Contacts:
Great Portland Estates plc	+44	(0)	20	7647	3000
Toby Courtauld, Chief Executive
Nick Sanderson, Chief Financial & Operating Officer Stephen Burrows, Director of Financial Reporting & IR
Finsbury Group	+44	(0)	20	7251	3801
James Murgatroyd
Gordon Simpson

There will be a live webinar session via Zoom at 8.30am today, which will include a Q&A session with the GPE management team. Please use the following link to join the webinar:
https://us06web.zoom.us/j/86102304238
Passcode: 191121 

 

A video presentation of the results by Toby Courtauld and Nick Sanderson is available, along with accompanying presentation materials and appendices, at:

www.gpe.co.uk/investors/latest-results

For further information see www.gpe.co.uk or follow us on Twitter at @GPE_plc

Disclaimer

This announcement contains certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.

Any forward-looking statements made by or on behalf of Great Portland Estates plc (GPE) speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

 

To view the accompanying graphics please paste the below into your web browser 

http://www.rns-pdf.londonstockexchange.com/rns/8871S_1-2021-11-18.pdf
 

Half Year Results

 

Our market

Introduction 

The last quarter of 2020 marked the low in activity levels in London's occupational markets, as the UK returned to lock-down on the resurgence of COVID-19. The subsequent successful rollout of the vaccination programme has helped turn the tide on the impact of the pandemic, greatly improving business and consumer confidence and returned the UK economy to growth. Activity levels have also recovered from the lows of 2020 in both the central London occupational and investment markets, particularly in the West End. In our occupational markets, the quarter to 30 September 2021 saw the strongest quarterly take up since the start of the COVID-19 pandemic but remained below the long run average. In the investment market, whilst activity has picked up with the easing of domestic restrictions, activity levels remain modest given travel restrictions for many international investors. However, we continue to see strong demand for high-quality, well located assets and development opportunities with a rapid route back to market.

Global economic recovery

Economic growth across developed economies has recovered as the impact of the pandemic has been managed through mass vaccination programmes, widespread government support and the subsequent reopening of economies. Global GDP has now surpassed its pre-pandemic level and the IMF forecasts global GDP to grow by 6.0% and 4.9% in 2021 and 2022 respectively. However, the recovery remains uneven with vaccine access the principal differentiating factor between countries' relative economic performance. As the impact of the pandemic has abated, the rebound in global demand, together with depleted inventories and supply chain disruption, has increased commodity prices and transportation costs around the world. 

In the UK, the economy has responded strongly as domestic COVID-19 restrictions have ended, with GDP growth of 5.5% in the quarter to June 2021 and a further 1.3% in the quarter to September. However, rising oil and gas prices, combined with the end of Government support schemes, are expected to impact household spending power and moderate the recovery from here. Accordingly, whilst many commentators anticipate price rises to be transitory, Oxford Economics has trimmed its GDP expectations to 6.9% for 2021, although the near-term forecast for the UK remains at the upper end of the G7 countries.

Stronger activity in occupational markets

As the economy has strengthened, activity levels in our occupational markets have continued to recover, with many businesses committing to new space or resuming a search that had been paused due to the pandemic. As a result, central London office take-up was 4.3 million sq ft, considerably higher than the preceding six months and closer to the ten-year average of 6.0 million sq ft. CBRE estimate that central London active demand at September has also improved, totalling 9.6 million sq ft, an increase of 2.0 million sq ft since March and back to levels last seen in 2019. We have also seen a rebound in the flexible office sector with Workthere reporting that enquiries are up 30% on pre-pandemic levels. However, improving levels of take up and demand have yet to reduce central London availability which remains elevated at 25.7 million sq ft, consistent with 31 March 2021 and ahead of the ten-year average of 15.2 million sq ft. The vacancy rate has also continued to rise reaching 9.1% at September 2021. Whilst the amount of available space remains high, the proportion that is either newly completed or under construction remains low at only 25% of total stock (6.4 million sq ft). This continued scarcity of high-quality space has provided relative support for prime rents which is demonstrated by a period of strong leasing for the Group, including our recent pre-let of all the offices at 50 Finsbury Square, EC2.

Looking forward, the future supply of new space remains limited. In central London, CBRE estimate that 12.1 million sq ft of new space is currently under construction, of which a third is already pre-let. Whilst CBRE estimate that 35.0 million sq ft of new speculative buildings could be delivered before the end of 2026, construction has yet to start on more than 75% of that space. This lack of availability, combined with a rebound in the UK economy, will in our view support the demand for high-quality spaces, further encourage pre-letting activity and support prime rents in the second half of the year.

 

West End occupational market

Over the six months to 30 September 2021, West End office take-up was 2.0 million sq ft, up 112% on the preceding six months and the highest quarter since September 2017. Current availability of 6.6 million sq ft has started to decline from a peak of 7.1 million at 31 December 2020. Vacancy rates also declined marginally to 5.5% at 30 September 2021, with Grade A vacancy estimated by CBRE to be only 3.6%. CBRE reported that prime office rental values increased over the last six months by £10 per sq ft to £120 per sq ft, with rent frees six and a half months lower at 22.5 months on a ten-year lease.

The UK retail environment continues to be challenged. Whilst consumer confidence rebounded in the first half of 2021, and returned to pre-COVID-19 levels, confidence fell in the quarter to September 2021 for the first time since Q4 2020. City centres have continued to suffer as consumers have been slower to return to high density locations, particularly if they are reliant on public transport. Footfall in the West End has recovered, particularly for leisure activities, to levels around 60% higher than a year ago, albeit they remain around 30% below pre-pandemic levels. According to Savills, vacancy on Oxford Street, Regent Street and New Bond Street has stabilised at 14.0%, 13.1% and 13.6% respectively, with CBRE reporting prime Zone A rents on Oxford Street, Regent Street and Bond Street unchanged at £631 per sq ft, £593 per sq ft and £1,702 per sq ft respectively.

City, Midtown and Southbank occupational markets

Over the six months to 30 September 2021, City office take up remained subdued at 1.2 million sq ft an increase of 21% on the prior six months but materially below the ten-year average of 2.4 million sq ft. Availability has also increased and now stands at 11.7 million sq ft up from 11.5 million sq ft at 31 March 2021. However, there are some early signs of improvement with the amount of space under offer up more than 150% since March to 1.6 million sq ft, 17.5% ahead of the 10-year average. The City vacancy rate remains greater than that of the West End and has continued to rise to 12.6% at September 2021, although Grade A vacancy was estimated by CBRE to be lower at 8.9%, up from 8.4% at March. CBRE also reported that City prime rental values remain unchanged from March at £70.00 per sq ft, with rent free periods on a ten-year lease marginally lower at 24-27 months (27 months at 31 March 2021).

Take-up in Midtown and Southbank was 0.9 million sq ft, significantly up from 0.2 million sq ft for the preceding six months. Prime office rental values increased by £7.50 and £2.50 per sq ft to £85.00 and £67.50 per sq ft for Midtown and Southbank respectively. Rent frees reduced to 24-27 months on average on a ten-year lease.

Our investment markets

Activity in our investment markets has followed the trajectory of the pandemic, with lockdowns and restrictions in international travel making sellers cautious and hampering the ability of buyers to inspect potential acquisitions and conduct effective due diligence. With restrictions easing, office investment deals in the six months to 30 September 2021 were £5.0 billion, down 8.5% on the prior six months an increase of nearly 200% on the equivalent period last year.

Today we estimate that there is currently £6.7 billion of stock on the market available to buy, up from £6.3 billion in May, whilst the weight of money seeking to invest remains elevated at £40.1 billion. Demand for London real estate has remained robust particularly for high quality assets and London offices remain attractively priced when compared to other major global cities. This continued demand has placed downward pressure on prime office yields over the six months, with CBRE reporting prime office yields of 3.25% for the West End (down 25 basis points) and 3.75% in the City (down 25 basis points). Given continued challenges in core retail markets, retail yields continued to soften over the period, with CBRE reporting that retail yields moved out to 4.0% for Regent Street and 4.25% for Oxford Street with Bond Street remaining stable at 2.75%.

Near-term market outlook

Given the cyclical nature of our markets, we actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last six months, given the continued economic recovery, our property capital value indicators have seen further improvement from those we reported in May. Today, we expect investment activity in the central London commercial property market to trend towards more normalised levels and prime yields to continue to come under downward pressure given the continued demand for central London real estate. In the occupational market, given a strong leasing and rental performance of the portfolio in the first half of the year, we have upgraded our rental value growth range for the financial year to 31 March 2022 to between +2% and +5%, predominantly driven by the positive performance of our office portfolio.
 

Our business

 

Our business is accompanied by graphics (see Appendix 1 and 3)

Our leasing activities

 

During the six months to 30 September 2021, we have seen growing momentum in our occupational markets. With a strong demand, particularly for our prime Grade A and flex office products, we have continued to let space ahead of ERV. Key highlights include:

 

·           35 new leases were signed during the first half (2020: 9 leases), generating annual rent of £27.0 million (our share: £21.8 million; 2020: £6.1 million), market lettings 9.8% above March 2021 ERVs (offices; 9.3%; retail 11.1%);

·           three rent reviews securing £2.0 million p.a. (our share: £2.0 million; 2020: £3.7 million) of rent were settled during the half year, in line with the previous passing rent and 1.2% ahead of ERV;

·           total space covered by new lettings, reviews and renewals during the first half was 387,200 sq ft (2020: 136,400 sq ft);

·           83% (by area) of the 33 leases with breaks or expiries in the twelve months to 30 September 2021 were retained, re-let, or are under offer, leaving 20,500 sq ft still to transact; and

·           following the successful leasing period, the Group's rent roll has increased by 6.2% to £101.1 million.

Key leasing transactions

The table below summarises our leasing transactions in the period:

Leasing Transactions		Three months ended 30 September 2021	Six months ended 30 September 2021	Six months ended 30 September 2020
New leases and renewals completed
Number		19	35	9
GPE share of rent p.a.		£12.8 million	£21.8 million	£6.1 million
Area (sq ft)		174,200	358,800	77,300
Rent per sq ft (including retail)		£82	£76	£78
Rent reviews settled
Number		-	3	5
GPE share of rent p.a.		£nil	£2.0 million	£3.7 million
Area (sq ft)		-	28,400	59,100
Rent per sq ft (including retail)		£nil	£72	£62

Note: Includes joint ventures at share

Notable transactions during the six months included:

·      Inmarsat Global Limited pre-let all 121,800 sq ft of office space at 50 Finsbury Square, EC2, on a 20-year lease (15-year break) paying an annual rent of £8.5m, 11.2% above March 2021 ERV;

·      the leasing of the entirety of 103/113 Regent Street, W1 held in our Great Ropemaker Partnership (GRP) to Uniqlo Europe Limited (Uniqlo). The property, comprising 56,850 sq ft of mixed-use retail and office, was previously let to C-Retail Ltd (Superdry). GRP simultaneously surrendered the Superdry lease for £7.9 million and granted a new lease to Uniqlo;

·      the completion of five new office leases at our completed development Hanover Square, W1, including at Medici Courtyard (15,400 sq ft) to KKR and UPL for a combined £1.85m p.a. on a 14-year (six-year break) and 15-year (ten-year break) term respectively. Taken together, 95% of the office space at the scheme is now let. We have also completed two further retail lettings totalling 6,400 sq ft; and

·      our fully fitted and fully managed space at 16 Dufour's Place, W1 (16,300 sq ft) which was fully let within six months of launch with the two most recent lettings at more than £200 per sq ft. We continue the roll out of our flexible offering to other buildings, with a further three lettings recently completed.

At 30 September 2021, the Group's vacancy rate (including share of joint ventures) was 14.0% up from 13.2% at 31 March 2021 with the increase primarily due to the completion of 1 Newman Street and 70/88 Oxford Street, W1. Excluding recently completed developments, the vacancy rate was 5.1% down from 6.6% at 31 March 2021.  The average passing rent across our office portfolio was £62.50 per sq ft, up from £56.70 per sq ft at 31 March 2021.

Since 30 September 2021, our leasing activity included:

·           the completion of five new leases generating £1.7 million (our share: £1.7 million) of annual rent (13,300 sq ft), with market lettings 12.0% above March 2021 ERVs; and

·           a further 43,500 sq ft of space is under offer which would deliver approximately £2.4 million p.a. in rent (our share: £2.3 million), with market lettings 5.9% ahead of September ERVs or 7.1% above March 2021 ERVs.

Innovating with our flexible space

Quickly evolving patterns of work are changing what many occupiers want from their office space and we are meeting this demand with our innovative flexible spaces. Today our flexible spaces total 286,000 sq ft, or around 15% of our office portfolio. We have also expanded our offering with 16 Dufour's Place, W1, which we completed in the summer. This 16,300 sq ft building will provide occupiers with fully fitted, fully managed, tech-enabled office space with flexibility of lease term. During the period, we leased the entirety of the building at an average all-in rent of £191 per sq ft, some 10.5% ahead of the valuer's March 2021 flex ERV. Given this success, we have launched a further six spaces (35,000 sq ft) and these are already 65% let or under offer. Looking forward, we have further ambitions for growth and are appraising an additional 217,000 sq ft across our existing portfolio, which if converted, would take our flex offerings to 27% of our office portfolio.

 

Improved rent collection

Our rental collection performance has continued to improve from the lows of summer 2020. For the six months to 30 September 2021, of the £41.6 million of rents billed (including our share of joint ventures) we have collected 88% to date and have continued to collect outstanding balances from the prior year. This performance has improved further for the September quarter, as we collected 85% of all rent billed within 7 working days. During the half year, none of our occupiers went into administration (March 2021: two). All of our office buildings remain open for business, with levels of occupier utilisation currently around 57% of full occupancy and around 94% of our retail units are open. At 30 September 2021, we held rent deposits and bank guarantees totalling £20.0 million (March 2021: £17.2 million).

Our development activities

 

Within our 1.4 million sq ft development pipeline we have continued to make excellent progress with both our committed and four near-term schemes. Since March 2021, we have successfully completed one development and have pre-let the entirety of the offices at 50 Finsbury Square, EC2, where we are currently on-site. Furthermore, during the period, we achieved resolution to grant planning at two of our four exciting near-term schemes, the earliest of which has a potential commencement in early 2022.

 

One development completion; first retail letting achieved

At 1 Newman Street & 70/88 Oxford Street, W1 we completed the 122,700 sq ft office and retail building in July, which sits directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station. In June, we agreed the letting of all of the basement space to Boom Battle Bar for a new competitive socialisation offer. Together with the 39,600 sq ft of space pre-leased to Exane, the new building is now 37% let, and we have good interest in the majority of the offices and retail interest continues to improve.

 

One committed scheme, office space 100% pre-let

At 50 Finsbury Square, EC2, the refurbishment of the 129,200 sq ft building, including construction of the new roof pavilion, is progressing well, and we expect completion in late 2022. Our extensive repositioning will extend the office floor plates within the existing frame of the building, create a large reception with a concierge as well as an improved retail, leisure and amenity offer. The new building will be a sustainability, wellbeing and technology exemplar delivering on all four pillars of our Sustainability Statement of Intent and is expected to be our first building certified as Net Zero Carbon. We committed to the refurbishment at the start of the year and, testament to the quality of the building, in August we pre-let all of the offices to Inmarsat Global Limited (see above). We currently expect the scheme to deliver a profit on cost of 38.7%.

At 30 September 2021, our committed development property was valued at £115.9 million and required £43.3 million of capital expenditure to complete. Beyond this, the team continues to prepare our substantial development pipeline of a further eight schemes with prospective deliveries from the mid-2020s and beyond.

 

Four near term schemes; resolution to grant planning achieved at 2 Aldermanbury Square and French Railways House and 50 Jermyn Street

Following being awarded resolution to grant planning permission at 2 Aldermanbury Square, EC2 in June, we signed the s106 Agreement with the City of London, appointed a contractor for the demolition, enabling and substructure works and are in discussion with a number of main contractors ahead of our potential January 2022 start date. Our proposed development will substantially increase the size of the building to 319,800 sq ft (up from 176,000 sq ft) and will incorporate our sustainability aspirations from the outset, with the aim of delivering our second net zero carbon building. The scheme also includes a number of public realm and amenity improvements that will have a positive impact on the local area and improve accessibility to the western entrance of the Liverpool Street Crossrail station. To date we have been greatly encouraged by the strong occupier interest in the scheme.

In July, we obtained resolution to grant planning permission at French Railways House and 50 Jermyn Street, SW1, part of our Piccadilly Estate. Our proposed major office-led redevelopment will provide 67,700 sq ft (up from 54,600 sq ft) of new Grade A space. The proposed highly sustainable building will be in keeping with surrounding conservation area and heritage assets, will reuse substantial elements of the existing building's substructure to reduce its carbon footprint and will include a significant amount of new amenity including a number of external spaces including a communal roof terrace. The development of the building is subject to Crown consent.

At New City Court, SE1, we have amended our proposals, lowering the height whilst maintaining area, to materially increase the size of the existing 98,000 sq ft building to 389,100 sq ft and we expect a planning determination later this year.

At Minerva House, SE1, we are finalising plans for a 139,400 sq ft major office refurbishment. We are already in discussions with Southwark and aim to submit our planning application later this month. Our proposals will reposition this building taking full advantage of its river frontage and, by adding additional storeys, we will be able to create outdoor terraces and amenity space with commanding views over central London. A planning application for the scheme was submitted in early November.

In total, with a further four schemes in the medium-term pipeline, our total development programme totals 1.4 million sq ft and covers 32% of GPE's existing portfolio and will provide the foundation of our growth over the coming decade.

Our investment activities

 

Following the UK moving out of lockdown during the spring, activity in our investment markets is recovering to more normalised levels. Despite activity picking up, particularly for long-let, high quality buildings, opportunities providing attractive value remain limited. We continue to monitor the market closely and have more than £900 million of potential acquisitions currently under review. Our focus remains on development and repositioning opportunities, buildings that would suit our flex products and assets that are challenged from a sustainability perspective. However, given the prospective returns presented by our development pipeline, the hurdle for new acquisitions remains high. As a result, we retained our discipline and made no acquisitions in the period.

 

Crystallising surpluses at 160 Old Street, EC1

In September, the Great Ropemaker Partnership (GRP), our 50:50 joint venture with BP Pension Fund, sold 160 Old Street, EC1 to a fund advised by J.P. Morgan Global Alternatives. The headline price of £181.5 million reflected a 5% premium to the March 2021 valuation. The building was comprehensively refurbished by GRP in 2018 to provide 166,300 sq ft of high-quality accommodation arranged over lower ground, ground and eight upper floors. The office space is 70% let to Turner Broadcasting to 2034. The balance of the office and retail space is let to a variety of occupiers including Robert Bosch Limited, Pusher Limited and Sensat Surveying Limited together with a small amount of vacant space and some near-term asset management opportunities. The total contracted annual rental income was £7.9 million, with a weighted average unexpired lease term of approximately 10.3 years to the earlier of breaks or expiries.

Social impact, sustainability and technology

 

Social impact strategy launched

Today, we announced the launch of our Social Impact Strategy, building on our Sustainability Statement of Intent 'The Time is Now' launched in May 2020 and our existing community strategy.

Our strategy sets out how we will deliver the third pillar of our Sustainability Statement of Intent, namely to create a lasting positive social impact in our communities and £10 million of social value by 2030.

Our strategy is intrinsically linked to Our Roadmap to Net Zero, recognising the need to support a just transition to a low carbon economy. We've incorporated our approach to diversity and inclusion within our social impact strategy. Our approach is underpinned by four pillars:

·      Enabling healthy and inclusive communities

·      Championing diverse skills and accessible employment opportunities

·      Supporting the growth of local business and social enterprise

·      Connecting people with urban nature

 

Further details of our strategy can be found on our website.

Sustainable Finance Framework

In July, we published our Sustainable Finance Framework in respect of potential future debt issuance. This follows the Group's innovative £450 million ESG-linked revolving credit facility (the first of its kind by a UK REIT) issued in January 2020.

The Framework provides a platform for us to potentially issue debt instruments to finance or refinance projects that have a positive environmental and/or social impact, while supporting the Group's sustainability strategy and wider business strategy. The Framework is aligned to internationally recognised principles issued by the International Capital Markets Association (ICMA) and the Loan Markets Association (LMA).

The Hickman achieves a SmartScore 'Platinum' rating

In July, WiredScore announced that The Hickman, E1 was the first building globally to achieve the prestigious SmartScore 'Platinum' rating. The Hickman is a comprehensive redevelopment completed in September 2020, delivering 75,300 sq ft of highly tech enabled and sustainable workspace.

SmartScore, the certification for smart buildings, was launched in April 2021 to provide a global standard to identify best-in-class smart buildings that deliver an exceptional user experience, drive cost efficiency, meet high standards of sustainability and are fully future-proof. The Platinum rating demonstrates our commitment to continuous technological innovation to enhance the occupier workplace experience. The combination of the digital twin to optimise operational energy, together with the integration of sesame® and other building technologies means that occupiers and their staff enjoy a more sustainable and productive workplace.

Valuation

 

Valuation is accompanied by graphics (see Appendix 2)

The valuation of the Group's properties was £2,457.0 million as at 30 September 2021, reflecting a valuation increase of 2.0% on a like-for-like basis since 31 March 2021. At 30 September 2021, the wholly-owned portfolio was valued at £1,918.5 million and the Group had three active joint ventures which owned properties valued at £538.5 million (our share) by CBRE.

 

Development gains supporting value increase

The key drivers behind the Group's valuation movement for the six-month period were:

 

·           development gains - the valuation of our committed development properties increased by 29.7% on a like-for-like basis to £115.9 million during the period. Our development returns were supported by securing a major pre-letting, which was ahead of the valuer's assumptions;

·           portfolio management - a very strong six months, 38 new leases, rent reviews and renewals were completed, securing £23.8 million (our share) of annual income, supporting the valuation. At 30 September 2021, the portfolio was 6.5% reversionary;

·           rental value increase - since the start of the financial year, rental values increased by 1.6% on a like-for-like basis, with our office portfolio up by 2.3% and our retail portfolio reducing by 1.0%; and

·           low investment yields - equivalent yields decreased marginally by 10 basis points over the period. At 30 September 2021, the portfolio true equivalent yield was 4.5%.

 

Including rent from pre-lets and leases currently in rent free periods, the topped up initial yield of the investment portfolio at 30 September 2021 was 3.5%, 30 basis points lower than the start of the financial year.

 

Whilst the overall valuation increased by 2.0% during the six months on a like-for-like basis, elements of the portfolio continued to show greater variation. We continued to see office portfolio values outperform retail with our office properties increasing by 2.8% compared to a 0.8% fall in retail values, as weaker retailer sentiment reduced ERVs. Furthermore, short leasehold properties (<100 years), which represent 11% of the portfolio, reduced in value by 1.7% compared to an increase of 2.5% in the rest of the portfolio, as investor demand for shorter leasehold assets continued to lag that of freehold properties. Our joint venture properties increased in value by 4.0% over the period, largely attributable to the strong leasing activity at our recently completed development Hanover Square, W1, while the wholly-owned portfolio increased by 1.4% on a like-for-like basis, supported by our committed developments as detailed above.

 

The Group delivered a total property return (TPR) for the six months to 30 September 2021 of 3.7% (2020: -5.1%), compared to the Central London MSCI quarterly benchmark of 2.9%, and a capital return of 2.2% (versus 1.3% for MSCI). This relative outperformance resulted from our office development and leasing successes in the period.

  

Our financial results

 

Our financial results are accompanied by graphics (see Appendix 3)

We prepare our financial statements using IFRS. However, we also use a number of Alternative Performance Measures (APMs) to help explain the performance of the business. These include quoting a number of measures on a proportionately consolidated basis to include joint ventures, as it best describes how we manage the portfolio, like-for-like measures and using measures prescribed by European Public Real Estate Association (EPRA). The measures defined by EPRA are designed to enhance transparency and comparability across the European real estate sector. Reconciliations of APMs are included in note 7 to the accounts.

 

We calculate net assets and earnings per share in accordance with EPRA's Best Practice Recommendations. The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. EPRA's Best Practice Recommendations include three NAV metrics: EPRA Net Tangible Assets (NTA), Net Reinvestment Value (NRV) and Net Disposal Value (NDV). We consider EPRA NTA to be the most relevant measure for the Group and the primary measure of net asset value and relevant reconciliations between IFRS numbers and EPRA metrics are included in note 7 to the accounts.

 

Valuation gains drive 2.2% increase in EPRA NTA per share

IFRS NAV per share and EPRA NTA per share at 30 September 2021 were 796 pence per share, an increase of 2.2% over the last six months, largely due to the 2.0% like-for-like increase in the value of the property portfolio. The main drivers of the 17 pence per share increase in NTA from 31 March 2021 were:

 

·           the increase of 17 pence per share arising from the revaluation of the property portfolio;

·           EPRA earnings for the period of 7 pence per share increased NTA;

·           the final dividend of 8 pence per share reduced NTA; and

·           other movements increased NTA by 1 pence per share.

 

The EPRA NTA increase of 2.2%, combined with the payment of last year's final dividend of 7.9 pence per share, delivered a total accounting return for the six months to 30 September 2021 of 3.2% (2020: -6.9%).

 

At 30 September 2021, the Group's net assets were £2,015.3 million, up from £1,971.6 million at 31 March 2021, with the increase largely attributable to the increase in property valuation. EPRA NDV per share was 791 pence at 30 September 2021 compared to 777 pence at 31 March 2021 (up 1.8%). 

 

Earnings reduced, in line with guidance and our portfolio activities

Revenue from our wholly-owned properties was largely unchanged year on year at £42.2 million, down £0.2 million on the prior period. Within this, gross rental income reduced by £3.4 million primarily due to achieving vacant possession in June last year from Bloomberg, ahead of our development start at 50 Finsbury Square, EC2 and increased portfolio vacancy. The reduction in rental income was largely offset by an increase in joint venture fees, up £3.5 million on last year to £4.3 million, including the disposal fee for 160 Old Street, EC1 as well as an increase in portfolio management transactions.

 

Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) decreased 6.2% on the prior period after estimated credit loss provisions.

 

Cost of sales increased from £10.1 million to £13.7 million for the for the period to 30 September 2021, with the increase primarily due to an increase in vacancy expenses and higher costs associated with our portfolio initiatives in joint ventures, including the sale of 160 Old Street, EC1.

 

As the central London economy continues to reopen, we have seen a continued improvement in collection rates for both the June and September 2021 quarters. As a result, of the £4.8 million rent outstanding at 30 September 2021, we provided £3.1 million as an expected credit loss in the period, £0.6 million lower than last year and representing around 65% of outstanding balances. The majority of the provision relates to balances with occupiers from the retail, hospitality and leisure sectors.

 

Administration costs were £16.2 million, an increase of £3.3 million, primarily as a result of increased headcount to support our enhanced operational capabilities and an increase in provisions for performance related pay.

 

EPRA earnings from joint ventures (excluding fair value movements) were £9.8 million, an increase of £5.2 million from the prior year, largely driven by the Superdry surrender premium of £7.9 million (our share: £3.9 million) at 103/113 Regent Street, W1, coupled with our letting successes at our recently completed Hanover Square development. In total, our joint ventures delivered a profit before tax of £26.8 million (2020: £56.5 million loss).

 

Gross interest on our debt facilities was £7.2 million, up £1.8 million on the prior period. This increase was primarily due to drawing on the Group's new £150 million 2.77% private placement notes in November last year. We capitalised interest of £4.0 million (2020: £2.8 million). As a result, the Group had net finance costs (including interest receivable) of £0.1 million (2020: income of £0.4 million).

 

EPRA earnings were £18.7 million, 9.2% lower than for the same period last year. Revaluation gains together with EPRA earnings resulted in an IFRS profit after tax of £62.2 million (2020: £154.8 million loss). The basic and diluted earnings per share for the period was 24.6 pence, compared to 61.2 pence loss per share for 2020. Diluted EPRA earnings per share was 7.4 pence (2020: 8.2 pence), a decrease of 9.8%, and cash earnings per share was 5.1 pence (2020: 6.4 pence).

 

Results of joint ventures

The Group's net investment in joint ventures was £563.0 million, a decrease from £626.4 million at 31 March 2021, largely due a partner distribution after the profitable disposal of 160 Old Street, EC1 partially offset by a 4.0% like-for-like increase in value of the property portfolio. Our share of joint venture net rental income was £14.8 million, up from £7.2 million last year primarily as a result of receiving a one-off surrender premium of £3.9 million (our share), as well as increased leasing activity at our recently completed Hanover Square development. The underlying joint venture profits are stated after charging £4.3 million of GPE management fees (2020: £0.8 million) with the increase attributable to an increase in leasing transactions as well as a disposal fee for the sale of 160 Old Street, EC1.

 

Overall, our three active joint ventures represent an important proportion of the Group's business. At 30 September 2021, joint ventures represented 21.9% of the portfolio valuation, 27.9% of net assets and 23.1% of rent roll (31 March 2021: 24.6%, 31.8% and 25.2% respectively).

 

Strong financial position; LTV low at 16.7%

The Group's consolidated net debt decreased to £438.6 million at 30 September 2021, compared to £477.5 million at 31 March 2021. The decrease was largely due to the repayment of our revolving credit facility (RCF) following the disposal of 160 Old Street, EC1, partly offset by on-going development capital expenditure across the Group of £38.2 million in the six months. Group gearing decreased to 22.0% at 30 September 2021 (31 March 2021: 24.6%). Including cash balances in the joint ventures, total net debt was £409.5 million (31 March 2021: £451.0 million) equivalent to a loan to property value of 16.7% (31 March 2021: 18.4%). The Group is operating with substantial headroom over its debt covenants. At 30 September 2021, property values would have to fall by around 61% before covenant breach. Through the cycle, the Group aims to maintain a target LTV range between 10% and 35%, consistent with our low leverage levels over the last 10 years. Due in part to both our very low levels of low-cost debt, and the treatment of capitalised interest under our Group covenants, our interest cover ratio for the period was once again not measurable. Excluding the benefit of capitalised interest, our interest cover was 7.0 times.

 

The Group's weighted average cost of debt, including fees and joint venture debt, for the period was 2.8%, 10 basis points higher than at 31 March 2021 as we reduced amounts drawn on the RCF towards the end of the period, our lowest rate debt financing. The weighted average interest rate (excluding fees) at the period end was 2.7%, up from 2.5% at 31 March 2021 as a result of drawing on our new £150 million 2.77% US private placement notes at the end of 2020. At 30 September 2021, 100% of the Group's total debt was at fixed or hedged rates (31 March 2021: 91%). Our weighted average drawn debt maturity was 7.9 years at 30 September 2021 (31 March 2021: 8.1 years).

 

 

Taxation

The tax charge in the income statement for the half year was £0.1 million (2020: £nil million) and the effective tax rate on EPRA earnings was 0% (2020: 0%). The majority of the Group's income is tax-free as a result of its REIT status. Other allowances were available to set against non-REIT profits.

 

As a REIT, the majority of rental profits and chargeable gains from our property rental business are exempt from UK corporation tax, provided we meet a number of conditions including distributing at least 90% of the rental income profits of this business (known as Property Income Distributions (PIDs)) on an annual basis. These PIDs are then typically treated as taxable income in the hands of shareholders. During the six months ended 30 September 2021, the Group paid a PID of £20.0 million.

 

The Group's REIT exemption does not extend to either profits arising from the sale of trading properties or gains arising from the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years.

 

Dividends

The Board has declared an interim ordinary dividend of 4.7 pence per share (2020: 4.7 pence) which will be paid on 5 January 2022. 2.4 pence per share of this dividend will be a REIT Property Income Distribution (PID) in respect of the Group's tax-exempt property rental business.

 

Principal risks and uncertainties

The Group recognises that the successful management of risk is critical to enable delivery of the Group's strategic priorities. Ultimate responsibility for risk rests with the Board but the effective day-to-day management of risk is integral to the way the Group does business and its culture. The Board undertakes a robust assessment of the principal risks facing the Group on a regular basis.

 

The principal risks and uncertainties facing the Group for the remaining six months of the financial year remain those detailed on pages 84 to 97 of the 2021 Annual Report with no material changes:

 

Structural retail changes	Challenging planning environment
Climate change and decarbonisation	People
Pandemic	Meeting customer needs
London attractiveness	Poor capital allocation decisions
Failure to maximise returns from prevailing market conditions	Health and safety
Failure to profitably develop the development programme	Cyber security and infrastructure failure
Impact of property market dislocation on financial leverage and banking covenants

 

The Board and Executive Committee continue to regularly review the potential risks and impacts presented by the COVID-19 pandemic and the Group's response, including in relation to both short-term impacts and potential longer-term structural changes in working and retail practices and the level and nature of demand for space in central London. We continue to take steps to mitigate the threat and disruption caused by the pandemic, working collaboratively with our stakeholders, and we maintain our belief that London's appeal as a global business capital will persist for the long term.

 

The Board also continues to closely monitor the UK government's progress in resolving its international trading relationships after it's exit from the EU, with the outcomes of many negotiations remaining uncertain.

 

As a result of both the COVID-19 pandemic and Brexit, the Group's forecasts and business plans continue to be prepared under a variety of market scenarios to reflect a number of potential outcomes.

 

 

Condensed group income statement

For the six months ended 30 September 2021

Year to 31 March  2021 Audited £m						Notes			Six months to 30 September 2021 Unaudited £m					Six months to 30 September 2020* Unaudited £m
88.5				Revenue		2			42.2					42.4
(24.7)				Cost of sales		3			(13.7)					(10.1)
63.8									28.5					32.3
(25.2)				Administrative expenses					(16.2)					(12.9)
(7.7)				Expected credit losses		12			(3.1)					(3.7)
(0.1)				Development management losses					(0.2)					(0.1)
30.8				Operating profit before surplus/(deficit) from investment property and results of joint ventures					9.0					15.6
(156.8)				Surplus/(deficit) from investment property		8			26.6					(114.3)
(76.2)				Share of results of joint ventures		9			26.8					(56.5)
(202.2)				Operating profit/(loss)					62.4					(155.2)
8.0				Finance income		4			4.1					4.0
(7.8)				Finance costs		5			(4.2)					(3.6)
(202.0)				Profit/(loss) before tax					62.3					(154.8)
0.1				Tax		6			(0.1)					-
(201.9)				Profit/(loss) for the period					62.2					(154.8)
(79.8p		)		Basic earnings/(loss) per share		7				24.6p				(61.2p)
(79.8p		)		Diluted earnings/(loss) per share		7				24.6p				(61.2p)
15.9p				Basic EPRA earnings per share		7				7.4p				8.2p
15.8p				Diluted EPRA earnings per share		7				7.4p				8.2p

    

All results are derived from continuing operations in the United Kingdom and are attributable to ordinary equity holders.

 

 *As explained further in note 1, the directors have changed the way in which the Group's performance is presented on the face of the income statement. The underlying results have not been amended and this modified presentation has had no effect on operating profit or profit for the period.

 

Condensed group statement of comprehensive income

            For the six months ended 30 September 2021

Year ended 31 March 2021 Audited £m			Six months to 30 September 2021 Unaudited £m	Six months     to 30    September 2020 Unaudited £m
(201.9)		Profit/(loss) for the period	62.2	(154.8)
		Items that will not be reclassified subsequently to profit and loss:
0.8		Actuarial (loss)/gain on defined benefit scheme	(0.7)	(2.5)
(0.1)		Deferred tax on actuarial loss on defined benefit scheme	0.1	-
(201.2)		Total comprehensive income/(expense) for the period	61.6	(157.3)

 

Condensed group balance sheet

At 30 September 2021

 

As at 31 March 2021 Audited £m			Notes	As at 30 September 2021 Unaudited £m	As at 30 September 2020 Unaudited £m
		Non-current assets
1,894.5		Investment property	8	1,959.2	1,904.6
626.4		Investment in joint ventures	9	563.0	595.1
6.3		Property, plant and equipment	10	5.7	7.0
0.7		Pension asset		0.1	-
1.0		Other investments	11	1.5	0.5
2,528.9				2,529.5	2,507.2
		Current assets
19.5		Trade and other receivables	12	21.8	23.1
0.4		Corporation tax		-	0.5
11.1		Cash and cash equivalents		6.8	7.2
31.0				28.6	30.8
2,559.9		Total assets		2,558.1	2,538.0
		Current liabilities
(55.1)		Trade and other payables	13	(53.3)	(54.0)
(55.1)				(53.3)	(54.0)
		Non-current liabilities
(488.6)		Interest-bearing loans and borrowings	14	(445.4)	(409.5)
(40.7)		Obligations under head leases	16	(40.7)	(40.7)
(3.9)		Obligations under occupational leases	17	(3.4)	(4.3)
-		Pension liability		-	(2.8)
(533.2)				(489.5)	(457.3)
(588.3)		Total liabilities		(542.8)	(511.3)
1,971.6		Net assets		2,015.3	2,026.7
		Equity
38.7		Share capital	15	38.7	38.7
46.0		Share premium account		46.0	46.0
326.7		Capital redemption reserve		326.7	326.7
1,560.0		Retained earnings		1,602.2	1,615.7
0.2		Investment in own shares	18	1.7	(0.4)
1,971.6		Total equity		2,015.3	2,026.7
779p		Diluted net assets per share	7	796p	800p
779p		Diluted EPRA NTA per share	7	796p	800p

 

Condensed group statement of cash flows

For the six months ended 30 September 2021                      

 

Year to 31 March 2021 Audited £m			Notes	Six months to 30 September 2021 Unaudited £m	Six months to 30 September 2020 Unaudited £m
		Operating activities
(202.2)		Operating profit/(loss)		62.4	(155.2)
238.5		Adjustments for non-cash items	19	(51.0)	173.3
(3.4)		Increase in receivables		(0.8)	(6.9)
(6.3)		Decrease in payables		(1.9)	(6.2)
26.6		Cash generated by operations		8.7	5.0
(10.3)		Interest paid		(7.1)	(5.3)
0.2		Interest received		-	0.1
0.1		Tax refunded		0.4	-
16.6		Cash flow from operating activities		2.0	(0.2)
		Investing activities
8.3		Distributions from joint ventures		4.8	4.3
(45.3)		Funds from/(to) joint ventures		89.5	(2.0)
(10.8)		Investment in joint ventures		-	(3.0)
(60.8)		Purchase and development of property		(34.3)	(30.8)
(0.4)		Purchase of plant and equipment		(0.1)	(0.2)
(0.8)		Purchase of other investments		(0.5)	(0.3)
(0.2)		Sale of properties		(0.4)	(0.2)
(110.0)		Cash flow from investing activities		59.0	(32.2)
		Financing activities
(202.0)		Revolving credit facility repaid	14	(116.0)	(35.0)
97.0		Revolving credit facility drawn	14	71.0	-
(2.8)		Payment of lease obligations		(1.5)	(1.4)
149.1		Issue of private placement notes	14	-	-
(31.7)		Dividends paid	21	(18.8)	(18.9)
9.6		Cash flow (used in)/from financing activities		(65.3)	(55.3)
(83.8)		Net decrease in cash and cash equivalents		(4.3)	(87.7)
94.9		Cash and cash equivalents at 1 April		11.1	94.9
11.1		Cash and cash equivalents at balance sheet date		6.8	7.2