Workspace Group Plc (WKP) Earnings Call Transcript & Summary

Okay. 9:30. So I'd like to welcome you all to our year-end presentation today. Just quickly running through the agenda for today. We'll start with an overview from me, just really give you a quick overall business update. I then want to spend a little bit of time taking you through some more details on our recent McKay acquisition. Dave is then going to take you through the financial performance in a little bit more detail, then I'll come back to talk about our plans for growth in the future. So if I start off with just a quick overview. I mean, I think from my perspective, it's been a tremendously challenging year, but equally, I'm really pleased with the performance of the team at Workspace over the last year. We've now got our occupancy, our like-for-like occupancy back to 90%. We've turned the corner on pricing. And with our scalable operating platform, we do see really exciting growth opportunity ahead, both from our organic pipeline of activity, but equally from the acquisitions that we've made and continue to make. At our recent Capital Markets Day, we set out a clear path for our net zero carbon business ambitions by 2030. So overall, I think as a business, I think we've got a compelling, sustainable long-term growth story for you to look at today. Before we go into the details around performance, I just want to talk a little bit about our business model. And I think it's just worth reminding. I mean, mainstream flex is now it's great to see. The only challenge I'd say is that there's a lot of different variants around flex and sometimes a little bit confusion about different models in the marketplace. For us, actually, the great thing is actually our model has been developed over the last 30 years or so that we've been in the market for flex space, very much tailored to the needs of our customer base. So just 6 scale, I just want to quickly run through, just to remind people about what our flex model is about. First, it's around the lease. We've got a flexible lease. Typical lease will be a 2-year lease with a rolling 6-months break. That's not because we think of all our customers want to leave us within 6 months. It's actually because our customers are continually looking to expand or maybe resize as their businesses evolve. And actually what we do is we give them the flexibility to change their space requirement as they require. And typically, our customers stay far longer than their lease term, 4 years to 10 years is the average sort of stay that we see for our customer. In terms of the customer themselves, they're best described, I'd say, as sort of service-based SME customers across London. We've got around 3,000 of these customers, a diverse range in size and -- and in sector. Typically size will be sort of 5% to 20% type businesses, but we have smaller customers, we have much larger customers. And overall, we are, by far, the largest provider into this customer base in London. We reckon it's around a 3% market share. So still a huge opportunity for us to go for in terms of the opportunity in London. A really important part of our model is around the customer service. We keep our customers by the quality of service we provide, not by the length of the lease that we make them sign up to. And that's really been at the heart of the business really from the very beginning. And every touch with -- that you have with us is actually with a Workspace employee, from the very first inquiry that you make through to your viewings, through to the negotiating or lease terms, through to your moving in and you'll stay with us. So at every point, you're dealing with a customer -- customer is dealing with Workspace employee. And that's a hugely important part of the model and is reflected in those very high quality of service responses that we get from our customers when we do surveys, delighted with the level of service response that we've got in terms of 85% of customers think we provide a really good level of service. In terms of the real estate, we own all our real estate long-term. With a long-term sustainable focus, the scale buildings and in great locations across London. And within the buildings, we dedicate around 30% of our space for the communal areas, very important aspect of our model, big open reception areas, typically with an on-site cafe, meeting rooms, other breakout space as well as, of course, pretty much standard now requirements for bike storage, changing facilities, shows, et cetera. These are all absolutely must have to be in our sorts of our business centers. And lastly, and something I think differentiates us from a number of the other flex players is we provide our customers with very much a blank canvas. They want to fit out the space as they see fit. Of course, we provide all the basic utilities as well as it goes without saying high-spec connectivity. I just want to touch on a couple of these areas in a bit more detail. Firstly, in terms of the mix of customers by sector, we collect huge amounts of data around our customers. And as you know, we've got a wealth of information, which is really useful in managing our business. This is around the sectors. You'll see a very broad spread of what I would call the London SME economy in terms of service-based businesses. We update this every year. And actually, for me to, it doesn't really change that significantly. Interestingly, over the last year, I'd say the strongest demand has been from technology businesses, e-commerce businesses, film video production has been a very strong area of demand. And one that actually for the last year has been really strong and probably the last 2 years, fashion design. Interesting, the ebbs and flows by sector and no surprise to see some of the weaker sectors over the last year have been in travel and events. But even though, we are going to see a pickup in demand. In terms of the buildings that we own, a very collective mix of buildings, modern in some cases, older in other cases. But what they have got in comment is scale; 30,000 square foot plus even probably I'd say most of them more to 40,000, 50,000 square foot plus and configure well for our multi-let model, which typically the long and thin, all the ability to drop light bulb through the middle of buildings. So there is a certain type of building that would work for our multi-let model. What you would say about them is every one of our buildings is different. And actually our customers really identify where their individual building is. It's a really strong pull for our customers. And in terms of fit-out, as I said, we provide a blank canvas. And as you can see from these, to say, hey, sort of random shots, every fit-out from our customers are different. Every customer we have wants to bring in their own sort of creative style. They create their own identity. It's a hugely important part of what our customers want when they have -- they take office with us. And it's really what draws their staff into the office, that collaboration and the feel. As you can see, there's not intensive use in space. It's very much what people talk about is attracting your staff into the office. It's hugely important part of that is actually the fit-out of their space. And on that, I think there's no surprise that actually you're seeing a very good recovery in terms of customers using their space this year. We've got up to around 70% use of space by the end of March this year, actually much higher than actually many of the other reported occupancy levels that you're seeing with other types of customer. So we're delighted our customers are seeing the really important use of their space. And actually one of the things we did early in the year was do a survey of SMEs, asking them, what is the importance of the office to them? No surprise, actually, one of the things that's coming out time and time again is actually, for employees, the ability to divide their time between home life and work. It's becoming a really important part in the consideration, I think, particularly for well-being of your employees. But alongside that, all the things that I just talked about as well, is creating that buzz within the building. It's wanting to be part of that sort of community of like-minded people. Equally, for the business itself, actually collaboration within the office. And actually for employers as well, it's actually what creates the identity of the business. And in the fight for talent, attracting and retaining staff, the office is a key component in actually attracting and retaining those staff. Just then turning on to performance in the year. As I said, I'm delighted with the stability of our teams to actually capture demand through the year. And as you see, inquiries have been running pretty much now at pre-COVID levels in recent months. We're running at about 200 to 250 inquiries every week. We're doing around 150 viewings every week. And in terms of lettings, the scale of letting, sometimes when you look at these numbers, you don't appreciate just how much that means in terms of lettings in the year. So we've done over 1,500 lettings this year. We've let out over 900,000 square feet of space and with a rental value of around GBP 30 million. I mean, it's a phenomenal achievement for the business, which I'm delighted with. And on the right-hand side of the chart there, you'll see the impact that's had. Like-for-like occupancy, as I said, has now recovered to a shade below 90% and we've turned the corner in pricing. The last 3 quarters, we've seen a positive rent per square foot. And indeed the second half of the year, rent per square foot was up 2.5%. So really positive signs of strong recovery, which is continuing with strong demand into the current year. Overall, the like-for-like rent roll was up just under 9%, 8.7%. And on the back of that, you'll see a strong trading performance. Dave will take you through some more detail on performance, but highlights to me, rental income up 6%, flowing through to the bottom line with trading profit up 21%. On the back of that, we've paid an increased dividend -- increase of 21% to GBP 0.215. And in terms of the balance sheet, again, we've seen a turning point in the property valuation. Property valuation was up in the second half of the year. And overall in the year was up 3% with a follow-on in terms of the net tangible assets per share, up 5% to GBP 9.88. So that's enough to be on trading performance. But before I hand over to Dave, I just really wanted to spend some time talking a little bit more detail about our recent acquisition of McKay. So just to start then in terms of the offer we made an offer to buy the McKay business in March this year and completed on the transaction on the 6th of May. As I said at the time when we announced the deal, we do see this as an opportunity to really accelerate our growth, particularly with the London assets that we're acquiring, really exciting opportunity for us near-term, actually, just to fill the vacant space, but we do see tremendous opportunities for us with those properties. In the South-East offices, we see an opportunity there to extend our reach. As I've said previously, there's nothing magical about the M25 border and SMEs do cross it from time to time. So there is opportunity for us, particularly in some of those well-connected towns feeding into London. In terms of integration, it's a relatively simple integration for us to bring those properties and onto our platform, operating platform. And in terms of the noncore assets, where we don't see that we can add value, we'll be looking to sell those, in particular, the quite attractive South-Eastern industrial portfolio. And overall, when we -- based on the March valuations for the McKay portfolio, we've acquired that portfolio at a 14% discount to the net tangible assets. I just want to spend a bit of time now talking about the individual elements of that portfolio. Firstly, the London offices. As I said, this is a great opportunity for us to accelerate our growth across London. There's 7 properties of scale actually and properties that work well for our multi-let model in a variety of locations, some that we're already in, others that we know we will -- we see strong demand for. And on the right-hand side, I've just highlighted 4 of the larger buildings, just to give you an idea of our plans on them. The first 2, Portsoken House in Aldgate and Corinthian House in Croydon, those have both been undergoing quite significant refurbishment. That refurbishment was actually being undertaken prior to our acquisition. And as a result of that refurbishment, you'll see they've both got relatively low occupancy levels at the moment, which is great for us because actually it gives us an opportunity to roll out our flex model more quickly. We're also looking at reconfiguring some of the space to our smaller units. And the other thing we're looking to do is potentially add some more amenities, particularly Corinthian House and maybe the front of house as well, improve the quality of the reception area. The Swan Court, Wimbledon, another property that's been recently refurbished. Again, there's a couple of floor vacant there, great building right in the center of Wimbledon. We'll be looking there to see whether or not we can reconfigure for our multi-let model. And The Mille, Brentford, is a big beast in Brentford, works very well for us in terms of our multi-let model, long and thin, divides up well. It's pretty well let. So it's more limited in terms of near-term occupancy because the occupancy -- near-term opportunity for us. But equally we'll be looking over time as space becomes available to roll out our flex model and also divide up into smaller and midsized units. Again there, we also look to improve the amenities. But for us, great opportunities, actually, what we do day in, day out, great properties across a range of locations that's really exciting for us. In terms of the South-East offices, they're pretty well let overall. You'll see the occupancy is pretty high. There's more limited opportunity here, but good income yielding properties that we're acquiring day one. As I said, I think we do see real opportunity. I mean, my view on the South-East market is it's relatively underserved for flex office opportunity. You either have the opportunity to take more traditional leases or you've got the service office offering. We do offer something in between that I do think will resonate with a lot of SMEs in the South-East region. In terms of near-term opportunity for us, it's relatively limited, as I said, but at Woking where actually they just completed on a fairly large refurbishment of the building. We do see opportunity. The occupancy there is around 65% in Woking. And we will roll out our flex model there. The other location we're excited about around near term is in Reading. One of the buildings there, we can get vacant possession relatively quickly. And we're looking at potentially a fairly major refurbishment there. It's a building, a couple of hundred yards from the main station at Reading. Great location for us and obviously with Elizabeth line opening up as well. We do see that as quite an exciting opportunity to extend our reach in the South-East. And then lastly, in terms of noncore properties, as I said, where we don't think we can add value, we'd be looking to sell. And as we said that we're in a process at the moment, we've had a lot of inbound inquiries around the South-East portfolio, industrial portfolio. So we're progressing with that process. Likewise there's a couple of other noncore assets, there's an asset in Reading that's already been sold, residential scheme. There's a medical center in Newbury and then there's another residential scheme that currently with the plan is in Woking. If we sold all of those at book value, we generate around GBP 200 million of cash to be able to reinvest in the business. So overall, in terms of our plan and progress on McKay, rollout of our flexible offer across London, well, that's ongoing. And indeed you'll see already the Portsoken House is on our website, the Workspace website. The sale of the noncore assets, again, ongoing. I'd like to think that we'll complete that by December of this year. Integration, underway. And again, I expect that to be completed by December this year. We will, of course, be aligning our sustainability goals across both portfolios and I'll give you a little bit more detail on that later in the presentation. And lastly, as I say, a selective rollout where the opportunity arises for our offer into the South-East region. And it's really a test of extending our offer, but let's be clear. I mean, the main focus will continue to be the opportunity in London. But overall, I think McKay gives us a great opportunity to accelerate our growth in London and actually I think will also give us very good returns over the coming years. Okay. On that point, I'd like to hand over to Dave.

Thanks, Graham. Good morning, everyone, because I haven't had a chance to say hello to you yet. So as Graham said, I'll first run through the financial performance for the year and then touch on the outlook moving forwards. So starting with operating performance. Net rental income was up 6% to GBP 86.7 million, the increase reflecting the impact of discounts given to customers during the lockdown in the previous financial year. Admin expenses up 2% with an underlying increase of 7%, offset by a reduced charge for share-based payments. The underlying movement was driven by higher staff and recruitment costs and increased investment in technology. Net finance costs, down 14%, reflecting the refinancing that we did at the beginning of the financial year. And trading profit after interest was therefore up 21% to GBP 46.9 million. We saw an underlying increase of GBP 68.7 million in property valuation. And together with a gain on disposals of GBP 7.8 million, resulted in profit before tax of GBP 124 million, with EPS up 21% to GBP 0.258. And off back of that, total dividend of GBP 0.215, also up 21%, which is 1.2x covered by adjusted EPS. So looking at the movement in net rental income in a bit more detail. There's been a few moving pieces over the last couple of years. The year to March 2021 was impacted, as I said, by one-off discounts that we gave to customers during the first lockdown in spring of 2020, as well as falling occupancy over the year, lower average rents with the total rent roll falling from GBP 133 million to GBP 104 million. There was a large increase in the charge for expected credit losses. But service charge costs were low due to the reduced numbers of customers actually physically in utilizing our centers. Over the last year, we've seen occupancy increasing back up to those pre-COVID levels, pricing start to recover, with total rent roll increasing to GBP 111 million at the end of the year. But the lower average rent roll across the year meant that there was a 13% reduction in rental income. As expected, we've seen an increase in unrecovered service charge costs as increasing customer utilization, combined with higher energy prices means costs have returned to more normal levels. Our other non-recoverable costs have also increased as a result of higher empty rates and increased marketing and sales activity. Pleasingly, though, cash collection has continued to improve and the charge for expected credit losses has fallen significantly to GBP 1.5 million, although it does remain above pre-COVID levels as a result of the fact that the government restrictions on rent collection were in place throughout the year. Turning to the balance sheet. The underlying increase in the property valuation drove a 3% increase in the carrying value of investment property. Net debt was broadly flat year-on-year, resulting in net assets increasing to GBP 1.8 billion. EPRA NTA per share, up 5% to GBP 9.88 with a total accounting return of 8%. So the property valuation at the end of March was GBP 2.4 billion, so an underlying increase of around GBP 69 million. This was a result of a decrease of 0.7% in the first half of the year and an increase of 3.6% in the second half of the year, so very much a tale of 2 halves. Looking at the like-for-like portfolio, which accounts for around 80% of the overall value. The underlying increase of 3.4% was driven by a 20 basis point movement in yields with equivalent yield coming in from 5.9% to 5.7%. That was partly offset by a 1.9% decrease in ERV per square foot down to GBP 41.42. ERVs decreased in the first half of the year, down 3%. But in the second half of the year, they did increase, and that really reflects the improved pricing that we've seen in the second half of the year. Capital value is around GBP 666 a square foot. In completed projects, we saw an GBP 8 million increase, including GBP 4 million at Parkhall in Dulwich, where ERVs increased falling completion of the refurbishment works. The value of refurbishment projects decreased though, by GBP 4 million, reflecting the movement on Leroy House, where we're now on-site, reflecting really the emptying of that property in advance of starting works and we're now incurring construction costs. Moving on to cash flow and net debt. Cash conversion remained strong, 98% of rent collected for the year so far. This has generated operating cash flow after interest of GBP 58 million, which more than covered the dividend of GBP 43 million. We generated GBP 122 million from disposals, including a Fitzroy Street and Highway and recycled GBP 88 million of the proceeds to acquire The Old Dairy and Busworks, as well as continuing to invest in our planned pipeline of refurbishment activity with total CapEx of GBP 31 million in the year. Overall, therefore, net debt decreased slightly to GBP 558 million at the end of March. And I'll come back to debt facilities in a moment, but first, I just want to touch on the impact of the McKay acquisition. The acquisition completed on the 6th of May, with total consideration of GBP 191 million in cash and the issue of 10.5 million Workspace shares valued at GBP 67 million based on the average share price on the date of completion. The total cost of the acquisition, including transaction costs of GBP 7.5 million, was therefore GBP 265 million or GBP 2.90 per share. The net assets of McKay at the 31st of March, after acquiring for their transaction costs of GBP 6.9 million were GBP 310 million or GBP 3.39 per share. So as Graham says, a discount of 14%. Next, looking at what the acquisition means in terms of the enlarged Group financials. Top half of this slide shows a summary pro forma income statement for the year till March 2022 and the bottom half a pro forma balance sheet as at March 2022. We then adjusted the results for the individual businesses for 3 things. First, we've reflected the increase in net debt from the payment of the cash consideration and transaction costs, resulting in an increase of GBP 205 million in net debt and associated GBP 6.5 million increase in interest costs. The increase in net debt is partly offset by the disposal of Great Brighams Mead in Reading at the beginning of May for GBP 19 million with a corresponding reduction in the value of investment properties, a GBP 2.2 million reduction in net rental income and GBP 0.6 million reduction in interest costs. And finally, we've built in a 50% saving in corporate costs, which includes the departure of the McKay executive team after a short handover period. So in terms of earnings and NTA per share, after allowing for the Workspace shares issued as consideration, on a pro forma basis, the combination is marginally accretive. With more meaningful accretion anticipated as we increase occupancy across the portfolio, as Graham's outlined, and drive further synergies. Pro forma LTV increases to 32%, although with the expected proceeds of the disposals of the Workspace assets currently held for sale and the noncore McKay assets, we expect LTV to reduce comfortably below our 30% target maximum in the short-term. So coming back to debt and facilities. This slide shows the position for Workspace at the end of March, but we've also included a column showing the pro forma position for the enlarged business after McKay. So with our core debt facilities of GBP 800 million as well as the GBP 200 million acquisition facility that we put in place to finance the McKay acquisition and the GBP 245 million of existing McKay facilities, we now have over GBP 1.2 million of debt facilities with pro forma cash and available facilities at the end of March of GBP 331 million. The McKay facilities comprise GBP 180 million revolving credit facility, which matures in 2024 and a GBP 65 million loan from Aviva, which matures in 2030, both of which have prepayment options on change of control. We're in constructive dialogue with all the McKay lenders and there's a good overlap between our existing relationship banks and the McKay banks, who have already consented to the change of control. The relatively short-term 18-month acquisition facility reduces the average maturity of our facilities to just over 4 years. With the utilization of the acquisition facility and the McKay revolving credit facility, both of which bear interest at floating rates, the proportion of our drawn debt at fixed rates is reduced to around 2/3. And with expected increases in interest rates, is likely to increase our marginal cost of borrowing to, sorry, overall cost of borrowing to around 3.2%. Moving on to the near-term outlook. Rental income in the current year will be underpinned by our opening like-for-like rent roll of GBP 92.9 million, which is about 5% ahead of the average like-for-like rent roll last year. Rental income will be boosted by a full year's contribution from the acquisitions of Busworks and The Old Dairy, as well as the ownership of McKay for 11 months of the year. Rental income from the McKay portfolio will be reduced by sale of noncore assets, but the impact on trading profit should be broadly offset by reduced interest costs. We should also see a good contribution from the letting up of recently completed space, including Mirror Works and Pall Mall Deposit. And with occupancy back at pre-COVID levels, we're now seeing good pricing momentum with our average rent per square foot up 2.5% in the second half of last year. And the extent to which this pricing momentum continues, will be influenced by the impact of any economic downturn on our customers, but pricing still remains well below pre-COVID levels. In terms of cost inflation, the main drivers for us are people costs and energy costs. Although we've not been completely immune from energy price increases over the last year, the majority of the cost is passed on to our customers and our energy costs are now fixed until October 2024. Staff costs are the most significant driver of our admin costs. And whilst we've generally limited salary increases to 3%, we are seeing higher increases in more junior roles. We expect capital expenditure to increase to around GBP 50 million this year as we progress with our project pipeline, and this will be more than offset by the planned disposals of residential schemes at Riverside and Chocolate Factory as well as disposals of McKay noncore assets. So overall, we start the position, sorry, start the year in a strong position with positive momentum, although we will, of course, remain vigilant and respond, if needed, to any changes in economic outlook. And finally, looking at the opportunity for continued growth in rent roll over the medium term, the total rent roll at 31st of March, including the McKay assets, was GBP 135 million. Whilst this will reduce somewhat following disposal of noncore assets, the reversionary opportunity across the portfolio is significant. Letting up our properties to 90% at current ERVs, would increase rent roll by GBP 28 million. And there remains scope for pricing growth beyond this with current ERV still around 10% below pre-COVID peaks. At the same time, we can continue to increase our footprint, both from our extensive project pipeline as well as the potential for further acquisitions. And this growth in rent roll drives capital returns, but also particularly with our fixed cost base, central cost base, revenue flows through to trading profit growth. I'd now like to hand back to Graham to talk more about the growth opportunity ahead.

Okay. Thanks, Dave. And yes, as Dave says, I mean, it's a really exciting growth opportunity ahead of us. I mean that last slide around rent roll opportunity, I think, is a key slide for me. So what I'd do now is just perhaps give a little bit more flavor around that growth opportunity. So the first, in terms of acquisitions, that we've already talked about, and the McKay acquisition. But let's not forget we made 2 other exciting acquisitions this year. The Old Dairy, it's a building just adjacent actually to one of our existing buildings, The Frames in Shoreditch, great location for us, Frames is flying. And The Old Dairy, it's a great addition to our portfolio. Likewise, at Busworks, building in North London, just off Caledonian Road, just a couple of miles North of Kings Cross, a great location for us in an area we know there's going to be strong demand and there are already -- it's an acting business center already. Both of these, though, do need quite a lot of investment to upgrade them to really modern standards as well as the sustainability potentials that we expect from our buildings. So they will both now feed into our project pipeline and indeed will come on to it. I mean, they're exciting addition to our project pipeline. Despite that, at the moment, they are good income-earning assets. So great for us to add these to our momentum in the growth of the business in the coming years. And while we are long-term holders of our buildings and we're not blind to opportunities to actually recycle capital, if we think we can get good value from selling our assets. So in the case of Highway, industrial estate location, just near Limehouse Station, we had got planning, albeit of quite a challenging period, for a mixed-use scheme, residential and new business center, quite excited about that. But actually, over the hills, we actually had approaches from a number of logistics players to take that off our hands. And we ran a process and actually we got a very strong bid, pretty much double our current book value to sell it to a logistics player for GBP 24 million. So I think we are, as much as I say, a long-term holder. We do want to create value for shareholders and occasionally that will mean selling assets. Slightly different story of Fitzrovia, I won't go through it again, but actually, we do see better opportunities to deploy capital than actually potentially on this building [indiscernible] in June last year. So we sold that building in September last year and reinvested that in other opportunities. And in terms of our pipeline, it continues to be a really healthy extensive pipeline over the coming years. Around 1.2 million of planned projects now, 1.2 million of space being either new or upgraded space that we'll be delivering over the coming years. I mean, full details, as always, are set out in our appendices to this presentation. Just wanted now to perhaps look at some of those projects in a little bit more detail. Firstly, 2 of the projects we've completed in recent years, Firstly, Dave mentioned Pall Mall, Ladbroke Grove. That's a refurbishment we completed last September. It's a lovely old building in West London. It used to be a furniture depository, which we've sort of upgraded for our SME customer base over the years, but it really did need quite a significant uplift in terms of quality of space. We took the opportunity to add an extra floor as well also add an extension at the back of the building. It's now a fantastic 60,000 square foot business center. The other element of our refurbishment is also to actually create a much better reception area and also a fantastic new cafe area as well. A really fantastic upgrade to the space there. And while we retained a number of customers there, actually, it's been letting up really well since we've completed the refurbishment, 76% occupancy by the end of March. And as part of that, as I mentioned, when we do our projects, we do upgrade the sustainability credentials. This is, again, very good scheme. And in terms of EPC rating, it's now gone from a D rating to a B rating. And Mare Street. Mare Street was actually completed a year before, not the greatest of timing and as much as we opened it in the middle of one of the COVID lockdowns, which is always a bit of a challenge. So it's fair to say that actually letting up in the early stages was slow. But again, it was a fantastic refurbishment. We've taken an old warehouse building there, added an extra floor and also an extension out of the back. This time we did have to vacate all the customers, but it's really a fantastic now location for us. And in terms of the sort of fit-out the building, there's a lovely reception area, cafe area, which is used both by our customers, also by the local community as well. And again, over the last year, we've seen really strong demand in this location. The occupancy has gone up from something around 5% at the beginning of the year to 70% by the end of the year. Really great momentum now around that location. Sustainability wise, it's a BREEAM excellence rated scheme and with EPC rating improved from E, in the previous warehouse building, to B. And it's a fantastic example of our repurposing, repositioning of our buildings across London and giving us very good returns. In terms of projects underway, Leroy House is a project we showed as a case study potentially for our sustainability credentials that we're refurbishing now in Islington. Great building, but it does need a sort of an uplift. Again we're adding an extra floor in that building as well as an extension of the side. What we're hoping to show from the case study of this building is actually the efficiency in terms of embodied carbon production compared to a new build. We reckon there will be about 80% less embodied carbon produced from this repurposing of an old building compared to actually if has been doing a new build. It will be delivered around end of 2023, a really exciting addition again to our portfolio. I just also wanted to touch on a couple of the future projects, which sometimes we don't necessarily highlight in a sufficient detail, I don't think. Firstly, Havelock Terrace. This is 2 workshop buildings we've got just south of a Battersea Power Station, literally, a couple of minutes walk from the new tube. We've been through the pre-app and now getting supported by the local council for a fairly major redevelopment there, going to replace those 2 warehouse schemes with actually a new business center, a large business center, 190,000 square foot business center, which we expect to deliver in about 2026. Really exciting opportunity for us in an area which I think will go from strength to strength over the coming years. Likewise, at Kennington, a site we've already been progressing with a lot of refurbishment over the years. We've now got planning for some additional business center space at the back end of the site, replacing 6 of the warehouse sites we've got on that site. There we've got planning for just under 150,000 square feet of new space, which would be spread over 5 separate buildings, and we'll be delivering that on a phased basis over the next 5 years. In this case, we'll be bringing the sort of net lettable business space at Kennington Park to something over 400,000 square feet. And this is a site that we bought in the early 2000s when it was just a storage site. It's amazing, the repositioning, the regeneration we've delivered at Kennington Park over those years. In terms of our overall sustainability approach, I don't think I can do justice today. What I would recommend is if you haven't seen already, is the presentation that we gave at our Capital Markets Day, led by Sonal Jain, our Head of Sustainability, which really set out in detail our sustainability approach. What I would say though is if -- just to highlight the 3 pillars of our sustainability approach. Firstly, around delivering a climate-resilient portfolio, absolutely key for us. Secondly, though, as importantly, is really that long-term engagement with local communities that we're in. We're a long-term holder of our properties. We drive huge amounts of job employment locally in these communities as well as engaging with the local environment, local societies, local schools, a very important aspect of what we do day-to-day. And lastly, looking after our people. And that's not just our own staff, it's also our partners, the contractors that we work with as well as, of course, our customers and their staff. A big element there, of course, is around well-being, and we're putting a lot of money into well-being initiatives across our portfolio. One thing I did say at the Capital Markets Day that we had in May is, I would update you on the impact of bringing in the McKay portfolio on some of our ambitions, particularly around our net zero ambitions for 2030. Here I'm just highlighting on the right-hand side of the chart, the additional information that we didn't provide on the day around the EPC ratings of the McKay portfolio. And as we knew at the -- when we did our due diligence, actually, the McKay portfolio is in a pretty good position. 40% of the units within that portfolio already EPC A and B rated. And in terms of incremental cost to upgrade the remaining space to A and B ratings over the coming years, we reckon that's around GBP 10 million to GBP 12 million. So a relatively small incremental cost to bring their space up to the same standards as we are aiming to achieve for our own core Workspace portfolio. So in conclusion then, I think from my perspective, hopefully, your gain from today, we've got a clear strategy. We've got a sustainable, proven-business model. We've got a scalable operating platform and we've got exciting opportunities for growth, both through our organic pipeline of activity as well as from the acquisitions that we are making. In terms of near-term, we've come through the challenges of COVID in good shape. We're also seeing real momentum in the business with high levels of customer demand, pricing improving. But the caveat on that, I don't -- it's not a heavy caveat, but it's a caveat. We are obviously aware of the challenges in the broader economic environment and particularly the inflation pressures. Not so much on our business, but actually the more challenging pressures that may impact on some of our customers. But we do benefit from the diversity of our SME customer base, as I highlighted earlier. And equally, I'd say, important, the agility of our SME customer base, enabling to adapt to an economic circumstances. And by that, we've seen that through 2 fairly major downturns through my time at Workspace. It's amazing, the entrepreneurial spirit of those SMEs. So overall, hopefully, from today, you've garnered the ideas that we believe we've got a compelling long-term sustainable investment case for both investors and for our customers as well. So thank you for your time today. So what I'd like now is if we'll start with questions from the audience here at the stock exchange. So if anyone's got a question, could you please raise your hand? And for the benefits of those joining remotely, if you could actually introduce yourselves before you ask your question.

So if you've you got any questions. Miranda?

Miranda Cockburn from Panmure. Could you just give us a bit more color on the McKay acquisition on the South-East offices? So you've got 12 properties there. How many of those are single-let versus multi-let? And on the single-let, what's the weighted average on the expired lease term? Just trying to get a feel for when -- whether or not those are actually going to end up being noncore and you may sell out or whether or not it's worth waiting to potentially look at doing multi-lease at a later date?

Well, I don't know the weighted average of the overall portfolio. You asked me this question last time around and I deferred answering it. I think it's just over 4 years with the overall weighted average. But in terms of single-let on the town center sites, I mean, certainly 2 of the sites are leased to Regus. So it's interesting there, it does highlight that the flexible demand in that. The ones in Reading and ones in Windsor. Single-let's on other sites, I don't think there's any other single-lets. I'm looking for Leo to confirm this. So they're not single-lets. It is a broad spread. And likewise, with the business parks, they're much more broader spread of customers, no single-lets there. We have no intention at the moment to see those as noncore. I mean, I think over time, we'll look to see whether or not actually we can rent out our model effectively. I mean, the restriction there is really about the availability of space because they are so well let. And it's interesting business parks, not probably our key focus at the moment, Townsend's, I do think are the most obvious focus. But when you look to the continent, there are other players that play in our space, a company called Technopolis, for example, who actually do use business parks as a combination of larger corporate as well as smaller businesses. And I do think there's probably an interesting interplay there. But at the moment, what we're seeing there is they're well let with good income yielding sort of potential as a whole at the moment.

And then just following on just in terms of costs, you obviously highlight on the EPC, the extra costs required there. But more generally, the cost of these rolling refurbishments, et cetera, that you talk about in London. Is that included in the GBP 50 million that you give?

Yes. Yes, it is.

My name is James Carswell from Peel Hunt. You sort of talked about getting to the 90% occupancy now starting to push rents. I'm just wondering, how much would impact is what the competition are offering in terms of their rents? How much does that makes you to [indiscernible]?

Yes. I mean, It's interesting. I mean, our competition seems to be quite local. I mean, we've got a very broad spread. So I mean, I think people tend to revert to what they're seeing in more central locations in London. I mean, it's very much us sort of playing against local competition. I mean, I would say that it's a fairly mixed, I'd say, sort of picture there. I mean, what we're seeing is actually demand for our space is strong. So I think it's also about the quality of space as much as about the price. So I would say that actually, people are happy to pay for good quality space in the sort of buildings that we've got, which create an environment that actually employers can actually feel comfortable. They can track their employees back into work. Certainly, when we talk to customers, one of the biggest challenges and one of the biggest considerations is actually to get their staff back into work on a regular basis. So I think price is one factor. I think it's actually about the quality of space. So overall, we're not seeing any particular challenges around pricing for us. And if anything, actually, we're actually seeing the ability to push pricing quite hard. But I would say that as this caveat I had is, given the economic situation, we're pretty cautious about being too aggressive on pushing pricing. What I wouldn't want is us to push pricing and then have to drop pricing again. So I do think we've got an opportunity there, but I think we can do it on a measured basis. I think the key thing, as Dave mentioned earlier, is actually our pricing is around 10% below where it was pre-COVID. So I think we've got a pretty well-priced product at the moment. Any other questions here? So are there any questions from our remote audience?

[Operator Instructions] Your first telephone question is from Paul May from Barclays. Please, go ahead.

Just quick 3 questions from me. The outlook statements sort of have varied as you read through the results. Some of them read relatively positively and some of them read relatively cautiously. Just wondered whether the higher like-for-like rent and occupancy position offsets the potential economic slowdown and where you sort of sit on that. The second one is just regarding the ERVs. I think they were up in the second half. I was just checking whether that is a like-for-like comparison. And then finally, on the yield compression that's come through, given the increase in the cost yield market financing rates, do you think yield compression is justified? Or do you believe there's risk that we might see some yield expansion in the -- either your market or the broader market?

Dave, do you want to pick those up?

Sure. If I miss one, then please chip in. So I mean, in terms of the outlook, I mean, as I said, I think we've got one eye on the sort of the general macroeconomic environment. We're not blind to that. But what we have seen and what we are seeing is strong continued demand for our flexible offering. And I think, particularly with uncertainty, if anything, helps to drive people towards the flexible product because it gives them that ability to upsize, downside move as they need as their business changes in uncertain times. But certainly, what we've seen, let's say, over the last half, pricing up 2.5%, so 5% annualized basis and really the occupancy back at those pre-COVID levels, which is important from a sort of recovering cost as much as it is from driving pricing. I think in terms of ERVs, I mean, on a like-for-like, yes, so yes, they are up like-for-like. And as I say, what's driven that is although it's backwards looking, the values when they're looking at ERVs are very much reflecting on the deals that we've been doing over the sort of the historic period. So really over the last 6 months, and that's why you've seen those ERVs increasing in the second half of the year driven by the pricing improvements. And then in terms of yield compression, yes, I mean, I say our like-for-like valuation was really -- most of that was driven by yield compression. For us, that's part of that compression certainly is helped by the fact that our occupancy has improved, which means that there's less risk in less reletting risk, I guess, in the properties and that helps to improve the yield as well. I guess more generally, if the question is around, well, what will interest rate inflation mean for property yields? I guess London continues to be very attractive. I think there is cost inflation certainly. And we're not immune to that, although we think we can still deliver strong returns. But certainly, some others who -- and we've got relatively high yields, I guess, say, like-for-like I think yield of 5.7%, which gives us some capacity there. I guess others in terms of development, but may be more challenged on that and when they're looking at the cost of debt, for instance. And if anything, that will restrict supply. And if anything, therefore, that helps to protect valuation for us as well. So I think, obviously, we're aware of it. But I think from our perspective, I think we're well-placed. And the strength of our offering and the demand for our product [indiscernible].

I think the other thing I would say, and we always remind people is the yield is one element. But if you look at our capital yield -- capital value per square foot, GBP 660 a square foot. I mean, when we're surfing the London for acquisitions, I mean, you do well to find acquisitions at the capital value of those range levels. I do think we've got a pretty conservative value portfolio. Okay. Thanks, Paul. Any other questions remotely?

There are no further telephone questions at this time. We have one comment on the webcast from [ Vince Elive ]. Firstly, do you foresee any delays with regards to the deliveries of refurbs and redevelopments? And secondly, could you please provide some general color on the impact from construction cost inflation on development margins?

I'll have a go at this and then, if I don't cover it well, Dave, I'll leave it to you to pick up the pieces. Yes. I mean, we generally -- our general approach is to have fixed-term contracts, so I'm probably answering the second first. So we try and avoid exposure to sort of unexpected price increases. Now it's sometimes quite hard to avoid it. But that is our sort of general approach. So on current projects, for example, Leroy House, we have got a fixed price contract. So we are protected there. But there's definitely significant inflation in the construction industry at the moment, and we're certainly factoring in costs rising at least by 10%. Overall, some material costs are rising higher. It's interesting, I'm talking about Angus. I mean, by virtue of the fact that actually in some of our buildings now as we go to a much more sustainable approach, and we're moving away from steel to actually low-carbon content concrete. Actually, that's protecting us against some of the ravages of inflation because inflation on steel is pretty extraordinary at the moment. But what we are going to be doing, as you'd expect, is reappraising projects on an ongoing basis. I mean the good news, as Dave mentioned, is actually pricing is moving upwards as well. So to a large extent, that's helping to offset some of those inflationary increases. A good point, the well-around delay. I mean, that's almost uncontrollable and certainly, we have seen that impacting on delivery time tables. We have, unfortunately, been delivering a little later than we planned on some of our projects. I think that will continue to be a theme, actually, that actually when you're dealing with contractors who you'd hope have already access to material, there inevitably are delays from time to time. So I'm more concerned at the moment about delivery timetables, and I am about actually the feasibility of our projects because we do get very good returns traditionally from our projects. I mean, with the land ineffective and free, I mean, when we're doing our refurbishment projects, we're getting generally typically 15%, 20% ungeared IRR. So inflation would have to have quite a severe impact before they become less attractive to us. But I do think we are going to, as I say, be monitoring on a year-to-year basis. I mean, the question I have in my mind is how long do we build in these 10% plus inflationary levels? I mean, if you build them in year-after-year, then definitely, that's going to be a much more challenging beast. But we'll monitor it, as I say, as we go. But overall, I'd expect us actually still to see our pipeline of activity to be very attractive.

And then another question from online from [ Maria July ]. In terms of the McKay disposals, can you give us a sense of the bidding tent for the industrial portfolio?

What sort of bid?

The bidding tent, so that the prices is progressing. And then in regards to cost inflation, and with regards to the increases in G&A, do you expect those to continue growing ahead of inflation in the next year? And similarly, for property-related costs, how much would you expect these to grow?

Okay. I'll do the first, and Dave, you can gear up to answer the second. I think in terms of the type of the industrial portfolio, as I said, we're going through a process. I won't go any further than that at this stage. I mean, we are rating through a process. We had a significant level of interest raised by a number of parties. We'll see how that progresses over the coming period.

Yes, on admin costs and costs more generally, as I said, the main drivers really for us sort of where the potential for significant increases are around those people costs. I mean, we have limited our sort of pay rises generally. But it's no doubt that it is a competitive environment in terms of getting talent into the business. So that's something we will continue to look at. Having said that, if the question is around do we see it by inflation? Inflation is running at 10%, but that's a relatively high numbers across the board. I don't see us sort of exceeding inflation over the next 12 months. And so it costs more generally, I guess, the biggest cost in terms of property costs is those energy costs, and those are now fixed for the next couple of years. So obviously there are other suppliers, et cetera. But typically we have relatively long-term contracts, which want to go over multi-years. So the limit sort of in year is modest as well.

Anything else?

No. That's all from the web.

Okay. Well, I'd like to thank you all for your time today. And then thank you very much.