Great Portland Estates Plc

Thank you very much for joining us for our interim results presentation. It's great to see you all and we really appreciate the time that you give us. So thank you for coming along. Now, first of all, I'm going to start by summarizing some of the key messages that we'll be giving you over the next 30 or so minutes. And essentially, we have carried on where we left off at the year end, successfully executing on our growth strategy. You'll hear about our strong operational performance so far this year, delivering some excellent leasing well ahead of target and leading us to reiterate our rental value growth guidance We've made further accretive acquisitions and significant sales ahead of book value, and our developers have created more premium spaces timed to deliver into a market that is starved of such quality, meaning that we are well set to deliver both strong income and value growth. So to help us tell this story, we have a full agenda as ever for you this morning. I'll start with a reminder of how we're delivering on our very clear strategy before giving you an update on our market opportunity. I'll then run through our successful six months of acquisitions, sales, and developments before Nick looks at our exciting fully managed growth and our results. And I'll then wrap up with our outlook before opening the floor to you for Q&A. As ever, we have the full executive committee team here to help answer any questions you have. Plus, we also have our newly promoted Rebecca Bradley as Customer Experience Director and Simon Rowley as Flex WorkSpaces Director. And congratulations to them on their appointment. But before we get into all of that, first of all, can I just say, as this is probably Nick's last session before Pastors New, I just wanted to pay tribute to him, to thank him for his exemplary leadership across multiple facets of life at GPE. He's been a great partner to me and I know to many of you and to all of our colleagues at GPE over the past 14 years. And I know you will join me in wishing him well. Nick, thank you. So let's start then with our strategy, and to do so, I want to remind you of our investment case, essentially the six fundamental pillars upon which our strategy is built, and you can see them here. And in approaching each, it's always been about doing what we said we would do. First, prime central London. It's the largest city economy in Europe, it's outperforming the UK overall, and it has decent forecast jobs growth. And so we have been and will continue to be focused on 100% prime locations only. Second, we create and manage premium luxury offices across our HQ and our flex products. It's where the richest seam of customer demand exists and our strong leasing and rents rising supports our position. with space under offer today materially ahead of ERV, and as I'll show you later, even after substantial growth, they're still affordable, especially given the price inelastic nature of many premium customers. Third, contracyclical capital allocation. You'll recognize the chart at the top, raising capital, the green circles, and buying when markets are cheap as was the case in 2009 through 13 and again last year, developing into the inevitable supply crunch before selling completed business plans as markets recover and then returning excess capital to shareholders shown by the pink circles. We've bought well, 390 million, including capex, since our rights issue last year. We're developing some of the best space in town, covering 36% of our book, and we have rotated towards sales as we said we would, more than 290 million sold so far this year, 1.7% above book value, and including One Newman Street, the largest single asset sale in the West End year to date. Fourth, driving innovation, leading the market in the creation of sustainable spaces and in our customer experience offer. We've delivered a world first in our circular economy activities at 30 Duke Street, and our award-winning CX team is helping grow our unique flex offer towards our 1 million square foot target. And all of this activity always with a strong balance sheet and within an LTV range of 10 to 35%. So far this year, we've delivered a record financing, maintaining high liquidity and have kept LTV low at 28%. And sixth, strong EPS and NTA growth, and we're on target to deliver a 10% plus return on equity over the medium term with more than three times earnings per share growth. So then with a strong strategy and supportive fundamentals, we've had another successful period of delivering on our promises. So let's then have a quick look at our half-year results and our outperformance despite the challenging UK economic and political backdrop. Now, as you can see on the chart on the right, our excellent leasing continues. 37.6 million in six months, the same as in the whole of last year, 7% ahead of ERV, leasing faster than underwrite, and with strong appeal to AI-led customers, now up to 23% of fully managed spaces. And we have a further 10.3 million under offer today, a very strong 31% ahead of ERV. Our rental values were up 2.6%, with prime offices up 3.3%, bringing the total to 6.8% over the last 12 months. Our vacancy rate remains within our target range at 6.9%. Our customer retention rate remains high at 76%, well ahead of target. And we've made an attractive acquisition at a discount and sold at a premium. More on these deals later. Now, all of this activity has helped us deliver healthy financial results for the period. Pro forma rent roll up 29%, with our average office rents up almost 10% over the last 12 months. Our valuation was up 1.5% over the first half, with developments up 6.1%. delivering NTA growth of 2% and earnings growth of almost 85%, still with low LTV at 28%. And as we think about what next, we have created a fantastic platform for further growth. Income growth of some 64% by FY27, or more than 140% in the medium term, led by Flex. Big development surpluses of circa 300 million to come, with potential for upside from there. We'll buy more, we'll sell more, and all supported by a London economy that continues to deliver GDP growth ahead of the UK overall. So, significant growth to come. Now, talking of London, let's have a look at our markets. And in short, we expect supportive leasing conditions to continue with best rents to rise further despite the challenging macro backdrop. Now, why do we think this? In short, because supply and demand conditions in London are both supportive and much stronger than the UK picture overall. First, demand for space is strong, driven by jobs growth. As you can see in the blue bars on the right, today there are 500,000 more jobs in London than there were at the time of the Brexit vote in 2016. Oxford Economics expect the number to continue rising by some 200,000 between now and 2030, equating to roughly 20 million square feet of new demand. Second, take up remains robust with 5.1 million square feet signed in half one ahead of the 10 year average. And third, active demand, that's companies looking for space right now, is still way ahead of the long run average. dominated by banking, finance and digital sectors, with the latter responsible for some 40% of UK GDP growth, with AI-led businesses creating jobs in London today. And history shows us that two-thirds of them will only lease prime space. Plus, contrary to many commentators' perception, way more companies today are looking to expand their space take than contract it, 55% versus 14%. Plus, these companies are going to struggle to find that space. They will run into a supply drought that is extreme and shows no signs of abating any time soon. Bottom left, we've updated our forecasts that deliveries shown by the purple bars are very low, and we know that new starts are at lows not seen since 2010. And we think that commentators continue to overestimate deliveries, and CBRE's forecasts are shown here by the pink diamonds. Now either way, if you divide the long-run average take-up of 4.6 million feet per annum into the amount being delivered, we think we will need to build 84% more every year than is currently planned to meet this demand. That's as high a shortfall as we can remember. And it's not as though customers have much choice from existing space. The current Grade A vacancy rate in the core West End is only 0.3%. And so as a result, we think further rental growth is coming, focused on prime spaces and continuing the theme of the chart bottom right, highlighting the very clear bifurcation between the best and the rest that we have seen since 2023. And remember, overall, rents in London remain affordable. In both the city and the West End, they are still only 5% to 8% of the average London business's salary cost. So conditions then that most definitely play to our strengths with our 100% core prime locations, 94% near an Elizabeth Line station. So then, turning to our investment markets, and we think that there is good evidence to back up our view of six months ago that they are now recovering, albeit slowly. Capital values are rising, up 6% in nominal terms since our capital raise last year, shown on the right, driven by rental growth and tight investment supply. Prime yields, shown bottom left, are now either stable or mildly falling. Investment volumes are also up by 63% in H125 compared to last year, and many more larger lots are now trading, as you can see bottom right in the green bars, with 19 deals of over 100 million already traded so far in 25, up from 11 last year, with a further eight currently under offer. Plus, institutions are buying again, accounting for only two of the larger deals done last year, but 10 so far this year, or more than 50%. And with equity demand up since May to 23.5 billion, the multiple of demand to supply at 4.8 times remains steady and relatively supportive to pricing. And so we'll continue using these improving conditions to take more selective acquisitions and sales, crystallizing surpluses and more on this in a minute. So to sum up then with our market outlook, which supports strongly our strategy. For rents, whilst business confidence has weakened since May, healthy demand and a dearth of prime supply has helped us deliver rental value growth in our forecast range that we set out at our finals, as highlighted at the bottom, and so we maintain our expectations for this year overall of growth between 4% and 7%, driven by prime offices up 6% to 10%. Looking at yields, whilst the political backdrop has probably weakened since May, we think improvements in investor confidence and likely lower interest rates could push prime yields in further, especially where rental growth is a real prospect. So given that, let's turn then and look at our investing and developing activities so far this year. And you'll remember this slide from May, and it shows our successful deployment of the capital that we raised last year. We've added to the four deals we told you about back then with the purchase of the gable shown on the far right. So that's five opportunities acquired since May 24, all in line with our disciplined criteria, all in the West End, for a total of £180 million or £390 including capex, and at only £770 per foot and a whopping 57% discount to replacement cost. Three offer fully managed conversions, two offer major HQ repositioning, and each with attractive stabilized yields and ungeared IRRs. From here, more acquisitions. We have two deals in negotiation or under offer, all in the West End. And more sales to build on the 290 million completed so far this year, with a further 150 to 200 million in the near term and 650 to 700 million identified for the medium term. So plenty of opportunity with more to come. So turning then to look at some of the detail and starting with the acquisition of the gable shown in yellow on the map. And it sits in an area of London we know inside out and next to the courtyard, which we bought last year. We paid 18 million or only £409 a foot, some 77% beneath replacement cost and with a current running yield of 6.4% until July 26. We have two possible business plans here. First, a conversion to flex. We're in design and talking to the planners and the economics are attractive with a near 7% yield, but this does rely on vacant possession. And if the government-based customer renews their lease, we'll maintain our low risk running yield of at least 6.4% and probably hold for a future flex conversion. Now, since we saw you last, we've also sold our completed inlet development at 1 Newman Street to a UK institution shown at the bottom of the map. we received 250 million, priced off a 4.48% yield, more than 2,000 pounds a foot, and 1.8% ahead of book value. So a good sale of this completed business plan and showing both that there is liquidity at scale and strong prices for the best assets, and reaffirming our long held commitment to actively recycling capital into the next opportunities for us to drive growth. So talking of growth, let's have a look then at our development program and taken together, we now have 11 schemes with three onsite HQ projects already 71% pre-let and three further flex schemes onsite. Across our four pipeline HQ schemes, we achieved two new planning consents in the past few months. And with the gable purchased, we now have more than 1 million square feet in the program, covering 36% of our book by area and delivering into the deep supply shortage that I referenced earlier. So looking then at our onsite HQ schemes, progress has indeed been good. At 2AS, we're on time to finish in Q1 next year, although the surplus to come has reduced as the valuer has adjusted the cap rate up by 15 basis points. At 30 Duke Street, we signed our pre-let with CD&R, 6.5% ahead of ERV and nearly 12% ahead of the underwrite. As a result, we've captured some significant surplus, but there's more to come as we deliver our expected profit on cost of almost 40%. At Minerva, shown bottom left, we are on time to finish in Q1 27, and although costs are up since May, reducing the forecast profit to circa 15%, we are under offer on about 40% of the space at a substantial premium to ERV, which would drive our returns materially higher. Taken together, total area is up 66%, ERV is 174% higher, 99% of the capex to come is fixed, and we have 65 million of surplus to come of current rents and current yields. They are all prime, with exemplary sustainability credentials, and have strong pre-letting potential for the remainder, with therefore healthy upside to capture. For the next phase of our HQ programme, we have four fantastic schemes, each timed to deliver into the supply drought, with three in the West End next to the Elizabeth Line and one next to London Bridge Station. At Soho Square, we're starting imminently and strip out has begun. At Whittington, we've just received consent for our rooftop pavilion and we're on site with preparatory works for this major refurbishment. We've also finally achieved planning at St. Thomas Yard on the South Bank for an exceptional 184,000 square foot part refurb, part new build project that will be significantly more profitable than our original tower proposals and will be starting here in Q3 next year. And finally, back in the West End, our Chapel Place project is in design with planning discussions ongoing for a submission next summer. So big area and ERV gains and targeting a healthy minimum profit level, all next to major transport hubs and all with strong upside potential. Now, of course, we also have multiple growth opportunities across the rest of our portfolio too. You'll remember this portfolio stack. I've talked about our HQ developments at the top and in the middle sits our active portfolio management assets representing 50% of the book and in many ways the engine room of the business. They are full of opportunity for us to grow rents and values, for example, on-floor refurbishments and their subsequent leasing to generate some £47 million of income, capturing reversions of almost £14 million, restructuring and re-gearing our interests and prepping assets for major repositioning. And this presents us with real upside. Their valuation is undemanding at just over £1,000 a foot, but with limited capex needed. And all of them are in prime locations. And of course, they include our flex assets, covering some 29% of our total book, and where the growth potential is significant, as you'll hear from Nick in a minute. And shown in yellow is the stabilized proportion of the portfolio where we will rotate out of completed business plans at high capital values per foot, potentially releasing more than 800 million of capital to employ for much higher returns towards the top of the stack. So lots then to do for us as we execute our plan to deliver the substantial growth available to us. On which topic, and probably for the last time, over to Nick to dig into our flex options.

Thank you, Toby. Good morning, everyone. I certainly didn't need these when I started 14 years ago. Nor was I talking about our unique and well-established fully managed growth strategy, where we are successfully delivering premium hassle-free spaces for our customers. Our leasing volumes continue to grow with more than a deal a week over the last 12 months, representing nearly 90% of all our sub 5,000 square foot office lettings. Rents are growing strongly too, with these deals securing rents of £37 million and, as shown in purple, regularly achieving more than £250 a foot. As you can see top right, this is driving outsized performance well ahead of our targets. We're generating strong absolute returns, with an average yield on cost of 6.5% and service margin of 35%. And relative to ready to fit, we delivered a 103% rent beat and a 61% 10-year cash flow beat. And we've secured good lease duration too at just under three years. Our fully managed spaces are today generating 50 million pounds of annualized rent. And we're currently managing 25 million of OPEX and other costs across the categories shown in the green bar. So with a gross to net of 50%, our annualised NOI is £25 million or £107 a foot. Once we factor in capex, along with fully managed specific corporate overheads, this results in an annualised net cash return averaging £80 a foot, or 40% higher than the ready-to-fit net rent. So much higher net cash returns than on a traditional basis, and the customer base dominated by corporates, not SMEs. Our retention rate is strong at 75%, well ahead of our 50% underwrite, as our award-winning customer experience team delivers outstanding customer satisfaction. The most common driver for customer non-renewal is needing more space than we can currently provide, as we experienced with our largest departure to date, a fast-growing unicorn status AI business who we'd already moved twice within our portfolio. Pleasingly, we were able to re-let their space within a month at a higher passing rent to Vanta, another high-growth company with AI-led businesses now representing 23% of our fully managed customers. And our recently completed schemes are leasing quickly too. In the heart of Soho, Wardour Street is 100% let within two months of launch, including two pre-let floors. We've secured average rents per foot of £279, with more than a quarter of the space let above £300, together driving a valuation uplift of 10% in the half. Our customers include those we've relocated from adjacent GPE fully managed space, an occupier of a GPE developed HQ building on Broadwick Street, as well as a new customer who decided to double their space take within a month of moving in. And over at Piccadilly, which launched last month, 35% of the space is already let or under offer at an average rent of 296 a foot, although we're breaking through 400 pounds on a smaller space. So with an 11% beat to ERV and healthy interest in the balance of the building, the prospects look strong. So having more than tripled NOI over the last two years and our leasing velocity ahead of target, there's plenty more growth to come from today's £25 million. We'll generate 7 million of additional NOI as we finish leasing up the recent completions. Our three onsite schemes, all in the West End, will deliver a further 12 million, with our pipeline schemes expected to add another 15 million, taking our fully managed NOI to 59 million, so an organic growth uplift of 2.4 times. And as we execute more acquisitions, total NOI would increase to around £90 million if we grow Flex to 1 million square feet. And with more than £19 million of additional service profit, shown in blue, we'll be creating additional value of more than £200 million or more than £200 per foot. So lots more income and value growth to come on top of the strong outperformance we're already delivering with fully managed ERV growth and valuation growth of 11% over the last 12 months. Now a few comments on our overall performance in the half year. we delivered like-for-like value growth of 1.5%, as the best continues to outperform, and EPRA NTA rose 2% to 504 pence per share. As expected, and in line with consensus, EPRA EPS increased 70% to 3.9 pence, and we're paying an interim dividend of 2.9 pence. Our consistent financial strength saw EPRA LTV falling to 28.2% and available liquidity rising to more than £450 million as we transitioned to a net seller and secured our largest ever bank facility. Overall, we generated positive TAR of 3% and 7.5% respectively over the last 6 and 12 months, delivering prime spaces against a backdrop of ERV growth, with more to come as we continue to execute our growth strategy. Our opportunity-rich £3.1 billion portfolio is 83% in offices, where we experienced the strongest value growth of 1.8% and ERV growth of 2.7%, with retail ERVs up 1.9% in the half-year and fully managed rents up 3.5%. And with an overall valuation uplift of 1.5%, developments delivered the strongest performance, up 6.1%, with 30 million of surpluses captured in the half-year valuation. Yields were broadly stable, with our portfolio equivalent yield today at 5.5%, and our reversionary yield at 6.7%, higher still at 8.7% 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. In particular, our West End properties, representing nearly three quarters of the portfolio, again outperformed with capital growth of 2.9%. And as we continue to allocate capital to drive value growth, our almost 700 million pound CapEx program is predominantly in the West End, combining 290 million to complete our six onsite schemes, shown in black, with approximately 400 million for pipeline schemes in gray. You'll find the usual scheme by scheme detail in the appendices. With a total GDV of £1.8 billion, we'll deliver further surpluses of more than £300 million, based on conservative 10% cumulative rental growth. And you can see by the solid line, more than £125 million should come through within the next 18 months, based on profit release at Scheme PC, although our pre-letting activities typically accelerate these. Plus, there's serious upside potential with further rental growth and some mild prime yield compression taking the surpluses to more than £500 million or 130 pence per share. On the right, our investing and leasing activities will clearly change the portfolio composition, with stabilised properties, shown in yellow, growing from 19% to 55%, all else equal. However, our recycling activities will evolve the portfolio mix further, with prospective sales of around 800 million in the next few years, meaning active portfolio management properties, shown in blue, will again dominate, with Flex also representing around 40% of the office portfolio. In reality, our sales will likely be higher still, given our disciplined capital management, as they were in the last cycle, with more than 3 billion of disposals. Plus, I imagine there'll be some acquisitions too, to replenish the GPE development hopper. Now, we'll also be driving more income growth. Like-for-like rental income was up 5% over the last 12 months, whilst rent roll was up almost 30%, standing at £127 million today following the sale of Newman Street. Over the next 18 months, this builds by more than 80 million, or 64%, and rises to around 30 million in the medium term, an uplift of 142%, including the market rental growth we expect to capture. Of course, some of this uplift will be tempered through sales of stabilised properties, but there's still lots of growth to go for, and we reiterate our guidance for a threefold increase in EPRA EPS over the medium term. Nearer term, we expect EPRA EPS to roughly double to around 10 pence by FY27 as we lease up our on-site development and refurb programme with more growth to come as we deliver our 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 20 pence in around four years time. As a result, we expect a stable dividend for FY26 with potential DPS growth thereafter. Whilst continuing to invest for growth, we've maintained our financial strength and capacity, including through proactive management of our debt profile. We've recently issued a new five-year, £525 million ESG-linked RCF, allowing us to redeem an early 27 maturing facility and repay a higher margin term loan. We've also extended the maturity of our smaller RCF and Moody's reaffirmed our BAA2 credit rating. When combined with our successful sales activity, LTV today is 28% as we continue to operate within our 10 to 35% through the cycle target range. Interest cover is strong at 15 times, with more than 450 million of liquidity, and we've extended our average debt maturity to almost six years, whilst our weighted average 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 we invest for growth in a rising market. But remember, a couple of big sales can really move the needle and give a significant incremental acquisition capacity. So wrapping up with a positive financial outlook. We expect to deliver further property value and NTA growth in the second half and beyond based on current market outlook and our active business plans. H2 EPS will likely be broadly in line with H1 and the capture of our organic rental growth opportunity will drive significant income and EPRA EPS growth moving forward. With an expected threefold EPS increase supporting our progressive dividend policy. Our through the cycle LTV range and disciplined capital management will be maintained. And through the capture of attractive prime rental growth and the delivery of our development-led growth strategy, we expect FY26 TAR to at least match FY25 as GPE moves towards delivering a 10% plus annual return on equity. And of course, shareholder returns would be higher still should the share price discount narrow. So I'll certainly be holding on to my GPE shares. And whilst I'm not leaving just yet, as Toby said, this will likely be my last set of GPE results. It's, of course, been a privilege to have been part of such an awesome GPE team. And I'm also proud of my contribution to both the strategic evolution of the business and its very special culture. But I'm also departing happy in the knowledge that GPE is in great shape with an exciting growth strategy to deliver for shareholders and customers alike. And as I look around the room with slightly blurry glasses, a massive thanks to all of you for your support, your challenge, and most importantly, your good humor and camaraderie. And given this is the 29th time that I've run through this presentation, I think it merits a very special thanks to both Stevie and to Rich and their teams for the uniquely special work that they put into putting this presentation together. Not only do I know that footnote 13 on page 99 will be accurate, I know that it will be accurate to at least one decimal place. So a massive thanks to you guys for leaving Toby and I to do the easy work of tapping the ball over the line. And as I hand back to you, Toby, I must say it's certainly been fun. You're a good man, a great colleague, and there are many things I will miss at GPE, including your exceptional taste in wine. Over to Toby for the wrap up.

But not, I should add, at this time of day. Thank you, Nick. Very good. Okay, so let's wrap up then with our outlook. And in short, it's all about delivering more growth as we continue doing what we said we would do. We think that our market opportunity is strengthening. London remains Europe's business capital, will outperform the UK economically, and will generate jobs growth, driving healthy demand for space that will collide with a supply drought, meaning rents are and will continue to rise, with the best buildings materially outperforming the rest. As a result, office values are rising, the investment market continues its recovery, with prime yield compression a real possibility. Meanwhile, we are focused fully on executing our growth strategy. First, capturing significant income growth of more than 140% in the medium term. Second, delivering development surpluses of between 180 and 520 million just from our existing program, some 130 pence per share. Third, more acquisitions. And fourth, significant further sales of more than 800 million and always operating only in prime central London, majority West End, 94% near an Elizabeth Line station. So all in all then, GPE is well set. Our operational infrastructure is in place and is delivering, and our deeply experienced team, bound together by our collegiate culture along with our strong balance sheet, will help us generate an attractive return on equity, even more so for shareholders, should our share price continue its re-rating to properly reflect the group's exciting prospects. So 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. Now, I know some of you will have questions, maybe even for Nick, last chance. We'll have some microphones running around the room. As I say, we've got the home team to help answer any of those questions that you may have. Who would like to raise something? Any hands? Yes, here at the front. Morning, Tom.