Derwent London : Interim 2023 Announcement

Derwent London plc Interim Results 2023 Announcement

10 August 2023

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

UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2023

STRONG LEASING ACTIVITY CONTINUES

Paul Williams, Chief Executive of Derwent London, said:

"We delivered our second highest H1 lettings on record with momentum maintained into the second half as businesses continue to commit to our distinctive central London buildings and brand. With our strong balance sheet, we are well- positioned with the right product and pipeline to capture London's diverse demand, despite the uncertain economic outlook."

Letting activity

• H1 2023 lettings of £19.3m (228,000 sq ft); H2 lettings to date of £7.0m (81,200 sq ft); YTD average 8.3% above December 2022 ERV
• Key transactions in the year to date include:
  o PIMCO (106,100 sq ft in H1) and Moelis (49,200 sq ft in H2) at 25 Baker Street W1; commercial 76% pre-leto Buro Happold (31,100 sq ft in H1) and Tide (14,400 sq ft in H2) at The Featherstone Building EC1; 70% let o Uniqlo (22,200 sq ft in H1) at One Oxford Street W1; retail 70% let

Financial highlights

• EPRA1 net tangible assets 3,444p per share, down 5.2% from 3,632p at 31 December 2022
• Gross rental income of £105.9m, up 3.9% from £101.9m (restated) in H1 2022
• EPRA1 earnings £55.6m or 49.5p per share, down 7.0% from 53.2p (restated) in H1 2022
• IFRS loss before tax of £143.1m from a profit of £137.1m in H1 2022
• First half dividend of 24.5p, up 2.1% from 24.0p
• Total return -3.7% from +3.0% in H1 2022
• Interest cover remains high at 411% (H1 2022: 419%) and EPRA1 loan-to-value ratio low at 25.0% (31 December
  2022: 23.9%)
• Net debt of £1,274.0m, a marginal increase compared to £1,257.2m at 31 December 2022
• Undrawn facilities and unrestricted cash of £562m

Portfolio highlights

• £11.7m of asset management transactions, 4.6% ahead of December 2022 ERV; 86% retention/re-letting rate
• EPRA vacancy of 4.5%, from 6.4% at December 2022
• Portfolio valued at £5.2bn, an underlying decline of 3.7%; development valuations up 10.6% underlying
• True equivalent yield of 5.13%, a 25bp increase in H1 2023; total increase since 30 June 2022 of 67bp
• Portfolio ERV growth of 1.0%
• Total property return of -2.0%, outperforming our benchmark2 at -3.2%
• Project expenditure3 of £68.8m
• £65.6m of disposals
• Two major on-site developments totalling 435,000 sq ft, due for completion in 2025 on budget and programme
• Planning consent received for c.100 acre 18.4MW solar park on our Scottish estate

Outlook

• Guidance unchanged for average ERV growth across our portfolio at 0% to +3%
• Our high quality portfolio yield to be more resilient than the wider London office market

1. Explanations of how EPRA figures are derived from IFRS are shown in note 24
2. MSCI Central London Offices Quarterly Index
3. Including capitalised interest

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

CHIEF EXECUTIVE'S STATEMENT

Operational performance

In H1, we agreed £19.3m of new leases and momentum has been maintained with a further £7.0m of leases signed in H2 to date. On average, the £26.3m of new income agreed since the start of 2023 is 8.3% ahead of December 2022 ERV with a WAULT of 10.3 years.

Key lettings in 2023 to date include:

• 25 Baker Street W1 pre-lets - both substantially ahead of ERV; commercial element 76% pre-let or pre-soldo PIMCO - 106,100 sq ft at £103 psf on a 15-year lease (no break) in H1
  o Moelis - 49,200 sq ft at £100 psf on a 15-year lease (break at year 10) on lower floors in H2
• The Featherstone Building EC1; now 70% leased
  o Buro Happold - 31,100 sq ft on levels 5-8 at £74 psf on a 15-year lease (break at year 10) in H1 o Tide - 14,400 sq ft on level 4 at £71 psf on a 10-year lease (break at year 5) in H2
• One Oxford Street W1; retail element now 70% leased
  o Uniqlo - 22,200 sq ft on a 10-year lease (break at year 5) in H1
• Tea Building E1 - newly refurbished space
  o Jones Knowles Ritchie - 8,100 sq ft at £60 psf on a 10-year lease (break at year 5) in H1 o Gemba - 7,100 sq ft (Furnished + Flexible) at £64 psf on a 5-year lease (no break) in H2

The first half of 2023 was characterised by increasing caution as higher UK inflation became more embedded and monetary policy continued to tighten. Encouragingly, figures released more recently show the inflation rate reducing and a number of forward-looking indicators suggest this should continue. There remains a disconnect between the investment market, where yields came under further pressure in H1, and the occupational market, where we have delivered a near record level of leasing in the year to date.

In addition, our Asset Management team agreed £11.7m of rent reviews, renewals and regears on average 4.6% ahead of December 2022 ERV. The portfolio WAULT is 7.2 years (on a 'topped-up' basis) and our EPRA vacancy rate has reduced from 6.4% during H1 to 4.5%.

Our business model incorporates a disciplined approach to capital allocation and leverage. Including £65.6m of disposals in H1 2023, we have sold almost £900m of assets since 2018. Over the same period, we have invested over £900m in development capex and have added to our longer-term pipeline with acquisitions of over £500m.

Following the signing of the main construction contract with Laing O'Rourke in early 2022 at 25 Baker Street W1, we have now completed the fixed price contract with Kier at Network W1. Together these projects comprise 435,000 sq ft.

The next phase of our new-build pipeline extends to c.240,000 sq ft at 50 Baker Street W1, held in a 50/50 joint venture, and c.150,000 sq ft at Holden House W1. Beyond that, our conditional £239m acquisition of Old Street Quarter EC1, the current Moorfields Eye Hospital site, is expected to complete from 2027. We also have a programme of rolling refurbishments which we expect to deliver attractive rental uplifts.

Valuations

Despite the strong operational performance, against a weak economic backdrop, our central London focused portfolio reduced in value by 3.7% in H1, taking the overall decline to 11.4% from H1 2022. The majority of the correction is yield- driven, with the portfolio EPRA true equivalent yield increasing a further 25bp to 5.13% (up 67bp since 30 June 2022). The portfolio ERV increased 1.0%, partly offsetting the impact of outward yield shift on the valuation. Our total property return was -2.0%, outperforming the quarterly MSCI Central London Offices index which was -3.2%. Our on-site developments increased in value by 10.6%, helped by the pre-let at 25 Baker Street to PIMCO.

In line with the trend reported at FY2022, our higher quality properties outperformed. Buildings valued above £1,500 psf saw capital values reduce by only 1.3% compared to properties valued below £1,000 psf, principally our future pipeline, which fell 6.3%.

Financial performance

The Group's EPRA net tangible asset (NTA) value per share declined 5.2% to 3,444p as at 30 June 2023 from 3,632p as at 31 December 2022. After allowing for the 54.5p dividend paid to shareholders in June 2023, the total return for the first half was -3.7% (H1 2022: +3.0%).

The total downward investment property revaluation movement in H1 2023 was £204.1m including owner-occupied property and our share of joint ventures. This compares with a surplus in H1 2022 of £72.9m (restated from £73.0m after a change in accounting treatment for incentives) but the deficit is less than half the £503.6m seen in H2 2022.

Gross rental income increased to £105.9m from £101.9m (restated) in H1 2022 with a £4.7m overall increase in irrecoverable property expenditure the main factor behind the reduction in EPRA earnings. This cost increase was principally due to a combination of higher average portfolio vacancy and the exceptionally high irrecoverable service charges seen through the first quarter of 2023 when energy pricing was elevated. Energy prices fell in Q2 2023 to levels closer to those seen in early 2022. The IFRS loss before tax was £143.1m in H1 2023 (H1 2022: £137.1m profit) and, after the usual adjustments for fair value movements and property disposals, EPRA earnings were £55.6m (H1 2022: £59.7m restated) or 49.5p (H1 2022: 53.2p restated) on a per share basis.

Our annual dividend remains well covered by EPRA earnings and we have increased the interim 2023 dividend by 2.1% to 24.5p.

Capital recycling means net debt rose marginally to £1.27bn from £1.26bn at December 2022, but is £87m below the £1.36bn reported a year ago. Lower property valuations led to a slight increase in the EPRA loan-to-value (LTV) ratio to 25.0%, compared to 23.9% at December 2022. It remains comfortably within our target range.

The balance sheet is very well placed with 98% of borrowings at fixed rates, £562m of undrawn available facilities and unrestricted cash, and only £83m of debt due to expire in October 2024, at a fixed interest rate of 3.99%.

London's global appeal

London is recognised as a world-leading city with broad appeal. For occupiers, it has a deep talent pool and sophisticated business ecosystem. This makes it a particularly appealing destination for a wide range of occupiers, including both UK and European Head Quarters. For investors, the restrictive planning environment and strong long- term performance provide a robust investment case.

One of the key drivers of the London office market is job creation. In 2021 and 2022, c.335,000 net new office-based jobs were added (CBRE). A further c.235,000 jobs are forecast between 2023 and 2028. In addition, the population of London continues to grow and is forecast to reach 10.6m by 2035, an 11% increase compared to 2022. This is significantly higher than the general rate of growth forecast in most other major European cities.

London attracts a broad range of occupiers while many other global cities are more reliant on specific sectors. The three largest sectors currently looking for space in the capital are banking & finance, business services and creative industries. There is also good demand from high growth areas such as AI and life sciences.

London is a major contributor to the UK economy, accounting for 24.4% of UK GDP. Since 2013, it has delivered average economic growth of 2.8% pa, outperforming the UK as a whole by c.130bp annually and is expected to continue to outperform the UK overall over the next five years.

Market backdrop

Businesses are more discerning around their occupational requirements as the flight to quality gathers pace. Encompassing many factors including amenity, location and sustainability credentials, the definition of prime is becoming more nuanced. Set against this, a large part of the current available supply does not meet these more stringent needs.

London has recently seen a trend of companies committing to return to more central, well-located and amenity-rich locations, notwithstanding the higher occupational costs. The opening of the Elizabeth line last year has emphasised the importance of location and connectivity and c.80% of our portfolio is within a 10 minute walk of an Elizabeth line station.

In a recent Knight Frank report, 77% of businesses surveyed expect their total floorspace to increase or remain the same over the next three years. In addition, 87% of businesses believe the office will play a central role in their future occupational models. The return to the office is continuing and a rising number of corporates have issued more prescriptive guidelines to their employees. The majority of those reported now require a minimum of three days in the office as businesses plan for peak occupation.

Vacancy is not evenly spread across central London. While overall office availability remains elevated at 8.5%, the West End is very tight at 3.8% compared to the City at 11.7% and Docklands at 14.3%. New supply, however, is constrained. Only 3.4m sq ft of projects are due to complete in the West End by the end of 2026, of which 28% is pre-let. Against long-term average annual take-up of 4.1m sq ft, the West End faces an emerging supply shortage.

Central London office take-up in H1 of 4.2m sq ft was down 36% compared to H1 2022, but space under offer increased 51% to 4.1m sq ft through H1. Pre-letting levels across central London are high at 45% as companies with larger requirements increasingly recognise the forthcoming lack of prime supply, particularly in central locations. Active demand increased 35% in H1 to 7.7m sq ft, a positive indicator for future take-up.