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Edited Transcript of GPOR.L earnings conference call or presentation 22-May-19 8:00am GMT

Full Year 2019 Great Portland Estates PLC Earnings Call

London Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Great Portland Estates PLC earnings conference call or presentation Wednesday, May 22, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew White

Great Portland Estates Plc - Development Director

* Marc Wilder

Great Portland Estates Plc - Leasing Director

* Nick Sanderson

Great Portland Estates Plc - Finance & Operations Director and Director

* Robin Matthews

Great Portland Estates Plc - Investment Director

* Steven R. Mew

Great Portland Estates Plc - Portfolio Director

* Toby Courtauld

Great Portland Estates Plc - CEO & Director

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Conference Call Participants

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* Colm Lauder

Goodbody Stockbrokers, Research Division - Real Estate Analyst

* Jonathan Sacha Kownator

Goldman Sachs Group Inc., Research Division - Financial Analyst

* Rubinder Singh Virdee

Green Street Advisors, LLC, Research Division - Analyst of Research

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Presentation

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [1]

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All right. Good morning, everybody. A very warm welcome to our annual results presentation. Thank you very much for coming. It's great to see so many of you here this morning. We're going to have our full on usual agenda. There's a lot of information that we are going to get through this morning. We're going to give you a really clear steer on market conditions. We're obviously going to talk about our investments and disposition programs, and we'll touch obviously on development and portfolio management with the team. I'm then going to ask my wonderful colleagues to come and help me answer some questions later on, so feel free to get stuck in at that point.

But let's start first of all with my overview. And in the face of an uncertain backdrop, we have again delivered solid results. Our valuation was up 0.2% over the year driven by developments, up 4.1%; and ERV is up 1.2%. NAV was up 1%; and we are paying a higher dividend, up 8%.

Our performance relative to IPD remains marginally negative, shown on the table, due principally to our shorter average lease length. But we need these shorter leases to capture the significant potential in our development pipeline. It's these assets that will drive our outperformance as they have over the longer term shown in the chart.

Back to the year just finished, and we delivered another period of unlocking the potential across our business and building the solid foundations that we will need for our future growth. First, income successes. GBP 24.5 million of new rent at a 6.9% premium to ERV with a higher beat in the second half at plus 8.4%, including another major pre-let at Hanover Square. We've captured reversion generating a 19.2% uplift with 63% of our remaining 8% available by this time next year.

And we've grown our flex space product, now covering almost 90,000 square feet, generating 30% more than the value as ERV and today, we are appraising a further 124,000 feet.

Second, we've been investing for growth, making strong development progress with one completion at a 27% profit on cost; starting 3 projects, the largest of which, Hanover Square, is already 48% pre-let; and working on 10 pipeline schemes where we expect to submit 2 planning applications over the next 12 months and bringing our total program to 13 schemes and a record 54% of our portfolio.

Third, our rock-solid financial position is even stronger from this time last year. LTV is down to 8.7% with an average interest rate of only 2.7%. And even after returning GBP 490 million to shareholders since 2017, we still have available liquidity of more than GBP 600 million.

And fourth, we've been successfully enhancing our already strong culture with a renewed focus on our values program, Together We Thrive, through ensuring that ESG initiatives are hardwired across the group and by finding ways to innovate across our operations and more from Steven and Andy on this in a little bit.

Plus, our depth of talent has ensured that almost all of our promotions this year have been from within and our latest staff survey confirmed the magnetic power of our culture with 89% describing GPE as a great place to work. So despite these uncertain times, we have a business that is operating well, one with great organic growth potential and that is well placed to capitalize on any market weakness.

We have existing income growth potential of more than 50%, a significant development pipeline, meaning that we have no need to buy. And we have the balance sheet capacity and the strength of team to enable us to unlock this great potential. And it's all in Central London, a world city where near-term resilience despite the political noise and long-term growth remain as compelling as ever as I will cover later on.

In the meantime, over to Nick to hear some more of the detail.

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Nick Sanderson, Great Portland Estates Plc - Finance & Operations Director and Director [2]

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Thank you, Toby. Good morning, everyone. I'm going to take you through the details of our resilient financial performance along with our significant organic rent roll growth opportunity, which together supported continued ordinary dividend growth. And I will also cover our exceptionally strong debt metrics, which have allowed us to continue returning surplus equity to shareholders through our ongoing share buyback program, whilst also maintaining our significant capacity for future investments. So let's look at the headline numbers.

The group's property portfolio reduced in value to GBP 2.6 billion with our net sales activity partly offset by 0.2% like-for-like valuation growth. EPRA NAV per share increased 1% to 853p and triple net NAV rose to 850p, loan-to-value remains low at 8.7%.

Turning to the income statement. EPRA earnings of GBP 53.7 million are down 19.2%, given our sales activity. EPRA EPS fell 4.9% and total ordinary dividends of 12.2p are up 8%. Taken together, we delivered a total accounting return of 2.3%.

Let's look in more detail at our NAV per share growth. Starting from our March 2018, EPRA NAV of 845p in gray, the main factors behind the small uplift were an increase of 2p arising from revaluation of the property portfolio, which I'll come back to shortly.

The small discount to book value on our sales resulted in an accounting loss of 2p whilst EPRA earnings of 19p enhanced NAV and ordinary dividends of 12p reduced NAV.

Our share buyback has to-date enhanced NAV by 5p whilst tax associated with our profitable sales and other items reduced NAV by 4p. This resulted in NAV per share of 853p, up 1%.

Returning to our property valuation and providing more color behind the headline 0.2% like-for-like growth. Shown top left, our retail properties, which represent 28% of our portfolio fell 1.8% with a 3.7% decline in the second half, whilst the offices were up 1.2% over the year. The chart top right shows that these moves will predominantly ERV driven with retail ERVs down 0.6% in the year and office ERVs up 1.9%.

We also saw a differential in valuation performance depending on our ownership interest. As you can see, bottom left, our sub-100-year leasehold properties, which represent 18.7% of the book were down 6.4%, whilst our freehold and long leasehold properties were up 1.9%. And as shown bottom right, our committed developments were the strongest performers up 4.1%.

Our long-dated properties were up 2.9%, whilst our shorter income development pipeline fell 3.4%. Unsurprisingly, our weakest performing asset over the year was a retail-focused, short leasehold property in the development pipeline, Mount Royal and Oxford Street where we have some of the greatest upside potential going forward as you will hear from Andy later.

Moving to EPRA earnings and comparing against GBP 66.5 million for last year. Rental income from our wholly owned portfolio fell by GBP 11.7 million, predominantly driven by rent foregone of GBP 9.1 million given our property sales over the last 2 years.

JV fees fell by GBP 1.4 million given reduced transactional activity and our share of JV profits increased by GBP 0.2 million.

Property costs rose GBP 0.6 million predominantly due to significant empty rates rebates in the prior year, while admin costs rose GBP 1 million given lower capitalized employee costs and higher marketing spend to support our development leasing activities.

Finally, net interest costs fell by GBP 1.6 million given the reduced debt levels and our refinancing successes. Overall, with other movements of GBP 0.1 million, earnings of GBP 53.7 million represents a 19.2% decline on last year.

However, as you can see on the right, EPRA EPS fell only 4.9% given the reduced share count following our returns of capital and cash EPS rose 0.6% to 17.1p. This has supported growth in the final dividend to 7.9p, taking total dividends for the year to 12.2p, up 8% as we maintained our annual dividend payout at over GBP 33 million.

Turning to our rent roll where following the 6.2% like-for-like uplift in the year, the opportunity to grow the existing GBP 100.4 million shown in gray remains substantial.

Starting with our investment portfolio, letting our voids and refurbs space, shown in yellow, would add GBP 13.1 million with a further GBP 8.3 million available through reversion capture, shown in light blue, which Steven will provide more color on shortly.

And turning to our 3 committed developments. The dark blue bar shows GBP 6.4 million of rents already secured through office pre-lets at Hanover Square and the red bar shows the estimated GBP 23.8 million of rents still to be captured across these schemes, which are all located around Crossrail stations.

Taken together, there's 51% of potential incremental rent roll to capture, which would drive future earnings growth, although we expect EPRA EPS to be broadly stable over the next 12 months given the full year impact of our sales over the last financial year.

The quality of our rent roll remains robust, too, with our 7-day collection rates remaining above 99%. And as you can see, bottom right, our delinquencies, including from CVAs have been very minimal. However, we remain vigilant and whilst our watchlist remains retailer-focused, we have some protection with GBP 25 million of rent deposits across the portfolio of which 28% are from our retail occupiers.

And our financial position remains equally robust too. As shown top left, our LTV has reduced to 8.7% with our net gearing at 6.8% and interest cover was, again, not measurable. Top right, you can see the weighted average interest rate remains low at 2.7%, which would fall to 2.3% on full draw down of our RCF. As you will remember, we amended and extended our GBP 450 million RCF during the year as well as issuing GBP 100 million of new USPP notes. Shown bottom left, this has increased our weighted average debt maturity to 6.4 years, whilst maintaining our preference to flexible unsecured debt.

Finally, as you can see, bottom right, our liquidity remains very strong with GBP 608 million of available firepower. As well as maintaining our financial strength, we have also maintained our financial discipline. In November, following our GBP 329 million of sales in the first half, we launched a nonmarket share buyback of up to GBP 200 million. Since then, we have bought back just over GBP 74 million of shares at an average price of 720p and the program recommenced this morning on exit from our closed period.

As well as retaining our significant financial capacity, which I'll come back to in a moment, we are also giving ourselves the maximum flexibility in the execution of the program, including continued regular review by the Board of its size and timing.

And as shown on the right, this buyback is a clear continuation of our commitment to balance sheet efficiency, maintaining our track record of raising equity capital shown by the orange bars, when we can deploy it accretively and returning it to shareholders, shown in purple, when we have surplus equity as we currently do.

Taken together, we have now returned GBP 490 million to shareholders since 2017 equivalent to more than 23% of our current market cap and considerably more than the GBP 310 million raised early in the cycle with more to come as the share buyback continues.

So looking ahead, all else equal, our pro forma LTV following the remainder of the buyback would be only 13.6%, shown top left, leaving a significant scope for continued investment. As you can see in the green box, our committed CapEx to come stands at GBP 140 million, which would take LTV to 18% before factoring in any development surpluses.

Adding in perspective refurb CapEx, shown in orange, takes LTV to 18.7%. And as you can see bottom left, should new accretive investment opportunities emerge, we have the capacity to take advantage with an illustrative GBP 1 billion of acquisitions leaving LTV at 40%, assuming constant property values. However, our capital allocation discipline will always be maintained.

So to sum up from me, our development, portfolio and capital management activities resulted in a small uplift in both EPRA NAV and cash EPS despite the expected decline in EPRA earnings given on net sales activity. Our progressive dividend policy continues with significant further rent roll growth potential from our robust occupied base and our debt metrics remain exceptionally strong.

Our commitment to balance sheet discipline remains intact with our ongoing share buyback program returning further surplus equity to shareholders, and we have again retained both our financial flexibility and firepower. As a result, we continue to be extremely well positioned.

Now back to Toby for a market update.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [3]

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Thank you, Nick. Right, let's turn and look at our markets. But first of all, a quick update on strategy. As you know, we're always seeking to take advantage of market conditions, shown by the blue line, and we have done so aggressively with 6 years of net sales, crystallizing surpluses since 2014, shown by the orange bars.

We've also been executing asset strategies across our 4 principal areas of our business really well. So what conditions do we need from here? For sales, we need investor confidence and liquidity for the very best assets in liquid lot sizes, we have both, but in the main, the market has paused pending some political clarity.

For acquisition pricing to work, we need risk aversion and motivated sellers, and we are not seeing either. And for successful execution, we need economic growth that delivers jobs. It exists, but with elevated levels of uncertainty, particularly about the very near term. So with the political deadlock has continued, it's no surprise that current perceptions of uncertainty and willingness to take risk, shown by the blue and the red lines top left, have both worsened over the year. So too have the PMIs for economic activity, top right, and jobs, bottom left.

And yet the longer-term indicators are more positive. Bottom right, we're looking at 3-year forward estimates of GDP showing a slight improvement on last year's figure and crucially, for us, suggesting that London will outperform the U.K. by a healthy margin, and so the picture for the immediate future remains uncertain, but more positive beyond that. And you can see that, when you look at the 5-year office job creation stats, shown top left, it's up since November and led by professional services companies. And perhaps explaining why office take-up, the yellow bars top right, is still running ahead of the 10-year average, even excluding serviced office leasing, shown by the hatched areas, as are both active demand, being companies out looking for space now and deals under offer, shown by the blue and the red bars, respectively. And we've taken advantage of these trends in our own business, shown bottom left, with another year of strong investment portfolio leasing, beating ERVs by 5.9% and by an increased margin of 7.6% in the second half.

A word on retail. Despite the mayhem on the U.K. High Street, Central London retail has done materially better than the U.K. overall, as you can see bottom right. However, London is not immune, and we can expect some turbulence in the short term. But given it's growing in affluent catchment, strong tourist trade and exceptional mix of offer, we expect London's outperformance to continue over the long term, particularly on its prime streets, where 78% of our own retail assets sit.

Let's turn and look at supply. This chart shows central London office completions with our projections plotted against those of CBRE. The story remains as compelling as ever. 37% of all new supply through to the end of 2023 is already pre-let. CBRE think that 26 million square feet could be built speculatively over the next 5 years. We think that actually only 12 million will be. And in our backyard of the core West End, there is only 1.6 million feet to be delivered, and that's way less than 1% of core stock per annum. So arguably, we face a shortage of new supply over the next few years, meaning that pre-letting remains a real likelihood.

As for the rest of supply, shown on the right, no real change from this time 2 years ago. Mostly it's tenant controlled or secondhand where letting terms will be weaker than for new build. But either way, vacancy is and is expected to remain low. 3.3% in the West End today and not forecast to go through 5% at any point in the next 5 years.

So what does this all mean then for rent? Well, currently office market balance marginally favors landlords with both the city and the West End trending at less than 20 months' worth of supply, assuming an orderly Brexit. Overlay a no deal Brexit, and we would expect a demand freeze to immediately impact balance as shown by the dotted line. So looking at the right of the slide, PMA forecast gently inclining office rents in both the city in yellow and the West End in blue, again, assuming an orderly exit.

Either way, our own office rent passing and ERVs remain relatively low, especially when you remember that 67% of our portfolio is in the West End with 92% near a Crossrail station.

So investment market. A couple of points here, too. If you look at the quarterly turnover, shown by the orange bars, you can see that the total was sharply down in Q1 and way beneath the 5-year average as Brexit uncertainty weighed on investors' risk appetite, and yet we are not seeing any meaningful increase in the yield gap between prime and secondary as shown on the right. The margin remains stubbornly tight in part due to the lack of motivated or forced sellers.

So looking bottom left, of the GBP 4.3 billion available to buy in November, 60% has since sold or is under offer and fully 40% was either withdrawn or haven't sold, being mainly overpriced assets with no angles and where vendors are willing to sit tight if their aspirations aren't met. So with only GBP 3.5 billion available today versus more than GBP 11 billion 18 months ago, we expect turnover to remain low for now. But if supply does increase, there is still plenty of equity looking to buy in London, almost GBP 32 billion at last count, shown by the red bar bottom right, or a multiple of 8x today's available stock.

Granted, some of it may be waiting to see how British political risks play out. But any business-friendly outcome could easily see yields push lower as this capital comes off the sidelines. For now, therefore, it is a very good thing that we have no need to buy preferring instead to harvest our existing portfolio.

So our market outlook then is similar to that of last November assuming an orderly exit with a couple of small tweaks. First, across our rental drivers, we think weakening confidence has worsened the prospect for business investment in the very near term, but tight supply conditions and job growth will provide counteracting support, particularly for the best quality space in central locations.

So following our strong leasing performance and a better than forecast office outturn last year up 1.9%, as shown bottom left, we have increased our rental growth guidance range, which is now minus 1% to plus 2% for offices. The retail, we expect structural headwinds to impact ERVs with our range of down 5% to flat, meaning that for the portfolio overall, we expect broadly flat ERV growth this year.

For yields, we see some short-term risk of a marginal increase across the board during this current period of uncertainty, but with so much equity on the sidelines, an orderly Brexit could well bring them back in over the next 12 months or so.

So what about then our own activities in the investment markets? As you will know, we were a big net seller last year with no acquisitions since June 2017, and the reason can be found on the line chart. It shows how much we are appraising at any one time. It's been falling consistently since 2017. More relevantly perhaps the dots on the line reveal the percentage of the markets that traded within 10% of our view of fair value over the past 6 months. It was 15% last time we met in November down to 9% today. So not much value in the market today, but where it exists, we will find it, and we are currently reviewing circa GBP 0.5 billion of opportunities.

Our disposals have been well reported, GBP 349 million since March last year consistently selling beneath 4% and our forward IRRs that were lower still. So where next then for our investing activities? Not surprisingly, much depends on political outcomes, not least what type of Brexit we get. If it's orderly, you can expect us to continue selling completed business plans and we're currently reviewing GBP 170 million of assets for sale. You can also expect us to unearth interesting acquisitions and our deal flow remains good.

A no deal Brexit and we are a net investor. Either way, we have significant firepower should we need it, we also have patience, we have discipline and we have no need to buy.

Plus, of course, we have growth to generate from both investing in our significant development opportunity and from our portfolio management operations. So more recycling and internal investment to look forward to.

Let's go now to Steven to hear some more.

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Steven R. Mew, Great Portland Estates Plc - Portfolio Director [4]

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Thank you, Toby. This morning, I'm going to update you on our portfolio management activities, including the continued rollout of our flexible space offer and how we're improving the GPE occupier experience.

So let's turn first to leasing where strong progress has been made and investment in the portfolio has delivered lettings well ahead of estimated rental values. 78 lettings have been completed, securing GBP 24.5 billion of rent, 6.9% ahead of March's ERV and with our rental beat strengthening as the year has progressed.

And as you can see from the orange bars top right, we continue to lease well ahead of our long-term average. Successes have included the second significant pre-let at Hanover Square, leased on a 20-year term at GBP 6.2 million, 18 months ahead of completion and at an impressive 9.6% premium to ERV and has encouraging interest in the remaining space. City Tower and Elsley House have also performed well with continued investment into the buildings.

City tower has added GBP 2.1 million at a 5.7% premium and Elsley GBP 2 million at an even stronger 11.6% and with all the Elsley deals signing for completion of our refurbishment works. We've also seen a strong contribution from our flex and co-working office, adding GBP 4.5 billion in new rent, more of that in a moment.

Our void remains at 4.8% or 2% if we exclude City Place House where we're leasing short-term ahead of a major redevelopment. Andy will be updating you later. We've also agreed 27 rent reviews securing over GBP 13 million pounds, an uplift of just under 20% and 3.3% ahead of rental value.

And looking forward, there is still a healthy GBP 8.3 million of reversion to collect with nearly 2/3 available in the next 12 months. We're maintaining our leasing momentum with GBP 2.8 million completed or under offer since year-end.

And the portfolio provides further opportunities for growth, including flexible space, where we continue to make excellent progress. 12 flex deals have completed in 6 buildings across London on just under 40,000 square feet at an average 30% premium to ERV and with all of this space let within 1 month of fitting out. But that is only half of our flexible space story.

When we were here in November, we've just opened our co-working partnership with Runway East. With our first 26,000 square feet leasing ahead of business plan, we opened a further 23,000 square feet 3 weeks ago. Just under 80% of all desks have now been sold and there's negotiations on almost all of the remainder. When let, our income grows to an anticipated GBP 2.8 million, delivering a 30% rental beat when compared to traditional letting. And all of this whilst preserving our redevelopment plans in 2022.

So what next for us in flex and co-working? With the market continuing to grow, we are appraising 124,000 square feet of flex and co-working floor space across both our investment and development properties, taking our potential to over 200,000 square feet around 10% of the office book. Plus, we're also looking to evolve our flex offer, trialing a fuller service provision designed to appeal directly to those graduating from serviced offices.

Back to the wider portfolio, where our occupier services team are always looking for innovative ways to build value, this time using technology to enhance our well-being and amenity offer. 200 Gray's Inn Road is a good example. Along with turning a small outdated reception into a fabulous new space with a greater sense of arrival, plenty of room for informal meetings and a new café, we've launched our market-leading app. Occupiers benefit from automated entry, greater climate control, a community platform, and a lifestyle concierge service similar to that found in the best hotels.

So what's next? There will be more innovation. We rolled out the app at Old Street and by the end of the year this will be available to some 20,000 office users across our portfolio. Data collected from this technology will improve design, user experience, and ultimately, portfolio performance, with a recent survey highlighting that 2/3 of occupiers are willing to pay a premium for enhanced service and amenity offer. And let's not forget that we have a strong track record of creating value from our bricks-and-mortar, delivering revenue and capital growth from our proactive management, investing to reposition assets and unlocking opportunity in our pipeline by aligning leases to a common block date.

So to sum up, the portfolio is in great shape, and we continue to evolve our offer to improve the GPE occupier experience. And now over to Andy for a development update.

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Andrew White, Great Portland Estates Plc - Development Director [5]

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Thank you, Steven. Good morning. I'll update you on the development program where we continue to make strong progress. As shown on the pie chart, our 3 committed schemes represent 17% of the portfolio, which together with our opportunity-rich pipeline of 37% brings the total program to 54%. I'll start with an update on the committed developments.

We made strong progress over the past 6 months with these 3 exciting schemes, all close to Crossrail and having BREEAM Excellent sustainability ratings. That will deliver 415,000 square feet of new space and over GBP 30 million of new rent. Having recently entered into the building contract at Oxford House, we've now over 98% cost certainty for our committed schemes.

Since November, profitability has increased to GBP 125 million, of which only GBP 15.7 million have been taken in March. And as you can see on the right-hand side, the level of pre-lets has increased to 21.3%.

Starting with Whitechapel, which we've now branded The Hickman recognizing its rich heritage as the home of toolmakers Buck & Hickman. As you can see in the photo, construction of this 75,000 square-foot building is progressing well, albeit, completion is marginally moved out to Q1 next year. We're targeting pre-lets and have early interest. We're also aiming to have about 20% of the building as co-working space and are in discussions with the short list of potential operators on a revenue share basis similar to Runway East that Steven has covered. The Hickman will showcase our innovation, high sustainability with a 40% energy improvement over building regulation requirements as well as green roof and urban greening, WiredScore Platinum smart building with technology to improve the user experience and provide data on how the building's performing, and to enhance amenity, our concierge offer and dedicated café. Expected profit on cost, 13.8%.

We've also recently entered into an agreement to sell the courtyard development sites to a neighboring owner securing 2.5x our expected development profit for no risk, good business.

Turning to our 2 West End committed projects, starting with Oxford House. For this 119,000 square foot prime east end of Oxford Street building, demolition works are complete and the main construction works have started having fixed construction cost with land lease. We're targeting pre-lets for the 81,000 square feet of offices and marketing for the 38,000 square feet of retail will commence later this year. The anticipated completion is improved to Q2 '21, expected profit on cost 18.3%.

Finally to Hanover Square. I'll start with #18, the 144,500 square foot building directly above the Bond Street Crossrail station. In March, we had further success where we pre-let 54,000 square feet to Glencore shown edged orange. Following last year's pre-letting to KKR, shown edged yellow, we've now secured 87% of the ERV at a combined GBP 115.45 per square foot with an average lease length of 17.4 years from world-class covenants, and we now have only 1 floor remaining. As you can see in the photo, construction works are progressing well and we've recently topped out.

We're also making excellent progress with the New Bond Street element of the scheme. We've strong interest in the 33,000 square feet of offices and for the 31,000 square feet of retail, we have a number of encouraging discussions with retailers. 48% of the total ERV is secured, and we remain on target to finishing Q3 '20. Expected profit on cost 20.9%.

Next to our opportunity-rich pipeline of the 10 schemes with a potential area of 1.4 million square feet, which is already a 54% increase on the existing area. It's grown 150,000 square feet since November and there's more to come. We're preparing this pipeline, and I'll update you on 3 of these assets starting with New City Court in the exciting London Bridge quarter.

In December, we submitted the planning application for this landmark building where we're proposing an uplift to the existing area of 380% as well as exciting office and retail space, we've designed the building to be part of the vibrant local community by including a hub space, a public garden with terracing and food on the fifth floor and the landscape courtyard providing new routes through the site and a new entrance into the London Bridge underground. We're continuing our discussions with Southwark through the planning process for what will be an exemplary building for sustainability and well-being.

Next to City Place House, which is only 200 meters from the new Moorgate Crossrail station. The image on the left is the existing building and on the right, early massing ideas where you can see there's the potential to significantly increase area. As a result, we switched the business plan to new build rather than refurbish as a best-in-class building for sustainability and innovation will maximize potential.

We moved the block date back to 2022, and in the interim are running the building for income. We've held positive pre-application discussions with the City of London and aim to submit a planning application in the next 12 months.

At the western end of Oxford Street in the core West End, there's Mount Royal where our GVP joint venture is working in partnership with the Portman Estate and GLH Hotels. The potential for this gateway site is enormous. It's 2 acres, which is similar to Rathbone but with a scope to create double the area.

The image on the right shows our early design ideas. As at City Place House, there will be leading community, sustainability, well-being and innovation initiatives, which will maximize its appeal. We've held a number of positive discussions with Westminster as the redevelopment of this site would be a major contributor to their planned transformation of Oxford Street.

So to summarize, firstly, our development program comprises 13 projects with a potential area of 1.8 million square feet. Secondly, we have 3 committed schemes all close to Crossrail where there is real potential to deliver further pre-lets. And finally, we're preparing our deep and opportunity-rich pipeline where we aim to submit 2 planning applications over the next 12 months, giving us a strong platform for growth well into the 2020s.

So back to Toby for the outlook.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [6]

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Thank you, Andy. So as you've heard this morning, we remain resolutely focused on capturing our opportunity to deliver long-term organic growth. Our committed developments now 17% of the portfolio, up from 11% at March '18, are pre-letting well and being 100% near a Crossrail station, they give us strong near-term value upside. We'll crystallize further surpluses from our remaining 9% in long-dated assets, shown in orange; 37% of the book is in active portfolio management assets with plenty of repositioning potential; and finally, our development pipeline is already 11% reversionary in its existing state giving us real long-term value to aim at.

So a strong opportunity supported by our clear and consistent strategy, repositioning to generate growth, recycling, returning surplus equity and investing in new raw material in Central London only. And in London only, because we believe it remains Europe's business capital. Despite all the noise, it's growing, supporting long-term occupational demand and yet supply remains tight. And its investment markets have established themselves as some of the most liquid anywhere in the world. Plus our long-term growth strategy remains deliverable. We're executing asset plans really well across our quality portfolio, which has the highest proximity to Crossrail of all the REITs at 92%. We're bringing our exceptional developments into production and preparing our long and strong pipeline, all the while innovating and evolving our product to suit the changing patterns of occupier demand. We're ready to buy, but we have no need to, and we'll only do so if truly accretive. And our unprecedented financial strength will allow us to choose our path to maximize returns for our shareholders.

So whatever the political outcome and its economic consequences, we are well placed. Our portfolio is full of opportunity. We have the capacity to both invest in it and exploit any market dislocation, and our talented team, supported by our strong culture, is fully committed to deliver on all of our ambitious plans. So let's see what unfolds over the next few months. Either way, we're positioned for any outcome, and for that reason, our outlook remains a confident one.

Right. Special team, up here, please. So we've got the full range of people to help answer questions you may have and who would like to go first?

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Questions and Answers

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [1]

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In the back there, thank you.

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Unidentified Analyst, [2]

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This is Paul from Barclays. Just a couple of specifics and a more general question for me. On the first one you highlight the HMRC guidance on tax and CGT on -- profit on development, just wondered if this would change your accounting approach whether you'd accrue deferred tax for the first 3 years post completion? And whether you would change your development strategy because obviously that's been part of your strategy to sell developments ahead of completion? Second one, you also highlight the shorter lease lengths and valuation declines in that part of portfolio. Just wondered if this is a one-off adjustment or if we can expect this to be an accrual each year as the leases get shorter.

And then the more general one is, can London actually get any better from here? I mean, you highlighted a number of things, highlighted the positives of London and yet rents not really moving, yields not really compressing, partly because they both remain at record levels. I just wonder whether you need to see a couple of periods of negative performance coming through before you can then start to deliver what GPOR sort of have been famously historically been able to do?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [3]

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Okay. Thank you, Paul. 4 very good questions, if I might say so, particularly the first one, which I'm going to hand resolutely to Nick to answer. The development strategy, Andy, perhaps you want to touch on that and think about little bit around our portfolio planning on where next. Shorter leases, valuation one, Nick, do you want to deal with that one as well, and I'll do with the broader one at the end, if I may. Nick?

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Nick Sanderson, Great Portland Estates Plc - Finance & Operations Director and Director [4]

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So we've obviously included in the results the confirmation that the tax man has put out new guidance. That guidance is -- in draft format is not yet in the final form. So that for us today has no impact on us. What I would -- going forward it may do. What I would say though is that firstly, if you're paying tax, it means you made a profit which tends to be a positive rather than a negative thing, but also we are willing to pay tax. We have clearly sold some assets prior to PC and that has largely been driven by accelerating our returns given that we've delivered major pre-lets and the prospective returns going forward have been lower, we clearly have benefited from those not being subject to tax. But again as we've demonstrated, over the last 12 months, we made 2 sales in the 3-year tax window at Wells Street and at Great Portland Street. So as ever, it will be one of the considerations that we look at when we think about our sales strategy. It doesn't drive it and let's wait to see where the guidance pan out.

On the valuation point, Rich, if you want to put up the slide that I ran through earlier on, what we really were trying to do here is we just give a lot more color beneath the valuation because clearly it would have been quite easy to say valuation moved by 0.2%, there's nothing to see. But as you can see on the chart, there were quite a few movements. And I think the 2 things we were highlighting, one, with regards to short leasehold. There has been a view from the valuers from what they've seen in the investment market that their appeal to the international investor, in particular, has been reducing. But that isn't the only reason why our short leaseholds moved down in value. Our half of short leaseholds are in retail and within there, for example, Mount Royal not only is it short leasehold, it also has short income. On some of the pipeline assets, as they move towards going into the development program, they will start to move towards a residual valuation. Not all of them are valid on residual valuation basis at the moment because some of them it's while away, but as the income falls off then they naturally you would see the land value come down, but it will be very, very asset-specific.

What I would say, just going back to the short leasehold point is that when markets are very, very strong, the delta between short and long leaseholds and short leaseholds versus long and [preheld] tends to be quite small. And when markets are little bit more uncertain, as they are at the moment, you tend to see them move out a little bit. But it is not only yield shift that has caused the move-down in valuation of the short leasehold. In fact, you'll see that actually the biggest driver behind rents for the move in the valuation year was in the residual. And part of that is assumed void and change in development timings on the pipeline schemes. So hopefully that's covered the question. If you have more follow-up, very happy to take it after the session.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [5]

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Andy?

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Andrew White, Great Portland Estates Plc - Development Director [6]

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It's only development pipeline. Clearly, we're pushing very hard and looking at the alternatives, and you'll see this time on, say, City Place House, we've moved into a new-build scheme rather than a refurb. And I think the reasons to sit behind that are: a, you're generally getting better premium for a better product so that's accretive as we move forward. But I think in terms of the product that you deliver, we're finding that by moving into some new builds you're getting much more efficient floor plates, you're able to introduce sustainability and well-being right from the outset rather than trying to retrospectively put it into buildings. And I think also just looking at the whole sort of user experience in terms of the amenity that we're putting into the building and really playing to what they want, I think we're really trying to be sort of future thinking in what we're doing and really trying to push the envelope. And I think there is a whole debate going on in London at the moment around good growth, a lot of our pipeline is around major transport node so that supports the case for large buildings. So we're very excited about the pipeline and we're pulling together.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [7]

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Thank you, both very much. So Paul, it's worth remembering that we, every quarter, re-underwrite every asset we own and that essentially is our saying to the forward returns sufficiently compensate for holding that risk, okay, and just another cost that goes into that analysis is tax. So it's treated as any other cost, and we look at it when thinking about our forward returns.

This short lease transition to development site is really interesting. And as Andy and his team are working really hard to get the program from being existing raw material where, as you say, there's an element of value reduction as you approach residual value, there's a transition at some point when you get planning and suddenly the future profit of that development becomes a real prospect. And then you should start to see them go the other way as you begin to consume that profit.

This new build versus refurb, I think is really important. We're really seeing for the first time in a long time a real differential in the appeal around the tenant community of new build versus secondhand space. And I expect that to continue. And so I expect that we -- as we look at our pipeline over the next few years, we'll be more focused on finding ways to increase net area and focus on new build than we will on refurb for that reason and that reason alone.

Can London get better? Well, I think if you go back, Rich, if you may to the -- thank you very much, brilliant mind reading, bottom right, the forward growth of London relative to the U.K. is an important point. It's been relatively strong all the way through, and, of course, it's compounding. So it's getting relatively stronger. Still population is going up, really important; jobs are going up, even more important. So if those things continue to happen, you should see, we think, long term the spread of its business community deepen and widen. You're seeing that in the life sciences community, for example, if you went back 25 years, you wouldn't have seen half of the investment that you're now seeing coming into London. Brexit will have an impact on some of that for sure. But I think that as every -- as one particular business softens a little bit or community softens a little bit, there's another that pops up that we haven't, perhaps, invented yet. Fintech, great example. From nowhere, London has taken the dominant position, if not globally, certainly in Europe over the last 3 or 4 years, and I don't see that slowing down at all. Can it get better? I think relative, yes, it can, relative to some of the capitals of Europe, it has been getting better, and I don't see any real risk of them eating our lunch as some people suggest they're going to. In fact, when you look at some of the European capitals, they've got as many issues domestically driven often as perhaps we have. I think the real issue actually is New York, and it's -- and that East Cost of America and its ability to pull business back from here. That's something we should watch. But sitting as we do between the economic powerhouses of the U.S. over there and Asia and particularly China over there, there is nowhere else in the world from which you can trade both markets in a day in the English language. Yes.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [8]

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Jonathan Kownator, Goldman Sachs. 2 questions, if I may. The first one coming back to the development pipeline. And obviously, you have some big schemes in the city, we've discussed one already that is being pushed back. You commented on the strength and the lack of supply of the new market in the West End but not in the city. Obviously, there is more supply coming here. So what is your appetite currently in launching large schemes in the city? And is it one of the reasons why you delayed the scheme that we discussed already? That's the first question. And that applies also to a non-West End market like the South Bank as well. The second question, on lettings ahead of ERV, can you comment perhaps on the condition that you need to achieve these lettings, i.e. are you seeing more incentive, do you need to put more CapEx in, perhaps, a comment on these other elements of the market as well?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [9]

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Okay. Marc, if you'd like to deal with the second one in a second, so just talk about the -- what we're seeing in the pre-letting market and more generally and tenant incentives.

Jonathan, in relation to your first question, city versus West End, actually, Rich, I don't know if you can find it, but in the back there are some slides on the -- on take-up in city and West End, respectively. What you see if you look at take-up in both those markets, this is data monthly or is it quarterly? Might be -- it's monthly, from CBRE. You can see that actually it's been trending at/or around the 10-year average over -- on an annualized basis in both the city here and the West End on that slide, thank you very much. With a bit slowdown 3 months ago and this month just gone, I think we'll see a little bit -- similarly, we'll see a little bit of a slowdown or relative weakness as people are uncertain over the next few months. But medium to longer term, I think the story remains remarkably strong in these 2 markets. On the supply side, there is not much as I have shown you already, particularly in the core West End.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [10]

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But again the question on the supply is more on the city.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [11]

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Supply side, city, if you go back to that one, Rich, please? There is a supply pipeline, maybe not. There is more on the city. Not a lot. You can see the vacancy rate on the bottom is a little bit higher in the city than it is in the West End, and it's forecasted to go up through 5% just through at the minute. But if you look at the big towers and the big buildings in the city that are being delivered at the minute, they're leasing pretty well, 100%, Bishopsgate is almost gone, 22 Bishopsgate market is 1/3 gone already with...

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Marc Wilder, Great Portland Estates Plc - Leasing Director [12]

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That is expecting 50% but it's not in the PC.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [13]

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And if you look at the active demand in the city at the minute.

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Marc Wilder, Great Portland Estates Plc - Leasing Director [14]

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Well active demand at the moment is probably as high as it's been for a good couple of years. It's around 6 million square feet in the city. And I think to your point, Toby, about vacancy generally, it's currently sort of 4.4% against the 10-year average of 5.5%. So it's pretty low. And I think that in terms of people that are looking for new opportunities to relocate, the searches are definitely becoming earlier, pre-letting is definitely driving the market as it is at the moment. That's about 1.35 million square feet that is pre-let of the 3.7 million square feet that's currently under offer, and that is definitely having an impact on rents. We're seeing it both in the West End and the city, and certainly the buildings that Toby alluded to. As far as 100 Bishopsgate and 22 Bishopsgate are concerned, plus The Scalpel which is another big one that is only recently PC not only are they pre-letting ahead of schedule, ahead of business plan, but also they're getting into these sort of super prime rents that's a lot of agents are talking about.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [15]

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But that's today. And if I look at these forecasts from the city, you are expecting -- sorry, just a slide back, you're expecting a 200 basis points increase. I mean, obviously most of that should be obsolete space. But you're expecting pressure on rent when you're going to have to deliver and the question is do you start today given that there has been an increase in new construction starts in the city?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [16]

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I think that if and when we get to the point of delivering buildings such as City Place House, the quality of this space, this disparity between secondhand and prime space, we will have pre-let it. I think the market...

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [17]

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So you feel very confident about launching as soon as possible when you...

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [18]

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I If we could start City Place House today, we would. We don't have planning. So we're working on planning.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [19]

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Sorry, not finished this one on incentive.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [20]

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There are others, so let's make it the last one. So you can -- sorry, ask the question. Go for it.

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Jonathan Sacha Kownator, Goldman Sachs Group Inc., Research Division - Financial Analyst [21]

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That's the incentives question.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [22]

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The incentives one, right.

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Marc Wilder, Great Portland Estates Plc - Leasing Director [23]

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And I would say that as far as rent-free is concerned, they are stable, they have remained stable for quite some time. Toby's chart talks about that. 22, 24 months in the West End, it's the same across the city, Midtown and South Bank for a 10-year term. And then I think for a 15-year term, again, they are pretty stable. They are 33 to 36 months. And just to give you an example, not city related, but certainly from our own experience of the deals that we have done at 18 Hanover Square with KKR we gave them a 34-month rent fee on a 15-year term, but with Glencore, we agreed to 36-months on a 20-year term.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [24]

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It's Rob Virdee from Green Street Advisors. A couple of questions. So on the investment market for secondary assets, obviously occupational demand is not that great. Just wondering when you think that would catch up in the secondary markets and what is stopping that? Are potential buyers just too aggressive on that underwriting?

The second question is on the development pipeline. Clearly, you're getting better returns from your committed developments than you can see externally. What is that differential? And part of that is, how far are you prepared to take your committed development as a percentage of your portfolio?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [25]

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Okay. Good questions, thank you. Robin, if you would like to address the whether or not secondary assets are being overbought relative to where we think they should be and perhaps, Rich, you can bring up that line chart in my section, and then I'll come back to the second question. Thanks, Rob.

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Robin Matthews, Great Portland Estates Plc - Investment Director [26]

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Yes. I think you picked up on right point that the secondary market is being overpaid for in our view. And you've seen from our chart there, only 9% of deals that we booked out in the last 6-months have actually traded within our range of fair value and that actually represents any one deal. So that's right. I think the reason behind it is pricing is being driven particularly by development managers who are acting for a third-party capital. And then it all gets through the investment committee when it comes again to the third-party capital, but the development managers are willing to push their assumptions and their business planning very strong. And that is creating a sense that the pricing should be high and vendors are holding out to get those numbers. So we're not seeing a huge amount of evidence of it, but there is enough around to keep the markets strong and the yield gap is still very close, as Toby showed in one of his other charts between prime and secondary assets of around 2%.

So we're not really seeing that movement at the moment. I think we need to see some really strongly motivated sellers, perhaps, under some stress to see a greater volume of that start coming to the market to see some price movement. For the moment, it's still sought after. But we don't the risk is being rewarded, and that's why we're not actively buying in that market.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [27]

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And you made the point about relative risk of external versus internal. And when we think about the internal and why is it that developments are delivering the returns they're delivering it because you're taking risk and you are removing that risk as you go through the process. If you take Hanover Square, that's a great example, Marc touched on the 2 deals we did in the last 12 months, that was up in value by circa 6% over the period, way ahead of the portfolio average because we have delivered an income stream prospectively as a rent ahead of ERV, ahead in timing terms to the original underwrite and on overall net effective terms that are substantially better. And as you consume those risks and remove them, clearly, some of that value accretes into the balance sheet and that is a consistent process. However, I would say, if you look at the 3 schemes and perhaps we can get to Andy's summary slide, only GBP 12.5 million or so -- sorry, what's it GBP 15 million of the GBP 120-odd million of profit that we expect -- the table, there we go, so if look bottom left of that table, GBP 15.7 million of profit of the GBP 124 million has been taken so far. So as we think about the next few periods, there's more growth to come from this, you can imagine that we're going to deliver as we go through removing those risks. That profit should, I think, firstly grow, all else equal, and secondly, we should capture more of it as we remove those risks.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [28]

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How far are you willing to take the committed development as a percentage?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [29]

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And how far are we willing to take committed as a percentage? Nick, do you want to touch on that in our operational parameters?

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Nick Sanderson, Great Portland Estates Plc - Finance & Operations Director and Director [30]

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Yes. So we run a variety of internal parameters around leverage development risk, asset concentration risk and around committed speculative development exposure. It's been 30%, 0% to 30%. We have briefly been through this cycle when we were delivering in Rathbone and a variety of other schemes in the West End. Clearly, our exciting exposure with the 3 committed schemes is 17% but with the CapEx to come takes you into the low 20s, and we feel very comfortable with that. Again, when we went through our 30% of ceiling, leverage was very low. So you can't look at these things simply in isolation and also you just need to look at these specifics of the individual assets that you -- because effectively, you are taking -- the big risk you're taking is lease-up risk, so a lot of it comes out to the confidence of that lease-up risk and your ability to mitigate that lease-up risk through pre-letting either prior or during delivery.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [31]

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Okay. We probably got time for one more. Here we go. Sorry.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [32]

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Just 2 questions really on the -- Colm Lauder, by the way, in Goodbody Stockbrokers. Just 2 questions on the flex space sort of phenomenon that's coming through and you had a specific slide on it in terms of the Runway East arrangement. Maybe if you could just sort of tell me how the Runway East joint venture is structured? Is there a sort of floor rent and then there is a revenue share on top of that? And what inputs are behind it? And in terms of additional expansion, there was figure of over 200,000 square feet potentially earmarked for this type of flexible space arrangement. Would that be with the existing joint venture structures that you've employed and the other restructure or would you be willing to entertain other occupiers in this flexible space environment?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [33]

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Steven, sounds like a perfect one for you.

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Steven R. Mew, Great Portland Estates Plc - Portfolio Director [34]

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Okay. Runway East (inaudible) structure the revenue share agreement. I mean in very, very simple terms, we put the building in and they put the expertise in and then we share the revenue as prorated to our operational costs. There is no floor, so it's not a base rent plus but there is a notional rent that goes into that calculation. So that's the Runway East type deal. The 200,000 square feet, the growth is a mix of the flex offer that we've talked about plus the co-working that we -- the Runway East type deals. So Hickman, for example, Andy talked to, we're looking at revenue share type structures there. We haven't yet settled on the structure, but it's similar to the Runway East type deal, yes.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [35]

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It's just worth remembering, Colm, that the average lease term, and they are all leases except for the Runway East arrangement in which they're license is, but the average lease term of the flex offers we've done is 3.

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Steven R. Mew, Great Portland Estates Plc - Portfolio Director [36]

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Typically 5 with a break at 3. So it's not sort of as flexible as you'd -- whilst we're offering the flexible -- ability to be flexible, people in the flex spaces typically around 4,000 square feet. They are coming out of serviced office space, they want their own front door, they want a home, unbranded, somewhere they can put roots down. So that's why -- but they're also growing quite quickly, some of these businesses, which is why the sort of 5 with the break at 3 suits them and us.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [37]

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So because that was such a quick answer, we'll take one more, if there is one.

No. Okay. Good. So as ever, we're always around for the -- for further questions you might have. Thank you very much for coming today, and see you soon.