Derwent London : Interim 2022 Announcement

Interim Results 2022 Announcement

11 August 2022

Derwent London plc ("Derwent London" / "the Group")

UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022

CONTINUING FLIGHT TO QUALITY

Paul Williams, Chief Executive of Derwent London, said:

"We are seeing good demand for our distinctive brand of high quality offices, with short supply of prime space in our core locations. Despite the uncertain macro environment, the continuing flight to quality combined with our strong financial position gives us confidence that we are well placed with a pipeline of value-adding opportunities."

Financial highlights

• Total return of 3.0%, up from 2.7% in H1 2021
• EPRA1 NTA 4,023p per share, up 1.6% from 3,959p at December 2021
• Net rental income £93.9m, up 4.2% from £90.1m in H1 2021
• EPRA earnings 53.13p per share, down 1.7% from 54.04p in H1 2021
• IFRS profit before tax of £137.1m, up 13.2% from £121.1m in H1 2021
• Interim dividend raised 4.3% to 24.0p from 23.0p in H1 2021
• EPRA loan-to-value ratio 23.7% (December 2021: 22.3%); interest cover 419% (FY 2021: 464%)
• Net debt of £1.36bn (December 2021: £1.25bn)
• Undrawn facilities and cash of £452m (December 2021: £608m)

First half activity

• Lettings of £7.1m at 9.3% above December 2021 ERV
• Renewals and regears of £6.2m, 8.0% above December 2021 ERV
• Reviews of £5.5m, 6.2% above December 2021 ERV
• Principal acquisitions of £130.2m and disposals of £65.9m (excludes post-H1 transactions)
• Completion of developments at Soho Place W1 and The Featherstone Building EC1
• • Soho Place 88% let or sold
  • First leases signed at The Featherstone Building (22% let), 10% above ERV
• 25 Baker Street W1 (298,000 sq ft) demolition complete with 80% of total construction costs fixed
• Network W1 (137,000 sq ft) committed with demolition underway
• Portfolio energy intensity 61kWh/sqm in H1, 18% below three-year average

Portfolio update

• Portfolio valued at £5.9bn; underlying valuation increase of 1.7% including developments up 8.5%
• True equivalent yield 4.46% (December 2021: 4.50%)
• 0.9% increase in portfolio ERV
• EPRA vacancy rate 6.5% (December 2021: 1.6%) reflecting development completions
• Bush House WC2 and 2 & 4 Soho Place W1 disposals completed in July for £123.6m

Guidance

• Unchanged ERV guidance of 0% to +3% for 2022 average growth across our portfolio
• Upward pressure on property yields; our portfolio expected to be more resilient

1 Explanations of how EPRA figures are derived from IFRS are shown in note 25

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:30 BST today. The webcast can be accessed via www.derwentlondon.com

To participate in the call, please register at www.derwentlondon.com

A recording of the webcast will also be made available following the event on www.derwentlondon.com

For further information, please contact:
Derwent London	Paul Williams, Chief Executive
Tel: [phone]	Damian Wisniewski, Chief Financial Officer
	Robert Duncan, Head of Investor Relations
Brunswick Group	Simon Sporborg
Tel: [phone]	Nina Coad
	Emily Trapnell

CHIEF EXECUTIVE'S STATEMENT

Overview

Rents and yields in the London office market were stable through H1 2022 with prime buildings continuing their outperformance in both occupational and investment markets. Geopolitical events caused the macroeconomic environment to deteriorate through the period leading to rising inflation and interest rates, with upward pressure on yields emerging since the half year. Despite this, the Group is well positioned with a high quality portfolio and strong balance sheet.

Results overview

The Group's total return for the period was 3.0%, against 2.7% for the first half of 2021 and 5.8% for the full year 2021. This return comes from the dividend of 53.5p per share paid in June 2022 plus the 64p increase in EPRA net tangible assets (NTA) per share to 4,023p during the period.

The Group's IFRS profit before tax increased 13.2% to £137.1m for the first six months of 2022 against £121.1m for H1 2021. The increase is principally a revaluation surplus (net of accounting adjustments) of £74.1m, higher than the £58.1m recognised in H1 2021. After adjusting for fair value movements, EPRA earnings were 53.13p per share, 1.7% lower than the 54.04p reported last year. Net property and other income of £96.5m was 1.5% higher than the first half of 2021 and administrative expenses £1.6m lower, but finance costs increased by £4.5m to £18.7m on higher borrowings. Our annual dividend remains well covered and we have increased the interim by 1.0p or 4.3% to 24.0p per share.

We remained net investors in the portfolio in H1 2022, including the payment made to TfL plus costs of £71.9m on completion of Soho Place W1. As a result, borrowings increased to £1.37bn from £1.25bn in December. Our gearing ratios remain low, with the newly defined EPRA loan-to-value (LTV) ratio at 23.7% against 22.3% at year end.

The balance sheet remains very strong with 90% of our borrowings at fixed rates, undrawn facilities and cash of £452m and only £83m of debt to refinance prior to June 2025. Following the sales of Bush House WC2 and 2 & 4 Soho Place W1 in July 2022, our debt levels reduced by c.£126m.

Continuing flight to quality and London's enduring appeal

Offices have an important role for companies in attracting and retaining talent. An increasing number of businesses have actively re-engaged with their long-term occupational requirements as Covid restrictions have lifted which translated into high market take-up in H1. However, leasing transactions are taking longer to complete as decision making timescales are being extended. The supply of top quality buildings remains relatively constrained and established businesses with large requirements continue to enter into early pre- let discussions. In addition, we may see some development deferrals as market conditions lead to a reappraisal of schemes.

Despite some of the large Tech companies pulling back on their space expansion plans, there remains a broad range of businesses with active requirements. A variety of international companies continue to choose London for their UK or European HQ.

CBRE reported a net withdrawal of tenant-controlled space in H1 across central London. Combined with strong take-up, market vacancy has reduced to 8.2% (December 2021: 8.8%) although this masks the ongoing divergence between the West End at 4.3% (now back in line with the long-term average since 2000 of 4.2%) and the City at 12.3% (long-term average 6.6%). Space under offer is close to record levels at 4.3m sq ft, 1.7m sq ft of which is in the West End.

Adaptability and amenity

Businesses want a combination of adaptable space and high quality amenity in innovative and sustainable buildings. Our customer-focused approach led us to initiatives such as DL/78, which opened last year and which is proving popular with both existing and new customers. Based on its success, we are exploring the potential to open an equivalent amenity in The Featherstone Building EC1.

Occupier needs cover a broad spectrum from very flexible to long-term leases. We deliver bespoke solutions which recognise the differing demands of our diverse customer base. For larger occupiers, typically on longer leases, this might mean a combination of core and flex space with some optionality. For smaller occupiers looking for greater flexibility, our 'Furnished + Flexible' product provides an attractive solution, achieving a premium rent.

Portfolio activity

Leasing in H1 was strong with £7.1m of new rent signed on average 9.3% above December 2021 ERV. Five leases comprised 71% of the total, including the first two lettings at The Featherstone Building EC1 and two occupiers expanding at White Collar Factory EC1, altogether 10% above ERV. In addition, several leases elsewhere have been extended on terms ahead of ERV.

Given the flight to quality, we have been retaining large recently completed developments for longer and have sold buildings where we expect lower returns or where we do not believe they can be economically upgraded into the next generation of prime product. Proceeds are being reinvested into our pipeline of larger net zero schemes.

Portfolio reshaping and pipeline restocking activity continued in 2022 with major acquisitions of £130.2m, principally 230 Blackfriars Road SE1 and the final payments at Soho Place W1. In H1, we sold New River Yard EC1 for £65.9m. Since the start of H2, we have completed the disposal of Bush House WC2 and the forward-sale of 2 & 4 Soho Place W1 for a combined £123.6m.

The Group also exchanged a conditional contract to acquire the 2.5 acre Old Street Quarter EC1, the site of the Moorfields Eye Hospital. Plans are being evaluated for a major 750,000+ sq ft campus for the longer- term. Subject to relocation of the hospital and subsequent receipt of vacant possession, the £239m acquisition is expected to complete in 2027, when the site payment will be made.

Our developments at Soho Place W1 (offices 100% pre-let) and The Featherstone Building EC1 have now completed, adding £20.0m of contracted rent with a further £9.9m of ERV to capture from vacant space. As a result, the EPRA vacancy rate increased to 6.5% (December 2021: 1.6%).

At 25 Baker Street W1, following appointment of the main contractor in January 2022, 97% of the office construction costs (80% of total) have been fixed. Demolition has completed and ground works are underway. At Network W1, demolition has commenced under a fixed price contract and we have selected our preferred tier one contractor for the main construction package. These two projects have a combined ERV of £30.3m. In addition, there are a number of smaller projects underway, including EPC upgrading activity.

Creating value responsibly

In July 2020, Derwent London became the first UK REIT to publish its Net Zero Carbon 2030 pathway. We have set ourselves science-based targets, aligned with a 1.5oC climate scenario, for reductions in energy usage and embodied carbon.

Between our 2019 baseline and the end of 2021, energy intensity across our managed portfolio, which encompasses Scope 1, 2 & tenant emissions in Scope 3, reduced 17% to 134kWh/sqm, beating our targets. Despite a rise in building occupation in H1 2022, we are on track to again exceed our target for this year. The roll-out and integration of our Intelligent Building platform will help deliver further efficiencies over the coming years.