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Edited Transcript of HLCL.L earnings conference call or presentation 23-May-19 8:00am GMT

Full Year 2019 Helical PLC Earnings Call

London May 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Helical PLC earnings conference call or presentation Thursday, May 23, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald A. Kaye

Helical plc - CEO & Director

* Matthew Bonning-Snook

Helical plc - Property Director & Executive Director

* Timothy John Murphy

Helical plc - Finance Director & Director

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Conference Call Participants

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* Matthew Saperia

Peel Hunt LLP, Research Division - Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property Analyst

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Presentation

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Gerald A. Kaye, Helical plc - CEO & Director [1]

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Good morning. It's great to see you all here today, and welcome to those dialing in remotely. Our presentation is on our website if you would like to look at it whilst we're speaking.

I'm delighted to share our results with you to explain how we have progressed in terms of building on the transformation that we announced last year. We have done this by completing most of our development program, achieving sales above valuation, lettings above ERV and acquiring new assets to drive the business forward.

Please let me start by running through the agenda for today. I will update you on our portfolio and our strategy, after which I will run through the results highlights, our latest acquisition and the future upside. Tim will explain the numbers in detail, and Matthew will provide more information on the individual properties within the portfolio. I will then sum up, after which we would be delighted to answer any questions you may have.

Our portfolio. The disposal of the final 3 non-core assets early in the year was followed by the sale of Shepherds and 31 Booth Street at a valuation surplus of GBP 15 million. A more detailed breakdown of the strong performance of these 2 assets comes later in the presentation. Our focus is exclusively in London and Manchester. We seek to create interesting buildings with high-quality architecture, which are attractive to occupiers, conscious of the need to project the right image to customers and employees. In this way, we aim to achieve premium rents. We were excited to announce on Monday the acquisition of a major site on Charterhouse Street, which I will describe in more detail shortly. As at the 31st of March, the portfolio was valued at GBP 876 million.

Please, may I remind you of Helical's strategy. We invest in London and Manchester for development profit, income and capital growth. We tend to keep our multi-let buildings if we assess that they will carry on performing through rising rents and capital growth. We are building up a great cluster of assets around the city in EC1 and E1 as there is considerable demand from growing businesses in this area. By having buildings in close proximity, we have the ability to move tenants around the portfolio.

Flexibility and lease length is becoming ever more important to our customers who are on a rapid -- who are on rapid growth trajectories and have no real idea of what their headcount would be in the years to come. We are responding to this first by granting leases that are either shorter or contain break clauses.

Second, we are providing fully fitted space to let at enhanced rents and reduce rent-free periods. Some customers want to move in quickly, and they do not want the hassle of organizing their own fit-out. I would add that we are happy with multi-let buildings on short leases as our experience over the years is that we have -- if we have top-quality, well-managed buildings, we can maintain occupancy at high levels.

Shepherds was a good example of this, where during the 2008 downturn, the occupancy level never fell below 97%. On the larger schemes, we sometimes work with partners and we seek to enhance our equity return with performance fees.

I will now pick out the key highlights from our results, which demonstrate our ongoing progress. We've increased our profit before tax by 41.2% to GBP 43.5 million. Our EPRA NAV per share has increased by 3% to 482p. Our total dividend per share is up 6.3% to 10.10p. We have a significant sale and valuation gain of GBP 60.6 million. And our total accounting return is 8.4%, which is up from 5.3% last year.

Some of you will be familiar with this slide, which shows the real progress we have made in letting our space since 1st of April last year. We let a total of 304,000 square feet in the year to 31 March, and since then, we've let a further 73,000 square feet. Most of these lettings are at premium rents and are testament to the quality of the space we provide. All of these lettings are shown in the crosshatch [corporate] bar. The gray crosshatch is what is vacant, and the solid gray is space under construction. Matthew will take you through the detail of the individual properties.

Please, may I highlight the like-for-like valuation change of 6.8%. Whilst this is not a statistic over which we agonize, our WAULT has gone up from 5.4 years to 7.3 years. This reflects the lettings at The Tower and the sale of Shepherds. On this slide, perhaps I would highlight the true equivalent yield, which, at 5.1% in London and 6.1% in Manchester, is higher than some of our peers.

This graph shows Helical's performance against the upper quartile of the MSCI indices for both the All Properties Universe and the Central London Offices Total Return Index. It is good to see that we have never been out of the first decile over 1, 3, 5, 10 and 20 years. Our performance for this year at 10.1% is significantly above the London office upper quartile of 6.2%.

Our ERV is GBP 51.5 million. How do we get that? The passing rent is GBP 21.9 million. Add to this GBP 11.3 million of contracted rents, this is signed leases, to get to a total of GBP 33.2 million. The available completed space has an ERV of GBP 8 million, and over 50% of this is the remaining floors at The Tower. The current development is Farringdon East, which has been named Kaleidoscope, and I will now tell you more about the acquisition since 31st of March.

Charterhouse Street is our latest acquisition, which we announced on Monday. Following an off-market process through a long-established relationship, we have acquired the long leasehold interest in a 50-50 joint venture with AshbyCapital of a cleared site for new office development of 192,000 square feet. The planning consent needs tidying up, the design improving, and we aim to be on site as soon as we can, with the building available in the first half of 2022. The GDV is around GBP 300 million. Now we are underwriting this on a similar rental profile to that which we have achieved at One Bartholomew. That is mid-70s to mid-80s as one rises through the building. We will achieve enhanced equity returns if we hit the necessary waterfalls, and this is a great addition to our pipeline.

Now we put in this slide because it shows our increasing holdings in the Farringdon submarket, which is an area we like and where we have achieved premium rents. The local environment and the improved transport links will be even further enhanced when Crossrail opens, which makes Farringdon an area of considerable tenant demand. The latest acquisition also adds to the cluster I was describing earlier.

Our future upside. The following 2 slides provide a good summary of our different assets, and we have indicated what we anticipate is the future potential. I would highlight the impact of our latest acquisition, which I have just described; fully letting The Bower; the completion and letting of Kaleidoscope; and further contributions from One Bartholomew and Barts Square. We will also see ongoing growth from our high-quality Manchester portfolio as we increase rents and let up Trinity. Altogether, these 2 slides show there is conservatively nearly GBP 90 million of upside, none of which is in the NAV.

What do we see happening in the market under all of the political chaos around us, which seem to get even worse since I wrote this a couple of days ago? Central London take-up on a rolling 12-month basis is 5% above trend. Whilst the April take-up was down, the space under offer was 26% above average, so perhaps, some deals are taking longer to sign up. The vacancy rate at 4.3%, which is below the 10-year average, and there is a shortage of new-build space for nearly 10 million square feet of the 13.3 million square feet total availability being second-hand.

Rents are increasing for the Grade A or, as I prefer, Grade Interesting buildings, as proved by the premium rents we are achieving in our own portfolio. It is also interesting to see that rents are harmonizing across markets across London, with the quality of the building as important as the location. 117,000 new office jobs were created in London during 2018. Over the next 10 years, employment growth in London is predicted to outperform Paris and Berlin. Key to this are the creative industries and life sciences. Both are expected to grow strongly.

The investment market is subdued as the money awaits the Brexit outcome. I'm not sure it cares what the outcome is. It just wants to know on what field it is playing. Please bear in mind the attractive yields in London at 4%-plus compared to Paris and Berlin at 3% and many Asian cities around 2%. Interestingly, there appears to be more demand for the value-add opportunities as seen by the considerable interest and competitive bidding on assets such as Remington Street, BT Centre and most recently, the ITV building. As described earlier, in this arena, we have uncovered one nugget, and we are confident we can find others.

Thank you, and I will now pass over to Tim.

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Timothy John Murphy, Helical plc - Finance Director & Director [2]

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Thank you, Gerald, and good morning, everyone.

Let me start with Slide 19. These are strong results. And repeating some of the metrics that Gerald mentioned, our total property return is up 18%, pretax profits up 41%, shareholders' funds up by 6% and our EPRA NAV per share up 3%. Our total accounting return, being the increase in shareholders' funds before payment of dividends, was 8.4%, a good increase on last year's 5.3%. Against this, there was an increased EPRA loss per share, and I will come onto that shortly.

Our dividend has never been directly linked to earnings, but these results have encouraged the Board to seek shareholders' approval for 7.1% increase in the final dividend, which would give a 6.3% increase in the total dividend for the year. And of course, the sale of assets has brought our LTV down from 40% last year to just over 30%.

Moving on from the headline numbers and looking at some of the detail and, in particular, on Slide 20, the movement in EPRA net asset value per share. This demonstrates the impact of creating valuation surpluses from development activity with 38p of valuation gains. The slide also provides evidence of the quality of our portfolio, where GBP 15 million profit above book value or 12p per share was made on those assets sold during the year. Finally, we're also reminded that we are not a REIT and we do pay tax on our U.K. income and capital gains, and in the year, this reduced our EPRA NAV by 11.7p.

Looking at earnings and IFRS profit. This shows the makeup of those 2 figures. Net rents were down substantially on last year, reflecting sales of investment assets over the last 18 months. However, we do expect this to be the low point in terms of our rental income profile. And as Gerald outlined in his presentation, we can see the route to achieving our ERV of GBP 51 million with additional rents to come at our new scheme at Charterhouse Street. We made development profits at One Creechurch Place, One Bartholomew and on the sale of Hammersmith Town Hall. However, provisions increased, most notably at Barts Square, where the failure of Carillion again impacted on the results. Total administration costs increased, but there was a substantial fall in net finance costs compared to last year. The EPRA loss of GBP 10 million was transformed by the gain on sale and revaluation of the investment portfolio into a profit before tax of GBP 43.5 million, an increase of 41% on last year.

I want to look at our debt and cash flow position now. Turning to Slide 22. At 31st of March, we had GBP 479 million of borrowings, including the GBP 100 million convertible bond with GBP 176 million of unused bank facilities. The average interest rate at year-end was 4%, down from 4.3% last year. And this would come down to around 3.4% if the bank facilities were fully utilized and completed developments fully let. We have hedging on 82% of our total borrowings, with an average maturity of 4.2 years on our secured debt. The convertible bond will be repaid next month, and this will provide an annual saving in interest cost of GBP 4 million.

Moving on to loan-to-value. I include here in Slide 23 a note of the position as at 31st of March compared to previous years. The recent acquisition increases our current LTV to around 33%.

Looking at the cash flow and forecast CapEx program on Slide 24. We spent GBP 17 million on acquiring an office building in Manchester and further acquisition cost of GBP 13 million at Kaleidoscope. GBP 50 million was spent on CapEx during the year, with GBP 25 million at Kaleidoscope, GBP 10 million at The Bower and GBP 7 million at Trinity in Manchester. Sales generated GBP 164 million of net receipts. Overall cash balances in the group increased by GBP 106 million by the year-end, but of course, GBP 100 million is allocated to the repayment of the convertible bond.

Turning to our forecast capital expenditure program. We've included here an indication of the quantum and timing of the current CapEx requirements. Going forward, the remaining Barts Square and Tower CapEx will be fully funded with the bank loans we have in place as will 70% of the Kaleidoscope cost. We'll be seeking bank finance for the development of the Charterhouse Street scheme.

If we look at the impact of our committed CapEx program on Slide 25, we would expect this to take us to a mid-30s LTV by 31st of March 2020. This includes the recent site acquisition of Charterhouse Street, the remaining cost of The Bower -- The Tower, Barts Square and most of the remaining costs at Kaleidoscope. There are GBP 30 million of contracted sales at Barts Square, which we expect to complete by March 2020.

And finally, on Slide 25 (sic) [Slide 26]. We now have a portfolio of around GBP 915 million, including Charterhouse Street, which we estimate should provide further capital profits of around GBP 90 million on the slides that Gerald referred to earlier. We have a surplus of ERV over contracted rents of GBP 18 million, increasing to GBP 26 million on completion and letting of Charterhouse Street. And LTV is down from over 50% a couple of years ago to 31%. And we have firepower to add to the portfolio to fund new deals.

As I stated on the slide, we're happy with our chosen markets. We have financial and operational capacity to grow, and we look forward with confidence in our ability to deliver capital profits and increased earnings.

And with that, I'll hand you over to Matthew.

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Matthew Bonning-Snook, Helical plc - Property Director & Executive Director [3]

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Thank you, Tim. Good morning. Firstly, I would like to cover some of the operational highlights from our London portfolio, starting with those in the city and Tech Belt area pictured here.

The Bower at Old Street roundabout is the largest asset within our portfolio, accounting for just over 50% by value. It was developed in 2 phases, the first of which was fully pre-let prior to completion in March 2015. In Phase 1, we have 5 office tenants in The Warehouse and John Brown Media in The Studio, along with just over 10,000 square feet of F&B tenants, and they are situated within the newly created street. Many of the rent reviews are due in Q4 of next year, so it will be interesting to see how those play out. The scheme has been shortlisted for 5 different industry awards, and we await the results of many of those.

Turning to Phase 2. The Tower was completed in August 2018, having pre-let 6 floors to WeWork. With 3 office tenants taking space this year, which includes an expanding tenant from Phase 1, we are now 70% let with only 5 floors available, although one of those floors has gone under offer this week. This has provided a further GBP 4.4 million in rent as an average rate of GBP 72.70 per square foot, and we have achieved a top rent of GBP 83. We also have 2 new F&B tenants, with Albion & East now up and trading at Serata Hall and Wagamama currently fitting out. The [peninsularization] of Old Street roundabout pictured on the slide will add significant public realm, and we believe it will further enhance the attractiveness of this location and our holdings here.

At Farringdon East, we have now formally launched the marketing of Kaleidoscope, which has been topped out, and the claddings should be complete within the next 4 weeks. We have a double-height reception entrance with an adjoining restaurant proposed and 5 floors of offices ranging from 14,000 to 19,500 square feet. We also have a 5,000 square foot roof terrace stretching the whole length of the building with wonderful views of some pools and across London. With limited competition expected when we complete, we are hoping for a good letting result and the upside, as Gerald has mentioned. Whilst it's a shame Crossrail has been delayed, we expect the station below to be operating within 12 to 15 months of completion.

At The Loom, our listed Victorian warehouse in Whitechapel, we have 48 office suites and 37 different tenants. During the year, we have secured 11 new lettings totaling 37,000 square feet. And we now only have 3% vacancy, namely 2 suites both under 2,000 square feet.

On acquisition, the building was predominantly occupied by back-office, finance and insurance functions. And since then, we have been able to refurbish all of the common parts and about 85% of the office space. Today, the building is home to mostly creative and media companies. We have adopted a flexible leasing approach and are retaining rent levels of GBP 55. We see the attraction of the location strengthening with the delivery of the adjoining residential and the amenities and the restaurants which have formed part of this. We also have a Crossrail station at Whitechapel under 10 minutes walk away.

Our office building overlooking the historic Charterhouse Square remains fully let to a range of companies in sectors such as advertising and designer furniture, which favor this colorful and eclectic neighborhood, which is being transformed through the arrival of Crossrail, the Culture Mile initiative and the beginning of the re-purposing of Smithfield Market.

The largest office building within our Barts Square scheme is One Bartholomew, which was forward sold to clients of AshbyCapital. The 214,000-square foot 12-story office building was completed in December 2018 and is now 64% let, having secured lettings to The Chicago Booth School of Business, Infrared and The Trade Desk. Having achieved rents rising from GBP 75 to GBP 85 per square foot depending on floor level, we now only have floors 3 to 6 to let. And a profit share will be due to the Baupost-Helical joint venture once the building is predominantly let.

With respect to the residential element of Barts Square, we have sold 134 of the first phase of residential at an average rate of GBP 1,558 per square foot. Since the year-end, one further unit has exchanged and one additional unit has been reserved. Both restaurants are now let. Stem + Glory, our vegan offering, is up and trading, and Halfcup are currently fitting out their premises. The final phase of residential comprising 92 units has seen 44 exchanged with an average sales price of GBP 1,793 per square foot. Completion is due at the end of this year. Despite the slowdown in the London residential market, we feel confident about the prospects given the rather unique nature of the product and the limited supply of residential in the locality.

90 Bartholomew Close was completed in March 2018, and we have let the ground and basement floor restaurant unit to Lino and the first floor to Northridge Law. Floors 4 and 5 are under offer, leaving just the second, third and sixth to go. We have fitted out the second floor so that we can offer a plug-and-play option, which seems popular at this floor size level. Our smallest office building within the Barts Square complex is 54 Bartholomew Close, and this is due to be complete at the end of this year.

Our landmark city office scheme in the heart of the insurance district, One Creechurch Place, is now fully let. Our total investment was approximately GBP 12 million. And through the development management fee, promote and share of profits after taking into account the City of London's share, Helical will have received in excess of GBP 33.5 million in return.

In Chiswick, at Power Road Studios, we have 16 tenants across 27 office suites in 4 separate studio buildings. Much of the office space is now being refurbished since acquisition, including a new cafe amenity. Of the 23,000 square foot either un-refurbished or available, 70% is under offer. We have planning consent for a rooftop extension to studio 1 of 13,000 square feet and a new studio building of 30,000 square foot on surplus carpark land. We're achieving rents of GBP 40 a foot through a flexible leasing policy, typically 5-year terms with tenant breaks where required.

The Powerhouse is an office building with long leasehold residential units above where the office is single let to a music recording studio. Once some recoverable service charge works have been carried out, we expect to dispose of this asset.

I'd now like to turn to Manchester, where our properties make up 14% of the total portfolio across 4 buildings following disposal of 31 Booth Street. Churchgate & Lee near Oxford station is our biggest asset at just over 50% of our Manchester holdings by value. These 2 interlinked buildings provide almost 0.25 million square feet of multi-let office space and is home to 14 different companies. With average rents of GBP 16.50 per square foot and new lettings and regears achieving GBP 21.50 a square foot, we expect to see some decent capital growth coming through. We continue to focus on the value creation side through a planned refurbishment of the reception at Lee and a new amenity feature in the underutilized courtyard that links the 2 buildings.

In the Northern Quarter, at Dale Street, our 2 lettings to a technology and advertising company now mean that we are fully let with 11 tenants in total. During the letting phase, the rents grew by 30% from the first letting to the last. And we're finding that the Northern Quarter is increasingly in demand by the creative sector.

Following an extensive refurbishment at Trinity completed on time and on budget in January of this year, we are now marketing this space. We have received very positive feedback on the quality of the floors and the clean and contemporary design, and we're hoping we'll be able to announce some letting success before long.

Our latest multi-let office acquisition is a converted packing warehouse in the Northern Quarter known as Fourways House. We have submitted a planning application to carry out an extensive refurbishment of the atrium, improving it not only visually but also improving the lateral connectivity. Despite these works having not started, we've been able to move rents in the building by new lettings and regears from GBP 16 a foot to GBP 25. And we hope to start the refurbishment works in the autumn, and these will be carried out while the tenants are in occupation.

During the financial year, as Gerald mentioned, we've sold 2 assets, The Shepherds Building in West London and 31 Booth Street in Manchester. The performance metrics of both is set out here for you. In terms of book value, Shepherds was sold at a 12% premium and Booth Street at a 29% premium.

With that, I will now hand you back to Gerald.

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Gerald A. Kaye, Helical plc - CEO & Director [4]

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Thank you, Matthew. Please, may I summarize. I would like to identify some key milestones we want to achieve over the next 12 months. On the letting front, there are 4 key buildings, the remaining floors at The Tower and at One Bartholomew and then at the Kaleidoscope as we move towards completion as well as Trinity in Manchester. We're also looking to sell the remaining residential at Barts Square, and we will probably recycle some assets for new acquisitions where we see greater future performance. Helical has a focused portfolio of Grade Interesting offices in London and Manchester. We provide flexibility to our customers to enhance our returns. There is further upside to capture in the existing portfolio, and we continue to evaluate new opportunities.

We look forward to seeing you again in November, and we'd now be happy to answer any questions. Thank you very much.

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Questions and Answers

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Gerald A. Kaye, Helical plc - CEO & Director [1]

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Any questions?

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Matthew Saperia, Peel Hunt LLP, Research Division - Analyst [2]

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It's Matt Saperia from Peel Hunt. You finished there with new opportunities, Gerald. Just interested to know -- you touched upon how competitive the marketplace is. I'm interested to know how much you're sort of costing (inaudible) for the moment and what it is that gives you an advantage when it comes to securing the types of opportunities that you're looking for.

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Gerald A. Kaye, Helical plc - CEO & Director [3]

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Yes. We looked at a number of opportunities over the last 12 months, and I think it's to fair to say there's more competition for the sort of the value-add assets than there is for the open let [standing] investment market. And I think that's clear. And it's great to uncover Charterhouse Street, which wasn't on the market, and it was just because we're in the right place. We knew the right people. And when something like that comes past you, you've got to make every effort to acquire it. And it's a very exciting opportunity to take forward, which is getting to grips now with the changes we're going to make to the building.

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Unidentified Analyst, [4]

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I'm James from Peel Hunt. Again, just on acquisition. I mean

you (inaudible) of reducing leverage. And I'm just wondering, how willing are you to push the leverage back up to some degree? And should we expect to see some more kind of capital recycling given (inaudible) you mentioned at the end?

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Gerald A. Kaye, Helical plc - CEO & Director [5]

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Yes, certainly. I mean, as I mentioned, we'll look to potentially sell some assets if we deem that future performance isn't matching the criteria we've set. And I think as Tim indicated on one of his slides, our LTV will nudge up with the current expenditure.

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Timothy John Murphy, Helical plc - Finance Director & Director [6]

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Yes. There's no intention to take the LTV back up to where it was before. And obviously, as part of our business model, what we've done in the past is we have used other people's balance sheets to leverage off them rather than use our own resources. So that is an option for big development schemes and will continue to be part of our business model.

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [7]

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Just on the -- sorry, it's Robbie at Numis. On that point around sort of balance sheet structure, just wondering, was there an opportunity -- Charterhouse Street on balance sheet sort of 100% as opposed being on joint venture, was it always the preferred route on a building of that scale to go down the JV route? I'm just sort of thinking forward. Should we basically expect more kind of JVs, not balance sheets, rather than sort of wholly owned balance sheet type structures?

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Gerald A. Kaye, Helical plc - CEO & Director [8]

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Yes. I think Charterhouse Street is a chunky asset, and I think it makes a lot of sense. We know Ashby very well. We've got excellent relationship with them at One Bartholomew. And I knew they were keen to acquire more assets in this area, so it was an easy conversation to have with them. But I think depending on the scale of what we're looking at, if it's small, we'll do it on our own. If it's bigger, then we'll potentially bring in a partner alongside us. And what we do try to do, as I hope I made clear, is -- and we have it on Charterhouse Street. If we hit some performance targets, then the returns skew our way. So we're trying to make our equity work a bit harder. And we also get a DMV on Charterhouse Street, which is good to have. Is anyone calling in got any questions? Or listening in?

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Operator [9]

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We don't have any questions. We don't have anybody at this time. (Operator Instructions) We don't have any questions. I'll turn it over to you.

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Gerald A. Kaye, Helical plc - CEO & Director [10]

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Thank you very much. Thank you, everyone.