Company Announcements

10 August 2021

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

 INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2021
 INCREASED ACTIVITY AND CONFIDENCE

Financial highlights

·      Total return of 2.7%, -0.1% in H1 2020, -1.8% in FY 2020

·      EPRA¹ NTA 3,864p per share, up 1.4% from 3,812p at 31 December 2020

·      Net rental income of £90.1m, up from £84.4m in H1 2020

·      EPRA¹ earnings of £60.6m or 54.0p per share, up 10.5% from 48.9p in H1 2020

·      Interim dividend raised 4.5% to 23.0p from 22.0p in 2020

·      Net debt of £999.7m (£1,049.1m at 31 December 2020)

·      Loan-to-value ratio 17.3% (18.4% at 31 December 2020)

·      Undrawn facilities and cash of £527m (£476m at 31 December 2020)

Portfolio highlights

·      Portfolio valued at £5.4bn, an underlying value increase of 1.4%

·      True equivalent yield of 4.65%, tightening 9bp since December 2020

·      Total property return of 3.2%, outperforming our benchmark index² of 2.3%

·      EPRA vacancy rate rose from 1.8% to 3.3% in H1 (subsequently reduced to 2.4%)

·      ERV movement of -0.3% in first half of 2021

·      First half lettings £3.9m, 1.6% below December 2020 ERV with offices 0.4% above

·      Raised 2021 ERV guidance to +2% to -2% from 0% to -5%

Second half activity to date

·      Exchanged contracts to acquire two freeholds for £214.6m

·      Signed memorandum of understanding to form a JV with Lazari Investments for a major development in Baker Street W1

·      Secured vacant possession of Bush House WC2, accelerating refurbishment opportunity

·      Exchanged contracts to sell Angel Square EC1 for £86.5m before costs

·      Resolution to grant consent for the redevelopment of Network Building W1

·      Second half lettings to date £3.8m, 2.2% above ERV

·      Potential pipeline now c.2.5m sq ft

¹ Explanations of how EPRA figures are derived from IFRS are shown in note 23

² MSCI IPD Central London Offices Quarterly Index

Paul Williams, Chief Executive, commented:

"Sentiment is improving as the year progresses which has been reflected in our results and encouraged us to raise our ERV guidance. We are well positioned to invest and are moving forward with our next phase of net zero carbon developments and today's acquisitions have added to our extensive pipeline."

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09.30 GMT today.  The audio webcast can be accessed via www.derwentlondon.com

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

A recording of the conference call will also be made available following the conclusion of the call on www.derwentlondon.com

For further information, please contact:

CHIEF EXECUTIVE'S STATEMENT

Improved business confidence

London's business confidence and economy were stronger than expected in the first six months helped by the successful roll out of the UK's vaccination programme. In our sector this has been reflected in increased property activity levels and the tightening of property yields. We expect these trends to strengthen further in the second half now that most lockdown restrictions have been lifted.

Operationally, we have seen higher rent collection with offices, the bulk of our income, now close to pre-Covid levels. Our letting activity has picked up as the year has progressed and we have now let 139,000 sq ft for £7.7m of which 50% was in Q3.  We continue to embed our net zero carbon strategies across the business and support our local communities.

Our average ERV fell only 0.3% in the first six months which was at the top end of our previous guidance but, as expected, higher quality buildings are performing better. Our vacancy rate rose marginally to 3.3% at 30 June 2021 but, following H2 lettings to date, is now 2.4%.

Our current developments at Soho Place W1 and The Featherstone Building EC1 are on track to complete in H1 2022. We are commencing our next major project at 19-35 Baker Street W1 in Q4 this year which will take our space on site to over 700,000 sq ft.

We have also taken advantage of robust investor demand for central London office properties by disposing of two older buildings in the year to date for £256.5m and will be investing the proceeds in new acquisitions and our extended development pipeline.

Major West End investment

Today we are announcing three transactions with Lazari Investments.

We have exchanged contracts to acquire two freehold interests in the West End's Knowledge Quarter¹:

·      250 Euston Road NW1 is a 165,900 sq ft office building on a 1.6 acre site. It is let to UCLH until 2039 at a rent of just £28 per sq ft, subject to 2.5% fixed annual increases compounded every five years, coinciding with tenant break options. The consideration is £189.9m including estimated costs.

·      171-174 Tottenham Court Road W1 is a 16,200 sq ft mixed-use property acquired for £24.7m after estimated costs.  This is an interesting strategic holding, part of a much larger block including significant UCLH and UCL interests.

In addition, we have signed a memorandum of understanding with Lazari Investments to form a 50:50 joint venture which is expected to acquire their leasehold interests in a group of Baker Street buildings totalling 122,200 sq ft. The consideration for our 50% interest including costs is £64.4m.

It is our intention to apply for planning permission to create a major c.240,000 sq ft development. This will be almost opposite our 19-35 Baker Street scheme due to commence later this year. Subject to the necessary approvals this project could begin in 2024. A further payment of £7.25m would be payable to the vendor when planning and headlease regears are achieved.

The estimated initial financial impacts of these transactions are disclosed in a separate RNS published today.

¹ London's Knowledge Quarter is defined as the small area around Euston Road, Kings Cross and Bloomsbury which has a very high concentration of academic, cultural, research, scientific and medical organisations

Adding to our next phase of developments

In the second half we have received a resolution to grant planning consent for either 137,000 sq ft of offices or 112,000 sq ft of lab-enabled space at Network Building, Fitzrovia W1.  We expect to commence work on site in 2022.  Also in the second half, we have bought in the headlease interest in the South West Wing of Bush House WC2 for £13.5m before costs. The Group already owns the freehold to this 103,700 sq ft property facing the Strand. As well as releasing marriage value we are working on plans to refurbish and extend the building to c.130,000 sq ft, with a potential start date in 2022, subject to planning. Including the 19-35 Baker Street project these two projects would take our next phase of developments up to 565,000 sq ft in addition to our existing 410,000 sq ft on site.

Improved first half results and dividend

The recovery in confidence and activity is reflected in a significant improvement in our financial results compared to H1 2020 when the first impacts of Covid-19 were being felt.

Gross rental income for the six months to 30 June 2021 increased modestly to £98.1m from £97.8m a year earlier, with the £9.5m increase from 80 Charlotte Street W1 being offset by a combined £9.4m of disposals and increased voids.  However, the impact of Covid-related rental waivers and other concessions has been significantly lower in 2021 so that net property income on an EPRA basis rose by 10.9% to £93.8m from £84.6m in H1 2020.  EPRA earnings have benefitted accordingly, rising 10.8% to £60.6m from £54.7m in H1 2020.  EPRA earnings per share were 10.5% higher at 54.0p from 48.9p in H1 2020 and were also 5.3% above the 51.3p in H1 2019.

The investment property revaluation surplus for the half year was £57.8m after accounting adjustments, which followed declines of £68.3m in H1 2020 and £196.1m for the full year.  This has helped drive EPRA Net Tangible Assets to 3,864p per share, up 1.4% from 3,812p as at December 2020, and IFRS profit before tax was £121.1m for the first half compared to a loss of £14.0m in H1 2020.  Adding back dividends paid gave a total return for the first half of 2021 of 2.7% against -0.1% in H1 2020 and -1.8% for the whole of 2020.

Our other financial ratios remain very secure with interest covered 4.8 times and the Group's LTV ratio at 17.3%, the same as a year earlier and a little lower than the 18.4% at 2020 year end.  All of these aspects have encouraged us to increase the interim dividend by 4.5% to 23.0p per share, where it remains well covered.

The London office market

Business activity has been improving as London follows the roadmap out of lockdown and with the increased level of vaccinations. We believe it is the strength of the London economy and its adaptability in attracting new sectors that will ultimately determine demand and Derwent London's long-term growth. London's large, relatively young and well-educated labour pool continues to attract growing businesses. All of this further endorses our confidence in London.

Office demand has focused on much more than just location and price for some time. A building's adaptability, amenities, ability to promote wellbeing, sustainability and 'digital intelligence' are increasingly important to occupiers. The pandemic has further highlighted these broader issues. High quality office space is an important weapon in promoting a business's culture and the 'war for talent'.

One example of how we are responding is 'DL/78' which is due to launch next month at our latest completed development 80 Charlotte Street W1. Located at the heart of our Fitzrovia village it is a purpose built occupier facility providing drop in space and refreshments, as well as the opportunity to hire meeting rooms and event space ranging in capacity from 8 to 100+ persons. We are encouraged by the positive response to this initiative from our occupiers.

Many businesses are still considering how changing working practices will affect them in the future. However, we expect space requirements to continue to focus on peak occupational demand, which often requires a significant proportion of the workforce to be present at one time. Less individual desk space may be replaced by additional video conferencing facilities. In addition, as more businesses return to their offices the need to be 'at the centre of things' will be reinforced.

These views are supported by the results of our third occupier questionnaire since the start of the Covid pandemic. This survey, which covers 50% of our income, has consistently shown that collaboration and social activity have been most missed during the pandemic. As time has progressed, wellbeing, training and innovation have become significant additional concerns. In February we were encouraged to find that 51% of respondents intended to increase their headcount.  That has not changed, but the percentage seeing no change has increased from 18% to 29%. As a result, 80% have said they intend in increase or see no change in their headcount in the next six to 12 months up from 69% in February.

An evolving business

The increasing flight to quality within the central London office market has led us to take a more nuanced look at our portfolio and strategy.

We expect to retain more of our larger modern developments where we see good long-term demand. These will provide asset management opportunities and a core of high quality income. These properties will enable the Group to build on its network of established occupier relationships as well as making meaningful long-term investments promoting climate resilience, higher levels of customer services, intelligent buildings and supporting local communities.

An income producing pipeline of potential projects will remain at the heart of our business. We will continue to ensure that it is extensive and offers multiple opportunities where we can continue to utilise our design skills, proactive management and our brand. We will advance our active development programme which we expect to remain a significant contributor to our performance. Our proven ability to produce high quality product should serve us well in a market where potential legislation is putting much of central London's older office stock in need of improvement.

The Lazari transaction announced today involves a classic mix of income-producing medium and longer-term opportunities in an area we know well, adding to a major cluster of Derwent London properties. It adds 243,200 sq ft to our potential development pipeline which now totals c.2.5m sq ft based on pre-development floor areas.

The strong investment market has given us the opportunity to dispose of some of those buildings where, on our estimates, we believe we can find greater returns elsewhere. The proceeds will be reinvested either into new acquisitions or the development programme.

All this activity will continue to be based on a financial structure with modest gearing and sufficient headroom to ensure we retain the flexibility to deliver all our objectives.

A responsible business

Last year we published our pathway to becoming a net zero carbon business by 2030. Our focus on sustainability is highlighted by the delivery of net zero carbon developments and a continuing investment in our buildings and teams.

The pandemic has increased levels of collaboration with our stakeholders. We will continue to support our occupiers as they return to work, as well as offer financial support on a case by case basis to those whose businesses remain particularly impacted by the pandemic. In particular we have been supporting many of our retail and hospitality occupiers.

Our own employees have increasingly been back in the office and we have benefitted from the increased levels of human interaction.  Feedback on our workplace initiatives has been positive and in the second half we will be continuing to focus on wellness and mental health initiatives as well as talent development and cultural awareness.

The Group continues to enjoy excellent relationships with its suppliers who have responded well to the challenges presented by the pandemic. Recognising the importance of cashflow in these times, our average payment terms to our suppliers remains at 20 days. Looking forward in the next 12 months, we will be awarding a number of significant new construction contracts covering projects commencing in 2021 and 2022. We are assuming a higher rate of construction cost inflation than in recent years with both materials and labour costs impacted. We have mitigated this in the past with fixed price contracts and by working closely with our contractors.

We support local communities around our buildings through our Community Funds and direct sponsorships and donations. In H1, with support from our partners AHMM and TTP, we delivered a new counselling room for the Soup Kitchen in Fitzrovia. In H2 we will be helping St Monica's Primary School, Hoxton in the Green Schools Project and Chickenshed in providing two initiatives designed to help young people get into employment. We are very active and we continue to engage constructively to ensure outcomes that benefit the wider community such as our commitment to provide 23 affordable homes with the development of Network Building in Camden.

Outlook and upgrade in guidance

In the first six months the London office market and our own portfolio have performed near the upper end of expectations. We are continuing to see good letting activity and demand. The growth rate in the London vacancy rate appears to be levelling, new supply remains constrained and some previously available tenant-controlled space has been withdrawn from the market. In the light of this evidence and on the assumption that there is no further lockdown, we are raising our average portfolio ERV guidance to +2.0% to -2.0% for the year ending December 2021. This compares to our March 2021 estimate of 0% to -5%.

Our average portfolio investment yields tightened in the first half as expected. They are still higher than those of comparable European cities and there is strong demand from a wide range of sources (estimated at £41bn by CBRE). Inflation has begun to rise from very low levels, but it is not yet clear this will become a long-term trend and the yield gap between property and many other assets remains wide. We expect investment demand and property yields to remain firm in the second half.

We will continue to focus on the pre-letting campaigns for the offices at The Featherstone Building EC1 and the retail at 1 Oxford Street (Soho Place) W1 (together 161,000 sq ft); commencing our next major net zero carbon development at 19-35 Baker Street W1 which totals 298,000 sq ft and continuing the progress to becoming a net zero carbon business by 2030.

On the back of our strong financial position we have made a positive start to the second half, and we can now finalise our plans for Network Building for a 2022 development start, preparing to submit plans for Bush House and embedding the Lazari transactions into our portfolio.

As a result, we expect the Group to benefit from London's continuing economic recovery. Our business model should also gain from the increasing focus on making cities climate resilient.  Risks remain and international travel is still limited but our strong activity levels are supported by our skill sets, financial strength and well established relationships. These should provide additional impetus ensuring that we can still produce above average long-term returns and benefits for all our stakeholders.

Board appointments

We recently announced the appointment of Sanjeev Sharma who will join the board as an independent Non-Executive Director from 1 October 2021. He will become a member of the Risk, Audit and Nominations Committees.  On 31 October Simon Fraser will retire from the board and his position as Senior Independent Director, a position that will then be taken by Helen Gordon. We are looking forward to working with Sanjeev and would like to thank Simon for his considerable contribution to Derwent London over the last nine years.

CENTRAL LONDON OFFICE MARKET

The pandemic continues to impact the London office market, but there are signs that its grip is starting to loosen as the economy recovers and London's business confidence improves.

Occupier demand

Activity is improving with first half take-up at 3.0m sq ft, 55% higher than H2 2020 although, in absolute terms, this remains significantly below pre-Covid levels. Professional and business services represented 31% of demand, slightly below recent years, banking and finance increased their share to 23% and creative industries remained at c.20%.

The overall vacancy rate has risen to 9.3% from 8.0% in the first six months, with the City vacancy rate at 12.7% rising faster than the West End's at 6.0%. These levels are above long-term trends but new space is estimated at under 15% of the total. CBRE classify the majority as secondhand of which 41% is tenant controlled. Much of this space is of lower quality which has been a contributing factor to the two tier market, and the flight to quality.

The impact on rent has been relatively modest with CBRE estimating that prime rents have fallen 1.1% overall in the last year, declining 2.2% in the City and actually rising 1.3% in the West End.  The MSCI IPD central London office index recorded average rents rising 0.1%. This improving trend is reflected in the amount of space under offer. This fell steadily from 3.7m sq ft at Q1 2020 to reach its low point at 1.9m sq ft in Q1 this year and has now recovered to 2.7m sq ft at the end of Q2, its highest level for five quarters.

The supply of available new space remains constrained despite lower levels of pre-letting activity. The first half saw 2.9m sq ft of space delivered leaving 11.2m sq ft under development compared to 12.1m sq ft in December 2020.  This space is 32% pre-let leaving available new space due for delivery between now and the end of 2023 of 7.6m sq ft. This is in line with recent trends at c.3% of the total market.

Investment demand

There were £3.9bn of investment transactions in the first half of 2021 as estimated by CBRE, despite the UK being in lockdown for a major part of the period. Nearly 70% of activity occurred in Q2, which also represented the highest single quarter's activity since 2018 outside the two very active last quarters in 2019 and 2020. This demand has seen the MSCI IPD central London office equivalent yield move in 5bp to 4.85%.

Overall investment activity remains 35% below the pre-Covid trend but is beginning to recover. There was greater interest from North American buyers which represented 29% of the total and UK investors at 28%. Asian and European buyers also remain active and together amount to 34%. Overall, there seems increased interest in UK assets not just in the property sector, as UK value growth has lagged many international peers. These higher levels of interest may reflect the impact of the UK leaving the EU in January 2021 as well as the UK's population's relative levels of vaccination.  The largest single transactions were in the City and Whitechapel.  CBRE reports that potential investment demand remains high at £41bn.

VALUATION

The Group's investment portfolio was valued at £5.4bn on 30 June 2021. There was a valuation surplus of £70.1m for the first half which, after accounting adjustments of £12.0m (see note 10), produced an uplift of £58.1m. This movement represents an underlying valuation increase of 1.4%, and a reversal of the 2.1% valuation fall seen over the second half of 2020. By location, our central London properties, which represent 99% of the portfolio, increased in value by 1.3% with the West End 1.6% and City Borders 0.7%. The balance of the portfolio, our Scottish holdings, were up 7.4% following a favourable residential planning consent.

Our portfolio's capital growth outperformed the MSCI IPD Quarterly Index for Central London Offices, at 0.5%, but underperformed the wider All UK Property Index which increased 2.9%.

Looking at EPRA metrics, with lower leasing activity than pre-pandemic, our rental values fell marginally by 0.3%. Whilst our portfolio has limited retail exposure it accounted for the fall, as rental values in this sector fell by 5.8% compared to the marginal 0.1% increase for offices. The strong investment market, which continues to see a hunt for yield from well let, quality buildings, helped drive the portfolio's valuation yields lower. Accordingly, the true equivalent yield tightened 9bp from 4.74% to 4.65% over the first half of the year. The initial yield is 3.4%, which after allowing for the expiry of rent frees and contractual uplifts, rises to 4.6% on a 'topped-up' basis.

The total property return for the first six months was 3.2%, which compares to the MSCI IPD Index of 2.3% for Central London Offices and 5.3% for UK All Property.

We are on site with two major developments: Soho Place W1 and The Featherstone Building EC1. Further details on their progress are set out under 'Developments' below. They were valued at £392.3m in June 2021 and delivered a 5.8% uplift. Both are scheduled for completion in early 2022 and require £127m of additional capex to complete. Their ERV is £28.6m, of which 59% is pre-let by ERV. Excluding these developments, the portfolio increased by 1.1%.

Portfolio reversion

Turning to our income profile, our contracted annualised cash rent in June was £175.8m, which was a 7% decrease over the 6 months, mainly reflecting the disposal of the Johnson Building EC1 and falling income at our Portman joint venture, ahead of its restructure and the redevelopment of 19-35 Baker Street W1. With a portfolio ERV of £282.4m there is £106.6m of potential reversion. Within this, £60.0m is contracted through rent-frees and fixed uplifts, which under IFRS accounting treatment is already mostly incorporated in the income statement. Our on-site developments and major refurbishments could add £31.1m of which £17.0m is pre-let at Soho Place. There is then £5.0m of potential income from several ongoing smaller projects across the portfolio. Our vacancy rate, whilst low, moved to 3.3% from 1.8% over the first half. This represents £8.4m of reversion. Since then our letting activity, including at the recently completed 6-8 Greencoat Place refurbishment, would take the level down to 2.4%. The balance of the potential reversion £2.1m comes from future reviews and expiries.

ASSET MANAGEMENT & INVESTMENT ACTIVITY

Our rent collection has steadily improved since the June 2020 Quarter Day.  We have now received 93% of our June 2021 quarter rents up from 89% when we last reported on 9 July 2021, and we still have another 3% due to be paid this quarter. Our office rent collection was 95% with another 2% due later in this quarter, and we have now received 59% of our retail and hospitality rents compared to 27% in July.  In relation to the previous two quarters, we have received or have payment plans in place for 96% of March 2021 quarter day rents and 97% of December 2020 rents.

1 Rent received to date for English quarter days     2 Principally monthly receipts

With a low vacancy rate we continue to have limited amounts of space to let.  The table below shows that Q1 was very quiet in the market, but our activity and performance has since improved. The sample size remains relatively low so single deals can have a major impact.  In the first half, our office transactions were 0.4% above December 2020 ERV, brought down by short-term residential lettings.  However, our overall lettings were 1.6% below ERV on average.

Table 1: Letting activity 2021 to date

¹ Includes short-term lettings at properties earmarked for redevelopment

The largest deal in the first half was the letting to Depop who took the first floor at 20 Farringdon Road EC1.  Activity has continued in the second half. We have let the recently completed 6-8 Greencoat Place SW1 to Fora, and The & Partnership has chosen the Charlotte Building W1 as its main HQ which has seen them take additional space as well as extend their existing lease. Our 'furnished & flexible' offer has made an important contribution letting 20,900 sq ft in total. One of the larger of these deals was at 3-5 Rathbone Place W1. More details on these transactions can be seen in the table below.

Table 2: Principal lettings 2021 to date

A year ago, our asset management focus was on our 2021 lease expiries which represented 24% of our rental income.   By December 2020 this had reduced to 17% of this year's income. During the first half we have retained or re-let 78% of all expiries and completed the disposal of Johnson Building EC1. As a result at 30 June 2021 only 9% of our second half income was subject to expiry. After adjusting for the disposal of Angel Square, and two buildings being cleared for development this falls further to 5%. Thereafter our lease expiry profile follows a more normal pattern.

In the first six months lease events have seen our rental income increase by £1.9m. This activity covered rents on £16.5m of rental income or 9% of our December 2020 annual rent. Overall, these transactions were 3.5% below ERV. Most of the underperformance was driven by just two transactions. Our lease renewal performance was impacted by one letting to a retail business and the rent review performance was impacted by a transaction at Angel Square EC1. The performance of lease regears was more in line with expectations. The aggregate performance of our activities is shown in the table below.

Table 3: Asset management H1 2021

Improving the energy efficiency of the existing portfolio

Our existing portfolio represents a very significant part of our journey to net zero. In the first half we completed 6-8 Greencoat Place SW1 improving its EPC rating from an 'E' to 'B'. In addition, we fitted out 19 Fitzroy Street W1 as 'furnished & flexible' space which involved upgrading its all-electric heat and power services. This has seen that building's EPC rating rise from 'C' to 'A'. As a result of our first half actions, we are now fully compliant with the 2023 EPC legislation, excluding known projects. Our sights are now set on the potential 2030 legislation which will require all our portfolio to be EPC 'B' or better.

Investment activity

Our investment team has had an active year to date notwithstanding the continuing competitiveness of the market.  The majority of this activity relates to the second half and is included in the table below.  This excludes the three Baker Street properties in joint venture with Lazari Investments, for which we have signed a detailed memorandum of understanding.

Table 4: Major acquisitions 2021 to date

We continue to dispose of those assets where we think the potential returns are less exciting. Recent events have made us reconsider some of our potential schemes and the current strong levels of investment demand have allowed us to crystalise these buildings at good levels.

Table 5: Major disposals 2021

¹ To be sold with vacant possession

DEVELOPMENTS

We have two major developments under construction, both due for delivery in H1 2022. In the next 18 months we expect to have commenced our next phase of major schemes incorporating 19-35 Baker Street W1, Network Building W1 and Bush House WC2.  Together these additional projects could add 565,000 sq ft to our on-site programme. Beyond that our longer-term pipeline has been increased by our second half investment transactions so that we have a potential further 1.7 million sq ft, or 31% of our portfolio by area, that could form the basis of future regeneration activity.

On-site projects

At Soho Place W1, the offices and theatre element, in total 249,200 sq ft, is either pre-let or forward-sold. The pre-let income has an ERV of £17.0m. This leaves 36,000 sq ft of retail, with an ERV of £3.1m, still to let.

The Featherstone Building EC1, with an ERV of £8.5m, remains available to pre-let. Following initial interest in a substantial proportion of the space which has since been satisfied elsewhere, we continue with the original multi-let strategy similar to our successful campaign at Brunel Building W2.

Table 6: Major developments pipeline

¹ As at 30 June 2021    ² Includes remaining site acquisition cost and profit share to Crossrail

³ Total area - Derwent London currently has a 55% share of the joint venture

19-35 Baker Street W1

Our next major scheme 19-35 Baker Street, which totals 298,000 sq ft, is expected to commence at the beginning of Q4 2021 when we exercise our development option with The Portman Estate.  Subject to payment, our 55% interest in a 69-year lease will become a wholly owned 129-year headlease on the 206,000 sq ft office element. The ground rent is initially 2.5% rising to 6% in 29 years' time.

The development also includes 45,000 sq ft of residential for sale at 100 George Street W1, where we are working with Native Land, and affordable housing. The bulk of the remaining space will be pre-sold to The Portman Estate as part consideration for the unwinding of our previous 55:45 joint venture.

We have recently awarded the demolition contract, which was within budget, and plan to finalise the main building contract in H1 2022. The total capital expenditure is estimated at £271m and we will draw down monies from the 'green' tranche of our revolving credit facility. As well as joining our long-life, loose-fit high quality portfolio the building will be our first NABERS UK certified scheme and we are targeting BREEAM 'Excellent'. We gave more details on the building's sustainability aspects in our Report & Accounts 2020.

Refurbishments

Our two smaller retrofitting projects have progressed well. 6-8 Greencoat Place SW1 was completed in June and totals 32,400 sq ft (see Table 2 for more details). Work started on the adjacent Francis House SW1 in March and the completion of this 38,000 sq ft project is due in H1 2022.

Network Building W1

The Group recently received two resolutions to grant consent at the Network Building W1. We received consent for either an office scheme or a lab-enabled project. The former totals 137,000 sq ft and the latter will comprise 112,000 sq ft of lab-enabled space. Both projects include 5,000 sq ft of retail. In addition, we are providing 23 affordable homes in Tottenham Mews W1. Work will start in H2 2022 for completion in 2025.

Bush House, South West Wing WC2

The recent acquisition of the outstanding 7-year leasehold interest in Bush House accelerates our refurbishment ambitions for this 103,700 sq ft building.  We are working up plans for a refurbishment and extension that could, subject to planning, increase the lettable area to c.130,000 sq ft. If successful, we could start this scheme in 2022.

Longer term pipeline

In the future we have other projects such as Holden House W1, Blue Star House SW9 and The White Chapel Building E1 so that at 30 June we had a further 1.7 million sq ft (or 31% of the portfolio) designated for future development. Our second half activity could increase this by a further 243,200 sq ft (or 4%).

FINANCIAL REVIEW

Results for the period

Improved confidence among our occupiers and those who invest in UK real estate has driven stronger results across most aspects of our business compared to both H1 2020 and the last full year.  In addition, the Group's balance sheet remains lowly geared with substantial headroom under our financial covenants and with significant cash and available facilities.  These outcomes benefit all our stakeholders and have encouraged us to recommend a further 4.5% increase in the interim dividend payable to our shareholders.

Derwent London's total return for the first half of 2021 was +2.7% following a Covid-19 impacted 0.1% fall in H1 2020 and a 1.8% decrease over the whole of 2020.  EPRA net tangible assets (NTA) per share increased by 1.4% to 3,864p from 3,812p as at 31 December 2020 and EPRA earnings per share were 54.0p for the first half of 2021, 10.5% higher than in H1 2020. 

Gross rental income increased to £98.1m from £97.8m in H1 2020 after £9.7m of additional rent recognised on major lettings, including £9.5m from 80 Charlotte Street W1 alone.  This was largely offset by additional voids which reduced rental income by £4.9m, and disposals, principally the Johnson Building EC1 sold in January 2021, where £4.5m less rent was recognised than in H1 2020.  The acquisition of Holford Works WC1 added £0.2m and Covid-related rent waivers took gross rents down by £0.6m compared to H1 2020.

The first half of 2021 has also benefitted from £3.6m of net surrender premiums, largely at 90 Whitfield Street W1.

Net rental income has recovered more significantly as our occupiers have not needed the same level of support as last year, reflected in gradually strengthening rent collection figures from our office occupiers over the last few quarters.  The overall progress in sentiment has been reflected in the unwinding of £1.6m of impairment provisions previously recognised in 2020 but there remain a few sectors where the recovery has been slower.  Principally in relation to our retail, restaurant and leisure occupiers, the overall net impairment charges booked in H1 2021 under IFRS 9 against trade and lease incentive receivables were £1.2m.  We also added £0.2m of service charge provisions to give an overall first half impact estimated at £1.4m.  This is substantially lower than the £6.5m recognised in H1 2020 when impairment charges totalled £3.6m, £0.8m of receivables were written off and service charge waivers of £2.1m were provided.  Other property costs in H1 2021 totalled £6.6m, very similar to the £6.9m in H1 2020.

As a result, net rental income was £90.1m in H1 2021, 6.8% higher than the £84.4m in H1 2020, and net property and other income, which includes the £3.6m of net surrender premiums, was £95.1m, up £8.6m or 9.9% from H1 2020.

With more difficult letting conditions over the last year or so and a higher vacancy rate, EPRA like-for-like gross rents fell compared to H1 2020 by 4.5% and against H2 2020 by 3.4% but like-for-like net rental income was 0.8% and 4.6% higher, respectively due to the lower waivers and impairments.

Administrative expenses have increased to £19.4m for the half year with a higher headcount and pay increases driving salaries up by 9.6%.  There was also a substantial rise in the amount accrued for staff incentives, mainly a result of our higher share price.  Our EPRA cost ratio (including direct vacancy costs) has fallen back to 25.7% from 28.9% in H1 2020 and 30.5% for the whole of 2020 but remains higher than in previous years.  The overhead is impacted by our investment in digital solutions, ESG, climate change solutions, additional customer amenity and a growing governance and assurance programme.

The investment property portfolio carrying value at 30 June 2021 rose slightly to £5.1bn after the usual adjustments for leasehold incentives and headlease liabilities.  Including owner-occupied property (25 Savile Row W1), the assets held for sale (Angel Square EC1, certain Baker Street properties and part of Soho Place W1) and the trading properties, the total property portfolio was carried at £5.3bn after a revaluation surplus for the half year of £58.8m.  Of this, £57.8m passes through the income statement compared to the deficit in H1 2020 of £68.3m, with £1.0m of surplus on our head office included in the statement of comprehensive income.  Profit from operations has accordingly recovered significantly to £134.1m for the half year, against £2.8m in H1 2020 and a loss of £49.2m for the full year 2020.

Net finance costs have increased a little to £14.2m from £13.6m in H1 2020 mainly due to a lower level of capitalised interest at £5.4m against £6.3m in H1 2020 and, as before, we do not capitalise any overhead costs.

Overall, the IFRS profit before tax for the first half of 2021 was £121.1m with the profit for the period, after a small tax charge, of £120.5m.  The corresponding figures in H1 2020 were losses of £14.0m and £13.2m, respectively.

Cash flow, net debt and financing

In order to provide support for some of our tenants in 2020, we agreed to defer £11.8m of rental income under agreed payment plans to the following year.  Though this reduced our operating cash flow in H1 2020 to £30.1m, it has helped boost cash from operating activities in H1 2021 to £51.3m.  Further cash receipts of £166.5m have come from investment property disposals, chiefly the sale of Johnson Building EC1.  After capital expenditure and the acquisition of Holford Works WC1, net cash received from investing activities was £58.4m.

The cash generation seen has reduced our debt levels from an already low base to provide a net debt figure of £999.7m at 30 June 2021, down from £1,049.1m at 31 December 2020.  The Group's loan-to-value ratio was 17.3% at 30 June 2021, the same as a year earlier and below the 18.4% at December 2020, illustrating our firepower for new acquisitions.  It is also good to see that interest cover has improved again to 477% or 4.8 times from 435% in H1 2020 and 446% for the whole of 2020.  For many years, this has been one of our principal financial KPIs.  Cash and undrawn facilities have also risen to £527m, against £502m at June 2020 and £476m at the 2020 year end.

The next loan expiry relates to the £28m loan provided by HSBC against some of our Baker Street properties and, with these interests due to be reorganised with The Portman Estate in the next few months, we expect to repay this loan in the second half of the year.  There has been no fresh refinancing in H1 2021 but we do anticipate raising some new debt over the next twelve months. 

As at 30 June 2021, the weighted average maturity of our borrowings was 6.4 years (December 2020: 6.8 years) and the interest rate payable on drawn debt was 3.44% (December 2020: 3.34%) on a cash basis and 3.58% (December 2020: 3.48%) on an IFRS basis after adjusting for the convertible bond.

Qualifying expenditure under the Green Finance Framework

The qualifying 'green' expenditure as at 30 June 2021 for each project is set out in the table below.  The 80 Charlotte Street scheme commenced in 2015 with Soho Place and The Featherstone Building both starting on site in 2019.

The cumulative qualifying expenditure on Eligible Green Projects ('EGP's) at the half year was £489.7m, with £70.0m of this being incurred in H1 2021. 

Table 7: Cumulative spend on each EGP as at 30 June 2021

As at 30 June 2021, drawn borrowings on the £300m green tranche of the Group's £450m revolving credit facility totalled £83.0m.

The 19-35 Baker Street development, which is targeting BREEAM excellent, will be elected as the next EGP.

Dividend

The dividend remains well covered by EPRA earnings and our policy of a sustainable and progressive dividend is unchanged.  With these improved results, we are raising the interim dividend payable for 2021 by 4.5% to 23.0p per share, all of which will be paid as a Property Income Distribution on 15 October 2021 to shareholders on the register as at 10 September 2021.

RISK MANAGEMENT AND INTERNAL CONTROLS

We have identified certain principal risks and uncertainties that could prevent the Group from achieving its strategic objectives and have assessed how these risks could best be mitigated through a combination of internal controls, risk management and the purchase of insurance cover. These risks are reviewed and updated on a regular basis and were last formally assessed by the Board in August 2021. The Board has confirmed that its risk appetite and key risk indicators remain appropriate. The Group's approach to the management and mitigation of these risks is included in the 2020 Annual Report.

Covid-19 has had a considerable impact on the materiality of our principal risks. As lockdown restrictions have eased, and the economy re-opened, we expect to see a slow reversal.

As a business we have taken steps to mitigate the threat and disruption being caused by the virus and have worked proactively with our occupiers to assist them during this time of difficulty. The safety and wellbeing of our employees and other key stakeholders has been consistently at the forefront of our efforts. Measures introduced at our buildings to reduce transmission remain in place, including in respect to cleaning regimes, air ventilation and social distancing in common areas.

Due to the Group's strong financial position and its proactive response to the pandemic, the risks arising from Covid-19, and the lockdown restrictions, have been carefully managed. The success of the UK's vaccination programme has had a positive impact on the number of Covid-19 cases resulting in serious illness, hospitalisation and death. There remains a risk that variants emerge with increased transmissibility, severity or are vaccine-resistant.

Self-isolation requirements arising from NHS track and trace 'app' notifications, has had an impact on attendance at our construction sites and for our occupiers. From 16 August 2021, all adults in England who have received a second dose of a Covid-19 vaccine will be exempt from isolation if they come into contact with a positive case, which should ease the impact of this risk.

Beyond Covid-19, the Group has continued to make positive progress on its Net Zero Carbon Pathway. In response to the Department for Business, Energy & Industrial Strategy (BEIS) the 'Future Trajectory to 2030' consultation, we have commissioned a review of our portfolio to assess the steps we are required to take to ensure our compliance by 2030.

The principal risks and uncertainties facing the Group for the remaining six months of the financial year are set out on the following pages with the potential impact and the mitigating actions and controls in place.

Strategic risks

That the Group's business model and/or strategy does not create the anticipated shareholder value or fails to meet investors' and other stakeholders' expectations.

Financial risks

Significant steps have been taken in recent years to reduce or mitigate the Group's financial risks. The main financial risk is that the Group becomes unable to meet its financial obligations, which is not currently a principal risk. Financial risks can arise from movements in the financial markets in which we operate and inefficient management of capital resources.

Operational risks

The Group suffers either a financial loss or adverse consequences due to processes being inadequate or not operating correctly, human factors or other external events.

10.  Financial instruments - risk management

The Group is exposed through its operations to the following financial risks:

·      credit risk;

·      market risk; and

·      liquidity risk.

In common with other businesses, the Group is exposed to risks that arise from its use of financial instruments. The following describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous years.

Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, accrued income arising from the spreading of lease incentives, cash at bank, trade and other payables, floating rate bank loans, fixed rate loans and private placement notes, secured and unsecured bonds and interest rate swaps.

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority to executive management for designing and operating processes that ensure the effective implementation of the objectives and policies.

The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's flexibility and its ability to maximise returns. Further details regarding these policies are set out below:

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from lease contracts in relation to its property portfolio. It is Group policy to assess the credit risk of new tenants before entering into such contracts. The Board has a Credit Committee which assesses each new tenant before a new lease is signed. The review includes the latest sets of financial statements, external ratings when available and, in some cases, forecast information and bank or trade references. The covenant strength of each tenant is determined based on this review and, if appropriate, a deposit or a guarantee is obtained. The Committee also reviews existing tenant covenants from time to time.

The impact of Covid-19 has given rise to higher estimated probabilities of default for some of the Group's occupiers.  As a result, impairment calculations have been carried out on trade receivables and accrued income arising as a result of the spreading of lease incentives using the forward-looking, simplified approach to the expected credit loss model within IFRS 9. In addition, the Credit Committee has reviewed its register of tenants at higher risk, particularly in the retail or hospitality sectors, those in administration or CVA and the top 50 tenants by size with the remaining occupiers considered on a sector by sector basis.

As the Group operates predominantly in central London, it is subject to some geographical concentration risk. However, this is mitigated by the wide range of tenants from a broad spectrum of business sectors.

Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of investment grade are accepted. This risk is also reduced by the short periods that money is on deposit at any one time.

The carrying amount of financial assets recorded in the financial statements represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk arises for the Group from its use of variable interest bearing instruments (interest rate risk).

It is currently Group policy that generally between 60% and 85% of external Group borrowings (excluding finance lease payables) are at fixed rates. Where the Group wishes to vary the amount of external fixed rate debt it holds (subject to it being generally between 60% and 85% of expected Group borrowings, as noted above), the Group makes use of interest rate derivatives to achieve the desired interest rate profile. Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates nor eliminates fully cash flow risk associated with variability in interest payments, it considers that it achieves an appropriate balance of exposure to these risks. At 30 June 2021, the proportion of fixed debt held by the Group was slightly above this range at 89% (31 December 2020: 85%). During both 2021 and 2020, the Group's borrowings at variable rate were denominated in sterling.

The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. When the Group raises long-term borrowings, it is generally at fixed rates.

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group's policy is to ensure that it will always have sufficient headroom in its loan facilities to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain committed facilities to meet the expected requirements. The Group also seeks to reduce liquidity risk by fixing interest rates (and hence cash flows) on a portion of its long-term borrowings. This is further explained in the 'market risk' section above.

Executive management receives rolling three-year projections of cash flow and loan balances on a regular basis as part of the Group's forecasting processes. At the balance sheet date, these projections indicated that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

The Group's loan facilities and other borrowings are spread across a range of banks and financial institutions so as to minimise any potential concentration of risk. The liquidity risk of the Group is managed centrally by the finance department.

Capital disclosures

The Group's capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and non-controlling interest).

The Group's objectives when maintaining capital are:

·      to safeguard the entity's ability to continue as a going concern so that it can continue to provide above average long-term returns for shareholders and support for its other stakeholders; and

·      to provide an above average annualised total return to shareholders.

The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may vary the amount of dividends paid to shareholders subject to the rules imposed by its REIT status. It may also seek to redeem bonds, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of NAV gearing and loan-to-value ratio. During 2021, the Group's strategy, which was unchanged from 2020, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio, are defined in the list of definitions at the end of this announcement and are derived in note 24.

The Group is also required to ensure that it has sufficient property assets which are not subject to fixed or floating charges or other encumbrances. Most of the Group's debt is unsecured and, accordingly, there was £4.4bn of uncharged property as at 30 June 2021.

Statement of Directors' responsibilities

The Directors' confirm that, to the best of their knowledge, these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

·      An indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      Material related-party transactions in the first six months of the financial year and any material changes in the related-party transactions described in the last Annual Report.

The Directors are listed in the Derwent London plc Annual Report of 31 December 2020 and a list of the current Directors is maintained on the Derwent London plc website: www.derwentlondon.com. The maintenance and integrity of the Derwent London website is the responsibility of the Directors.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the Board

Paul M. Williams                                                                                    Damian M.A. Wisniewski

Chief Executive                                                                                     Chief Financial Officer

9 August 2021

GROUP CONDENSED INCOME STATEMENT

¹ Net property and other income includes write-off/impairment of receivables of £1.4m (half year to 30 June 2020: £4.4m; year to 31 December 2020: £10.1m). In addition, net property and other income included a service charge waiver of £2.1m in the half year to 30 June 2020 and £4.1m in the year to 31 December 2020. See note 3 for additional information.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

GROUP CONDENSED BALANCE SHEET

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

GROUP CONDENSED CASH FLOW STATEMENT