had a good year delivering profitable disposals, crystallizing completed business plans. Four deals for GBP 516 million at GBP 1,200 a foot, more than twice the price of our acquisitions, and in aggregate, at a 2% premium. I told you about Challenger House and Newman Street at the interims, since which we've sold Wells & More in [ Fitzrovia ] on the left and 103 Regent Street on the right. In both cases, we dealt at or near record capital values and crystallizing accretive ungeared whole-of-life IRRs. And as we finish business plans elsewhere in the portfolio, there's a lot more to come, circa GBP 200 million near term and a further GBP 1 billion plus in the medium term. Let's have a look now at our HQ development activities, and we have 3 schemes on site and have made good progress this year with their net valuations up 22%. At Duke Streets and James, we're now 100% pre-let ahead of completion in the autumn, and all our performance numbers are good, with a 37% projected profit on cost and an ungeared IRR of more than 30%. Similarly, at The Delft in [ South Bank ], progress has been strong, and we pre-let 40% to data analytics company, Quantexa, in January. Our development yield is almost 8%, and our profit on cost is 27%. Back in the West End, Whittington House bottom left, we started this major refurbishment last month, and already have leasing interest for what will be a wonderful building and a healthy development yield and profit here, too. Taken together, we're generating a sizable 152% ERV increase and a further circa GBP 60 million of surplus to come, assuming 10% rental growth for the currently unlet space. They're all prime, with exemplary sustainability credentials and a pre-letting well, giving us strong upside potential. Wrapping up then on our program. Here, you can see our 11 major schemes, totaling some 700,000 square feet across 27% of the portfolio. They're all in prime locations, all best-in-class product, delivering into the deep supply shortage, meaning they have strong pre-letting and rental growth prospects. Now finally, on our capital allocation. We've continued investing in our market-leading Flex offer, with record fully managed leasing. 40.9 million of lettings, 7.7% ahead of ERV and outperforming against all our main operating targets shown on the right. 6.7% yield on cost versus our 6% target, 64% customer retention versus our 50% target and a 37% service margin, nearly double our 20% hurdle. Plus over the last 12 months, we've delivered 3 new buildings, taking our Flex portfolio to more than 650,000 feet, and they are already 85% let or under offer, beating our underwrites. And of course, we have significant further growth to come. 136,000 square feet of new deliveries in the next 18 months, some of which are shown on the right, and generating gross rents of some GBP 100 million over the next 3 years. And we'll be working hard to capture operational efficiencies. For instance, at an 8.5% yield, every GBP 1 we save in OpEx translates to an effective valuation increase of GBP 12. We also have a supportive market with broadening demand. Today, there are more corporates taking Flex space, 47%, up from 13% in 2020, and often taking larger spaces, too. Demand for 600,000 square foot units or above has more than tripled since 2023. And as you know, our fully managed spaces are delivering a sizable net income beat, more than 40% over the more traditional ready to fit product. So it's working well, and there's much more to come. So bringing it all together, this is a portfolio full of growth opportunity. Our HQ developments at the top of the stack are all prime, majority in the West End and will deliver healthy prospective profits. Our active portfolio management assets, some 56% of the book, are the engine room of the business, with numerous angles for rent and value growth, for example, through delivering refurbs or capturing our growing reversion. Their valuation remains on demanding at just over GBP 1,100 a foot, with limited CapEx requirements, all in prime locations. And of course, they include our Flex assets, now around 32% of our total book, full of the growth potential that I just described. Finally, shown in yellow is the stabilized portion of the portfolio, where we will continue selling out of completed business plans at higher capital values per square foot. We're aiming to realize more than GBP 1.2 billion over the next few years, and we will employ our usual discipline in deciding the most productive use for the proceeds, either back into the pipeline for income and value growth or accretive acquisitions, with IRRs well ahead of our cost of capital or a return of capital to shareholders where it exceeds to our needs or for that matter, a combination of all 3. So lots to do as we execute our plan to deliver the substantial growth available to us. So wrapping up then with our outlook. In short, absent a macro-driven downturn, we have more growth to go for doing what we said we would do. It's clear we have a market full of opportunity. London remains Europe's business capital. It has jobs growth, which is creating healthy demand, colliding with a severe supply drought, meaning that rents are rising, particularly for the best spaces with a great customer experience. Whilst the investment market remains more mixed, again, the best is outperforming and prime yield compression remains a possibility, particularly for smaller lot sizes. Meanwhile, we remain fully focused on executing our growth strategy. First, significant further income growth; second, sizable development surpluses of up to 100p per share; third, a major sales program of more than GBP 1.2 billion; and fourth, the proceeds from which will go to their most productive use, including a possible capital return of any excess; and always, of course, operating in 100% prime Central London only, never more important than it is right now. So all in all, whatever the macro throws at us, GPE is well set and is in great shape. Our operational infrastructure is delivering. Our amazing team has deep experience, honed over multiple cycles and is bound together by our collegiate culture, along with our robust balance sheet, all of which will help us capture our strong potential over the next few years.

Right, lots of information in there. I hope that all made sense. We are, as ever now more than happy to take any questions you wish to throw at us. There are mics going around the room. I've got the members of the Executive Committee here to help answer any questions as well and provide more color. Who would like to go first? Yes.

Neil Green from JPMorgan. Two for me, please. On the rental side, you've had good growth and is expected to continue. Maybe I can ask about the conversations you're having with occupiers around rent reviews? How they're going and where they're landing? And secondly, a lot of leasing activity in your portfolio in the market as a whole. Are you seeing that coming out with any softness in incentives?

Okay. Thanks, Neil. Simon, in a second, perhaps you'd like to address the second of those questions. On the rent reviews, we did, I think, about GBP 30 million of increase. The single biggest of which was in Hannover Square in the year. And within that, there were 2 principal done so far. We've got a few more to go down there. And the largest, our financial services friends in that building, we ended up with a circa just short 50% increase there. So a good result. But bear in mind, we leased the building originally in 2020. So given the growth we've seen, not surprising for what is one of the best buildings anywhere, you would expect to see good growth from 2020 through to the review date, October last year, I think it was. Going forward, we've got a few more to do in that building. And clearly, with the growth that we've seen over the last few years, you would expect us to generate more rent review upside. We tend to generate more growth, that said, from new lettings because our average lease length is typically less than 5 years or around about 5 years. So we've been, as you've seen this year with GBP 71 million of new lettings generating the majority of our upside there. In relation to demand for space, Simon, have you seen any softening since the beginning of this year?

Was the question about softening of incentives as in they're going out or actually coming in? Going out, okay. So the answer to that is no, we aren't in fact, actually the opposite. So when you have, obviously, a supply crunch and demand the way it is, as Toby has mentioned, we've seen rental growth. And that rental growth is never linear. It's usually -- you get bumps as you get competition for space as people actually start to lose out on the space that they were targeting. Over the last sort of 2 years or so, haven't seen a huge amount of that competition. It's kept landlords and customers pretty honest. You tend to get a customer in place and you do a deal and they know that there isn't a lot of supply. And we know as a landlord that, yes, there's good demand out there, but you want to secure that customer. Recently, we have started to see some competition for space. So there's an example in the West End at the moment. The ribbon is on Wells Street. It's 1 of only 4 buildings in the West End that can deliver over 60,000 square feet. They've placed the top sort of 35,000 square feet under offer, rents topping out at GBP 150 per square foot. And in doing so, have displaced 2 other customers who would have taken space in that building. The other -- 1 of those other 4 buildings is under offer in its entirety to Microsoft AI, that's Film House on Water Street. And these are the kind of situations which then drive not only rental growth, but then you start to see incentives come in. Typically, incentives at the moment are still about 12 months per 5 years term certain, but there are examples of that actually reducing. And I would expect us to see a little bit more of that, albeit clearly a lot of landlords are going to be driven by maintaining high headline rents.

If you were to turn around and look at the screen behind you, you would see the net effective in the West End, where rents -- the package to incoming customers has not moved. But in the city, if you go forward one, it has come in a tiny bit as you can see over the last couple of years.

Yes. I just think that the way the market dynamics are at the moment, I think we're going to see a little bit of compression.

Yes. Thanks, Neil. Yes?

[ Johnny Huber ] from Deutsche Numis. It's really useful to have the slide on CapEx and how rental inflation might impact the development gains. It would be useful to always say here how you think over the past couple of years, development economics more broadly have trended? And given that divergence that you mentioned between prime and nonprime capital values that you're effectively trading up has widened, has that benefited or has it been dominated by rising construction costs?

Let's come to the rising construction costs in a second, and there is a slide in the back which, Andy, if you wouldn't mind, just chatting as to the key components, that would be helpful. I mean, clearly, in a world of inflation, consuming much of the rental growth that we've seen, economics of developments have not been as stellar as they would have been in the last cycle, when clearly, construction cost inflation was not a thing and we had rents rising and we had yields compressing. We've not got yields compressing at the minute, although I do think, as we just discussed, there are going to be some opportunities for that at the prime end and certainly in the smaller scale, but it is the case that clearly, development returns are less than they were last cycle. That said, look at our print this morning with plus 22% of the on-site schemes, largely because rents have come in quite a long way ahead of expectations and our own underwrite, and the growth in that rental print is significantly faster than the growth in the inflation that also we've experienced in those schemes off a stable yield. So there are circumstances in which you can make development work. And if we think about the next stage of our program, we're looking at some pretty healthy numbers there, very healthy, as Jayne described earlier, if we see further rental growth. And if we get really lucky and see a bit of yield compression, whatever happens to construction cost in a sense will be less relevant. And don't forget in the West End, for example, land is somewhere between 50% and 75% of the total capital stack, right? So therefore, the construction cost inflation is only applying to somewhere between 25% and 50% of your cost base. And in fact, it's not even that because you've got fees and that's interest and all the other things that go to the equation. But just on construction cost inflation, Andy, in the back on where they go.

Thank you. Good morning, everyone. So just before we actually talk about inflation, just to set sort of our CapEx to come in context. As you've heard earlier, we've got about 90% of the cost fixed on that and healthy contingency allowances for the rest. So we're feeling very well placed for our current CapEx to come. In terms of -- for the next cycle, what you're seeing here is this inflation slide is indexed and its average from 4 leading cost consultancies. It's showing about 3.5% to 4% per annum. As ever, you've got upward and downward pricing pressures. Output -- construction output is down. PMI for the last 15 months has been below 50. So there is competition for work that is then offsetting, as you see on the bottom right, some of the upward pressures on pricing. So you've got labor availability and cost. Right now with what's going on in the Middle East, obviously, energy cost and energy intensive materials. Steve did ask me to get this one stat in today. So construction costs are not particularly strongly correlated to oil price. A 20% increase in oil price roughly equates to a 1% increase in construction costs. Gas prices are more important, but you've seen they've been a lot more stable recently. And then finally, you've got some carbon-based tariffs coming. When we look at that same relation to our [ St. Thomas Yard ] scheme, we think that would have less than a 1% impact on construction pricing, were it to be introduced by the government next year. So all in all, for us, we've been here before. It's about early engagement with our supply chain and think about advanced sourcing of materials.

Great. Thanks, Andy. Thank you, Johnny. Yes?

It's Tom Musson at Berenberg. Just thinking about the tail risk of a macro-driven downturn. In your going concern statement, you say that property values would have to fall 18.5% before breach. Last year, that was a 45% fall, but values have gone up in the year. Can you just help me understand why that headrooms got a lot tighter?

Sure. Stevie?

Tom, so that statement is essentially -- is looking at the forward look at the values after applying our going concern scenario to the values. So it's a further 18% fall from the underlying assumptions within that model. So if you look at the valuation as at 31 March, the headroom you have on your covenants is values could fall by 46% before you come anywhere near breaching any of your covenants. So we've got plenty of headroom as you should expect, given our LTV is only 29% today.

That makes sense. Second one, looks like CBRE have rotated off after valuing the portfolio for 20 years, [ Knight Frank ], they're in their place. Do you think -- do you expect any risk to the comparability of valuations?

No. I don't. They valued -- I think they've actually valued since the inception of the listed entity, [ HeliaPark ] originally and then CBRE. I think that's right. The reason I don't expect there to be any comparability issues is because we have had Knight Frank shadowing the last 2 valuations. So they've been in the conversations. [ Hugh Morgan ] and the team has done a really good job in getting under the skin of understanding what they're thinking about our valuation. So we've got a pretty clear idea of where they're coming from. And like CBRE, they've got good market share in London. They understand the dynamics of what's happening to rents and values and yields and costs, et cetera. So I'm not expecting there to be dramatic or frankly, any significant noticeable difference in the underlying tone valuations. There will be differences, clearly, but not fundamental to the tone. There shouldn't be.

Okay. And maybe I can ask a last one. By when do you forecast dividends to be fully covered by cash earnings?

That will be a bit unfair to ask you, Jayne. So I'm going to ask Stevie.

Question, Tom. I would say we're going to be some time yet because what you have to remember is the significant growth that's coming through in the cash earnings over the next few years will be driven by development completions. And there, for example, the largest, which will be 2 [ Aldermanbury ] Square, is GBP 25 million worth of rent, but they're on a 15-year term and a 3-year rent free. So it's probably at least 3 years out. But you should see them grow quite materially over that period as we get towards cover.

If you were -- not as you are, Tom, but were you to be worried about cash, clearly, with north of GBP 1 billion of sales coming, the cash component of this business is going up, not down.

Adam Shapton from Green Street. Just one from me on the fully managed Flex business. On the overheads, can you help us sort of triangulate -- I think you're saying GBP 8 a foot in the sort of waterfall chart. Is that -- does that mean it's about GBP 5 million today based on 650,000 square feet? Or is it less than that?

It's less than that because not all of it is fully managed to the 650,000. So broadly, they're fully managed within the 650,000.

It's the majority, but it's probably about 60%.

Okay. And then looking forward, as that portfolio grows -- is that -- are those overheads now pretty much fixed? Obviously, there's staff costs in the OpEx as well, but can we assume that will drop from GBP 8 to GBP 6 to [ GBP 4 ] a foot?

I think you can assume that as we grow, those numbers will come down. The forecast is that today at GBP 8 per square foot, we think that's going to be not quite half, but pretty close to half that. We've already got the platform in place to manage a larger scale. What you would see inevitably as we scale up is more junior level additions to the team to help manage customer relationships and those kind of things. But critically, we've got the platform in place for that growth.

And sorry, just to be clear, what is the absolute number if it's GBP 8 a foot today?

Well, let's come back to you on the exact economics. Thanks, Adam. Back.

It's Zachary Gauge from UBS. Just a couple of fairly quick questions. First one, I was just a bit surprised given you're probably see even more bullish on prime than 12 months ago that you've actually slightly reduced your prime estimate for this year from -- I think it was 6 to 8 to 4 to 7, so effectively now in line with average. So if you could just touch on what's moving that? And the second one is, you mentioned Duke Street as a potential sale. Can we assume that you would then potentially take a capital gains hit to sell that within the 3-year window?

Yes. I don't think we're any more bullish on prime than we were last year. Exactly the same basic messages were delivered last year. The difference being last year, we still had it all ahead of us. This year, we've delivered it. So the risk associated with it last year was higher than it is today in the sense that we've delivered a lot of that. So it's been proven to have been broadly accurate. In fact, last year, we said, as you can see here, 6 to 10 for prime, and we delivered in the 7s. We're narrowing the range. I think as we get more data and we understand more what's likely to happen in the market, 6 to 8 -- 6 to 10 in a world of inflation at low single digits feels a lot. And I think what we're really saying here is we don't need 6 to 10, and it's probably more the case that you'll see a repetition of this year, next year -- last year, this year, which ever want to look at it, in other words, broadly 7 for prime rents as we go forward into this year. And if we do that, we'll be delighted, right? So that -- was there a second part of your question, sorry.

Duke Street sale.

Duke Street sale. As ever with us, this is all about looking at the forward IRR and thinking about the opportunity cost. We've sold buildings in the past soon after the tax window has expired. We've sold buildings before the tax window has begun, and we've sold them in the tax window and paid the tax. And the analysis is always going to be the same. What do we think is in the best IRR outcome of that particular economic trade? Is it worth waiting? If we do wait, what happens to the IRR, what are the risks associated with it versus taking the money now and moving it on? And we'll do the exact same with that one. You will have [ eagle eye ] noticed already that the GBP 200 million that we're trading, we're anticipating trading this year. And if you go to the slide, Rich, with the stack on it, whatever that was, you would have noticed that Duke Street is there, broadly. In other words, we are thinking about whether we trade that this year, this financial year. Thanks, Zach. Yes, Marc?

Marc Mozzi, Bank of America. Can we have some color around the 10% return on equity targeted for this year? How you break that down between income, capital? And within capital between like-for-like capital growth and development contribution?

Yes. Good question. I think, Rich, there's a slide in the back, isn't there? Yes, well done. Thank you. So here you go. So this is essentially building up from the net earnings the company is generating through rental growth, so you go 4 to 5. So that's broadly in the range. In fact, it's towards the bottom of the range that we just chatted about. A bunch of development surpluses that what we've done there is look at the likely deliveries of schemes and what we estimate the values might do or if we were to sell them, what we think we could sell them for, and there you get to your 10% plus, no yield compression in there at all. That's quite important. Some of them we might -- given some of the evidence in the market right now, we might get some yield compression. We're not assuming we do. But I think it would be foolish to assume that we do because then you're just layering unknowns upon unknowns, and the 4 to 5 rental growth, clearly, it's contingent on relative stability in conditions out there going forward, and we clearly can't know that either. But that's how we get to the figure. Thank you, Marc. Yes?

Eleanor Frew at Barclays. On leasing, how repeatable do you think your strong performance is moving into this year? How much will be kind of timing related from developments? And how should we think about the leasing volumes in FY '27 overall? And then linked to that, where do you see your vacancy rate moving over the year?

Okay. Simon, repeatability?

We're being asked to do it all over again. So we think we can certainly deliver. The -- as I mentioned earlier, the dynamics in the market are fully supportive. Now as Toby just mentioned, you cannot necessarily forecast everything in the world, and if you could, you'd be a very rich person. But the feeling in the market right now is that take-up is up, demand is up. There are over 30 requirements for over 100,000 square feet in Central London at the moment. More -- about 47% of those are expanding rather than contracting. So there's lots and lots of confidence that we can take into this forthcoming year. On the HQ side of things, in the year-to-date, 51% of all take-up has been pre-let. I do think that we will see this continuing. There is a real lack of stock, and people are definitely looking at this with risk in mind, but in a way of I need space. If you look back to COVID, back in 2020 to today, companies took expansion options. So lots of people needed that ability to grow. Of all of that expansion space, only 11% was not taken. So people have actually been expanding through the last 5 years. And the other thing is that tenant release space again, Rich, I think it's in the back -- in the deck at the back, tenant release space is currently 14% of availability. That's the lowest it's ever been. So the market dynamics are really, really strong, and that's why we feel like we can repeat it on the HQ side. On the fully managed side, we've done in the last year, a deal a week or just over a deal a week. And the rental tone has been increasing. And the supply side on the fully managed side of things is no different. We don't see new entrants coming into the market. We don't see new serviced office operators coming into the market. We don't see new landlords creating a platform like we have. And in a world where flexibility, lack of CapEx and giving over the kind of difficulties of managing an office to a landlord who owns the space, that's really attractive. So these are all the reasons why we are confident going into this year.

I think we'll do less than this year, partly because we've consumed quite a lot of the obvious leasing challenges in the year just gone, right? So those big pre-lets were a big part of the story. And if you look at the existing on-site schemes, they are now a majority pre-let. So -- so I think we will do less this year. In relation to -- can you go to Slide 42, Rich? In relation to -- here you go, this is the long run of the components of the void rate. Clearly, at the bottom is the investment portfolio. That goes up and down depending on what we want to do with it. And we've wanted it to be higher for the last few years as we described, because we knew we could generate rental growth from those vacancies. We've clearly had a lot going on in development and refurbishment. And there, you can see the reduction in green over the last couple of years and the purple as we pre-let stuff. So I think looking forward, it will probably be a lower percentage of leasing. And I would imagine that the vacancy rate will be around the same as we get towards the end of the year. Yes. Okay. Do we have any more? If not, that's great. Some good questions. Thank you very much, everybody. And I hope that was helpful. As ever, we are around to answer further questions. The things I would take away from this: stack of income, growth to come, load of sales to come. We will buy more, but I think it's -- this year will be all about those sales and what we do with that capital, look out for potentially returns to shareholders as the year progresses, but a sense of optimism, all else equal. Thank you very much for coming.