Great Portland Estates H2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 21, 2025

There are 10 speakers on the call.

Operator

Are we early?

Speaker 1

We might be. Well, since you're all sitting so obediently, why don't we start? And welcome, everybody. Thanks very much for joining us despite battling through this strange thing called rain that woke us up this morning. Great to see you all.

Speaker 1

We really appreciate your time. So, thank you very much for coming. So, what I want to do this morning is start by summarizing the key messages that we'll be giving you over the next thirty or so minutes. And this was an extremely productive year as we set about executing our growth strategy, accelerating our activities as the year progressed, and delivering a strong operational performance across the board. We committed the rights issue capital ahead of plan into new growth opportunities.

Speaker 1

We have created premium spaces into a market starved of such quality. Our record levels of investment leasing with strong growth in our flex operations have led us to upgrade our rental value guidance, all of which means that we're well set to deliver strong income and value growth from here, as we'll show you this morning. So, as well as putting the meat on these messages, we're also going to cover our results and finish with our outlook. But let me first of all remind you of our strategy and revisit what we said to you back in May 24. You'll remember this chart?

Speaker 1

It shows our long track record of contracyclical capital management: raising capital and buying when markets are cheap, developing to create value, and then selling completed business plans into stronger markets, and returning surplus capital to shareholders. And the last twelve months has seen us continue this clear, contracyclical plan. In May 24, we said the cycle was at or around its trough, and today we see Central London markets inflecting, with values rising and turnover recovering. Last May, we said it was the time to buy and not sell. We did, essentially committing all the rights capital at an attractive 53% discount to replacement cost, and from here, we'll buy more and we'll rotate towards more sales as the market strengthens.

Speaker 1

We said there was a supply drought of grade A offices. There is, and we're delivering into it, with circa 40% of our book in production, and big development surpluses to come. We said prime rents would rise they have up 7.6% across our prime spaces over the year, and our nearly £38,000,000 of leasing was signed at a strong 10.6% beat to ERVs. We said we'd grow our unique flex offer: we have, up 16% to 600,000 feet, with our net operating income up 114% over the year, and which we expect to grow substantially from here, up by some 2.5 times. And we said we'd supplement our capital base with further debt financing, and we've done that too: pounds 400,000,000 raised since then, adding to the £350,000,000 of fresh equity.

Speaker 1

So, we are delivering and have significant organic growth to come, with a strong base case return on equity outlook of more than 10% per annum and EPS growth of more than three times. Turning then briefly to the full year results, and this was a year of strong operational performance, delivering record investment lettings of £38,000,000 handsomely beating ERVs, with offices 11.5% ahead. And this strength is continuing, with our lettings so far this financial year already at £17,600,000 and 5.5% ahead of the March 25 ERV, only six weeks after the valuation date, including last week's 62,000 square foot fifteen year pre let, generating £11,700,000 at a strong rental premium of 6.5% to ERV. Plus, today, we have a further £3,000,000 under offer at a premium to ERV of more than 14%. Overall, rental values across the book were up 5%, prime offices better still at 7.6%, vacancy rates remain where we want them, customer retention continues to be exceptional at 87% across the portfolio, and we've made strong progress across our developments and our refurbishments, as I'll cover in a minute.

Speaker 1

Our financials for the year were healthy too. Our valuation was up 3.6%, driven entirely by our activities and rental growth, with our fully managed spaces the best performer up 12.8%. EPRA NAV was up 4.4%, rent roll grew strongly by 15%, and EPRA LTV remains low at circa 30%. So as we think about what next from here, our clear and differentiated strategy gives us a strong platform for growth. Four main drivers: first, income growth: 43% over the next two years from our on-site activities, and more than 130% in the medium term as we lease up our pipeline and deliver 2.5 times growth from our flex spaces.

Speaker 1

Second, development surpluses, circa £220,000,000 to come, assuming current rents and current yields, and we think there's big upside from these numbers, as you'll hear in a minute. Third, more acquisitions, with two off market deals in negotiation. And fourth, sizable sales to come, aiming at some £350,000,000 in the near term. So, growth to come, and we'll expand on these opportunities in a minute. But first of all, I want to tell you about our markets, and in particular, why supportive leasing conditions will stimulate best rents to continue rising, despite today's many current macro uncertainties.

Speaker 1

First, office jobs in London are rising. Oxford Economics think they'll grow by another 200,000 by 02/1930, as you can see on the left. Second, levels of take up are robust, slightly ahead of the long run average. And third, active demand remains strong at 12,600,000 square feet, well ahead of the ten year average, and some 35% higher than it was in 2023. Now, we know some two thirds of this demand will only lease prime spaces, and yet the undersupply of new offices in Central London, shown on the right, remains extreme.

Speaker 1

Our forecasts suggest 2,700,000 square feet per annum against an annual take up of new space of 4,700,000 feet, or a shortage of some 74%. Indeed, 2027 could see one of the lowest ever levels of deliveries. So it's no surprise then that we think best rents are set to grow. Demand remains strong from proper businesses, with banking and finance dominating. We're seeing a record number of 100,000 square foot plus requirements.

Speaker 1

Pre netting is currently running at a ten year high as customers lease earlier than ever to secure quality spaces. And we know that a far higher proportion of companies are expanding their space take rather than contracting 48% versus 14%. And this strong demand is colliding with a supply drought that is extreme and not set to change anytime soon with low in place vacancy rates. Planning departments are under resourced, and policies around retrofit first and sustainability will constrain new development. And as you know, we got ahead of these challenges, investing early in materials reuse and circular economy development to give us an edge and becoming the market leader in the process.

Speaker 1

So, for these reasons, as you can see on the right, rents are set to rise further. Now these are Savol's forecasts, and we think that they are potentially pretty conservative. And remember, despite the recent run up in rents, we think they remain affordable, with Central London occupiers' average rent being only some five to 8% of their salary bill. All up, therefore, conditions play to our positioning: 100% core prime locations, 94% near Elizabeth Line stations. Turning then to the investment market, where we think the story is one of recovery with the return of both competitive bidding and of larger deals.

Speaker 1

Capital values are clearly inflecting, shown in real terms on the right, driven entirely by rental growth. But they still remain near historic lows. Turnover is still pretty depressed too, but as you can see on the chart bottom left, it's up 40% since last summer. And there are some early signs of recovering market dynamics. UK institutions are definitely more active.

Speaker 1

We've seen more deals trading above asking 11 in the five months so far this year, versus three in all of 2024. Plus, as you can see on the right hand chart, there are more large deals happening today, up from one in Q4 twenty twenty four to seven in Q1 twenty twenty five, and with a further six under offer. So definitely a recovering picture. And from here, whilst challenges remain, we think sentiment could improve, clearly helped by the trajectory of interest rates. Stock levels are marginally down, and interestingly we've seen more vendors withdraw sales in anticipation of better pricing.

Speaker 1

Plus, equity demand, shown bottom right, is marginally up to £21,400,000,000 as you can see in the pink bars. So, in tune with our countercyclical strategy, you should expect to see us move to a more balanced position, with both further acquisitions and more sales as conditions strengthen, allowing us to crystallise surpluses. Summing up then our view on the market: and we think conditions strongly support our strategy. For rents, whilst we contend that conditions on the ground are strengthening, continuing macro uncertainties mean we have left our key drivers as they were in November. That said, as you look down our actual rental value performance for the year versus November's guidance, we were towards or above the top end in all categories, which is a strong result and which has led us to upgrade our estimates for the year to March 26, as you can see.

Speaker 1

And we're now expecting to deliver overall rental growth of between 47% for the year, up from three to 6%. For yields, we have slightly strengthened our drivers, given the tick up in equity looking to buy. Overall, we think they are stable to slightly down, at the most liquid best end of the spectrum. So, as I say, overall supportive conditions. Let's turn now then and look at our acquisitions, sales and development activities, and we've had successful year deploying the proceeds of the rights issue.

Speaker 1

We bought four growth opportunities, all in line with our disciplined criteria, all in the West End and at a healthy 53% average discount to replacement cost. Each has a compelling repositioning or redevelopment business plan, and we're aiming for post capex yields of between five point five percent and six point eight percent, with ungeared IRRs of early 9s to mid 12s. We have more to come too, with two deals in negotiation, both in the West End, both next to existing assets. We are also likely to sell more, as I mentioned earlier, expecting to crystallise circa March in the near term, and we have more than 50% buy value in two assets under offer today. So plenty of opportunity then to come.

Speaker 1

Our most recent acquisition was One Chapel Place, highlighted here in yellow. We paid £56,000,000 for this tired 34,000 square foot 1920s through to 1980s freehold in a fabulous location, two minutes from Bond Street Elizabeth Line Station, and surrounded by much larger recently rebuilt buildings, giving us a fantastic HQ redevelopment opportunity with three years of income whilst we work up our plans. Here you can see two images of the planning application we have inherited from the previous Chinese owner, and which we are likely to withdraw. We know Westminster Planners don't like the proposals, and bluntly, we can and we will do better. On the right, you can see an image of the existing building, with an outline of the sort of massing gain that we are working up.

Speaker 1

We're aiming for somewhere between a 4575% net area increase, and we're confident that we can hit all of our target metrics. So a great opportunity to create another truly best in class HQ building. We've also made great progress across our prime on-site HQ developments. At Aldermenbury, top left, we're on track to finish in Q1 twenty twenty six, and we're expecting around 21,000,000 pounds of surplus to come from here. At 30 Duke Street St James's, we've just announced the pre let of the entirety of the offices to USP firm Clayton, Dubillier and Rice, on a new fifteen year lease without break and at a blended rent some 6.5% ahead of the March 25 ERV and 11.9% ahead of the underwrite.

Speaker 1

As a result, all of our performance metrics have moved along nicely since the March balance sheet. Progress is also good at Minerva House, where we are on time and budget to finish in Q1 twenty twenty seven. Our metrics are good here too, and we have healthy levels of interest from prospective customers. If you take these three schemes together, we have about £277,000,000 of CapEx to come, almost all of it is fixed, we're creating big ERV increases, up 168%, seventy three % of which is now pre let, and we're generating a sizeable surplus to come of some £111,000,000 shown at the bottom of the table. With only Minerva left to let, were we to see 10% ERV growth on that scheme alone not that challenging given both the market conditions I outlined earlier and the quality of the space we're creating the total surpluses from these three schemes would rise to around £133,000,000 or more than 30p per share with limited risk.

Speaker 1

So good business from these best in class schemes and with plenty of further upside to capture. Next up in our HQ pipeline are three more gems, to which we'll be adding Chapel Place, as I touched on a few minutes ago, and all delivering into the supply drought I referenced earlier. On the left you can see some of the terracing at Soho Square, again best in class, with a big area increase on a West End Square and we expect to start imminently. Top right is our recently acquired Whittington House, opposite and next to our existing holdings on the pedestrianised Alfred Place in the West End, and again starting later this year. And at the bottom are revised proposals at St Thomas Yard, next to Borough Market, where our planning application is in for a major refurbish and extension scheme next to London Bridge Station, and where we gain vacant possession in just over a year's time.

Speaker 1

Taken together, these three exemplary schemes will generate increases in area of 55% and in ERV of 164%, and we will be targeting our usual surpluses and IRR metrics. As ever, all best in class, all near major transport hubs, and given the supply drought, well timed to capture strong upside. So far, I have only talked about our HQ CapEx program, and as you know, we are also very actively growing our flex portfolio through multiple refurbishment schemes, which Nick will talk about in a minute. And here you can see the sum of our current programme: all Central London, mainly West End, all of the highest quality, all near major transport hubs, and at 12 schemes covering 1,100,000 feet, or 37% of our portfolio, by area, and crucially, timed to deliver into an undersupplied occupational market where rents are growing. Now, before handing over to Nick, I want to summarize the shape of the portfolio today, and to reinforce the message that this business is full of growth opportunities across the whole portfolio.

Speaker 1

I've already talked about the HQ developments, which, once finished and let, will move to the long dated investment segment at the bottom of the stack. But it's not just our developments that give us growth. We also have more than £1,600,000,000 or almost 60% of the current book value in what we call active portfolio management assets, and you can see some of them here. They give us multiple angles for both rent and value growth: through refurbishing to create higher quality spaces and therefore higher rents leasing vacancies as refurbishments finish and capturing the reversion sometimes restructuring or re gearing our interest, and of course, through preparing some for major refurbishment or redevelopment. Taken together, this segment gives us real upside: Their valuations are undemanding at only circa £1,000 a foot.

Speaker 1

They don't need much capex. They're all well located, and all have good foundations that we can build value upon. Now, as you know, one of our most exciting growth opportunities is our flex operation. We were early to the game, starting back in 2017, have built the infrastructure, and now have some 25% of the total portfolio given over to this powerful model. But we are just getting going, and Nick will talk about our growth plans in a moment.

Speaker 1

And finally, once we've delivered our business plan, properties often move to the long dated segment from which we've typically sold. We expect to sell circa £350,000,000 from this group near term and a further £650,000,000 over the medium term. But that's for another day. Now over to Nick to hear about our exciting Flex growth plans.

Operator

Thank you, Toby. Good morning, everyone. Let's dig into our unique Flex offer, where we are delivering our growth strategy with conviction. As we've been saying for a while, Flex is now the default choice for customers with smaller space needs in Central London, representing 90% of our sub 5,000 square foot lettings in the year, ahead of the market average. And in a growing market, customer demand continues to be broad based, with ever increasing demand from previous traditional cate customers, along with larger corporates and services firms.

Operator

Customers are paying a premium for our high quality hassle free spaces, with our average fully managed rent well ahead of £200 per foot. And our continued growth means our annualized NOI is now £19,000,000 up 93% since September. We're also delivering valuation performance too, with our fully managed values up nearly 13% in the year, endorsing our 1,000,000 square foot ambition. Today, our nearly 600,000 square feet of flex space is 60% in the West End and 61% is fully managed, the focus of our planned growth in buildings that we own, we fit out and we operate. Our average flex unit size is around 3,000 square feet with an average lease length of three point five years.

Operator

And we're providing outstanding customer satisfaction with our NPS of plus 48 for our fully managed spaces, driving our 91% retention rate. And we're leasing new fully managed space successfully too, with £23,000,000 of deals in the year to an increasingly corporate customer base. With almost a deal a week, we secured rents more than 10% ahead of the fully managed DRV, at an average $2.00 £6 a foot, higher still at £227 for our West End lettings. As shown top right, our strong leasing and operating capability are combining to deliver outsized performance, well ahead of our targets. We're generating strong absolute returns, with an average yield on cost of 6.6% and service margin of 40%.

Operator

And relative to ready to fit, we delivered a 120% rent beat and a seventy seven percent ten year cash flow beat. And as I've already said, we've got strong customer retention and good lease duration too. Our operating performance is also strong. Our fully managed spaces are today generating £39,000,000 of annualized rent. We're currently managing £20,000,000 of OpEx and other costs across the categories shown in the green bar.

Operator

And with a gross to net of 50%, our annualized NOI is £19,000,000 or £104 a foot. Once we factor in both amortized fit out and refreshed CapEx, along with the fully managed specific corporate overheads, this results in an annualised net cash return averaging £78 a foot, or 45% higher than the ready to fit net rent. And economies of scale are already emerging, with our clustering and established best in class team driving both higher customer retention and lower costs. Plus, there's plenty more net income growth to go for. We'll generate £6,300,000 of additional NOI as we finish up the leasing of our recent completions, including Alfred Place and 6, which are already 7452% let, respectively.

Operator

Our four on-site schemes, all in the West End, will deliver a further £12,300,000 with our pipeline schemes expected to add another £17,500,000 taking our fully managed NOI to £55,400,000 so an organic growth uplift of 2.5 times. And as we execute more acquisitions to hit our 1,000,000 square foot ambition, total NOI would increase to £90,000,000 a more than fourfold uplift overall. And with more than £19,000,000 of annual service profit, shown in blue, we'll be creating additional value of more than £200,000,000 or more than £200 per foot, based on the valuers' current 8.5% cap rate. So, our flex activities remain a significant income and value growth driver. Now a few comments on our full year results, which provide a platform for growth, and we have passed both the valuation and earnings trough.

Operator

Starting with our priority to drive value growth and following a strong second half, we delivered a like for like valuation uplift of 3.6% as the best continues to outperform, and EPRA NTA rose 4.4% to 494p per share. EPRA earnings increased 13% to £20,000,000 with our cost saving activities reducing admin costs by £3,000,000 As expected, EPRA EPS was 5.2p. And as we said we would, we're paying total dividends of nearly £32,000,000 And you'll find the usual walks in the appendices. We've also maintained our financial strength with EPRA LTV at 30.8% and available liquidity of almost £400,000,000 as we deployed the rights issue proceeds ahead of plan, whilst also locking in 400,000,000 of new debt financing in the year. Overall, we generated positive TAR of 6%, delivering prime spaces against the backdrop of VRV growth, with more to come as we build on our strong foundations.

Operator

Our £2,900,000,000 portfolio is opportunity rich, with 83 in offices, where we experienced the strongest ERV growth of 5.3%, with overall portfolio ERV growth of 5%. Our fully managed rents were up 7.5%, with 6% growth at our long dated office properties. Overall, the portfolio has an average capital per foot of just over £1,100 and the investment properties are valued at around a 20% discount to replacement cost. We think there'll be growth from here, and that's before factoring in any potential yield compression, with our portfolio equivalent yield today at 5.5, and our reversionary yield at almost 7%, much higher still at almost 9% on a share price implied basis. Finally, the best continues to relatively outperform at both an ERV growth level in purple and by valuation shown in green.

Operator

By EPC rating, our A and B spaces again outperformed, as did our higher capital value per square foot spaces. And our West End properties, representing nearly three quarters of the portfolio, outperformed too, with the RV growth of 5.7%. And we expect these trends to continue as we invest to drive growth. Our £700,000,000 CapEx program combines £357,000,000 to complete our seven on-site HQ and fully managed schemes, shown in yellow, with a further £343,000,000 for our four near term schemes in pink. These CapEx estimates include appropriate inflation allowances, and you'll find the usual scheme by scheme detail in the appendices.

Operator

These schemes have a total GDV of £1,800,000,000 which will deliver a surplus to come of more than £340,000,000 based on conservative 10% cumulative rental growth. As we show, there's serious upside potential with further rental growth and some mild prime yield compression, taking the surpluses to nearly £600,000,000 or 150p per share. And the lines on the chart prudently show how these surpluses would accumulate over time, based on profit release at Scheme PC, although our pre letting activities typically accelerate these. On the right, our investing activities clearly change the portfolio composition, which Toby covered earlier, with long dated properties shown in grey, growing from 21% to 52%, all else equal. However, our recycling activities will evolve the portfolio mix further, with prospective sales of around £1,000,000,000 in the next few years, meaning active portfolio management properties, shown in dark blue, will again dominate, with flex also representing almost 40% of the office portfolio.

Operator

In reality, our sales of long dated properties will likely be higher still, given our disciplined capital management as they were in the last cycle with more than £3,000,000,000 of disposals. We're also investing to drive income growth with a significant organic rent roll growth opportunity. Our rent roll today is £123,000,000 up 15 over the year. Over the next two years, this builds by more than £50,000,000 or 43%, and rises to more than £280,000,000 in the medium term, an uplift of 131%, including the market rental growth we expect to capture. Of course, some of this uplift will be tempered through sales of long dated properties into more stable investment markets.

Operator

But there's lots of growth to go for, which should deliver a more than threefold increase in EPRA EPS over the coming years. As we said twelve months ago, we expect FY twenty twenty five to be the EPS inflection point at just over 5p. From here, as we lease up our on-site developments and refurb program, we expect EPS to more or less double over the next two years, which will accelerate further as we deliver our near term pipeline and capture market rental growth. Once we factor in finance and other costs to deliver this growth, along with our likely earnings accretive sales, we anticipate annual EPRA EPS of 15 to 20p in four or five years' time. As a result, we expect to maintain our progressive dividend policy with potential DPS growth by FY 2027.

Operator

As we continue to invest for growth, we will be maintaining our financial strength. Following our significant investment activity in FY 2025, LTV is today around 30%, as we continue to operate within our ten percent to 35% through the cycle target range. Interest cover is strong at 10.9x. Our well timed debt financing activity in the autumn means we've almost £400,000,000 of liquidity, and we've extended our average debt maturity to more than five years, whilst our average weighted interest rate remains in the fours. Looking ahead, as the bar chart shows, we expect LTV to remain above the midpoint of our through the cycle range as our investment and divestment activities become more balanced.

Operator

And as you know, a couple of big sales can really move the needle and give us significant incremental acquisition capacity. Pulling this all together with our financial outlook. As we deliver and crystallize surpluses in line with our business plan, we expect both property value and NTA growth in this new financial year and beyond based on our current market outlook. The capture of our significant organic rent roll growth opportunity will drive both income and EPRA EPS growth, with an expected threefold EPS increase supporting our progressive dividend policy. We will maintain our diversified debt book along with healthy liquidity and our through the cycle LTV range.

Operator

And over time, our enhanced earnings profile may potentially enhance our credit rating too. In sum, through the capture of attractive prime rental growth and our disciplined capital management, we expect a stronger TAR outturn for the year ahead as we move towards delivering a 10% plus annual return on equity before factoring in any potential yield compression. And of course, shareholder returns would be higher still should the share price discount narrow. Now back to Toby to wrap up.

Speaker 1

Thank you, Nick. So let's wrap up then with our outlook. And in short, we expect more growth, supported by our strengthening market opportunity. During this recent period of elevated political and economic uncertainty, London has become relatively more attractive, consolidating its position as Europe's business capital, with demand for offices running a long way ahead of supply, meaning rents are rising, and office values are inflecting. Plus, we're seeing early signs of an investment market recovery, with Grade A yield compression very much a possibility.

Speaker 1

And with these supportive conditions, we're successfully executing our growth strategy: first, delivering lots of income growth, particularly across our flex spaces, where we can look forward to NOI rising by more than two and a half times second, delivering development surpluses across our best in class projects, from a base of circa $220,000,000, all the way up to $580,000,000 if markets move in our favour, or up to around 150p per share. Third, more acquisitions. Fourth, more sales, with at least £1,000,000,000 over the medium term. And of course, all this activity is in prime Central London only, with more than 70% in the West End, a market with one of the highest barriers to entry anywhere in the world, and 94% of which is near an Elizabeth Lyon station. So to sum up then, we're well set to capture significant growth.

Speaker 1

Our operational infrastructure is in place with a deeply experienced team, our balance sheet is strong, and our prospective return on equity looks attractive, even more so for shareholders should our share rating continue to improve. GPE is in great shape with all to play for, and we can look forward to capturing our strong potential over the next few years. Right, that's the formal bit. We will have some microphones running around the room. Think we've got the senior team here to help us answer some questions.

Speaker 1

Who would like to go first? Thanks,

Speaker 2

Rob.

Speaker 3

Rob James from BNP Paribas. Toby, I've got three in total. The first one was on the Savills rent

Speaker 4

forecasts.

Speaker 3

I can't remember which slide it was, but you said you thought they were too conservative. And I just wanted to understand why you think they're too conservative or indeed how conservative you think they might be. Secondly, think it was slide 23 on the development surpluses to come. On that slide, you've got a solid line and two dotted lines either side of it. Now you said the two seventeen million surpluses to come as your base, but I wonder perhaps if it's not your base case and maybe the 10% is given that that's the solid line.

Speaker 3

And then Nick, you talked about a couple of big sales can really move the needle in terms of firepower. I wonder if you fast forward to twelve months from today, whether you still expect to be the owner of or part owner of Hanover?

Speaker 1

Rob, as ever, very good questions. First of all, on the Savills rents, so if you just look at our own performance at the prime end of the spectrum, whether it's fully managed at 7.5% last year or our office, prime offices at 7.6%, that is a rate that is faster than the Savills compounded rate shown in their chart. On the market, the rental market slide, Rich, we can see what they forecast. I think there are a couple of interesting things about this. Firstly, the West End growth rate over that five years, three years actually, it has, according to Savile, slowed down a bit.

Speaker 1

At the prime end, I'm not sure that's right. I think that's the point At the prime end, we think we could see some pretty healthy growth from here. The other interesting thing about this is that it's suggesting that secondary rents are now also on the move. And that's what happens when you run out of prime spaces.

Speaker 1

And if you go back to our traffic light slide, Rich, one of the strongest outperformers in the year just gone, you can see their secondary assets, where we were predicting down two to flat, and we delivered plus four. Mark, why don't you just give us a very, very quick update on how you're seeing rents in the core of the markets and the West End in particular? Thank you.

Speaker 5

So I think there are a load of factors that play into why rent is moving as strongly as it is at the moment. Toby has referenced on this particular slide a number of reasons, particularly the strong demand. We know that banking finance is driving that demand. We know that there are expansionary requirements out there. We know that in particular sub markets and this plays into the rental growth that there is virtually nothing available.

Speaker 5

Mayfair and St James has got 0%, Citicorp has got 0.1%, Fitzrovia zero point three %, north of Oxford Street zero point four %. So the combination of lack of vacancy and also the under offers at the moment, which are 4.1, which is the highest since Q3 twenty nineteen, all of that is playing into a number of deals. And last year, there was 137 deals over £100 a square foot across Central London. So to Toby's point, something like Minerva House, we think that we will benefit from that, not only the sort of grade B stock where people are diverting to and that goes back to the chart that Toby showed on Slide six. But also if you look at super prime rents, we've been a beneficiary with CD and R where super prime rents now in Mayfair and St.

Speaker 5

James is a £220 plus square foot. But if you look at the city, that today is now around a hundred pounds a square foot. And again, if you look at the super prime, there it's a hundred and 20 sorry, a hundred and £20 a square foot as well. So lots of examples and lots of good activity both across the take up and also the deals that people are prepared to pay. And again, that point of salary cost being 5% to 8% of rents is a very real factor.

Speaker 1

Yes. Thank you, Mark. Very helpful. Second question, development returns. I think on Nick, on your chart, we show the £342,000,000 which is essentially suggesting our base proposition is that we are going to get some rental growth.

Speaker 1

And the gearing of development returns into rents is pretty high, especially when yields are where they are, and as we know our costs are broadly fixed. So that's why we're seeing that degree of compression, move up in the profits. Showing up all the way up to nearly £600,000,000 that's as big a number as we've ever had, just to put that in context. We've never had the potential to deliver that much surplus, certainly in the twenty, however many years I've been doing this. So that's a great place from which to build, I think, some proper growth.

Speaker 1

Third question, firepower. Nick, do you want to touch on that?

Operator

Rob, just to add on in terms of the we've been very clear around our TIR outlook, and there's a breakdown build in the back of how you get there. That does include some rental growth, both at the investment portfolio level and the development level, which you should expect. And in terms of sales, if you I think the question was twelve months from now, will we be stood here saying that we still own Hanover Square? Maybe I'll answer the question differently. Six months' time, I think we probably will be still owning Hanover Square.

Operator

20 4 Months from now, may well not. And I think that really one of the things that you've seen over the course of the last twelve months, as Toby has touched on, investment markets have stabilized, demand for larger lot sizes increased, but also our long dated properties have been performing well. And clearly, the main event for us at Hanover Square is delivering the rent reviews. They kick off back end of this year. Let's see what the level of rent that we capture, we feel very confident around that.

Operator

But I think it's fair to say it's probably not a long term hold, but it's not a decision that we need to make today. But hopefully, we've given you some reasonably good signaling around the kind of properties we're likely going to be selling. It's long dated properties, business plans delivered, but more relevantly, where the forward look returns are below the returns that we need to both deliver our cost of capital and to deliver the TAR target that we've set. What we haven't factored into any of the analysis as yet is sales of fully managed properties. That may happen over time.

Operator

We're not remotely wedded to holding any asset if the forward look returns don't justify that ownership. But as you've seen, the performance from fully managed continues to be strong. We're really seeing the power of clustering come through. But also what we're also seeing is not only we're getting great rents when customers are moving in, we're also being able to push those rents on when in the vast majority of those customers stay. So, we think there's more rental growth to come through.

Operator

And one of the things that thematically we're hearing in the market from some of our peers, and they're not direct peers, but those that are operating in the broader flex arena is why are rents in the flex arena not keeping pace with what's going on in the prime cat A? And I think there's an expectation there'll be more growth to come through. We're certainly delivering that growth. We're doing deals in the city and North of £200 a square foot. We've done one deal in the West End at north of 300.

Operator

And we think there is more growth to come there as well.

Speaker 1

Rob, just last point. The Hanover Square, if we can go back to that slide with the picture of Hanover on it, it's not in the $350,000,000 It's in the $650,000,000 Thank you. More.

Speaker 2

Yes. Callum Mali from Colytics. Three questions, two quick ones first. Great to see the strong top line rent growth. Could you just provide a little bit more color on underlying like for like net rental income growth and how you expect that to evolve, particularly as vacancy has increased and costs are relatively flat?

Speaker 2

And then in the half year results, you had 2026 RemRel target of 198,000,000. I believe now you're guiding to 177,000,000 by 2027, so about 10% lower. Can you just outline the main drivers for that decrease?

Speaker 1

Sure. Well, Nick, maybe you want to take the second one. On the first one, Callum, so if we just go to the income projections, I think if I understood your question, I think that's answered by the walk that Nick took us through as to what's happening to net rents. So currently GBP 123,000,000, up GBP 15,000,000 in the last GBP 12,000,000 from here. We don't give you dates for that, but we do talk about next two years, so you can gauge broadly what's happening within that.

Speaker 1

Was that broadly what you were after?

Speaker 2

What if there's a like for like number?

Operator

Well,

Speaker 1

the like for like number is I can't tell you what that is exactly, actually, because it's going to be very dependent on whether or not we sell some of the things and the timing of the sales that we've been talking about. And as you heard me say, 50% of the $350,000,000 is under offer. So if we sell those very quickly, then the net rental number comes down or rather some of that rents comes out of the P and L for next year. On the longer dated stuff, Nick?

Operator

Just to confirm, your question was, I think, why is that lot together not the same as what we were forecasting guiding to two years ago?

Speaker 2

One year as well. So, I think that's the 'twenty seven, but we're still 'twenty six.

Operator

Yeah, so historically, we've done this in a number of different ways. We've put no timings on it at all. We've put timings on it year by year, and we've now moved to doing it over periods of time. And the reason being, a one month change in the PC date of a development can clearly make things very, very lumpy. So, I can come back and give you a more specific question as to which individual buildings may have moved within The thing I would be focusing on, candidly, is the entire journey, but the fact is that we're not entirely wedded to that two eighty four.

Operator

I think in reality, things will change between now and then. What we're absolutely focused on is delivering this near term growth, and though we are confident though, there will be longer term growth. What that exact number looks like, I don't know, it's 24. But what I do feel confident around, given what our business plan, which involves buying, selling, developing, leasing, is that the growth that feeds through to the EPS level of threefold growth over the next four to five years, I feel very confident around. We know what the levers are that we need to pull, and the vast majority of them are in our control.

Operator

The one thing that really is a little bit out of our control is the rental growth. The rental growth is not that relevant when it comes to the EPS. It's clearly much more relevant when it comes to

Speaker 1

NAV, but we're pretty confident in that rental growth as well. The way we've traditionally made money in this business is through creating a rental story, which you then hold for it or sell. And the sale often, we've sold buildings before we've received that rent, But if you take a development, for example, if you go back to things like Fetter Lane, we pre leased it and sold it or others besides where before we've received the rent. So you never see it in the P and L, but we crystallize the surpluses earlier than that.

Speaker 2

That's clear. Maybe just on that

Speaker 1

Can you talk into the microphone?

Speaker 2

Sorry, maybe just on that last one on that growth profile. Toby, you've been through several economic cycles and just looking at where we are today in the current environment. How do you contrast, obviously what you're saying with the investment market that's potentially inflecting positively against an operating environment where unemployment and occupancy potentially could be inflecting negative?

Speaker 1

Yeah, I think any cycle is the same, first point, although there are often similarities. I feel today that there are similarities to some of the conditions we saw in 2012, '20 '13. So as we came out the other end of the sovereign debt moment and the bond taper tantrum that we saw back in that period, we noticed in 2013, for example, a significant pickup in customer demand in 2013 from 2012, and it had been quite weak in that two year period leading up to that. And we saw rents correspondingly rise. You can actually see it in some of the data in the back of the deck.

Speaker 1

There's a long history of leasing and the premium we got to ERVs, and you see it spike in 'thirteen. And I think there are some similarities today to that. So in other words, limited supply, decent pickup in demand for space, whatever was happening in the macro backdrop. One of the points I tried to make earlier was that there is a bit of a disconnect between London's story and the macro story. So, for example, Liberation Day, relevant for all of us in so many ways, but we are not seeing it at all in customers' any form of changed approach to our own leasing.

Speaker 1

I'm not even sure The UK macro metrics are that relevant when we think about, for example, unemployment and so on, because London is a completely different place. It's an international city, it's a capital city, it's a center of business, it is not a manufacturing hub of any description. It's reliant on skills, and there are lots of them, many in this room, that go to drive demand, and growth in those skills doesn't seem to be slowing up anytime soon. I mean, if you look at the jobs growth number we publish in here, that's with pretty anaemic macroeconomic GDP growth. That said, London's GDP forecasts are running at twice the rate of The UK overall.

Speaker 1

I think we published that in the back somewhere. So you've got a different story. So the read across to London from macro issues is quite difficult to do. The other final thing I would say is that it may just be that our friend on the other side of the pond is one of London's greatest supporters, because with all of the noise going on over there, push factors have suddenly become relevant again from The US to here. We're really seeing that.

Speaker 1

And I don't think that's going to slow up as well. I think London is presenting itself as actually a relatively stable, strong, deep skills, free and open city once again, which is a good thing.

Speaker 2

That's interesting, thank you.

Speaker 6

Yes. Frew from Barclays here. So thinking about acquisitions, and at the half year, you had quite large acquisition A Lists and B Lists. You've obviously now used the rights issue proceeds, still have GBP 45,000,000 of acquisitions to come. But maybe how are you thinking about acquisitions ahead of that if there are still opportunities?

Speaker 6

Or is the focus now shifted to selling? And then on those A and B lists, was there anything that you missed out on and why, if so?

Speaker 1

Dan, maybe you'd like to take the second part of that question, the second stuff that we perhaps didn't do, and maybe just a comment on what we might do from here. Mean, I'll take you back to the point I made earlier, which was that we are definitely shifting to a more balanced position. I mean, this time last year we were super clear, it was not the moment to sell. And let's also be clear, we're not about to sell anything for any price. We'll only sell what we own for the price that reflects the quality of the asset and in turn, for us, doesn't give us enough prospective returns.

Speaker 1

So the forward IRR is not enough. And an institution, for example, can more happily hold a long dated income stream off a generally lower cost of capital than we have. So that transition mechanism of why we exist is very much alive today, much more so than it was twelve months ago, which is why we're moving towards a more balanced position. We will still buy, and checked a couple of things just this morning, as I said earlier, on a couple of deals we're working on. They're both accretive, they'll both be the sorts of things we love buying.

Speaker 1

I mean, other thing I'd say is, historically, you can actually buy at any point in the cycle and make money, if you know what you're doing, you know why you're buying it, and you know how to extract value from it. I remember we bought something in 02/2007 on Oxford Circus and sold it in 02/2009, so we bought at the top and sold at the bottom, made a positive, unlevered 12% IRR. So, you can always buy well if you're focused and you know what you're looking for. Stuff we've missed and perhaps some color on how you're seeing the investment market today, Dan?

Speaker 4

So in terms of things that we missed, I think we didn't, so short answer. As most acquisitions people tell you, they get it right. But we had so we had four acquisitions last year, we've got a two or three, which we're still tracking. I mean, we bid in a lot of processes. So our name is out there on stuff that was openly marketed.

Speaker 4

But that's the sort of method of keeping match fit. You often don't expect to win those because there's a lot of other capital that gets exposure to those marketed processes. Our favorite phrase is side doors, front doors. So, side doors being looking at things through relationships with banks, off market processes. So, I think all the stuff that we got through those processes and through those side doors, we managed to transact on last year.

Speaker 4

And we do have a couple that we're still looking at, which we'd love to buy, one or two have been in the press. So we're still tracking them though. We never give up. If it's still unsold, we absolutely don't stop. So do we miss them?

Speaker 4

They haven't transacted, so they don't count as misses in our book. And we'll keep pursuing until the conclusion is reached. In terms of the market going forward, I mean, the Toby and both Nick have talked about the improvement in the investment market. And I sort of the risk reward curve has sort of moments and pieces on it, which are sort of glowing warmer than the others. Last year, as Toby said, it was a sort of value add stuff that was all the P money, bit of private money active in the market.

Speaker 4

So there were certain bits of the market that became quite heated. And there was competition and bidding processes. I say we did take part, but we're sort of pleased not to win them. And actually, you're starting to see the different bits of the risk reward curve start to become lively. So, we've seen institutions, UK institutions come back into the market.

Speaker 4

LNG bought something top left hand side 30 Golden Square, M and G have enough an office in the city under offer, which again, you know, it's a return from sort of different people that we've seen active over the last year or two. So, parts of the risk reward sort of curve are starting to become active. And what we'd like to do is bid and be successful in the parts where there isn't a huge amount of competition. So, we're constantly looking at where the pressure is, and then we'll dive into the bits where there isn't that pressure. So, yes, there will definitely be more.

Speaker 4

Obviously, it's now balanced approach with we've got some room left in the from the rights issue. But obviously, from sales going forward, we'll create some additional liquidity to enable further acquisitions and to keep the team engaged.

Speaker 1

And of course, we've got a big ambition in our fully managed spaces. So we're looking to acquire up from our 560,000 odd feet to 1,000,000 feet over the next few years. And that's a unique offer that nobody else has, which gives us, for the right assets, an edge in the market for sure. Okay, thank you, Helena. Yes.

Speaker 7

Adam Chapton from Green Street. Just one for me. On the Flex, on one of the Flex sides, you broke out rent freeze, I think, for the first time. I think it was bundled together with other, previously. And it looks like, I guess, sort of three, four months on a on a three year deal.

Speaker 7

Just wondering if that's is that consistent across the portfolio? Is it becoming a market convention? How do you expect it to evolve in the future?

Speaker 1

Simon, do you want to talk about how we're the package of deals that we're typically doing and how you're seeing the evolution of rent freeze?

Speaker 8

Yes. Morning, Adam. So we typically grant a month's rent free for each year of income that we're receiving. That's mainly to do with just an incentive. Clearly, the fit out is already there.

Speaker 8

So there's nothing that is going into the fit out. Typically in the market, that's what you'd expect. It's nothing unusual. And that is also being supported by the rental growth that we've seen. So the ERV uplifts, but also that rent average rent over the last year was $2.00 £6 per square foot, which is pretty much in line with the long term average of $2.00 £7 So this year, we expect to see more of the same, but actually more of our void coming through this year is in the West End.

Speaker 8

And I think on Slide 61, Rich, there's a pie which shows where our rental tone is. And you'll see in the West End, the average rent is £234 per square foot. There is Mayfair and St. James is there where you might be surprised to see the average rent is £235 less than Soho. Reason being that that's been in slightly secondary assets.

Speaker 8

We're now delivering E And D, which is 170 Pick And Dilley. That is going to be a fully managed whole building. We are anticipating rents of circa £300 per square foot there. So you should expect Macpher And St. James's to tick up.

Speaker 8

And I think that average will increase over this year because of that West End pipeline.

Speaker 1

As those rents go up, what happens to that rent free package?

Speaker 8

It remains the same, albeit obviously the value of that rent free naturally has gone

Speaker 1

up proportionally.

Speaker 7

On renewals, obviously, you're getting impressive retention rates. Any rent free on renewals? Or was that

Speaker 8

Typically not. So on the renewals, we have a 5% typically 5% annual uplift on our rents and we're renewing at or above those levels and typically without rent free and importantly without broker

Speaker 1

Yes, that's a huge leakage if we can save broker free. What's the typical rate we're paying to brokers on a new letting?

Speaker 8

On new letting is 10 of the gross rent of an annual gross rent blended.

Speaker 1

Yes. So trying to disintermediate that is that's an opportunity as well for us. Sorry, Ella.

Operator

I just want to add to that, Adam. One of the things, I mean, you've picked up on is we're evolving our disclosure. We'll keep evolving our disclosure. We'll keep doing that to give you more information. But actually, one of the chart Rich you had up earlier, we didn't get Sam didn't get to touch on all of it, which is the chart about where the demand is coming from.

Operator

And this is really important. We've done the analysis now looking across our customer base. And the chart bottom right reaffirms this message that the vast majority of demand we're seeing is not from SMEs. Never has been for us. It's been typically from bigger corporates wanting this to be a small part of their overall footprint.

Operator

And that's really important. It's a really important message. It doesn't mean they will be insensitive to how economic conditions evolve, but it does mean that this is proper grown up businesses actively making the decision to go into spaces that they could fit out themselves, they could manage themselves, but frankly, they don't want to because they'd rather focus on their core business and let us do it for them instead. And I think that is a trend that we will see more and more of. We'll see more deals with the likes of NeXT, Standard Chartered, etcetera, going forward from it.

Operator

It's a really important differentiator, not just about what we're doing, but it's about how the market is evolving. And over the last two years, the average flex deal size in London has gone up by 45%. So, some players are having to reduce their units to get them away. Actually, there's more demand coming through for big units. We're witnessing all we do next is 12,000 square foot, 11,005 square foot.

Speaker 1

Thanks, Adam. Yes. Thank you. We've probably got time for one more. Yes, Mark.

Speaker 9

Thank you. Marc Muzi, Bank of America. Just a quick follow-up on your and just to make sure I understand correctly, your valuation surplus, $342,000,000. Is that taking on board the fact that you're developing at six plus yield on cost and the market yield is probably sub-five? Is that reflecting that?

Speaker 9

Or is this part of the 25 bps yield compression you're adding on?

Speaker 1

No, the $342,000,000 assumes no ongoing market compression from here. It assumes current yields, but it is the transition of the value of the asset using 10% uplift on rents, on prime rents, and costs to deliver based on the existing balance sheet cost of the asset, and then deducting clearly the value from everything. So were we to get yield compression from where we sit today, can we just go to the HQ summary slide? We get yield compression on say Minerva should come up in a second, which is in the fives, cap rate, No, the HQ3. Anyway, if we were to get compression from that level, the $3.40 goes up.

Speaker 1

If we were to do better than 10% rental growth, thank you Rich, bottom left, if we were to do better than the 10% rental growth as I described, the 111 starts to really motor. As you can see, 10% gets us 133 so the gearing into that profitability is pretty high.

Speaker 9

Fair enough. And on your GBP $15.20 target range medium term, just making sure medium terms mean four, five years for you. And what could be the reason to beat that 20p per share?

Operator

So the I think I said in my script, yes, we're talking about medium term four to five years. What are the risks associated with it? As I say, it's not regulatory.

Speaker 9

Upside risk, go ahead.

Operator

It's really the things that would provide upside here is we recycle more, actually. I think that we will likely be selling assets I don't need this on when I'm looking at this all out. We'll likely be selling assets where the yield is lower than our cost of debt. And at the moment, we're assuming in this forward look, billion of sales. I think in reality, over the medium term of four to five year horizon, it's going to be more than that.

Operator

So I think that is something that will come through. But also this is static. This is not looking at any further acquisitions. And particularly, we deliver, which we still want to, this ambition of the million square foot, the extra income you get from your fully managed will certainly get you nearer, I think, to the 20 than the 15. And what clearly we will do, as we always do with our disclosures, as we go forward to get nearer to that four or five years out, we'll get more precise in terms of what the EPS outlook is that we have.

Speaker 9

So to be extremely more precise here, rental growth, what sort of rental growth are you talking about? Are you talking about the 10% rental growth you assume on your

Operator

Yes, 10% cumulative. And you can see it's this very small little bar just there.

Speaker 1

But actually the rental growth consequences are much bigger in valuations than they are in the EPS line, which is often why we sell.

Speaker 9

Absolutely. And the final one is on capitalized interest. Yes. What sort of quantum should we assume here?

Operator

Mean, year, capitalized interest around £30,000,000 and in convention with accounting standards, I think this year the year ahead is going to be a little bit higher than it will tail off. I mean, I think this year so the year just ended and the year ahead, I think we'll have EPS growth next year compared to this year. But I think we're still in that peak development phase. So perhaps thinking about it the other way around. I look two years forward from now, our LTV is going to be pretty similar.

Operator

Our net debt to EBITDA multiple will half. So the next two years, there's a lot of execution for us to deliver, which we're going to be all on top of, but it will really start to move, not just the balance sheet side of the business, more relevantly the P and L and income side of the business, and that capitalized interest will start to fall down, unless the team buy more HQ developments that we can then start to feed into DARPA.

Speaker 1

Thank you. Okay, everybody. Well, listen, there's clearly lots of growth for us to grab. I hope that was helpful. We're looking forward to rents going up, we're looking forward to values going up, we're looking forward to lots of development surpluses.

Speaker 1

Look out for some sales from us as this year progresses. And as I say, we put ourselves into an amazing position and it is now for us to grab it, which we fully intend to do with some of your help, should add. Thank you very much everybody for coming. And if you have any further questions, we're always around to help answer them. Thank you.

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Key Takeaways

  • Strong execution of growth strategy: committed £350m of rights issue capital, delivered record £38m of investment lettings at a 10.6% premium to ERVs and upgraded rental value guidance.
  • Robust market fundamentals with a 74% supply deficit in Central London Grade A offices, prime rents up 7.6%, active demand 35% above last year and vacancy at target levels.
  • Acquisitions and developments on track, having bought four West End assets at a 53% discount to replacement cost, with HQ and flex projects set to generate ~£340m of base development surpluses (up to £580m of upside) and £350m–£1bn of sales over the medium term.
  • Rapid flex expansion to 600k sq ft (up 16%) with annualized NOI of £19m (up 93%), a 91% retention rate and 40% service margin, targeting 1 million sq ft and £90m NOI to drive significant value growth.
  • Financial strength maintained: EPRA NAV +4.4% to 494p, EPRA LTV ~31%, rent roll +15% to £123m, and a medium-term outlook of >10% return on equity, >3× EPS growth and sustained dividend progression.
AI Generated. May Contain Errors.
Earnings Conference Call
Great Portland Estates H2 2025
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