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Edited Transcript of GPOR.L earnings conference call or presentation 14-Nov-19 9:00am GMT

Half Year 2020 Great Portland Estates PLC Earnings Call

London Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Great Portland Estates PLC earnings conference call or presentation Thursday, November 14, 2019 at 9:00:00am 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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* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Marc Louis Baptiste Mozzi

BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team

* Robert Alan Jones

Deutsche Bank AG, Research Division - Research Analyst

* Sander Bunck

Barclays Bank PLC, Research Division - VP of Real Estate Equity Research

* Timothy Leckie

JP Morgan Chase & Co, Research Division - Head of European Property

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Presentation

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

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Good morning, everybody. It's a rare privilege to be able to say that we're sitting down early. We're normally late for this. So thank you very much for taking your seats so promptly.

As ever, we're going to have a full presentation for you this morning. There's lots of good material in here. There are some important facts and themes that we want to get across to you, and I'm going to be supported ably by the senior management team this morning. We're then going to have a Q&A session as ever, and we can dig into some of the detail that you want to ask us about later on.

But let me, first of all, start with our overview. And once more, despite the unsettled political and economic environment, we are pleased with these good positive results.

Our valuation was up 0.8% for the half, driven by our developments up 6% and ERVs up 1%. We generated a total property return of 2.7%, beating MSCI's Central London quarterly index by 0.9 percentage points.

NAV per share was up by 1.8%, and we're paying a higher dividend, up 9.3%. And these positive numbers are the result of another strong operating performance.

First, income successes. We let GBP 9.9 million in the first half, 9.4% ahead of ERVs, and taking our flexible space commitments to over 200,000 square feet, and where we are beating ERVs by 35% on the space opened so far.

The second half has started well too. GBP 2.2 million already signed, bang in line with September's ERVs. And today, we have a further GBP 8.1 million under offer, 5.4% ahead of September ERVs. And all up, our void rate is down to only 2.3%.

Second, we're making good development progress. Our 3 projects on-site are now 24% pre-let, up from 21% in May, and we're aiming to deliver a surplus of a GBP 123 million, only 27% of which has already been taken.

We're working hard on our 10 pipeline schemes. They're already generating a 54% lettable area uplift, and we aim to increase this further as we work up our plans.

Three of the schemes are near-term prospects, each with planning application decisions expected over the next few months, and with starts planned from 2020. Taken together, our 13 projects cover more than half of our business.

Third, we've maintained our rock-solid financial position. LTV is only 14.8%, even after completing our GBP 200 million share buyback, taking to GBP 616 million, the total surplus capital we've returned to shareholders since 2017, more than 30% of our current market cap. And today, we have available liquidity of more than GBP 430 million at an attractively low-interest rate of only 2.6%.

And fourth, we're enhancing our strong culture and refining our purpose. As you've seen from this morning's statement, we're promoting from within, and our latest employee survey confirmed the magnetic power of our culture, with 94% describing GPE as a great place to work, up from 89% last time.

We're also making sure that sustainability considerations increasingly drivers of returns are interwoven throughout the group's operations. We've signed the climate change commitment and have undertaken to deliver net-zero carbon developments from 2030, plus we've broadened both our IND and our social and community programs.

We're also innovating across the group. In technology, we completed the rollout of our new app, and our operating structure has been realigned for a higher level of service provision through the strengthening of our occupier services team. So we have in GPE a business that is operating really well, covering all the bases and crucially, one with plenty of organic growth potential, whatever the outcome of the current political uncertainties.

Income upside from our existing portfolio, plus 45%, and a significant development pipeline, meaning that today, we have no need to buy. And we're as well placed to capitalize on this potential as we have ever been. We have the balance sheet capacity and a great team with a strong and a creative culture. And it's all in London. I'll talk about our markets later, but we've strengthened our view that it remains a dominant world city, resilient in the near term and with good long-term growth prospects.

With all of that, over now to Nick to hear some more on this potential.

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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, everybody. I'm going to run you through the details of our positive financial performance, along with our significant organic rent roll growth opportunity, which supported continued dividend growth.

I will also cover how we maintained robust debt metrics, while successfully completing our third return of surplus equity through our share buyback and retaining our significant capacity for future investment.

So let's take a look at the headline numbers. The group's property portfolio rose in value to GBP 2.65 billion. EPRA NAV per share increased 1.8% to 868p and triple net NAV rose to 861p. Loan-to-value remains low at 13.3%.

Turning to income. EPRA earnings of GBP 28.1 million are up 11.1%, with EPRA EPS increasing 17.8%, and we have declared an interim ordinary dividend of 4.7p up 9.3%. Taken together, we delivered a total accounting return in the 6 months of 2.7%.

So let's look in more detail at our NAV per share growth. Starting from 853p in March, the main factors behind the NAV uplift were an increase of 6p arising from revaluation of the property portfolio, equating to like-for-like growth of 0.8%, which was driven by ERV growth of 1%, including 1.4% from our offices.

Shown in the bar chart, our committed developments in red were again the strongest performers, up in value 6% with a notable double-digit uplift at Hanover Square. And our long-dated properties in orange also performed well, up 4.1%, with Britton Street performing particularly strongly following a successful lease regear.

As expected, shown in gray, our shorter income development pipeline fell down 2.2%, although this is where we have some of the greatest potential upside going forward.

Returning to the walk, EPRA earnings, the 11p, enhanced NAV with last year's final dividend reducing NAV by 8p. Our share buyback, enhanced NAV by 7p in the period and with other items of 1p NAV per share at period end was 868p, up 1.8%.

Moving to EPRA earnings and comparing against GBP 25.3 billion for the same period last year. Rental income from our wholly owned portfolio fell marginally by GBP 0.5 million, and JV fees fell by GBP 1.2 million given reduced transactional activity, although our share of JV earnings increased by GBP 2.9 million, predominantly due to lease starts at 160 Old Street.

Property costs fell GBP 1.6 million due to lower void costs, while admin costs rose GBP 0.9 million, predominantly due to higher provisions for performance-related pay.

Finally, net interest costs fell by GBP 1.2 million, given increased capitalized interest at our on-site developments. Overall, with other movements of GBP 0.3 million, earnings were GBP 28.1 million, up 11.1%.

As you can see at the bottom of the slide, EPRA EPS rose more strongly by 17.8%, supported by our reduced share count given the buyback and cash EPS was flat at 8.3p. Taken together, this has supported growth in the interim dividend of 9.3%.

Turning to our rent roll. We're following the 5.6% uplift in the first half. The opportunity to grow further the existing GBP 106 million shown in gray remains substantial.

Starting with our investment portfolio, letting our void and refurb space, shown in yellow, would add GBP 8.5 million, of which GBP 5.1 million relates to our flex space offerings. And we have a further GBP 8.3 million available through reversion capture, shown in light blue, and Steven will provide more color on these shortly.

And turning to our 3 committed developments. The dark blue bar shows GBP 7.2 million of rent already secured through office and retail pre-lets at Hanover Square. And the red bar shows the estimated GBP 23.3 million of rent still to be captured across the schemes, which are all located around Crossrail stations.

Together, that's 45% of potential incremental rent roll to capture, and that's before factoring in our development pipeline and further acquisitions or sales.

The quality of our rent roll remains robust too, with our 7-day collection rate remaining at 99%. And as you can see, bottom right, we had only 1 delinquency and 1 CVA in the period. Needless to say, we remain vigilant. And whilst our watch list remains retailer-focused, we have some protection with GBP 26 million of rent deposits, of which 30% are from our retail occupiers.

Now let's run through our recent debt financing activities. In September, boxed in red, we repaid the 2.7% coupon secured bank debt in our GRP JV from existing cash resources. And since period end, we extended our low-cost GBP 450 million corporate RCF to 2024.

As a result, shown top right, our well-laddered debt book has an average drawn maturity of 6.4 years. And we have increased our flexibility with 92% of our total committed facilities on an unsecured basis.

Our financial position remains rock solid too. Shown top left, our weighted average interest rate remains low at 2.6%, which would fall to 2.3% on full drawdown of our RCF. You can see bottom left, our liquidity remains very strong, with GBP 434 million of readily available firepower. Moreover, whilst LTV has moved up, given our development spend and share buyback, it remains low at 13.3% with net gearing at 14.7% and interest cover, again, not measurable.

As well as maintaining our financial strength, we have also maintained our financial discipline. As you can see on the left, with the completion of our GBP 200 million share buyback, we have now returned GBP 616 million of surplus equity to shareholders since 2017, equivalent to more than 30% of our current market cap.

As detailed on the right, the on-market buyback program concluded yesterday with 28 million shares purchased and canceled, including 5 million since period end at an average price of 720p per share.

Whilst we have retained our significant financial capacity, which I'll come back to in a moment, we also maintain our commitment to balance sheet efficiency, with any future returns of surplus equity dependent on the market outlook and the scale and speed of our investing and divesting activities underpinned by our strategy of low-financial leverage.

Turning to our significant capacity for future investment. You can see top left, the following completion of the buyback, LTV today stands at 14.8%.

As shown in the red box, with CapEx to come of GBP 100 million across our 3 committed schemes. Our pro forma LTV rises to 17.9%, although this is before factoring in any development surpluses. These schemes are on track for BREEAM Excellent ratings. And as you'll hear later, we have ambitious sustainability targets for our future developments and broader business.

Returning to our upcoming spend. We have prospective refurb CapEx of GBP 28 million, shown in orange, of which GBP 6 million relates to Cat B fit out at our flex space, taking 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 activities resulted in an uplift in both EPRA NAV and EPS. Our progressive dividend policy continues, and we expect the existing 45% potential rent roll growth to rise further as pipeline development schemes come onstream. We have also successfully returned further surplus capital to shareholders, whilst maintaining exceptionally strong debt metrics and retaining significant financial capacity for future investments to deliver sustainable spaces.

Taken together, we are extremely well positioned for all market eventualities, and we look forward to giving you a deeper insight into how we are innovating and further embedding sustainability across the business and at an investor event to be held in February next year.

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. So a look at our markets. But first of all, let me just give you a quick update on our strategy. As you know, we've taken good advantage of market conditions throughout the last cycle, shown by the blue line, and we are now into our seventh year of net sales, shown by the orange bars. All the way through, we've been executing asset strategies across the 4 principal areas of our business really well. So what conditions then do we need from here? For sales, essentially, liquidity and confidence. For the very best assets and liquid lot sizes, we have both; for everything else, the market has paused pending political clarity.

For acquisitions to work, we need risk aversion and motivated sellers. We have neither currently. For successful execution, we need economic growth that delivers jobs. It exists, but with increasing levels of uncertainty. And we're seeing that uncertainty in CFO's willingness to take risk, shown top left. It's back to levels last seen at the 2016 referendum. And in London, economic activity, top right, and jobs, bottom left, have both dipped back towards the equilibrium line. But looking ahead, bottom right, and you can see that the London economy is still expected to grow faster than the U.K., overall, although at a slower rate than 6 months ago. But despite this uncertainty, 203,000 jobs are still expected to be created over the next 5 years, and that's more than we forecast in May and led by the professional services and the creative industries. So no surprise then to see take-up marginally higher and active demand also up too. No surprise either to see professional services and creatives account for more than half of this demand, bottom left in the red and in the green. And even if you strip out the 11% that is serviced office operators, the resultant active demand is still ahead of the 10-year average.

A word on retail. And as you can see that the London story remains healthier than the U.K., overall, here looking at vacancy rates with the 3 prime streets, where almost 80% of our retail sits faring way better than the average U.K. High Street.

Yes, we are expecting further rental pressure, but the best units in strong streets are letting well and witness our recent Bond Street pre-letting 11.5% ahead of ERV.

Now even if we strip such pre-lets out and look only at the investment portfolio, bottom right, the theme of beating ERVs through strong letting continues and by an increasing margin, 8.9% over the past 6 months. So with the demand for quality space feeling robust, what then about supply. No change here from May, we have a shortage. Looking at the table at the bottom left, 44% of everything to be delivered over the next 5 years is already pre-let, shown by the hatched areas. There's only 12 million feet of spec space to be delivered across London by the end of 2023. That's 1% of existing stock per annum. And in the West End core, it's only 0.6% per annum. In fact, if you want to pre-let new space in the West End, that'll be delivered by the end of 2020. You only have 150,000 square feet to choose from. And because total supply is now falling, shown by the right-hand graph, and vacancy rates are both lower than March, shown in the table at the bottom, and projected to remain low, we think that pre-letting is inevitable.

So we agree with PMA that office market balance under an orderly Brexit shown on the left will remain on the landlord-friendly side of equilibrium. We also think that there's a good prospect of further rental growth under these conditions, as you can see on the right. A messy, no-deal Brexit, and we would expect a demand pullback to lead to rental value falls, shown by the dotted lines. Either way, though, our own average rents remain low, way lower than prime West End, where 67% of our business sits with almost all of it next to Crossrail.

So let's turn then and look at our investment markets. And again, similar themes to May. Turnover is way down on the 5-year average, top left, partly because there's limited stock available and no forced sellers, shown top right. Of the GBP 3.5 billion for sale in May only 51% has since sold or is under offer compared to 70% for the same period last year. 49% has been withdrawn or are still available, also up on last year as owners are choosing to hold out for big prices rather than sell. Why is this? We think, 3 reasons. First, they know there's not much for sale, only GBP 3.6 billion across London today; second, high relative yields, bottom left. On average, London gives them more than 125 basis points over Paris or 500 basis points against real gilts; and third, they know there's a bucket load of equity out there looking for London assets, GBP 33 billion at last count, shown bottom right. So every incentive for them to hang on. Crucially for us, though, with our sizable pipeline, we have no need to buy in these challenging conditions.

So to sum up then on our market view. And again, similar to the summer. Although for our rental drivers on the left, we think low-vacancy rates are now a positive.

Looking at the table at the bottom, and although we've performed towards the top end of May's rental value guidance, the current macro uncertainties have led us to leave our expectations for the full year unchanged. But sensible resolution to the current uncertainties, and we should outperform our guidance. For yields, whilst the drivers are the same as they were in May, we think a business-friendly outcome to the current political uncertainties will lead to compression across the board. And by inference, therefore, the opposite is likely to lead to a correction.

As ever, we'll be watching conditions closely and whatever the result, our strong medium-term positioning means that we feel very well placed. So when we then look at our acquisitions and disposals since March, it should be no surprise that we have bought nothing.

Looking at the pie chart of the assets we've been tracking since March, only 7% traded within our view of fair value, shown by the blue segment of the pie, 43% was 25% or more ahead of fair value. But despite this demanding pricing, you can see from the graph that we have circa GBP 1 billion under review, all of which fits our criteria of having repositioning opportunities, generating net area gains and being near key transport infrastructure. The question is, will we find pricing acceptable or not. And only time will tell.

Turning to sales. And we've closed out a few remaining residential units. And today, we have circa GBP 180 million in the market or being prepped for sale, recycling out of completed business plans, off low yields and where our forward IRR is beneath our cost of capital.

As ever, we'll remain opportunistic on both acquisitions and on sales. So where next then for our investing activities, and not surprisingly, much depends on the outcome to the current uncertainties. An orderly property market, and you can expect a balance between more sales and some acquisitions. Market dislocation, and we're likely to be a net investor. Either way, we have significant firepower should we need it, but we will maintain both our patience and our discipline because we have no need to buy.

Meanwhile, we have growth to generate from both investing in our significant development business and from our many portfolio management opportunities. And so with more recycling and internal investment to look forward to, over 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 progress with our flexible space and how we're improving the GPE occupier experience. We've been making strong progress against a backdrop of uncertainty. Over the 6-month period, GBP 9.9 million of new rents have been secured with GBP 1.5 million from flexible space. And our continued program of investment has delivered rents 9.4% ahead of March's rental value, with a strengthening rental beat.

Recent success has included our first retail pre-letting at Hanover Square on New Bond Street. We have secured GBP 1.5 million of rent at an impressive 11.5% premium to ERV, and kick-started the leasing campaign on these exceptional units.

And at Britton Street in Farringdon, we've agreed GBP 2.75 million at a 10% premium, together with the lease extension, giving 15 years term certain. And with our business plan completed, we're in the market for sale.

Leasing success has reduced the void to 2.3%, the lowest for some 4 years. And since the end of September, we've completed or have under offer another GBP 10.3 million, 4.8% ahead of September's ERV and with a major contribution from our developments. There's more from Andy later.

We've also seen strong reversion capture this half, GBP 11.7 million has been secured, delivering an uplift of 21% and slightly ahead of rental value, with a particularly strong performance from our retail on Regent Street. We've doubled the rent and beat ERV by 30%. And there's further opportunity for growth.

GBP 8.3 million of reversionary potential, with GBP 7 million available in the next 18 months. And we've also got plenty to go for in flexible space, where we continue to evolve our offer within a changing occupational market.

Let me first remind you of our various flexible space products, which have been steadily growing. And let's not forget, we own all of this space.

Flex, where we're delivering fitted space with its own front door and unlike serviced offices, it's priced by floor area, not by desk. Flex plus, which provides all the benefits of flex, but with a fuller service provision. And finally, our partnerships, where we are working with flexible space operators in revenue share agreements that maximizes revenue ahead of development and enhances building amenity. So what have we been doing? 49,000 square feet of flex deals have now completed. We've leased almost all of this within 1 month of fitting out and secured GBP 3.6 million of rent at a 32% premium to ERV.

We've also now committed to our first flex plus building, refurbishing 16,000 square feet in Soho, which launches next year. Encouragingly, we've already had occupier interest. And with a portfolio that's well suited to these products, you can expect to see us grow in this space with some 137,000 square feet currently being appraised.

We're also growing our partnerships. You'll be familiar with Runway East, signed ahead of our New City Court development. With occupancy at 96%, our revenue share is GBP 2.8 million. And when we compare the net cash flows to traditional letting, we're ahead by some 160%. And in September, at City Place House, we entered into a short-term agreement with Knotel on 82,000 square feet, which has greatly reduced our leasing risk and holding costs ahead of this exciting development. Space is already 72% pre-let, at rents 10% ahead of underwrite. And when fully occupied, our anticipated revenue will be GBP 1.5 million.

And more recently, terms have been agreed for a longer-term, 10-year partnership at our Hickman development in Whitechapel, which animates the ground floor space and widens the building's appeal.

Our commitment now totaled some 214,000 square feet, broadly 10% of the office portfolio. And we're looking at a further 150,000 square feet, which would take us to around 17%. Within the wider portfolio, we're increasing our focus on customer experience with even higher levels of service and amenity to attract and retain occupiers and stay ahead of their expectations. The launch of our market-leading app in May is an important part of the offer. This has now been rolled out across our office portfolio with encouraging take-up. This smart building technology takes the occupier experience to the next level, giving greater control of the office environment, a community platform and a connection to a lifestyle concierge service. Moving forward, real-time data will improve building design and portfolio performance, helping us achieve our targeted 40% reduction in energy intensity. Technology, combined with a new team structure, will ensure we continue to enrich the GPE experience, help shape our occupational offer, enhances occupier satisfaction and improves brand loyalty.

So to sum up, we're in great shape. Our market offer continues to evolve with an increasing focus on enhancing well-being and amenity. And when combined with an opportunity-rich portfolio, there's real potential to drive greater revenue and capital growth from both our investment portfolio and pipeline assets. On which, I'll now hand over -- hand you over to Andy for an update on our developments.

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

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Thank you, Steve, and good morning. Today, 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 19% of the portfolio, the 3 near-term schemes are a further 10%, which, with the balance of the medium-term pipeline, brings the total program to 54%.

As you can see from the graph, bottom left, the depth of opportunity within our portfolio remains as strong as ever. I'll start with an update on the committed developments. We continue to make good progress with these 3 exciting schemes, all close to Crossrail and having excellent sustainability ratings. They'll deliver 415,000 square feet of new space and over GBP 30 million of new rent. Of our expected profit of GBP 123 million, shown bottom left, only GBP 34 million have been taken at September, leaving nearly GBP 90 million to come or 35p per share.

With the recent retail letting at Hanover Square, the level of pre-lets increased to nearly 24%, as shown on the right-hand side. And assuming our current under offers exchange, this will rise to around 50%.

Starting with The Hickman. We recently topped our construction of this 75,000 square foot building. As you can see in the CGIs, we're creating exciting space, which will have wide market appeal. We're targeting pre-lets and have encouraging interest.

We're enlivening the arrival experience and enhancing building amenity with a combined cafe and reception. And as Steven has covered, we've agreed terms with an operator on a partnership basis for about 20% of the building.

With our increased focus on sustainability, technology will give us the ability to monitor energy usage in real-time and make adjustments to ensure the building performs optimally. Expected profit on cost 10.7%.

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, our works are progressing well with a call already up to Level 6.

We've recently placed all of the 81,000 square feet of offices under offer to a single occupier. We'll shortly be launching the marketing of the 38,000 square feet of retail. We're seeking pre-lets and with the unit layout and size, as well as being opposite Crossrail, we expect there'll be good interest. Anticipated completion remains Q2 '21. Expected profit on cost 17.3%.

Finally to Hanover Square. Starting with #18, the 145,000 square foot building directly above Bond Street, Crossrail station. You'll recall, we've already achieved strong pre-lets to Glencore and KKR at an average rent of just over GBP 115 per square foot with an average lease length of 17.5 years.

There's only 1 floor remaining, outlined in blue, and there's good interest. With these lettings, we've already secured 87% of the building's ERV. For the New Bond Street element of the scheme, we're targeting pre-lets for the 33,000 square feet of offices, and there's healthy demand.

For the 31,000 square feet of retail, the recent pre-let to Canali is shown edged white, and we've encouraging interest in the remaining units.

For the 6 residential apartments, our marketing will begin early next year, and we'll be fitting out 2 of them as show flats.

Taking the development overall, we've now secured 53% of our ERV. Construction is progressing well, and we remain on target to finish in Q3 '20, expected profit on cost 21.9%.

Next to our opportunity-rich pipeline of 10 schemes with a potential area of 1.4 million square feet, which is already a 54% increase on the existing area and there's more to come. The team is busy preparing this pipeline, and I'll update you on the 3 near-term schemes, starting with 50 Finsbury Square, which is only 200 meters from the Moorgate Crossrail station.

Since the half year, we've agreed a surrender of Bloomberg's lease, and the building remains income-producing from their subtenants until next summer, our proposed block date.

Our plans for the major refurbishment are well advanced. As you can see from the image, we're proposing a large and active reception featuring our concierge and amenity offer. We're also partially infilling the atrium, improving the retail and leisure offer as well as an animated new roof terrace overlooking the square.

This will reposition the building for the rich variety of occupiers that we're targeting. We've submitted planning applications to Islington and intend to commence the refurbishment works next summer.

Now to New City Court in Southwark. In December, we submitted a planning application for this landmark new building where we're proposing a significant area uplift. As well as exciting office and retail space, we want our buildings to have a positive long-term social impact. We've included community facilities within our design proposals and are actively engaged with local groups to operate and manage them. We're continuing our discussions with Southwark through the planning process for what will be an exemplary building for sustainability and well-being and expect a determination in Q2 next year.

Finally, across the river to City Place House, which is also only 200 meters from the new Moorgate Crossrail station. We're making good progress in our pre-application discussions with the City of London and are targeting an area of 320,000 square feet, nearly double the existing. We expect to submit a planning application for this highly sustainable and innovative new building in the first half of next year.

So to summarize. Firstly, we've 3 committed schemes, all close to Crossrail, where we continue to make good progress with our pre-letting activities. Secondly, we're preparing our deep and opportunity-rich pipeline of 10 projects with a potential area of 1.4 million square feet. And finally, we're embedding sustainability and social value into our business, all new build developments completed from 2030 will be net-zero carbon.

We're working with local communities and charities to tackle issues such as homelessness and air quality. We're also supporting training and education initiatives. All of this gives 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 have plenty of long-term organic growth to go for. Our committed developments now 19% of the portfolio, up 5 percentage points versus this time last year are pre-letting well, and there's more near-term value upside to capture. We have further surpluses to crystallize from our 9% that is long-dated assets, 37% of the book is in active portfolio management assets with strong repositioning potential. And finally, 35% is in our development pipeline, and we expect that to grow. Plus, it's already 12% reversionary in its existing state, giving us real medium- and longer-term value to aim at.

So a strong opportunity supported by a clear strategy, repositioning to generate growth, recycling, returning surplus equity and investing sustainably in new raw material in Central London only. And in London only because we believe it remains Europe's business capital. It's still growing, generating long-term occupational demand with little supply and its investment markets remain liquid despite the current uncertainties; plus, our strategy is deliverable. We're executing plans well. And with 92% of the book near Crossrail.

Our exceptional pipeline gives us growth well into the 2020s, delivering net-zero carbon schemes from 2030. Meanwhile, we're successfully innovating, evolving our product to suit the changing patterns of demand and working up our roadmap to a net-zero carbon business. We're ready to buy, but we have no need to, and our financial strength gives us the freedom 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 balance sheet strength, both to invest in it and exploit any market dislocation. And our talented team, supported by our strong culture is fully committed to deliver on our ambitious plans.

So let's see then what the next few months give us. But either way, we are positioned for any outcome, and we remain justifiably confident in our outlook.

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Questions and Answers

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

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Can I ask a few of these people to join me on the stage, please? Okay. There are some microphones in the room.

We have question number 1 from Mr. Christopher Fremantle.

Microphone over here, please. Thank you very much.

Chris?

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [2]

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Chris Fremantle from Morgan Stanley. Two questions, one, a general question, one, a specific question. You talked about how the market might change or a number of different scenarios, political, macro-based. Can I just press you a little bit on how your behavior is going to change your behavior, not the market, but how you are going to change your behavior, both in terms of capital structure and the amount of CapEx, the quantum of CapEx that you might spend in those varying different scenarios? That's the general question. Then the specific question was just on the -- you talked a little bit about the CapEx you're spending on the refurb of flex space, I think it was GBP 25 million, GBP 30 million or something. Is the profit on cost that you anticipate for that sort of CapEx very comparable with the sort of -- with the other development CapEx that you're spending? Or is it lower?

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

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Okay. Thank you, Chris. Let me deal with the first one then. Perhaps, Nick, you might address the CapEx going out on the flex space. Behavior, how will it change? Such an enormous question that I can give you a politician's answer. And I'm afraid that's what I'm going to do because, of course, we don't know what the circumstances are going to look like and what the conditions specifically will look like. And indeed, what policy responses might be. And I think that's why we go into as much detail as we do about this -- the ability for us to go whichever direction we see most fit, whether that's balance sheet strength that allows us to expand or indeed the discipline, as we've shown previously, to contract. So if we sell more than we buy or sell more than we put back into the market, we'll give back surplus capital or hold on to it, if conditions tell us that we should be buying a load. And that optionality, dreadful word, but it's a really important word, is important for GPE just at the minute. You've got to be able to react quickly to conditions. I mean the other thing I would say is that conditions are difficult to read at the best of times. They're now really difficult to read. But at least it feels like we're getting towards the back end of that uncertainty. We've had 3 years since the referendum. We have seen much stronger, I would argue, take-up than even we were expecting in those 3 years. It's been a better story from that perspective. We've evolved our offer, I think, really well. We've fronted up to condition changes, and we're offering a whole load more for our customers than ever before. They're sticking with us, they're leasing from us, they're paying us a premium to ERV, which is important. We've got good development, existing stock that we can exploit over the next 7 to 10 years, plenty of it. So we don't have to buy anything. But if we do have the opportunity to buy stock, we will. So our behavior, to your question, will depend entirely on the circumstances as we see them. That's always been the key for GPE. And we feel like we have the ability to do that. The right size of this business is small enough to be nimble enough to change direction quickly. We've done that before, and I suspect we'll have to do it again. And big enough to have access to great people and a relatively low-cost of capital. And blending that is a really, really important USP that we've offered the market for a while now. As to the CapEx...

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

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Yes. So the CapEx I referenced was -- there's GBP 28 million of refurb CapEx. Within that -- the point I have to make, within that there's GBP 6 million of specific additional fit out for flex base, that's the Cat B fit out. So it's quite a small number overall in the context of our forward-look spend. In terms of the returns that we're getting on that investment. You'll see on the slide that Steven put up, which compared the various products that we're offering, particularly looking at the flex. We've previously given you data around the beats to ERV. What we've given you this time is some more color around the NPV uplift, and that is a 7-year NPV analysis relative to what you would get if you're leasing the space traditionally without spending that Cat B money. What we haven't put up here, which is some further data is that effectively the income return we're generating on the net new money is in the mid-teens. So do we feel as though we're getting a satisfactory or an adequate return for the risk we're taking. We're absolutely comfortable with what we're doing.

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

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Yes, Tim?

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Timothy Leckie, JP Morgan Chase & Co, Research Division - Head of European Property [6]

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Tim Leckie, JPMorgan Cazenove. Just 2 questions, actually, almost directly following on from Chris'. The flex, you said, I think goes up to 17% of offices when you finish the current developments. At what point do valuers will start to get a bit anxious about the flex component? And how do you prioritize what they do, independent though it is, against the enhanced cash flow that Nick was just talking about?

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

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Okay. Perhaps, Steven, you could address how we prioritize values, although, of course, as you've also suggested they are independent. So the prioritization of somebody who's independent is somewhat challenging. But perhaps you can think about, Steven, what it is they're thinking through when the valuation process is being carried out. I just want to make a general point, which is that our experience of leasing to these occupiers to that particular subset has been really positive. I mean Steven made the point about leasing 93% of all of that space within 1 month. If you were to go and talk to our friends at Knotel, they are some way from opening there. They've already gone through 70% pre-let, right? So there is a flood of users wanting that sort of space, where they have the ability to come and go relatively quickly. And that's what's driving. It's not valuation, it's occupational demand that is driving our willingness to offer more of this space in our business. It is good business. Now I think the valuation construct will catch up. And eventually, you should see it accrete into value for the right sort of building. If you expand too quickly, if you take poor buildings, if you do it inappropriately, you're going to lose money as ever. Steven?

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Steven R. Mew, Great Portland Estates Plc - Portfolio Director [8]

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I suppose the first point is, I think the valuers are feeling their way of it. It's a new thing they're valuing. In terms of the sort of percentage within a building, and sort of the rule of thumb is sort of up to about 25%, but that usually relates to serviced office operation. In terms of our flex operation, that's the fitted space that we've talked about. The values aren't discounting the yields, but they are reflecting refresh CapEx through the valuation process because you will -- as time goes on you will have to refresh the fit out works.

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Timothy Leckie, JP Morgan Chase & Co, Research Division - Head of European Property [9]

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And just the last question then. Thanks very much for the first answer. The scenarios you had laid out, if I remember correctly, were orderly market or dislocation. No chance of a third option, maybe bullish? Is that...

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [10]

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Well, let's see, Tim. I mean, of course, that is a possibility. There are ways in which that is a potential outturn. I mean, I think, as you can see here, we've traded a very strong cyclical play over the last 10 or so years. It's been less obvious for the last 3. It feels to us that at some point there will be a return to a cycle, possibly even a less of an amplitude of a cycle, but that will return, we think. How and when and for what reason? Is the big question. I go back to my answer to Chris' question about having that ability to go left or right, depending on how conditions play out. And it is so important to reemphasize this point about having 1.4 million feet and growing of existing pipeline potential because whilst we wait for acquisitions, and perhaps, Robin, you might just give a view on how the investment market is looking at the minute and some of the things that we're looking at. While we wait for those opportunities to come through, we've got bucket loads to be getting on with.

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Robin Matthews, Great Portland Estates Plc - Investment Director [11]

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Yes. I mean we're always looking at a lot of opportunities. But as we all see from these stats, since June last year, haven't able to acquire anything. And I think we are cautious about -- on our underwriting because of the uncertainties at the moment. But like all investors, clarity will give some confidence. And I think we are hopeful on the acquisition side to see some market cycle change and the ability to acquire. But we are underwriting a lot of deals, they're quite complex. Obviously, the development arena in London is really complicated at the moment. Planning authorities are really tricky. So we actually think of the harder under development, where we're focusing our search for new opportunities. It's actually quite tricky space. And we might find that some more aggressive buyers who've been in the market the last couple of years actually have to trade on or look at or partnering or getting out of an opportunity. So as always, we're small enough that we can always look and search and dig something out. So I think we'll get there. But the market as a whole is obviously very positive to London.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [12]

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Yes, you might imagine that with all the uncertainties out there that this market was -- people were running from it. It's quite the opposite. I mean, okay, turnover is down, but people aren't selling stuff. When anything interesting comes along, there is a significant amount of interest from a variety of different forms of capital to buy it partly because they're running coupon there. They're able to access is so much higher than so many other markets around the world.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [13]

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Bunck, Barclays. Just a few questions from me. Does the change in HMRC tax guidance on properties that are currently under development impact your future investment decisions? And does your -- or do your current development IRRs assume a greater than 3-year hold period post completion? Or would we expect those to come down? And I've got a couple of others. I don't know if you want to answer first?

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Nick Sanderson, Great Portland Estates Plc - Finance & Operations Director and Director [14]

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Yes. So the -- I mean as we referenced, when we were here in May, HMRC had put out some tax guidance in draft form that has now been finalized. And clearly, what they're looking to do is to see developments that are sold price to PC be taxable. And I think as I said then, I say again now, one of the various factors that we look at when we're thinking about investment decisions and divestment decisions, one of them is tax, but it is not the driver of our decisions. When we look at transactions going forward, I think you would expect us to reflect a little bit more heavily on the prospective tax that one would have on pre-PC sales. The numbers that we show here are not reflecting the potential tax the way that we've always disclosed them on a pretax basis. And you know that on some of the developments that we have sold in the tax window, we have paid tax. So it's not as though, we haven't been paying tax on some of our sales historically.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [15]

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The IRRs are run from the commitment date to the 70% leasing date or sale, all right? So whichever is the former. And the reason we stop them there is because the development IRR being a different risk profile is different to an investment IRR from that income start date effectively. And we'll then look at it as we've always done every asset every quarter and make our decision as to whether we think it's an accretive hold or something we should be selling. And that's why we've sold as much as we have because typically, as we've gone from a development risk generating big returns into an investment risk with little else to do, it's better in somebody else's hands with the cost of capital that's coming out of the ground in oil form or similar, which is clearly going to be lower than ours, and thus, we sell. And that process of reviewing every asset, every quarter, we still do.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [16]

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Just on the sort of investment market, as you mentioned, and that's obviously come off this year, partly due to Brexit, partly due to availability of good product. It's just not there as nobody is really selling. Do you, sort of, honestly think there will be a materially better market in the event of everything being resolved, given underlying tenant demand remains very strong, rental growth likely to be flat to slightly up, not much change there? Just sort of what makes you think that, that will become much more positive in the event of things getting resolved?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [17]

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Can we just go to the market outlook slide please, Rich? Thank you. So what we're saying here is the traffic light is one. What we're saying is that the yields we think are currently -- there you go, bottom left, under a series of resolves outcomes, whatever that means. We think that those yields are almost certainly going to come in because we are seeing from our day-to-day dialogue with the market. We're seeing a lot of demand from people sitting out. They're just pending some form of clarity. They like London a lot. The attraction of London, most of them are taking a long view. They're looking at rule of law essentially, they're looking at deep and liquid markets, they're looking at the largest economy, city economy in Europe, one of the largest in the world, one of the most liquid real estate markets in the world. They're looking at employment growth, all of the things that London has in abundance. And for those of you who get around the world, you come back here, I certainly do. And I find I'm regularly reminding myself what an amazing place this is. If you don't do that, I would suggest, get out and go and have a look because it really is very special. And that attraction is still very strong. So it is no surprise that a lot of this overseas capital looks at 4% to 4.5% in London and says, I'm getting 2% to 2.5% on the continent. I'm getting 2% at best in the key cities in Asia. And it's not as if they are without risk, let's be clear. And if you talk to our friends in the investment markets, they will tell you that there is a lot of capital, particularly in Asia, that is looking at London again, but it's just pausing, pending some clarity around some of those issues. Now that's the message we've been getting across in those yields, let's see. But it doesn't feel like it's going to go the other way when we get some clarity on some of these big questions.

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Sander Bunck, Barclays Bank PLC, Research Division - VP of Real Estate Equity Research [18]

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Cool. Last one for me. Just on the retail market, you mentioned that you're expecting further pressure on rents coming through in the retail market. It sort of doesn't really tally with, obviously, your experience that lettings have been very, very strong. Just wondering if you had any examples or guidance on where you think that rental pressure is going to end up?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [19]

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Sounds like one for you, Marc.

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Marc Wilder, Great Portland Estates Plc - Leasing Director [20]

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Thank you very much. Well, the only experience I can give you is really what's been happening in Bond Street. We've mentioned that the deal that we did with Canali was 11.5% above ERV. And the market generally has responded well to the news of Canali. And we've got a lot of conversations ongoing at the moment on the development. And I think that, certainly, in terms of rental pressures generally. We've found to date that the ERVs that we are working to are at similar levels to that, that we have discussed with Canali. But generally, what we have tried to create are units that are smaller, that gives total occupational cost certainty generally around GBP 1 million to GBP 1.5 million a year. Premiums themselves are still being paid in Bond Street. And the market is that we are talking to, we do have a number of those active conversations ongoing. So we haven't really found any negativity towards the sort of the levels of rent that we are seeking to achieve in Bond Street. I will turn a more general point, though, as far as Oxford Street is concerned, there is definitely more headwind there. And I think that there we are finding that we have adjusted our ERV down marginally from 650 to 625 Zone A. But as Andy mentioned, we haven't really started the premarketing campaign there. And I suspect, when we actually get into those real negotiations then we'll be seeking a little bit more than the ERV guidance.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [21]

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Okay. Any more for -- any more? Yes, Marc?

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Marc Louis Baptiste Mozzi, BofA Merrill Lynch, Research Division - MD & Head of the EMEA Real Estate team [22]

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So if I get to right -- so sorry, Marc Mozzi, Bank of America. If I could -- your -- the feedback from your -- from this presentation, you're relatively more positive than 6 months ago, if I get it right. But there is an elephant in the room, which is we were -- do you see we worked as an opportunity today or as a risk for the market because once again they released a number yesterday or 2 days ago where there's more losses than revenues, which obviously raised a point about something has to change in the way they are operating. London is a single market. How do you think that could impact the market positively or negatively, by the way?

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [23]

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Yes, I'm not sure it's an elephant. I mean it might be an ex-elephant, it might be a mouse, actually. And I'm not sure it's that significant really because -- I mean they have clearly fallen into an expansion trap, if you like. They've gone too fast, too quickly. If you look at their operations in London, they're pretty well occupied, actually, they're still generating good demand for the space. They've taken some good buildings and some less good buildings. But I think what's more relevant, much more relevant, is what the underlying market is telling us about that area of operations. And the flex end of the space is trading really well. I mean our own evidence is telling us that. We're getting live data every day about what's happening in that space. And there has been a structural change in the way that occupiers interact with their landlords like us. And that customer relationship we have is completely different to that than it was 15 years ago. Whether that's -- anything to do with work is irrelevant. It's just a fact. And we are engaging with our occupiers on a level now that is all about service provision, Steven touched on. If Andy was to talk to you in detail about some of the design ideas that we're coming through with for our buildings. And you can see it at The Hickman, it's much more about engagement with occupier at the moment they walk through the front door and the amenity we're giving them in that reception area of a building is completely different. And all of that speaks to a completely different way of operation. So it would be mad for us not to be doing it, whatever we've worked with up to or their ilk and there will be others like them. And last generation, Mr. Dixons' business went, I think, once. So there'll always be somebody who runs into a bit of a brick wall. That's a fact. It happens in every industry. And this is no different. But the truth is the occupational relationship with occupiers that we have is changing, and we're changing with it. And I think we're doing a really good job to address their needs, and we'll continue to do so. And the people who do that really well, will win out. They will generate extra premium, they'll keep occupiers happy and with them. Their voids will be shorter, their developments will be more profitable, and they'll end up owning better buildings.

Any on this side? We monopolized over this side. One more. Yes?

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [24]

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It's Rob Jones from Deutsche Bank. Just one on Page 31 about The Hickman. If I read this right, anticipated finish is only about 4 months' time. But currently, it's 0% pre-let. I'm slightly surprised by that, given there's obviously a number of landlords out there, including yourself, that are announcing significant pre-letting, sometimes years ahead of practical completion. I appreciate that, obviously, I think you said 20% of that space is going to be under a partnership agreement and you're underway or kind of heavily through discussions with regards to that. But just slightly surprised to not see a figure at this stage greater than 0. Wonder if you could touch on that?

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

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Marc or Andy, you take your pick.

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Andrew White, Great Portland Estates Plc - Development Director [26]

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Marc, you go.

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Marc Wilder, Great Portland Estates Plc - Leasing Director [27]

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All I'll say is watch this space. We have ongoing conversations. And actually, what has proved to be quite challenging is the viewing experience over the building during construction, particularly with the new floors that are going on top of the building. But we do have a number of conversations on big chunks of space, 28,000 to 35,000, a couple of floors. And I would hope that by the time we come to financial year-end that we will have bagged something in addition to the serviced office provider.

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Toby Courtauld, Great Portland Estates Plc - CEO & Director [28]

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You heard it here first.

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [29]

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So you think you can get to, say, a 70% let by financial year-end?

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Marc Wilder, Great Portland Estates Plc - Leasing Director [30]

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I didn't say that. I...

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Robert Alan Jones, Deutsche Bank AG, Research Division - Research Analyst [31]

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If you're a betting man.

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Marc Wilder, Great Portland Estates Plc - Leasing Director [32]

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I'm always optimistic. I think that's the thing. And I think the other thing also just to say is, in terms of rental expectation, the sort of numbers that we are talking about are -- again, are ahead of what our esteemed value is.

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

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Rob, what I think you've got to remember -- what I think you've got to remember is that every appraisal that we put together and every underwrite for every development, we always make an assumption that we have circa 9 to 15 months of void between completion of the building and letting. What you've got used to is the pre-letting of space. Rich, if you can just go to my letting slide that I did in the market section, the yellow chart on the right. You've got used to us pre-letting a very high proportion and others, not just us, clearly. Thank you. And you can see that -- typically, you're seeing -- and actually, that's the first half isn't it. That's not the pre-lets. But you're seeing us pre-letting an awful lot of space and have done over the last few years. So that's -- you've got used to that idea. And don't forget we're underwriting quite large voids. Will we beat the void underwrite, we should.

Right. And that's it your -- that side. Any on this side? No, stun silence.

Okay. In the interest of time, I think if we have no more we'll wrap it up there.

Thank you, everybody, for coming. As ever, we really appreciate it. And we're available for the rest of the day, should you want to ask any more questions. Thank you.