Workspace Group Plc (WKP) Earnings Call Transcript & Summary

Okay. Right. Well that definitely hush suggest we might start. So well, good morning, everyone. Great to see some of you here today. I'm sure it's not just to say goodbye to me. But welcome again to our Eventspace at Salisbury House for our 2024 Year-End Results Presentation. Just turning to the agenda. I'll start with an overview of performance, and then Dave will take you through the financials in more detail. And then we'll finish with my thoughts on the outlook for the business. If I could just start with a quick recap on our business model. Need to say, we're one of the leading players in the flexible space market in London, very much focused on providing space to the SME community, and we've got some 4,000 customers. We invest in the long term, and we own a large portfolio of character and what I would say, in many cases, are landmark buildings across London. And we've got a broader view of London than many others with many of our properties in areas, where probably I would describe as some of the more interesting areas of London, areas of change in gentrification across the capital. And in total, we've got some 77 properties now with 4.5 million square feet of lettable space. And as a business, we've been around now for over 35 years, and we've got a well-recognized brand, particularly with our SME customer base and a scalable operating platform, which has evolved over many years. In terms of our customers, they're diverse in their -- by size and by industry sector, with only about half of them using their space as what I would call more traditional use as an office. Indeed, as we've highlighted before, what we used to say is better description of the way our customer use the space is as workspace rather than office space. And as you might notice, that's very convenient, it's also the name of our company. So quickly moving on to the trading performance for the year. Well, trading wise, as you will have seen from the numbers that we released this morning, it's been another strong year with like-for-like rent roll up 10%, trading profit up 9%. And on the back of that, our total dividend up 9% in the year. I think it's the trading performance, sometimes we figured how to -- just how good it is. And certainly, I think it measured up very well against our peers in the sector. Also, as you can see on the bottom left there, we're also making very good progress now and recovering our trading profit growth from the effects of COVID. Indeed, in terms of pricing at our buildings, we're now back at pre-COVID levels and beyond. But of course, we're in a very different economic environment with much higher interest rates and also the after effects of some high inflationary cost increases. Turning to the right and the balance sheet, you see that the continued outward movement in yields over the year has seen our property valuation drop by an underlying 9.5%, albeit the reduction in the second half is much slower with our net tangible assets per share now at GBP 8. I think now with equivalent yield at 7% and the forecast of interest rates falling later in the year, I'd expect our yields to now stabilize at around this level. And despite that drop in the valuation, we've still got a robust balance sheet, with LTV at 35%, which we're comfortable with at the stage in the cycle. Okay. I now wanted to take you through sort of what I would call 3 key features of our operating model. Firstly, it's our ability and sometimes we forget to highlight just how strong it is, our ability to deliver strong growth in rent roll over the long term. This is not a cyclical play. This is long-term growth in rent roll. And the chart on the left just shows that rent roll growth over the last 10 years. And that growth has averaged at some 6% per annum, even taking into account the understandable dip during COVID. And where does this growth come from? Well, it comes from us being able to consistently increase pricing on the back of the strength of demand from our customers for the spaces that we provide. But to do this, we need to create pricing tension. And to do that, you need high levels of occupancy in our business centers. And that's when we have the pricing power. And as you can see from the chart on the right, actually, this is typically at around 90% occupancy, and that's a level we've consistently achieved over the last 10 years, apart again, obviously during COVID. Secondly, a key element of our operating model is our scalable operating platform, something that's being discussed a lot more these days, and really, I just highlighted what we see as the key elements of that model. Our platform brings together a skilled and experienced team, fit for purpose of the systems and, of course, valuable data. And just looking on the left-hand side in a little bit more detail, you see in terms of our team, we've got around over 300 people now in Workspace, and that's because with the majority of our activities actually managed in-house rather than outsource given the scale of our business. But more importantly, if you see the breakdown of that team, over 2/3 of the team are customer-facing. This is a very intensive operating business, and it's absolutely vital that actually we have that customer-facing team to really give our customers a high level of service they expect and indeed, they demand. Then behind that team, we have a continued investment in technology and systems, and that's to take advantage of the capability and efficiencies that they bring. And then, of course, what that also brings with it is a huge amount of data that we can capture in a structured way, and that in itself provides invaluable insights and also information for us to make our business decisions. To building that platform, it takes time and money, and our platform is a product of over to 30 years of investment and evolution. And what I've highlighted on the right-hand side of this slide is just really some examples of the scale of activity that, that platform supports day-to-day. And this includes, for example, over 46,000 engaged sessions on our website every month, also to the high levels of enquiries and viewings that we manage every month. And that's true to then the conversion of those into lettings and renewals every month. But it's not just that, it's also the day-to-day interaction with our customers. And I've highlighted here actually, it's not the 4,000 businesses that we support, it's actually the 40,000 people that are employed by those businesses across our centers in London. And I'm delighted to say that we continue to score very highly in terms of customer satisfaction in the services that we provide to those employees. That is a key element of our business model. And then last year, just really something that we've always highlighted is really that our operating model -- sustainability really is an integral part of the way the Workspace has always operated. It's not something new to us. And it's no surprise, it's also closely aligned actually with what our customers look for and indeed, again, they expect. First is, we've always had a refurbishment-first ethos in Workspace. We've got a long track record of converting character and of the historic -- sorry, historic buildings across London into our multi-let business centers, bringing new life and vibrancy. And indeed, a great example is here today, Salisbury House. And of course, our retrofitting of these buildings also delivered significant savings in embodied carbon, which we estimated around the 70% saving compared to actually a new build. We also make property investments long term. And so, when we're delivering benefits, they're not just for the business, but also for the communities that we're in. In particular, our focus on providing space and support to a wide range of entrepreneurial businesses, often in areas of change in regeneration give huge opportunities for local businesses to grow, and, of course, provides significant local employment. Then lastly, we've also got a series of ambitious 2030 environmental targets. And within those is the removal of all our gas central heating systems, the reduction in energy consumption by 50% by 2030 and ensuring all our buildings are EPC, A and B rated. And I'm really pleased to say that we've made excellent progress during the last year on all fronts. So on that note, I'd like you to hand over to Dave.

Thanks, Graham. Good morning, everyone. I haven't spoken to already. So as the top 2 charts on this slide show, customer demand has remained resilient. Despite the macroeconomic and political turmoil over the last year, we've seen a good level of customer enquiries, which on average have converted to more than 100 deals per month. Following the 14% growth in estimated rental values in the previous financial year, our focus over the last 12 months has been on capturing the reversion across the portfolio, resulting in a 10% increase in average like-for-like rent per square foot with occupancy broadly stable. That rental growth has fueled another year of strong trading performance, with net rental income up 8% to GBP 126 million. This more than covered increases in administrative costs and interest resulting in trading profit after interest up 9% to GBP 66 million. Underlying admin expenses increased to GBP 22 million, reflecting the high level of wage inflation we've seen over the last year. Share-based costs also increased, driven by higher vesting levels with the Workspace portfolio performing strongly against the IPD benchmark over the past 3 years. Net finance costs increased slightly to GBP 34.9 million with the increase in interest rates over the past couple of years, largely offset by a reduction in average net debt following asset disposals in the period. Over the year as a whole, there was a decrease of GBP 255 million in the property valuation, resulting in a loss before tax of GBP 192.8 million. Adjusted earnings per share was up 8% to 34.1p. And in view of the growth in trading profit and our confidence looking ahead, we're proposing a final dividend of 19p taking the full year dividend to 28p, which is fully covered and up 9% on the prior year. Slide 12 looks at the movement in net rental income in a little more detail. On an underlying basis, adjusting for acquisitions and disposals, rental income was up 8% to GBP 122 million, largely driven by pricing growth. The majority of service charge costs are recovered from our customers. And despite the high levels of inflation in the U.K. over the last year, we've managed to keep costs under control with unrecovered service charge and other non-recoverable costs broadly flat year-on-year. This, combined with an increase in sundry income has resulted in underlying net rental income up 10%. Total rental income benefited from progress on recent acquisitions, which contributed GBP 13.4 million in the year, although this was offset by the impact of disposals, with total net rental income up by 8%. Turning to the balance sheet, following the disposals made in the year and an underlying revaluation decrease of GBP 156 million, the value of our investment properties decreased to GBP 2.4 billion. The property disposals, however, also reduced net debt, resulting in EPRA NTA per share of GBP 8, down 3.8% since September and 13.7% in the full year. Slide 14 shows the movements in the property value over the year, with an increase from CapEx of GBP 71 million, outweighed by disposals of GBP 110 million, and the underlying revaluation decreases of GBP 178 million in the first half, which slowed to GBP 78 million in the second half of the year. This next slide sets out the valuation movements by property category. On the left-hand side, you can see the valuations at the 31st of March, and on the right-hand side, you can see the movements in the year. In the first row is the like-for-like portfolio, which accounts for around 3/4 of the overall value. There was an 8.1% decrease in the like-for-like valuation driven by a 78 basis point yield movement. Although as we've seen, the majority of the valuation decrease was in the first half, with the like-for-like valuation down around 2.5% in the second half of the year. Despite the strong increase in rents over the last year, the like-for-like equivalent yield is still 150 basis points higher than the initial yield with significant opportunity for continued reversion. Valuation movements in the non-like-for-like categories were also largely driven by market yield movements, albeit with more pronounced yield expansion in South East offices, reflecting the broader market outside London. Lower rental growth in refurbishments and redevelopments and with redevelopments also impacted by lower residential values and higher build costs. So as we've seen, the 2 main drivers of the valuation are yield movements and ERV growth. Looking first at yields. In the chart on the left, the dark blue line shows the movement in 10-year gilts over the last 20 years or so. As we know, after a decade of low rates following the global financial crisis, we've seen rates increasing sharply over the last couple of years, although they appear to be stabilizing more recently at levels more consistent with historic norms. The yellow line shows how the CBRE London yields broadly track gilts over the same period, with the gray bars showing the spread. As we can see, CBRE yields have also increased sharply recently. And although, the spread to gilts has decreased compared to recent years, it's now broadly in line with that historically seen in higher rate environments. Finally, the light blue line shows the Workspace like-for-like equivalent yield over the past 10 years. You can see that the spread versus the CBRE benchmark has narrowed, as we continue to invest in the portfolio. However, with the recent rise in guilts, we've seen over a 100-basis point yield expansion over the last couple of years, that's 7% in absolute terms, our equivalent yield is now around 250 basis points higher than 10-year gilts and around 300 basis points higher than our average cost of debt. Turning next to ERVs. Following the strong recovery in pricing we saw in '22, '23, ERV growth in '23, '24 returned to historically more normal levels. On average, like-for-like ERVs were up around 3% in the year. However, we saw strong growth in ERVs for smaller units, which account for the majority of our letting activity. The chart on the right analyzes our like-for-like portfolio, grouping customer units by size. More than 80% of our customers -- customer units by number covering 1.2 million square feet are less than 1,000 square foot. For these units, we've seen average ERV growth of over 6% in the last year. For units between 1,000 square feet and 3,000 square feet, we've seen ERV growth of around 3%. And for our largest units, ERVs have been broadly flat. The chart also highlights the higher pricing achieved on smaller units with a premium of around 15% to 20% on average, and the strategic opportunity to drive rental growth by converting larger spaces into smaller customer units. Moving on to cash flow and net debt. Overall, net debt decreased to GBP 855 million at the end of March with cash from operations fully covering dividend payments of GBP 51 million and GBP 118 million of proceeds from disposals, more than offsetting capital expenditure of GBP 71 million. When considering capital allocation, we remain focused on maintaining a strong balance sheet with disciplined approach to gearing. We continue to recycle capital from selected disposals into our rolling pipeline of refurbishment projects, including smaller, high-returning asset management projects such as unit subdivisions. In the medium term, we also expect to see increasingly attractive opportunities to recycle capital into property acquisitions. The majority of the Group's debt comprises long-term fixed rate facilities totaling GBP 665 million with shorter-term liquidity provided by committed bank facilities. Together with GBP 4 million of cash, this gave us a total of GBP 145 million of cash and available facilities at 31st of March. Disposals in the year meant that despite the fall in property valuation, LTV remains comfortable, increasing marginally to 35%. The disposal proceeds have reduced our floating rate debt, which currently has an effective rate of 7%. In addition, in February this year, we fixed up GBP 100 million of floating rate debt at an effective rate of 6.1%. Together, this has reduced our weighted average interest cost to 3.7% with nearly 90% of debt now at fixed rates. Interest cover remains well ahead of our [ 3x ] covenant at 3.7x, and net debt to EBITDA continues to improve towards our 7.5x target reducing from 9.3x to 8.3x. Following the extension of our bank facilities to 2026, we have an average drawn debt maturity of 3.6 years with no maturities until August 2025. So looking forward, we have good earnings momentum and expect further progress in the current year. Rental income will be underpinned by the growth in like-for-like rent roll we've seen over the last year with around 6% growth in the second half on an annualized basis. We continue to see good customer demand and expect further rental growth from reversionary pricing on new deals and the benefit of project activity. The high levels of inflation we experienced last year are expected to have less impact in the current year, although wage inflation remains significantly above historic norms. The disposals we've completed over the last year have reduced our debt, which combined with our recent hedging activity and a likely reduction in interest rates should result in lower interest costs this year. Capital expenditure will be around GBP 60 million to GBP 70 million, which we expect to be largely offset by capital recycled from disposals. So in summary, we have a robust balance sheet, good momentum and are well set for another year of growth. And I'll now hand back to Graham to talk about the longer-term opportunity.

Thanks, Dave. And as Dave said, what I'd like to do now is look at that longer-term opportunity ahead for Workspace. I'll start with probably what is the most important element of our opportunity, and that's our customers. I mean, our target market, as I mentioned before, is a large and growing community of SMEs across London, what I've always described as the unsung heroes of the London economy. And these customers are knowledge, creative and service-based SMEs, of which we estimate there are currently around 140,000 businesses in London. We've got 4,000 customers. So we've got around about a 3% market share. So there's plenty to go for in capturing that demand, as we look to grow our property footprint over time, both from organic growth, but also from acquisition. And as you can see from the pie chart on the left-hand side of this slide, our customers cover a wide range of sectors and industries. There's no one sector dominating. And on the right-hand side, I've just given you some examples of customers in each of those sectors -- in 6 of those sectors. So just to highlight some of them. On the top left is Quell Tech. They're a technology customer, who have developed an immersive fitness gaming platform. Now they've got 5,000 square feet across 2 units at our location in Kennington Park at the Oval. Top right, you've got Jukebox Studios. They're one of London's premier recording studios, and they're in 1,500 square feet at our Pall Mall Deposit site in Ladbroke Grove. On the bottom left, we've got one of our larger customers, ClearScore, who, as many of you will know, they are one of the large credit scoring and financial advisory business. Now they're based at Vox studios in Vauxhall in 18,000 square feet. And conversely, on the bottom right, we've got Greater Goods. They upcycle, reclaim damage and unwanted goods, and they're in a 400-square foot unit in our Chocolate Factory site in Wood Green. Now these are just 4 examples of our customers, but hopefully give you a taste for the sheer diversity of our customers, not just by sector, but also by size. Then often we get asked about the competition that we see. And our general response is to say that it's very fragmented. Well, why is that? Well, to compete with us, what you need is to be able to deliver on a number of key elements, which I've highlighted on the right-hand side of this slide. Now just to run through those, of course, you need lease flexibility, and you also got to provide a great service, but you also need ownership and control of the right sort of buildings. And then also, you need to invest time and money, as I highlighted earlier, in establishing an appropriate operating platform. But you then also need the scale of activity to drive efficiencies from the investment that is required. And if you don't have all those components, then you will struggle to compete with us on a level footing. And in terms of scale, just the other thing I wanted to highlight about scale is actually what it gives us in terms of the wide range of options in terms of size of space and price that we can offer to our customers to fit any of their budgets, and that sort of variety in terms of optionality. It's not just across the buildings in our portfolio, but also within any one of our buildings. And on this chart, what I've shown you here is the range of pricing at all of our buildings in our like-for-like category and also the average price, which is the dot in the middle of the range. And just to highlight 3 of those buildings, if you go to the right-hand side of the slide, Metal Box Factory, one of our buildings on the bank side, on the South Bank. Here, we offer 144 units of varying sizes across 6 floors. And the prices will vary by floor and also on the configuration of the space. And you'll see the average rent is GBP 81 a square foot, but actually, the prices range from GBP 26 a square foot to GBP 110 a square foot in the units across that building. Likewise, Vox Studios in Vauxhall in the middle of the chart. Here, we've got 141 units across 3 buildings on that site. And again, the average here is GBP 48 a square foot, but actually, prices range from GBP 25 a square foot to GBP 63 a square foot. And then lastly, to the left on its Fuel Tank in Deptford, where we've got 62 units with an average of GBP 23 a square foot, but range from GBP 18 a square foot to GBP 30 a square foot. And this is crucial for us, being able to offer this broad range of units and price points at our buildings means that we can attract a very wide range of customers to any one of our buildings and also allows those customers to actually move up or down in terms of the size of their space and their price points, as their needs change. So it's a crucial part of what actually makes our ability to create these communities of interesting businesses in any one of our buildings. And in addition, of course, with our extensive portfolio, we've always got significant opportunities for asset management, and these can be both large and smaller. So in terms of the larger projects, we've got 3 underway at the moment. And indeed, with Leroy House in Islington, we're hoping to be opening that 58,000 square foot new business center in September of this year, a very exciting project for us. It will be our first net zero building that we open. In addition to those 3 projects, we also got another 1 million square feet of larger project activity in the pipeline. But alongside that, and as Dave referenced earlier, there's lots of smaller asset manager opportunities for us. And a good example is that The Mille in Brentford. Here, we've actually subdivided one of the floors into 12 units, and it took us just about 6 months to do that, and that's delivered a 48% uplift in pricing at that side. Likewise, Barley Mow in Chiswick. Here, we've subdivided and refurbished 27 units, again, in a similar time scale of around 6 months and again achieved a significant uplift, 58% uplift in pricing at that location. So really exciting opportunities, not just on larger projects, but the smaller projects across our portfolio. So what does that all mean in terms of future income growth. Well, apologies is a fairly detailed waterfall chart here. But if we start on the left, on the left-hand side is our rent roll at the end of March 2024 of GBP 143 million. And if you go to the right from there, firstly, we've got an GBP 18 million uplift potentially in rent roll in our like-for-like portfolio. If we can move all of our centers up to 90% occupancy and all our customers up to current pricing levels, current ERV pricing levels. With occupancy almost 90% already, actually, the most of the uplift achieved that GBP 18 million of uplift in rent roll will come from moving our customers up to the current ERV pricing levels. And of course, with the relatively short length of leases that we have typically 2 years, we should be able to achieve most of that uplift within the next 2 years to 3 years. So a very significant uplift in rent roll from our like-for-like portfolio. In addition, with the project activity, you've then got an uplift potentially of GBP 15 million from both projects completed and those underway at the moment and that will probably -- that will come up from letting up those buildings to 90% occupancy at more or less current pricing levels. So it's not about moving pricing there. It's actually just move -- letting those buildings up to 90% occupancy level. And given the expected time of completion of those projects, I'd expect this uplift to be delivered over the next 4 years or so. So in total, adding those 2 together, you've got some GBP 33 million of uplift in rent roll to come over the next 3 years to 4 years, that's a 23% increase on the rent roll at the end of March, taking the rent roll to GBP 176 million. And if you work on that on an annualized basis, that will deliver on its own, an increase in rent roll of some 6% per annum over the next 3 years to 4 years. And this is obviously before any additional growth from actually further increases in our ERV pricing levels. And bear in mind, as Dave mentioned, our like-for-like ERV growth last year was just over 3%. And of course, in addition, any new projects completing, and of course, acquisitions. So a significant opportunity for us to drive strong rent roll growth in the near term from reversion and then obviously, further opportunity to grow income beyond that. So in summary, looking forward, firstly, I'm sure it's no surprise to you that actually flexible leases are now very much a mainstream option, a significant change from when I -- certainly, when I first joined this company, when you stepped apologize for offering a flexible lease. But they come in many different forms, and they are very much adapted to the needs of a varying occupier base. And there's often a confusion about how much these offers overlap. Well, we're very clear that the Workspace offer is very specifically tailored to the needs of SMEs. It's a flexible blank canvas offer that allows our customers to fit out the space, as they want. And in terms of the competition, as I've highlighted, we've got a significant advantage of the scale of our footprint across London and the proven capabilities of our operating model. And I think with the attractions of our target SME market in London and that competitive advantage that we enjoy, I do think we are very well placed to continue to deliver strong profit and dividend growth in the years to come. And of course, as I've just highlighted, that's underpinned by the income reversion of potentially some 6% per annum over the next 3 years to 4 years. And lastly, as you hopefully are aware, I'll be retiring soon. So I will be handing over to Lawrence Hutchings, our new CEO. Although, of course, as you'll appreciate, the timing will depend upon progress and his current employer, Capital & Regional. But in the meantime, what I'm really pleased to say is that the business is in very good order. We've got an excellent team in place, and we've got lots of exciting opportunities to progress and develop over the coming year. And with that, I'd like to thank you for your time today, and we'll now open up for any questions. We'll start with, if you don't mind, questions from the floor, and then we'll take questions from the webcast. But as usual, if you could introduce yourself and your company before asking a question.

Paul May from Barclays. Three questions, if I can. The first one, you just locked in 6% cost of debt for the next couple of years via a swap. Is the business sustainable with this level of financing expense moving forward, if everything were to refinance at those levels. Occupancy has been on a declining trajectory over the last 2 years. At what point is this concerning? And what is the all-in operational cost of your portfolio? So I appreciate the net ratio of 5.5% reflects a low operational cost assumption. What would be the free cash flow yield post all of your operational costs?

I think I'll be handing over to Dave for [Technical Difficulty] those.

Fine. So cost of debt, so yes, we locked in at 6% for the next couple of years. I mean, if you assume that, that is a refinancing level, and we'll see where rates move over the next year or say, as I say, there's no immediate refinancing need. I mean, the answer is, yes, it is sustainable. I mean, our equivalent yield, 7% is obviously above that. If you look at the reversion in the portfolio, it more than covers even just with the current reversion for getting the continued growth in ERV. It more than covers the increase in interest cost that we would see. If you think about it from a yield perspective, if you build in the reversion, our yield or sort of EBIT yield is probably about 5% if you build in capital increase, as well. I mean, long term, our total return is roughly 50-50 income and capital. Again, long-term capital return has been about 5%. So if you build that and you probably got a sort of 10% to 11% return, which obviously is over our cost of capital. So yes, I think if that does end up being where the cost of capital is, it would be sustainable. Having said that, the expectation is currently, there will be rate cuts this year. We'll see where rates come down. Certainly, spreads have come in a lot over the last year. And again, as we continue to drive operational performance, I'd hope those spreads will come in further.

I'll pick up the second one, and you can pick up the free cash flow because I think it is quite complex. On occupancy, yes, it's a bit harsh comment down the trajectory. I mean, we are bubbling around 80% -- 90%. I mean, as you'd appreciate, the overall occupancy is a blend of 42 buildings in our like-for-like portfolio. So there's always an ebb and flow on various sites. I would expect our occupancy to bounce anywhere between 88% to 92% on an ongoing basis. I mean, I wouldn't read too much into the fact that 2 years in a row, it's gone down slightly. I mean, it is a variety of factors. Some customers leaving and timing of when we fill that space, replace those customers. Certainly, what we are looking at, and Dave highlighted is, we're holding back on some of the largest space we get back to be able to actually cut that up and convert it into smaller units. So that does delay sometimes the recovery in occupancy, as we get that space back. If it's a large space, we'd actually take it out of like-for-like. But for some of the smaller space that comes back, we wouldn't do that. So I wouldn't read anything into that. I mean, I think if you saw the occupancy going down and the ability for us not to drive pricing forward, I think you would have a good challenge that we're probably not pricing to the market. I'm very comfortable that our operator model is very intense, and we price our buildings and our units pretty much week to week. So we priced the market. So I think the evidence for me is actually still our ability to continue to grow that like-for-like rent roll, gives me comfort that actually we're driving the model in the right way. But in 2 years' time, although, I won't be here, and it's still going down, then you can tell me that I am wrong.

On the free cash flow point...

Yes. I mean, really just building on what I said before, I mean, for us, broadly, earnings equals cash, adjusted anything it equals cash, and we don't really have sort of many non-cash items. So if you take, let's say, an income yield of sort of 5% and then building a capital return, I think that's a 10% overall total return. And I think from a cash flow basis, as I say, we generate good operating cash flows, which more than cover dividend payments contribute towards CapEx as well.

Neil from JPMorgan. Just 2 questions, please. You mentioned you look to spend about GBP 60 million to GBP 70 million of CapEx this year. Just wondering what the flex is on that, please, and if there is an upper limit, given the confident remarks around the office demand? And secondly, you mentioned opportunities emerging in the market. How would you think about funding that potentially? Would it be more disposals? Or would it be something else, please?

You pick up the first, Dave, and I'll pick up the second.

Okay. I mean, flexible. Yes. I mean, we have flexibility both ways. I guess, our committed CapEx is probably roughly half of that as we sit here today. So we can certainly flex it downwards in terms of accelerating it. I think if conditions, we see a strong economic recovery, if rates come down significantly, there's lots of factors that can contribute to how we could accelerate that. And we can turn on, as we said, a lot of our projects and particularly higher tech returning ones are quite quick to switch on. It's really about the availability of space and getting the space back from customers is probably the key determinant of when you can do some of those schemes. But we've got a significant pipeline, albeit that pipeline has currently got customers sitting in it, paying rent. So we're earning a yield on it. So we do have that flexibility. It's not like it's a land bank sitting there empty. So we're currently generating income from it. So yes, I think there is flexibility within it, that's the guidance at the moment.

And I guess, the second point around investment more widely, I mean, my priorities would be, firstly, keep driving that core like-for-like income growth. So that's important that we maintain that momentum. As I highlighted, that's significant and going to give us a very good dividend growth on its -- in its own right. The smaller projects, as well as those larger projects that are currently underway will be the next focus of attention because, again, they're giving us very good returns over the next 2 years to 3 years and beyond. Then as you'd expect, we continue to look outside for any potential investment opportunities. But let's be clear, I mean, our -- we invest for the long term. We're not a cyclical trader-developer type mindset. So we're not looking to buy today to sell in 3 years', 4 years' time. So we're looking actually where we can deliver long-term benefit and growth from acquisitions. So it's certainly something we'll be looking at, but it's nothing that we're rushing to do as a priority today. Sorry.

Callum Marley from Kolytics. Just one question. Where are the best growth opportunities that you see today? Obviously, you've had another good year of rental growth, but you've commented in the past that you don't want to increase rents too fast in order to maintain occupancy, but then you've also commented about converting larger spaces into smaller spaces. Just wondered how you're balancing that. And then maybe kind of what are the economics, the CapEx per square foot on those conversions and the additional returns you might make?

Yes. I mean, it's a challenging question as much as because of that broad spread, we've got our properties and at different price points across London, and we have different opportunities in very different levels of investment in different parts of London. So we can do a sort of relatively light refurb maybe in an area, where we don't think we can push the pricing so far. So everything we talk about, we end up talking about averages in terms of investment. But to your first point about where do we see the opportunities across London. I mean, the reality is that we'd say there's suburbia across London, which actually is as attractive and as exciting in terms of returns that we can get at Central London is just a different price point, but it's consistently, where the demand for our SME customer base is, and that is very broad and very wide in terms of the demand. So there are no hotspots that I would bring to your attention. I mean, every now and again, there will be a quieter time in a certain area of London, and it will pick up. But that's just a trend that we've seen every year since I -- certainly I've been here. So I would say, it's a pretty consistent story. I mean, the one, I'd say, area of London that consistently, I think, has been strong over the last 10 years or so, putting COVID to one side, there's been a strip of South Bank really everything from London Bridge through to Vauxhall. And it's certainly fortunately, I would highlight that would like that [indiscernible] we're very strong in as well. But I think that is an area that's kind of changed so completely over the last 10 years, obviously, benefiting hugely from the investment in infrastructure, transport infrastructure across London. So I think there are changes across the whole of London, and we have benefited actually more widely across London with that investment that there's been in transport infrastructure. So as much as we're talking about the CapEx that we've invested, actually, I'd say we've benefited hugely from that investment that's been made by the government. In terms of CapEx spend, I mean, it really depends upon the scale of the upgrade we're doing, but it can be anything from GBP 150 a square foot, GBP 250 a square foot. So it's very much, as I say, suited to the scale of uplift we think we can achieve in pricing. And the great thing about our business is because we've got so much data and data points, we can actually work with confidence about the demand at different price points across London. Miranda?

Miranda Cockburn, Berenberg. Can you just give a bit more on the demand side. You were talking obviously about more demand at the moment for smaller units. Any sort of particular reason behind that? Is it companies downsizing? Is it more new companies coming in? Can you just give us a bit more of a feel for that?

I'll have a go. Dave, you can have -- you start because you did a nice slide on it.

I mean, I think we always have the mark for small units. I mean, it's our bread and butter. Our target audience is very much those, as Graham talked about, those SMEs across London. And typically, there'll be anything from 5 to 50 people, but that very much in that sort of 5 to 10, 20 people sweet spot. So those smaller units are always in demand. Very often business will come to us and then scale with us, so they start small. So the larger units often are from people growing upwards, but we absolutely do get new customers joining us and taking larger spaces as well, and it's a mix. I wouldn't say we've seen a trend of customer downsizing to take space no. I think it's more they like the quality of the space and they like being part of the community, I think, is probably more the attraction. So I don't think the demand for smaller space is a new thing. I think there's just strong demand for it across London, and there's an opportunity for us to continue to deliver smaller units, to be honest.

Just -- I mean, the only thing I'd add to that is most of the larger units we've got, we've inherited from acquisitions. So when we start out with a new business center, you won't find many larger units. It generally the likes of some of the larger properties we've acquired over the years. So it's not by plan that we've inherited them. But obviously, we can't subdivide them and drive better value until they are actually existing customers [indiscernible]. So that's one of the challenges. The second one I'd say also, what we've seen with larger units is, there's a lot more competition out there. There's a lot more available space of that larger size. Smaller units, which is our bread and butter, they take a lot more active management, but that is great for us because that's what our operating platform was all about. So it's much more something that we're very happy to manage, where actually I think you can find other landlords, they much rather just have one customer taking a whole floor rather than have 20 different customers being having to then manage all of that activity around those individual customers. So I think those 2 elements together will drive us, as we say, today towards over time, moving more and more to those smaller units from these larger ones that we've inherited. Sorry, there is Denese, and then behind as well. Okay. Well, that -- ask 2 questions at once. That's good.

Well done.

Adam Shapton from Green Street. Two questions, one on ERV growth and one on capital allocation. So on the ERV growth, you set out the split between smaller and larger units, which is very helpful. In the statement this morning, you mentioned a wide range of smaller unit refurbishments and subdivisions. Can you give some figures on the total cost of those refurbishments in the like-for-like portfolio, just trying to get a handle on what's the true sort of organic ERV growth without those, if you can give that on a per square foot basis.

Right, you go on, Dave.

Yes. And I was going to say, I mean, it's not just like-for-like. It's across the portfolio is the truth.

No. But in your like-for-like ERV growth you talked about the growth in the smaller units because of refurb...

Yes. So in broad terms, I would say that these smaller projects, there's probably around about 1/3 of CapEx is probably in those smaller projects overall as a guide. But as Graham’s given a couple of examples on it, so I mean, there are 2 examples, he is citing here, one for GBP 1 million and GBP 1.5 million, one for GBP 2 million. And on those, we're seeing rental growth of 50% or so. So there is CapEx there that is driving very strong returns on that CapEx.

But let's be clear, don't get excited that, that -- all the uplift goes to value in as much as there's a gross-to-net impact as well because when you subdivide space, you don't have as much space. So we're getting good double-digit returns, but it's part of the overall, as you say, growth rate of ERVs, but it's not the most significant part. The main part is actually just the fundamental demand moving the price point up, not the fact that we're upgrading the units. That's really -- it's complementary to our core focus, which is actually just moving customers up because of the strength of demand for what we offer. And you wanted one on capital allocation...

Yes. On cash allocation, so I mean, you've got a sort of over GBP 600 million pipeline, future projects, GBP 450 million is consented. Can you talk through how you think about making the decision to commit to those projects in the context of where your share price is. And we've mentioned your most recent evidence of marginal cost of debt is above [ 6 ], your capital structure more generally. So how do you as a management team think through that commitment decision. I couldn't help noticing that you've removed the dates from the future projects slide, that's significant.

I mean, we've said that last time, to be honest, is that we were moving away from committing because I think, certainly, over the years since we've sort of put those slides together, the cost to build some of these schemes have gone up because inflationary cost increases. And I think what we've said is that we're holding back on a number of those projects until we're certain about the returns justify the investment given those increases in costs. So I think we sort of said that it made more sense to hold back. And then, as you say, deliver them piecemeal, as once we're confident equally also make sure we've got the appropriate capital to be able to fund those schemes. I think the answer to your question is that we will look as and when we think those schemes are viable at the appropriate way of funding them, and it may be through joint ventures, it may be through other sources, maybe through just a recycling of capital. The great thing is there's opportunities out there for us with planning in many cases. And the other thing I think Dave highlighted as well is that it's not that we need to press a button tomorrow. I mean, these are all good income earning assets today. And in fact, one of the challenges, I mean, on a number of these schemes is we get the strength of the demand and is driving up pricing for the existing product as opposed to that what we might be able to deliver over time. So that's holding back in some cases, the viability of the schemes at the moment.

Do you have a sort of a [indiscernible] hurdle rate for pressing the button today.

Yes. I mean, we haven't changed our hurdle rate, which is 8% ungeared IRR over time. But what has changed is, well, I guess, it hasn't really changed the principle. As always, we focus on where do we get best returns. And at the moment, we're seeing strong returns well ahead of that, particularly around the smaller asset management opportunities. So it's really just looking about where do we actually get best return rather than the hurdle rate. There's plenty of opportunity above the hurdle rate.

Ben Richford from Bernstein. Just as you depart the business, Graham, I'm just wondering of your thoughts looking at it in terms of scale, it's an operational business. Do you think there's benefits to getting quite a bit bigger over time? And is there an opportunity to do that right now, you're seeing some of your competitors commenting on cyclically low values yourself as well. I know capital is part of that equation. But is this a business that should be a lot bigger? Is now a good time to try and find ways to achieve that? That's the first question. And then secondly, just in terms of the smaller spaces, do you lose square footage when you subdivide to smaller spaces? And is there greater frictional cost?

The second one, I'll answer first is yes. I mean -- I mentioned earlier, I mean, as we do this subdivision, you typically lose 10%, 20% of the floor area because you're putting in corridors, you're often putting in breakout space as well. So there is a gross-to-net impact as you subdivide, but that's more than offset by the increases we've highlighted in the pricing that we can achieve. And the other thing I'd highlight about subdividing space is for us, it diversifies the risk significantly. And then also, [indiscernible] is actually also where we get stronger pricing growth longer term is in our smaller units because our DNA really is around marketing of these smaller units, and that's where the strongest demand is. So on a number of fronts, it makes sense. On your first point about scale, yes, I mean, there's a lot of discussions about scale at the moment, and obviously, you're seeing that with some of the capital raises. I think for me, it's going to be scale with purpose. So it's not scale for the sake of it. We have a very clear model around providing space to our SME customer base. I've also highlighted, you've got to have the right sort of building. So it's not something you're just going to build the buildings in center of London, and that will be great, that will come to you. You've got to make sure you've got the right building in the right location and buying them at the right price point. It's something we've built up by acquisitions stealthily over the last 30 years. And there's no reason for us to suddenly rush out and buy everything that's available. It's got to be the right buildings at the right price. There will be opportunities, but it's not like today's a day when we got to go and buy all the buildings. We have a huge opportunity across London. As I highlighted earlier, we are a relatively small market share of a very large, exciting economy of SME businesses. So I would say that yes, there is a huge opportunity for us to grow, but it will be selectively and over time on a measured basis. But equally, in the same breadth, we want to make sure that we continue to deliver a progressive dividend policy because at the end of the day, that's something that's, I think, respected from an investor base in terms of our ability to be able to deliver a sustained dividend growth alongside actually building up the business.

Yes. Sustained growing dividend, good for shareholders in the future.

Exactly right. And I'm talking for myself there. Okay. There are no more questions. Are there any from the webcast?

We haven't got any yet, but I'm just going to make a call if there are any questions that want to come in from the webcast, please submit now.

It's like the Eurovision Song Contest. Okay. No votes. Okay. All right. Okay. Well, on that note, thank you for your time today. Hopefully, see you soon. Maybe not at Workspace.