Good morning, everyone, and welcome to Workspace's half-year results presentation. I'm Lawrence Hutchings, CEO, just arrived on Monday, crutches and all. Alongside me today is Dave Benson, our CFO. As you'd expect, only four days into the job, I'm going to say just a few words at the beginning and the end of today's presentation. But it's wonderful to be here and to see so many familiar faces and some new ones as well. I wanted to say how humbled I have been by the kind comments and support from many of you here today and others since I accepted the job earlier this year. Thank you all for joining us, and I know there is a big home team, both in the audience and online, so welcome to all of you as well.
I'm going to hand over to Dave in a moment to take you through the financial and operational performance in the first half. But first, I want to share some of the reasons why I'm so excited to be here as Workspace's new CEO. There is no doubt I've inherited a fantastic business, and I'd like to acknowledge the very great contribution that my predecessor, Graham, has made over the last 18 years as both CFO and CEO. He leaves a great legacy, having championed and embedded a customer-centric strategy and successfully steered the business through some extremely challenging periods, including the GFC and COVID-19. I'm grateful Graham is staying as Director until the end of January to ensure a smooth handover.
As you would expect, I've taken the opportunity to visit several of our sites in and around London over the last few months; many are very close to where I live in East London. There are a lot more to see, but one of the things that has struck me already, beyond the quality and character of the buildings, is how genuinely customer-centric this business really is. I'm really impressed by the passion and dedication demonstrated by everyone I've met in making sure that Workspace provides the best possible experience for its SME customers. Our purpose is to give London's brightest businesses the freedom to grow, and I've already seen this in action. I was excited to witness the energy and entrepreneurial spirit of some of these SMEs at work on my tours around the buildings.
I understand our team recently picked up an award for customer experience, so it's not just me that's recognized this. Importantly, my entire career has been spent in operating property businesses. This is something I love. In joining Workspace, I know I've come to one of the very best, a business that has a 35-year heritage in supporting London's SMEs. At Monday's weekly trading meeting, I was bowled over by the sheer velocity of this dynamic business. Just to give you a flavor, we reviewed feedback from the 140 viewings completed last week by our sales team, and we discussed the 25 lettings that were signed in the week. The scale of our activity managed by the operating platform is immense, and I'm excited by the ability this gives us to continue to grow market share.
But my first priority will be to ensure we continue to meet the expectations of our customers and our shareholders. I'll now hand over to Dave to present the results.
Thanks, Lawrence. Welcome to Workspace, and good morning, everyone. Overall, it's been a solid start to the year with valuations stabilizing and continued earnings and dividend growth. Trading-wise, it's been a good half, with trading profit up 5% despite rental income decreasing slightly following recent disposals. On the balance sheet, as expected, we've seen property valuations stabilizing with a small outward yield movement largely offset by ERV growth, resulting in NTA per share down 1.9% to GBP 7.85. In terms of customer activity, as the top two charts on this slide show, customer demand has been steady, whilst recent macro and economic and political uncertainty, not least concern around the U.K. budget, has accentuated a traditionally quieter summer period. Rates of conversion from inquiries to deals have been at historic highs, with an increase in deals in the first six months compared to the same time last year.
As highlighted in our Q2 trading update, we did, however, see a drop in occupancy due to a higher-than-usual number of customer vacations. I'll come back to this on the next slide, but demand for our core product remains good, and we continue to see improved pricing, with average rent per sq ft growing around 6% over the last 12 months, in line with our long-term average. Coming back to customer vacations, it's worth remembering that churn is an important part of our model. Giving customers the flexibility to move helps customer retention, and when they do move, our operating platform allows us to capture the significant reversion across the portfolio and drive rental and capital growth through active asset management.
The chart on the left of the slide compares customer movements across the like-for-like portfolio for the first six months of this year compared to the same period last year. The dark blue and pink bars below the line represent existing customers moving out of their units, either to expand, contract, move elsewhere, or leave Workspace. Dark blue represents units smaller than 3,000 sq ft, and pink is units larger than 3,000 sq ft. The light blue bar above the line represents new customers joining Workspace and existing customers moving into new units. You can see that the light and dark blue bars largely offset. The main difference between this year and last is the pink, the increase in the amount of space vacated by a handful of large customers.
You can see from the pink donut in the middle of the slide, the majority of these vacancies were either where customers have grown with us successfully over many years and have now been acquired by large corporates, or where we have not wanted to give longer leases that are typically required by larger occupiers because of planned redevelopment. The vacancies have had a temporary impact on rent roll and occupancy, although, as I will cover later, we're working at pace to upgrade and re-let this space, and the impact on occupancy is limited while the net lettable area is adjusted to exclude the larger spaces currently unavailable due to the asset management activity. Turning to the income statement, continued pricing growth has seen underlying rental income up 5% to GBP 68.7 million.
Net rental income was marginally down, reflecting the impact of disposals over the last year, but this was more than offset by the corresponding saving in interest costs, resulting in trading profit after interest up 5.1% to £32.7 million. Both service charge costs and admin expenses reflected the persistent wage inflation we've seen in the U.K., although the majority of service charge costs are recovered from customers. After accounting for the small decrease in the property valuation, total profit before tax was £10.2 million. Adjusted earnings per share was up 5% to 16.9p, and we will be paying a fully covered increased interim dividend of 9.4p. Other than the slight change in the property valuation, the balance sheet has been stable over the last six months, with trading profit funding dividends and the proceeds from disposals being recycled into capital expenditure, resulting in net debt basically unchanged at £856 million.
Looking at our debt facilities, and I do appreciate there's a lot of detail on this slide, but the key points are that we continue to maintain a wide range of debt facilities with a spread of maturities, largely fixed interest rate, and significant headroom. At the end of September, we had £144 million of cash and available facilities. Following the period end in November, the maturity of £135 million of bank facilities was extended to November 2028, with options to extend by two further years and to increase the facility amount by a further £120 million. At the same time, a new £80 million term loan was agreed with an initial maturity of November 2026 and options to extend by two further years.
These changes make no significant difference to the group's average cost of debt or LTV, which remain at 3.6% and 35%, respectively, but they do provide increased headroom and extend our average maturity. This gives us significant flexibility, with no additional refinancer required until 2027, assuming all options are exercised. Coming back to the property valuation, this slide sets out the valuation movements since March by property category. On the left-hand side, you can see the valuation at 30 September, and on the right-hand side, you can see the movements in the period. In the first row is the like-for-like portfolio, which accounts for around three-quarters of the overall value. As you can see, the like-for-like valuation was pretty much flat, with a nine basis points yield movement offset by a 1.3% overall increase in ERV.
At 7.1%, the like-for-like equivalent yield is now 170 basis points higher than the initial yield, giving us significant opportunity to continue to capture reversion. Valuation movements in the non-like-for-like categories were largely driven by market yield movements, with a more pronounced yield expansion in South East offices reflecting the broader market outside of London, and with refurbishments and redevelopments also impacted by increases in build costs and lower residential values. So, as we've seen, overall ERV increased by just over 1%. However, we saw stronger growth in ERVs for smaller units, which account for the majority of our lettings activity. The chart on the right is an updated version of one I showed at the year-end and analyzes our like-for-like portfolio, grouping customer units by size. More than 80% of our customer units by number, covering 1.1 million sq ft in total, are less than 1,000 sq ft.
For these units, we've seen an average ERV growth of 3% in the first half. For units between 1,000 and 3,000 sq ft, we've seen ERV growth of around 1%, and for our largest units, ERVs have actually slightly decreased. The chart highlights how higher demand and less competition drives higher pricing for smaller spaces, with a premium of around 15%-20% on average. In addition, smaller units have significantly shorter void periods and no customer incentives, which offsets the loss of lettable area from subdivision. The chart also highlights the scale of the opportunity across the estate to drive rental growth by converting larger spaces into smaller customer units, with larger units currently totaling around 900,000 sq ft, as shown in the dark blue circle.
Taking a closer look at that larger space, the majority of it is currently let and represents a future opportunity when the space is vacated. Around 10%, shown in pink on this slide, is currently unavailable to let due to current and planned refurbishment and redevelopment projects. More than half of this, around 60,000 sq ft, is expected to be completed over the next year and to add GBP 2.5 million to next year's rent roll. It's our operating platform that allows us to deliver this rolling program of upgrades and refurbishments to meet changing customer needs and to deliver rental and capital growth. Last financial year alone, we refurbished over 100,000 sq ft of space, which is now largely let, adding around GBP 4 million to the rent roll. In the first half of this year, we've delivered another 60,000 sq ft, which is also letting up well.
Swan Court in Wimbledon is a great example where we're repositioning the asset which we acquired in 2022 as units become available. In the first half of the year, we subdivided one 10,000 sq ft floor into 13 smaller units. The new units are letting up well, with an increase of over 40% in ERV per sq ft, and the project is on track to deliver good double-digit IRR. But our focus on smaller units is not limited to smaller projects. Our major refurbishment projects also deliver the kind of space demanded by our target SME community. In October, we completed the major refurbishment of Leroy House in Islington, delivering 57,000 sq ft of new and upgraded space across 101 units, an average unit size of around 560 sq ft. Leroy House is also a great illustration of the sustainability of our model.
It was designed to be net zero both in construction and in operation. With 90% of the structure retained, the embodied carbon is 40% less than industry best practice. Like all our buildings, it's powered by renewable energy from our solar farm in Devon, and it has a 75-square-meter green roof to promote biodiversity. The design prioritizes natural light and ventilation, and 25% of the project spend was with local suppliers. And it looks good too. It's capturing the imagination of London's SMEs, and we've signed 13 leases already. Looking forward, our focus in the second half of the year is on driving occupancy and rent roll growth. We expect the immediate direct impact of the budget on Workspace and the majority of our typically service-based SME customers to be limited. However, it may take some time for broader market sentiment to adjust.
While the high levels of inflation we've seen over recent years have been reducing, some cost inflation pressures do remain, largely driven by wage inflation, and we continue to invest in our operating platform to drive productivity and efficiency and enhance profitability. We have planned CapEx of around GBP 30 million in the second half, and we continue to progress with our rolling program of asset management, including the ongoing refurbishment and subdivision of larger units across the portfolio. The CapEx will be largely offset by disposals, and we expect interest costs to be broadly stable, and on valuation, now that yields have stabilized, we would hope to start to see valuation improvement driven by ERV growth, and in the longer term, there's potential for significant further income and growth. Firstly, we have GBP 21 million of reversion from the like-for-like portfolio, largely from moving customers up to current ERV pricing levels.
With the short length of our leases, we should be able to achieve the majority of the uplift over the next two or three years. There is then the uplift in rent roll of GBP 15 million from our projects recently completed and underway, including the likes of Leroy House. The uplift will come largely from letting up the new buildings to our target 90% occupancy. So in total, there's some GBP 36 million of reversion that can be delivered over the next three to four years, an increase of 26% on the September 2024 rent roll. Potentially, this could deliver an increase of some 6% per annum over the next three to four years, underpinning our profit and dividend growth ambitions. And this is obviously before any additional income growth from further increases in ERV, new projects, and of course, acquisitions. And I'll now hand back to Lawrence to wrap up.
Thank you, Dave. So in summary, we're in a strong position. Our customers are growth businesses in a structurally growing market. London's SMEs are a key driver to the wider U.K. economy, and nobody understands those businesses better than Workspace. With only a 3% share of our target market in London, there is plenty for us to go for. We have an operating platform that is primed to capture that opportunity and can be further enhanced to create additional value with multiple routes to drive growth. While still in my first week as CEO, I can confidently say I'm more excited about the future than I was when I accepted the role earlier this year.
We have a lot to do, but I'm going to take the necessary time working closely with the team to get up to speed on our operations, our assets, our CapEx and repositioning plans, and of course, our customers. From all that I've seen, I believe the business is very well positioned to continue to deliver income and capital growth and drive strong shareholder returns. I'm looking forward to seeing many of you over the coming weeks on our roadshow and providing a further update next year. Before we move to questions, I'd just like a few reminders in terms of protocol.
As you may have seen, we've got members of our executive team and senior team in the front rows, and we may call on those people to answer one or two of the questions that come in, but they will also be around after the presentation and are very happy to speak to you all. Dave and I will first take some of the questions from the room, and then we'll hand over to Clare to field any questions that come in from the webcast. If I could please ask you to wait for a microphone to come around and tell us your name and company before asking a question. At this point, we'll hand over to Q&A. Thank you.
Miranda Cockburn from Berenberg. Two questions. Just firstly on Leroy, you've made some lettings already. How do they compare with the ERVs? Are they in line or?
Yeah, no, good.
I mean, there's a range, and as we always do, our focus first is to let up the space and then drive rents. But actually, no. I mean, within that range, some are significantly ahead of ERVs. So I mean, there's always a spread, but yeah, no, it's letting up well.
Yeah. And then the other question, just in terms of this sort of decline in demand for larger space, is this a trend that has been sort of going on over the last few years, or is it just really over the last 12 months? And also the difference, again, between the like-for-like rental growth between the large space and the small space, again, is that something that we've just really seen over the last 12 months, or is this three, five years that it's been growing?
Yeah, I mean, I think the first thing to say is our core target market has always been SMEs, and the focus of them is smaller units, and I guess that's where we've always seen the best demand. I think there's two pieces to what we're seeing at the moment. The first is market, and I think there is, in the market more generally, there is more availability of larger space, larger for us, smaller for other people perhaps, but on more flexible terms. And so there's more options out there once you get into those largest spaces. But equally, there's a timing point for us. A lot of this space that's coming back now is in acquisitions that we've made over the last few years that there's been acquired with existing tenants on longer-term leases, and the space is now becoming available.
So I think there is a market piece, but actually probably more relevant to what you're seeing in this year's numbers in the first half is actually it's a timing point in terms of when those spaces are coming back to us.
Thank you.
Morning, John Cahill from Stifel. Two questions, please. On slide seven, you show your conversion rate, and it's materially improved over the last couple of years compared to the long-run average. Just wonder if you could comment on whether that's been due to changes in the way you operate, or is it just a function of the fact that there's price visibility through Hubble, etc. Then the second question, please, is in the investment market, we can see London office values have fallen pretty substantially, probably reached a trough now.
Are there things, not naming assets, but are you seeing propositions that could be of interest as something that you might look for an acquisition?
Sure. So on conversion, yes, I mean, as I say, it's at historic highs over the last couple of years. I mean, we have absolutely made significant changes. Lawrence has talked about how customer-focused it is and giving credit to Graham in terms of the journey that we've been on, and we continue to go on. Some of those changes are wheels in motion now, but we've made investments in brand. We've changed our sales process. We've brought in-house our own sales team to deliver consistently. So I think a lot of those pieces that we've put in place are definitely yielding benefits and will continue to do so.
In terms of acquisition opportunities, yes, I mean, valuations hopefully have troughed, and I think there is more availability out there at the moment. Things do seem to be loosening up. We always keep a very active eye on the market and our tracking opportunities within that. And as always, there's a few things that we're looking at and we'll continue to do so.
Thank you.
Hey, good morning. Neil Green from J.P. Morgan. Just two questions, please. On the plans to subdivide the space, the larger space, are there any schemes or assets you currently see that could generate a return that will perhaps consider taking it back proactively? And secondly, we've been hearing a bit recently about how replacement costs for London offices are quite a bit above book values. Just wondering if you had any idea of where your portfolio sits relative to replacement costs, please.
Okay. I mean, on the larger space and taking it back proactively, obviously our customers are on existing leases. I think we have the advantage because we have a lot of leases, we can do it on a rolling basis, and we don't have to take back necessarily a whole building. I mean, Leroy House, we did take back the whole building, but in a lot of times, we can just take back the space as it becomes available and let it through. I mean, as I said, there's 900,000 sq ft of larger space there. To take that all back in one go, we do a lot of activity. I mean, as I said, 160,000 sq ft over the last 18 months, but to take back 900,000 sq ft proactively would be a lot.
So yes, we do work with it, and we look forward in terms of what do we think, what lease events are coming up, and where do we want to take it back proactively. But we try and manage that pipeline. And sorry, your second question was?
Just on the replacement cost for London offices.
Yeah, I mean, I think like others, replacement costs are not insignificant, and I think for ours, it would be not dissimilar to others, I think, to be honest.
Thank you.
Any more questions from the room? Please move to the webcast. Thank you.
Got a question from Paul May. You've talked in the past about occupancy ranging from between 88% and 92%. Should we be concerned that it's dropped below that, and how do we plan to change that trajectory?
Yeah. Hi, Paul. So we do talk. I mean, there is no magic number.
We talk a lot about 90%. We talk about 88%-92%. The key point is that that's the level at which those high levels are where we see pricing tension, where we get the vibrancy in the centers, and that's what drives the return. But it's important to remember that within that number, there will be buildings that are higher than that, buildings that are lower than that. And equally, it's about the size of space, the configuration of space, which floor it's on, etc. So there is a whole melting pot in there. Should we be concerned? I mean, certainly we are very focused on driving occupancy at the same time. I mean, that's one of the things we're very focused on for the second half.
But having said that, a lot of what you're seeing at the moment is one-off, or at least a punctuation point where we're getting these larger spaces back. And whilst they're relatively quick projects, I mean, it doesn't take years to reposition individual spaces. It's not something that happens overnight. So by the time you've actually done the construction and re-let the space, you're probably talking 6 to 12 months. So you do see a temporary impact of it, but it's not, as I say, a trend. It's part of our model. When we acquire these assets, we know that they have larger spaces, we know they have existing customers, and we know we will get that space back and cut it up and drive rent as a consequence.
Another question from Adam Shapton at Green Street.
You mentioned the GBP 2.5 million of additional rent roll from 60,000 sq ft of large units being refurbished. What is the yield on total cost reflected in that?
I mean, typically, it's high single-digit % on total yield on cost. I mean, there's some very. I was looking at it yesterday. There's some projects. I mean, looking at Swan Court, I think the incremental yield on cost on that was over 40%. But in terms of total cost, it's probably high single-digit %, generally high single digits %. Fantastic.
Well, if that's the end of the questions, it's back to me just to thank you all very much for your attendance today, both in the room. As I say, great to see so many familiar faces and new faces. And of course, for those who have joined us, including our team members on the webcast, thank you very much.
And for those of you that want to spend a few minutes with the team afterwards, we have tea, coffee, and pastries, etc., outside. So we look forward to catching up with you there. But thank you. Excellent. Have a great day.