Great Portland Estates Plc

Good morning, everybody, and welcome to our results presentation. There are a few seats scattered around if you don't want to stand at the back. There are four in the front over here if you wanted. Thank you, everybody, for coming. Great to see so many of you, and we've got a lot to get through, so I'll crack straight on. But I first of all want to welcome Jane. Many of you will have met Jane. Jane took over as CFO about five weeks ago. She's had a cracking start, but these are her first results, so go easy on her. Okay, and what I'm going to do first of all is start by summarising the key messages we'll be giving you over the next 30 or so minutes. And this year has been all about us executing on our growth strategy. We'll tell you about our excellent operational performance, delivering record leasing well ahead of target, with acquisitions made at discounts and sales at premiums, and creating more prime spaces into a central London market starved of such quality. And as we think about the next few years, we'll explain how we have both strategic and financial flexibility should we see a macro-driven downturn. But absent that, we are well set to deliver both strong income and value growth across our portfolio, and we fully expect to deliver accretive total accounting returns. So as ever, we have a full agenda for you this morning to help tell this compelling story. I'm going to start with a reminder of our progress against our very clear strategy. Jane's then going to take you through the results and what to expect next. And I'll then address our market opportunity, look at capital allocation, and conclude with our outlook before opening the floor up to you. And as ever, we have the full senior team here to help answer questions. So let's start then with our growth strategy. And you will remember our key strategic themes shown here on the left. And we've made excellent progress against each throughout the year, doing exactly what we said we would do. First, prime central London. It remains the largest city economy in Europe and is growing faster than the UK overall. But to really benefit, you need to be in the centre, which is where 100% of our attention is focused, and we concentrate on the best only, where the outperformance against the rest is accelerating. Second, we create and manage premium HQ and flex spaces. Their quality has enabled us to deliver a record leasing year with deep demand for our space, signing up customers at rents well ahead of ERV. Our rents are still rising, and even after substantial growth, we argue that they remain affordable, especially given the price inelastic nature of many premium customers. Third, contracyclical capital allocation, never more important than in volatile conditions such as we have today, and delivering on the promises we made at the time of our rights issue. We've continued to buy well, almost 500 million, including CapEx, since our rights issue, at a significant 60% discount to replacement cost. we've been developing some of the best spaces anywhere in central London, delivering into a market starved of such quality, and their valuations were up 22%. And we've sold out of completed business plans as we said we would, £490 million at a 2% premium to book value. Fourth, driving innovation, leading the market with world firsts in our circular economy activity and with our award-winning CX teams delivering exceptional experiences and an industry-leading net promoter score. And all of this activity always supported by a strong balance sheet and low leverage. Liquidity today is high and LTV is where we want it to be. As we well remember from the many macro crises we've navigated through over the years, having financial flexibility gives us the luxury of strategic options. However, the macro story unfolds, investing for growth and or returning excess capital to shareholders. Finally, strong EPS and NTA growth. We're delivering here too with both measures ahead of consensus and we've raised the dividend. Looking forward, we are on target to deliver three times EPS growth over the medium term and a 10% plus return on equity this financial year, along with a three-year annualised ROE well ahead of our cost of capital. So a strong strategy that is right for today's volatile world and a business delivering on its promises. Turning briefly then to our excellent operational performance, and as you can see on the chart, our leasing has been outstanding with a record 70.9 million let, 10.3% ahead of ERV, with the fourth quarter the strongest at a 15.8% beat. And we are maintaining last year's run rate into Q1 this year with no discernible impact from the current hostilities in the Middle East. Rent roll was up 46%. Rental values were up 5.8%, led by prime offices up more than 7%. Vacancy was better than forecast, as was our fully managed customer retention at 64%, where AI-led customers now account for some 27%. We made attractive acquisitions at a 70% discount to replacement cost, added only £590 a foot. whilst our 490 million of premium sales closed at more than twice that, at over £1,200 a foot. And we made strong progress against our development and our refurbishment activities, finishing 380,000 feet on time and on budget. From here, we've given ourselves a great platform for further growth. We will be crystallising sales of more than 1.2 billion of stabilised assets, developing to generate organic surpluses of between $260 million and $430 million, and generating significant organic income growth up 95%, with a 2.1 times increase in our fully managed net operating income. All of which will, of course, combine to deliver significant NTA and earnings growth from here. More on all of these opportunities in a minute, but first over to Jane to look at our financial results.

Thank you, Toby. Morning, everybody. Thank you for joining us today. I'm pleased to be presenting my first set of results for GPE. I'm very much looking forward to taking you through our numbers and what has been a great year for the business. So I've been with the business now for a couple of months and I've received a fantastic GP welcome. A great business with great people and an outstanding product. What has particularly stood out to me over this period is the discipline with which the strategy has been executed and the consistency of performance driving both earnings and value, supported by the quality of our portfolio. We are focused on long-term returns, but also have the strategic optionality Toby referenced earlier, which emphasises the resilience of our business. So turning first to our financial results, these are delivering upon our growth strategy of driving both income and value. Our earnings per share is up by 63% to 8.5 pence ahead of consensus. This, in part, is as a result of our record leasing year and growing our fully managed space, including the leasing of 100% of Wardour Street within two months of completion, as well as the full-year benefit from Alfred Place and 6 St Andrew Street. Our dividend was 8.2 pence per share, an increase of 4%, which is a reflection of the confidence in our earnings growth, and this is fully covered. Moving on to our value growth, we saw a like-for-like valuation increase on our portfolio of 4.3% as our assets continue to outperform the wider office market. Our focus on high-quality buildings continues to support the demand for well-located, high-specification office space in central London. All this hard work has increased our EPRA NTA to £524 per share, an increase of 6.1%, which is also ahead of consensus. We have maintained our financial strength, and as we set out last year, we have transitioned to a net seller with £490 million worth of sales, which included one Newman Street and Wells & More. This has contributed to the reduction in our LTV from 30.8% to 28.6%. Liquidity increased to £412 million, an improvement of £36 million, providing good headroom across our facilities. With strong ERV growth of 5.8% in the year, we continue to make progress towards our objective of delivering a return on equity in excess of 10%, achieving 7.9% this year. If we turn to our property valuation in more detail, you can see from the table on the left that overall we have seen both valuation and ERV growth of 4.3% and 5.8% respectively. If we dig a little deeper, you will see that offices, which are 87% of our portfolio, have seen the highest valuation and ERV growth. Whilst our retail assets have not fared quite as well, this represents only 13% of the portfolio. The fully managed assets have seen valuation growth of 4.4%, whilst the stabilised portfolio grew by 3.6%, and the development saw strongest growth at 22.2%, with an £82 million development surplus captured within the valuation, which is not easy when construction costs are still rising. Today, our topped-up initial yield is 4.8%, and our true equivalent yield stands at 5.6%. On a reversionary basis, this rises to 7%, but as you can see, much higher at 9.8% on a share price implied basis. As you'll hear many times today, it's the best versus the rest. 73% of our portfolio is at an EPC of A or B, which saw valuation growth of 6.4%. However, the assets that are not in the 73% are buildings which are being repositioned and they will ultimately have an EPC of A or B and their value will realign accordingly. In addition, 73% of the portfolio has a capital value in excess of £1,000 per square foot, and it's these assets that have also seen the highest increase in valuation, at 5.9%. And the West End continues to outperform the rest of London. The 66% of our portfolio here saw a valuation increase of 6%. All of this demonstrates that we have a portfolio positioned for growth, which, as you can see, is reflected in our impressive organic rent roll growth of 46% over the last 12 months. The rent roll now stands at £153 million. Absent sales, we expect this to continue to grow by around £42 million over the next 12 months. with the leasing of vacancy and capturing of reversion adding around £16 million, and then our development and refurbishment programme delivering a further £26 million. Looking further ahead, with the completion of our on-site developments, including the Delft and Whittington house, and 10% rental growth, our potential rent roll would almost double from where it is today to £299 million. But as you know, we are also recyclers of capital. And once our business plans are complete, we are often keen to move them on. Therefore, assuming 1.2 billion of sales over the medium term, rent roll would reduce by approximately £60 million over the same time period. So what does this mean for our earnings? Ahead of market expectations, our earnings per share have grown by 63% from 5.2 to 8.5 pence. We expect further growth over the next 12 months, targeting an EPRA EPS of around 10 pence, an increase of 20%. Beyond this, whilst the journey may not be linear, the growth in rent shown below shows that we are well on our way to tripling our earnings from April 2025. And as you can see from the purple bar, Fully Managed is set to become a major contributor to rent roll. And it's this part of the portfolio that continues to go from strength to strength. Looking at the chart, you can see we have grown our net operating income over three times in the last two years, from £9 million to £28 million. This is ahead of our target timeframe due to the excellent work of our team to complete refurbishments and lettings in short order. Our recent completions, including 170 Piccadilly and Wells Street, will deliver a further £6 million. Beyond this, we're on site with five fantastic schemes, including the Howlett and the Courtyard, and these will grow our NOI by £16 million, with a further pipeline of six refurbishments, including 175 Piccadilly and the completion of Kent House, providing a further £8 million of NOI. This organic growth over the medium term will more than double our NOI to £58 million. The service profit on this growth is also generating additional value on the portfolio of around £150 million as the space is completed and let. This remains a fantastic organic growth opportunity for the business. Our ambition is to continue to grow this product, and we are targeting a 100 million NOI post-future acquisitions of around 375,000 square feet of space. And indeed, as you can see from the blue circles, that fully managed is becoming a much larger contributor to our P&L, rising from just 8% of gross profit two years ago to 28% today, and we expect this to be more than 40% in the future. We also continue to drive value growth from our developments. We have a £590 million CapEx programme with a gross development value of £1.6 billion, mainly in the West End. Highlighting the dark green bars, we are currently on site with six schemes at various stages of completion, with a further £223 million of CapEx to come. The light green bars show our pipeline of a further three schemes, which have a capex of £367 million. If you assume 10% rental growth, we expect to deliver surpluses on these schemes of £260 million. There is also the potential for further growth from this programme. For example, if we see further rental growth over the next few years, 20% growth would equal a surplus of £330 million. And illustratively, if yields were to compress by 25 basis points, the surplus would increase to £427 million. Our growth is underpinned by our financial strength. Our team have been busy putting in a new £525 million ESG-linked RCF and extending our existing £150 million RCF with our partner banks. These facilities give us liquidity certainty and no refinancing needs until October 2028, particularly relevant during these volatile times. Moody's reaffirmed our BAA2 investment grade rating and we have significant headroom against our covenants. Looking at the top right, our robust debt metrics highlight the strong position we are in with a low LTV at 28.6% and available liquidity of 412 million. And this means we can be agile in an ever-changing market. Our weighted average debt maturity has increased to 5.4 years and our weighted average interest rate has reduced to 4.3%. Altogether, this puts us in a great position as we move forward through 2026 and beyond. This chart is an illustrative pro forma of our loan to value through the cycle of our existing and pipeline activities. Our on-site capex, near-term sales of approximately 200 million and development surpluses show that LTV would fall to 28.1% in the next 12 months. Whilst the further pipeline capex, development surpluses and rental growth push the loan to value up to 32.5%, we would expect to realise sales of a further £1 billion over the medium term. This reduces our LTV and gives us flexibility and options around further acquisitions and or the return of excess capital to our shareholders, as we have done previously. Bringing all of these components together, as we look forward, we are excited about the opportunities it presents. We expect to deliver a further 20% earnings growth in the next 12 months as we capture our 95% organic rent roll growth potential. As we grow, we will drive both operational and corporate efficiencies through economies of scale and technology. Our developments will deliver surpluses of £260 million. And as we expect to remain net sellers of assets, we will crystallise these surpluses with anticipated sales in excess of £1.2 billion over the next few years. Supporting this will be our disciplined approach to capital and liquidity management. We have a flexible debt book with the ability to support future growth and we will maintain our 10% to 35% LTV range through the cycle. As we capture the prime rental growth opportunity and complete our development pipeline, we are on track to deliver an above 10% return on equity and maintain our progressive dividend policy. So in summary, this is a business well-placed to continue with its growth strategy, despite a backdrop of macroeconomic uncertainty. And I'm very much looking forward to being a part of it in the years to come. And with that, I will hand you back to Toby to talk through the market.

Thank you, Jane. So let's turn then and look at our market opportunity. And the first point that I want to make is despite all the macro uncertainties around today, leasing conditions in our core markets remain strongly supportive. And we think that best rents are set to rise further. Let me tell you why. In short, it's because demand for space is materially outstripping supply. In fact, demand is at record levels today, perhaps driven by the expectation of further growth in office jobs, shown by the blue box on the right, expected to grow by a further 170,000 by 2030 and remarkably up 33% since Brexit in 2016. The green bars show how this jobs growth has been converted into increasing take-up, now well ahead of the 10-year average, as well as much stronger levels of active demand, shown on the right, up 13% in the last 12 months, and today it's circa 40% ahead of the long-run average, and more of these companies are looking to expand than contract, 47% versus 15%. And all this demand is colliding with a supply drought of new offices that remains acute. Bottom left, the bars show the history. And as has been clear to us for many years now, this situation is not going to change immediately. any time soon. Indeed, if you take the annual average speculative supply for the next four years, divided by the long-term average take-up of new space, we are some 53% short every year out to 2030. And remember, the vacancy rate of Grade A space in the core is already virtually zero. It's only 0.3% in the West End. So it's no surprise then that we think there's more rental growth to come, shown on the chart bottom right, with prime space to continue outperforming strongly, as it has done since the end of the pandemic in 21. And despite this growth, we think these rents remain affordable, as they still represent only a fraction of the average London business's salary bill, some 7% on average. So growth in prime absolutely playing to our strengths with our 100% core locations and 91% next to a Lizzy Line station. Turning then to look at the investment markets where the story is a mixed picture and a little less clear cut. Although we are seeing liquidity for prime assets despite macroeconomic volatility. Looking at the chart top right, you can see that overall, real capital values have been flatlining since our 24 capital raise, with the nominal up 6%. Our own assets have been faring rather better, up 8.1%, driven by our focus on the best locations and the rental growth I've just described. Meanwhile, yields in both the city and the West End, shown bottom left, are stable. although we would argue that this hides the widening bifurcation between on the one hand prime liquid assets, where there is some downward pressure, and poorly located ex-growth assets on the other that simply aren't selling and remain overvalued. Helpfully, there are signs of a recovery in investment volumes from 2024's lows, shown by the green bars, with 25% up 50% versus 24%. And as shown by the pink bars, the number of larger transactions was also up strongly last year by 118% for deals of 100 million or more. And we expect this momentum to continue as equity demand for London assets is up again, now standing at more than 25 billion. And this matters to us as we prepare some of our larger prime stabilised assets for sale. Plus, of course, with our healthy liquidity, we stand ready to take advantage of these volatile conditions to acquire future pipeline opportunities at discounts, as we have been over the last two years. So to sum up then with our market outlook, which strongly supports our strategy of focusing on the best assets and in prime locations only. For rents, whilst macro uncertainties have increased since our interims, affecting confidence and business investment, the combination of decent demand and the continued supply drought have enabled us to deliver office rental value growth at or above the range we set out in November, as shown by the middle column, bottom left. Now, these conditions also allow us to maintain our guidance of plus 4% to plus 7% for offices this year, still with a notable outperformance of prime versus secondary quality space. Looking at yields, heightened political risk and a less accommodating interest rate environment will continue to have a dampening effect on yield compression in the near term, but beyond that, it's clearly hard to read at present. That said, evidence of deals transacting right now supports our long-held view that the best, most liquid assets will continue to attract more downward yield pressure than the rest. So in this context, let's turn then and look at our capital allocation over the past year and consider what's next. Now, you'll remember this, our contracyclical capital allocation model. The blue line shows the long run of real office capital values in central London. The green bars are net acquisitions above the line, net disposals beneath. We raise capital, the green circles, to acquire discounted opportunities when markets are distressed, as was the case in 2009 through to 2013 and again in 2024. We then repositioned these assets into the inevitable supply crunch before selling completed HQ business plans as markets recover and returning excess capital to shareholders, shown by the pink circles. Last cycle, following more than 3 billion of realisations, we returned in excess of 600 million to shareholders, more than twice the capital that we raised from them. Now looking at the current cycle, as you can see on the right of the chart, we transitioned over this year from a net buyer to a net seller, shown by the green bar. We've been selling stabilised assets, benefiting from rising prime rents, shown by the blue dotted line. But we've also bought well, taking advantage of market weakness for non-prime buildings in prime locations, buying repositioning opportunities off the orange line at sizable discounts. So our model then is alive and well, and we are successfully exploiting the best versus rest bifurcation that we've talked about. What next? Well, as Jane highlighted earlier, we expect to be a net seller this year too, and let's turn and look at some of the detail, but I'm going to start with acquisitions. Six deals done since the rights issue in 24, all in the West End, for a total of £231 million, or only £756 a foot, and at an average discount to replacement cost of more than 60%. Including capex to deliver the business plans brings the total to just short of 500 million, and once completed, we can expect them to deliver stabilised yields of up to circa 7% and ungeared IRRs of up to 15%, and that's before any market yield compression. So plenty of opportunity for income and capital growth. Now, here you can see our Alfred Place cluster. I spoke about the Gable acquisition in November, adding to our pipeline, since which we bought South Crescent for £51 million, paying only £708 a foot or a 67% discount to replacement cost and giving us a running yield of 7.1%, with the offices let at only 67 a foot until August 29. The business plan has optionality. either to re-gear with the existing customer at expiry or undertake a full refurbishment to create a prime HQ building, adding area and radically repositioning the space to a much higher quality, only some 400 yards from the Elizabeth line, and of course hitting all of our target return metrics in the process. So attractive deals at decent discounts and with good upside to come. We've also had a good year delivering profitable disposals, crystallising completed business plans. Four deals for £516 million at a £1,200 a foot, more than twice the price of our acquisitions, and in aggregate at a 2% premium. I told you about Challenger House and Newman Street at the interims, since which we've sold Welsenmore in Fitzrovia on the left and 103 Regent Street on the right. In both cases, we dealt at or near record capital values and crystallising accretive, ungeared, whole-of-life IRRs. And as we finish business plans elsewhere in the portfolio, there's a lot more to come, circa 200 million near term and a further 1 billion plus in the medium term. Let's have a look now at our HQ development activities. And we have three schemes on site and have made good progress this year with their net valuations up 22%. At Duke Street St. James's, we're now 100% pre-let ahead of completion in the autumn, and all our performance numbers are good, with a 37% projected profit on cost and an ungeared IRR of more than 30%. Similarly, at the Delft in Southwark, progress has been strong, and we pre-let 40% to data analytics company Contexa in January. Our development yield is almost 8% and our profit on cost is 27%. Back in the West End at Whittington House, bottom left, we started this major refurbishment last month and already have leasing interest for what will be a wonderful building and a healthy development yield and profit here too. Taken together, we're generating a sizeable 152% ERV increase and a further circa 60 million of surplus to come, assuming 10% rental growth for the currently unlet space. They're all prime, with exemplary sustainability credentials and a pre-letting well giving us strong upside potential. Wrapping up then on our programme, here you can see our 11 major schemes, totalling some 700,000 square feet across 27% of the portfolio. They're all in prime locations, all best-in-class product, delivering into the deep supply shortage, meaning they have strong pre-letting and rental growth prospects. Now, finally, on our capital allocation, we've continued investing in our market-leading flex offer with record fully managed leasing. 40.9 million of lettings, 7.7% ahead of ERV and outperforming against all our main operating targets shown on the right. 6.7% yield on cost versus our 6% target. 64% customer retention versus our 50% target, and a 37% service margin nearly double our 20% hurdle. Plus, over the last 12 months, we've delivered three new buildings, taking our flex portfolio to more than 650,000 feet, and they are already 85% let or under offer, beating our underwrites. And of course, we have significant further growth to come. 136,000 square feet of new deliveries in the next 18 months, some of which are shown on the right, and generating gross rents of some 100 million over the next three years. And we'll be working hard to capture operational efficiencies. For instance, at an 8.5% yield, every £1 we save in OPEX translates to an effective valuation increase of £12. We also have a supportive market with broadening demand. Today, there are more corporates taking flex space, 47% up from 13% in 2020, and often taking larger spaces too. Demand for 6k square foot units or above has more than trebled since 2023. And as you know, our fully managed spaces are delivering a sizeable net income beat, more than 40% over the more traditional ready-to-fit product. So it's working well, and there's much more to come. So bringing it all together, this is a portfolio full of growth opportunity. Our HQ developments at the top of the stack are all prime, majority in the West End, and will deliver healthy prospective profits. Our active portfolio management assets, some 56% of the book, are the engine room of the business, with numerous angles for rent and value growth, for example through delivering refurbs or capturing our growing reversion. Their valuation remains undemanding at just over £1,100 a foot, with limited capex requirements, all in prime locations. And of course they include our flex assets, now around 32% of our total book, full of the growth potential that I've just described. Finally, shown in yellow, is the stabilised portion of the portfolio, where we will continue selling out of completed business plans at higher capital values per square foot. We're aiming to realise more than 1.2 billion over the next few years, and we will employ our usual discipline in deciding the most productive use for the proceeds, either back into the pipeline for income and value growth, or accretive acquisitions with IRRs well ahead of our cost of capital, or a return of capital to shareholders where it exceeds to our needs, or for that matter, a combination of all three. So lots to do as we execute our plan to deliver the substantial growth available to us. So wrapping up then with our outlook. In short, absent a macro-driven downturn, we have more growth to go for doing what we said we would do. It's clear we have a market full of opportunity. London remains Europe's business capital. It has jobs growth, which is creating healthy demand, colliding with a severe supply drought, meaning that rents are rising, particularly for the best spaces with a great customer experience. Whilst the investment market remains more mixed, again, the best is outperforming and prime yield compression remains a possibility, particularly for smaller lot sizes. Meanwhile, we remain fully focused on executing our growth strategy. First, significant further income growth. Second, sizable development surpluses of up to 100 pence per share. Third, a major sales program of more than 1.2 billion. And fourth, the proceeds from which will go to their most productive use, including a possible capital return of any excess. and always, of course, operating in 100% prime central London only, never more important than it is right now. So all in all, whatever the macro throws at us, GPE is well set and is in great shape. Our operational infrastructure is delivering. Our amazing team has deep experience, honed over multiple cycles, and is bound together by our collegiate culture, along with our robust balance sheet, all of which will help us capture our strong potential over the next few years. Right, lots of information in there. I hope that all made sense. We are, as ever now, more than happy to take any questions you wish to throw at us. There are mics going around the room. I've got the members of the executive committee here to help answer any questions as well and provide more colour. Who would like to go first? Yes.