Okay, right. Well, that deathly hush suggests we might start. So, well, good morning, everyone. Great to see so many of you here today. I'm sure it's not just to say goodbye to me. But, welcome again to our event space at Salisbury House, for our 2024 year-end results presentation. Just turning to the agenda, I'll start with an overview of performance, and then Dave will take you through the financials in more detail, and then we'll finish with my thoughts on the outlook for the business. But if I could just start with, a quick recap on our, our business model. Needless to say, we're, we're one of the leading players in the flexible space market in London. Very much focused on providing space to the SME community, and we've got some 4,000 customers.
We invest in the long term, and we own a large portfolio of character, and what I would say, in many cases, are landmark buildings across London. We've got a broader view of London than many others, with many of our properties in areas that would probably I would describe as some of the more interesting areas of London, areas of change and gentrification across the capital. In total, we've got some 77 properties now, with 4.5 million sq ft of lettable space. As a business, we've been around now for over 35 years, and we've got a well-recognized brand, particularly with our SME customer base, and a scalable operating platform, which has evolved over many years.
And in terms of our customers, they're diverse in their, by size and by industry sector, with only about half of them using their space as what I would call more traditional use, as an office. Indeed, as we've highlighted before, what we say is better description of the way our customers use the space is as workspace rather than office space. And as you might notice, that's very conveniently also the name of our company. So, quickly moving on to the trading performance for the year. Well, trading-wise, as you'll have seen from the numbers that we released this morning, it's been another strong year, with like-for-like rent roll up 10%, trading profit up 9%, and on the back of that, our total dividend up 9% in the year. I think it's a trading performance.
Sometimes we forget how, actually, just how good it is, and certainly, I think it measures up very well against our peers in the sector. Also, as you can see bottom, on the bottom left there, we're also making very good progress now and recovering our trading profit growth from the effects of COVID. Indeed, in terms of pricing at our buildings, we're now back at pre-COVID levels and beyond. But of course, we're in a very different economic environment, with much higher interest rates, and also the aftereffects of some high inflationary cost increases. Turning to the right, in the balance sheet, you've seen that the continued outward movement in yields over the year has seen our property valuation drop by an underlying 9.5%.
Albeit, the reduction in the second half is much slower, with our net tangible assets per share now at GBP 8. I think now, with the equivalent yield at 7% and the forecast of interest rates falling later in the year, I'd expect our yields to now stabilize at around this level. And despite that drop in the valuation, we've still got a robust balance sheet with LTV at 35%, which we're comfortable with at this stage in the cycle. Okay, I now wanted to take you through sort of what I would call three key features of our operating model. Firstly, it's our ability, and sometimes we forget to highlight just how strong it is, our ability to deliver strong growth in rent roll over the long term. This is not a cyclical play. This is long-term growth in rent roll.
The chart on the left just shows that rent roll growth over the last 10 years. That growth has averaged at some 6% per annum, even taking into account the understandable dip during COVID. Where does this growth come from? Well, it comes from us being able to consistently increase pricing on the back of the strength of demand from our customers for the space that we provide. But to do this, we need to create pricing tension, and to do that, you need high levels of occupancy in our business centers, and that's when we have the pricing power. As you can see from the chart on the right, actually, this is typically at around 90% occupancy, and that's a level we've consistently achieved over the last 10 years, apart, again, obviously, during COVID.
Secondly, a key element of our operating model is our scalable operating platform, something that's getting discussed a lot more these days. And really, I've just highlighted, you know, what we see as a key element of that, that model. Our platform brings together a skilled and experienced team, fit-for-purpose systems, and of course, valuable data. And just looking on the left-hand side in a little bit more detail, you'll see in terms of our team, we've got around over 300 people now in Workspace. And that's because with the majority of our activities are actually managed in-house rather than outsourced, given the scale of our business. But more importantly, if you see the breakdown of that team, over two-thirds of the team are customer-facing.
This is a very intensive operating business, and it's absolutely vital that actually we have that customer-facing team to really give our customers a high level of service they expect and indeed, they demand. Then behind that team, we have a continued investment in technology and systems, and that's to take advantage of the capabilities and efficiencies that they bring. And then, of course, what that also brings with it is huge amounts of data that we can capture in structure, in a structured way, and that in itself provides invaluable insights and also information to for us to make our business decisions. But building that platform, it takes time and money, and our platform is a product of over 30 years of investment and evolution.
What I've highlighted on the right-hand side of this slide is just really some examples of the scale of activity that platform supports day-to-day. This includes, for example, over 46,000 engaged sessions on our website every month. Also, to the high levels of inquiries and viewings that we manage every month, and that's through to then the conversion of those into lettings and renewals every month. But it's not just that; it's also the day-to-day interactions with our customers. I've highlighted here, actually, it's not the 4,000 businesses that we support, it's actually the 40,000 people that are employed by those businesses across our centers in London. I'm delighted to say that we continue to score very highly in terms of the customer satisfaction in the services that we provide to those employees.
That is a key element of our business model. And then lastly, just really something that we've always highlighted is really that our operating model and sustainability really is an integral part of the work, the way that Workspace has always operated. It's not something new to us. And it's no surprise it's also closely aligned actually with what our customers look for, and indeed, again, they expect. Firstly, we've always had a refurbishment-first ethos in Workspace. We've got a long track record of converting character and often historic buildings across London into our multi-let business centers, bringing new life and vibrancy. And indeed, a great example is here today, Salisbury House. And of course, our retrofitting of these buildings also delivers significant savings in embodied carbon, which we estimated around a 70% saving compared to actually a new build.
We also make property investments long-term, and so while delivering benefits, they're not just for the business, but also for the communities that we're in. In particular, our focus on providing space and support to a wide range of entrepreneurial businesses, often in areas of change and regeneration, give huge opportunities for local businesses to grow and, of course, provide significant local employment. Then lastly, we've also got a series of ambitious 2030 environmental targets, and within those there's the removal of all our gas central heating systems, the reduction in energy consumption by 50% by 2030, and ensuring all our buildings are EPC A and B rated. And I'm really pleased to say that we've made excellent progress during the last year on all fronts. So on that note, I'd like you to hand over to Dave.
Thanks, Graham. Good morning, everyone I haven't spoken to already. So as the top two charts on this slide show, customer demand has remained resilient. Despite the macroeconomic and political turmoil over the last year, we've seen a good level of customer inquiries, which on average have converted to more than 100 deals per month. Following the 14% growth in estimated rental values in the previous financial year, our focus over the last 12 months has been on capturing the reversion across the portfolio, resulting in a 10% increase in average like-for-like rent per sq ft, with occupancy broadly stable. That rental growth has fueled another year of strong trading performance, with net rental income up 8% to GBP 126 million.
This more than covered increases in administrative costs and interest, resulting in trading profit after interest up 9% to GBP 66 million. Underlying admin expenses increased to GBP 22 million, reflecting the high level of wage inflation we've seen over the last year. Share-based costs also increased, driven by higher vesting levels, with the Workspace portfolio performing strongly against the IPD benchmark over the past three years. Net finance costs increased slightly to GBP 34.9 million, with the increase in interest rates over the past couple of years, largely offset by a reduction in average net debt following asset disposals in the period. Over the year as a whole, there was a decrease of GBP 255 million in the property valuation, resulting in a loss before tax of GBP 192.8 million.
Adjusted earnings per share was up 8% to GBP 0.341, and in view of the growth in trading profit and our confidence looking ahead, we're proposing a final dividend of GBP 0.19, taking the full-year dividend to GBP 0.28, which is fully covered and up 9% on the prior year. Slide 12 looks at the movement in net rental income in a little more detail. On an underlying basis, adjusting for acquisitions and disposals, rental income was up 8% to GBP 122 million, largely driven by pricing growth.... The majority of service charge costs are recovered from our customers. And despite the high levels of inflation in the U.K. over the last year, we've managed to keep costs under control, with unrecovered service charge and other non-recoverable costs broadly flat year-on-year.
This, combined with an increase in sundry income, has resulted in underlying net rental income up 10%. Total rental income benefited from progress on recent acquisitions, which contributed GBP 13.4 million in the year, although this was offset by the impact of disposals, with total net rental income up by 8%. Turning to the balance sheet. Following the disposals made in the year and an underlying revaluation decrease of GBP 256 million, the value of our investment properties decreased to GBP 2.4 billion. The property disposals, however, also reduced net debt, resulting in EPRA NTA per share of GBP 8, down 3.8% since September and 13.7% in the full year.
Slide 14 shows the movements in the property value over the year, with an increase from CapEx of GBP 71 million, outweighed by disposals of GBP 110 million, and the underlying revaluation decreases of GBP 178 million in the first half, which slowed to GBP 78 million in the second half of the year. This next slide sets out the valuation movements by property category. On the left-hand side, you can see the valuations at the 31st of March, and on the right-hand side, you can see the movements in the year. In the first row is the like-for-like portfolio, which accounts for around three-quarters of the overall value. There was an 8.1% decrease in the like-for-like valuation, driven by a 78 basis point yield movement.
Although, as we've seen, the majority of the valuation decrease was in the first half, with the like-for-like valuation down around 2.5% in the second half of the year. Despite the strong increase in rents over the last year, the like-for-like equivalent yield is still 150 basis points higher than the initial yield, with significant opportunity for continued reversion. Valuation movements in the non-like-for-like categories were also largely driven by market yield movements, albeit with more pronounced yield expansion in Southeast offices, reflecting the broader market outside London. Lower rental growth in refurbishments and redevelopments, and with redevelopments also impacted by lower residential values and higher build costs. So as we've seen, the two main drivers of the valuation are yield movements and ERV growth. Looking first at yields.
In the chart on the left, the dark blue line shows the movement in ten-year gilts over the last 20 years or so. As we know, after a decade of low rates following the global financial crisis, we've seen rates increasing sharply over the last couple of years. Although they appear to be stabilizing more recently at levels more consistent with historic norms. The yellow line shows how the CBRE London yields broadly track gilts over the same period, with the gray bars showing the spread. As we can see, CBRE yields have also increased sharply recently, and although the spread to gilts has decreased compared to recent years, it's now broadly in line with that historically seen in higher rate environments. Finally, the light blue line shows the Workspace like-for-like equivalent yield over the past 10 years.
You can see that the spread versus the CBRE benchmark has narrowed as we continue to invest in the portfolio. However, with the recent rise in gilts, we've seen over 100 basis points yield expansion over the last couple of years. At 7% in absolute terms, our equivalent yield is now around 250 basis points higher than ten-year gilts and around 300 basis points higher than our average cost of debt. Turning next to ERVs. Following the strong recovery in pricing we saw in 2022, 2023, ERV growth in 2023, 2024 returned to historically more normal levels. On average, like-for-like ERVs were up around 3% in the year. However, we saw stronger growth in ERVs for smaller units, which account for the majority of our letting activity. The chart on the right analyzes our like-for-like portfolio, grouping customer units by size.
More than 80% of our customer units by number, covering 1.2 million sq ft, are less than 1,000 sq ft. For these units, we've seen average ERV growth of over 6% in the last year. For units between 1,000 and 3,000 sq ft, we've seen ERV growth of around 3%, and for our largest units, ERVs have been broadly flat. The chart also highlights the higher pricing achieved on smaller units, with a premium of around 15%-20% on average, and the strategic opportunity to drive rental growth by converting larger spaces into smaller customer units.... Moving on to cash flow and net debt.
Overall, net debt decreased to GBP 855 million at the end of March, with cash from operations fully covering dividend payments of GBP 51 million, and GBP 118 million of proceeds from disposals, more than offsetting capital expenditure of GBP 71 million. When considering capital allocation, we remain focused on maintaining a strong balance sheet, with disciplined approach to gearing. We continue to recycle capital from selected disposals into our rolling pipeline of refurbishment projects, including smaller, high-returning asset management projects, such as unit subdivisions. In the medium term, we also expect to see increasingly attractive opportunities to recycle capital into property acquisitions. The majority of the group's debt comprises long-term fixed rate facilities totaling GBP 665 million, with shorter term liquidity provided by committed bank facilities.
Together with GBP 4 million of cash, this gave us a total of GBP 145 million of cash and available facilities at the 31st of March. Disposals in the year meant that despite the fall in property valuation, LTV remains comfortable, increasing marginally to 35%. The disposal proceeds have reduced our floating rate debt, which currently has an effective rate of 7%. In addition, in February this year, we fixed up GBP 100 million of floating rate debt at an effective rate of 6.1%. Together, this has reduced our weighted average interest cost to 3.7%, with nearly 90% of debt now at fixed rates.
Interest cover remains well ahead of our 2x covenant at 3.7x, and net debt to EBITDA continues to improve towards our 7.5x target, reducing from 9.3x-8.3x. Following the extension of our bank facilities to 2026, we have an average drawn debt maturity of 3.6 years, with no maturities until August 2025. So looking forward, we have good earnings momentum and expect further progress in the current year. Rental income will be underpinned by the growth in like-for-like rent roll we've seen over the last year, with around 6% growth in the second half on an annualized basis. We continue to see good customer demand and expect further rental growth from reversionary pricing on new deals and the benefit of project activity.
The high levels of inflation we experienced last year are expected to have less impact in the current year, although wage inflation remains significantly above historic norms. The disposals we've completed over the last year have reduced our debt, which, combined with our recent hedging activity and a likely reduction in interest rates, should result in lower interest costs this year. Capital expenditure will be around GBP 60 million-GBP 70 million, which we expect to be largely offset by capital recycled from disposals. So in summary, we have a robust balance sheet, good momentum, and are well set for another year of growth. And I'll now hand back to Graham to talk about the longer term opportunity.
Thanks, Dave. As Dave said, what I'd like to do now is look at that longer term opportunity ahead for workspace. I'll start with probably what is the most important element of that opportunity, and that's our customers. I mean, our target market, as I mentioned before, is a large and growing community of SMEs across London. What I've always described as the unsung heroes of the London economy. These customers are knowledge, creative, and service-based SMEs, of which we estimate there are currently around 140,000 businesses in London. We've got 4,000 customers, so we've got around about a 3% market share. There's plenty to go for in capturing that demand as we look to grow our property footprint over time, both from organic growth, but also from acquisition.
I mean, as you can see from the pie chart on the left-hand side of this slide, our customers cover a wide range of sectors and industries. There's no one sector dominating. And on the right-hand side, I've just given you some examples of customers in each of those sectors. Well, sorry, six of those sectors. So just to highlight some of them, on the top left is Quell Tech. They're a technology customer who have developed an immersive fitness gaming platform. Now, they've got 5,000 sq ft across two units at our location in Kennington Park at the Oval. Top right, you've got Jukebox Studios. They're one of London's premier recording studios, and they're in 1,500 sq ft at our Pall Mall Deposit site in Ladbroke Grove.
On the bottom left, we've got one of our larger customers, ClearScore, who, as many of you will know, they're a large credit scoring and financial advisory business. Now, they're based at Vox Studios in Vauxhall, in 18,000 sq ft. And conversely, on the bottom right, we've got Greater Goods. They upcycle, reclaim damaged and unwanted goods, and they're in a 400 sq ft unit in our Chocolate Factory site in Wood Green. Now, these are just, you know, four examples of our customers, but hopefully it gives you a taste for the sheer diversity of our customers, not just by sector, but also by size. Then often we get asked about the competition that we see, and our general response is to say that it's very fragmented. Well, why is that?
Well, to compete with us, what you need is to be able to deliver on a number of key elements, which I've highlighted on the right-hand side of this slide. Now, just to run through those, of course, you need lease flexibility, and you've also got to provide a great service. But you also need ownership and control of the right sorts of buildings. And then also, you need to invest time and money, as I highlighted earlier, in establishing an appropriate operating platform. But you then also need the scale of activity to drive efficiencies from the investment that is required. And if you don't have all those components, then you will struggle to compete with us on a level footing.
And in terms of scale, just the other thing I want to highlight about scale is actually what it gives us in terms of the wide range of options, in terms of size of space and price that we can offer to our customers to fit any of their budgets. And that sort of variety in terms of optionality is not just across the buildings in our portfolio, but also within any one of our buildings. And on this chart, what I've shown you here is the range of pricing at all of our buildings in our like-for-like category, and also the average price, which is the dot in the middle of the range.
And just to highlight three of those buildings, if you go to the right-hand side of the slide, Metal Box Factory, one of our buildings on the Bankside, on the South Bank. Here, we offer 144 units of varying sizes across six floors, and the prices will vary by floor and also on the configuration of the space. And you'll see that the average rent is GBP 81/sq ft, but actually the prices range from GBP 26/sq ft to GBP 110/sq ft in the units across that building. Likewise, Vox Studios in Vauxhall, in the middle, in the middle of the chart. Here, we've got 141 units across three buildings on that site.
And again, the average here is GBP 48/sq ft, but actually prices range from GBP 25/sq ft to GBP 63/sq ft. And then lastly, to the left on in, is Fuel Tank in Deptford, where we've got 62 units with an average of GBP 23/sq ft, but a range from GBP 18/sq ft to GBP 30/sq ft. And this is crucial for us. Being able to offer this broad range of units and price points at our buildings means that we can attract a very wide range of customers to any one of our buildings. And it also allows those customers to actually move up or down in terms of the size of their space and their price points as their needs change.
It's a crucial part of what actually makes our ability to create these communities of interesting businesses within any one of our buildings. In addition, of course, with our extensive portfolio, we've always got significant opportunities for asset management, and these can be both large and smaller. In terms of the larger projects, we've got 3 underway at the moment, and indeed, with Leroy House in Islington, we're hoping to be opening that 58,000 sq ft new business center in September of this year. A very exciting project for us. It'll be our first net zero building that we open. In addition to those 3 projects, we've also got another 1 million sq ft of larger project activity in the pipeline. But alongside that, and as Dave referenced earlier, there's lots of smaller asset management opportunities for us.
A good example is at The Mill in Brentford. Here, we've actually subdivided one of the floors into 12 units, and it took us just about 6 months to do that, and that's delivered a 48% uplift in pricing at that site. Likewise, at The Barley Mow in Chiswick, here, we've subdivided and refurbished 27 units, again, in a similar timescale of around 6 months, and again, achieved a significant uplift, 58% uplift in pricing at that location. So really exciting opportunities, not just on larger projects, but these smaller projects across our portfolio. So what does that all mean in terms of future income growth? Well, apologies, this is a is a fairly detailed waterfall chart here.
But if we start on the left, on the left-hand side is our rent roll at the end of March 2024 of GBP 143 million. And if you go to the right from there, firstly, we've got a GBP 18 million uplift potentially in rent roll in our like-for-like portfolio. If we can move all of our centers up to 90% occupancy and all our customers up to current pricing levels, current ERV pricing levels. With occupancy almost 90% already, actually, the most of the uplifts... achieve that GBP 18 million of uplift in rent roll will come from moving our customers up to the current ERV pricing levels. And of course, with the relatively short length of leases that we have, typically 2 years, we should be able to achieve most of that uplift within the next 2-3 years.
So a very significant uplift in rent roll from our like-for-like portfolio. In addition, with the project activity, you've then got an uplift potentially of GBP 15 million from both projects completed and those underway at the moment. And that will probably, that will come up from letting up those buildings to 90% occupancy at more or less current pricing levels. So it's not about moving pricing there, it's actually just move, letting those buildings up to 90% occupancy level. And given the expected time of completion of those projects, I'd expect this uplift to be delivered over the next 4 years or so. So in total, adding those two together, you've got some GBP 33 million of uplift in rent roll to come over the next 3-4 years.
That's a 23% increase on the rent roll at the end of March, taking the rent roll to GBP 176 million. And if you work on that on an annualized basis, that would deliver, on its own, an increase in rent roll of some 6% per annum over the next 3-4 years. And this is obviously before any additional growth from actually further increases in our ERV pricing levels. And bear in mind, as Dave mentioned, our like-for-like ERV growth last year was just over 3%. And of course, in addition, any new projects completing and of course, acquisitions. So a significant opportunity for us to drive strong rent roll growth in the near term from reversion, and then obviously, further opportunity to grow income beyond that. So, in summary, looking forward.
Firstly, I'm sure it's no surprise to you that actually flexible leases are now very much a mainstream option. You know, a significant change from when I first joined this company, when you used to have to apologize for offering a flexible lease. But they come in many different forms, and they are very much adapted to the needs of a varying occupier base. There's often confusion about how much these offers overlap. Well, we're very clear that the workspace offer is very specifically tailored to the needs of SMEs. It's a flexible blank canvas offer that allows our customers to fit out the space as they want. And in terms of the competition, as I've highlighted, we've got a significant advantage of the scale of our footprint across London and the proven capabilities of our operating model.
And I think with the attractions of our target SME market in London and that competitive advantage that we enjoy, I do think we are very well placed to continue to deliver strong profit and dividend growth in the years to come. And of course, as I've just highlighted, that's underpinned by the income reversion of potentially some 6% per annum over the next 3-4 years. And lastly, as you hopefully are aware, I'll be retiring soon, so I will be handing over to Lawrence Hutchings, our new CEO. Although of course, as you'll appreciate, the timing will depend upon progress at his current employer, Capital & Regional. But in the meantime, what I'm really pleased to say is that the business is in very good order.
We've got an excellent team in place, and we've got lots of exciting opportunities to progress and develop over the coming year. With that, I'd like to thank you for your time today, and we'll now open up for any questions. We'll start with, if you don't mind, questions from the floor, and then we'll take questions from the webcast. As usual, if you could introduce yourself and your company before asking a question.
So, Paul May from Barclays, three questions, if I can. The first one, you just locked in 6% cost of debt for the next couple of years via swap. Is the business sustainable with this level of financing expense moving forward, if everything were to refinance at those levels? Occupancy has been on a declining trajectory over the last two years. At what point is this concerning? And what is the all-in operational cost of your portfolio? So I appreciate the net yield of 5.5% reflects a low operational cost assumption. What would be the free cash flow yield post all of your operational costs? Thank you.
Oh, I think I'll be handing over to Dave to.
Okay
... pick up those.
Fine. So cost of debt. So yeah, we locked in at 6%, for the next couple of years. I mean, if you assume that that is, you know, a, a refinancing level, and, you know, we'll see where rates move over, over the next, you know, year or so. As I say, there's no immediate refinancing need. I mean, the answer is, yes, it, it is sustainable. I mean, our equivalent yield, 7%, is obviously above that. If you look at, you know, the, the reversion in the portfolio, it, it more than covers, even just with the current reversion, forgetting, you know, the continued growth in ERV, it more than covers the increase in interest cost that we would see.
If you think about it in a yield perspective, you know, if you build in the reversion, our yield, our sort of, you know, EBIT yield is probably about 5%. If you build in, you know, capital increase as well, I mean, long term, you know, our total return is roughly 50/50 income and capital. Again, long-term capital return's been about 5%. So if you build that in, you've probably got a sort of 10%-11% return, which obviously is over our cost of capital. So yes, I think if that does end up being where the cost of capital is, it would be sustainable. Having said that, the expectation is, you know, currently that there will be rate cuts this year.
We'll see where rates come down. Certainly, spreads have come in a lot over the last year. And again, as we continue to drive operational performance, I'd hope those spreads would come in further.
Okay. I'll pick up the second one-
Okay.
and you can pick up the free cash flow, because that sounded quite complex.
Okay.
On occupancy, yeah, yeah, it's a bit harsh comment, downward trajectory. I mean, we are bubbling around or at 98%-90%. I mean, as you'd appreciate, the overall occupancy is a blend of 42 buildings in our like-for-like portfolio, so there's always an ebb and flow on various sites. I would expect our occupancy to bounce anywhere between 88%-92% on a, you know, on an ongoing basis. I mean, I wouldn't read too much into the fact that two years in a row it's gone down slightly. I mean, it is a variety of factors, some customers leaving and timing of when we fill that space, replace those customers.
Certainly, what we are looking at, and Dave highlighted it, is we're holding back on some of the larger space we get back to be able to actually cut that up and convert it into smaller units, so that does delay sometimes the recovery and occupancy as we get that space back. If it's a large space, we'd actually take it out of like-for-like, but for some of the smaller space that comes back, we wouldn't do that. So I wouldn't read anything into that. I mean, I think if you saw the occupancy going down and the ability for us not to drive pricing forward, I think you would have a good challenge that we're probably not pricing to the market.
I'm very comfortable that, you know, our operational model is very intense, and we price our buildings and our units pretty much week to week, so we price to the market. So I think, you know, the evidence for me is actually still ability, our ability to continue to grow that like-for-like rent roll. Gives me comfort that actually we're, we're driving the, the model in the right way. But in two years' time, although I won't be here, and it's still going down, then you can tell me that I'm wrong. On the free cash flow point?
Yeah, I mean, you know, really just building on what I said before. I mean, for us, you know, broadly, earnings equals cash, adjusted earnings equals cash, and we don't really have sort of many non-cash items. So if you take, let's say, an income yield of sort of 5%, and then build in a capital return, I think, you know, that's a 10% overall total return. And I think from a cash flow basis, as I say, you know, we generate good operating cash flows, which more than cover dividend payments, contribute towards CapEx as well.
Okay.
Hi, good morning, Neil from J.P. Morgan. Just two questions, please. You mentioned that you look to spend about GBP 60 million-GBP 70 million of CapEx this year. Just wondering what the flex is on that, please, and if there is an upper limit, given the confident remarks around the office demand.
Mm-hmm.
Secondly, you mentioned opportunities emerging in the market. How would you think about funding that potentially? Would it be more disposals, or would it be something else, please?
You pick up the first, Dave, and I'll pick up the second, if that's all right.
Okay, I mean, flexible. Yeah, I mean, we have flexibility both ways. I guess, you know, a committed CapEx is probably roughly half of that, as we see it here today. So we can certainly flex it downwards. In terms of it accelerating it, I think if conditions, you know, we see a strong economic recovery, if rates come down significantly, there's lots of factors that can contribute to how we could accelerate that. And we can turn on. As we said, a lot of our projects, and particularly, you know, higher returning ones, are quite quick to switch on. It's really about the availability of space, so getting the space back from customers is probably the key determinant of when you can do some of those schemes.
But, you know, we've got a significant pipeline, albeit, you know, that pipeline has currently got customers sitting in it, paying rent, so we're earning a yield on it, so we do have that flexibility. It's not like it's a land bank sitting there empty, so we're currently generating income from it. So yeah, I think there is flexibility within it. That's the guidance at the moment.
And I guess the second point around investment more widely, I mean, you know, my priorities would be, firstly, keep driving that core like-for-like income growth. So that's important that we maintain that momentum. As I highlighted, that's, you know, significant and going to give us a very good dividend growth on its, in its own right. The smaller projects, as well as those larger projects that are currently underway, will be the next focus of attention, because, again, they're giving us very good returns over the next 2-3 years and beyond. Then, as you know, you'd expect, we continue to look outside for any potential investment opportunities. But let's be clear, I mean, our... You know, we invest for the long term. We're not a cyclical trader-developer type mindset, so we're not looking to buy today to sell in 3-4 years' time.
So we're looking actually where we can deliver long-term benefit and growth from acquisitions. So it's certainly something we'll be looking at, but it's nothing that we're rushing to do as a priority today. Sorry.
Callum Marley from Kolytics. Just one question: where are the best growth opportunities that you see today? Obviously, you've had another good year of rental growth, but you've commented in the past that you don't want to increase rents too fast in order to maintain occupancy. But then you've also commented about converting larger spaces into smaller spaces.
Yeah.
So just wondered how you're balancing that, and then maybe kind of what are the economics, the CapEx per sq ft on those conversions, and the additional returns you might make?
Yeah, I mean, it's a challenging question as much as because of that broad spread we've got of properties and the different price points across London. You know, we have different opportunities in very different levels of investment in different parts of London. So we can do a sort of relatively light refurb, maybe in an area where we don't think we can push the pricing so far. So everything we talk about, we end up talking about averages in terms of investment. But to your first point about where do we see the opportunities across London, I mean, the reality is that we'd say, you know, there's suburbia across London, which actually is as attractive and as exciting in terms of the returns we can get as Central London.
It's just a different price point, but it's consistently where the demand for our SME customer base is, and it, that is very broad and very wide in terms of the demand. So there are no hot spots that I would bring to your attention. I mean, you know, every now and again, there'll be a quieter time in a certain area of London, and it will pick up. But that's just a trend that we've seen every year since I've certainly been here. So I would say it's a pretty consistent story. I mean, the one I'd say area of London that consistently, I think, has been strong over the last 10 years or so, putting COVID to one side, has been that strip of South Bank, really anything from London Bridge through to Vauxhall.
It's certainly, fortunately, I would highlight that, wouldn't I? Because that's an area we're very strong in as well. But I think that is an area that have changed so completely over the last 10 years, obviously benefiting hugely from the investment in infrastructure, transport infrastructure across London. So I think, you know, there, there are changes across the whole of London, and we have benefited actually more widely across London with that investment that there's been in transport infrastructure. So as much as we're talking about the CapEx that we've invested, actually, I'd say we've benefited hugely from that investment that's been made by, by the government.
In terms of CapEx spend, I mean, it really depends upon the scale of the upgrade we're doing, but it can be anything from, you know, GBP 150/sq ft, 200, 250/sq ft. So it's very much, as I say, suited to the scale of uplift we think we can achieve in pricing. And the great thing about our business is because we've got so much data and data points, we can actually, you know, work with confidence about the demand at different price points across London.
Uh, Miranda?
Miranda Cockburn, Berenberg. Can you just give us a bit more on the demand side? You were talking obviously about more demand at the moment for smaller units. Any sort of particular reason behind that? Is it companies downsizing? Is it more new companies coming in? Can you just give us a bit more of a feel for that?
I'll have a go. Dave, you can have a... Or, no, you start because you did a nice slide on it.
I mean, I think, you know, there's we always have demand for small units. I mean, it's our, it's our bread and butter. Our target audience is very much those, as, as Graham's talked about, those SMEs across London. You know, and typically, you know, they'll, they'll be anything from 5-50 people, but that very much in that sort of 5-10, 20 people sweet spot. So those smaller units are, are always in demand. You know, very often business will come to us and then, and then scale with us. They so they start small. So, the larger units often are from people growing upwards, but we absolutely do get new customers joining us and taking larger spaces as well. And it's, and it's a mix.
I wouldn't say we've seen a trend of customers downsizing to take space. No, I think it's more they like the quality of the space, and they like being part of the community, I think is probably more the attraction. So, I don't think the demand for smaller spaces is a new thing. I think that there's just strong demand for it across London, and there's an opportunity for us to continue to you know, deliver smaller units, to be honest.
Just, I mean, anything I'd add to that is, most of the larger units we've got, we've inherited from acquisitions. So, you know, when we start out with a new business center, you won't find many large units. It generally, you know, the likes of some of the larger properties we've acquired over the years. So it's not by plan that we've inherited them, but obviously, we can't subdivide them and drive better value until actually the existing customers vacate. So that's one of the challenges. The second one, I'd say also, what we've seen with larger units is there's a lot more competition out there. There's, you know, a lot more available space, of that larger size.
Smaller units, which is our bread and butter, they take a lot more active management, but that is great for us because that's what our operating platform was all about. So it's much more something that we're very happy to manage, whereas actually, I think you would find other landlords, they'd much rather just have one customer taking a whole floor rather than have 20 different customers having to then manage all of that activity around those individual customers. So I think, you know, those, those two elements together will drive us, as we say in, today, you know, towards over time, moving more and more to those smaller units from the larger ones that we've inherited. So there's Denise and then behind her.
I was actually done.
Oh, eh? Okay. Well, that's... Asked two questions at once. That's good. Well done. Hi there.
Hi, Adam Shapton from Green Street. Two, two questions, one on ERV growth and one on capital allocation. So on the ERV growth, you set out the split between smaller and larger units, which is very helpful. In the statement this morning, you mentioned a wide range of smaller unit refurbishments and subdivisions. Can you give some figures on the total cost of those refurbishments and the like-for-like portfolio? Just trying to get a handle on what's the true sort of organic ERV growth without those, and if you can give that on a per square foot basis.
Like-for-like. But go on, Dave, you-
Yeah, I was gonna say, I mean, it's not just like-for-like, it's, it's across the portfolio as the op- the opportunities.
No, but in your like-for-like ERV growth-
Yeah
... you talk about the growth in the smaller units-
Yeah
because of refurb.
Yeah, so in broad terms, I would say that those smaller, you know, projects, there's probably around about a third of CapEx is probably in those smaller projects overall as a guide.
Okay.
You know, but as Graham has, you know, given a couple of examples on it, so, I mean, there were 2 examples he cited, you know, one for GBP 1 million and GBP 1.5 million, one for 2, just over GBP 2 million. And on those, we're seeing rental growth of, you know, 50% or so. So there is CapEx there, but it's driving very strong returns on that CapEx.
... But let's be clear, you know, don't get excited that, that all you know, all the uplift goes to, to value in as much as there's a gross to net impact as well, because when you subdivide space, you don't have as much space. So, you know, we're getting good double-digit returns, but it's, you know, it, it's part of the overall, as you say, growth rate of the ERVs. But it, it's, it's not the most significant part. The main part is actually just the fundamental demand moving, moving the price point up, not the fact that we're upgrading the units. That's really it's complementary to our core focus, which is actually just moving customers up because of the strength of demand for what we offer.
Okay. Understood.
You want one on capital allocation?
Yeah, on capital allocation. So, I mean, you've got a sort of over GBP 600 million pipeline, future projects, GBP 450 million is consented. Can you talk through how you think about making the decision to commit-
Mm
... to those projects in the context of where your share price is? We've, we've mentioned, you know, your, your most recent evidence of marginal cost of debt is above 6, your capital structure more generally. So how, how, how do you, as a management team, think, think through that commitment decision? I, I couldn't help noticing that you've removed the dates from the future projects slide. I don't know if that's significant.
Yeah. I mean, we said that last time, to be honest, is that we were moving away from committing because I think certainly over the years since we've sort of put those slides together, the costs to build some of these schemes have gone up because, you know, inflationary cost increases. And I think what we've said is that we're holding back on a number of those projects until we're certain about the returns justify the investment, given those increases in costs. So I think we sort of said that it makes more sense to hold back and then, as you say, deliver them piecemeal, as once we're confident. Equally, also, make sure we've got the appropriate capital to be able to fund those schemes.
I think the answer to your question is that we will look as and when we think those schemes are viable, you know, at the appropriate way of funding them, and it may be through joint ventures, it may be through other sources, maybe through, just say, recycling of capital. The great thing is, there's opportunities out there for us with planning in many cases. And the other thing I think Dave highlighted as well, is that it's not that we need to press the button tomorrow. I mean, these are all good income-earning assets today. And in fact, one of the challenges, I mean, you know, on a number of these schemes is we've got the strength of demand, and is driving up pricing for the existing product, as opposed to the, what we might be able to deliver over time.
That's holding back, in some cases, the viability of the schemes at the moment.
Do you have a sort of full par hurdle rate for pressing the button today?
Yeah, I mean, you know, we, we haven't changed our, our hurdle rate, which is, which is 8% ungeared IRR, over time. But, but what has changed is... Well, I guess it hasn't really changed the, the principle. As always, we focus on where do we get best returns, and at the moment, we're seeing strong returns well, well ahead of that, particularly around the smaller asset management opportunities. So it, it's really just looking about where do we actually get best return rather than the, the hurdle rate. There's plenty of opportunity above the hurdle rate.
Sure. Thank you.
Thanks. Good morning, Ben Richford from Bernstein. Just as you depart the business, Graham, I'm just wondering of your thoughts, looking at it in terms of scale. It's an operational business. Do you think there's benefits to getting quite a bit bigger over time? And is there an opportunity to do that as right now? You're seeing some of your competitors-
Mm-hmm
... commenting on cyclically low values, yourself as well. I know capital is part of that equation, but is this a business that should be a lot bigger? Is now a good time to try and find ways to achieve that? That's the first question. And then secondly, just in terms of, the smaller spaces, do you lose square footage when you subdivide to smaller spaces? And is there greater frictional, cost?
The second one I'll answer first is, yes. I mean, I mentioned earlier, I mean, as we do this subdivision, you typically lose 10%-20% of the floor area because you're putting in corridors, you're often putting in breakout space as well. So there is a gross to net impact as you, as you subdivide, but that's more than offset by the increases we've highlighted in the pricing that we can achieve. And the other thing I'd highlight about subdividing space is, for us, it diversifies the risk significantly. And then also, as we've highlighted, is actually also where we get stronger pricing growth longer term is in our smaller units, because it's our DNA really is around marketing of these smaller units, and that's where the strongest demand is. So on a number of fronts, it makes sense.
On your first point about scale, yeah, I mean, there's a lot of discussions about scale at the moment, and obviously, you're seeing that with some of the capital raises. I think, I think for me, it's got to be scale with purpose, so it's not scale for the sake of it. You know, we have a very clear model around, you know, providing space to our SME customer base. I've also highlighted, you've got to have the right sorts of buildings, so it's not something you just go and build the buildings in center of London, and that will be great. They'll all come to you. You've got to make sure you've got the right building, the right location, and buying them at the right price point.
It's something we've built up, you know, by acquisition, stealthily over the last 30 years, and there's no reason for us to suddenly rush out and buy everything, you know, that's available. It's got to be the right buildings at the right price. There will be opportunities, but it's not like today is the day when we got to go and buy all the buildings. We have a huge opportunity across London. As I highlighted earlier, we're a relatively small market share of a very large, exciting economy of SME businesses. So I would say that, yeah, yes, there is huge opportunity for us to grow, but it'll be selectively and over time on a measured basis.
But equally, in the same breath, we want to make sure that we continue to deliver a progressive dividend policy, because at the end of the day, that's something that's, you know, I think, respected from an investor base in terms of our ability to be able to deliver a sustained dividend growth alongside actually building up the business.
Great, thank you, and a sustained growing dividend, good for shareholders in the future.
Exactly right.
Thank you.
I'm, I'm talking for myself there. Okay. Is there no more questions? Are there any from the webcast?
We haven't got any yet, but I'm just gonna make a call. If there are any questions that want to come in from the webcast, please submit now.
It's like the Eurovision Song Contest, isn't it? Okay. No votes. Okay. Right. Okay, well, on that note, thank you for your time today. Hopefully, see you soon. Maybe not at Workspace.