Derwent London : FY 2022 results announcement

Derwent London plc

Announcement 2022

28 February 2023

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

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

WELL POSITIONED IN THE CONTINUING FLIGHT TO QUALITY

Paul Williams, Chief Executive of Derwent London, said:

"The £14.7m of lettings we have announced today further demonstrate the depth of demand for our distinctively designed, sustainable offices and we anticipate rental growth accelerating for the best buildings over the medium-term. We have an opportunity-rich pipeline, underpinned by our high quality core portfolio. Our balance sheet remains strong helped by another year of active capital recycling."

Lettings activity

• 2022 lettings of £9.8m, 13.0% above December 2021 ERV
• 2023 lettings of £14.7m year to date, including:

1. PIMCO - 106,100 sq ft pre-let at 25 Baker Street W1, at rent of £11.0m on a 15-year lease (no breaks)

1. Buro Happold - 31,100 sq ft let at The Featherstone Building EC1, at rent of £2.3m on a 15-year lease with a break at 10

Financial highlights

• EPRA net tangible assets1 3,632p per share, down 8.3% from 3,959p at 31 December 2021
• Net rental income of £188.5m, up 6.0% from £177.9m (restated)
• IFRS loss before tax of £279.5m from a profit of £252.5m in 2021
• EPRA earnings £119.7m or 106.6p per share, down 1.8% from 108.5p (restated)
• Full year dividend of 78.5p, up 2.6% from 76.5p
• Total return -6.3% from 5.8% in 2021
• Interest cover of 423%, EPRA loan-to-value ratio of 23.9%
• Net debt of £1,257.2m, broadly unchanged from £1,251.5m
• Undrawn facilities and cash of £577m2

Portfolio highlights

• Portfolio valued at £5.36bn, an underlying decline of 6.8% with development valuations up 4.8%
• True equivalent yield of 4.88% compared to 4.50% at December 2021
• Portfolio ERV growth of 1.3%
• Total property return of -3.4% outperforming our benchmark3 at -8.0%
• £133.0m of property acquisitions and £121.8m4 of capital expenditure
• £206.4m5 of disposals, £25.6m above December 2021 book value; further £53.6m sold in 2023
• Development pipeline

1. Three schemes completed in 2022, totalling 450,500 sq ft

• 1. Two major projects on-site, totalling 435,000 sq ft, due for completion in 2025
• £29.6m of asset management transactions, 5.3% above December 2021 ERV
• EPRA vacancy increased to 6.4% from 1.6% in December 2021; reduces to 5.0% for 2023 lettings to date

Sustainability

• Fully compliant with 2023 EPC legislation; 65.3% compliant with expected 2030 requirements
• Energy intensity reduced 4% to 123 kWh/sqm, ahead of target for third consecutive year

Outlook

• Our guidance is for average ERVs across our portfolio to increase by 0% to +3%
• Upward yield pressure easing; yields for our portfolio to be more resilient than wider London office market

1. Explanations of how EPRA figures are derived from IFRS are shown in note 25
2. Excludes restricted cash
3. MSCI Central London Offices Quarterly Index
4. Including capitalised interest
5. Disposals exclude the sale of trading property

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:45 GMT 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

CHAIRMAN'S STATEMENT

Derwent London aims to add value to its portfolio through a combination of major projects and refurbishment schemes, while recycling capital out of assets where we see lower forward returns. We are committed to delivering high quality and sustainable offices through the economic cycle.

Global events in 2022 caused a marked increase in uncertainty. However, we have seen confidence return to the market in recent months as the economic outlook has improved.

Following the decision in 2021 to retain our larger modern developments for longer and to dispose of non- core properties, the business made good progress against this strategic objective and has seen relative outperformance against its property benchmarks. This, together with our objective of operating with low leverage, gives us firepower for further development and future investment opportunities.

Estimated rental values across our portfolio rose by 1.3% over 2022 but the rapid outward movement in property yields seen in the second half took our portfolio fair value to £5.36bn after a revaluation deficit for the year of £430.9m, including our share of joint ventures. This was a reversal from the £73.0m revaluation surplus seen at the half year and took the Group's EPRA net tangible asset (NTA) value to 3,632p at 31 December 2022. This equates to an 8.3% decrease over the year from 3,959p in December 2021.

Gross rental income rose 6.0% to £207.0m for the year. EPRA earnings were marginally lower than 2021 at 106.6p per share (2021 restated: 108.5p) but, after deducting premiums received in both years, underlying EPRA earnings were slightly up year on year.

We propose raising the final dividend by 1.0p to 54.5p, in line with our progressive and well covered dividend policy. It will be paid on 2 June 2023 to shareholders on the register of members at 28 April 2023. This takes the full year's dividend to 78.5p, an annual increase of 2.6%. EPRA earnings covered the 2022 interim and final dividends 1.4 times.

In 2022, we refreshed our Vision, Purpose and Values:

• Vision: We craft inspiring and distinctive space where people thrive.
• Purpose: We design and curate long-life, low carbon, intelligent offices that contribute to London's position as a leading global city, while aiming to deliver above average long-term returns for all our stakeholders.
• Values: We build long-term relationships. We lead by design. We act with integrity.

Derwent London is an inclusive employer. Our people remain highly engaged and in our recent employee survey, 91% of respondents said they were 'proud to work for Derwent London'. I would like to thank all the staff at Derwent London for their continued hard work and commitment.

In recognition of the challenges faced in the uncertain economic environment, we made a one-off cost of living payment to eligible employees.

After nine years on the Board, Richard Dakin is stepping down from his position as a Non-Executive Director of the Company and Chair of the Risk Committee. The Board thanks Richard for his significant contribution to the business and wishes him every success in the future. Helen Gordon, who is the Senior Independent Director and a member of the Risk Committee, will become Committee Chair.

CEO STATEMENT

Introduction

At the start of 2022, confidence levels in London were strong. In Q1, occupational and investment markets both recorded high levels of activity. The outlook weakened as the year progressed following the invasion of Ukraine and its economic impact globally, as well as changes in the UK political landscape. In more recent months, the outlook for the UK economy has improved and confidence is recovering.

London is very busy again. The opening of the Elizabeth line has increased capacity across the transport network, contributing to substantially higher footfall around the central stations, benefitting offices, shops and restaurants.

The flight to quality for London offices continues to gather pace. Data from CBRE show a clear divergence in demand for new versus secondhand space as businesses recognise the important role design-led,amenity-rich, low carbon offices play in attracting and retaining talent. The hybrid working model is now established and occupiers are planning for peak occupancy with lower occupational densities.

Letting progress

The 163,000 sq ft of leases signed in 2022, with a combined annual rent of £9.8m, were agreed on average 13.0% above December 2021 ERV. As well as long leases, our letting activity included seven 'Furnished + Flexible' lettings - also at substantial premiums - bringing our total of these smaller units to 27 across 63,600 sq ft.

Activity has accelerated in 2023 with 10 new leases agreed totalling £14.7m of rent, 7.7% above December

2022 ERV on average. The two key transactions are:

• PIMCO (the investment management company) has pre-let 106,100 sq ft at 25 Baker Street W1 at a rent of £11.0m, well above December 2022 ERV on a 15-yearlease with no breaks (commercial element 56% pre-let/soldahead of completion in H1 2025); and
• Buro Happold (a global engineering consultancy) has leased 31,100 sq ft at The Featherstone Building EC1 at a rent of £2.3m in line with December 2022 ERV on a 15-yearlease with a break at year 10.

For further details, refer to the separate RNS announcement we have published this morning. We are in detailed negotiations with a number of other occupiers across the portfolio.

New leases signed in 2022 had a weighted average unexpired lease term to break (WAULT) of 5.7 years and our 'topped-up' WAULT at year end was 7.2 years. This will increase with post-year end activity and we see good demand for both long and short-term leases. Our tenant retention rate remains high, and 79% of space subject to break or expiry in 2022 was retained or re-let.

Completion of The Featherstone Building EC1, Soho Place W1 and other smaller refurbishments led to an increase in our EPRA vacancy rate to 6.4%, from 1.6% at 31 December 2021. Following lettings in 2023, proforma vacancy would reduce to 5.0%.

Property valuations

Portfolio ERV growth was 1.3% in 2022, in the middle of our guidance range. However, there was a broad range of outcomes. Buildings with a capital value above £1,000 psf saw ERVs up 2.5%, while those below £1,000 psf saw ERVs up 0.3%, the latter often being the raw material for future regeneration.

The portfolio's true equivalent yield increased 38bp in 2022 to 4.88%, a level last seen in 2014. Yields moved down 4bp in H1 and up 42bp in H2. Our portfolio outperformed the market with a total property return of - 3.4% compared to the MSCI Central London Office index down 8.0%, endorsing our strategy of keeping our recently completed high quality buildings for longer.

The outward yield shift resulted in underlying values reducing 6.8% in the year and a revaluation deficit of £430.9m (including share of joint ventures).