Derwent London Regulatory News (DLN)

11 August 2020

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

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2020RESILIENT WITH BUILT-IN GROWTH 

Financial highlights

· Total return of -0.1%

· EPRA1 NTA2 3,900p per share, down 1.4% from 3,957p in December 2019

· Gross rental income of £97.8m, up 5.0% from £93.1m in H1 2019

· EPRA1 earnings of £54.7m or 48.9p per share, from 51.3p in H1 2019

· £6.5m (5.8p per share) of costs linked to Covid-19

· Interim dividend raised 4.8% to 22.0p per share from 21.0p in 2019

· Net debt of £992.8m (£981.6m in December 2019)

· Interest cover 435% (462% in December 2019)

· Loan-to-value ratio 17.3% (16.9% in December 2019)

· Undrawn facilities and cash of £502m (£511m in December 2019)

Portfolio highlights

· 80 Charlotte Street W1 377,000 sq ft completed in June 2020 - 91% let

· Two remaining on-site developments totalling 410,000 sq ft - 60% pre-let or forward sold

· Property disposal proceeds of £129.4m sold above book value

· Acquisition of Blue Star House, Brixton SW9 for £38.1m before costs

· Portfolio valued at £5.4bn - an underlying valuation decrease of 0.9%

· Valuation uplift of 4.0% on developments

· True equivalent yield of 4.77%, unchanged from December 2019

· Total property return of 0.7%, ahead of our benchmark index3 of -0.7%

· EPRA1 vacancy rate rose to 1.1% from 0.8% in December 2019

· ERV movement of -0.7% in first half of 2020

Responsibility

· Published our Net Zero Carbon Pathway to 2030

· 25% contribution to tenants' service charges for March and June quarters

· Donations budget increased 81% to £0.7m

· Use of 16 flats donated to University College Hospital until year end

1 Explanations of how EPRA figures are derived from IFRS are shown in note 23 2 Net Tangible Assets

3 MSCI IPD Central London Offices Quarterly Index

Paul Williams, Chief Executive, commented:

"Recent events have highlighted the importance of offices for enhancing collaboration, social interaction and wellbeing to build business culture and attract and develop talent. Derwent London's design-led and adaptable space will support our occupiers returning to their offices, an essential part of getting London back to full strength.

Derwent London has a strong financial base with built-in growth from its developments and we have increased the interim dividend 4.8% to 22p per share."

Presentation and conference call

There will be a recorded presentation together with a conference call for investors and analysts at 9.30 BST today. The audio webcast can be accessed via www.derwentlondon.com

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

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

There will also be a film on our 80 Charlotte Street W1 development released this morning

For further information, please contact:

CHIEF EXECUTIVE'S STATEMENT

The year started well with a positive outlook for central London offices. We had 790,000 sq ft under development of which 72% was pre-let, completed the sale of 40 Chancery Lane WC2 for £121.3m and acquired an interesting opportunity in Brixton SW9 for £38.1m. The fundamentals of our market were favourable, exhibiting good occupier and investor demand with limited supply of both letting and investment stock.

Covid-19 and the resulting lockdown has brought unforeseen challenges to London and the wider global economy but has not prevented the Group from making further progress. We completed our first net zero carbon development at 80 Charlotte Street W1 which was 91% pre-let. We progressed the two other major developments at Soho Place W1 and The Featherstone Building EC1 which, following the forward sale of 2 & 4 Soho Place W1 for £40.5m in July, are now 60% pre-let or forward sold. In July we published our Net Zero Carbon Pathway, which sets out in more detail how we will become a net zero carbon business by 2030.

Our office portfolio has been open throughout this difficult period with increased health and safety procedures in place. The strict measures of lockdown have impacted the ability of some of our occupiers to meet their rental obligations. We have responded by working with them to agree payment plans for some and in extreme cases, principally in the retail and hospitality sectors, to grant rent free periods. We have now received 81% of the rents due for the March quarter plus 11% due under agreed payment plans. For the June quarter, 78% of the rents have been received, with another 6% due later in the quarter and 9% under agreed deferrals.

London is gradually beginning to see people come back to their offices and business confidence needs to improve before we see a sustainable recovery. We believe changing work patterns already happening prior to the pandemic will accelerate. Derwent London for some time has been developing space that is more flexible and adaptable, anticipating changing trends. In response to the pandemic we have allocated additional resources to study the changes underway to ensure that our office space continues to meet evolving occupier requirements.

First half results and dividend

New lettings at Brunel Building (completed in 2019) and 80 Charlotte Street helped gross rents rise 5.0% to £97.8m in the first six months. The impact of Covid-related costs and impairments brought a modest decline in net rental income to £84.4m and EPRA earnings were £54.7m or 48.9p per share compared to 51.3p in H1 2019. IFRS earnings include the £68.3m investment property revaluation deficit, principally on our retail space or those properties with shorter leases, so that on an IFRS basis we reported an 8.49p loss per share. EPRA Net Tangible Assets (NTA) per share were 3,900p and, after allowing for the final dividend paid in the period, our total return was -0.1%.

We have raised the first half dividend 4.8% or 1p to 22p per share. This reflects the direct impacts of the pandemic, offset by the fact that our second half will benefit from a full six months' rent from 80 Charlotte Street and further sales of trading properties at Asta House W1.

Against a challenging background our business is in great shape. The EPRA vacancy rate is only 1.1% and that includes the recently finished 80 Charlotte Street scheme. This is our largest project to date totalling 377,000 sq ft which completed in June with all the office space already let. The total capital expenditure on this project was £284m excluding capitalised interest and our profit on cost 27%.

Response to Covid-19

The health and wellbeing of our employees, occupiers and other stakeholders is our top priority. Focus initially was on our teams working from home successfully which then allowed them to concentrate on assisting our occupiers and helping those most in need. As previously reported, we made the decision to reduce the March and June service charges across the whole portfolio by 25% as well as providing additional assistance for those occupiers most impacted. To help our local communities, we also increased our 2020 donations commitment by 81% to £0.7m. The donations were enhanced by the Directors waiving 20% of their second quarter salaries. In addition, we supported local NHS staff by donating the use of 16 flats to University College Hospital for the remainder of the year.

The future of offices

Technology has helped many companies operate effectively with workers working from home since the beginning of the pandemic. As time progressed questions have been raised about office use and its role in business. We believe that this debate has highlighted workplace trends that were already in place which the pandemic has accelerated. For some time, occupiers have looked for more flexible, adaptable and increasingly higher quality and 'greener' space. These trends are likely to increase. As part of our planning and design, in conversation with business, with architects and with local authorities, we are focused on 'long-life loose-fit' adaptable spaces and wellness factors that can enable people to meet together in larger common areas, with higher ceilings and better air quality and ventilation.

We will continue to adapt. More flexible working, heightened health and safety, more space required between desks and in communal areas all impacts the way in which we think about occupational density. Companies still need to bring their staff together, for the collaboration that social interaction brings, to build culture, to attract and retain talent and to have a physical embodiment of their brand. There is no substitute for building relationships with colleagues and clients in person. That is fundamental to the recovery of the economy and to our wellbeing. We expect the benefits of having technology working better from home will be supplemented by relationship building as businesses across sectors get back into work and London's villages come alive again.

Surveys frequently report that many younger workers are keen to get back to the office. This closely relates to our long held view that a significant driver of the demand for our spaces is the 'war for talent'. This tenant demand will increasingly favour well designed modern office space that provides good amenity and promotes wellbeing. We think our focus on progressive design, our wide range of leases, customer focus, flexible approach and early adoption of our Net Zero Carbon Pathway to 2030 leaves us well placed to meet the continually changing office demand.

Market background and outlook

The latest office market statistics, which are based on low activity levels, do not yet reflect the true impact of the lockdown. Our market guidance was withdrawn at the time of our Q1 update on 8 April 2020, reflecting significant uncertainty. This caution persists especially over the pace of the London economic recovery with many businesses delaying their return to work. In the short term, we are still to see the impact of the Government withdrawing furlough support and the terms by which the UK leaves the EU at the beginning of 2021.

We expect rising unemployment and business closures will see the London office vacancy rate rise which, in turn, may put pressure on office rents. However, we believe our better quality lower rise space, located in West End and Tech Belt mixed use locations that attract a broader spread of occupiers, will be relatively resilient.

Against the background of extremely low interest rates, the relatively attractive yields on central London office properties should support values. However, investments are likely to become increasingly differentiated with demand focused on properties that offer secure income with a growing focus on adaptability and climate resilience.

Occupier demand is key to our business so the speed of London's economic recovery will play an important part in determining our medium-term performance. The current slowdown in momentum means that, in the short term, there will be more focus on the Group retaining existing income. However, we do have significant income growth already built-in from our recently completed or pre-let developments: 80 Charlotte Street will contribute in the second half of this year and Soho Place from 2022.

Looking forward, we have another 125,000 sq ft at The Featherstone Building for delivery in 2022, and our strong financial position means that we in a position to commit to new projects or pursue opportunities. We anticipate commencing our next major development at 19-35 Baker Street W1 in 2021, which has planning permission for 293,000 sq ft mixed use and is expected to complete in 2025. Covid-19 may have tempered our short-term growth but ongoing developments ensure that the portfolio is still strongly reversionary and we remain in a good position to benefit once the economy improves.

Board changes

We are announcing today that Simon Silver has informed the Board of his intention to retire with effect from 26 February 2021. On his retirement, Simon will continue to support the business as a consultant until 31 December 2022. Simon is the co-founder of Derwent London and has been a Director since 1986. From the very beginning, Simon has led our development efforts and as such has played a major role in establishing Derwent London's brand as an innovative design-led business adept at anticipating occupier demands.

CENTRAL LONDON OFFICE MARKET

The UK lockdown in response to Covid-19 has had a major impact on the economy with output falling 25% during March and April, subsequently recovering 2% in May. Understandably business confidence remains low while concerns over the pandemic persist. Consensus estimates have UK GDP falling 8-10% this year assuming continuing recovery in the second half. Overall occupier and investment activity has been very low this year especially in Q2 with many decisions put on hold as both occupiers and investors adopt a "wait and see" approach.

First half take-up of 3.6m sq ft was reported by CBRE. This level is approximately 40% below last year's levels, with less than a third transacted in Q2. Business and professional services continue to dominate with 41% of take-up although, as expected, flexible office providers were less active with only 6% of take-up. These lower levels saw the market vacancy rate rise from 3.9% to 5.3%. The greater increase was in the City where the vacancy rate rose to 6.6% while the West End vacancy increased to 3.9%. Some 74% of the vacant space is second hand as new space remains in relatively short supply.

We expect the vacancy rate to rise further, as well as the amount of 'grey' (tenant controlled) space, from what were previously low levels. Active demand has also been falling and according to JLL is currently below average at 7.9m sq ft as a number of searches have been withdrawn or temporarily suspended.

During the period, 974,000 sq ft of development was completed with another 13.9m sq ft under construction for completion up to 2024. The level of future supply has risen 13% since the year end reflecting the increased business confidence for most of the first quarter. Since then development starts have been low. Of this space 50% was pre-let or under offer, leaving c.7.0m sq ft available to let over the next four and a half years, or about 3% of the market.

Investment activity was also significantly down at only £2.3bn in the first half. This was in contrast to the £4.9bn that transacted in Q4 2019 alone. Continental European investors featured strongly with 47% market share and UK investors represented another 40%. It is estimated that £0.9bn of transactions have been withdrawn due to the pandemic, although there have been a number of examples where properties have been acquired by underbidders. There is approximately £2.8bn under offer currently, and with the current low levels of bond and interest rates we believe central London's office investment yields remain attractive.

VALUATION

The buoyant outlook at the beginning of the year all changed in the spring with the pandemic and lockdown leading to activity stalling. However, where there have been transactions of well let property, yields remained stable.

Against this backdrop, the Group's investment portfolio was valued at £5.4bn on 30 June 2020. There was a small valuation deficit of £58.4m which, after accounting adjustments of £10.2m (see note 11) produced a deficit of £68.6m. This movement represents an underlying valuation decline of 0.9%, compared to a 1.9% uplift over the second half of 2019. The Royal Institution of Chartered Surveyors (RICS) required valuers to add uncertainty clauses for central London properties at our valuation date although this has subsequently been relaxed, reflecting the increased levels of activity.

Our portfolio outperformed against our capital value benchmarks: the MSCI IPD Quarterly Index for Central London Offices, down 2.3% and the wider UK All Property Index which saw a 5.4% capital value decline. By location, our central London properties, which represent 98% of the portfolio, decreased in value by 0.8% with the West End down 0.9% and City Borders down 0.7%. The balance of the portfolio, our Scottish holdings, declined 5.3%.

Looking at EPRA metrics, with limited activity in the leasing market, our rental values fell marginally by 0.7%. Whilst our portfolio has modest retail exposure, it accounted for most of the fall, as rents here declined by 7.7% compared to 0.1% on the offices. The portfolio's yields were unchanged from the year end, with the initial yield at 3.4% which, after allowing for the expiry of rent frees and contractual uplifts, rises to 4.7% on a 'topped-up' basis. The true equivalent yield was also unchanged at 4.77%. This yield calculation included the newly completed 80 Charlotte Street for the first time which, given its size and quality of income, had a positive impact. If excluded, the portfolio's equivalent yield would be 4 basis points higher at 4.81%. This reflects the outward yield movement on the portfolio's retail space and leasehold properties.

The total property return was a positive 0.7%, which compares to the MSCI IPD Index of -0.7% for Central London Offices and -3.3% for UK All Property.

At the start of the year we were on site with three major developments: 80 Charlotte Street, Soho Place W1 and The Featherstone Building EC1. There is more detail on these in the Development section below. Combined they were valued at £789.9m in June 2020 delivering a 4.0% valuation uplift. 80 Charlotte Street completed in June and the final element of development profit was released in the valuation. However, as rent-free periods run down there should be further valuation surplus uplifts to come. This very successful development delivered a profit on cost of 27%. The two on-site developments were valued at £242.3m, require £254m of capex to complete and are scheduled for delivery in H1 2022. Excluding developments, the portfolio declined by 1.7%.

Our contracted annualised cash rent at 30 June was £180.8m. This was a 6.9% increase over the last 6 months, reflecting our development programme and asset management activity. New acquisitions contributed £0.9m but this did not offset the £5.5m of income lost from disposals. The portfolio's ERV of £295.9m includes £115.1m of potential reversion. Within this, £70.7m is contracted through rent-free periods and fixed uplifts, which under IFRS accounting treatment is already mostly incorporated in the income statement. Our on-site developments and major refurbishments could add £31.1m of which £16.6m is already pre-let at Soho Place. Our vacancy rate is low, at only 1.1%, so this element of the reversion represents only £3.1m. We also have £4.7m in reversion from several ongoing small refurbishments across the portfolio. When complete and if combined with the space available to occupy, this would take the vacancy rate to 2.8%. The £5.5m balance of potential growth is from future reviews and expiries.

ASSET MANAGEMENT AND INVESTMENT ACTIVITY

Asset management

The Group started 2020 with small amounts of space available. As a result, our letting activity has been comparatively modest. In total we let 60,700 sq ft in the first six months agreeing rents of £2.6m. The main transactions were the letting of the remaining office space at 80 Charlotte Street in Q1 and a newly created unit at Tea Building E1 in Q2.

Principal lettings in H1 2020

1 £70 psf on ground, £47.50 psf on lower ground 2 Reception area now rentalised as offices let entirely to Expedia

Our property teams have been focused on responding to the impact of Covid-19 and subsequent lockdown. These actions have seen exceptional levels of collaboration between our occupiers and our building managers. The work has unfolded in three phases. First, ensuring that our workplaces remained safe and healthy as the pandemic spread; secondly, managing the buildings during lockdown and now thirdly, focusing on helping our occupiers get more staff back to the office. Our teams have ensured that the Group's properties have been available for occupation throughout the lockdown, but at one stage usage was as low as 5% as tenants heeded government advice to work from home. Over the last few weeks usage has begun to recover but our buildings are on average still only being occupied to 15% of their capacity.

We recently conducted a survey of our managed portfolio to determine whether our teams' work had proved effective and we are pleased to report that 95% of respondents rated our teams' responses either 'very positive' or 'positive' and there were no 'negative' ratings. Given the difficulties that both our customers and our staff are facing, we believe this is a good endorsement of the strength of our response.

As well as combatting the property impacts of the pandemic, our teams have been handling the portfolio's more regular work including a renewed focus on rent collection. We have adopted a collaborative approach with our tenants, recognising that the lockdown has produced significant challenges especially for smaller businesses in the retail and hospitality sectors. In recognition of these issues we reduced the March and June quarters' service charge by 25% across the whole portfolio and granted rent free periods or rent deferrals to those tenants most in need. The financial impacts of these moves are discussed in the Finance Review, but overall we have now collected or agreed payment plans on 92% of the March quarter rents with similar levels of performance for June.

Another area of regular business is rent reviews, lease renewals and regears. This activity covered £5.2m or 3% of the December cash rent, which increased 8.8%. Rent reviews were 4.3% above December 2019 ERV. However, overall the new rent on these transactions was 2.7% below ERV principally due to the regearing of a short term lease at 19-35 Baker Street W1.

Asset management H1 2020

Although activity was relatively quiet, our EPRA vacancy rate remains very low at 1.1%. This is expected to rise dependent on levels of demand as we have an above average number of leases expiring in 2021. In total 24% (c.£44m) of our June passing cash rent could expire next year, which is approximately double the normal rate. The reason for the higher number of potential expiries is that breaks on a number of buildings, such as 19-35 Baker Street W1, Network Building W1 and Angel Square EC1, have been aligned to potential regeneration dates. Future schemes comprise 58% of 2021 expiries. The Group is mitigating the impact of our future expiries and currently there are active negotiations on 200,000 sq ft (c.£10m of passing rent).

Investment activity

In the first half we completed the disposal of 40 Chancery Lane WC2, which was let to Publicis. The property was part of our "core income" portfolio and was one where we regarded the short term income growth prospects as relatively low ahead of its next rent review. We also exchanged or completed on the sale of 14 residential units at Asta House (part of our 80 Charlotte Street development).

Major disposals in H1 2020

Earlier this year we acquired an exciting opportunity in Brixton, which was announced with our annual results in February 2020. We are considering redevelopment plans.

Major acquisitions in H1 2020

1 Rent on occupied floorspace

DEVELOPMENT

The Group started 2020 with three major developments on site. Work briefly paused at the beginning of lockdown but resumed once new health and safety working practices could be implemented. Overall, this caused the programme to be delayed by around two months.

In the first half we completed our largest project to date at 80 Charlotte Street, which is also our first all-electric building and net zero carbon development. Capital expenditure of £284m excluding capitalised interest was spent on the building and the project delivered a healthy 27% profit on cost. The 322,000 sq ft office space is fully let with a headline rental income of £25.1m. The two principal occupiers, Arup and Boston Consulting Group, both rated the building's strong sustainability credentials as one of the main reasons for taking space. There is 12,000 sq ft of retail space still to let. In addition, there are 55 residential units. Of these 22 units were for sale, 19 units to let and 14 affordable. Adjusting for units sold or exchanged we have 8 units remaining to be sold representing 8,600 sq ft.

We continue to make good progress at Soho Place W1, our major 285,000 sq ft project sitting above Tottenham Court Road station at the eastern end of Oxford Street. The project is expected to complete in the first half of 2022. The office space and the theatre is largely pre-let or forward sold. This essentially leaves 36,000 sq ft of retail space to let which we aim to start marketing closer to completion. The Featherstone Building is beside our White Collar Factory EC1 and includes many of the features incorporated within the latter such as concrete core cooling, opening windows and generous 3.1m floor to ceiling heights. This 125,000 sq ft office building is also due for completion in H1 2022.

Major developments

1 As at 30 June 2020 2 Total area - Derwent London currently has a 55% share of the joint venture

3 Includes remaining site acquisition cost and profit share to Crossrail

At year end, we listed a number of projects that we could start as early as 2021, demonstrating the significant optionality within the portfolio. The largest of these was 19-35 Baker Street W1 where we are continuing to progress our plans for a 293,000 sq ft mixed-use development which could start in the second half of 2021. We expect to commit to this project later this year. Our other major consented project is at Holden House W1, but given the current uncertainties in the retail market we have decided to delay this project and are looking to extend a number of leases.

We have committed to two refurbishments in Victoria SW1. 6-8 Greencoat Place is currently in hand for delivery of 32,000 sq ft in 2021, and at Francis House we aim to start 40,000 sq ft next year for delivery in 2022. As well as upgrading the physical space we are also improving these buildings' mechanical and electrical infrastructure so they become more climate resilient and contribute to our journey to becoming a net zero carbon business.

Beyond these projects we have another 1.5 million sq ft of existing space earmarked for development. We are currently actively progressing plans for Network Building W1 and Angel Square EC1.

FINANCE REVIEW

The Group remains very well placed financially as at 30 June 2020 with low leverage, strong interest cover and significant liquidity. However, the Covid-19 pandemic and subsequent lockdown measures are having a profound impact on many of our occupiers and other stakeholders and this is reflected in the financial results for the half year.

EPRA net asset value measures have been amended for this year's reporting cycle. From now onwards, we are reporting EPRA net tangible assets (NTA) in place of the previous EPRA net asset value (NAV). Similarly, EPRA net disposal value (NDV) replaces the previous EPRA triple net asset value measure (NNNAV). Derivations of these metrics, along with EPRA net reinstatement value (NRV), are shown in note 23.

With a negative revaluation movement of £65.7m or 59p per share in the first half, EPRA NTA per share fell by 1.4% in H1 2020 to 3,900p from 3,957p per share in December 2019. Adding back the dividends paid in June 2020, the total return was almost flat at -6p per share or -0.1%. The fair value of the portfolio fell slightly to £5.4bn but, as 40 Chancery Lane WC2 was classed as a 'property held for sale' as at December 2019, the carrying value of investment properties rose marginally to £5.2bn helped by further capital expenditure and acquisitions totalling £112.2m.

Turning to the income statement, gross property and other income was £119.3m in H1 2020, an increase of 7.8% over H1 2019 but £0.3m below H2 2019.

The rent commencement date at 80 Charlotte Street W1 was delayed by lockdown and social distancing measures. However, it added £1.5m of income in June 2020 and helped gross rental income rise to £97.8m, £4.7m or 5.0% higher than in H1 2019, but £0.8m lower than in H2 2019. Lettings and asset management added £10.5m compared to H1 2019 with disposals, including The Buckley Building EC1 in 2019 and 40 Chancery Lane in 2020, reducing rents by £4.1m. Breaks, expiries and voids removed a further £2.0m. The support provided to mainly retail and restaurant occupiers in Q2 2020 was £2.5m of rent-free allowances; as these are spread over the respective lease terms under IFRS16, the direct impact on H1 earnings was £0.2m.

Our net rental income for the six-month period shows the impact of Covid-19 more vividly, with a modest decrease to £84.4m from £86.3m in H1 2019. This incorporates £6.5m of costs arising from the actions we have taken to support tenants and from impairment of trade receivable and lease incentive balances in accordance with IFRS 9. The cost of providing a 25% service charge waiver for the second quarter of 2020 was £2.1m, £0.8m of bad debts were written off relating mainly to retail/restaurant tenants who have failed and we have impaired the remaining trade receivables by £0.7m. In addition, we have provided for impairment of £2.9m in relation to the accrued income from lease incentives and the straight-lining of rental income. These impairment provisions have been carried out on a case-by-case basis for our largest 50 tenants and for those believed to be most at risk, with the remaining balances considered according to their specific sector. The highest level of sectoral impairment was in relation to retail, restaurant and leisure operators.

Including irrecoverable service charge of £1.6m, other property expenditure was £6.9m in H1 2020, almost identical to the £6.8m incurred in H1 2019. EPRA like-for-like gross rental income grew by 1.5% compared to H1 2019 but declined by 0.3% compared to H2 2019. EPRA like-for-like net rental income, which includes the bad debts written off and the impairments referred to above, fell by 7.3% and 8.3%, respectively but was almost flat if the Covid-19 costs are excluded.

Administrative expenses remained unchanged at £17.1m for the half year, higher staff salaries on an increased headcount being offset by lower bonus and incentive accruals. In addition, all our staff other than Directors now receive a 15% pension contribution and the Directors' contributions are being reduced from 20% this year to 15% by 1 January 2022. Our main EPRA Cost Ratio has increased to 28.9% due to the Covid-19 costs but, if they are excluded, it would have been 22.2%.

After adjusting for lease incentives and other accounting adjustments, the revaluation deficit passing through the income statement was £68.3m against a surplus in H1 2019 of £75.0m. Together with a lower profit on disposal of investment properties, this is the main reason why the profit from operations declined from £151.1m in H1 2019 to £2.8m in H1 2020.

Net finance costs were £13.6m for the six months to 30 June 2020, a small increase on H1 2019 when the corresponding amount was £12.8m. This partially reflects the c.£200m of cash and short-term deposits that we have been holding over recent months to ensure our access to liquidity is demonstrably safe. Interest capitalised in the half year was £6.3m compared to £6.6m in H1 2019 and, as before, no administrative expenses have been capitalised.

Overall, the IFRS loss for the half year was £13.2m of which £9.5m is attributable to equity shareholders with the balance of £3.7m being in relation to the Portman Estate's 45% holding in the Baker Street properties.

EPRA earnings, which exclude fair value movements and property disposal profits, fell slightly to £54.7m from £57.3m in H1 2019. Were the direct Covid-19 costs stripped out, EPRA earnings would have been £6.5m higher than reported. EPRA earnings per share were 48.90p per share for the period (51.34p in H1 2019).

Cash movements, financing and net debt

Activity at our construction sites was inevitably affected by Covid-19, capital expenditure in H1 2020 falling substantially below expectations to £72.7m compared with £100.1m in H1 2019. This has extended our building programmes on the major projects by two months, including 80 Charlotte Street that reached practical completion in June 2020. Anticipated capex across all projects for the rest of the year is about £115m.

Supporting our stakeholders, particularly those most vulnerable, has been a major part of our efforts in 2020. Though many of our occupiers have been able to continue paying as normal, rent collected as cash in H1 has taken account of some additional rent-free periods, monthly payments or deferrals into longer term payment plans and explains why trade receivables have risen from £7.9m in December 2019 to £26.0m on 30 June 2020. The table below illustrates our rent collection performance to date for the March and June quarters. We are pleased to report that those with whom we agreed monthly amounts have been paying in accordance with that revised schedule. Rent deposits of £1.4m have been drawn, leaving a balance of £21.9m.

Rent collection in March and June quarters 2020

 1 Principally monthly receipts

In contrast to the slower rate at which our rental income has been received from our customers, we have been actively supporting our own supply chain and have reduced the average payment days to 20 from 25 in 2019.

Partly as a result of rental deferrals, net cash from operating activities fell to £30.1m from £42.9m in H1 2019 but the sales proceeds from the disposal of 40 Chancery Lane and the initial sales of the apartments at Asta House mean that cash and available facilities remain very strong at £502m. This compares with £495m at 30 June 2019 and £511m as at 31 December 2019.

As we have elected to hold additional cash over recent months, the Group's borrowings increased to £1,134.2m at 30 June 2020 but net debt of £992.8m was lower than at 30 June 2019 and only £11.2m more than at the 2019 year end. The Group's loan-to-value ratio therefore remains low at 17.3%, a fraction higher than the 16.9% reported at 31 December 2019 but lower than at June 2019. We are also encouraged that the Group's interest cover ratio, always a key indicator for the management team, remains strong at 435% even after impairment provisions have been netted off. The equivalent figure in H1 2019 was 454% when there was no impairment charge.

After refinancing facilities totalling £875m in 2019, which included our £300m 'green' tranche on the Group's principal revolving credit facility (RCF), the first half of 2020 has been quiet though the £28m interest rate swap reached maturity; it was connected with our £28m bank facility running to July 2022 secured on the Baker Street properties. With the expectation that the property ownerships at Baker Street will be rearranged between us and the Portman Estate, it is unlikely that this facility will reach its full term. The other facility expiring in 2022 is the £75m RCF with Wells Fargo. Together with HSBC, NatWest and Barclays, Wells Fargo have been an important relationship bank for many years and we anticipate extending this facility with them within the next year.

As at 30 June 2020, the weighted average maturity of our borrowings was 6.8 years (December 2019: 7.8 years) and the weighted average interest rate fell to 3.19% on a cash basis and 3.31% on an IFRS basis.

Dividend

Our dividend has remained well covered by EPRA earnings in recent years and we recognise the value to our shareholders of a consistent and sustainable dividend policy. We are also aware of the risks facing our tenant base, the potential impact upon our earnings and the importance of maintaining demonstrable liquidity and a strong financial position. Our rental income will be helped in H2 2020 by 80 Charlotte Street and we have further trading property sales of apartments either exchanged or under offer at Asta House. Taking all these things into account, we have raised the 2020 interim dividend by 4.8% to 22.0p per share, all to be paid as a PID on 16 October 2020 to shareholders on the register as at 11 September 2020.

RISK MANAGEMENT AND INTERNAL CONTROLS

We have identified certain principal risks and uncertainties that could prevent the Group from achieving its strategic objectives and have assessed how these risks could best be mitigated through a combination of internal controls, risk management and the purchase of insurance cover. These risks are reviewed and updated on a regular basis and were last formally assessed by the Board in August 2020. The Group's approach to the management and mitigation of risk is included in the 2019 Annual Report.

Since the signing of our 2019 Annual Report, Covid-19 was declared a global pandemic and has caused significant societal and economic disruption. It has impacted on our business and in general our overall risk profile is elevated. As a business, we have taken steps to mitigate the threat and disruption being caused by the virus and have worked proactively with our occupiers to assist them during this time of difficulty. To ensure the Board remained appraised of the latest developments, additional Board meetings were arranged in March and April. There was also an additional Risk Committee meeting in March. The safety and wellbeing of our employees and other key stakeholders has been consistently at the forefront of our efforts.

Due to the Group's strong financial position and its proactive response to the pandemic, the initial risks arising from Covid-19, and the lockdown restrictions, have been carefully managed. This has been confirmed by an internal audit review performed by RSM. 

There is a risk that there could be ongoing 'waves' of infections which could result in further lockdowns in the UK, and/or societal restrictions, which will prolong the adverse impacts of Covid-19 on businesses. Although we have the procedures in place to weather further lockdowns, this would still have a significant impact on our business, our occupiers, and the economic outlook for London. This risk and its potential impact is being monitored by the Board. There have been questions raised regarding the future of office use and its role in business; we have provided further commentary on this risk above under the heading 'The future of office use'.

The principal risks and uncertainties facing the Group for the remainder of the financial year are set out on the following pages with the potential impact and the mitigating actions and controls in place. The Board, Risk Committee and Executive Committee have been actively monitoring the impact of Covid-19 on our business and have subsequently reassessed its impact on our principal risks and uncertainties. An overview of the Board's assessment of this on each principal risk is contained in the tables below. In summary, Covid-19 has had a considerable impact on the materiality of these risks and has resulted in the classification of tenant failure, income decline and the potential cost on our business from the introduction of a capital or land values tax as principal risks.

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. Income decline has become the key financial risk for the Company, as a fall in rental income would lead to lower interest cover under these financial covenants. It would also normally have an adverse impact upon the property valuation.

Operational risks

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

10. Financial instruments - risk management

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

· credit risk;

· market risk; and

· liquidity risk.

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

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

Principal financial instruments

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

General objectives, policies and processes

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

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

Credit risk

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

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

As the Group operates predominantly in central London, it is subject to some geographical 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 2020, the proportion of fixed debt held by the Group was within this range at 78% (31 December 2019: 93%). During both 2020 and 2019, the Group's borrowings at variable rate were denominated in sterling.

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

Liquidity risk

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

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

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

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

Capital disclosures

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

The Group's objectives when maintaining capital are:

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

· 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 2020, the Group's strategy, which was unchanged from 2019, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio, are defined in the list of definitions at the end of this announcement and are derived in note 24.

The Group is also required to ensure that it has sufficient property assets which are not subject to fixed or floating charges or other encumbrances. Most of the Group's debt is unsecured and, accordingly, there was £4.4bn of uncharged property as at 30 June 2020.

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 2019 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

11 August 2020

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

The financial information for the half year to 30 June 2020 and the half year to 30 June 2019 was not 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 2019 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 2019 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 2019 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 30 of the UK Corporate Governance Code 2018, 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.

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 17.3%, the interest cover ratio of 435%, the £502m total of undrawn facilities and cash and the fact that the average maturity of borrowings was 6.8 years at 30 June 2020. They have also considered the impact of the Covid-19 pandemic and lockdown on the Group's business and occupiers.

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 2019, 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.

References to Conceptual Framework in IFRSs (amended);

IAS 1 and IAS 8 (amended) - Definition of Material;

IFRS 3 (amended) - Definition of a Business;

IFRS 16 (amended) - Covid-19-related Rent Concessions.

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 17 - Insurance Contracts;

IAS 1 (amended) - Classification of liabilities as current or non-current

IFRS 10 and IAS 28 (amended) - Sale or Contribution of Assets between an investor and its Associate or Joint Venture.

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

The Group uses the valuation carried out by external valuers as the fair value of its property portfolio. The valuation considers a range of assumptions including future rental income streams, investment yields, anticipated outgoings and maintenance costs, future development expenditure and appropriate discount rates. The external valuers also make reference to market evidence of transaction prices for similar properties. Against the backdrop of the Covid-19 pandemic, the Royal Institution of Chartered Surveyors (RICS) required valuers to add uncertainty clauses to their reports at the balance sheet date, although this has subsequently been relaxed for central London office properties. This was to reflect that less certainty and consequently a higher degree of caution should be attached to the valuation than would normally be the case. The valuers have also considered the impact of rent free periods and rent deferrals on the valuation, as well as the impact of occupiers from sectors deemed highest risk. For example, capital deductions equal to the rent free granted have been made to the valuations, with additional deductions for assumed future rent free periods for retail units, restaurants (both three months) and fitness clubs (six months).

Impairment testing of trade receivables and other financial assets

Trade receivables and accrued rental income recognised in advance of receipt are subject to impairment testing. This accrued rental income arises due to the spreading of rent free and reduced rent periods, capital contributions and contracted rent uplifts in accordance with IFRS 16 Leases.

Impairment calculations have been carried out using the expected credit loss model within IFRS 9. The impact of Covid-19 has given rise to higher estimated probabilities of default for some of our occupiers, so the impairment provisions calculated as at 30 June 2020 are higher than in previous periods. In arriving at our estimates, we have considered the tenants at higher risk, particularly in the retail or hospitality sectors, those in administration or CVA, the top 50 tenants by size and have also considered the remaining balances classified by sector.

Borrowings and derivatives

The fair values of the Group's borrowings and interest rate swaps are provided by an independent third party based on information provided to them by the Group. This includes the terms of each of the financial instruments and data available in the financial markets.

Significant judgments

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

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 five Executive Directors and five 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 Earnings and Net Asset Value metrics. 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 and trading property and comprised 97% office buildings* in central London by value (30 June 2019: 97%; 31 December 2019: 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 2019: 3%; 31 December 2019: 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/outer and City borders), with the remainder in Scotland (Provincial).

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

Gross property income