Derwent London Regulatory News (DLN)

9 August 2018

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

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2018OCCUPIER DEMAND UNDERPINS GROWTH POTENTIAL

Financial highlights

· Net rental income £80.6m from £79.3m in H1 2017, up 1.6%

· EPRA1 earnings 66.9p per share from 45.4p in H1 2017, up 47.4%, including surrender premiums and significant non-recurring property income

· Underlying1 earnings 51.8p per share, up 14.0%

· Total return 3.1% in first six months:

o Dividends paid 117.4p per share, which includes 75.0p special

o EPRA NAV 3,713p per share from 3,716p in December 2017, down 0.1% after dividends

· Interim dividend raised 10.2% to 19.10p per share from 17.33p in 2017

· Equity shareholders' funds £4,133.8m from £4,128.3m in December 2017, up 0.1% 

First half activity

· New lettings totalling £8.4m, 8.2% above December 2017 estimated rental value (ERV)

· Capital expenditure of £80.9m including capitalised interest of £5.1m

· Progressing two new developments totalling 410,000 sq ft 

Second half activity to date

· Further lettings of £3.4m, including the top two floors of Brunel Building W2

· Another £2.2m of rent under offer with good ongoing interest

· On-site developments 60% pre-let, up from 45% at December 2017

· Exchanged contracts on leasehold acquisition at 88-94 Tottenham Court Road W1 for £42m 

Portfolio update

· Portfolio valued at £5.0bn; an underlying increase of 1.3% in H1 2018

· Uplift on developments was 9.4% in the first six months

· True equivalent yield of 4.70%; tightening 3bp since December 2017

· Total property return was 3.3% in H1 which was ahead of our benchmark index2 of 2.7%

· EPRA vacancy rate rose to 4.2% from 1.3% in December 2017 principally due to the completion of two refurbishments

· ERV on an EPRA basis increased by 0.5% in H1

· ERV guidance for 2018 improved to +2% to -1% from +2% to -3% in February 2018 

Financial position

· Interest cover 514% and loan-to-value ratio 15.2%

· Borrowings up to £786.9m from £730.8m in December 2017

· Cash and undrawn facilities £403m

1Explanations of how EPRA and underlying figures are derived from IFRS are shown in note 23 2 MSCI IPD Central London Offices Quarterly Index

John Burns, Chief Executive, commented:

"London's robust occupier demand has endorsed our actions to push ahead with recent developments, and we are now in a strong position to proceed with our next two major projects. We remain confident that Derwent London will continue to deliver the buildings for today's occupiers and grow our earnings over the medium term."

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:00 BST today. The audio webcast can be accessed via www.derwentlondon.com.

To participate in the call, please dial the following number: +44 (0)20 3059 5868.

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

For further information, please contact:

OVERVIEW AND OUTLOOK

Since the EU referendum two years ago, the Group has achieved £65m of lettings and substantially de-risked almost one million sq ft of development. We have sold £713m of properties, invested £365m in capital expenditure, lowered debt by £187m and paid out £266m in dividends. All this has happened in a period of political uncertainty and slower economic growth during which central London office rents and values rose 0.6% and 0.7%, respectively, according to MSCI IPD.

In the first half of 2018 we achieved £8.4m of new lettings, progressed our on-site developments for delivery in 2019/2020 and advanced 410,000 sq ft of new developments. This momentum has continued into the second half and we have let or pre-let a further £3.4m including the top two floors of Brunel Building W2, which is now 40% pre-let. This takes the 623,000 sq ft of on-site developments to 60% pre-let.

First half net property income was up by 27% to £103.4m from £81.5m in H1 2017, driven by significant non-recurring property income. Net rental income was up 1.6% to £80.6m impacted by substantial disposals in 2017 and £2.5m of surrender premiums recognised in the period. EPRA earnings per share include non-recurring property income and therefore rose to 66.9p, an increase of 47.4% over H1 2017. Underlying earnings, which are set out in more detail in the financial review, increased by 14.0% to 51.8p per share from 45.4p in H1 2017. These figures support our decision to raise the interim dividend by 10.2% to 19.1p per share and we anticipate a similar rate of increase in the final dividend.

Portfolio growth was enhanced by the development programme so that, overall, it recorded an underlying gain of 1.3% and a revaluation surplus of £54.3m. This, together with our earnings, almost exactly matched our significant first half dividend distributions totalling 117.4p per share1, and therefore our NAV per share was only 3p lower at 3,713p.

1 Final dividend of 42.4p together with special dividend of 75p per share relating to year ended 2017

The portfolio continues to offer considerable opportunity to capture reversion either through developments or lease events. At 30 June 2018, we had another £70.5m of additional rent inherent in our existing portfolio. We expect to incur a further £206m of capital expenditure to achieve this. The new developments at Soho Place W1 and The Featherstone Building EC1 could add a further £28.5m to our ERV potential with additional capital expenditure and site costs of £369m.

A focus on design has been an important foundation of the business and our activities continue to be endorsed by prestigious third party recognition. In the last six months both White Collar Factory EC1 and 25 Savile Row W1 received RIBA London and National awards. White Collar Factory also won the New London Architecture Wellbeing Award, and 25 Savile Row achieved a Gold SKA rating. This year also represents the fifth anniversary of our Community Fund and we have made further distributions supporting local initiatives in Fitzrovia and the Tech Belt. We also recently became supporters of the Financial Stability Board's Task Force on Climate-related Financial Disclosures having previously adopted its recommendations in our Annual Sustainability Report.

Our concentration on emerging locations while offering high quality product at middle-market rents is proving well suited to current market conditions. Recently we have seen some retailers and restaurants under strain which has led to a number of CVAs, but this remains a small part of our business. Looking to the future, providing current levels of business confidence persist, we are expecting ERV growth of between +2% and -1% in 2018 and for average yields to remain firm in our portfolio.

Against a background of modest rental growth and flat property yields, it is essential that we can create internal growth. Derwent London's portfolio has meaningful asset management and development opportunities. We also have the finances and the people to enable us to deliver them so we expect to continue to grow medium-term earnings and enhance our longer term prospects.

THE BOARD

We have announced today that Lucinda Bell will be joining the Board as an independent Non-Executive Director with effect from 1 January 2019. Lucinda is a Chartered Accountant with significant knowledge in the listed real estate sector, including 26 years at British Land latterly as Chief Financial Officer. She will join the Risk and Audit Committees.

CENTRAL LONDON OFFICE MARKET

Occupier demand remains good with CBRE reporting 6.4m sq ft of office take-up in central London in the first half of the year, 7.2% ahead of the same period last year. Flexible workspace accounted for 14.5% of take-up. The vacancy rate has risen to 4.6% which compares to 4.3% in December but remains below the long term average of 5.1%. The strength of demand is demonstrated by the amount of space under offer at the end of Q2 which CBRE estimates at 4.3m sq ft, the highest level recorded for 18 years.

As the year has progressed an additional 2.5m sq ft of London office space has begun construction for delivery in 2020 and 2021. This takes the total to 13.5m sq ft under construction of which 49% is pre-let. This means that expected new supply of unlet space over the next three and a half years is about 3% of the total market. West End supply remains tighter with only 1.6m sq ft of space under construction available which represents less than 2% of the local market.

CBRE is reporting unchanged prime rents across the central London office market in the first six months, except at Paddington where prime rents have risen 3.6%. This, in part, reflects our own activity at Brunel Building. Prime yields are also reported as unchanged as investment activity, at £7.9bn, remains strong, with a number of sizeable City deals. Asian investors continue to provide substantial liquidity and represented 56% of total purchases. Other overseas investors accounted for a further 24%. The West End market has had less stock available and consequently has been less active, although domestic investors are more involved with a 45% market share.

We expect the market overall to benefit from the opening of the Elizabeth line from the end of 2018 with the whole line expected to be operational by the end of 2019. We expect to benefit from this as 74% of our portfolio is located close to a station.

VALUATION

The general property market stability was reflected in the £5.0bn portfolio valuation at 30 June 2018 giving a surplus of £54.3m after accounting adjustments (see note 11). The underlying valuation growth was 1.3% and this follows a 2.5% uplift in H2 2017. Compared with our capital value benchmarks, this was an outperformance against the MSCI IPD Quarterly Index for Central London Offices, up 1.0%, but just below the wider UK All Property Index which was up 1.4%. By location, our central London properties, which represent 98% of the portfolio, increased in value by 1.4% with the City Borders up 2.3% and the West End up 0.8%. The balance of the portfolio, comprising our Scottish holdings, declined 1.9%.

Our rental values, on an EPRA basis, rose by 0.5% over the first half, a similar level to the 0.6% seen in H2 2017. The City Borders were up 0.6% and slightly outperformed the West End, up 0.4%.

The portfolio's EPRA initial yield was 3.4%, which, after allowing for the expiry of rent frees, half rents and contractual uplifts, rises to 4.3% on a 'topped-up' basis. The true equivalent yield came in 3bp to 4.70% and has tightened 13bp over the last 18 months as capital markets have settled post the referendum.

Our first half total property return was 3.3%, which compares to the MSCI IPD Indices of 2.7% for Central London Offices and 3.7% for UK All Property.

At year end we were on site with two major developments: 80 Charlotte Street and Brunel Building. These were valued at £499.0m in June 2018 and they delivered a strong 9.4% uplift. Excluding these, the underlying portfolio increase was 0.5%. We are now progressing the next programme of developments: Soho Place W1 and The Featherstone Building EC1 (formerly Monmouth House), which together were valued at £71.5m1. When combined with the on-site schemes our development programme represented about 11% of the portfolio. There is more detail on our consented development pipeline below.

Our contracted annualised net cash rent at June 2018 was £156.9m. This was 2% lower than December 2017, following the disposal of the Porters North joint venture and several lease expiries and surrenders for premiums where we are looking to refurbish the space. The portfolio's estimated reversion is correspondingly higher at £114.5m to give a total ERV of £271.4m.

The make-up of the reversion is shown in the table below. Of the total, £44.0m was contracted through rent-free periods, half rents and fixed uplifts, and most of this upside is already incorporated in the income statement. The remaining £70.5m (£29.5m scheme pre-lets plus £41.0m potential income) will contribute to future rent. As at 30 June 2018, 42% of this was pre-let, with the remaining growth to come from new lettings (37%) or lease events (21%).

Portfolio income potential 30 June 2018

1 Total balance sheet carrying value at 30 June 2018 includes an additional £41.9m relating to discounted future headlease payments at Soho Place which are offset by an equal and opposite liability (see notes 11 and 18) 2 A further 20,500 sq ft pre-let at Brunel Building since 30 June 2018

PORTFOLIO MANAGEMENT

In the first six months, we achieved £8.4m of new lettings across 139,200 sq ft, on average 8.2% above December 2017 ERV. These transactions were dominated by the pre-letting at Brunel Building to Sony Pictures, which represented over 60% of the rents recorded in the first half. The other main letting in the period was 12,800 sq ft at 45-51 Whitfield Street W1 for a rent of £0.6m. There were a further 22 separate letting transactions which made up the remainder of the income. Since 30 June 2018, we have signed another £3.4m of lettings across 50,500 sq ft.

We show our main first half asset management activity in the table below. In total it covered 178,000 sq ft of space and we increased rents from £8.1m to £9.7m, which was 1.7% above ERV. The majority of these lease events were concentrated in 90 Whitfield Street W1, Morelands EC1 and 151 Rosebery Avenue EC1.

Asset management H1 2018

PROJECTS

As reported in 2017, we substantially pre-let the office element of 80 Charlotte Street W1, our largest development. We now expect this project to complete early in the first half of 2020 due to a combination of variations and some minor delays. So far this year we have also pre-let 40% of Brunel Building W2, including the pre-letting of the top two floors totalling 20,500 sq ft announced today, and we are seeing good interest in the remaining space. This project is due for completion in the first half of 2019. Together these two developments will add £42.0m to rental income and require future capital expenditure of £200m.

Our next major schemes are Soho Place W1, where we are already on site carrying out preliminary works, and The Featherstone Building EC1 where we will take possession in December 2018. The former is located in one of the best positions in London's West End over the Tottenham Court Road Elizabeth line station. The latter is beside our highly successful White Collar Factory development. Together the ERV on the two schemes is £30m and the additional capital expenditure and site costs total £369m.

Major developments pipeline

1 As at 30 Jun 2018 2 Resolution to grant planning permission 3 Total area - Derwent London has a 55% share of the joint venture

4 Includes remaining site acquisition cost of £48m

At 31 December 2017 we were also on site with three major refurbishments. The first of these was Phase 2 of The White Chapel Building E1, which was pre-let and we will shortly be handing over to Fotografiska. The Johnson Building EC1 and the upper floors of 25 Savile Row W1 completed in the first half of this year and are the principal reason why our vacancy rate has increased to 4.2%. Together the three projects total 165,000 sq ft, with an ERV of c.£7.5m of which 32% is currently pre-let.

INVESTMENT ACTIVITY

We continue to actively seek opportunistic purchases but recently we have seen few properties that meet our investment criteria. In the current year we have added to our Fitzrovia holdings in 2018 with two strategic purchases: a small £7.8m purchase in Tottenham Mews W1 in the first half and since then we have exchanged contracts on the 36-year leasehold interest in 88-94 Tottenham Court Road W1 for £42m before costs, which comprises 37,400 sq ft of offices and 8,500 sq ft of retail. We already owned the freehold of the latter, which adjoins a number of existing ownerships and is located between 80 Charlotte Street and Tottenham Court Road. The passing rent is £2.5m, which equates to an average office rent of £48 per sq ft and a 6.0% initial yield. In the short term there are opportunities to capture reversion as leases expire and in the longer term it could facilitate the potential for a larger project incorporating our other adjoining properties.

Following 2017's exceptional sales activity, we expect to dispose of less property in the current year. In March 2018 as previously announced, Porters North N1 was sold at a 5% premium to book value following a lease extension and refurbishment programme. The building was held in a 50:50 joint venture, and our share of the net proceeds was £22.3m.

FINANCIAL REVIEW

Gross property and other income increased to £122.3m from £99.4m in H1 2017 due mainly to an unusually high value of non-recurring property items; surrender premiums of £2.5m and rights of light/access payments from neighbouring property owners of £17.7m were recognised in the income statement in the first half of 2018. Despite the substantial disposals in 2017, gross rental income was up by 1.8% to £86.9m with net rental income growing from £79.3m in H1 2017 to £80.6m in H1 2018. Net property and other income increased by 26.9% to £103.4m from £81.5m a year earlier.

IFRS profit from operations was £142.3m for the six months to 30 June 2018 against £154.5m for the half year to June 2017, the prior period benefitting from £19.1m of profits from disposals of investment properties. The overall revaluation surplus for our investment properties in the first half of 2018 was £54.0m (H1 2017: £66.7m) after accounting adjustments for incentives. Administrative expenses increased to £15.2m (H1 2017: £12.8m), returning to a figure almost identical to that in H1 2016. In 2017, the bonus and incentive payments were substantially lower than in either 2016 or 2018.

With lower average borrowings, total finance costs fell to £11.5m in H1 2018 from £14.3m in H1 2017 after interest capitalised on projects of £5.1m (H1 2017: £4.7m). Derivative financial instruments showed an overall small gain of £1.3m in H1 2018 (H1 2017: £1.9m) as medium-term interest rates moved up slightly over the period. Our share of the results at our two joint ventures was £1.9m (H1 2017: £3.7m), coming mainly from the gain on the sale of Porters North which completed in March 2018.

IFRS profit before tax was £134.0m for the half year to 30 June 2018 against £145.8m in H1 2017 but EPRA earnings, which exclude fair value movements and profits on disposals of investment properties, increased by 47.4% to £74.6m from £50.6m in H1 2017. EPRA earnings per share (EPS) were up by a similar amount to 66.93p from 45.42p. Both EPRA earnings and EPS include non-recurring property income so we have also provided 'underlying' figures. These exclude the £15.8m access rights receipt and £1.1m of the premiums received that compensate for rents that relate to subsequent periods (see note 23). Adjusting the EPRA EPS for these two amounts gives an underlying EPS of 51.77p per share, up 14.0% over H1 2017. Note that the underlying figures include rights of light and dilapidations receipts of £3.5m as these items occur frequently within our ongoing property operations.

EPRA like-for-like income has also been somewhat distorted this time by the unusually high non-rental income and surrender premiums and the corresponding sacrifice of short term rental income while new tenants are put in place. In addition, most of this year's rent reviews and lease expiries, which tend to lead to increases in contracted rent, occur in the second half of the year. Adjusting the EPRA like-for-like net rental income in the same way as the underlying EPS gives an increase of 5.1% when compared with H1 2017 and 0.8% with H2 2017. Adjusted like-for-like net property income, which excludes £16.9m of non-recurring property income in H1 2018, increased by 9.8% compared to H1 2017 and 4.9% compared to H2 2017.

The EPRA cost ratio was 20.9% in H1 2018, the same as H1 2017 and against 20.8% for the whole of 2017.

As in the first half of 2017, H1 2018 saw substantial dividends paid to shareholders. The final dividend for 2017 was 42.4p per share and the special dividend a further 75.0p per share, together reducing the Group net asset value by £130.9m. However, the profit for the period meant that total equity shareholders' funds and total net assets both increased slightly over the six months, to £4,133.8m and £4,197.1m, respectively. After allowing for a small increase in the number of ordinary shares, EPRA net asset value per share was down marginally to 3,713p per share from 3,716p in December 2017. This represents a total return, including the dividends, of 3.1% compared to 3.4% for H1 2017.

Capital expenditure, principally on our projects at 80 Charlotte Street W1, Brunel Building W2 and Phase 2 of The White Chapel Building E1, totalled £80.9m in H1 2018, marginally higher than the £79.5m incurred in H1 2017. We anticipate incurring a further £118m in the second half of 2018. There were £12.9m of investment property additions, the main ones being £7.8m at Tottenham Mews W1 and £5.1m site assembly costs at Soho Place W1. As we are now actively on site in anticipation of signing a building contract later this year, the £41.9m discounted headlease payments in relation to Soho Place are also included in the June 2018 balance sheet. There is a corresponding credit balance in non-current liabilities.

Note also that the carrying value of our share of the two joint venture investments of £41.6m includes cash of £14.3m following the sale in March 2018 of Porters North. We expect this cash to be distributed to the parent company later in the year.

Financing and net debt

Following the dividend payments in June, Group borrowings increased to £786.9m at H1 2018 from £730.8m in December 2017. However, borrowings were a little lower than the £794.4m in June 2017. Grossing-up for leasehold liabilities, which have grown to £56.0m at June 2018 following the recognition of £41.9m at Soho Place, £4.7m of derivative financial instruments (interest rate swaps) and netting off Group cash balances, net debt increased from £657.9m at December 2017 to £821.5m at 30 June 2018. However, the Group loan-to-value (LTV) ratio remains low, being 15.2% at 30 June 2018. This is close to the 14.9% a year earlier but higher than at December 2017 when it fell to 13.2%. Including the cash in joint ventures brings the June 2018 figure down to 14.8%. Interest cover has risen again to 514% for the six months to June 2018 compared to 454% for the 2017 full year and available undrawn facilities and cash totalled £403m. Note that interest cover calculations are based on net rental income and do not include the surrender premiums or rights of light/access rights receipts. Full details are in note 24.

Net cash from operating activities increased significantly to £72.1m for the half year to June 2018 from £37.2m in H1 2017, boosted considerably by £22.1m of cash receipts for the lease surrenders and rights of light/access rights.

Other than the repayment of our small bank facility within the Primister joint venture which held Porters North, there were no changes to our bank or other debt facilities in H1 2018. We paid £1.8m to defer or re-coupon certain interest rate swaps with the £28m swap for our Baker Street joint venture being extended by a year to March 2020 and with the fixed rate under the swap falling from 3.525% to 0.875%. Together with the higher levels of floating rate bank debt, this has helped bring down our weighted average interest cost from 3.80% on a cash basis at year end to 3.56% at June 2018. Including the IFRS adjustment on the convertible bonds, the rate fell from 4.11% to 3.86%. The £150m convertible bonds mature in July 2019 and have a current conversion price of £31.78 so they were not dilutive based on the share price as at 30 June 2018.

A summary of the overall debt position at 30 June 2018 is shown in the following table:

Dividend

We have raised the interim dividend by 10.2%, taking it to 19.10p per share from 17.33p last year. It will be paid as a PID on 19 October 2018 to shareholders on the register as at 14 September 2018. This follows the increase in last year's interim dividend by 25%, and special dividends totalling 127p per share paid since the beginning of June 2017.

RISK MANAGEMENT AND INTERNAL CONTROL

We have identified certain principal risks and uncertainties that could prevent the Group from achieving its strategic objectives and assessed how these risks could best be mitigated through a combination of internal controls, risk management and the purchase of insurance cover. These risks are reviewed and updated on a regular basis and were last formally assessed by the Board and Risk Committee in August 2018.

The principal risks and uncertainties facing the Group in 2018 are set out on the following pages with the potential effects, controls and mitigation factors. The Group's approach to the management and mitigation of these risks is included in the 2017 Annual Report.

Strategic risks

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

Financial risks

Significant steps have been taken in recent years to reduce or mitigate the Group's financial risks such that few are now considered to be principal risks of the Group. 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.

Financial instruments - risk management

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

· credit risk;

· market risk; and

· liquidity risk.

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

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

Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, 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 established 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 and trade references. The covenant strength of each tenant is determined based on this review and, if appropriate, a deposit or a guarantee is obtained.

As the Group operates predominantly in central London, it is subject to some geographical 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 2018, the proportion of fixed debt held by the Group was within this range at 82% (31 December 2017: 88%). During both 2018 and 2017, 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 projections of cash flow and loan balances on a regular basis as part of the Group's forecasting processes. At the balance sheet date, these projections indicated that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

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

Capital disclosures

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

The Group's objectives when maintaining capital are:

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

· 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 2018, the Group's strategy, which was unchanged from 2017, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio, are defined in the list of definitions at the end of this announcement and are derived in note 24.

Statement of Directors' responsibilities

The Directors' confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules (DTR) 4.2.7 and 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 2017 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

John D. Burns Damian M.A. Wisniewski

Chief Executive Officer Finance Director

9 August 2018

GROUP CONDENSED INCOME STATEMENT

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

GROUP CONDENSED BALANCE SHEET

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

GROUP CONDENSED CASH FLOW STATEMENT

NOTES TO THE FINANCIAL STATEMENTS

1. Basis of preparation

Neither the financial information for the half year to 30 June 2018 nor the half year to 30 June 2017 was subject to an audit but has been subject to a review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.

The comparative financial information presented herein for the year to 31 December 2017 does not constitute the Group's statutory accounts, but is derived from those accounts. The Group's statutory accounts for the year to 31 December 2017 have been delivered to the Registrar of Companies. The Auditor's report on those accounts was unmodified, did not draw attention to any matters by way of an emphasis of matter and did not contain any statement under Section 498 of the Companies Act 2006.

The financial information in these condensed consolidated financial statements is that of the holding company and all of its subsidiaries (the "Group") together with the Group's share of its joint ventures. It has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting and should be read in conjunction with the annual report and accounts for the year to 31 December 2017 which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRS IC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, property, plant and equipment and financial assets and liabilities held for trading.

As with most other UK property companies and REITs, the Group presents many of its financial measures in accordance with the guidance criteria issued by the European Public Real Estate Association ('EPRA'). These measures, which provide consistency across the sector, are all derived from the IFRS figures in note 23.

Going concern

Under Provision C.1.3 of the UK Corporate Governance Code 2014, the Board needs to report whether the business is a going concern. In considering this requirement, the Directors have taken into account the following:

· The Group's latest rolling forecast for the next two years, in particular the cash flows, borrowings and undrawn facilities.

· The headroom under the Group's financial covenants.

· The risks included on the Group's risk register that could impact on the Group's liquidity and solvency over the next 12 months.

· The risks on the Group's risk register that could be a threat to the Group's business model and capital adequacy.

In particular the Directors have considered the relatively long-term and stable nature of the cash flows receivable under the tenant leases, the Group's loan-to-value ratio of 15.2%, the interest cover ratio of 514% and the £403m total of undrawn facilities and cash at 30 June 2018. They have also considered the fact that the average maturity of borrowings was 6.8 years at 30 June 2018.

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review. In addition, the Group's risks and risk management processes can be found within the risk management and internal controls.

Having due regard to these matters and after making appropriate enquiries, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date of signing of these condensed consolidated financial statements and, therefore, the Board continues to adopt the going concern basis in their preparation.

2. Changes in accounting policies

The accounting policies used by the Group in these condensed financial statements are consistent with those applied in the Group's financial statements for the year to 31 December 2017, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.

New standards adopted during the period

The following standards, amendments and interpretations endorsed by the EU were effective for the first time for the Group's current accounting period and had no material impact on the financial statements.

IFRS 2 (amended) - Share Based Payments;

IFRS 4 (amended) - Insurance Contracts;

IAS 40 (amended) - Investment Property;

IFRS 17 - Insurance Contracts;

IFRIC 22 - Foreign Currency Transactions and Advance Consideration;

IFRIC 23 - Uncertainty over Income Tax Treatments;

Annual Improvements to IFRSs (2014 - 2016 cycle).

IFRS 9 Financial Instruments (effective from 1 January 2018)

This standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. The Group's assessment of IFRS 9 determined that the main area of potential impact was impairment provisioning on trade receivables, given the requirement to use a forward-looking expected credit loss model. However, the Group concludes that this has no material impact on its financial statements.

IFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018)

IFRS 15 combines a number of previous standards, setting out a five step model for the recognition of revenue and establishing principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue. The standard is applicable to service charge income, facilities management income, investment property disposals and trading property disposals, but excludes rent receivable, which is within the scope of IFRS 16. The Group has completed its assessment of IFRS 15 and concludes that its adoption has no material impact on the financial statements.

Standards in issue but not yet effective

The following standards, amendments and interpretations were in issue at the date of approval of these financial statements but were not yet effective for the current accounting period and have not been adopted early. Based on the Group's current circumstances the Directors do not anticipate that their adoption in future periods will have a material impact on the financial statements of the Group.

IFRS 16 Leases (effective 1 January 2019)

This standard does not substantially affect the accounting for rental income earned by the Group as lessor. The main impact of the standard is the removal of the distinction between operating and finance leases for lessees, which will result in almost all leases being recognised on the balance sheet. As the Group does not hold any material operating leases as lessee, the impact of the standard is not expected to be material to the financial statements.

3. Significant judgments, key assumptions and estimates

Some of the significant accounting policies require management to make difficult, subjective or complex judgments or estimates. The following is a summary of those policies which management consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements.

Key sources of estimation uncertainty

· Property portfolio valuation.

· Borrowings and derivatives.

Significant judgments

· Compliance with the real estate investment trust (REIT) taxation regime.

A full explanation of these policies is included in the 2017 financial statements.

4. Segmental information

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is the Executive Committee comprising the six Executive Directors and six senior managers) in order to allocate resources to the segments and to assess their performance.

The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. These internal financial reports include the IFRS figures but also report the non-IFRS figures for the EPRA and underlying earnings and net asset value. Reconciliations of each of these figures to their statutory equivalents are detailed in note 23. Additionally, information is provided to the Executive Committee showing gross property income and property valuation by individual property. Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

The Group's property portfolio includes investment property, owner-occupied property, assets held for sale and trading property and comprised 97% office buildings* in central London by value (30 June 2017: 97%; 31 December 2017: 97%). The Directors consider that these individual properties have similar economic characteristics and therefore have been aggregated into a single operating segment. The remaining 3% (30 June 2017: 3%; 31 December 2017: 3%) represented a mixture of retail, hotel, residential and light industrial properties, as well as land, each of which is de minimis in its own right and below the quantitative threshold in aggregate. Therefore, in the view of the Directors, there is one reportable segment under the provisions of IFRS 8.

All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8. However, geographical analysis is included in the tables below to provide users with additional information. The majority of the Group's properties are located in London (West End central, West End borders and City borders), with the remainder in Scotland (Provincial).

* Some office buildings have an ancillary element such as retail or residential.

Gross property income

A reconciliation of gross property income to gross property and other income is given in note 5.

Property portfolio