Workspace Group Plc (WKP) Earnings Call Transcript & Summary

Okay. I'll pick up the first 2 and then I'll hand over to Dave on the breakeven point. So on pricing, I think I've said previously is that we price as demand. And obviously, demand is relatively weak. Supply is probably greater than normal. So pricing is definitely weaker than it's been historically. I'd say we're seeing a range of pricing probably from target pricing down to maybe 10% below target pricing is probably the range at the moment. We don't really price to protect value. I mean we price to maintain occupancy. As much as the values of our buildings is important, for us, actually, it's all about really driving the income of our businesses. The good news from a pricing perspective is, albeit it's a relatively weak market at the moment, we only sign relatively short leases. So we can capture back pricing that we may be giving away at sort of lower price points than we would normally be giving relatively quickly. But having said that, we're an experienced team at Workspace. So we're pragmatic. We're not going to do silly deals. So I think you've got to trust us as an experienced team to take a judgment call of when pricing makes sense and when pricing doesn't make sense. And we will walk away from deals if we don't think actually they make sense. So the good news I think, from my perspective, as I mentioned earlier, is actually, in recent days, I think that mood has changed. So I do think potentially, as we go forward over the next sort of 6 months or so, we'll see a sort of a plateauing now on pricing. But we'll see where we go. But as I said, it -- we're not going to be held to sort of supporting values. It's all for us around driving occupancy and then, on the back of that, income. In terms of density of offices, it's probably a more relevant question, I think, for your larger occupiers who probably pack in their staff into more tight space sort of requirements, or equally, actually, probably some of the more service office type businesses, which again have quite dense structures around their office environments. We obviously give our customers the freedom to furnish and sort of fill their space as they want. And typically, if you go around our centers, you'd find that, actually, there isn't a very dense sort of, if you like, fitting of desks into a particular unit. You'll find there's probably a sofa, maybe a pool table or something else. So they have a much less dense sort of, if you like, fit-out than you typically find in larger corporate type environment. So I don't think we're going to see probably the same sort of view that you might have about other office occupiers, where, actually, they may well be increasing their amount of space they require. And really, that goes back to the point that I made in the presentation and indeed in the results themselves is that we've seen a lot of the trends, I think, are -- that are going to be much more common across all occupiers over many years. So I think that density point is one that actually most of our occupiers have already got hold off. And actually, catering to employees' needs means that, actually, generally, they want more space, more sort of collaboration space. Dave, on breakeven analysis?

Yes. So I think the question was around occupancy and where we need to get to. So I mean, typically, as Graham said, a new site might take sort of 18 months to get to full occupancy. And the breakeven point is around about 40%. Obviously, it varies slightly from center to center. But it's about 40%. So typically, you're sort of looking at maybe 8, 9 months, something like that, to sort of get to a breakeven point. In terms of the impact of COVID on it, I mean, obviously, as you've seen in the presentation, inquiries and lettings have been slower during lockdown periods, and they are sensitive to sort of the policy and the progression of COVID. But as we've seen, when that demand comes back, then demand -- underlying demand is strong. So if you put aside lockdown periods, I think probably, broadly, those time scales and occupancy levels should hold true.

Okay. Just a quick one follow-up. You initiated a pilot test on one of your units, one of your buildings with furnished units. How is it working? It is a strong demand on that type of a space?

Yes. I mean I think you're referring to Mare Street, where we have put in on some of our units some furnished space. That's going fine. I mean it's early days. I mean we only launched, as we said, in June. We'll see how that goes over the next 6 months or so. But certainly, I think we do think that, actually, mixing and matching demand for empty space, furnished space, it's an interesting sort of play for us. But as I said, historically, we've always given customers very much opportunities to fit the space out as they want. This was really just to see whether there was demand for a more of a furnished type product. I'd say probably by the summer, we'll give you probably a firmer view on that.

The next question comes from Marie Dormeuil from Green Street.

I just had one question on -- and it's mostly been covered. But the tenants leaving, have you heard of tenants leaving to other flex operators and, I'm thinking, any other short-term flex office? And maybe it's a question down to how much price have fallen -- price per desk? Or of course, it's a little bit different from your business model. But maybe what you've heard in terms of competition versus these other guys and how much -- how many clients they can steal from you, in a way.

I can -- yes. I mean this is a common question we get. And obviously, our first point is that we don't really compete head on with service office players. They generally cater for a different market to us. On the fringes, there's always going to be some movement between the service office operators and us, though, on some customers. And actually, when I've looked through the detail of the customers that are moving in London, it's only a very small minority that are going into service office space. And actually, most of those are ones where, I mentioned earlier, unfortunately, some customers are really struggling and, actually, where they've significantly downsized and actually moving out of their own space. Those are the sorts of customers we've seen move back into a service office environment. And that's largely because, obviously, the [ price of ] furniture is actually an easy in, easy out. I think for a lot of these companies, it's very much a transition stage as they're trying to assess the future viability of their business. So we're not seeing any head-on competition between us and the service office players on sort of, if you like, our traditional sort of customer. And I think on that price point, I think that pricing battle, if there is one, I would imagine it's probably more between the service office players for their sort of customers that go to that very much service office space.

The next question comes from James Carswell from Peel Hunt.

Just thinking in terms of the discounts you offered in Q1, the 50% for most of the customers. I mean do you think there's a situation where you might bring that discount back if we continue in the current lockdown kind of longer than expected and it continues into Q1? Or do you think that was very much a one-off? And then just a second question on the dividend. You kind of deferred the decision to the finals. I mean if we could just get a little bit more color on why that decision was made and also what might drive the decision when we get to the finals with regards to dividend.

Sure, sure. I mean I think on the discounts, I mean, Dave mentioned earlier that we gave the discount for Q1. It's very much at the early stages of COVID and every business was trying to assess the impact they had -- that it had on their own viability. So we wanted to give them the breathing space. So we gave, as we said, a majority of our customers a 50% discount. We're in a very different position now. I think most customers that were trying to assess that, hopefully, now have got a good feel for the viability of their business through the whole of their COVID journey, which hopefully is going to be shorter than maybe it looked a couple of weeks ago. So our view now is that, actually, we'd rather just price people and put people at the right level of space that they need, or unfortunately for some, it's meant that they've left us. We don't think there's any real need at the moment to be doing further discounting overall. But obviously, there will be hardship cases from time to time, and they're dealt with very much on a case-by-case basis. But overall, I think our view is now is that we'd rather rightsize you, price you to the right level of space that we think you can afford. So at the moment, no, the answer. But never say never. I mean, hopefully, we aren't going to go into a long period of lockdown. But obviously, we're very cognizant that we're trying to support customers as best we can. And we are doing that in many other ways as well. We're obviously giving people at the moment, our existing customers, free access to all our meeting rooms, which I think has gone down well. So we are looking at other ways of helping to support them, encourage them to come in and actually use any of our other buildings as well as their own building as well. So I think we're doing as much as we can. I think it makes sense now to actually look forward though and actually make sure customers have got the right quality and pricing of space for their business as they go forward. And on the dividend point, I mean, I think it is something that we thought long and hard about. I mean it -- we have a proud, long track record of paying dividends pretty much every year since -- well, certainly since I've been here. And I think our view at the moment is that it's a very unclear picture for the second half. So setting an interim to give you a view of what we might pay at the final was going to be an almost impossible task. I think it also comes to the fact that we're still going through some very uncertain times alongside our customers. So the view was, let's get to the full year, know where we are in terms of full year performance and then make a view about the quantum of dividend that we think is appropriate. So I think it's really just defer until we had a much more clearer picture of the full year outturn than anything about the messaging from not paying it at the interim.

Okay. We've got some more questions from the webcast now. Question from Andrew Gill at Jefferies. Do you still intend to use EPRA net reinstatement value as your primary metric to replace EPRA NAV? Or has this changed now to EPRA NTA? If so, any reasons for the change?

That's a very good question. And it's one, I think, for Dave.

Yes. So the net reinstatement, I think for us, as we said at the year-end, we think it is appropriate on the basis that we hold assets for the long term. We don't -- we're not a developer, trader developer. We do hold the assets, and we hold them for their income. So we still think that, for us, is a very relevant metric. However, having said that, obviously, we recognize that to -- most people use the NTA measure. And in order to facilitate comparability and make it easier for everyone fundamentally to do that, we are quoting both. So yes, we'll give you both numbers.

Great. Now a question from Robbie Duncan at Numis. Have you already started talking to your lending banks regarding your 2022 maturities? Is there any indication of how lenders view Workspace from a credit quality perspective at this stage?

Dave, I think that's for you.

I think that's probably for me, too. Yes. I mean, obviously, we have good, strong and long-term relationships with our lenders. And as you'd expect, we continue to have conversations with them, both at the beginning, throughout the lockdown period, et cetera. So yes, obviously, we don't -- we got -- we have a good average maturity of 4.1 years, with maturities going way out to 2029. But certainly, looking at the 2022 maturities, it's something that we will be looking at over the next year.

And a question from Peter Papadakos at Green Street. Question on the nature of inquiries by size, whether we're seeing more demand from larger enterprises. We traditionally cater to the smaller end of the market, but can we break down any of the new inquiries since the summer per size bracket?

Yes. I mean if I -- and I thought that question would come up. So I did do a fair bit of work looking at it. I mean to date, actually, when you look at the characteristics of inquiries, they're pretty much consistent with the shape of inquiries we've seen over recent years. So we're not seeing any sort of change in the nature of inquiries, i.e., from larger corporates. I think that may well come in time as they look to sort of change the configuration or the way that they use their office space. But at the moment, no. I mean -- so I would say nothing really changed around the range of customers. I mean we still got very good demand from that existing customer base. The only thing I'd say that's changed, and not surprisingly in terms of the sectors that we've seen demand for is that, actually, we aren't seeing much demand from the sort of the leisure and the travel sector at the moment. That's probably one of the sectors we've seen more departures from in recent months. Again, though, I expect that to recover relatively quickly in the coming 6 months as more confidence returns to the market and the economy. But there's nothing noticeable yet about a change in trend. But certainly, I do think an exciting opportunity for us is that wider range of potential customers that will be attracted to the sort of space that we can offer.

We've got another question from Denese Newton at Stifel. Are there any notable differences in occupancy and pricing trends between locations? Or is it broadly the same picture across the whole portfolio?

Dave, do you want to pick that one up?

Yes. I mean, I guess the picture broadly is the same across the portfolio. I mean there certainly -- and it's probably, it does change almost week by week. And certainly, we have seen probably -- at very different stages during the lockdown, there has been maybe some more levels of interest around slightly more peripheral sites. But then, actually, as lockdown eases, the centers -- in the more central locations as well have shown good consistent interest. So no, I don't think there's a general trend of difference between the different sites. It's more on a site-by-site basis.

I mean I think -- just adding to that. I think the difference we've seen is actually more around the use of the buildings than it is around actually the demand from customers who are viewing. So utilization of space has definitely been higher in the more peripheral locations. And that, in the early days, did lead to actually more probably letting activity. But actually, as Dave says, as lockdowns ease through the summer, actually, there was a pretty consistent level of demand across all our buildings in our portfolio.

Okay. We've got no further questions on the webcast or call. So...

Okay. Well, thank you for your time today. And hopefully, I look forward to seeing you in the summer next year for our year-end results.