Derwent London Regulatory News (DLN)

24 February 2022

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

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021

IMPROVING CONFIDENCE, ADDING TO THE PIPELINE

Financial highlights

· Total return of 5.8%, from -1.8% in 2020

· EPRA net tangible assets1 3,959p per share, up 3.9% from 3,812p in December 2020

· Net rental income of £178.2m, up 2.2% from £174.3m

· EPRA earnings of £122.0m, or 108.8p per share, up 9.7% from 99.2p in 2020

· IFRS profit before tax of £252.5m from a loss of £83.0m in 2020

· Full year dividend of 76.50p per share from 74.45p, up 2.8%

· £350m 10-year 1.875% green bond issued in November with strong investor demand

· Interest cover 464%, loan-to-value ratio of 20.8%

· Undrawn facilities and cash of £608m, up from £476m in December 2020

Portfolio highlights

· Total property return of 6.3%, compared to our benchmark index2 of 5.9%

· Portfolio valued at £5.7bn, an underlying rise of 3.5% with development valuations up 9.2%

· True equivalent yield of 4.50%, tightening by 24bp

· 0.2% increase in office ERVs

· Significant portfolio reshaping activity

· £417.5m of property acquisitions

· £405.1m of property disposals £9.7m above December 2020 book value

· 708,000 sq ft under construction - two major schemes completing in H1 2022 and 19-35 Baker Street W1 commenced in H2 2021

· £13.7m of new lettings at +3.6% above December 2020 ERV

· £31.9m of asset management transactions in line with December 2020 ERV

· EPRA vacancy rate fell to 1.6% from 1.8% in December 2020

Sustainability

· Portfolio 99% compliant with 2023 EPC legislation and 61% 2030 compliant including projects

· Detailed EPC upgrade costings received

Outlook

· Our guidance is for 2022 average ERVs on our portfolio to move by 0% to +3%

· Average investment yields on our portfolio expected to remain firm

1 Explanations of how EPRA figures are derived from IFRS are shown in note 25

2 MSCI Central London Offices Quarterly Index

Paul Williams, Chief Executive, commented:

"London is a vibrant and global city that attracts world class talent. We are increasingly hearing from businesses across different sectors demanding modern, adaptable and environmentally responsible space. Our collaborative approach and our distinctively design-led product are well placed in this flight to quality and give us confidence to push ahead with our pipeline."

Webcast and conference call

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

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

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

For further information, please contact:

CHAIRMAN'S STATEMENT

Derwent London is an entrepreneurial business, with an open, collaborative and inclusive approach.

With confidence in the medium term outlook, despite some near-term uncertainty, the Group proceeded with portfolio reshaping and restocking the pipeline. We also progressed on-site and future schemes while maintaining a focus on income. Our financial results demonstrate the progress we have made.

Net property and other income increased to £187.5m for the year ended 31 December 2021 from £183.0m in 2020. This was helped by impairment charges and write-offs against tenant receivables of only £0.8m against £14.2m in 2020. Gross rental income fell 4.3% to £194.2m as we took lease surrenders for new schemes and disposed of several higher yielding low growth properties. EPRA earnings per share increased 9.7% to 108.8p from 99.2p in 2020 and the IFRS profit before tax was £252.5m, more than reversing the £83.0m loss reported in 2020.

Capital values across our £5.7bn portfolio rose by an underlying 3.5% with the main drivers being development surpluses and downward valuation yield shift. This has taken total net assets to £4.4bn with an increase in EPRA net tangible assets (NTA) of 3.9% to 3,959p per share from 3,812p in December 2020.

Recognising its importance to our shareholders, we propose raising the final dividend by 1.05p to 53.5p, in line with our progressive and well covered dividend policy. It will be paid on 1 June 2022 to shareholders on the register of members at 29 April 2022. This takes the full year's dividend to 76.5p, an increase of 2.8% over the prior year.

We have a strong team and a portfolio including many high quality buildings which we believe meet the ever more demanding requirements of occupiers. We have a pipeline of schemes that will deliver modern, adaptable and sustainable space. All of this is supported by a lowly geared balance sheet with substantial capacity to finance growth.

The Group has a long and consistent track record of value creation and effective capital allocation through property cycles. We also have considerable experience in acquiring the right assets in locations with supportive fundamentals. The Group is known for targeting emerging sub-markets gaining early mover advantage, delivering prime space in a supply-constrained market.

The schemes created by the Group over the long term show a clear determination to ensure each is an improvement on the last and to future-proof buildings as far as possible. This may come through the design, the technology or the green credentials. Our investment approach is supported by our in-house property management and asset management teams who focus on creating and strengthening close occupier relationships. Sustainability has been a core element of our activity for many years, incorporated across all elements of the business from our buildings to our finances.

We have close relationships with asset owners, occupiers and local communities. Our track record and long-term collaborative approach has helped us uncover new off-market opportunities such as the recent transactions with Lazari Investments and 230 Blackfriars Road SE1. We have also been selected as preferred bidder for The Moorfields Estate EC1.

The 2021 employee survey again demonstrated a high level of engagement and widespread job satisfaction and, as we come back together after the lockdowns of the last two years, our common focus and culture have been preserved and strengthened.

I wish to thank all the staff at Derwent London for their continuing hard work through 2021. I would also like to congratulate Emily Prideaux on her appointment as an Executive Director in March 2021, and Sanjeev Sharma who joined the Board as Non-Executive Director in October. Simon Fraser retired as Non-Executive Director in October and the Board thanks him for his substantial contribution over nine years. He was replaced as Senior Independent Director by Helen Gordon. In addition, I would like to say thank you on behalf of the Board to David Silverman who has played an integral role in our investment acquisitions and disposals and will be stepping down as an Executive Director and leaving the Group in April 2022.

The board is confident that Derwent London has the right strategy and business model to meet evolving occupier and wider stakeholder requirements and to continue to deliver above average long-term returns for shareholders.

Mark Breuer

Chairman

CEO STATEMENT

The past year was an important one for Derwent London and was our busiest period for portfolio activity for many years.

There was a significant recovery in net asset values, valuations and profitability in 2021. The improvement in occupational and investment markets, backed by rental collection returning to close to pre-pandemic levels, has given us the confidence to progress acquisitions and development plans. Projects include commencement of 19-35 Baker Street W1 and design finalisation following resolution to grant planning consent at Network Building W1. In addition, we are progressing plans for Bush House WC2 plus other smaller projects including Environmental Performance Certificate (EPC) upgrades.

Investment activity has been focused on restocking our development pipeline with future 'super-sites'. These are substantial regeneration schemes where we see potential to at least double the floor area. We have favoured locations benefitting from the twin drivers of strong forecast demand and low availability of high quality space. Based on early appraisals, these have potential for attractive development returns. Several should also appeal to the Life Sciences sector, a market where we have undertaken considerable research. We have sold £405.1m of buildings, for £9.7m above book value, where we expected to see lower returns.

We secured £13.7m of new lettings in 2021 at an average +3.6% above December 2020 ERV, with a further £31.9m of asset management activity in line with ERV. There was a distinct shift of emphasis among our occupiers to taking a more strategic and longer-term approach to their occupational needs.

Return to the office and changing working patterns

Our buildings are getting busier. Hybrid working is here to stay, but our occupiers are planning for peak occupancy as daily utilisation varies through the week. Tenants are increasingly demanding of their space, requiring it to fulfil multiple functions. Offices need to be design-led and amenity-rich, and able to adapt to a more agile workforce. We believe our approach of delivering 'long-life, loose-fit, low carbon' space with enhanced amenity, 'Intelligent Building' infrastructure, and employee wellbeing at its core will exceed these evolving requirements, as we are seeing in DL/78 in W1.

London is a vibrant global city, with world class restaurants, theatres and culture, whose resilience has been underscored by the speed with which activity has returned. We look forward to the opening of the Elizabeth line and capacity returning to the wider transport network.

Sustainability and net zero carbon

In 2021 the Group made good progress towards its net zero carbon ambitions following publication of our pathway in 2020. In the short term, our portfolio emissions will likely increase as office occupation levels continue to rise, but we remain well within our science-based targets.

Our portfolio is 99% compliant with 2023 EPC legislation (EPC 'E' or better). Including projects, 61% of the portfolio is compliant with potential 2030 legislation ('A' or 'B') by ERV. This compares with JLL's estimates for the wider London office market that only 23% is 2030 compliant by floor area. For those buildings with EPC 'C' or below, external consultants have now completed their initial report into capex requirements to uplift EPC ratings to 'B' or above. In line with our previous indications, we expect to invest c.£97m to 2030, prior to any service charge recovery. A proportion is already reflected in our valuations and existing capex plans.

As part of our sustainability agenda, we progressed Company-led initiatives this year as well as participation at COP26 to bring greater focus on the actions required across the industry. Our inaugural Stakeholder Day and net zero carbon occupier survey identified a number of potential collaboration opportunities to reduce our combined impact on the environment, ambitions shared by many of our occupiers. We also successfully issued a Green Bond, raising £350m for 10 years at a 1.875% coupon. This increased our total green debt potential to £650m.

Development projects

We have two large developments and one smaller refurbishment due to complete in H1 2022. At Soho Place W1, the offices are either pre-let or pre-sold with a rent of £17.0m, leaving the retail element still available. We are confident of leasing the retail space given its excellent location and prospects with the opening this year of the Elizabeth line and a recovery in international tourism.

At The Featherstone Building EC1, which has an ERV of £8.6m, there has been a marked increase in enquiries as the latest work from home (WFH) guidance was lifted. Interest has come for a range of size requirements and business sectors and we are in no doubt as to the building's prospects supported by a positive outlook for the Tech Belt.

We have pre-let the entirety of Francis House SW1 to Edelman at a substantial premium to ERV. This follows our letting earlier in the year to Fora at our adjoining recently refurbished 6-8 Greencoat Place SW1, also comfortably above ERV. The combined rent roll of these two buildings is £5.1m.

In Q4 we commenced our latest major development at 19-35 Baker Street W1 which extends to 298,000 sq ft. Completion is expected in 2025. We also progressed plans for our next two projects. At Network Building W1, resolution to grant planning consent was secured for both offices and a Life Sciences scheme. Depending on the outcome of early occupier discussions for each option, a decision will be made shortly on which we take forward. At Bush House WC2, we await the outcome of our planning application for a refurbishment and extension. Together, these two projects have the potential to deliver up to 267,000 sq ft of high quality space.

While the economy is recovering, short and medium-term inflationary pressures are becoming embedded in market expectations. Build cost inflation picked up in the year and we expect this to rise further. At 19-35 Baker Street, the demolition and build contracts have been signed and 97% of capex on the office element is now fixed, within budget.

Derwent London's high quality team

The events of the last two years have provided clear demonstration of the quality of the Derwent London team. Employees across the business responded with energy and commitment to minimise disruption and provide pragmatic and practical solutions to the challenges that arose. Derwent London is an inclusive and respectful employer that welcomes diversity and promotes equality. We were particularly pleased that the Group was awarded National Equality Standard accreditation in 2021, coming in the top 5% of accredited companies.

I am delighted that Mark Breuer, Emily Prideaux and Sanjeev Sharma all joined the board in the year. Helen Gordon was appointed as Senior Independent Director replacing Simon Fraser who retired. I was also pleased to announce three internal promotions to the Executive Committee: Vasiliki Arvaniti, Head of Asset Management; Victoria Steventon, Head of Property Management; and, John Davies, Head of Sustainability.

Finally, I want to thank David Silverman who will step down from the Board and, after almost 20 years of service, will leave the Group in April 2022. David has made a considerable contribution to the Group's success and we wish him well for the future.

Outlook

Our forward ERV guidance has improved through the last 12 months. We estimate our ERVs will grow in the range 0% to +3% in 2022 as an average across our portfolio. As the economic recovery gathers pace, we expect this will translate into sustained future growth. With continuing strong investment demand, we expect investment yields to remain firm.

London is firmly coming back to life. It continues to attract global talent as a leading city where people want to live and work. Our 'long-life, loose-fit, low carbon' approach, combined with the delivery of distinctive next generation developments, puts us in an excellent position to benefit from the emergence of rental growth for the best properties.

Paul Williams

Chief Executive

CENTRAL LONDON OFFICE MARKET

With a strong finish in Q4, both leasing transactions and investment volumes in 2021 more closely resembled long-term averages than in 2020 when Covid-19 pandemic disruption was at its greatest.

Whilst the UK started 2021 in lockdown this was gradually eased as the year progressed. With the success of the UK Government's vaccination programme, restrictions were lifted in July and only temporary and less severe restrictions re-imposed in response to emergence of the Omicron variant in December. Confidence has subsequently rebounded.

According to CBRE, office take-up across central London in 2021 was 9.1m sq ft, up 63% on 2020, 26% below the long-term average (12.3m sq ft). This was well spread across a number of different business sectors: Creative industries (TMT) accounted for 22% with Banking & Finance at 21% and Professional at 20%. As 2021 progressed, the level of active requirements rose and demand began to crystallise. The amount of space under offer at year end nearly doubled from 2.1m sq ft at December 2020 to 3.8m sq ft which is +28% above the long-term average of 3.0m sq ft.

Vacancy rates remain high at 9.3% (December 2020: 7.9%) against the longer-term average of 5.2% but empty space was concentrated in the City core and Docklands which represents 56% of the total. The West End vacancy rate was lower at 5.2% (December 2020: 5.5%; long-term average: 4.2%). In line with recent trends, lower quality tier two space makes up the majority of the vacancy at 74% of the total. Tenant-controlled space accounted for over one-third of the vacancy at the start of 2021, but since May there has been a steady removal of this space from the market, finishing the year at 29%. This suggests that occupiers view their space as increasingly important. Availability of tier one space remains restricted and below trend emphasising a polarisation of the market.

Commitment to speculative developments thinned through the year with several schemes deferred. At December 2020, CBRE estimated that 23.8m sq ft of space would complete between 2022 and 2024 but by December 2021 this had fallen by 11% to 21.3m sq ft. Of this, 11.6m sq ft was under construction of which 4.0m sq ft (34%) was pre-let and a further 9.7m sq ft was proposed. This leaves 7.6m sq ft of speculative space which is below the longer-term trend and less than the level of active demand estimated by JLL at 8.3m sq ft.

Headline prime rental growth for central London was 7.4% in 2021 and typical rent-free incentives reduced from c.27 months on a 10-year term to c.24 months. This market average masks differences by location as well as a divergence between tier one and tier two space. Rents for the former performed more strongly and we anticipate this trend will continue in the future.

There has been much debate about the 'green premium' vs the 'brown discount'. Recent analysis by both Knight Frank and JLL, corroborated by our own experience, suggest a building's leasing potential is increasingly influenced by environmental credentials, such as BREEAM and EPC ratings and importantly wellness and amenity provision. As changes to EPC legislation draw closer, the focus on sustainability is widely expected to increase.

We have outlined our expectations for rental growth in 2022 in the Chief Executive's statement.

London a diverse city with broad appeal to business

London is a truly global city which appeals to a broad range of businesses. Over the last five years, Business Services has accounted for 24% of take-up, Creative Industries 22% and Banking & Finance 20%.

The last few years have seen a number of occupiers eschew traditional sub-markets in the flight to quality and focus on emerging areas such as King's Cross and Paddington which have responded with substantial amounts of new development. These new areas are approaching their natural capacity and the volume of development is consequently reducing. Established areas such as the Tech Belt and emerging areas such as Southbank, which benefit from strong transport links and connectivity but which have not seen the same levels of overall regeneration, are firmly on occupiers' radars.

The pattern of 'foot loose' occupiers being location agnostic has been well documented. Occupiers are predominantly focused on the quality of space and its environmental credentials along with amenity and transport links rather than just location.

Since the EU referendum in June 2016, despite cautious expectations from a range of economic forecasters, London has experienced growth in both its population (+233,000 between 2016 and 2020) and jobs (+177,000 between June 2016 and September 2021). The outlook for employment and economic growth is positive. Oxford Economics and Experian both forecast a strong recovery in economic output and employment for the UK and for London.

A strong London economy with high and growing employment is supportive of the office sector over the longer-term. With constrained availability of high quality space, rental growth forecasts across the major firms of agents rebounded through 2021. Most now expect positive rental growth in 2022 and 2023. With our strategy of providing best in class differentiated buildings we are well placed to capture this.

Agile working & the war for talent

From engagement with our occupiers, it is clear that the office fulfils multiple functions. It is a place to work, collaborate, innovate, interact, produce and mentor. Some of these tasks can be fulfilled remotely but often with less positive outcomes. We have also heard consistently how the office needs to be representative of a business' culture and brand and our occupiers have stated that returning to the office is positive for business.

Global lockdowns have shone the spotlight on agile working but this is not an entirely new trend. Employers have responded by offering employees greater flexibility, in part to aid staff retention and recruitment in the war for talent, as technology has emerged that supports hybrid working.

Prior to the reimposition of WFH guidance at the end of 2021, there were clear signs of a return to the office for an increasing proportion of the workforce. Few businesses had formally mandated employees to return given the associated risks, but office utilisation was on a clear upward trend with the West End busier than the City core, in line with trends seen across our villages. Mid-week office utilisation was noticeably higher than on Mondays or Fridays, demonstrating more agility amongst the workforce. Our experience, in common with findings of market research by the agents, is that occupational decisions are being based on peak occupancy requirements and mid-week utilisation levels.

Within our portfolio we have seen a reconfiguration of spaces with a shift in the ratio away from fixed desks towards more collaboration space and meeting rooms with video-conference facilities. At the same time, occupational densities are being reduced in a reversal of the 'max-packing' trend from recent years. Our own experiences show that, as businesses return to looking to the future, there is a clear recognition of the importance of the role the office plays in bringing people and teams together to enhance communication, mentoring, creativity and importantly productivity.

London Underground usage gathered momentum following the lifting of WFH guidance in July 2021, reaching in excess of 60% of pre-Covid levels in October and November. Since the latest WFH guidance was rescinded in mid-January 2022, travel has begun to recover.

A return to normal service levels on the broader transport network will be crucial in facilitating the return to the office. The additional capacity that will be created with the opening of the Elizabeth line will also help. Provision of 'end of trip' amenity, such as bike facilities and showers, has come more into focus as increasing numbers have switched away from public transport to bicycle commuting.

London an attractive investment market

Investment volumes were weighted towards H2 2021 and in particular Q4 with the completion of several large deals. CBRE estimates £10.0bn of transactions completed in the year, +33% above 2020 although 16% below the long-term average. Investor demand is concentrated on either high quality buildings with long leases let to good covenants or 'value-add' opportunities, including 'build to prime' schemes, with strong competition for these buildings. According to CBRE prime yields compressed 25bp over the year in the City and West End to 3.75% and 3.25% respectively.

London's positive yield gap compared to other global cities, combined with its other attributes, namely a high level of market transparency, strong historic liquidity, long lease lengths and robust legal system, have helped it retain its relative attractiveness to global investors. CBRE estimates there is c.£40bn of potential investment demand targeting London offices which compares to current supply of £3.7bn. Asian investors account for 46% of overall demand, followed by Europeans at 32%, North Americans at 17% and Middle Eastern investors at 5%. UK investors were most active in 2021 accounting for 35% of activity followed by North Americans at 26%, Europeans at 22% and Asians at 14%. As air travel restrictions continue to ease, we expect the level of international investment to rise.

VALUATION

The Group's investment portfolio was valued at £5.7bn on 31 December 2021. There was a valuation surplus of £142.9m for the year, which after accounting adjustments of £9.8m (see note 11), gives a reported surplus of £133.1m. This performance represents an underlying valuation increase of 3.5%, and a reversal of the 3.0% decline seen in 2020. By location, our central London properties, which represent 99% of the portfolio, increased in value by 3.4% with the West End +3.9% and City Borders +2.5%. The balance of the portfolio, our Scottish holdings, was up 9.9%.

Our portfolio's underlying capital growth outperformed the MSCI Quarterly Index for Central London Offices, at 2.5%, but underperformed the wider UK All Property Index which increased by an exceptional 11.5%.

Looking at EPRA metrics, our estimated rental values (ERV) in 2021 fell marginally by 0.2% against a decline of 2.8% in 2020. Our office ERVs were up slightly at 0.2%. Our retail rental values, where our exposure is limited, fell by 5.8% focused in H1.

The investment market remained buoyant, especially for quality buildings and secure income streams, which helped drive the portfolio's valuation yields lower. Accordingly, the true equivalent yield tightened 24 basis points from 4.74% to 4.50% over the year. It is worth noting that the 250 Euston Road NW1 acquisition accounted for 7 basis points of the yield movement. The EPRA initial yield is 3.3% which, after allowing for the expiry of rent frees and contractual uplifts, rises to 4.4% on a 'topped-up' basis.

The total property return for the year was 6.3%, which compares to the MSCI Index of 5.9% for Central London Offices and 16.5% for UK All Property, the latter driven mainly by very strong yield compression and rental growth for industrials and logistics.

We are on site with three major developments, each at different stages of delivery. Soho Place W1 and The Featherstone Building EC1 are nearing completion with delivery scheduled for H1 2022. Following demerger of our properties held with The Portman Estate, we obtained vacant possession of 19-35 Baker Street W1 in September 2021, commenced demolition and have recently signed the main building contract. Completion is scheduled for 2025. Further details on all these projects are set out under 'Development & Refurbishment' below. Combined, they were valued at £577.1m in December 2021 and delivered a 9.2% valuation uplift over the year, after adjusting for capital expenditure. An additional £355m is required to complete these projects. Their combined ERV is £47.1m, of which 36% is pre-let. Excluding these developments, the portfolio valuation increased by 2.9% on an underlying basis.

Portfolio reversion

Our contracted annualised cash rent on 31 December 2021 was £178.4m. This 5.7% decrease in the year was principally due to the loss of income from the disposal of the Johnson Building EC1 and Angel Square EC1 and obtaining vacant possession of 19-35 Baker Street, ahead of redevelopment.

With a portfolio ERV of £293.9m there is £115.5m of potential cash reversion. Within this, £54.6m is contracted through rent-frees, fixed uplifts and indexation. Under IFRS, a large proportion of this contracted income is already recognised within the accounting gross rental income. Our on-site developments and major refurbishments could add £50.0m, of which £17.0m is pre-lettings at Soho Place W1 and £2.9m at Francis House SW1. There is then £7.2m of potential income from several ongoing smaller projects across the portfolio. ERV on space available to occupy is relatively small at £3.8m, reflecting our EPRA vacancy rate of 1.6%, which is down slightly from the 1.8% at the start of the year. With Soho Place and The Featherstone Building being delivered in the next few months, if no further pre-lets are secured the vacancy rate would rise to 5.9% upon their completion. There is then £5.8m of reversion from anticipated rent reviews and expiries. However, this is offset by £5.9m already included within contracted uplifts where there is rental indexation and minimum uplifts on rent reviews to levels above their current ERV.

LEASING, ASSET & PROPERTY MANAGEMENT

Rent collection

Prior to Covid-19, the Group typically collected over 99% of its rent from tenants within two weeks of the quarter date, with negligible bad debts. This pattern changed in early 2020 with the pandemic and subsequent lockdown as we supported those of our occupiers most in need. Staying close to our customers, combined with the subsequent recovery in 2021, helped us deliver a high level of recovery of deferrals agreed in 2020. Through 2021, office collection rates improved and have now returned to pre-Covid levels while retail (only 8% of income) continued to lag. Refer to Appendix 4.

Lettings

Leasing activity in 2021 totalled £13.7m across 50 transactions despite having little space available. Activity, however, picked up following publication by the Government of the 'Roadmap out of lockdown' at the end of Q1. Three deals - to Depop at 20 Farringdon Road EC1, Fora at 6-8 Greencoat Place SW1 and Edelman at Francis House SW1 - accounted for half of new rent secured. On average, new leases were signed at +3.6% above December 2020 ERV. Pre-lettings accounted for £5.8m or 43% by value in six transactions.

Since the start of 2022, a further four leases across 28,300 sq ft have been signed with a rent roll of £1.9m pa at +8.7% above December 2021 ERV.

Letting activity 2021

1 Includes short-term lettings at properties earmarked for redevelopment

Principal lettings in 2021

Asset management

At the start of 2021, 17% of passing rent was subject to break or expiry in the year. In aggregate, 77% of breaks and expiries were retained or re-let in the year. Looking forward, breaks and expiries in 2022 account for 9% of passing rent, already considerably below the 13% at June 2021.

In Q1, renewals and regears were mainly short-term roll overs as occupiers continued to adopt a 'wait and see' approach to their office space. As the year progressed, there was a notable shift towards longer-term solutions. 27 lease renewals and 43 lease regears completed in 2021. The table below provides further details.

Asset management 2021

Excludes transactions on assets subsequently sold or taken back for major redevelopment

Property management

Property management is the main point of contact with our occupiers. 2020 and 2021 were busy years for the team who responded proactively to provide pragmatic and practical solutions for occupiers while also rolling out and maintaining Covid-19 secure protocols across our estate. We have also embraced new technologies to enhance cleaning and air safety. The team has introduced new initiatives to drive customer engagement. As well as encouraging a return to the office, some of these events have helped raise money to support local charities.

We re-tendered major contracts to ensure high and consistent quality and value for our occupiers and to ensure that high standards of customer experience are delivered consistently. Our property managers work closely with our Sustainability team to deliver on our net zero carbon ambitions, for example through co-ordination of plant maintenance.

ACQUISITIONS AND DISPOSALS

Through 2021, a nuanced change was made to the Group's strategy. For the time being we expect to retain more of our larger recent developments where we see good growth. At the same time, we may look to sell some of those buildings where we believe returns will be more limited. Disposal proceeds will be reinvested into new acquisitions and the development programme. Our investment activity through 2021 has been closely aligned to this.

The Group's investment team had a very busy year. We invested £417.5m in the acquisition of eight buildings. The Lazari Baker Street JV and 230 Blackfriars Road are potential future 'super-sites' where we see substantial uplifts in floor area when compared to the existing buildings.

Acquisitions

1 Group 50% share

In addition, the Group was selected as preferred bidder for The Moorfields Estate EC1 in December 2021. The c.400,000 sq ft of buildings, on a 2.5 acre site, has potential for a substantial redevelopment and is considered another future 'super-site'.

Major disposals completed in 2021 realised net proceeds of £396.4m, rising to £405.1m including smaller sales. After year-end, contracts were exchanged for the sale of New River Yard EC1 for net proceeds (after rental top ups) of £66.0m.

Major disposals

1 Sold with vacant possession 2 Includes 16-20 Baker Street, 27-33 Robert Adam Street, 17-39 George Street and 26-27 Castlereagh Street W13 After rental top ups

Restructuring of The Portman Estate Baker Street holdings

At the end of Q3 2021, our Baker Street holdings with The Portman Estate (TPE) was restructured. This was a longstanding 55:45 jointly owned company with TPE which owned properties in Baker Street W1 and the surrounding area. The restructuring involved Derwent London buying in the 45% of shares previously owned by TPE, resulting in the Group taking full ownership of the development site at 19-35 Baker Street and TPE granting a new 129-year headlease over the site. Other properties owned within the company were transferred to TPE and the Group made a balancing payment of £6.2m. Refer to the Finance section for further details. This set of transactions are excluded from the tables above.

DEVELOPMENT & REFURBISHMENT

At the end of 2021 we were on site at three major projects: Soho Place W1, The Featherstone Building EC1 and 19-35 Baker Street W1.

Soho Place is due to complete in H1 2022. The office space at 1 Soho Place was pre-let to Apollo Group and G-Research in 2019. When combined with the forward-sale of 2 & 4 Soho Place, which comprises 18,400 sq ft of offices and a 40,000 sq ft theatre pre-let to Nimax, all of the office space is either pre-let or forward-sold. Scheme profitability has benefitted from the strong performance of the office element. The marketing campaign for the 36,000 sq ft of retail space is due to be launched in April. We are confident in the long-term attractions of this retail location above the Elizabeth line station at the junction of Oxford Street and Charing Cross Road. The ERV of this space stabilised through H2 2021 with CBRE's rental expectation now £3.1m. The development will be net zero carbon and we are targeting a BREEAM 'Outstanding' rating on the commercial element.

The Featherstone Building is due to reach practical completion in H1 2022 with an ERV of £8.6m. The space incorporates many of the features of White Collar Factory EC1, such as concrete core cooling, openable windows and generous floor to ceiling heights as well as high quality amenities. Combined with the location in the heart of the Tech Belt, we remain confident in the prospects for this building. Current enquiries are for a range of different size requirements and we have seen an increase over recent weeks in enquiry levels. The development will also be net zero carbon, while also incorporating our 'Intelligent Building' infrastructure and with WELL 'Enabled' credentials. We are targeting a BREEAM 'Outstanding' rating.

On-site works at 19-35 Baker Street W1 commenced in Q4 2021. This scheme extends to 298,000 sq ft, a 108% uplift on the pre-existing space, the majority of which is offices (218,000 sq ft). Most of the retail is subject to a forward sale agreement with The Portman Estate. The Group has entered an agreement for Native Land to act as our development partner for the private residential, providing funding as well as development and marketing advice in exchange for which they will receive a share of the profits.

The 19-35 Baker Street demolition contract was secured below budget and the main building contract, which was finalised in Q1 2022, was in line with budget. 97% of capex on the office element is now fixed effectively mitigating our exposure to further build cost inflation. Capital expenditure is estimated at £266m and we will use capacity under our green finance facilities to fund eligible expenditure. The development has been designed to be 'long-life, loose-fit' with 3.2m floor to ceiling heights, integrated 'Intelligent Building' infrastructure, double height lobby, roof terraces and generous public realm. The building will be net zero carbon with a target of BREEAM 'Outstanding', NABERS 4 Star (our first NABERS UK certified scheme) and WELL 'Enabled' credentials on the office element. Completion is due in 2025.

We completed our 32,400 sq ft refurbishment at 6-8 Greencoat Place SW1 in June 2021 which was effectively pre-let to Fora. In Q4 2021, we pre-let the whole of our on-site refurbishment at Francis House SW1 (38,200 sq ft) to Edelman. Both these transactions were at premiums to ERV.

In 2021, the Group secured a dual planning consent for Network Building W1: offices (137,000 sq ft) and lab-enabled Life Sciences (112,000 sq ft). Both benefit from ground floor retail. On a speculative basis, we would expect to deliver the office scheme but we have had an early approach from a life sciences operator. On-site works are expected to commence in H2 2022 with capex for either option of c.£100m.

At Bush House WC2, a planning application was submitted in 2021 for a c.26,000 sq ft extension to the current building which would increase the overall floor area from 103,700 sq ft to c.130,000 sq ft. On-site works are expected to commence later this year on either the larger scheme, subject to planning, or refurbishment of the existing building.

Beyond the near-term pipeline, a further 1.7m sq ft, or 31% of the portfolio, has development potential.

FINANCE REVIEW

Introduction

The past year has seen a return towards more normal business conditions punctuated by periods of elevated uncertainty when levels of Covid-19 infection increased. With lockdowns having eased and the UK's very successful vaccination programme providing some protection from the worst impacts of 2021's Covid-19 variants, activity across most of our stakeholder groups has gradually recovered. This is evidenced by many economic indicators including GDP growth, employment and investment. Our own experiences have borne this out with office rental collections now almost at pre-Covid levels and most of our occupiers planning further ahead once more. We have responded with a substantial investment programme in new future projects and have reshaped the business more than in any year since the LMS merger in 2007.

Challenges remain with businesses facing increased compliance requirements and staff shortages while also tackling the climate change and biodiversity emergencies. We take these issues very seriously but also see them as opportunities to differentiate our product and business while becoming ever more customer focused. Cost inflation is now also being widely felt, though views differ on how long it will last. However, the economy is expected to grow and many of London's businesses are actively recruiting and expressing greater confidence in the future than for some time.

Financial overview

As noted in last year's report and with a subtle change in emphasis announced during 2021, we have continued to rebalance the portfolio. We have made disposals where we see more challenging future returns and replaced them with some new acquisitions to provide future projects and 'super-sites' for the next decade or so. This reshaping is not finished and we hope to secure further value-add opportunities in the future which may see balance sheet gearing rise a little higher. I have previously noted our shift in focus, with future value creation a higher current priority than income growth; this may provide some short-term impact on earnings until we are able to replace all the income lost from recent disposals. However, we now anticipate income reversion increasing as meaningful rental growth comes through for the strongest office product.

Our asset and property managers continue to engage with our occupiers to extend leases, remove breaks and minimise voids. With relatively strong property revaluations and much lower impairment provisions booked in 2021 than in 2020, this has helped 2021 earnings rise significantly with IFRS earnings up 294.33p to 224.99p per share and EPRA earnings per share up 9.7% to 108.8p. I cannot recall a more active year for our development team either and all this activity helped the Group produce a total return of 5.8%.

Turning to liquidity, as expected the Group's rental collections bounced back well in 2021 but we also executed some very successful treasury transactions, notably our new £350m 1.875% 10-year unsecured green bond issue in November. This is further evidence of our commitment across the business to a net zero carbon future.

Return to growth

The portfolio showed a return to revaluation growth in 2021. This came from downward yield shift for well let offices together with development profits from recent schemes and modest ERV growth for the best properties. With IFRS earnings comfortably exceeding dividends paid, the closing EPRA net tangible assets (NTA) per share was 3,959p, up 3.9% from December 2020. Similarly, IFRS equity shareholders' funds increased over the year by 4.2% to £4.44bn.

Derwent London continues to focus on property returns, recurring earnings, sustained dividend growth and modest leverage as well as our Net Zero Carbon Pathway and a number of other ESG and stakeholder-focused metrics. However, we believe that total return (ie dividends paid plus EPRA Net Tangible Assets growth per share) is the best single measure of our financial performance. After adding back the dividends paid, the Group's total return (see note 27) recovered to 5.8% in 2021 after the 1.8% decline seen in 2020.

Property portfolio

Our property portfolio was externally valued at £5.6bn (excluding the new joint venture) as at 31 December 2021, allocated across the balance sheet as follows:

The year was marked by transactions with The Portman Estate (TPE) and Lazari Investments Ltd (Lazari) which have helped unlock two different and large-scale development opportunities in Baker Street W1. Further opportunities for future growth have also come from acquisitions announced subsequently in 2021 but their impact will be felt more in the medium term.

Firstly, we acquired TPE's 45% £53.4m non-controlling interest in Portman Investments Baker Street Ltd (PIBS) on 30 September 2021. PIBS was a longstanding 55%/45% joint company holding properties in two main blocks adjoining Baker Street and George Street. Because it was majority owned and controlled by the Derwent London plc group, it was consolidated within our accounts for many years subject to a non-controlling interest. As part of this overall transaction, properties in George Street, Baker Street, Robert Adam Street and Castlereagh Street W1 totalling £45.2m were disposed of to TPE. The last part of the transaction was to surrender the existing headleases to TPE with a new 129 year headlease being granted by TPE across the 19-35 Baker Street site. This surrender and regrant of the headleases has been treated as a £100.7m disposal and subsequent acquisition though no cash passed between the parties on this element as the transactions netted off; the net cash that passed from Derwent to TPE on completion of the various steps outlined here was £6.2m. The result is that the Group now has a long leasehold interest in the newly geared development site at 19-35 Baker Street where work is underway to demolish the old buildings.

The other major transaction was the acquisition of two buildings from Lazari Investments in October 2021 and the formation of a 50/50 joint venture. The buildings acquired were 250 Euston Road NW1 for £190.3m and 171-174 Tottenham Court Road W1 for £24.3m, both inclusive of costs. The joint venture was formed in October as a Limited Partnership; each partner has an effective 50% share in a deadlocked structure and our 50% interest is therefore held within Investments (note 13) rather than being included within the Property portfolio (note 11). The joint venture holds three leasehold properties in Baker Street W1 which are currently income producing but where the intention is to work up a major new scheme subject to planning, site assembly and regearing of the headlease. The Group's share of the properties acquired cost £64.0m but was subsequently revalued at £50.0m as at 31 December 2021 giving a JV revaluation deficit for the year of £14.0m. It is expected that the valuation should rise in due course upon a successful planning and headlease gearing outcome.

In addition to the transactions above, other property acquisitions during the year included £23.8m for the long leasehold interest at Holford Works WC1 and £14.5m for the short leasehold interest at Bush House. Altogether, acquisitions totalled £353.6m. Capital expenditure in 2021 increased to £166.1m plus £12.0m of capitalised interest bringing total additions to £531.7m in the year. Disposals included the Johnson Building EC1, which was disclosed as an 'asset held for sale' at the start of 2021, and Angel Square EC1, which completed in August 2021. The properties within 'non-current assets held for sale' at 31 December 2021 were New River Yard and 2 & 4 Soho Place W1, with carrying values of £63.7m and £37.5m, respectively. New River Yard exchanged in January 2022 with completion expected in Q2 2022 and contracts for the sale of 2 & 4 Soho Place have been exchanged with completion expected later in 2022.

The trading property held at 31 December 2021 included the last remaining residential apartment at Asta House W1. This was subsequently sold post the year-end and brings to an end our development of these units connected with the 80 Charlotte Street scheme. The other item in trading stock was Welby House SW1 which was written down by £1.4m in 2021.

The overall wholly-owned property portfolio valuation performed much better than in 2020 and gave rise to a total revaluation surplus for the year of £130.8m after accounting adjustments, of which £3.7m related to our owner-occupied head office at Savile Row. The latter figure is shown in the Group Statement of Comprehensive Income rather than the Income Statement.

The balance of unamortised letting and legal fees plus the accrued income from the 'straight-lining' of rental income under IFRS 16 to spread the effect of incentives and fixed uplifts over the lease terms has increased to £183.4m (2020: £166.0m). This balance rises as income is recognized through incentive periods and falls gradually once the cash flows stabilize. The grossing up of headlease liabilities increased the carrying values of the leasehold properties by £70.4m (2020: £66.5m) but there is an equal and opposite liability within 'net debt' (note 18) and the profit share payable to TfL on the Soho Place scheme of £14.8m makes up the remaining balance.

Rent collection and impairment of receivables

One of the clearest barometers of the Covid-19 period for the real estate sector has been the impact on rent collection rates. This was very noticeable in the early lockdown days of H1 2020, particularly for retail and hospitality tenants or for those in the travel and entertainment businesses, but had already started to recover significantly in H2 2020. It is good to report that rent collection rates have continued to move back towards pre-Covid levels for our office portfolio through 2021 and into 2022. For the December 2021 quarter day rents, we have now collected 98% of office rents and 97% of overall rents, including our share of the new joint venture. The retail and hospitality sectors continue to lag but are showing much stronger payment performances than in 2020 and occupiers are now generally not asking for concessions beyond some requests for monthly rental payments.

1 Principally monthly receipts

Impairment reviews using the expected credit-loss model in accordance with IFRS 9 have continued in 2021 against trade receivables as well as amounts due under the spreading of lease incentives. These have been carried out for each of our 50 largest tenants and for others where we believe the risk is elevated, with the remaining balances considered according to their sector. Substantial impairment charges and write-offs totalling £14.2m were incurred against receivable balances in 2020. In 2021, these amounts have reduced considerably to £0.8m, this total amount including £2.4m of charges reversed from 2020. This pattern is due to an improved assessment of the risks as the financial health of tenants has improved as well as lower outstanding balances. For example, net trade receivables were back to normal year-end levels at £6.9m as at 31 December 2021, 75% lower than the £27.5m a year earlier.

Property income and earnings

Net property and other income increased to £187.5m for the year ended 31 December 2021 from £183.0m in 2020. However, there are several different themes underlying this overall increase, set out in note 5 and explained briefly below.

Gross property and other income fell to £240.2m for the year to 31 December 2021 from £268.6m in the prior year, the main reason for this being significantly lower sales of trading properties at Asta House. Most of the apartments were disposed of in 2020, hence the reduction in disposal proceeds from £32.3m in 2020 to £6.7m in 2021. The next apartments that we will undertake are those at our 19-35 Baker Street scheme where the main building contract will commence shortly. These are due to complete in 2025 so trading property disposal proceeds are expected to be very low for the next few years. In addition, gross rental income fell back a little in 2021 to £194.2m from £202.9m in 2020. This was mainly the result of property disposals where the income yields were relatively higher and acquisitions where they were lower. Gross rents have also been impacted by the 'softer' letting and lease extension transactions undertaken through 2020 and early 2021 when the pandemic was affecting occupier sentiment. In particular, we undertook a number of transactions to extend leases at passing rental levels while offering incentives that took the net effective rents a little lower than previously. Combined with a small increase in the average vacancy rate, this also explains why EPRA like-for-like gross rental income has declined over the year. Surrender premiums and other property income increased to £5.6m in 2021 from £1.8m in 2020, helping offset some of the lower gross rents. Other factors were service charge income rising to £30.2m in 2021 against £28.1m in 2020 and other income of £3.5m, the same as in 2020. Together, these movements account for the reduction in gross property and other income referred to above.

However, as in 2020, it is net property income that shows the full impact of the Covid-19 pandemic on our business. As noted above, with much stronger rent collection and occupation levels among most of our occupiers, impairment charges and bad debts fell to £0.8m in 2021, a significant improvement from the £10.1m booked in 2020. Irrecoverable service charges also fell from £6.9m in 2020 to £3.4m in 2021 as we did not repeat the £4.1m service charge 'holiday' that we allowed tenants in 2020. Other property costs were broadly unchanged at £11.8m against £11.6m in 2020. As a result, net rental income increased to £178.2m in 2021, a 2.2% increase over the year.

Lower profits from the Asta House apartment 'trading' sales of £0.7m in 2021 against £5.2m in 2020 were largely offset by higher surrender premiums recognised. As a result, net property and other income also saw a rise of 2.5% to £187.5m from £183.0m in 2020.

Administrative expenses were 1.9% lower than in 2020 at £37.1m, with increased headcount and staff salaries/bonus offset by lower Directors' remuneration. Cost pressure is being seen across the business and professional salaries are rising at a rate above general inflation. This is impacting our own staff cost but also those of the many professional advisers, consultants and contractors that work with us. As before, we do not capitalise any of our overhead.

Lower impairment and administrative expenses have seen our EPRA cost ratio move back down to a more normal level compared to the 'spike' in 2020. Including direct vacancy costs, it fell to 24.3% from 30.5% in 2020.

The investment portfolio revaluation surplus after accounting adjustments for the straight-lining of incentives, deferred legal/letting fees and the grossing up of headlease rentals was £130.8m for the year compared with a deficit of £196.1m in 2020. The profit on disposal, relating mainly to Angel Square which completed in August 2021, was £10.4m (2020: £1.7m).

Net finance costs were £28.1m in 2021 after capitalised interest of £12.0m, a decrease of £2.0m over the net charge of £30.1m in 2020. With slightly higher interest rates across the swap curve, the fair value of forward-start swaps moved in our favour by £4.8m, or £2.9m after netting off derivative termination costs.

When the new joint venture transaction with Lazari Investments in relation to the Baker Street properties was announced, we anticipated a revaluation deficit for the first accounting period. The Group's share of that was £10.2m and, after profit from operations of £0.3m, the net result for the period attributable to the Group was a loss of £9.9m. After allowing for acquisition costs of £4.0m, the total IFRS loss attributable to our share of the joint venture was £13.9m.

The Group's resulting IFRS profit before tax for the year was £252.5m after the loss before tax of £83.0m in 2020 and IFRS earnings per share were 224.99p against a loss of 69.34p in the prior year.

A table providing a reconciliation of the IFRS results to EPRA earnings per share is included in note 25.

EPRA like-for-like rental income

EPRA like-for-like gross rental income was down by 3.9% over the year, due mainly to our decision to extend leases through the pandemic in 2020 and early 2021 with incentives higher than usual and slightly increased average vacancy levels. However, EPRA like-for-like net rental income was up by 2.7% over the year, benefitting from the lower impairment charges. Likewise, EPRA net property income, which includes surrender premiums, was up by 5.9% on a like-for-like basis.

Internal controls, assurance and the regulatory environment

We have recently seen a widespread increase in stakeholder focus on assurance and internal controls, linked partly to the BEIS review. Internal audits over the past two years have already had a beneficial impact on our control environment and, while no financial loss or reputational damage has been noted from this work, we recognise that the evidencing and documentation of robust controls are of increasing interest to our stakeholders and to regulators more widely.

We provided feedback in relation to the BEIS review and await the final conclusions and recommendations of their report with interest. In parallel, we have also been working on a draft audit and assurance policy which tackles our assurance approach for those limited parts of the business which are not yet subject to external assurance. Our principal third party checks include the annual statutory audit, internal audit procedures carried out throughout the year, service charge audits, a twice-yearly external valuation plus the assurance work carried out on our ESG data and procedures, health and safety reports and green finance. We recognise the importance of high-quality reporting that stands up to scrutiny, both from within the business through robust internal control mechanisms and also from third-party verification. This work is ongoing and is expected to escalate.

Taxation

The corporation tax charge for the year ended 31 December 2021 was £0.5m. Most of our portfolio is within the REIT regime but this charge relates to the Portman Estate non-controlling interest held outside the REIT up until it was acquired by us at the end of Q3 as well as income from property trading operations.

The movement in deferred tax for the year was a credit of £0.8m (2020: £0.7m credit).

A £1.8m credit was taken through the income statement mainly due to the reversal of the deferred tax liability once the Portman Estate's 45% interest in the jointly-owned company was acquired, bringing the asset fully within the REIT regime. In addition, £0.7m was credited through equity in relation to future tax deductions for equity-settled share-based payments, £0.4m was charged in respect of future defined benefit pension liabilities, and £1.3m was charged in relation to the owner-occupied property at Savile Row.

As well as other taxation paid during the year, in accordance with our status as a REIT, £8.6m of tax was paid to HMRC relating to tax withheld from shareholders on property income distributions (PIDs).

Derwent London's principles of good governance extend to a responsible approach to tax. Our statement of tax principles is available on our website www.derwentlondon.com/investors/governance/tax-principles and is approved by the Board in line with the Group's long-term values, culture and strategy.

Borrowings, net debt and cash flow

In last year's report, I noted that our low leverage meant that we would be comfortable adding further debt to our capital structure if the right acquisition opportunities were identified. In 2021, those opportunities crystallised in the form of acquisitions totalling £251.8m plus £53.4m arising on the acquisition of The Portman Estate's 45% interest in PIBS. Because the latter was already consolidated within the Group accounts and did not result in a change of control, it is required by IAS 7 to be shown in 'financing' activities rather than 'investing' activities. In addition, we spent £172.1m on capital expenditure including capitalised interest and incurred a further £1.6m on trading stock additions. The latter arises when we invest in properties where the intention upon completion is to sell rather than hold. Altogether, this meant that £478.9m was spent on property acquisitions and development expenditure, compared with £219.6m in 2020.

This cash outflow was offset by £297.3m of property disposal proceeds. As a result, Group borrowings increased by £216.2m to £1.25bn at 31 December 2021. This is the highest level the Group has seen but it remains relatively modest, equivalent to a loan-to-value (LTV) ratio of 20.8% against 18.4% a year earlier. Moreover, the level of headroom under debt facilities has increased after the financing activities noted below; as at 31 December 2021, available cash and undrawn facilities totalled £608m compared with £476m at 31 December 2020.

Following correspondence during Q4 2021 with the Corporate Reporting Review Team of the Financial Reporting Council, we have agreed to reclassify the cash flows relating to the investment in, and disposal of, trading properties within the Group Cash Flow Statement. Accordingly we have re-presented the Statement for the year ended 31 December 2020 to reclassify £31.7m of cash receipts and £1.2m of expenditure on trading properties from 'investing activities' to 'operating activities'. This has the effect of increasing the net cash inflow from operations in 2020 from £85.4m to £115.9m with a corresponding increase in the net cash outflow in investing activities from £62.0m to £92.5m. There is no net impact upon the cash flow statement overall and there is no impact on any balance sheet or income statement figures.

As reported last year, net cash from operations was adversely impacted in 2020 from the immediate effects of the pandemic. Our response at the time was to agree cash deferrals and other forms of tenant support that reduced cash rental receipts in 2020. Almost all of that deferred rent has subsequently been collected in 2021 such that the rents received in 2021 were £25.1m higher than 2020 at £187.0m. Net cash from operating activities further increased in 2021 to £125.7m from the restated £115.9m in 2020. Note that the cash flow from operations may be affected in the next few years by the build-up of trading stock at our 19-35 Baker Street development with both residential and some retail components of the scheme earmarked for onward sale.

The lower levels of impairment in 2021 have helped interest cover recover to 464% for the year compared to 446% in 2020 and 462% in the pre-Covid 2019. Our debt covenant remains at 145%.

Debt and financing

The Group had another year of active and successful refinancing in 2021. Both of the unsecured revolving credit facilities (RCFs) totalling £550m were extended for a year to fresh five year terms, evidence of the continuing excellent relationships we have with our four longstanding and valued lending banks. They have provided further support and advice through the year and remain key stakeholders in our business.

We documented the second and final one-year extension to the £450m RCF provided by HSBC, NatWest and Barclays, taking the maturity out to October 2026. This facility incorporates a £300m 'green' tranche and details of the qualifying projects, expenditure incurred and amounts drawn are shown below. As before, these disclosures have been subject to a 'reasonable' level of assurance by Deloitte.

We also documented our first one-year extension for the £100m RCF provided by Wells Fargo taking its term out to November 2026.

In Q4, both the RCFs and their associated interest rate swaps were transitioned from a LIBOR to a SONIA basis. These two forward-start swaps totalling £115m have commencement dates in January 2022 and £1.9m was paid in 2021 to defer their effective starting dates. Rates have moved in our favour during the year such that the mark-to-market fair value on these swaps improved by £4.8m.

In advance of the unwinding of the 55%/45% joint investment with the Portman Estate, the £28m secured loan provided by HSBC was repaid and cancelled. As noted earlier, the main Baker Street island site under development is now wholly-owned and subject to a new headlease. Development expenditure is being funded from existing Group revolving debt facilities, including the green tranche of our £450m RCF.

The main financing activity in 2021 was a debut green bond. This was very well received and raised just under £350m at 1.875% for 10 years to November 2031. The bonds were rated 'A' by Fitch and will be utilised in accordance with our Green Finance Framework, updated as required to deal with the green bonds as well as the existing green RCF tranche.

As a result of this financing activity, the Group's weighted average interest rate fell by 20bp over the year to 3.14% on a cash basis and 3.27% on an IFRS basis which adjusts for the convertible bonds. In addition, the weighted average maturity of our borrowings increased to 7.2 years at 31 December 2021 compared to 6.8 years at 31 December 2020.

Reporting under the Green Finance Framework

Derwent London's Green Finance Framework (the Framework) has been updated again this year as a result of the green bond issuance in November 2021. The Framework has been prepared in line with the LMA Green Loan Principles and ICMA Green Bond Principles guidance document, has been externally reviewed and a second party opinion has been obtained. The latest Framework is available on our website at www.derwentlondon.com.

In accordance with the reporting requirements set out in the Framework, we are disclosing the Eligible Green Projects (EGPs) that have benefited from the green funding element of our £450m RCF and £350m green bonds 2031 (together the Green Financing Transactions (GFTs)) and the allocation of drawn funds to each project.

The projects benefiting from the GFTs are as follows:

The 19-35 Baker Street project includes part new development and part refurbishment. The project will be assessed under the BREEAM, LEED and Home Quality Mark standards where applicable. Sections of this project do not qualify as eligible expenditure under the Framework, relating mainly to the retail and refurbished residential elements, and these have been excluded from the qualifying green expenditure.

Qualifying 'green' expenditure

The qualifying expenditure as at 31 December 2021 for each project is set out in the table below. This includes an element of 'look back' capital expenditure on live projects which had already been incurred as at the original refinancing date in October 2019. Soho Place and The Featherstone Building both commenced on site in 2019 and are due to reach practical completion in H1 2022.

The 19-35 Baker Street scheme commenced on site in October 2021. Costs incurred on the eligible sections of this development prior to October 2021 have been included in the 'look-back' spend for this project as they occurred prior to the project being formally elected.

Cumulative spend on each EGP as at the reporting date

The cumulative qualifying expenditure on EGPs was £562.8m, with £116.6m of this being incurred in 2021 (excluding expenditure incurred on 19-35 Baker Street prior to October).

The net proceeds of the Bonds were initially used to repay amounts drawn under the Group's revolving credit facilities, including the £300m green tranche, thereby refinancing the EGPs in line with our Green Finance Framework.

The drawn borrowings from GFTs as at 31 December 2021 were £360m, which included £10m from the green tranche of the RCF and the £350m Green Bonds. Therefore, there was £290m of headroom within the £300m green tranche of the Group's £450m revolving credit facility as at 31 December 2021, of which £203m is available green headroom.

A requirement under the Framework and the facility agreement is for there to be an excess of qualifying spend on EGPs over the amount of drawn borrowings from all GFTs which, as shown above, has been met.

More information can be found in the Responsibility Report 2021.

Dividend

We continue to operate a progressive and sustainable dividend policy. After considering our pension funding obligations and other stakeholder requirements, the board is recommending a 1.05p per share or 2.0% increase in the final dividend to 53.5p. This will be paid in June 2022 with 35.5p as a PID and the balance of 18.0p as a conventional dividend. We will not be offering a scrip dividend alternative.

This takes the total dividend for 2021 to 76.5p, 2.8% higher than 2020. Dividends declared in relation to 2021 earnings were 1.42 times covered by EPRA earnings and 2.94 times covered by IFRS earnings.

PRINCIPAL RISKS AND UNCERTAINTIES

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 February 2022. The Board has confirmed that its risk appetite and key risk indicators remain appropriate.

During the year under review, Derwent London responded to the Covid-19 pandemic through proactive risk identification and mitigation, and early and continual engagement with our stakeholders. Our strong financial position and stakeholder-focused approach has helped us to weather the uncertainty.

In the second half of 2021, as the Government completed its roadmap to ease lockdown restrictions, London's business confidence and the wider economy started to rebound. Individuals and businesses are starting to adapt to 'living with Covid-19' with assistance from the vaccination and booster programmes.

Arising from the upturn in the economy, the new challenges facing the Group and the wider economy are, material and labour shortages and inflation. Overall, our risk profile remains elevated but is expected to slowly stabilise to pre-Covid levels during 2022.

Demand for office buildings remains polarised. Well-designed, energy efficient, amenity rich, modern buildings with adaptable floor plans and good floor-to-ceiling heights are proving more desirable and easier to lease than older, less attractive buildings which may require refurbishment. Without additional capital expenditure to improve energy efficiency, our ability to lease certain properties in our portfolio could be impacted.

The principal risks and uncertainties facing the Group in 2022 are set out on the following pages with the potential impact and the mitigating actions and controls in place. The Group's approach to the management and mitigation of risk is included in the 2021 Report & Accounts.

Strategic risks

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

Financial risks

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

Operational risks

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

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

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous years. The Group's loan-to-value ratio has increased to 20.8% as at 31 December 2021 but remains modest.

Principal financial instruments

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

General objectives, policies and processes

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

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

Credit risk

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

The impact of Covid-19 has given rise to higher estimated probabilities of default for some of the Group's occupiers though the estimated risk is considered lower than in 2020. Impairment calculations have been carried out on trade receivables and accrued income arising as a result of the spreading of lease incentives using the forward-looking, simplified approach to the expected credit loss model within IFRS 9. In addition, the Credit Committee has reviewed its register of tenants at higher risk, particularly in the retail or hospitality sectors, those in administration or CVA and the top 69 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).

The Group monitors its interest rate exposure on at least a quarterly basis. Sensitivity analysis performed to ascertain the impact on profit or loss and net assets of a 50 basis point shift in interest rates would result in an increase of £0.1m (2020: £0.8m) or a decrease of £0.1m (2020: £0.7m).

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 31 December 2021, the proportion of fixed debt held by the Group was above this range at 99% (2020: 85%) following the green bond issue in November 2021 which has a fixed interest rate. It initially used to repay amounts drawn under the Group's revolving credit facilities, which have a floating interest rate. During both 2021 and 2020, the Group's borrowings at variable rate were denominated in sterling.

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

Liquidity risk

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

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

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

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

Capital disclosures

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

The Group's objectives when maintaining capital are:

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

The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may vary the amount of dividends paid to shareholders subject to the rules imposed by its REIT status. It may also seek to redeem bonds, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of NAV gearing and loan-to-value ratio. During 2021, the Group's strategy, which was unchanged from 2020, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the net interest cover ratio, are defined in the list of definitions at the end of this announcement and are derived in note 26.

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 £4.8bn (2020: £4.3bn) of uncharged property as at 31 December 2021.

Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and the Company financial statements in accordance with UK-adopted international accounting standards.

Under Company law, Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing the financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· state whether applicable UK-adopted international accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

· make judgements and accounting estimates that are reasonable and prudent; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The Directors are responsible for the maintenance and integrity of the Company's website. 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

24 February 2022

GROUP INCOME STATEMENT

1 Net property and other income in 2021 includes write-off/impairment of receivables of £0.8m (2020: £10.1m plus a service charge waiver of £4.1m). See note 3 for additional information.

GROUP STATEMENT OF COMPREHENSIVE INCOME

GROUP BALANCE SHEET

GROUP STATEMENT OF CHANGES IN EQUITY