Derwent London Regulatory News (DLN)

10 August 2023

Derwent London plc ("Derwent London" / "the Group")UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2023

STRONG LEASING ACTIVITY CONTINUES

Paul Williams, Chief Executive of Derwent London, said:

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

Letting activity

· H1 2023 lettings of £19.3m (228,000 sq ft); H2 lettings to date of £7.0m (81,200 sq ft); YTD average 8.3% above December 2022 ERV

· Key transactions in the year to date include:

o  PIMCO (106,100 sq ft in H1) and Moelis (49,200 sq ft in H2) at 25 Baker Street W1; commercial 76% pre-let

o  Buro Happold (31,100 sq ft in H1) and Tide (14,400 sq ft in H2) at The Featherstone Building EC1; 70% let

o  Uniqlo (22,200 sq ft in H1) at One Oxford Street W1; retail 70% let

Financial highlights

· EPRA1 net tangible assets 3,444p per share, down 5.2% from 3,632p at 31 December 2022

· Gross rental income of £105.9m, up 3.9% from £101.9m (restated) in H1 2022

· EPRA1 earnings £55.6m or 49.5p per share, down 7.0% from 53.2p (restated) in H1 2022

· IFRS loss before tax of £143.1m from a profit of £137.1m in H1 2022

· First half dividend of 24.5p, up 2.1% from 24.0p

· Total return -3.7% from +3.0% in H1 2022

· Interest cover remains high at 411% (H1 2022: 419%) and EPRA1 loan-to-value ratio low at 25.0% (31 December 2022: 23.9%)

· Net debt of £1,274.0m, a marginal increase compared to £1,257.2m at 31 December 2022

· Undrawn facilities and unrestricted cash of £562m

Portfolio highlights

· £11.7m of asset management transactions, 4.6% ahead of December 2022 ERV; 86% retention/re-letting rate

· EPRA vacancy of 4.5%, from 6.4% at December 2022

· Portfolio valued at £5.2bn, an underlying decline of 3.7%; development valuations up 10.6% underlying

· True equivalent yield of 5.13%, a 25bp increase in H1 2023; total increase since 30 June 2022 of 67bp

· Portfolio ERV growth of 1.0%

· Total property return of -2.0%, outperforming our benchmark2 at -3.2%

· Project expenditure3 of £68.8m

· £65.6m of disposals

· Two major on-site developments totalling 435,000 sq ft, due for completion in 2025 on budget and programme

· Planning consent received for c.100 acre 18.4MW solar park on our Scottish estate

Outlook

· Guidance unchanged for average ERV growth across our portfolio at 0% to +3%

· Our high quality portfolio yield to be more resilient than the wider London office market

1 Explanations of how EPRA figures are derived from IFRS are shown in note 24

2 MSCI Central London Offices Quarterly Index

3 Including capitalised interest

Webcast and conference call

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

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

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

For further information, please contact:

CHIEF EXECUTIVE'S STATEMENT

Operational performance

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

Key lettings in 2023 to date include:

· 25 Baker Street W1 pre-lets - both substantially ahead of ERV; commercial element 76% pre-let or pre-sold

o  PIMCO - 106,100 sq ft at £103 psf on a 15-year lease (no break) in H1

o  Moelis - 49,200 sq ft at £100 psf on a 15-year lease (break at year 10) on lower floors in H2

· The Featherstone Building EC1; now 70% leased

o  Buro Happold - 31,100 sq ft on levels 5-8 at £74 psf on a 15-year lease (break at year 10) in H1

o  Tide - 14,400 sq ft on level 4 at £71 psf on a 10-year lease (break at year 5) in H2

· One Oxford Street W1; retail element now 70% leased

o  Uniqlo - 22,200 sq ft on a 10-year lease (break at year 5) in H1

· Tea Building E1 - newly refurbished space

o  Jones Knowles Ritchie - 8,100 sq ft at £60 psf on a 10-year lease (break at year 5) in H1

o  Gemba - 7,100 sq ft (Furnished + Flexible) at £64 psf on a 5-year lease (no break) in H2

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

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

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

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

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

Valuations

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

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

Financial performance

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

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

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

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

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

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

London's global appeal

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

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

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

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

Market backdrop

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

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

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

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

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

Investment volumes of £2.9bn in H1 were low against long-term trends. Market interest rates have increased with the 10-year gilt yield rising from 3.0% in February to 4.4% at 30 June 2023. Lender risk appetite has reduced leading to an increase in margins and contraction in lending volumes. City prime yields increased by 75bp to 5.25% in the first half. However, reflecting the level of equity targeting the West End, prime investment yields were unchanged in H1 2023 at 3.75%, per CBRE.

Derwent's brand and product differentiation

Our distinctive, design-led spaces are focused on the people that occupy them. Through innovative design and high quality materials, we continually push boundaries to create architecturally striking buildings that have a positive impact on businesses and communities.

Sustainability is embedded throughout our business. Implementation of our Intelligent Building programme continues across the portfolio and will play an important role in our journey to net zero carbon, helping reduce both energy consumption and costs. We were recently granted planning consent for our 18.4MW solar park in Scotland which will deliver tangible environmental benefits for us and our occupiers.

Derwent's offer extends beyond the bricks and mortar: customer service and our 'member' approach is integral. We maintain strong relationships with our occupiers at all levels. The second of our lounges, DL/28, will open this autumn in our Old Street village, following very positive feedback from our occupiers on DL/78. This amenity - available to and highly valued by both our members and potential occupiers - is a significant brand differentiator.

We do not take a 'one size fits all' approach to flex. Rather, we tailor space to meet market demand across the board. Our buildings are designed to be flexible, and our 'long-life, low carbon' approach means space is adaptable to the needs of a diverse range of occupiers.

As well as leasing space to third party serviced office providers (163,000 sq ft), we provide a variety of 'Furnished + Flexible' workspaces, each designed for the relevant sub-market. This extends to 128,300 sq ft, including 44,200 sq ft which is on site or committed. Overall, flex comprises 5.4% of our portfolio floorspace which compares to the wider London market at 5-6%.

Guidance and outlook

Although availability across central London is elevated, supply of the best space is constrained, particularly in the West End. The medium-term speculative development pipeline looks thin with some new starts being delayed. Take-up was lower in H1, but we are encouraged by the increased amount of space under offer and levels of active demand.

We expect rents for the best space to continue to rise, with poorer space to underperform. Our portfolio, which is 72% in the West End, is well-placed as demonstrated by our near record leasing activity in the year to date at rents well ahead of ERV. Our guidance for average ERV growth across the portfolio in 2023 is unchanged at 0% to +3%.

Our EPRA equivalent yield has increased to 5.13%, up 67bp over the last 12 months to levels last seen in 2014. We expect our portfolio to be more resilient than the wider London office market, with the West End to continue to outperform. Our strong and well-financed balance sheet means we are well-placed to continue upgrading our properties through developments and refurbishments while remaining opportunistic should attractive acquisitions emerge.

As the flight to quality continues in an increasingly complex world, we are well positioned with the right product to capture London's diverse demand.

CENTRAL LONDON OFFICE MARKET

Occupational market

Take-up in H1 2023 totalled 4.2m sq ft across central London, 36% below H1 2022 and 25% lower than the 10-year H1 average. However, space under offer increased 51% to 4.1m sq ft which is 18% above the 10-year average. Pre-let space comprised 25% of H1 take-up, and eight of the top 10 lettings. Banking & finance was the most active sector at 29% of take-up, followed by business services at 22% and creative industries at 16%. These trends further underline the flight to quality.

Average vacancy rose through H1 to 8.5% from 7.7% at December 2022. However, performance by sub-market continues to diverge. In the West End, supply is constrained at 3.8% compared to the City with availability at 11.7%. Supply is dominated by secondhand space while demand is focused on prime, green space. According to CBRE, secondhand space accounts for 67% of total availability.

CBRE estimates 12.7m sq ft of new space will be delivered across central London by 2026, split 61% new developments and 39% refurbishments. The 3.4m sq ft in the West End equates to 3.7% of existing stock and is 28% pre-let. The 2.4m sq ft being delivered speculatively compares to average annual take-up of 4.1m sq ft. The 5.6m sq ft in the City is equivalent to 7.2% of existing space, and is 62% pre-let.

Combined with low existing vacancy, there is expected to be an ongoing shortage of prime supply. New construction starts in H1 2023 were below trend at 1.7m sq ft. The long-term six-monthly average for new construction starts is 2.3m sq ft.

Investment market

London is an attractive location for international investors. In H1, overseas capital comprised 71% of investment volume with Asian investors the most active at 49% in part reflecting their access to cheaper domestic debt. CBRE estimated prime West End investment yields were flat in H1 at 3.75%, while in the City there was a 75bp increase to 5.25%. This compares to prime yields in key European cities which range between 3.75% and 4.70%.

Investment volumes in H1 2023 of £2.9bn were 11% lower than in H2 2022 (£3.3bn) and below the 10-year H1 average of £6.0bn. Q1 was stronger at £1.7bn as transactions that had been put on hold at the end of 2022 completed. Q2, however, slowed to £1.2bn as inflation and interest rate concerns added to economic uncertainty. Deals in the West End represented 29% of the total compared to 45% in the City.

Market interest rates have increased with the 10-year gilt yield rising from February's low of 3.0% to 4.4% at the end of H1 2023. The 5-year swap rate and SONIA experienced similar increases in H1 to 5.3% and 4.9% respectively. UK lending markets remain constrained in terms of both cost and availability of debt.

Liquidity is focused on the sub-£100m lot size 'value-add' market and is dominated by equity buyers. To date, there has not been a significant change in the level of market distress but as refinancing events gather pace the number of motivated vendors is expected to increase. Lenders are seeking to deleverage facilities to lower LTVs on refinancing given the rise in investment yields and decline in capital values.

VALUATION

The Group's investment portfolio was valued at £5.2bn on 30 June 2023. There was a deficit of £201.5m in the first half which, after accounting adjustments of £2.7m (see note 11), produced a decline of £204.2m including our share of joint ventures. On an underlying basis the portfolio decreased by 3.7%, following an 8.0% decline in H2 2022. 

The background to this performance continues to be weak economic conditions with the impact of stickier than expected inflation and higher interest rates feeding through to the economy. This has resulted in a further outward movement of property valuation yields in the first half of the year.

By location, our central London properties, which represent 99% of the portfolio, reduced in value by 3.7% with the West End -2.4% and City borders -7.2%. The balance of the portfolio, our Scottish holdings, was down 2.5%.

Our portfolio capital growth outperformed the MSCI Quarterly Index for Central London Offices, at -4.9%. The wider MSCI Quarterly UK All Property Index decreased by 1.8%.

Our leasing activity provided valuation support, with the strongest occupier demand being for high quality space with strong ESG credentials. Our EPRA rental value moved up 1.0% in H1, in line with our guidance and showed an improvement on the 0.5% growth in H2 2022.

The portfolio's true equivalent yield expanded by 25bp, from 4.88% to 5.13% in H1. The initial yield is 3.9% (December 2022: 3.7%) which, after allowing for the expiry of rent frees and contractual uplifts, rises to 4.8% on a 'topped-up' basis (December 2022: 4.6%).

The total property return for the six month period was -2.0%, which compares to the MSCI Quarterly Index of -3.2% for Central London Offices and 0.5% for UK All Property.

During the first half we were on-site at two West End developments - 25 Baker Street W1 and Network W1. We are making good construction progress at each project. 76% of the commercial space at 25 Baker Street has been pre-let or pre-sold at a significant premium to the valuer's ERV. The completion date for each project is 2025 and £289m of capital expenditure is required to complete. Together, they were valued at £330.1m at 30 June 2023 and delivered a strong 10.6% valuation uplift, after capital expenditure. Excluding these projects, the portfolio declined in value by 4.6% on an underlying basis.

Further details on the progress of our projects are in the 'Developments' section below and additional guidance on the investment market is laid out in the 'Guidance and outlook' section above.

Portfolio reversion

Our contracted annualised cash rent at 30 June 2023 was £203.3m. With a portfolio net ERV of £305.6m there is £102.3m of potential reversion. Within this, £47.3m is contracted through rent-frees and fixed uplifts, the majority of which is already straight-lined in the income statement under UK-adopted international accounting standards. On-site developments and refurbishments could add £35.6m, of which £10.7m is pre-let. The ERV of available space is £12.1m. The balance of the potential reversion of £7.3m comes from future reviews and expiries less future fixed uplifts that are above current ERV.

LEASING, ASSET MANAGEMENT & INVESTMENT ACTIVITY

Lettings - £19.3m of new rent, 7.3% above ERV

Leasing activity in H1 2023 was the second strongest first half since 2007. £19.3m of new rent was signed in 33 transactions covering 228,000 sq ft, of which £11.3m (59%) were pre-lets. On average, new leases were agreed 7.3% above December 2022 ERV, or 8.9% excluding short-term lettings at properties earmarked for development, principally Holden House. This provides further evidence that occupiers are prepared to pay a premium rent for the right space which meets their requirements. The three key transactions in the period were:

· 25 Baker Street W1 - 106,100 sq ft pre-let to PIMCO two years ahead of completion;

· The Featherstone Building EC1 - 31,100 sq ft letting to Buro Happold; and

· One Oxford Street W1 - 22,200 sq ft letting to Uniqlo.

Our 'Furnished + Flexible' space continues to lease well, with 13 units (21,400 sq ft) leased in H1 for a combined rent of £1.4m, on average 10.9% ahead of December 2022 ERV

Post-H1 lettings - £7.0m of new rent, 11.2% above ERV

Since the end of H1, occupier demand for our product has continued to be strong. We have agreed a further £7.0m of lettings. The two principal lettings in H2 are:

· 25 Baker Street W1 - 49,200 sq ft pre-let to Moelis at a rent of £4.9m, significantly above June 2023 ERV. The commercial element is now 76% pre-let/sold; and

· The Featherstone Building EC1 - 14,400 sq ft letting to Tide at a rent of £1.0m, in line with June 2023 ERV. The building is now 70% leased.

Leasing activity in 2023 to date

1 Weighted average unexpired lease term (to break)

2 Includes short-term lettings at properties earmarked for redevelopment

Principal lettings in 2023 to date

1 There is an additional break at year 5 on level eight subject to a 12-month rent penalty payable by the tenant

2 Uniqlo will pay a base rent (subject to annual indexation) plus turnover top-up

Asset management progress - Extending income and capturing reversion

Overall asset management activity in H1 2023, excluding two short-term development-linked regears, totalled 195,700 sq ft, 18% higher than in H1 2022 (166,400 sq ft). There were 15 rent reviews totalling 145,400 sq ft which were settled on average 3.8% above the December 2022 ERV.

Rent on lease renewals was 10.1% higher than December 2022 ERV on average. Lease regears completed in line with the previous rent but were 4.9% on average above December 2022 ERV. This excludes two development-linked regears at Holden House where works are expected to start on site in 2025.

In aggregate, 86% of breaks/expiries were retained or re-let prior to the end of H1 excluding space taken back for projects and disposals. The Group's WAULT (to break) is unchanged compared to FY2022 at 6.4 years, rising to 7.2 years on a 'topped-up' basis.

The EPRA vacancy rate reduced through H1 to 4.5% from 6.4% at FY2022.

Asset management activity in H1 2023

1 Excludes two development-linked regears

Investment activity

Investment activity in H1 2023 was quiet with disposals of £65.6m and no acquisitions. The Group takes a proactive approach to capital recycling with disposal proceeds largely reinvested into development capex. Since the start of 2018 the Group has made investment property disposals totalling almost £900m, compared to acquisitions of over £500m and development capex of over £900m. This is aligned to our strategy of keeping our prime recently completed buildings for longer and disposing of buildings with less repositioning potential.

Disposals

The principal disposal in H1 2023 was the sale of 19 Charterhouse Street EC1 for £53.6m, slightly ahead of December 2022 book value, reflecting a net initial yield of 4.6% and a capital value of £850 psf. The other key disposal was 12-16 Fitzroy Street W1 for £6.7m, 4.8% below December 2022 book value, which equates to a yield of 6.9% and a capital value of £775 psf. Other smaller disposals totalled £5.3m.

Disposals in H1 2023

SUSTAINABILITY

We continue to make meaningful progress in a number of areas on our journey to net zero carbon.

On our Scottish estate, following receipt of resolution to grant planning for a c.100 acre 18.4MW solar park in 2022, planning consent was formally granted in H1. On completion, we expect the electricity generated, on an annualised basis, to be in excess of 40% of our London managed portfolio's usage. Providing our occupiers with certifiable renewable electricity will lead to a lower residual operational carbon footprint.

Implementation of our Intelligent Buildings programme, in collaboration with Johnson Controls, has been completed at seven buildings, 29% of our portfolio by area, and we are now starting to receive integrated data on their performance. This will allow for greater running efficiency, reducing both operational costs and our carbon footprint.

Alongside this, our programme of occupier collaboration and education continues to gather pace. Energy intensity across the managed portfolio was 67 kWh/sqm in H1 compared to 123 kWh/sqm in FY 2022. We are on track to again achieve our SBTi-verified targets in 2023 for the fourth consecutive year.

As refurbishment projects complete, the EPC profile of our portfolio continues to strengthen. At H1, 67.6% by ERV was rated EPC A or B (including on-site projects), with a further 18.4% rated EPC C. Our portfolio is 100% compliant with 2023 EPC legislation. We have a schedule of works estimated at c.£100m to ensure we remain compliant with evolving environmental legislation.

DEVELOPMENTS

On-site projects - 435,000 sq ft of best-in-class space (43% pre-let/pre-sold)

At H1 2023, we were on site at two major projects totalling 435,000 sq ft which we currently expect will deliver a 17% development profit and 5.9% yield on cost. These figures do not include the impact of the post-H1 pre-let to Moelis at 25 Baker Street W1 which was agreed significantly ahead of the June 2023 ERV. Our current embodied carbon estimates for both projects are in line with or ahead of our 2025 target of ≤600 kgCO2e/sqm.

25 Baker Street W1 (298,000 sq ft)

This office-led multi-use scheme comprises 218,000 sq ft of offices, 28,000 sq ft of retail and 52,000 sq ft of residential. Against an increasingly supply-constrained backdrop for best-in-class offices with strong sustainability characteristics, the commercial element of 25 Baker Street is now 76% pre-let/pre-sold (by floor area) to PIMCO and Moelis. The Courtyard retail and Gloucester Place offices have been pre-sold to The Portman Estate. There is also strong early interest in the private residential units.

Construction is progressing on time and on budget. The private residential building at 100 George Street has topped out and the super-structure of 25 Baker Street has reached level 7. Since the start of the year, a fixed price contract has been signed with Make One for the 30 Gloucester Place element and we are finalising the contract for the private residential element. The mid stage 5 embodied carbon estimate is c.600 kgCO2e/sqm.

Network W1 (137,000 sq ft)

Demolition works at this office-led project completed in H1 and ground works have commenced. A fixed price construction contract was signed with Kier prior to the end of H1. The scheme is currently being delivered on a speculative basis, but with very little competing office supply in Fitzrovia and the broader West End, we are confident in the letting prospects for this high quality building which is adjacent to 80 Charlotte Street W1 and DL/78.Fitzrovia. The stage 4 embodied carbon estimate is c.530 kgCO2e/sqm.

Major developments pipeline

1 As at 30 June 2023

2 Comprising book value at commencement, capex, fees and notional interest on land, voids and other costs. 25 Baker Street W1 includes a profit share to freeholder The Portman Estate

3 Long leasehold, net of 2.5% ground rent

4 19,000 sq ft courtyard retail and 12,000 sq ft Gloucester Place offices sold to The Portman Estate, 106,100 sq ft pre-let to PIMCO

5 Embodied carbon intensity estimate as at stage 4 or 5

Longer-term pipeline - c.1.3m sq ft of space consented or under appraisal

In addition to our on-site projects, our longer-term pipeline extends to c.1.3m sq ft across four projects.

The next phase of projects are expected to commence in late 2024 or 2025 and total c.390,000 sq ft (at 100%):

· 50 Baker Street W1 (c.240,000 sq ft; 50:50 JV with Lazari Investments) - planning application submitted;

· Holden House W1 (c.150,000 sq ft) - consented.

In the longer-term, Old Street Quarter EC1 (c.750,000 sq ft) could commence from 2027 and 230 Blackfriars Road (c.200,000 sq ft) from 2030.

Refurbishments

Derwent London has a strong and established reputation for both development and refurbishment. We expect refurbishment projects will comprise an increasing proportion of capital expenditure over the coming years as we continue to upgrade the portfolio to meet both ever higher occupier requirements and evolving EPC legislation. Larger refurbishments likely to commence over the near to medium term, on a rolling basis, include 1-2 Stephen Street W1, 20 Farringdon Road EC1 and Middlesex House W1. Through improving the amenity offer and overall quality, we expect these projects will deliver substantial uplifts in ERV.

We will continue to appraise sub-10,000 sq ft units for our 'Furnished + Flexible' product where we see strong occupier demand at an attractive rental level. We currently have 128,300 sq ft of 'Furnished + Flexible' space across the portfolio, which includes 44,200 sq ft which is on-site or committed. This equates to 2.2% of portfolio floorspace.

FINANCIAL REVIEW

Gross property and other income increased to £133.3m in the first half of 2023 from £122.5m in H1 2022 (restated by £0.2m for a change in the accounting treatment relating to Covid-19 incentives in past years). The increase in the first half was mainly due to much higher service charge income of £25.0m when compared with the £16.8m in H1 2022. Much of this came from the exceptional level of energy costs recharged to tenants after the price of energy on fixed price green tariffs increased almost threefold during 2022, but was also impacted by general cost inflation. Energy tariffs have since returned to a level close to that in early 2022 and we expect some unwinding of this impact in H2 2023.

Gross rental income was up by 3.9% to £105.9m with additional income from the occupied offices at Soho Place W1 and The Featherstone Building EC1, both of which reached practical completion during H1 2022. However, the level of irrecoverable property expenditure has risen by £4.7m from H1 2022 to H1 2023, due to higher average vacancy rates combining with these unusually high service charge levels. Recent lettings at The Featherstone Building and the majority of the retail space at Soho Place (known as 1 Oxford Street) together with lower energy tariffs from March 2023 should see this cost move down relative to rental income in H2 2023 but it is likely to remain above the levels generally seen in recent years. These temporary service charge peaks also meant that the minority of tenants who have capped service charges paid less than the full cost; the associated cost borne by us was £1.0m in the first half of 2023. Irrecoverable service charge overruns totalling £1.1m also came through from 2022 in the first half of 2023.

Rent collection for office tenants has remained very strong in the first half but an increased provision against retail, gyms and hospitality occupiers, which together make up only 7% of portfolio income, has led to impairment and bad debt charges totalling £1.9m. This contrasts with a release of impairment provisions in H1 2022 of £0.5m. These all combined to take net rental income to £90.9m in H1 2023 from £94.0m (restated) in H1 2022. Net property and other income moved by a similar amount from £96.6m (restated) in H1 2022 to £93.3m in H1 2023. 

Administrative expenses increased to £19.2m from £17.8m in H1 2022 largely due to higher headcount, wage inflation and £1.2m in relation to 2022 bonuses awarded to directors and executive committee members. These are calculated and paid in March following the year to which they relate unlike staff bonuses which are paid in December.

The revaluation deficit in the income statement was £196.7m relating to our wholly-owned investment property. There was a further £2.6m deficit for the Group's owner-occupied offices at 25 Savile Row W1 plus a £4.8m deficit from our 50% share of the 50 Baker Street W1 joint venture. Together, these total £204.1m, a considerable reduction on the £503.6m deficit seen in H2 2022 but contrasting strongly with the £72.9m (restated) surplus in H1 2022 when market conditions were more favourable.

Gross interest costs were £23.0m in H1 2023, marginally lower than the £23.4m in H1 2022. However, capitalised interest of £2.7m in the period was £2.0m lower than the £4.7m in H1 2022. This is a result of the completion of mature developments in H1 2022 when the monthly rate of interest capitalisation is at its peak. As a result, net finance costs were a little higher in H1 2023 at £20.3m compared to £18.7m in H1 2022.

The resulting IFRS loss before tax for the first half was £143.1m which compares with the profit before tax seen in H1 2022 of £137.1m. EPRA earnings, which exclude fair value movements, fell 7% to £55.6m from £59.7m (restated) a year earlier and EPRA earnings per share (EPS) were down to 49.51p per share. In H1 2022, EPRA EPS were 53.22p (restated). As noted above, most of the decline came from higher irrecoverable property costs. 

EPRA like-for-like gross rental income, which excludes the effect of acquisitions, disposals and developments, was up 1.4% compared to H2 2022 while like-for-like net rental income was down 1.7% compared with H2 2022. 

Irrecoverable property costs, increased overheads and the impairment charges booked in H1 2023 have also increased our EPRA cost ratio (including direct vacancy costs); it rose to 28.8% in H1 2023 against 23.3% in both H1 and the whole of 2022. Excluding direct vacancy costs, it was 23.2% (H1 2022: 20.4%).

Capital expenditure in H1 2023 on wholly-owned investment properties was £54.1m plus capitalised interest of £2.3m, lower than the £69.2m and £4.4m, respectively, in H1 2022. In addition, we incurred £6.8m plus capitalised interest of £0.4m on our residential trading property at 25 Baker Street plus £1.9m on the development costs to be transferred to The Portman Estate upon completion. Pre-development design fees also continue at Old Street Quarter EC1, totalling £3.0m in the first half. This brought the balance of prepaid development expenditure to £12.1m, in advance of our acquisition of the site no earlier than 2027.

The Group's total return over the six-month period, including the 54.5p dividend paid, was -3.7% compared to 3.0% for H1 2022 and -6.3% for the full year 2022. The property valuation decline has also taken the Group's EPRA Net Tangible Asset value per share down 5.2% to 3,444p at 30 June 2023 from 3,632p at 31 December 2022. As at 30 June 2022, it was 4,023p. As interest rates continued to rise across the curve, the mark-to-market adjustment for our fixed rate debt has now increased to £190.6m from £159.5m in December 2022. As a result, EPRA Net Disposal Value was 3,609p at 30 June 2023, a smaller decline of 4.2% from the 3,768p reported as at 31 December 2022.

Financing and net debt

Lending conditions in the office real estate market have deteriorated quite sharply in the last few months exacerbated by higher rates across the curve. As a result, the market is seeing increasing margins with funders becoming increasingly selective. Derwent London is in a relatively strong position with low leverage, 98% of our debt at fixed rates as at 30 June 2023 and with an additional £75m forward start interest rate swap at 1.36% out to April 2025. Our debt has a weighted average term of 5.6 years, our revolving bank facilities (which are substantially undrawn) extend to Q4 2026 and Q4 2027, respectively, and we have only one loan expiry of £83m prior to June 2025. That is a secured loan at 3.99% which falls due in October 2024 and we have held early and positive discussions to refinance it. The cost of refinancing would currently be a little over 6% but may vary by the time we transact.

As a result of property disposals early in the year, our debt levels have barely increased in H1. Net debt at 30 June 2023 was £1.27bn, only marginally higher than £1.26bn at the 2022 year end and some way below the £1.36bn reported at 30 June 2022. Total borrowings were £1.28bn at 30 June 2023, again only just above the £1.25bn in December 2022.

EPRA loan-to-value ratio, which takes account of the lower property valuations and which also includes a net payables amount of £65.9m in addition to net debt, increased to 25.0% at 30 June 2023 (H1 2022: 23.7% and 23.9% at 31 December 2022). 

As at 30 June 2023, the Group had £562m of unrestricted cash and undrawn facilities (31 December 2022: £577m).

Interest cover remains very strong at 4.1 times (2022: 4.2 times). Our interest cover debt covenant is at 1.45 times so there remains very substantial headroom. The weighted average interest cost was 3.19% as at 30 June 2023 (31 December 2022: 3.14%) on a cash basis.

The Group's balance sheet strength and debt metrics helped maintain an unchanged issuer default credit rating from Fitch of BBB+ in May 2023 with a stable outlook and a senior unsecured rating of A-.

Qualifying expenditure under our Green Finance Framework

The qualifying expenditure as at 30 June 2023 for each Eligible Green Project (EGP) is set out in the table below.

Network W1 commenced on site in 2022 and was elected as an EGP in 2023. As per our Green Finance Framework, costs incurred on this development in the periods before election qualify as 'green' expenditure, and have been included in the 'look-back' spend.

The cumulative qualifying expenditure on EGP's at 30 June 2022 was £687.1m, with £44.5m of this being incurred in H1 2023.

At 30 June 2023, total drawn borrowings from Green Financing Transactions were £372.5m. This includes £22.5m from the green tranche of the Group's RCF and the £350m Green Bonds.

Tax and dividend

We were advised by HMRC in July 2023 that we have been assigned the lowest risk status across all tax categories following their business risk review. This recognises the responsible approach to tax taken by the Group. Our statement of tax principles is available on the Derwent London website.

After considering our dividend cover and various stakeholder obligations, we have increased the interim dividend by 2.1% to 24.5p per share from 24.0p last year. It will be paid as a PID on 13 October 2023 to shareholders on the register as at 8 September 2023.

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, where possible, through a combination of internal controls, risk management and the purchase of insurance cover.

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. These risks are reviewed and updated on a regular basis and were last formally assessed by the Board on 8 August 2023. The Group's approach to the management and mitigation of these risks is included in the 2022 Report & Accounts. The Board has confirmed that its risk appetite and key risk indicators remain appropriate.

There has been no significant change to the Group's principal risks and uncertainties since the publication of our 2022 Report & Accounts. The last significant change was in August 2022 with the reinstatement of 'a fall in property values'. There continues to be a heightened risk to property values over the next six months.

We are operating in a changed interest rate environment following a long period of historically low rates. Conditions in the debt markets have deteriorated with central banks raising rates in an effort to deal with inflation. With 98% of borrowings at fixed rates, the Group has minimal current exposure to market interest rates. Our average interest rate is 3.19% on a cash basis. Our next refinancing exposure arises in October 2024 on the £83m secured debt currently paying a coupon of 3.99%. We do not consider the cost of borrowing and the availability of funds to be a principal risk for the Group during the next six months. In these turbulent markets, we are helped by our high level of refinancing activity in previous years, unrestricted cash and undrawn facilities totalling £562m and our strong banking relationships.

As UK economic growth slows, there is an increasing risk of recession. A recession is unlikely to have a material impact on the Group or its tenants in the short-term. However, in the medium to long-term, a recession could lead to some of our occupiers facing a more challenging financial situation which could result in Derwent London having higher vacancy rates and reduced rent receipts. The occupiers deemed to be most at risk are those which rely heavily on consumer spending such as retail and hospitality, which make up only 7% of the Group's income.

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

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

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. The Group's EPRA loan-to-value ratio has increased to 25.0% as at 30 June 2023.

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.

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 largest 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 2023, the proportion of fixed debt held by the Group was above this range at 98% (31 December 2022: 100%). During both 2023 and 2022, 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 and retained earnings).

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 2023, the Group's strategy, which was unchanged from 2022, 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 25.

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 2023.

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 2022 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 2023

GROUP CONDENSED INCOME STATEMENT

1 Figures for the prior period ended 30 June 2022 have been restated for a change in accounting policy in relation to forgiveness of lease payments. See note 2 for additional information.

2 Net property and other income includes a net charge of £1.9m in relation to the write-off/movement in impairment of receivables (half year to 30 June 2022 restated: net credit of £0.5m; year to 31 December 2022: net credit of £1.0m). See note 3 for additional information.

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

GROUP CONDENSED BALANCE SHEET

1 Figures for the prior period ended 30 June 2022 have been restated for changes in accounting policies. See note 2 for additional information.

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

GROUP CONDENSED CASH FLOW STATEMENT