SEGRO Plc (SGRO) Earnings Call Transcript & Summary

All right. Good morning, everybody. Welcome to our full year 2024 results presentation. Thanks very much for all of you joining in the room on a Friday morning. Good to see some people still come into the city on a Friday, but also thanks to everybody joining us online. As usual, I'm going to make some opening remarks to set the context, and then we're going to go through the presentation and do Q&A at the end. As you know, we've been following a consistent strategy for almost 15 years now, founded upon disciplined capital allocation and operational excellence and underpinned by an efficient capital and corporate structure, whilst taking account of our -- the needs of our wider stakeholders through our responsible SEGRO commitments. Application of this strategy has continued to deliver for us in 2024, and it's positioned the business to perform well in the future. Our teams have been driving rents. We've signed up GBP 91 million of new commitments during the year, which is our third best year on record. And I think that's pretty impressive when you consider the macroeconomic environment we've been operating in. We've continued to invest for growth, both through executing on our profitable development program and leveraging our local knowledge and strong relationships on the ground to buy some very good assets at attractive prices. In parallel, we've crystallized profits and created extra liquidity through selling carefully chosen assets to motivated buyers. And our balance sheet is in great shape. With the additional firepower provided by our equity raise in February last year and the disposal proceeds we've generated in '24, we're very well positioned to invest at a point in the cycle when we think having access to capital is a competitive advantage. The hard work in 2024 added to our strong track record of delivering growth in rents, and that's fed through into an 8% average annual growth in earnings and dividends over the past 8 years. We've also continued to deliver on our responsible SEGRO commitments across three main areas. We've made great progress in cutting our carbon footprint, not least through the doubling of our solar capacity in the year and reducing the carbon intensity of our developments. And we've updated our science-based net zero targets in line with the latest SBTi methodology. Investing in our local communities also remains in focus. We now have 14 community investment plans designed specifically for our larger asset clusters across Europe, supported by our own employees, our suppliers and our customer base. And our nurturing talent -- sorry, let me click on, and our nurturing talent efforts, which are key to maintaining and improving our operating platform, not least through the continuous development of our bench strength and the improvement of our people policy to be more family-friendly; are helping us to achieve high levels of employee engagement and create a diverse pool of existing and new talent in the business. So 2024 has been a year of further strong delivery by our team in what we know was a challenging environment. And in a moment, Soumen will take you through some of the more detailed financial and operational figures behind that statement. We're also feeling confident about 2025 and the opportunities in front of us. Our business is in fantastic shape, and we're primed for further growth in earnings and dividends. And we're super excited about the significant additional value creation opportunity that we now have in front of us with regard to data centers and the growing 2.3 gigawatt land bank that we've created. We're going to take you through each of these elements in turn. So let me hand over now to Soumen, who will talk about the first chunk.

Thank you, David. Good morning, everybody. Starting here on Slide 7 and the slide with the key financial metrics. Now look, the key takeaway, as David said, it's been a really busy, really active year on the leasing front, which has fed earnings and fed dividend growth, while asset values have been stable after what was clearly a roller coaster 2022 and 2023. So we delivered 5.5% growth in earnings and dividends per share. It's just worth noting that the additional rent and income that we earned on the proceeds of the equity raise is the reason the profit before tax is up 15% but EPS is up 5%, as that extra income is offset by the higher share count. The equity raise was fairly EPS neutral in the year. But clearly, we're earnings accretive once it's fully deployed. We're recommending a final dividend of 20.2p, which makes a full-year dividend 29.3p. We saw a small increase in the like-for-like valuation of the portfolio. But due to a higher level of disposals in the year, the total remains at GBP 17.8 billion. And NAV per share is unchanged at 907p. The balance sheet is in good shape, with loan-to-value down to 28%, providing considerable opportunity for growth. Right, so turning now to the income statement on Slide 8. So we saw 8% growth in net rental income in the year, which I'll break down for you on the next slide. Before we get there, just a couple of things to note. Firstly, capitalized interest was GBP 69 million in 2024, similar to level of '23 and likely to be around these sort of levels in 2025. And on costs, we saw an increase in the cost ratio due to increases in both our property and our admin costs. Now the key items were higher vacant property costs, some additional tech-related spend and some one-off abortive transaction costs. We anticipate the ratio will move back below 20% without those one-off costs and as the vacancy is leased up. On Slide 9 now and turning into that net rental income growth in some more detail, so we delivered strong growth, and net rent is up GBP 41 million in the year. Then as in previous years, there are two main contributors to that growth, those first two pink bars. Rent on the standing portfolio grew GBP 29 million, with very strong like-for-like growth of 5.8%. And that's driven by the capture of reversion in the U.K. and indexation and leasing activity across the continent. Development completions added GBP 32 million in the period. The investment activities of buying and the selling resulted in a net loss of GBP 9 million of income last year. And you should note that due to the timing of that activity, the full-year impact is GBP 6 million higher than that. And Slide 38 in the appendix has got some more detail on that. The other box at the end is a mix of take-backs for development, FX and some nonrecurring items. Looking ahead from here, we will continue to drive rental income strongly with like-for-like growth especially for reversion and new income coming through from our development pipeline. Turning now to the valuation, and we're on Slide 10. 2024 saw the first positive valuation after 2 years of declines. And pleasingly, those are positive, albeit modest revaluation in both the U.K. and on the continent in the [ second ] half of 2024, which suggests we could well be past the inflection point on values. The portfolio is still at GBP 17.8 billion, net of the revaluation, capital recycling and CapEx. Yields were fairly flat, especially in the second half, so the capital value growth will be increasingly link to ERV growth going forward. We saw a healthy 3.2% ERV growth in the year. That was 3.7% in the U.K. and 2.3% in the continent. And again, that's weighted more towards the second half. Turning now to the balance sheet, which remains in great shape and provides us with significant firepower for growth with over GBP 2 billion of available liquidity. Loan-to-value has reduced to 28%, and our credit rating is stable at A minus, which continues to be a differentiator versus the vast majority of the real estate universe, which is rated mostly BBB. Our debt metrics are in really good shape. Net debt to EBITDA is down significantly from 10.4x to 8.6x as EBITDA has grown and net debt has been reduced by the equity placing and through disposals. Turn to Slide 12, we've got a diversified long-duration debt profile with an average maturity over 7 years, which, as you can see on the graph on the left, is debt stretching out until 2042. We've got low refinancing requirements in the next few years, reduced further because we've tapped the debt capital markets in the past 6 months out of both SEGRO and out of SELP, with bond issues with a 3.5% and 3.75% coupons, respectively. But to help you quantify the impact of what's to come in terms of interest costs from refinancings, we've added the graph on the right-hand side. So this assumes that each year, as we refinance the debt that comes due that year, using today's indicative rates in both sterling and in euros, you see the overall cost of debt moves up only 10 basis points this year and by 50 basis points through to 2027, but up to a level that's still lower than the level of 2023. And in terms of quantum, we're talking about around GBP 25 million. So look, it's not immaterial, but it is much, much lower than the reversion that we hope to capture in the period over the next 3 years. So it's very manageable in terms of the earnings impact. So moving on now and having provided you the 2024 financial overview, I'm going to take you through the highlights of our operational activity for the last year and how we've created value through both asset management and development. Now I said earlier that 2024 is a really active year. And on this chart, you can see why. We've signed a GBP 91 million of new rent during the 2024, and that is our third best year on record. Now our asset managers and leasing managers have been super busy finding [ ample ] opportunity to lease space whilst capturing record levels of reversion. You can see on the graph here, the contribution of the existing portfolio that's shown in red, has grown enormously over the years. There's still a very healthy and strong contribution from development lettings, including one of the largest letting last year at our site at Northampton. But it's fair to say the overall volume of pre-let in the market is lower than in previous years, and the big change is simply there are fewer mega box pre-lets around. But there are still deals to do, and occupiers are still engaging with us in conversations around expansion. In middle of 2024, converting those opportunities into deals was slower as we find occupiers were taking longer to take decisions. But pleasingly, we saw a very pronounced pickup in activity in activity levels in the final weeks of the year across the business, and that momentum has continued into 2025. So this chart, Page 14, the chart on left illustrates some of what I've just talked about. So this chart on the left summarizes literally the hundreds of leasing transactions that we undertook in 2024. Every dot represents a single lease event. And you can see it's a really busy year. There were over 400 individual transactions in there. But you can also even see how the momentum in volumes grew in the first half of the year, fell away in the summer, as you might typically expect, but it stayed there in the early part of the autumn. And then in the last 2 months of the year, it saw a real pickup. And then you can see from the density of the dots in December that we had a particularly busy month. Now on the right, you can see how that all that activity has kept the customer retention rate high at 80% and occupancy strong. Now 94% is at the lower end of our target range, and it fell 1% during the period, as our leasing progress was offset by a couple of specific items. Firstly, we completed on some speculative space, for which we're seeing good levels of interest, and we've signed some units already since the year-end. And secondly, we have an occupier in the global media sector, who chose to leave us in North London, and that accounts alone for around 50 basis points of group vacancy. But for us, it's an opportunity to capture that reversion earlier than we expected and potentially move that rent on ahead of ERV. On Slide 15 and diving deeper into the reversion capture, which I've said is a really major driver of that net rental income growth, we captured a record level of uplift from rent reviews and renewals in the year, 34% for the group and an extraordinary 43% in the U.K. You've got to understand these are really quite remarkable uplifts, they're not one-offs. We had 170 across the portfolio, and 69 of those showed uplifts over 60%. And you realize it requires us having the best space available and great customer relationships to achieve that level of uplift without adversely affecting the retention stats I showed you on the page earlier. It also demonstrates that our customers are able to afford these higher rental levels. As we showed you at the Investor Day in June and particularly within our urban portfolio, businesses are providing high-value goods and services and have the pricing power to pass these on. And importantly, we are not done. If you look at the chart on the right-hand side, it shows you we've still a lot more to go for, with GBP 118 million of further potential reversion to capture, and GBP 71 million of that comes up over the next 3 years. So on this slide, having talked to you about lots of numbers across the portfolio, I want to highlight a few examples of how we do this on the ground around our approach to customers and on leasing. So starting on the top left on with our German portfolio, and we've been seeing some really strong demand, particularly for our urban space, maybe counters what some of the macro headlines might suggest. We set a new record warehouse rental level at SEGRO Park Düsseldorf. And in Cologne, we set the highest industrial rent in the city at the estate, you see pictured in the top left. Secondly, our leasing activity helps us set evidence for rent reviews and helps to capture the reversion that we just talked about. On our East London portfolio in the bottom left of the screen, rents are up 100%. They were GBP 9 per square foot 5 years ago and now close to GBP 20 per square foot. Thirdly, we use refurbishment to help reposition assets to drive rents further. We're doing a lot in London at the moment. One of our most striking examples during 2024 was that our flagship Estate Premier Road. We took back a unit in May 2023 when a customer upsized to a larger unit at our recently completed SEGRO Park Hayes. We carried out a high-standard refurbishment on that space and finally leased to a new customer, which was 13% of ERV, but is more than double the previous passing rent. And finally, an example of the importance of supporting customers and benefiting from their growth. HG Walter is a butcher providing high-quality meat to some of London's finest restaurants and hotels. It has been a customer of ours at [ Tudor ] Park in West London since 2017. Not surprising, their business was badly hit during the pandemic when we locked down, and we offered them financial support, but we also pivoted their businesses to start delivering -- they pivoted their business to start delivering products to people in their own homes. That helped them not just to survive, but to create a new growth opportunity. So that business is now thriving. So much so, they even need some new space. We refurbished the unit at SEGRO Park Rainsford Road, which they took occupation last year, taking 3x more space. Finally on this section, this slide looks at our development activity during 2024 and looking ahead to '25. Now we completed space equating to GBP 37 million of headline rent, 84% of that is leased and delivering an attractive development yield of 6.9%. 97% of that was BREEAM Excellent rated, reflecting our effort to develop the most sustainable energy-efficient space for our customers. Looking forward, we have GBP 46 million of headline rent in our current pipeline, almost all of which will complete this year in 2025. The pre-let percentage is 50%, which is a reflection of the lower level of new pre-let signings in 2024. But also, we've just commenced schemes in some of our urban markets, where we always built speculatively, in responses where we've seen some really strong demand. As I mentioned earlier, one of the reasons we've seen this is in Germany, where our newly created flexible modern urban space is being snapped up by mostly small- and medium-sized businesses, who are servicing growing populations in nearby cities. Today, we've got schemes underway in Berlin, Cologne and in Dusseldorf. 25% of that space is already under offer and a further 15% of that is in negotiation, although these schemes don't complete until the second half of this year. So summing up from me, we had a really busy and active 2024 with positive financial and operating metrics, record reversion capture, profitable development completions and 5.5% earnings and dividend growth. Importantly, we saw a pickup in occupier market activity in the last quarter and continue that into 2025, all of which lays the foundation for continued delivery and growth. And with that, I'll hand you back to David.

Okay. Thank you, Soumen. Now I want to talk about the future and how we are positioned to drive further growth in rent and performance from our portfolio. As you well know, we've positioned our business to benefit from a number of enduring structural trends, which continue to support occupier demand and feature in many of the conversations that we have with customers regarding their future plans. All four remain very much intact. E-commerce continues to take market share from the physical space. The digital economy is becoming an ever more critical part of our business and personal lives. Major cities continues to grow at a faster rate than the wider economy. Our logistics customers continue to reconfigure their supply chains to optimize efficiency and reduce carbon emissions. And most of the corporates we talk to know that improving their sustainability credentials are not just good for the planet, but they're also good for their businesses. We expect these tailwinds to continue driving demand for well-located and modern industrial and logistics space, especially as when the macro environment improves. Meanwhile, competition for other uses of brownfield land and tight green belt planning restrictions will limit the availability of land in most chosen markets, which will keep new competitive supply in check and maintain upward pressure on rents. We have a fantastic portfolio of assets concentrated in Europe's most attractive markets and a market-leading operating platform dedicated to making sure that we remain close to our customers, offering them great space and service while ensuring that our portfolio delivers attractive returns through the cycle. We also have an exceptional land bank to support profitable development. But it's important to remember the unique composition of our portfolio and our 65% weighting to urban markets. We have conviction about the attractions of big box logistics, and we believe that we have one of the best, if not the best, logistics portfolios in Europe, along with some fantastic rare land holdings. But as we covered during our Investor and Analyst Day last June, we believe the urban part of our portfolio has some particularly special characteristics. The space we provide is used by an incredibly diverse and dynamic customer base, often providing value-added goods and services to businesses and consumers in some of Europe's largest, most congested and densely populated cities. And as those urban populations continue to grow, land supply in these locations is not just limited, it's shrinking, which puts even more upward pressure on rents and underlying land values, and opens up opportunities for alternative high-value uses such as data centers. This makes our portfolio unique. And it will be very hard, if not impossible, for anybody to replicate what we have. So we believe we've assembled an irreplaceable portfolio of assets. And this chart illustrates the returns we expect our portfolio to deliver. We do look at the running or the initial yield on an asset, but we're much more interested in where that yield can get to over time through active asset management. In other words, our primary focus is on total return that we expect to earn typically over a 10-year period and the risks to achieving that return. So I'll just walk you through what that means on this chart. If you start on the left with our existing portfolio of standing assets, you'll see that the -- you'll know that the initial yield topped up is currently 4.4% and the equivalent yield, which assumes that we capped to the reversionary potential averages, 5.4%. We've guided to recurring rental growth expectations of 2% to 6%, depending on the asset type, so let's say, in the 3% to 4% range on average. And all else being equal, therefore, it should lead to an 8% overall unlevered return. Clearly, some assets will be high-yielding, reflecting lower growth prospects and vice versa. But overall, we're thinking in terms of at least a high single-digit unlevered return from standing assets. Our development pipeline flows off a 7% to 8% yield on cost. So depending on the volume of CapEx and the particular specifics of the projects being developed, it should add another 1% to 2% of return at portfolio level on an annual basis. That results in a total unlevered return expectation at portfolio level of 9% or more. And if you add the benefits of leverage with our 30% assumed LTV, that translates into an expected levered return over 10%. And of course, that's assuming a stable yield environment. So yield compression work to come on the back of future interest rate cuts would be additive to these returns. Plus, as I'll come on to later, we have significant further value upside from data centers. Now our job beyond all the asset management leasing and development activity that Soumen referred to, which is needed to actually deliver these returns, is to keep actively managing the portfolio composition so that continues to deliver. That means adding assets that contribute positively to total returns and being ruthless in divesting assets which are likely to underperform. So let me bring that alive by describing our capital allocation decisions in 2024. Let's start with asset recycling. Every property in our portfolio has an asset plan, and we constantly review those plans to identify potential underperformers in terms of future returns or risk profile. We factor in location, rental growth, covenant quality, future CapEx requirements and a bunch of other things to rank them based on risk-adjusted returns. And the weakest ones become candidates for disposal. We believe all our assets are good, but it's a very important discipline to continually look to bottom slice, the bottom -- the weakest 2% of the portfolio each year. On top of that, we always have an eye out for special situations or motivated buyers who may well pay more for an asset than its value to us, which enables us to crystallize gains and generate funds for investment into better returning opportunities. During 2024, we sold GBP 786 million of built assets and GBP 110 million of land. This was higher than in recent years, partly because of the softer investment markets in '22 and '23 meant that we slowed down our usual disposal program. Our 2024 sales included big box assets, urban warehouses as well as two powered shell data centers adjacent to the Slough Trading Estate, sold and occupied at an attractive premium to book value. And all of this collection of assets that we sold had delivered for us in the past with an average unlevered IRR in excess of 10%. Looking forward, we expect the returns to be weaker. We also sold powered -- a plot of powered land with planning in place for a data center development. We did that because we offered -- we were offered a very, very attractive price by a hyperscaler that allowed us to record a significant surplus over book value and a 600% profit on cost. With acquisitions of standing assets, we're looking for investments that are additive in terms of quality, expected rental growth and total return. Again, we were more active in buying standing assets during 2024 than we have been for quite a few years, as we thought pricing was attractive and there was less competition for prime high-quality assets in this environment. Less competition doesn't mean no competition, so staying disciplined on pricing and return requirements is key. And the Tritax Eurobox potential acquisition, which looked to have ended well, was a good example of our discipline in that regard. Beyond that, though, we leveraged our strong relationships and local knowledge to create some excellent buying opportunities, which might not have been available to others in the market. Acquisitions totaled GBP 431 million and included 4 prime assets in the Netherlands, all of which have reversionary potential, which also then helped us to create a stronger geographical presence in a key target market, which has shown some of the strongest rental growth we've seen in recent years. We also acquired 2 urban estates in the U.K., including what we call a crown jewel asset in North London, neighboring our existing estate at SEGRO Park Enfield. This is also highly reversionary with rent reviews starting this year, which should enable us to record some early wins. The average forward-looking unlevered IRR of around 9% on the -- that we expect from the assets that we acquired in 2024 compares favorably to the expected returns from the asset disposals, and the quality is higher. And then finally, as I've mentioned, development is returning a very attractive 7% to 8% yield on cost. And that yield on cost allows for all the costs of, obviously, the land, rolled-up interest during the build period and of course, the construction costs. Once the assets are completed and let, they'd typically be revalued to a stabilized yield of about 5%, which equates therefore, to a 20% to 30% profit on cost. And we would expect them to deliver an unlevered IRR above 10% over a 10-year hold period, which is typically how we look at it. So development is undoubtedly the most accretive use of our capital. And as you can see, during 2024, we invested GBP 471 million into development, slightly lower than we'd originally plan due to the quieter pre-let market. But we would anticipate the rate of spend picking up as development volumes increase. And then looking forward, we have GBP 51 million of potential rent in our current and near-term pipeline we expect most of that to become income producing within 12 months or so, with just GBP 190 million of capital left to spend on those completed projects. On top of that, we have a further GBP 371 million of additional rent in our remaining land bank, which we'll build out over the coming years. Our teams have been working hard during 2024 to get these sites ready to go, progressing some large infrastructure schemes and taking projects through planning. We're expecting to spend about GBP 500 million on development in 2025, with a likely acceleration thereafter. So bringing all of these opportunities together, this is an update of the usual chart, which sets our pathway or our bridge from today's cash passing rents to almost GBP 1.5 billion in the coming years. You can see that on a 3-year view, we have the opportunity to grow our rent by 50% through rent -- burning off rent freeze, leasing vacant space, capturing the near-term reversion, completing our current and near-term development projects, along with some others that we expect to become income-producing during that period. If we look at the longer-term opportunity, we can more than double our rent roll over, say, the next decade, capturing the longer-term reversion and building out the rest of the development pipeline. There's additional upside from this in the form of redevelopment of existing assets. The chart doesn't factor in any further ERV growth. It doesn't include the accretive effects of our acquisition and disposal activity, the recycling I was talking about earlier. And it doesn't allow for what I'm about to tell you with regard to data centers. So let's now turn to the significant additional value creation opportunity that we have with data centers, a market where there is very significant growth forecasts for the next several years. Firstly, I want to give you a quick update on our existing data center business. As many of you know, we've been operating in this space since 2005, which means we have a strong understanding of the market, good relationships with the major data center players, and we had a head start on most others in terms of securing power to expand the opportunity set across Europe. Today, our data center pipeline represents about GBP 55 million of headline rent, which will grow to GBP 61 million with projects under construction, so about 8% or 9% of our rent roll. The majority of that capacity sits in Slough. We are proud owners of Europe's largest data center hub. Most of it has been developed on a power shell basis. Quite a few of the early ones were leases of standard industrial buildings, and some were offered as ground leases of powered land. Accordingly, the income flowing is not reflective of the underlying value of the associated allocated power, which stands at approximately 0.5 gigawatt. In other words, there's a lot of latent value buried in the ground. During 2024, we progressed our data center development program. We completed another powered shell on the trading estate, and we're on site with a further one, which will complete later this year. Throughout the year, we've been progressing in conversations about other potential pre-lets on the estate. But most importantly, we secured a new and even more favorable simplified planning zone on the Slough Trading Estate, which gives us a blanket approval for the next 10 years to construct data centers of up to 36 meters high. As I mentioned, we sold 2 powered shell data centers as well as a powered land plot to hyperscalers, in both cases, crystallizing some attractive profits. But we've also invested a significant amount of time and energy into increasing our data center capabilities and our power bank across all our key markets. And we now have data center specialists in each of our geographies, who are well placed to progress land sourcing, power procurement and planning consents for 3 critical ingredients for data center development, which brings me on to the next slide. Our power bank now stands at 2.3 gigawatts on the land positions that we hold in key availability zones across Europe. This is split into our existing capacity of 0.5 gigawatt, mostly in Slough. And we have a further 0.4 gigawatts of opportunities available to pre-let by 2027 and a further 0.3 gigawatts by 2030. On top of this, we're working on another 1.1 gigawatts of opportunities, mostly in the form of well advanced grid connection applications. There's a bunch of other early-stage opportunities, which we're working on, which will no doubt see this figure grow in the future. This power bank aligns to our existing urban footprint. And it means that we're really well placed to benefit both from cloud-driven data center requirements, but also the inference or if you like, user interface aspects of AI-based growth. For every single one of these opportunities, we also have the land. In many cases, including, obviously, Slough, we already have the planning permission or at least a high degree of confidence that it will be secured in the foreseeable future. And as I mentioned at the start of the section, we have strong relationships with the world's largest data center players and an excellent track record of delivery over the 20 years that we've been operating in this sector. Back in June 2024 at our Investor and Analyst Day, we told you about our data center strategy for the first time. We mentioned the 1.2 gigawatts of future opportunity that we had at the time, which, of course, has grown significantly since then. And we explained the different ways we could approach it, powered land sale, powered shells or fully fitted. And we explained that the powered shell model would likely be our approach to the majority of opportunities, but that we were keeping our options open. So what's changed since then? While the growth of the data center market and expectations of future growth have expanded significantly. Whilst there's been much talk about generative AI and whether DeepSeek is a good or bad thing, one aspect that we are clear on is that all of it is good for demand for data centers near to the end-users. In other words, inside those core availability zones close to urban centers. Secondly, the battle for power and sites in the right locations has intensified, and we've come to appreciate what a rare and special opportunity we have in front of us. And thirdly, whilst we believe that the profit margins for building powered shells are not too dissimilar to the returns available from a fully fitted model, the likely magnitude of value creation opportunities on our powered land is just simply too great for us to ignore, bearing in mind that the volume of investment could be [ 8x ] the capital involved in a typical powered shell. So putting it another way, we can potentially create the same value out of one fully fitted data center as we can with several powered shells. Accordingly, we are now exploring opportunities to create fully fitted data centers on at least some of our sites. We're aware that such an approach involves more operational complexity. Accordingly, it's likely that in the first instance, our foray into the fully fitted model will be done in partnership with others, who bring the track record and experience of doing so. We've got some very interesting and active conversations going on in this regard at the moment, and we look forward to updating you in due course, but it's a very exciting opportunity. So to conclude, SEGRO has delivered further growth in rents and earnings during 2024 and has made good progress against our responsible SEGRO commitments. We're primed for further growth from our existing business in 2025 and beyond, and we're encouraged by the pickup in occupier activity that we've seen of late. And we're incredibly excited about the additional opportunity we have to create value in the data center sector. So thank you for your attention. We'll now take questions. I think. As usual, we'll start in the room, and then we'll go to the webcast.

[Operator Instructions]

Can you hear me? Bart Gysens, Morgan Stanley. Big announcement on data centers. Could you please help us understand what that means for CapEx? What that means for rents? How much of the EUR 500 million a year do you intend to spend on that and kind of help us translate a bit to kind of these ambitious plans into the financials? And then secondly, as a follow-up, some of your peers in Continental Europe that have embarked on a more fully fitted model seem to suggest that it is largely a speculative exercise, where you can take bookings, but you don't really sign a pre-let. And therefore, it's a riskier from that perspective as well. Your slide at the end seemed to suggest this is a pre-let strategy. Can you provide color on that?

Yes. Okay. There's quite a bit in there. We'll try and try to cover that between us. First, let me say on leasing strategy. I think -- and we said back in June last year, you can do spec all pre-let for those fully fitted data centers. It's very much our intention to be pre-let led because of the location of our sites in really high-demand core availability zones, so close to the urban centers, where there is tremendous demand for that space. We would expect most, if not all, of our developments to be very much pre-let led. And there's good -- there are good precedents examples of that being the case. In terms of the capital, I mean, it's really difficult to give you some very precise numbers. I mean first, because we haven't yet signed up our first fully fitted deal. And frankly, every situation is going to be very different. The cost of the land, the cost of getting the power, the nature of the building, what you're trying to get out of it; they do vary enormously, but it just gives you a very, very broad guide. If a powered shell, let's say, a 50-megawatt powered shell cost could be anywhere between GBP 50 million and GBP 100 million of construction costs on top of the land. You can multiply that by 6, 8, 10 times, depending on the particular configuration in terms of the amount of capital for the same data center if we're doing fully fitted. We've indicated the yield on cost, is 8% to 12%. Again, it will vary according to the particular situation. So were that to apply, if you take that to apply to any one opportunity, it's a significant ramp-up in income and CapEx requirements. But time will tell as to the particular characteristics of the first one we set out. So we're generally not giving a lot of specific guidance. When we announced our first project. We will share more details about what that entails. But in terms of your question around CapEx, and Soumen will correct me if I'm wrong, the GBP 500 million guidance we've given for 2025 does not make any allowance for a fully fitted data center. That will be incremental over and above that. And look, we haven't done our first one. If you extrapolate and do it over the whole portfolio of opportunities we've got, it's a huge amount of capital. But we'll cross that bridge when we get there. In the meanwhile, we've got plenty of capital and liquidity to do to the first one or two, and we'll update you in terms of funding thereafter.

Two and half questions, if that's okay.

I meant to say you're only allowed one, but we'll let you get with the first two.

We'll go down to two. The pickup in occupier market activity or occupied activity you talked about in the last couple of months of the year, I wonder if you could quantify that. Is that number of leases signed, a number of conversations that the leasing teams are logging in the CRM system internally? It would be helpful to kind of get some kind of quantitive thought around that, if that's okay.

Good. And I'm not sure I can give you the very precise quantitative numbers. But I think the way you characterize it is interesting, actually. So what we saw, and you saw it on Soumen's chart, where he showed all those dots, which -- what you can take away from that is there were a lot of deals done, a lot of things got pushed over the line in the last part of the year. I would say, particularly in urban markets, London, Southeast was very active. We were quite active on the continent with some of our light industrial schemes in Germany, for example. So there are actual deals done in the last part of the year that gave us quite a "Well, that's quite interesting that people having a general theme of last year being people sitting on their hands for a long time before taking commitments." People actually put pen to paper in numbers in the last part of the year. And this year, it's more around conversations, anecdotal feedback, general sentiment. But it's interesting that we're not just hearing in 1 or 2 places, everywhere across the business is seeing a lot more activity in terms of looking at deals, whether they're leasing up existing space or pre-let. It will be silly, given the macro environment, we're in for us to say, therefore, it's onwards only upwards from here because you just don't know what the macro is going to throw at us. But at the start of the year, we're feeling pretty positive about what we're seeing.

And then the second one was you rightly talked about selling assets that don't meet your forward IRR requirements. I wonder if you could share of the assets that you sold, say, last year, for example, what you thought the forward IRR of those disposals on average would have been, just so we can get a flavor of how that compares to saving...

Yes. I mean, in broad terms, and I talked about the average portfolio, looking for about 8-plus percent on standing assets, we acquired what we think was 9-plus. The disposals, they delivered, I forget the number, about 11% on average to date. We thought the forward look was more like 7%, 7% to 8%.

It's Marios Pastou from Bernstein. May I ask two questions as well?

Yes, sure. The new order.

Maybe start with the data center again. Could you maybe give us a bit of detail in terms of the partnership model you're looking at or thinking of? I appreciate it's probably very early days, but is this a partnership model in the sense that you're using expertise for the fit-out? Or is it a partnership model where you could potentially share the CapEx requirement?

Yes. We will answer that question in more detail when we get there. But broadly, yes to both. It could be the case with partnering with someone who brings expertise but also the ability to co-fund, so that would -- that's most likely the way we'll go. But we haven't absolutely definitively decided that's the only way to go. Definitely, we want the expertise. I mean you can look at what's involved in fitting out a data center. It's not that complex. It's MME and it's pretty -- there's a very, very good supply chain of people that can do this. But for us to go to, for example, hyperscaler or a major data center operator and say, "We've hired some people and we can do it," that will take a while to get people over that confidence level. So that's why doing it in partnership with someone who's tried and tested, got a track record, we think, is a quicker route to the opportunity.

And then just following up on Rob's question on occupancy levels and demand, I see your urban portfolio in the U.K. is now close to a 10% vacancy level. You're mentioning that you've got a bit more demand there and have done some active leasing. Can you maybe break that out into kind of what's been done at the start of this year, what's been taken back for refurbishment similar to what the pie chart you gave at the update last year?

Yes. On -- yes, I mean, James Craddock, who's our U.K. MD, is here. Why don't you give a bit of color in terms of what's in that U.K. urban vacancy? You need to pull...

Yes. No, that's -- absolutely. As David already mentioned, I mean, managing the urban portfolio is different from our big box. It's more intensive from an asset management perspective. And that means that obviously, we do see periods of elevated vacancy, particularly as we bring assets through the refurbishment and the redevelopment cycle. So as it stands at the moment, our vacancy is higher than we would like, but the teams are working hard to bring that down. I think on a positive note, if you look at our urban vacancy, about 25% of that is either under offer or in active and advanced negotiations for leasing. And also, we have about 30% that is either about to go into or is in refurbishment at the current time. So obviously, that's going to come through. And as you picked up on the presentation, we still remain very positive about the structural drivers, which support urban in the medium and longer term.

I mean -- and a good chunk of that U.K. urban vacancy is going through refurbishment or redevelopment as well. So it's not really effectively available for lease until we get further down the line. What we did -- what was interesting, and I think Soumen used an example of where we've taken a space back, we've refurbished it, obviously, it's [ non-income-producing ] for a while and now it's to vacancy. But the uplift in rents when we can create modern, sustainable space in the right location is pretty substantial. And obviously proving those higher rental levels is very important.

Yes, a couple for me, but they are linked, so I'll ask them at the same time. You showed a chart earlier in the presentation that showed, I think, the leasing done by existing space versus development space or new space. And the proportion of development space was, I think, the lowest since 2016. Obviously, your retention rate is still high at 80%. So I sort of take that to mean that actually occupiers are happy in their existing space and are staying more than necessarily moving to newer or even larger space. If that is the case, when do you see that potentially changing? And where do you sort of want or expect to see your CapEx guidance get to as and when that demand for new space picks up? And then sort of related to that, do you see any potential impact from tariffs, which you know is very unpredictable? But let's say we did enter a worst-case scenario and a more sort of a full-blown trade war impacting exports, do you see any impact on your logistics occupancy, but particularly around Heathrow Airport?

Gosh, quite a lot there. So on just with the tariff point, first of all, if you look at our portfolio, we are not massively linked to global trade. Remember, 2/3 of our portfolio is urban. And most of our logistics space, with a few exceptions, is around supporting inward consumption. You chat to -- maybe sadly from a U.K. perspective, you chatted to some of the rail operators at somewhere like East Midlands Gateway, where we've got rail connected facility, they talk about the containers. They come in full, and they leave empty because we're not shipping stuff out. And that is true for most of our portfolio, it's mostly around supporting inward consumption by U.K. businesses and consumers in and around the most densely populated urban areas. We've got a little bit more trade flow dependency in some of the European market, but it's a relatively small part. And we're not massively exposed to traditional auto -- the auto sector in Germany, for example. Again, it's mostly about small- and medium-sized businesses, very diverse supporting these, I'd say, wealthy congested population centers. So we're not complacent and don't ignore it, but I don't think -- we're not particularly concerned, in our case, about exposure to tariffs and potential trade wars. In terms of, I think, your earlier question about pre-let and development volumes, where we'd like to get to.,, There definitely was a case. By the way, you're right that a lot of occupiers were sitting on their hands rather than moving. We like to have a bit of churn. We want churn, particularly in our urban portfolio. And the concept, it was sort of touched on in that slide that I only skipped through briefly. But big box tends to be longer let, low asset management intensity, people stay there. And so the returns from big box are much more development orientated, plus, if you like, low-cost income on those boxes. Whereas the urban piece is much more intensively managed, lots more churn. We like to have some churn, not too much. We've got a big portfolio. So we've always got opportunities to move things around. So I think we're happy with the churn. We'd like to see -- as James said, we'd like to see the vacancy rate reduce and fill up some of those units as we particularly bring that refurbished space back onto the market. But I think what's really missing to sort of, if you like, even out those two parts of that lettings graph, it's just a bit more volume in the pre-let market. And that's mainly going to be around logistics and possibly data centers. And that's where -- it's too early to say because these projects, they're massive capital investments for the occupier. If you're building 1 million square foot, which is not uncommon, it's a huge technology investment as well as a real estate investment. It's usually part of a much wider reconfiguration of the supply chain. And so I think what we've seen is during the last couple of years, even though these are long-term strategic projects, a lot of occupiers have just been a little bit more cautious about putting pen to paper and committing to those projects; what I hope we're going to start to see soon is that there's this pent-up demand building. And therefore, it gets released into '25 and '26 as people say, "Okay, the world is not going to stop turning. We do need to put in place these plans. We've held that long enough. Now is the time to start committing." So hopefully, we'll see that pick up. We've slightly anticipated that with our [ old ] spec development. Soumen mentioned it, we're doing a bit more spec actually in urban markets, but also a couple of spec schemes in big boxes in Germany because we just think we've got a really good product and very little supply and good underlying demand.

It's Tom Musson at HSBC. Just a couple of questions. First one on the new data center fully fitted ambition. The 8% to 12% yield on cost is sort of the same as you reported versus the powered shell approach. Should we expect capital returns and therefore, total returns to be higher from the fully fitted ambition? Because I suppose, otherwise, it's optically a very similar return, but I suspect that the fully fitted is clearly higher cost of capital.

Yes. So we're obviously using the same -- we're using our cost -- our capital. We -- the main -- you're right, and it's hard to generalize because 8% to 12% is quite a range. And as I said earlier, very -- a great variety of different projects. But fundamentally, 8% to 12% on a much larger amount of capital, whatever you capitalize the finished income at and probably a fully fitted income-producing data center will be slightly higher yield when it's finished than, say, just the core shell real estate. But nonetheless, the volume of capital deployment and therefore, the volume of capital upside, the value creation is just a very much bigger number if you do fully fit it. Do you want to add anything to that, Soumen?

The only thing I was going to add is, we want to be very careful because a lot depends on the specific situation, it depends on the cost of land. And particularly, we're talking about doing these in the core availability zones, which means kind of in and around the urban areas where the land price is going to be higher than trying to do it in parts of Europe where, frankly, there's no -- there's very few people live. But taking all those caveats into account, you're looking at profit on cost north of 50% and probably north of 60 or 70 in some cases. So that's very, very firm. When David talks about 50-50, maybe 100 on a powered shell, but 8 to 10x that on a fully fitted basis, that's a phenomenal absolute profit and percentage profit if we can deliver it in those cases.

Makes sense. If I could just ask a second one. Just within the property disclosures, I think there's GBP 85 million or so of rent due to expire or break within the next 12 months. Can we sort of broadly assume a stable retention rates, does that create a slight occupancy headwind in 2025?

No. I think as I hopefully was trying to say during my presentation, and Dave do that, one of the things I think this business has done terrifically well over the past 24 months is capture that reversion and whilst keeping the retention rate really high, where there's been opportunity to relet either potentially directly or through a refurbishment and then reletting, we've done that terrifically well as well. So in our mind that we've got terrific real estate, as David talked about, it's part of our model, which is to own really good estate, really good space and capture the like-for-like growth. And I think we can see really strong growth coming through here. So I've got to say, it's been a concern that has been voiced by people to us. But I'd say if you look at the metrics, you look at our like-for-like capture and all the things that kind of go around it, I don't feel particularly exposed. I don't know if Mark or James, you wanted to add anything.

Any more questions? Right. We go to the conference line next, I think. We'll come back. Okay, one more in the room, sorry.

This is Suraj Goyal from Green Street. Just one question from me on the occupier market. So it looks like the development margins are pretty reasonably attractive across the board and maybe suggest a slight pickup in development activity in the sort of near midterm. And then if you couple that with the sort of vacancy potentially having peaked, would you say that if we do start to see that pickup, the market would be well placed to absorb the development? And would you still sort of expect sort of ERV growth of 3%?

Yes. I mean we, for quite a while, have this guidance range of 2% to 6% for ERV growth, which, let's say, averages 3% to 4%, depending on mix, slightly stronger in urban than in big box. But we're comfortable that is a very long-term sustainable number. Very difficult to predict in short-term period what it's going to be. We clearly massively blew out those numbers in the pandemic and slightly softer since then, but we're still in the right range. We're comfortable that we should at least do those numbers because as I've been saying pretty consistently through the presentation and previously, they're just not making a lot of land. Land is not easily released, whether it's green belt or even urban, where you've got these competing uses. So yes, we're pretty comfortable that the run rate of take-up of the new logistics space will support a return to some much higher development volumes for logistics. And urban, it's all around, can we get the sites, can we position and can we make the product available because in many of the urban markets, particularly in Europe, we're creating a product that just doesn't exist. We're introducing a new product. A lot of German businesses own their own very inefficient space. So when we go into market, we get a piece of brownfield land, we redevelop it, we create a secure, well-run, well laid out warehouse park. They're getting a much more efficient operation from it. So that's why we're very confident that there's lots of untapped demand still to go there. I hope I covered them, hopefully. Let's go to the conference line, please.

The first question from the phone comes from the line of Frederic Renard, Kepler.

Just to come back on the data center opportunity, so you showed a fully fitted model, of course, and the yield is the same than what you could achieve on a power shell model. But my question would be, what about the depreciation for the full fitted model? So should we look at the 8% to 12% as a growth yield versus a net yield for the other model? That would be the first question. And then on the second question, you still depict a very good picture for London. But as was pointed out, your vacancy rate is around 10% now. What does it impact in terms of your rent incentives? Do you give a bit more rent incentive to your tenant?

Sure, maybe I'll just answer the vacancy -- maybe -- and Soumen, maybe you can pick up on the first bit. I think if you look at our incentive packages, they haven't really moved very much. I think it's moved up less than 1%. So we're still seeing incentives around 6% or 7%, it does vary little bit by market. But no, one of the pleasing things is that where we have space and we've got an occupier lined up to take it, people are generally willing to pay the asking price. So very, very slight increase in incentives, but nothing very material. And encouragingly, we've been able to prove and push on rental levels with the deals that we've been doing in '24, and I'm sure that will continue in '25. Soumen?

[Technical Difficulty] I think was the question. On the fully fitted model, what we're talking about doing is fitting out things like the chillers, the backup generator. We're not buying the tech, we're not putting the tech in. And as one of the earlier questions, I think, asked, we're looking to then lease this or pre-lease this in its entirety on a triple net basis. So we are underwriting -- we would be underwriting a wider yield than a pure powered shell to take into account on that slightly different risk profile. But it's still a net yield to us. There's nothing else that we'd be taking into account. Was that the question?

Yes, that was the question. Thank you.

The next question comes from Jonathan Kownator from Goldman Sachs.

Two, if I may. Just to go back on DCs as well. On the fully fitted model, obviously, you've highlighted on Slide 32 that you had 3 pools of assets you had, where those are secured that with power before 2027, the reserve until 2030 and then the ones where you have power later than that. Can you help us understand where the fully fitted fits in, in terms of timing, given those timelines? Is it before 2027? Is it where you have power between '27 and '30 or is it post-2030 that you expect to do this fitted -- what is the first project in fitted?

Well, in broad terms, we are looking at current near-term projects for fully fitted. So it's not a question of waiting for 2030 and beyond. We've got some particular projects and opportunities we're looking at now, which are -- would be similar to the time frame for a powered shell. The only thing I would just highlight, just to mention and give a little more color on that is, clearly, if you do a fully fitted, it's a longer journey from when we start construction to actually completing the fit app as well as the building and therefore, when the project becomes income-producing. So you're going to be adding 12 or 18 months to the construction time, at least, I would say, before you get your income. But again, this is all about scale of the value creation opportunity rather than the near-term income impact.

And does that mean that it's a way for you to accelerate the CapEx that you're opening into data centers? Or is it just a question of demand for powered shell that is perhaps not as strong as what you thought initially?

Sorry, say that last bit again?

The question is, is it a way for you to accelerate CapEx? Or is it you're shifting to fully fitted because demand for powered shell is not as strong as you thought initially?

Well, I think as I said during the presentation, the real reason why we're looking at this is it's an opportunity to create a lot more value in totality. It's fair to say that fully fitted is a more flexible, I'd say, doable model across more European markets. We found that powered shell demand is exceptionally strong in Slough because, frankly, we've got such a unique replaceable asset there that anybody wants to plug into the network, needs to be there, and powered shell is all we've been willing to offer. In other markets across Europe, it's a bit patchier. Given the choice, most operators would rather own their facility. And there's probably a bit less demand for the powered shell model. It's not impossible, but there's less demand for powered shells. So it's another reason why the fully fitted model may well be the best route and the quickest route to extracting value from the opportunity set we have.

Okay. Very clear. One follow-up just on the sort of take-up and absorption. Obviously, you had strong take-up this year, but there was also a space return in equal number to take on the existing space. Can you perhaps give a bit of color on the space being returned? Is it from 3PLs, what type of operators? And I understand also it's not from space taken back from redevelopment, if I read your footnotes right?

Sure, Soumen will cover that in presentation, why don't you just mention that again, the take-back?

Yes. So look, there's one particular example into the take back, which was the -- which I referred to a global media company that chose to give us back their space in North London, which actually we see as a really interesting opportunity, is 3 buildings. We've had multiple viewings, and we would hope to set some interesting rental levels on it this year. But that, in particular, accounted for about 50 basis points of the vacancy, so over half the step-up in last year's vacancy. Otherwise, if you kind of get beneath the kind of the special cases, it was -- there was nothing in particular that was different about that, but there was one special case that change -- affected last...

That was particularly big?

Yes. I mean there's also the [ Matches Fashion ] unit that came back in Park Royal. So primary part [ Matches Fashion ] went insolvent that units come back to us. That's a great opportunity for redevelopment. So if you actually took out that [ Matches Fashion ] unit and the studio operator that Soumen was alluding to, I think you'd say that the level of take back was pretty normal and very similar to last -- to the year before. Two more?

The next question comes from [ John Wong ] from Kempen & Co.

You were just talking about the strong sentiment in leasing activity. At the same time, your balance sheet has much more headroom now. But your expected development CapEx is not materially changed compared to, say, last year despite the relatively short lead times in developments. Could you perhaps elaborate on that?

Soumen, do you want to cover that?

Yes. I think we tried to talk about the -- the balance sheet has got the capacity to grow. We've got GBP 2 billion plus of available liquidity. In terms of the development pipeline, as I think I talked about, the -- it's a mixture of things. There are fewer large -- very, very large pre-lets around. There are deals we've done. We've -- so we signed one of the largest pre-lets in the U.K. last year at Northampton. And we're looking at several now. The Investor Committee in January, we looked at several. But we have to say that the time from inquiry through to signing is longer than we might have liked, and it's just a feature of the market over the last 18 months or so. We have started spec schemes because particularly where we see pockets of demand on our standing estates, which makes us feel very confident about starting, particularly on the urban side, but a couple of big box schemes, as David mentioned. And so where we are, we are taking that risk around spec to kind of keep those development volumes high. But really, we do want those to convert more of the inquiries into actual pre-lets through the course of this year. But the -- yes, we're positive around the sentiment change that we saw 2, 3 months ago.

I think the reality is even if the sentiment converts into more pre-lets that we signed this year, which we hope will be the case, the likelihood is the amount of time on site will be -- this year, will be relatively limited. So the ability to spend significant amounts of additional capital this year, it's limited. So we think, hopefully, demand will ramp up. We'll sign more pre-lets this year. But the CapEx will start ticking in soon after then and will it most likely impact '26 rather than '25.

Okay. That's clear. And then just one more on data centers. I appreciate the difference in the absolute investment point. But with similar returns, it suggests that there's not much of a difference in risk premium assigned to, say, execution or obsolescence risk of the fit-out. What's your thought on this?

Well, our thought is that we're going to approach this in the way we approach every capital investment decision, which is we're looking for an attractive risk-adjusted return. And we're not getting into the specifics of a deal that we can't talk to you about just yet. There's no point in speculating about that. What we can say is we're looking at the returns, we're looking at an evaluation of the risks involved. Very clear what sort of return we want to make. And the overall value-creation opportunity is sufficiently large that this is getting some serious energy and attention. And we'll definitely share more details when we can. I don't think there is a one-size-fits-all answer to that question.

The next question comes from Paul May from Barclays.

Just a couple of ones for me, and apologies it's sort of similar to what we've had. But lot of commentary around the outlook seems very positive, but some of the overall operational figures, for example, vacancy higher since year-end '21 over every period and is lower than Q3 '24. Like-for-like growth has been slowing, pre-lets are at the lowest level. But I think I can recall them maybe ever, probably point to it not being quite as strong. And given market vacancy rates are expected to grow and take up was weaker year-on-year, I think CBRE has prime rents in London warehouses flat since Q2 '23. Just wondered, what should we take away from the numbers? What number should we be looking at to give us confidence in the operational outlook that you have? Because the sort of data would suggest potentially slightly otherwise in terms of the overall numbers and the headline numbers. I've got a second question after that.

Well, let me start. Look, the -- I think we've talked a couple of times around the occupier market this morning. The reality is we've had a normalization in the market since 2021 and 2022. And I think regarding that is that the benchmark is the wrong thing in our view. When you kind of look at the conditions in 2024, I showed you on the chart where I showed you the kind of difference in activity levels by month. We had some months which were really strong, months were less strong. I think we take it actually as a positive. In a year like that, we delivered very healthy levels of leasing activity, really healthy levels of reversion capture. And importantly, in terms of momentum into '25, we finished the year really strongly. So all of that, in our minds, shows, look, it's a market that is kind of working through some of what happened in the pandemic, but it's in good shape to be able to kind of recover from here. And as I said a couple of times, if we can convert some of the inquiry levels into deal activity, you can actually start to drive the kind of that -- those development volumes pretty strongly. And if we perform as well as we did last year, it doesn't take a lot to change it. So I think we can be realistic in terms of -- it's a market where there's things to do, and we've just got to make sure that we convert those opportunities that we can find.

Yes. I mean the other thing I'll just add, Paul, to that is, again, remember, most of the market data you look at will be market-wide big box logistics. 2/3 of our business is not that. And I don't know whether you've got better sources, but we find it very difficult to get market-wide data on urban markets. So what we're telling you is what we're seeing and what's coming from our conversations with occupiers and local agents and our teams on the ground, the proof of pudding will be in the eating. We'll see what happens. But our expectation is that occupancy will improve as we go through this year.

So just to say that last bit, so occupancy rates improving through the year and pre-lets also improving through the year, would that be the expectation?

We're not going to give you a forecast of our year-end vacancy rate. Good try there.

Okay. And sorry, just the second question was on the leverage and the balance sheet. I think you've worked hard to get your net debt to EBITDA down to towards a reasonable level in a European context, still high on the global context. Just wonder, what gives you the confidence that this should move higher? Because obviously, if you are investing, that will move higher. I just wonder, what your thoughts were around that and how much the net debt to EBITDA is a focus? Or is it all about LTV, which has become less relevant, at least in our conversations with investors?

Sure. Look, I'll give you an answer to that I think I've probably given for several years, which is there is no single one debt metric that is the right one. You've got to look at them all. You've got to look at loan to value, you've got to look at the debt to EBITDA, which is effectively is the debt yield, and you've got to look at the interest cover, which frankly, people stopped looking at 5 or so years ago. Our covenants are all set against LTV. So frankly, that is the relevant one to kind of focus on. I think there if you look at kind of where we are rated, you look at kind of where we're rated against the European population, I've said this before, you can take your pick. You can have a high loan-to-value and a lower net debt to EBITDA or you can have our balance sheet, which is 28% levered at an 8.5% net debt to EBITDA. I know which one I would pick every day of the week because a high yield is no sign of a good set of assets, and it's the sustainability of that leverage in the balance sheet that matters. David talked about kind of the approach we have around the portfolio management. It's the same thing on the balance sheet. And so just having lots of high-yielding assets that artificially depress your net debt to EBITDA, doesn't really get you very far. And the companies in Europe that have, outside of our sector, in fairness; that have lower net debt to EBITDA, I would question whether those loan to values are sustainable or not. So I think it's not a simple answer, Paul. We look at all of them, but I'm pretty comfortable as to where we sit in terms of the balance sheet today. And it's got more than enough funding available for what we've got in front of us. And hopefully, as David says, hopefully, things do start to pick up. We've got the firepower we need to capitalize on that.

I agree it's multiple factors. The question was at 8.6%, you mentioned that you're happy today. Would you be happy to see that 8.6% move to 9%, move to 9.5%, move to 10% again? Or would you prefer to keep that around 8.6, in which case, it implies there's actually not that much funding available or leverage available to invest?

We've been pretty clear that we like our A- rating. And that is -- that requires a net debt to EBITDA around the 9x area, plus or minus 0.5 turn. And that's quite a lot of flexibility, particularly when you've got the EBITDA growing through that period as well. So I think -- as I said, you've got to kind of look at the whole thing and flex every piece of it to really understand what the firepower and the opportunity set looks like.

I don't talk to the rating agency the way Sherman does. So you might kick -- if you were close, you might kick me on the table here. But I think -- just to add a little bit more color on that, we're certainly not planning on having our net debt to EBITDA going the wrong direction by, for example, buying a whole load of land that's [ noninducing ] sticky on the balance sheet. If it were to go up temporarily because we happen to have signed a lot of pre-let and it caused a temporary increase whilst we're waiting for those pre-lets become income producing, that would be a high-quality problem to have and not something I'd be too worried about. I'm not sure about you, Soumen.

No, exactly right. As I said, the EBITDA is the thing to keep an eye on, which is the thing that -- for all the things we talked about, is a huge opportunity to capture.

Okay, any more questions?

And the last question for today's call comes from [ Paul Gori ] from Citi.

Just one more follow-up on the data centers from me. The Slide 32 with the breakdown of the gigawatts is very helpful. Can I just ask on the split between secured reserves and applications in progress? How much is the kind of reserved and applications in progress is dependent on, say, the [ IVA ] upgrade or other kind of infrastructure products or projects, I should say? And how much is just kind of you going through the process of applying for power? I guess I'm trying to gauge how much is kind of in your control and how much there's maybe external factors that impacts delay, making more difficult on the power side.

Well, it's a great question. And the answer is there's a whole mix. I mean most people who know in this -- who are in this sort of power business, it's a moving -- it's always a moving target. To your specific point, there is some -- some of that capacity is related to Slough and the [ IVA ] upgrade. If you're looking for something more encouraging on that front, we know that this week, the planning permission for the IVA upgrade was granted by [ Buckinghamshire ] County Council, which is first time we've actually had a firm date in mind. So that is -- that will be -- there will be some of that power is related, so it's secured. We have it. We're right in the right place in the queue for that. We now need that upgrade to be delivered, which will be -- which will happen before 2030, is our current understanding. And then there's a whole bunch of other ones that are at various different stages of certainty around the group. Claire's got some on the webcast, I think, on the web line, web chat.

I'll try and group these in the interest of time. [ So ] on the occupier market, how do you explain the high level of reversion? What do you expect for the next year? Do we expect to see the same reversion capture level?

Well, we've set out a slide showing the breakdown by year, so that is what's available to us. It will potentially slightly increase as ERV growth continues, but we've given a slide which gives you the breakdown of ERV available through reversion capture.

And then working out on development CapEx, can you give the split between on-site and new constructions on the GBP 500 million of development CapEx?

So of the GBP 500 million, about GBP 150 million of that is infrastructure, we think, this year and of the rest is probably half and half in terms of stuff we start -- we already had on site and half that started.

A couple more questions on data centers. Would you be looking to transfer the data center assets into a separate subsidiary or fund something like you've done with SELP?

Possibly, but we'll cross that bridge when we get closer to it.

And then another one, DCs. Can you explain a little more about what you mean by the increased operational risk associated with data centers?

Well, we didn't talk about operational risk. I think what we're talking about is the -- is just the additional complexity associated with installing all of that equipment. And that's something that we don't think is too difficult. But we do think in terms of credibility with customers, we're right to be doing that with people who have got a tried and tested track record.

On solar, what percentage of the roof space is covered with solar at the moment? When you enter into it, when you install it, do you enter into agreements with customers to buy that? And what's the yield on cost for those projects?

Look, it varies enormously. We've got all kinds of things. I can't tell you, it's quite a low percentage of the total roof space that we have, probably 10% or 15% in totality. What would be doing because we've got a very large established portfolio, we've been doing over the last few years; is retrofitting solar where we can. That's not always straightforward because in the U.K., the occupiers are responsible for the roof, so you can't interfere with that. On the content, it's a bit easier. Some markets, it's very easy to supply the excess power you generate into the grid and get a sensible price. In other market, it's not. So it's very hard to give you a one-size fits all. But we would say we'll be looking for a high single-digit yield on cost, where we do this. We're looking to do it more actively on all new developments, again, where there's an attractive feed-in tariff available from the local marketplace. So I think you'll just see it continue to grow, but it's offering a sensible return. In some cases, we do a power purchase agreement and the customer pays for the energy. In other cases, we simply charge an additional rent a flat rate for it. So it's a very wide variety of different practices. But we're very pleased that we were able to double the amount of solar we had installed in the portfolio during 2024. We now got 123 megawatts, where we're looking to add to that as we go forward.

Two last ones, one for you, Soumen, on capitalized interest. Can you confirm what rate you're using to capitalize interest?

Yes, of course. So we use a variety of rates between kind of 3.5% and 5.5%, as we talked about 2 years ago now. You capitalize the margin rate at the point which you start a project, and that's been locked into the duration of that project. As we go forward from here, obviously, with the rates kind of -- well, [ euros ] certainly are a bit lower; I'd expect that number to come down over the next couple of years.

And one final question. Given the amount of cash and capacity on the balance sheet, would you consider doing share buybacks?

Look, I think David talked about our approach to disciplined capital allocation. So obviously, we have to have all options on the table at all times. Having said that, David's also laid out, I think, a really exciting sort of array of opportunities, both across the development book on industrial and logistics and a phenomenally exciting opportunity on data centers. I think, with that in mind, I think we find using capital to buy back shares would be the wrong option to take at this point in time. Investing that capital into those opportunities, we think, will create a better value for shareholders, going forward.

Okay. Well, thank you again, everybody, for joining us here or online. Have a great day, and enjoy the weekend when you get to it.

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