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Edited Transcript of HLCL.L earnings conference call or presentation 21-Nov-19 9:00am GMT

Half Year 2020 Helical PLC Earnings Call

London Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Helical PLC earnings conference call or presentation Thursday, November 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald A. Kaye

Helical plc - CEO & Director

* Matthew C. 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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* Kieran Adrian Lee

Joh. Berenberg, Gossler & Co. KG, 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, everyone. Thank you for joining us, and welcome to those dialing in remotely. As usual, our presentation is on our website if you would like to look at it whilst we are speaking. I'm delighted to present our half year results and to be able to report 6 months of solid progress with some strong lettings.

Most of you will be familiar with the format today. I will update you on our portfolio and remind you of our strategy, after which I will run through the results highlights, the future upside for our business and provide some market commentary. Tim will explain the numbers in detail and Matthew will provide more information on some of the individual properties within the portfolio. I will then sum up, after which we would be delighted to answer any questions you may have.

As you are aware, our focus is exclusively in London and Manchester. We have a premium portfolio of interesting buildings with high-quality architecture which appeals to today's ambitious organizations wanting to occupy the best possible space to attract and retain a high-quality workforce and to resonate with their stakeholders. In this way, we are achieving premium rents. As at 30th September, the portfolio was valued at GBP 955.8 million.

Helical's strategy is clear and very simple. We invest in London and Manchester for development profit, rental income and capital growth. We tend to retain our multi-let buildings if we assess that they will carry on performing with rising rents and capital growth. We have built up a strong 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. For example, one of our tenants at 25 Charterhouse Square has taken a floor for expansion at 90 Bartholomew Close.

Flexibility in lease length is becoming ever more important to our customers who are on rapid growth trajectories and they have no real idea of what their headcount will 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 reduced rent-free periods. Some customers want to move in quickly and they do not want the headache 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 top-quality, well-managed buildings so we can maintain occupancy at high levels. On larger schemes, we sometimes work with partners and seek to enhance our equity return with performance fees.

I will now pick out the key highlights from our results which demonstrate further positive momentum. Our EPRA NAV per share has increased by 0.8% to 486p. We've achieved a valuation gain of GBP 9.9 million. Our total accounting return is 2.7% and our interim dividend per share is up 3.8% to 2.7p.

This slide shows the further significant progress we have made in letting our space since 1st April this year. We have let a total of 173,000 square feet in the half year to 30th September. And since then, we have let a further 71,000 square feet. Again, we are achieving premium rents because of the quality of the space we provide. All of these lettings are shown in the crosshatch copper bar. The dark blue is the diminishing amount of vacant space being a floor at both The Tower and One Bartholomew, plus Trinity in Manchester. The royal blue represents space where construction will soon be complete at Kaleidoscope and 55 Bartholomew. The light blue is our latest acquisition of 33 Charterhouse Street.

I'm pleased to highlight the like-for-like valuation change of 1.5%. The London vacancy rate is down from 16.2% at 1st April to 8.9% at 30th September and is today lower still with the further lettings achieved at The Tower and 90 Bartholomew Close.

The main feature of this slide is the passing rent of GBP 27.4 million, which is a really healthy increase from GBP 21.9 million at 1st April. Our ERV is GBP 59.6 million. Let me take you through how we get there. Passing rent is GBP 27.4 million. Add to this GBP 11.1 million of contracted rents. This is signed leases to get to a total of GBP 38.5 million. The available completed space has an ERV of GBP 3.2 million and half of this is at Trinity in Manchester. The current developments are mainly Kaleidoscope and 33 Charterhouse Street.

This slide summarizes what we believe is a conservative estimate of the future potential. Picking out the highlights, at The Bower, when we let the remaining floor and begin to capture the ERV with the forthcoming rent reviews on Phase 1, that's The Warehouse and The Studio, we see GBP 10 million-plus. At 33 Charterhouse Street, our share of the potential surplus is upwards of GBP 20 million. At Kaleidoscope, there is an estimated GBP 15 million when we let the building. In addition, the 4 Manchester properties will show rental growth and of course, a surplus when we let Trinity.

I would like to share with you some thoughts on what is happening in the Central London market. The Central London vacancy rate at the end of Q3 is 4%, which is down from 4.1% in Q2. 11.6 million square feet is under construction and 60% of that has already been let. Savills are reporting that prime rents have increased in the city by 6.2% this year to GBP 82.60 per square foot. And interestingly, for the first time, they are recording average Grade A rents in the Tech Belt -- that's the area where we are most active -- higher than in the city core. Occupational demand remains strong. There is a potential shortage of high-quality new space to satisfy occupier requirements. There are now occupiers who need to move in 2025 already looking at their future space solutions.

I think 2 factors are driving this ongoing demand. First, occupiers are recognizing a need to have the best space they can afford as an essential tool for their business. And second, we are seeing the impact of the shorter 15-year leases working through the system, much better from our point of view as developers to have tenants on a 15-year rather than a 25-year cycle. Not surprisingly, Central London investment volumes are subdued at GBP 7.3 billion year-to-date compared to a total of GBP 17.6 billion the whole of last year.

Considerable change has been caused in the office market by the plethora of serviced office companies. Most traditional landlords have responded by providing their own flexible space, and we are seeing the financial stability of some of these serviced office providers becoming challenging. Our only engagement with a serviced office provider is WeWork at The Tower. Four weeks ago, I walked all 6 floors. Three floors were occupied in their entirety by single companies and the other 3 floors were fully occupied by 15 different businesses. Whatever happens, all of these organizations need somewhere to work.

In Manchester, many of the same factors that exist in London are driving good tenant demand. Take-up is strong and Grade A office supply is low. Assuming a business-friendly political outcome, I believe London looks attractive on a global basis.

I will now hand 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 the financial highlights on Slide 16. These are good results as we see the benefits of a focused and increasingly stabilized portfolio. I'll go through the major components of our earnings, our NAV movement and our debt position in the rest of my presentation but wanted to highlight a few metrics on this slide.

Our total property return benefits from an increase in net rental income and improved development profits, but the gain from the revaluation of the investment portfolio is down on last year. You will recall that the completion of The Tower and the sale of Shepherds Building boosted last year's results. In fact, these 2 assets comprised around GBP 27.5 million of the GBP 32.5 million gain at this time last year.

We previously reflected our total accounting return on an IFRS basis, and this shows a return for the half year of 2.7%. With these results, we've added this metric on an EPRA basis to provide greater comparability with the sector, and this shows a return of 2.9% for the period.

And finally on this slide, our earnings per share show an improved position going from negative 4.6p to a positive 5.4p. And whilst we don't directly link our dividend to earnings, we've increased the interim dividend by 3.8% to 2.7p. Let's move from the headline numbers and look at some of the detail.

Looking at our earnings on Slide 17, this shows the makeup of our EPRA profit of GBP 6.5 million and our pretax profit of GBP 13.1 million. Net rents increased by 11.1% on last year as we started to see the benefit of the lettings over the last 12 months. As you will have seen from the statement and recent announcements, we've made further progress on letting our buildings since the half year-end. I would expect our net rental income to show continued progression going forward. As Gerald outlined in his presentation, we can see the route to achieving our ERV of almost GBP 60 million over the course of the next few years.

We made development profits at One Creechurch Place as we exited that scheme and at One Bartholomew where we have let all but one floor. We did take a hit of just over GBP 1 million against the carrying value of the remaining first phase residential units at Barts Square. But overall, there was an improvement in the contribution from development since last year.

Total administration costs fell as the accrual for performance-related costs reduced with net finance costs also lower. Overall, on an EPRA basis, there were profits of GBP 6.5 million, a good improvement on last year's loss at this stage of GBP 5.5 million.

In addition to the EPRA earnings, there were revaluation gains of GBP 10 million, which were offset partially by a GBP 4.5 million charge from the valuation of our interest rate swaps, reflecting the very low level of interest rates at the end of September. Overall, these results show a net profit before tax of GBP 13.1 million.

Turning to the movement in EPRA net asset value per share on Slide 18. Our earnings of 5.4p and the investment gains of 8.2p took our EPRA net asset value per share up to almost 500p. The payment of the final dividend reduces NAV to 486.3p at the half year-end. I now want to look at our debt and cash flow position.

Turning to Slide 19. Following the repayment of the GBP 100 million convertible bond in June and increased borrowings on the investment portfolio of around GBP 15 million, we had GBP 395 million of borrowings at 30th of September. Our unused facilities increased by GBP 34 million, with this extra capacity coming from the expanded and extended GBP 400 million RCF signed in July. The average interest rate at the half year was 3.5%, down from 4% in March and 4.3% a year ago. The marginal rate of interest on additional borrowings under the RCF is around 2.2%. With hedging on all of our borrowings with an average maturity of 5.8 years, up from 3.6 years in March, and that's on a fully utilized and extended basis. Our LTV increased to 35.3%, reflecting the acquisition of 33 Charterhouse Street and the CapEx invested in the portfolio.

And looking at the cash flow and the forecast CapEx program on Slide 20. GBP 32 million was spent on CapEx during the period with GBP 21 million coming from the Kaleidoscope, GBP 7 million at The Bower and GBP 4 million in Manchester. We invested GBP 45 million in our joint ventures, primarily in acquiring 33 Charterhouse Street in Farringdon. Borrowings reduced by a net GBP 83 million as we repaid the convertible. And last year's final dividend payment amounted to GBP 9 million. Overall, cash balances in the group reduced by GBP 150 million to GBP 48 million at the end of September.

Turning to the forecast capital expenditure program. We've included here an indication of the quantum and timing of the CapEx requirements for the next 2.5 years. We have existing bank facilities for much of this commitment and are in discussions for the bank financing of our 33 Charterhouse Street development, which we anticipate will be in place before the main construction works commence.

We look at the impact of our CapEx program on Slide 21. We would expect this to increase our LTV by a couple of percent by March '21, but this is subject to any valuation movements in the next 18 months. This CapEx includes, obviously, the development of 33 Charterhouse Street, the remaining costs at The Bower, Barts Square and at Kaleidoscope. And just to note, we have GBP 25 million, our share of contracted sales at Barts Square that are expected to complete by March '20.

So finally, on Slide 22. We have an investment portfolio of just over GBP 900 million, which we estimate should provide further capital profits of over GBP 70 million, a surplus of ERV over contracted rents of GBP 21 million, LTV in the mid-30s and firepower to add to the portfolio to fund new deals. And as I state on the slide, we're obviously happy with our chosen markets of London and Manchester. We've got financial and operational capacity to grow and look forward with confidence in our ability to deliver both capital profits and increased earnings.

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

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

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Thank you, Tim, and good morning, everyone. I'm going to provide you with a brief overview of the portfolio highlights during this first half.

As Gerald mentioned, our portfolio is very much weighted towards the fast-growing locations favored by the creative and tech companies, with a particular focus on Old Street and Farringdon and Whitechapel.

Starting up on Old Street. Phase 1 of The Bower has been fully let since we completed it in 2015. So we now have a very busy year with rent reviews essentially all coming in between August and December next year. And we hope to see some good reversion in the rents. At The Tower, during the period, we have let a further 4 floors to Incubeta, Snowflake, OpenPayd and Infosys who have expanded onto our fitted-out 12th floor. We therefore only have the 15th floor to let. The attraction of our fitted-out plug-and-play floors where furniture, kitchens, meeting rooms, cabling, et cetera, are either pre-installed or agreed as part of a letting, is certainly increasing. 3 out of the 4 lettings were on this basis at The Tower, but they are also a feature at other buildings, including 99 and 55 Bartholomew, The Loom and Power Road, where we have floors or suites typically under 10,000 square feet. The fitted floor deals tend to break back to a premium rent of 10% to 15% compared to a traditional letting on a net effective basis after we've written off the cost of the works over a 5-year period.

So for the premium rent, we are taking the hassle out of the fit-out for an incoming tenant, but unlike a serviced office, they control their space, they brand it how they wish and they're not paying a premium for additional services they may not use. Essentially, we provide the flexibility our customers desire without imposing the significant costs of a serviced office.

Moving on to our Farringdon property. This slide hopefully captures our predominance in the area and their proximity to the all-important Crossrail station at Farringdon. At 33 Charterhouse Street, this new ground-up development project is a 50-50 JV with AshbyCapital. This was purchased just prior to our last announcement. And since that time, we've made an application to seek approval to some changes to the existing plan information. A start on-site is imminent and completion anticipated spring/summer '22.

At Kaleidoscope, we are on track for achieving practical completion either just before or just after Christmas. We have held a series of marketing preview events for the key acquisition agents, and we have a number of discussions ongoing with potential occupiers for both the whole building and significant parts. And we're hopeful of a successful outcome in the not-too-distant future. 25 Charterhouse Square, which adjoins Kaleidoscope, remains fully let since its completion just over 2 years ago.

At One Bartholomew, of the 4 floors that were vacant at our last announcement, we have only one left, having secured lettings to BDB Pitmans on the third and fourth floors and Sopra Steria on the sixth floor. The letting of all but one floor has allowed us to trigger the profit share from AshbyCapital.

Turning to the residential. In the period, we have sold a further 3 units in Phase 1, leaving us with 7 remaining units, one of which has gone under offer this week. The purchaser makeup of Phase 1 is a balance just slightly in favor of owner occupiers and domestic purchasers. In Phase 2, where the units are all new and we are not working with existing buildings or retaining facades, the purchaser makeup is a balance in favor of investors and overseas purchasers. In the period of Phase 2, we have exchanged on 8 units, taking us to 45 out of 92 apartments exchanged. Practical completion of 1 of the 3 buildings has happened this week and the other 2 follow in January and February. Having sold roughly 50% of the apartments, we have not pushed the product particularly hard but we will do so next year as it presents so much better when complete. We will also be launching the 7 small retail restaurant units on the ground floor along Little Britain, which will be open to the public in the next 2 weeks.

In the period, we've let all 5 remaining floors at 90 BC to a mix of companies, including business recruitment, law firms, management consultants, and as Gerald mentioned, to one of our existing tenants in Charterhouse Square. And this demonstrates the benefits of clustering one's buildings in order to work with our tenants, managing their space requirements. Again, we have let some of this space on a fitted-out basis.

Completing in December of this year, 55 Bartholomew has yet to be launched to the market but is already receiving interest as it offers interesting space with exposed brick and steelwork, timber floors and terraces. We intend to fit out one floor on a plug-and-play basis to assist in the letting.

In Whitechapel, we are consistently achieving rents of GBP 55 a square foot on the refurbished space at The Loom. We currently have 4 vacant refurbished units totaling just under 5,000 square feet, one of which is being fitted out. During the period, we have let 3 units, taking the building to 97% let.

The sale of our 10% shareholding in One Creechurch Place to our joint venture HOOPP took place in September 2019. As a reminder, we have achieved a total return of GBP 38.6 million and a return on equity in excess of 200%.

In Chiswick, our multi-let office campus is now 90% let at Power Road. We have secured 5 new lettings in the period. We also have the option here of proceeding with a rooftop extension and we have a consented new build Studio 5 in the car park to consider. Powerhouse is a long single-let investment, which we purchased by way of a sale and leaseback from Metropolis Music Group.

Moving to Manchester. This shows the location of our 4 assets in the city which are all within a 10-minute walk. So the interlinked Churchgate & Lee House have now been relaunched as The Tootal Buildings as they were synonymous with the Tootal Broadhurst Lee textile manufacturing company previously based there. We've carried out a number of asset management initiatives, including the reception you see here in Lee House and the lettings in the period to Capita, an existing tenant, have established a new rent of GBP 21.50. We are 100% occupied, but given any space to relet, we will be looking to push the rents on by a further 10%.

At Fourways, the ground floor reception and atrium works are underway with completion due in July next year. In the period, we've done 3 further lettings and we are establishing an ERV of GBP 25 per square foot for refurbished space. Our ambition here is to take back smaller suites, provide larger floor plates closer to 9,000 square feet where by omitting corridors and the like will add to the NIA and provide the larger units that are in demand in the Northern Quarter.

We acquired Dale Street in 2015 and carried out a rolling refurbishment which completed in 2018. During the period, Couchbase took occupation of the newly configured suite in the former loading bay as their U.K. office, and we are now 96% let.

At Trinity, we have discussions on a number of floors ongoing both in terms of the café and retail unit and the office floors above. We are planning to fit out the second floor so that it's available on a plug-and-play basis. The lettings here have taken a bit longer than we had hoped, but we are hoping to convert some of the discussions that we have ongoing if we get a business-friendly election outcome.

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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Great. Thank you, Matthew.

So in summary, in May, when we last presented, I identified some key milestones we wanted to achieve. These are repeated on this slide. And of course, these things can come back to haunt you, but I'm pleased that we have reported good progress. Three floors are let at One Bartholomew. We've got one more to go there. At The Tower, we've let 4 floors and again, just one remains there. As we finish the Kaleidoscope, we are optimistic that we will start to achieve lettings. Trinity in Manchester needs to gather momentum as Matthew's just explained. The Barts residential will be given a good push in the spring post completion. We will probably recycle some assets for new acquisitions where we see greater future performance. I will look forward to reporting further positive progress when we see you in May.

So finally, we have amassed a premium portfolio of offices in London and Manchester occupied by a prestigious lineup of growing businesses. We are able to provide flexibility to our customers to enhance our returns. As I explained, there is further upside to capture in the existing portfolio whilst we also continue to evaluate a number of new opportunities which would grow our pipeline.

We'd now be happy to take any questions that you may have. Thank you. Robbie, if you don't mind, just calling.

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Questions and Answers

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Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [1]

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Robbie from Numis. Just one question for me, please. Just thinking about your point there on capital recycling and then Tim's slide where he showed 100% fixed or hedged. Obviously, if you sell, debt comes down. So just could you think or give a bit more color about how you're thinking about that potential over-hedging unless you're going to try and sort of back-to-back recycling with acquisitions.

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

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Yes. I mean, just on the hedging, although we have a fair amount of swaps, we have interest rate caps as well, which are obviously we can keep in place in anticipation of any future acquisitions where we draw down funds from the banks.

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

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Any other questions?

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Unidentified Analyst, [4]

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Any conversations you had with WeWork? Do they term this one of their favorite, favorites centers?

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

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Well, as I said, it's fully occupied and very occupied. I mean, the desks are tiny and you just about get sort of go for bits of paper on them. And I mean, Tom and I walked around the other day and they were sort of virtually sitting on each other's laps. So it's full and I'd be very surprised if it's not making a handsome profit for them. It's in a great location for what they're seeking to provide. It's less than 20% of the income on The Bower and it's part of a really thriving community. And some of you certainly were up there in September when we did our property tour, but now we've got Serata Hall and Wagamamas going on the ground floor in The Tower. It's all fully occupied and is packed.

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Unidentified Analyst, [6]

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I mean, in the last 2 or 3 years, you have brought your strategy through as you wished it to come through. In the end, clarity of this sort, this company is so clear and apparent, gets rewarded in the market. There's been some significant change but there's more, definitely more to come for yourselves, no question on that. The missing piece of information, I suppose, is about earnings trend, continuing earnings and what your dividend position is. How do you see that now because there's going to be a big capture in the next 2 or 3 years of reversion?

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Timothy John Murphy, Helical plc - Finance Director & Director [7]

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Yes. I think we still have some way to go to ensure that the net rental income more than covers admin, finance and dividend on a fully covered basis. Our earnings in this year and probably going forward for the next period, 1.5 periods are helped with some of the development profits that we take through the EPRA earnings per share. It will be a couple of years, I would imagine, before we get towards full cover on the earnings. On a contracted basis, we're pretty much in a position where the contracted rents exceed our recurring admin and our finance costs and our dividend sitting here today. But on an IFRS basis, it will take a little bit of time to come through. So in terms of dividends, we'll continue to look to give incremental increases going forward. But speaking to our institutional shareholders over the summer after the results in May, very few of our institutional shareholders are holding the stock for income. We state we're a capital growth stock and that's why they hold the shares.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

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Kieran Lee at Berenberg. Just a quick one on this plug-and-play space. So you've talked about a number of units being sort of fitted out on this basis. What sort of proportion of the portfolio do you see that being applied to around your new developments? And then as a sort of follow-up to that, looking at valuations given the lease lengths may be a little bit shorter, how does that sort of impact your valuations and your thinking there?

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Gerald A. Kaye, Helical plc - CEO & Director [9]

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Matthew, do you want to?

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Matthew C. Bonning-Snook, Helical plc - Property Director & Executive Director [10]

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Yes. They are suited to the smaller floor plates. And with Barts, for example, we ended up with 90 BC and 55, which are both smaller buildings. It wouldn't be suitable, I don't think, to Kaleidoscope and those sorts of buildings where occupiers do actually want to take control, run their own fit-out. I mean, if you look at the fit-outs we had in Creechurch Place, they're all dramatically different and they've spent an unbelievable amount of money on, particularly on some of the floors. So I don't think there's a sort of -- it's horses for courses.

In terms of the valuation aspect, I mean, I think valuers had taken slightly different views. I mean, the valuation approach that Cushman's done with our portfolio is they will cash flow out that element. And then the froth element, if you like, will be, they'll take into account the expenditure on the fit-out and that element might be discounted by perhaps 1/4 of a point or something and then it will revert back to the reversionary rent, which would be the sort of typical rental value. So it's just being done on a cash flow basis, which I think is probably the right approach.

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Gerald A. Kaye, Helical plc - CEO & Director [11]

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I think it's fair to say all of them are on 5-year leases and 1 or 2 of the 3 are break.

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Matthew C. Bonning-Snook, Helical plc - Property Director & Executive Director [12]

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Yes. And I think Gerald mentioned a point about the quality of income. When you've got those short leases, it's how you run the building. We had The Shepherds Building for 15 years and over that period it remained 97% let, I think, at its worst possible time. The rest of the time, in good years, there was a waiting list to get into the building. So it's how you run the buildings and I don't think we're afraid of the short leases, and I think the valuers are now recognizing that.

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Gerald A. Kaye, Helical plc - CEO & Director [13]

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Any other questions? Are there any questions from anybody dialing in?

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Operator [14]

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(Operator Instructions) There are no questions at this time.

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Gerald A. Kaye, Helical plc - CEO & Director [15]

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One day, there might be, catch us all unawares. Thank you very much, everyone. Great to see you. Thanks for coming along.