Derwent London Regulatory News (DLN)

28 February 2023

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

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

WELL POSITIONED IN THE CONTINUING FLIGHT TO QUALITY

Paul Williams, Chief Executive of Derwent London, said:

"The £14.7m of lettings we have announced today further demonstrate the depth of demand for our distinctively designed, sustainable offices and we anticipate rental growth accelerating for the best buildings over the medium-term. We have an opportunity-rich pipeline, underpinned by our high quality core portfolio. Our balance sheet remains strong helped by another year of active capital recycling."

Lettings activity

· 2022 lettings of £9.8m, 13.0% above December 2021 ERV

· 2023 lettings of £14.7m year to date, including:

o  PIMCO - 106,100 sq ft pre-let at 25 Baker Street W1, at rent of £11.0m on a 15-year lease (no breaks)

o  Buro Happold - 31,100 sq ft let at The Featherstone Building EC1, at rent of £2.3m on a 15-year lease with a break at 10

Financial highlights

· EPRA net tangible assets1 3,632p per share, down 8.3% from 3,959p at 31 December 2021

· Net rental income of £188.5m, up 6.0% from £177.9m (restated)

· IFRS loss before tax of £279.5m from a profit of £252.5m in 2021

· EPRA earnings £119.7m or 106.6p per share, down 1.8% from 108.5p (restated)

· Full year dividend of 78.5p, up 2.6% from 76.5p

· Total return -6.3% from 5.8% in 2021

· Interest cover of 423%, EPRA loan-to-value ratio of 23.9%

· Net debt of £1,257.2m, broadly unchanged from £1,251.5m

· Undrawn facilities and cash of £577m2

Portfolio highlights

· Portfolio valued at £5.36bn, an underlying decline of 6.8% with development valuations up 4.8%

· True equivalent yield of 4.88% compared to 4.50% at December 2021

· Portfolio ERV growth of 1.3%

· Total property return of -3.4% outperforming our benchmark3 at -8.0%

· £133.0m of property acquisitions and £121.8m4 of capital expenditure

· £206.4m5 of disposals, £25.6m above December 2021 book value; further £53.6m sold in 2023

· Development pipeline

o  Three schemes completed in 2022, totalling 450,500 sq ft

o  Two major projects on-site, totalling 435,000 sq ft, due for completion in 2025

· £29.6m of asset management transactions, 5.3% above December 2021 ERV

· EPRA vacancy increased to 6.4% from 1.6% in December 2021; reduces to 5.0% for 2023 lettings to date

Sustainability

· Fully compliant with 2023 EPC legislation; 65.3% compliant with expected 2030 requirements

· Energy intensity reduced 4% to 123 kWh/sqm, ahead of target for third consecutive year

Outlook

· Our guidance is for average ERVs across our portfolio to increase by 0% to +3%

· Upward yield pressure easing; yields for our portfolio to be more resilient than wider London office market

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

2 Excludes restricted cash

3 MSCI Central London Offices Quarterly Index

4 Including capitalised interest

5 Disposals exclude the sale of trading property

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:45 GMT today. The webcast can be

accessed via www.derwentlondon.com

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

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

For further information, please contact:

CHAIRMAN'S STATEMENT

Derwent London aims to add value to its portfolio through a combination of major projects and refurbishment schemes, while recycling capital out of assets where we see lower forward returns. We are committed to delivering high quality and sustainable offices through the economic cycle.

Global events in 2022 caused a marked increase in uncertainty. However, we have seen confidence return to the market in recent months as the economic outlook has improved.

Following the decision in 2021 to retain our larger modern developments for longer and to dispose of non-core properties, the business made good progress against this strategic objective and has seen relative outperformance against its property benchmarks. This, together with our objective of operating with low leverage, gives us firepower for further development and future investment opportunities.

Estimated rental values across our portfolio rose by 1.3% over 2022 but the rapid outward movement in property yields seen in the second half took our portfolio fair value to £5.36bn after a revaluation deficit for the year of £430.9m, including our share of joint ventures. This was a reversal from the £73.0m revaluation surplus seen at the half year and took the Group's EPRA net tangible asset (NTA) value to 3,632p at 31 December 2022. This equates to an 8.3% decrease over the year from 3,959p in December 2021.

Gross rental income rose 6.0% to £207.0m for the year. EPRA earnings were marginally lower than 2021 at 106.6p per share (2021 restated: 108.5p) but, after deducting premiums received in both years, underlying EPRA earnings were slightly up year on year. 

We propose raising the final dividend by 1.0p to 54.5p, in line with our progressive and well covered dividend policy. It will be paid on 2 June 2023 to shareholders on the register of members at 28 April 2023. This takes the full year's dividend to 78.5p, an annual increase of 2.6%. EPRA earnings covered the 2022 interim and final dividends 1.4 times.

In 2022, we refreshed our Vision, Purpose and Values:

· Vision: We craft inspiring and distinctive space where people thrive.

· Purpose: We design and curate long-life, low carbon, intelligent offices that contribute to London's position as a leading global city, while aiming to deliver above average long-term returns for all our stakeholders.

· Values: We build long-term relationships. We lead by design. We act with integrity.

Derwent London is an inclusive employer. Our people remain highly engaged and in our recent employee survey, 91% of respondents said they were 'proud to work for Derwent London'. I would like to thank all the staff at Derwent London for their continued hard work and commitment.

In recognition of the challenges faced in the uncertain economic environment, we made a one-off cost of living payment to eligible employees.

After nine years on the Board, Richard Dakin is stepping down from his position as a Non-Executive Director of the Company and Chair of the Risk Committee. The Board thanks Richard for his significant contribution to the business and wishes him every success in the future. Helen Gordon, who is the Senior Independent Director and a member of the Risk Committee, will become Committee Chair.

CEO STATEMENT

Introduction

At the start of 2022, confidence levels in London were strong. In Q1, occupational and investment markets both recorded high levels of activity. The outlook weakened as the year progressed following the invasion of Ukraine and its economic impact globally, as well as changes in the UK political landscape. In more recent months, the outlook for the UK economy has improved and confidence is recovering.

London is very busy again. The opening of the Elizabeth line has increased capacity across the transport network, contributing to substantially higher footfall around the central stations, benefitting offices, shops and restaurants.

The flight to quality for London offices continues to gather pace. Data from CBRE show a clear divergence in demand for new versus secondhand space as businesses recognise the important role design-led, amenity-rich, low carbon offices play in attracting and retaining talent. The hybrid working model is now established and occupiers are planning for peak occupancy with lower occupational densities.

Letting progress

The 163,000 sq ft of leases signed in 2022, with a combined annual rent of £9.8m, were agreed on average 13.0% above December 2021 ERV. As well as long leases, our letting activity included seven 'Furnished + Flexible' lettings - also at substantial premiums - bringing our total of these smaller units to 27 across 63,600 sq ft.

Activity has accelerated in 2023 with 10 new leases agreed totalling £14.7m of rent, 7.7-% above December 2022 ERV on average. The two key transactions are:

· PIMCO (the investment management company) has pre-let 106,100 sq ft at 25 Baker Street W1 at a rent of £11.0m, well above December 2022 ERV on a 15-year lease with no breaks (commercial element 56% pre-let/sold ahead of completion in H1 2025); and

· Buro Happold (a global engineering consultancy) has leased 31,100 sq ft at The Featherstone Building EC1 at a rent of £2.3m in line with December 2022 ERV on a 15-year lease with a break at year 10.

For further details, refer to the separate RNS announcement we have published this morning.

We are in detailed negotiations with a number of other occupiers across the portfolio.

New leases signed in 2022 had a weighted average unexpired lease term to break (WAULT) of 5.7 years and our 'topped-up' WAULT at year end was 7.2 years. This will increase with post-year end activity and we see good demand for both long and short-term leases. Our tenant retention rate remains high, and 79% of space subject to break or expiry in 2022 was retained or re-let.

Completion of The Featherstone Building EC1, Soho Place W1 and other smaller refurbishments led to an increase in our EPRA vacancy rate to 6.4%, from 1.6% at 31 December 2021. Following lettings in 2023, proforma vacancy would reduce to 5.0%.

Property valuations

Portfolio ERV growth was 1.3% in 2022, in the middle of our guidance range. However, there was a broad range of outcomes. Buildings with a capital value above £1,000 psf saw ERVs up 2.5%, while those below £1,000 psf saw ERVs up 0.3%, the latter often being the raw material for future regeneration.

The portfolio's true equivalent yield increased 38bp in 2022 to 4.88%, a level last seen in 2014. Yields moved down 4bp in H1 and up 42bp in H2. Our portfolio outperformed the market with a total property return of -3.4% compared to the MSCI Central London Office index down 8.0%, endorsing our strategy of keeping our recently completed high quality buildings for longer.

The outward yield shift resulted in underlying values reducing 6.8% in the year and a revaluation deficit of £430.9m (including share of joint ventures).

Market overview

London office investment volumes totalled £11.2bn, 12% higher than in 2021, but this was 71% weighted to the first half. There was a significant pause in Q4 which comprised just 6% of the annual total.

London is recognised as a leading global city which appeals to a diverse range of businesses. Many sectors continue to grow and expand in the capital, including professional services, artificial intelligence (AI), fintech, education and life sciences.

London office take-up reached 12.3m sq ft in the year, evenly split between H1 and H2, up 29% from 2021 and in line with the 10-year average. The West End outperformed the City with take-up 23% above the 10-year average at 4.9m sq ft, while the City was in line at 5.1m sq ft. We have seen an acceleration in the number of companies committing to moving from outer London to the centre, particularly in the West End.

Following an increase in 2020 and 2021, central London vacancy reduced slightly but remains elevated at 8.2%. Looking in more detail, there are two notable trends. First, vacancy is not evenly spread. West End vacancy at 3.7% is in line with the 10-year average while in the City it is nearly double its long-term average at 11.9%. Secondly, the availability of prime space is very constrained, with 64% of supply being secondhand including tenant-controlled space.

There is increasing occupier focus on the overall service and amenity offering. As well as the amenity provided within our individual buildings, all our occupiers are given exclusive access to shared lounges at DL/78 and DL/28 (due to open in Old Street in Q4 2023). These offer a shared space in which to work, meet and socialise, as well as bookable meeting rooms, private hire space and events.

Strong balance sheet with low leverage

Despite a volatile market backdrop, 2022 was an active year for capital recycling. We invested £133.0m on acquisitions and £121.8m in capex (including capitalised interest), and were pleased to sell several non-core assets above book value for £206.4m (excluding trading properties), with a further £53.6m sold in 2023. We have now made disposals of more than £700m since the start of the pandemic three years ago.

Our balance sheet remains very strong with high interest cover of 423% for the year and low EPRA LTV of 23.9% at 31 December 2022. We also have a strong liquidity position with cash and undrawn facilities at year end of £577m (excluding restricted cash).

The Group has no current exposure to market interest rates, with 100% of borrowings at fixed rates. Our average interest rate is 3.14% on a cash basis. We have little to refinance in the near-term, with our first maturity being an £83m 3.99% secured facility in October 2024. The average maturity of our drawn debt is 6.2 years.

Developments and refurbishments

At year end, our portfolio was split 57% 'core income' and 43% 'future opportunity'. We continue to deliver best in class space that meets the evolving requirements of our occupiers. In 2022, we completed three substantial projects delivering an average 27% profit on cost at practical completion. We are on site at two major projects, 25 Baker Street W1 (298,000 sq ft; commercial element 56% pre-let/sold) and Network W1 (137,000 sq ft; speculative), both due for completion in 2025.

We have submitted a planning application for a c.240,000 sq ft scheme at our 50 Baker Street W1 50:50 joint venture with Lazari Investments, and are refreshing our planning for Holden House W1 (c.150,000 sq ft).

We are working on longer term plans for Old Street Quarter EC1 which has potential for a 750,000+ sq ft mixed-use campus. Our acquisition of the site for £239m is expected to complete from 2027. In addition, we are planning to increase the volume of major refurbishment projects in the coming years where we see the opportunity to substantially raise ERVs reflecting increased quality, energy efficiency and sustainability credentials.

In 2022, build cost inflation rose to c.11% but is now settling and is expected to moderate in 2023 and 2024. As previously outlined, at 25 Baker Street we have fixed 97% of the office element build costs (c.80% of overall) and we are close to agreeing the contract sum at Network.

Sustainability

We made good further progress in 2022 reducing energy consumption and thus operational carbon. Energy intensity across our managed portfolio fell 4% year on year to 123 kWh/sqm, a 22% reduction compared to our 2019 baseline, ahead of our science-based targets for the third consecutive year. This resulted in a 7% reduction in the operational carbon intensity across our managed portfolio to 31.4 kgCO2e/sqm.

At our projects, we account for 100% of the embodied carbon in the year of completion, at which point any residual is offset using high quality, verified schemes. In 2022, we completed two major developments (412,300 sq ft), one large refurbishment (38,200 sq ft) and several small refurbishments. The weighted average embodied carbon intensity for the major projects was 589 kgCO2e/sqm. This is below the target set by the GLA of <600 kgCO2e/sqm.

While our regeneration activity leads to the creation of embodied carbon, a project can take four to five years to deliver and the building will have an extended design life of over 60 years. In addition, the buildings are designed to be more energy efficient, and thus generate lower operational carbon in use, with maximum future flexibility and adaptability.

We were pleased to receive resolution to grant planning consent for a c.100 acre, 18.4MW solar park on our Scottish land which we expect will generate more than 40% of the electricity needs of our London managed portfolio.

At 31 December 2022, our portfolio was fully compliant with forthcoming changes to EPC legislation which require a rating of E or higher. These rules are due to become stricter in 2027 with a minimum rating of C or better. From 2030, it is expected that there will be a further change to a minimum of B. Including on-site projects, our portfolio is 85.7% 2027 compliant by ERV (2021: 78.9%) and 65.3% 2030 compliant (2021: 61.0%).

In 2021, we commissioned a third party report that identified c.£97m of works to achieve 2030 EPC compliance across our London commercial portfolio. This has since been updated to c.£107m reflecting the latest scope and 2022 cost inflation. Following the sale of 19 Charterhouse Street EC1 in January 2023, the figure reduces to c.£99m. Our external valuers have made a specific deduction of c.£58m for identified EPC works across the portfolio, plus further amounts for general upgrades on assumed vacancies.

Recognising employee performance

We were delighted to recognise high performance with 17 internal promotions in 2022, including four new appointments to the Executive Committee. Philippa Davies, Head of Leasing, joined the Committee from 1 July 2022 and there were a further two appointments with effect from 1 January 2023: Katy Levine, Head of Human Resources; and Robert Duncan, Head of Investor Relations and Strategic Planning. Executive Committee member Jay Joshi was also promoted to Group Financial Controller from Group Treasurer.

Outlook

We expect average ERV growth across our portfolio in 2023 of 0% to +3%, with our higher quality properties continuing to outperform. We anticipate rental growth accelerating for the best buildings over the medium-term, particularly in the West End.

The ongoing weight of global capital looking to invest in London, combined with the recent reduction in volatility across financial markets, is encouraging. This is supported by London's attractive yield relative to other European cities. Upward pressure on yields is easing and we expect our portfolio to be more resilient than the wider London office market.

Derwent London has a well-positioned portfolio, delivering the right product to meet diverse occupier demand. We have an exciting regeneration pipeline and the balance sheet capacity to take advantage of acquisition opportunities that may emerge.

CENTRAL LONDON OFFICE MARKET

Occupational market

Letting activity in 2022 was in line with the 10-year average. The flight to quality is well established and gathering pace, with nearly 80% of take-up being of new or good quality space, while availability of secondary remains elevated, in part due to heightened occupier focus on sustainability credentials. The constrained development pipeline, alongside occupiers being focused on high quality buildings in more central locations, is leading to an increase in pre-letting activity. Together with limited prime supply, we see good reason for rental growth on higher quality buildings. 

Central London take-up of 12.3m sq ft was 29% higher than in 2021 reflecting continued re-engagement by businesses with longer-term occupational strategies. This was focused on best quality product, with 39% of the total being new (including pre-lets) and 40% was Grade A secondhand. In the West End 4.9m sq ft of space was leased, up 36% year-on-year and 23% ahead of the 10-year average. In the City, take-up of 5.1m sq ft rose 33% compared to 2021, in line with the 10-year average.

Availability remains elevated across central London, with vacancy of 8.2% down 0.4% on the prior year, but this average masks a significant divergence between the West End and City. Strong demand in the West End led to a 1.1% decline to 3.7% (10-year average 3.4%). City availability also reduced, but by only 0.3% to 11.9%, nearly double the 10-year average (6.4%).

The amount of available secondhand space nearly doubled at the start of the pandemic to a peak of 19.2m sq ft at Q1 2021 and finished 2022 at 16.4m sq ft. The volume of tenant-controlled space remains high at 28% of total availability. Overall secondhand availability remains elevated at 64% of the total, but this compares to a peak of 77% at Q1 2021.

Knight Frank estimate that there will be a 11m sq ft supply shortage of best quality buildings over the next four years, assuming normal levels of annual take-up. The committed central London development pipeline between 2023 and 2025 totals 12.7m sq ft with 7.1m sq ft scheduled to complete in 2023 of which 28% is pre-let or under offer. Deliveries in 2024 and 2025 are significantly below historic levels. 

Businesses with large space requirements over the medium-term are engaging at an increasingly early stage of development in order to secure space that meets their requirements. Pre-lets comprised 24% of total take-up in 2022 and accounted for the nine largest transactions. We are also seeing signs of recentralisation with demand more focused on central and well-connected locations.

London is well recognised as a leading global city with broad appeal to a diverse range of occupiers. The key sectors taking space in 2022 were banking & finance (28%), and professional and creative industries (17% each). This diversity is also seen in the active demand figures, with banking & finance, business services and creative industries together accounting for 71% in total.

Businesses continue to adjust to more hybrid solutions but whilst working patterns may have changed, the power and function of the office seems to be more understood now than ever. Occupiers are making decisions based on peak occupancy with lower occupational densities, whilst also ensuring it is the right space to support their talent and overall business productivity.

Our experience is that long leases remain important for large occupiers given high fit-out costs and business continuity. For pre-lets, pre-completion expansion/contraction options are becoming more common. For smaller occupiers and in particular those in high growth mode, shorter leases provide the flexibility they need to adapt their real estate to their rapidly evolving requirements.

Sustainability credentials, high quality design, amenity, customer service and experience all remain high on the agenda for occupiers when it comes to making real estate decisions. That is why we focus on delivering best in class, design-led and sustainable buildings.

Macro backdrop

2022 was characterised by a spike in global inflation, a rapid increase in borrowing costs and a cost of living crisis in the UK. Towards the end of the year, inflationary pressures began to ease, partly driven by a reduction in both energy and food costs, which has led to expectations of a lower peak in interest rates than was expected at the height of the political and economic instability.

Following a strong post-pandemic bounce in 2021, UK GDP was 4.0% in 2022 albeit weighted to Q1. The latest forecasts from Oxford Economics and others are for both the UK and London to experience a short-lived and mild recession in 2023 as households and businesses respond to the increase in input costs from higher costs of materials and utilities, and interest rates. The economy is then expected to return to growth from 2024, with London to maintain its outperformance

Job creation is an important indicator for London offices. Forecasts from Oxford Economics show a small contraction in the number of office- based jobs in 2023, before a return to growth from 2024. These forecasts should be viewed, however, in the context of the last two years during which a combined c.280,000 net new office-based jobs were created.

The opening of the Elizabeth line, which has added c.10% capacity to London's rail transport network, has driven a surge in footfall around the central stations along the route. According to TfL data, more than 100m journeys have already been made since opening and daily usage is above the expected level of c.600,000. Tottenham Court Road is now in the top five most-used stations in the TfL network, with its usage increasing by more than 80% since launch. Approximately 41% of our portfolio is located in nearby Fitzrovia (including Soho Place).

Office occupancy rose through 2022 according to data from Remit Consulting, following an initial period of adjustment when work from home guidance was lifted in mid-January. West End office occupation has increased from c.10% to in excess of 45%. By contrast, occupation levels in the City continue to lag, reaching c.30% through Q4.

London remains an attractive place to live as well as to work. In 2022, the population rose by 1.2% to 9.5m and is forecast to increase to 9.6m in 2023. Over the longer-term to 2035, the UN is forecasting an annual increase of 0.8% to 10.6m, an increase of more than 1m people over the next 13 years. This comes on the back of sustained growth since the early-1980s when the population was 6.7m.

Long-term capital remains attracted to London

London remains an attractive location for domestic and international investors and CBRE estimates there is c.£33bn of potential investment demand targeting London offices. The story of 'the best versus the rest' continues and investor appetite is polarised.

Well-located and high quality buildings with strong ESG credentials, let on long leases to strong covenants remain in demand as do those with potential for regeneration into prime. Investor appetite for secondary assets, however, is very limited and these are likely to underperform.

Investment activity for 2022 was £11.2bn, 12% above 2021 and in line with the long-term average of £11.4bn. Unsurprisingly, given the uncertain economic backdrop, investment volumes were low in the last quarter of the year, totalling just £0.7bn. Overseas capital dominated investment activity, accounting for 80% of all transactions, with investors from Asia the most active at 43%.

Underlying rates and credit spreads both increased significantly in the year with prospective investors appraising return requirements against the higher borrowing costs. Consequently, investment yields came under upward pressure through H2. The West End was more resilient than the City, with prime yields rising c.50bp to 3.75% compared to City yields up c.75bp to 4.5%.

The rise in yields combined with heightened risk awareness from credit providers is expected to present potential acquisition opportunities. Owners who are currently actively marketing assets for sale are primarily driven by a combination of upcoming refinancing events, future vacancy risk and EPC/upgrade capex requirements.

Vendor pricing expectations are being reset as transactional evidence starts to emerge and financial markets show signs of stabilising. In contrast to previous market corrections, both the development pipeline and the volume of debt maturing in the short term are relatively low, which is expected to limit the magnitude of any market correction.

VALUATION

As reported with our H1 2022 results, we have changed our external valuer from CBRE to Knight Frank. At least half of our London assets were valued by Knight Frank at H1 and for the year-end valuation they were appointed on all the London assets. Our Scottish land, less than 1% of the Group's portfolio, continues to be valued by Savills.

The Group's investment portfolio was valued at £5.36bn as at 31 December 2022. There was a deficit for the year of £401.8m which, after accounting adjustments of £29.1m, produced a decline of £430.9m including our share of joint ventures. On an underlying basis the portfolio decreased 6.8%, following a 3.5% uplift in 2021.

This primarily reflected the weakening economy, with inflation and interest rates rising significantly in the second half. This had a direct impact on the commercial property sector with valuation yields moving out. Accordingly, the positive H1 valuation of 1.4% reversed in H2 to an 8.0% decline. Rental values generally held up with office occupiers seeking better quality, environmentally attractive accommodation, which is in short supply.

By location, our central London properties, which represent 99% of the portfolio, declined by 6.8% with the West End down 5.8% and City Borders 9.2%. The balance of the portfolio, our Scottish holdings, was down 5.7%.

Our portfolio valuation movement outperformed both the MSCI Quarterly Index for Central London Offices and the wider UK All Property Index which were down by 10.9% and 12.8%, respectively. The quality of the portfolio, low vacancy rate, successful development programme and active asset management all contributed to this outperformance. The table shows performance trends in more detail, with the higher capital value (in £ psf) buildings outperforming.

Capital value and ERV performance

Our long-term development pipeline, which provides well designed office space in central London, is well positioned, with occupiers having a greater focus on high quality, environmentally attractive space. This was reflected in our EPRA rental values which moved up 1.3%, an improvement on the 0.2% decline seen in 2021.

The portfolio's true equivalent yield moved out 38bp from 4.50% to 4.88% over the year. The initial yield is 3.7% (December 2021: 3.3%) which, after allowing for the expiry of rent frees and contractual uplifts, rises to 4.6% on a 'topped-up' basis (December 2021: 4.4%).

Derwent London's total property return for 2022 was -3.4%, which compares to the MSCI Quarterly Index of -8.0% for Central London Offices and -9.1% for UK All Property.

Our major development completions in 2022 were Soho Place W1 and The Featherstone Building EC1, and together these were 71% let or sold at year end. On-site developments are 25 Baker Street W1 and Network W1, both in the West End. The latter commenced in June 2022. Both are due to be delivered in 2025 and require £324m of capital expenditure to complete. Together the four schemes were valued at £790m at December 2022, representing 15% of the portfolio, and saw a 4.8% valuation uplift after capital expenditure, as development surpluses were released. Excluding these, the portfolio valuation decreased by 8.5% on an underlying basis.

Further details on the progress of our projects are in the 'Development and refurbishment' section below and additional guidance on the investment market is laid out in the 'Outlook' section above.

Portfolio reversion

Our contracted annualised cash rent as at 31 December 2022 was £204.2m, a 14% increase over twelve months as the pre-lets at our 2022 development completions came through. With a portfolio ERV of £304.6m there is £100.4m of potential reversion. Within this, £46.4m is contracted through a combination of rent-free expiries and fixed uplifts, the majority of which is already straight-lined in the income statement under IFRS accounting standards. On-site developments and refurbishments could add £33.0m. The ERV of available space is £17.3m. Just over half of this was at our recently completed developments: £5.9m at The Featherstone Building and £3.2m at Soho Place (retail). Since year end we have let £2.4m of this space. The balance of the potential reversion of £3.7m comes from future reviews and expiries less future fixed uplifts.

LEASING, ASSET AND PROPERTY MANAGEMENT

Lettings - £9.8m of new rent at 13.0% above ERV

Leasing activity in 2022 totalled £9.8m, across 46 transactions, of which £2.3m were pre-lets. These 163,000 sq ft of lettings were signed on average 13.0% above December 2021 ERV. Nine transactions comprised 68% of the total.

Demand for furnished space is also strong with occupiers prepared to pay a premium to secure high quality, ready to occupy units. This provides an excellent solution for our smaller units and we currently operate 63,600 sq ft of 'Furnished + Flexible' space with a further 34,100 sq ft on site or committed.

Post-year end letting activity - £14.7m of new rent in 2023 YTD

Since the start of 2023, we have seen a noticeable increase in letting activity. 10 new leases have been agreed totalling £14.7m of rent on average 7.7% above December 2022 ERV. Key transactions include:

· PIMCO has pre-let 106,100 sq ft at 25 Baker Street W1 at a rent of £11.0m, well above December 2022 ERV (commercial element now 56% pre-let/sold); and

· Buro Happold has leased 31,100 sq ft at The Featherstone Building EC1 at a rent of £2.3m, in line with December 2022 ERV.

Leasing activity

1 Weighted average unexpired lease term (to break)2 Performance against Dec 22 ERV

Principal lettings in 2022

Principal lettings in 2023 YTD

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

Asset management - £29.6m of transactions on average 5.3% above ERV

By March 2022, most Covid-19 restrictions in the UK had been lifted. As office occupancy levels have increased, businesses have re-engaged with their long term real estate strategy and, as a result, we are seeing growing demand for long-term solutions from the short-term extensions and regears experienced through the pandemic.

We continually review our asset strategies as occupier requirements evolve and align expiry profiles to facilitate the refresh, upgrade and repositioning of our portfolio.

At the start of 2022, 9% of passing rent was subject to break or expiry in the year. After adjusting for disposals and space taken back for schemes, 79% of income exposed to breaks and expiries were retained or re-let by year end. This compares to our 10-year average retention/re-let rate of 85%.

10% of passing rent is subject to break or expiry in 2023, a reduction from the 15% potentially at risk six months earlier.

Rent reviews were settled 6.2% above December 2021 ERV and delivered a 10.1% uplift over the previous income. The majority of this activity was at White Collar Factory EC1 where rents increased between 14% and 16%.

Renewals were completed 12.5% above the previous rent and 9.3% above December 2021 ERV. The main lease renewal was the extension of Morningstar's lease at 1 Oliver's Yard EC1 to June 2027. They have agreed a rental uplift reflecting an 18.8% premium to the previous rent.

Regears, excluding the impact of a landlord development facilitation break clause, completed 0.2% above previous rent and 1.6% above December 2021 ERV. The main regear was a restructuring of Burberry's break clause at 1 Page Street SW1.

Asset management activity 2022

1 Excludes single development-linked regear in Q1

Vacancy - 6.4% at year end, 5.0% proforma for post-year end lettings

The portfolio EPRA vacancy rate increased to 6.4% at 31 December 2022 from 1.6% at the start of the year. The increase primarily reflects development completions at The Featherstone Building EC1 and Soho Place W1 as well as refurbishment completions at Tea Building E1. Together these three projects contributed 58% to the year end vacancy. Letting activity since the start of 2023 would reduce the EPRA vacancy to 5.0% on a proforma basis.

Occupier survey

In January 2023, we carried out an occupier survey. 41 tenants contributed with a combined ERV of £103m, equivalent to 50% of ERV (excluding projects and contracted uplifts). When asked whether any change in the organisation's real estate footprint was anticipated over the next five years, 40% of respondents (by ERV) said they expected either a small or significant increase and 34% expect no change. Our occupier surveys (August 2020, January 2021 and July 2021) show a clear upward trend since the pandemic in the number of occupiers expecting their real estate footprint to increase or remain the same.

Rent collection - At pre-pandemic levels

As outlined with our H1 2022 results, rent collection continues to match pre-pandemic levels with 98% of the December 2022 quarter rent collected. Similarly, service charge collection remains strong at 96%.

Property Management

As occupation continued to rise through 2022, the Property Management team further engaged with our customers hosting a series of events including workshops and competitions, alongside initiatives to support local communities. Work has continued to support the Group's journey to net zero carbon with the development of a portfolio-wide metering strategy to ensure more robust data capture, supporting our energy reduction programme and facilitating roll-out of our Intelligent Building infrastructure. The team also implemented a number of practical measures, including a reduction in temperature set points, smart lighting initiatives and adjustments to plant running times, helping exceed our energy reduction targets.

ACQUISITIONS AND DISPOSALS

In 2021, the Group took the decision to retain its modern and recently upgraded buildings for longer while reducing its exposure to non-core properties with less repositioning potential. This decision reflected our view that the flight to quality would gather pace and that higher quality buildings would deliver stronger returns.

We remain committed to owning a portfolio balanced between core income properties and those that offer future regeneration potential. At 31 December 2022, the portfolio was split 57% 'core income' and 43% 'future opportunity' (excluding Old Street Quarter EC1, with an existing floor area of c.400,000 sq ft, where our acquisition is expected to complete from 2027 for £239m).

Since the start of 2022, we have made good further progress against our objectives, actively recycling capital out of several smaller non-core buildings above book value, where there was limited capacity for extra floor area and amenity.

Disposal proceeds have been recycled into our development pipeline thereby maintaining conservative gearing, providing firepower for future acquisition opportunities that may arise. Committed capex relating to our two on-site major projects totals £324m.

Disposals (excluding trading property)

1 After deduction of rental top-ups and sale costs2 Office space

Acquisitions

DEVELOPMENT AND REFURBISHMENT

2022 project completions - 450,500 sq ft at an average 27% profit on cost at completion

In 2022 we completed three major projects:

· Soho Place W1 (285,000 sq ft development) - at 1 Soho Place, the offices were fully pre-let to G-Research and Apollo Group at an average rent of £93 psf and 15 year WAULT. The retail is available to let but interest has strengthened following the opening of the Elizabeth line. At 2 & 4 Soho Place, the theatre and offices were pre-let to Nimax Theatres and Esselco respectively and were sold in 2022. The profit on cost at practical completion was 25% and the embodied carbon intensity of 1 Soho Place was 550 kgCO2e/sqm.

· The Featherstone Building EC1 (127,300 sq ft development) - after lettings to Dept Agency and Marshmallow, and following the lettings to Buro Happold and the 2,350 sq ft retail unit in early 2023, the building is 59% let by floorspace. We are encouraged by the level of interest in the remaining 53,000 sq ft of available space. The profit on cost at practical completion was 30% and the embodied carbon intensity was 539 kgCO2e/sqm.

· Francis House SW1 (38,200 sq ft refurbishment) - pre-let to Edelman at an average rent of £76 psf on a 15-year lease with a break at year 10. The profit on cost at completion was 31%.

Major on-site projects - 435,000 sq ft with an estimated 11% profit on cost

At the end of 2022, we were on site at two major projects totalling 435,000 sq ft which we currently expect will deliver an 11% development profit and 5.4% yield on cost (excluding the pre-let to PIMCO at 25 Baker Street).

· 25 Baker Street W1 (298,000 sq ft) - this mixed-use project comprises 218,000 sq ft of offices, plus residential and retail. As part of the leasehold regear to a new 129-year headlease, we have agreed to sell the courtyard retail and the smaller office block on Gloucester Place to the freeholder, The Portman Estate. The impressive landscaped retail courtyard forms an important part of this design-led destination in the heart of Marylebone. Demolition has completed and sub and super-structure works are progressing well. 97% of construction costs of the office element have been fixed (80% of total). Following the post year-end pre-let to PIMCO, the commercial element of the scheme is 56% pre-let/sold. The mid stage 5 embodied carbon estimate is c.600 kgCO2e/sqm.

· Network W1 (137,000 sq ft) - demolition works at this office-led scheme, adjacent to 80 Charlotte Street W1 and DL/78.Fitzrovia, have completed and negotiations are at an advanced stage with our preferred main build contractor. Supply in Fitzrovia is highly constrained and we are encouraged by the level of early occupier interest. The stage 4 design embodied carbon estimate is c.530 kgCO2e/sqm.

Major on-site development pipeline

1 As at 31 December 2022 

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

3 Long leasehold, net of 2.5% ground rent4 19,000 sq ft courtyard retail and 12,000 sq ft Gloucester Place offices 

5 Embodied carbon intensity estimate as at stage 4 or 5

Future development pipeline - Four schemes totalling c.1.3m sq ft

There are four key schemes that comprise our medium and longer-term development pipeline. Our medium-term pipeline could deliver c.390,000 sq ft (at 100%) of high quality office-led space. At 50 Baker Street W1 (c.240,000 sq ft at 100%), which we own in a 50:50 joint venture with Lazari Investments, we have submitted a planning application for a project approximately double the existing floor area. This leasehold property is on The Portman Estate and includes another building in their ownership. A regear of the various interests would be required to implement any scheme. At Holden House W1 (c.150,000 sq ft), we are working on a revised planning application with new architects which will have a higher office weighting and stronger sustainability credentials than the existing planning consent.

Over the longer-term, we continue to progress plans for Old Street Quarter EC1. Our current appraisals suggest the 2.5 acre island site has potential for a 750,000+ sq ft mixed commercial use campus targeted at different occupier sectors, including Life Sciences among others. We have had constructive engagement with the London Borough of Islington. Our acquisition of the site is expected to complete from 2027, conditional on delivery of the new eye hospital at St Pancras and subsequent vacant possession of the site. At 230 Blackfriars Road SE1, our current plans assume a 2030 block date. Our early appraisals show the site has capacity for a 200,000+ sq ft office-led development, more than three times the existing floor area.

Refurbishments - an increasing capex component

Refurbishment projects will comprise an increasing proportion of annual capital expenditure over the next few years as we continue to upgrade the portfolio to meet ever higher occupier requirements. These projects provide the opportunity to enhance the ERV through improving the amenity offer and overall quality. Smaller units will be appraised for our 'Furnished + Flexible' product. Larger refurbishments likely to commence over the near to medium term include 1-2 Stephen Street W1, 20 Farringdon Road EC1, 1 Oliver's Yard EC1 and Greencoat & Gordon House SW1. The floor area of these four buildings is 756,800 sq ft.

FINANCE REVIEW

Introduction

Derwent London's capital allocation and funding strategies through the last few years ensured that the Group ended 2022 with low leverage combined with a long weighted-average unexpired lease and debt profile. We have continued to balance value creation with resilient earnings and dividend growth while delivering a high-quality product which appeals to today's occupier with its combination of location, design, amenity, flexibility in use and customer focus.

The importance of a strong balance sheet and good long-term planning became very evident through 2022 as the UK, like most other major economies, experienced increasing costs and a widespread upward yield shift. Covid-19's impact, so strongly felt in 2020 and to a lesser extent in 2021, reduced further in 2022 but we then saw the major conflict in Ukraine, increases to energy and food prices and the emergence of other global tensions. These acted as a catalyst for the inflation outlook to change significantly and caused capital markets to re-look at interest rates and the pricing of credit risk, particularly during the period of higher UK volatility in late 2022. This has also not been an easy time for businesses and key public service providers in the UK who face staff shortages and cost pressures while dealing with regulatory changes and the long-term climate change and biodiversity emergencies.

Derwent London's product differentiates us in a central London office market where a flight towards quality combines with relatively low relevant supply. This bifurcation looks set to continue and we have the balance sheet capacity and business model to deliver our major developments while searching for new value-add opportunities. We also expect to further upgrade amenities and energy efficiency credentials within some of our more mature properties over the next few years to help satisfy this occupier demand.

Financial overview

As noted above, the Group's property valuation at 31 December 2022 was impacted by the significant upward yield shift seen in H2 giving rise to an 8.2% decline in the Group's total net assets over the year. This took our total return over the year to -6.3% compared to the +5.8% seen in 2021 with EPRA net tangible assets (NTA) down 8.3% over 2022 to 3,632p per share. 

EPRA Net Disposal Value (NDV), which takes account of the £166m positive fair value movement on fixed rate debt, was £4.24bn, equivalent to 3,768p per share. This is only 3.0 per cent lower than the 3,884p per share recorded as at December 2021.

We have continued to invest in the portfolio with acquisitions and project spend totalling £258m but property disposal proceeds in 2022 of £210m meant that our debt levels were almost unchanged compared to December 2021. Our gearing remains low, all of our year-end debt was at fixed rates and our weighted average debt maturity was 6.2 years. 

Overall estimated rental values rose by 1.3% in 2022 with the highest quality buildings outperforming. Vacancy levels were also higher in 2022 than in recent years, partly the result of development completions. However, with the exception of the property revaluation movement, our income statement remained robust with EPRA earnings only marginally down on 2021 at £119.7m or 106.6p per share. If the impact of non-recurring surrender and rights-of-light premiums is ignored, EPRA earnings per share were 1.9 per cent higher than 2021 on an underlying basis.

Following new guidance issued by the IFRS Interpretations Committee in October 2022, we have restated the results for 2020 and 2021 to reflect the writing off of Covid-19 concessions such as rent forgiveness that related to historic receivable balances; our previous accounting policy was to spread the concession over the remaining life of the relevant lease. Where related to a future lease obligation, the concession continues to be amortised over the remaining life of the lease. None of the adjustments is material but the re-presented figures follow the new guidance and ensure proper comparability between years.

We have also grossed up cash balances within the balance sheet to include cash held in tenant deposit accounts. These cash balances are restricted and not generally available to the Group but, as they are held within accounts which we control, have been grossed up and the amounts re-presented. 'Cash held in restricted accounts' also now includes cash within service charge bank accounts which was previously disclosed within 'trade and other receivables'. This change of treatment follows guidance from IFRIC issued in March 2022.

Property portfolio and balance sheet

Our wholly-owned property portfolio was externally valued at £5.3bn as at 31 December 2022, allocated across the balance sheet as follows:

We continued to recycle capital within our property holdings in 2022 with acquisitions totalling £133.0m, capital expenditure of £114.8m, capitalised interest of £7.0m and disposals with carrying values totalling £182.1m. Interest capitalised in 2022 was considerably lower than the £12.0m recognised in 2021 as the prior year included two major projects close to completion with correspondingly high cumulative development expenditure while the current year includes two relatively new schemes at 25 Baker Street W1 and Network W1.

Disposals included Bush House WC2, sold for £85m (gross) in Q3 2022. At the beginning of 2022, we had expected to carry out a comprehensive refurbishment of this property. Selling it instead, for a price that captured most of our expected development profit, substantially reduced our capital expenditure requirement and helped keep the Group's gearing at lower levels than those projected at the beginning of 2022.

Property, plant and equipment of £54.3m (2021: £54.0) includes the £50.0m owner-occupied property at 25 Savile Row W1 and £4.3m of leasehold improvements, furniture, equipment and artwork.

Investments of £43.9m (2021: £51.1m) are made up almost entirely of the carrying value of our 50 per cent holding at 50 Baker Street W1, stated after a revaluation deficit of £9.3m in the year and retained profits for 2022 of £2.0m.

The properties classified within 'non-current assets held for sale' totalling £54.2m at 31 December 2022 were 19 Charterhouse Street EC1, the sale of which completed in January 2023, and a small property at 13 Charlotte Mews W1.

The £39.4m (2021: £32.2m) trading property at year end comprised residential units under construction at 25 Baker Street for delivery in 2025 and Welby House SW1, originally acquired as a potential site for affordable housing and subject to a write-down in value of £0.2m in 2022. Additional costs have also been incurred within 'trading stock'; this is distinct from trading property as we do not own an interest in the property itself but have an agreement in place to deliver certain retail elements of the 25 Baker Street scheme upon completion to the freeholder, The Portman Estate, at an agreed price. Completion of this element of the scheme is expected in 2025.

Other receivables treated as non current increased to £188.1 from £159.3m in 2021. This includes £9.1m (2021: £nil) of design and planning application costs relating to the Old Street Quarter EC1 scheme which are recoverable up to a capped amount of £13.0m in the unlikely event that the vendor is unable to deliver vacant possession of the site. Other receivables also include accrued income from the 'straight-lining' of rental income under IFRS16 to spread the effect of incentives and fixed uplifts over the lease terms. The non-current element has increased to £165.2m from a restated £147.0m in 2021. In addition, £26.1m (restated 2021: £22.8m) is included under current asset receivables as this accrued income is due to unwind within a year. Unamortised letting and legal fees, which are also included in receivables, increased to £13.8m (2021: £12.1m) and are amortised over their respective remaining lease terms.

Property income and earnings

Gross property and other income increased to £248.8m in 2022 from a restated £241.3m in the year to 31 December 2021. Gross rental income was up 6.0% to £207.0m from £195.3m, largely due to new lettings at the two large developments completed in the first half of 2022. Soho Place W1 added £10.8m of income in 2022 and The Featherstone Building EC1 £1.0m. Other lettings across the portfolio provided a further £9.3m. We were very active with acquisitions and disposals through 2021 and 2022 and the major acquisition at 250 Euston Road W1 in Q4 2021 increased gross rents by £3.9m compared to the prior year, 230 Blackfriars SE1 added £1.8m and Holford Works WC1 a further £0.5m. The disposals were at a lower overall value but a higher yield; rental income reduced by £2.3m year on year due to the sale of Angel Square EC1, £1.5m at New River Yard EC1 and other disposals an additional £0.7m.

Lease surrender and rights-of-light premiums were unusually high in 2021 at £5.6m but fell back in 2022 to a more typical total of £1.4m. Property trading activity has decreased now that all the Asta House W1 residential units have been sold, the last one completing early in 2022 for £1.6m. In 2021, the corresponding sales turnover was £6.7m and, in 2020, was as high as £32.3m. The next apartments for sale at our 25 Baker Street scheme are due to complete in 2025 so trading property disposal proceeds are likely to be very low for the next two years.

Service charges and energy costs have become a much more significant issue for many of our tenants in 2022 with energy costs, in particular, rising to unprecedented levels. Our ability to manage energy tariffs has been impacted too by our commitment to green energy. For example, we were not able to move to 'out of contract' energy tariffs when rates spiked in Q4 2022 as those do not support renewable electricity. Typical cost per kWh for renewable electricity on six-monthly contracts increased from around 31p at the beginning of 2022 to about 108p at the end of the year but is now falling back to below 40p. Gas has seen a similar story, rates moving from about 7p to 25p and now back to around 12p per kWh. We very much hope to be able to pass on these lower costs to our tenants as soon as possible and have offered some help with the smoothing out of this price volatility where we can. One positive outcome is that there is now even more focus on reducing energy use with landlord and tenant seeking ways to co-operate further.

With our higher average vacancy rate through much of 2022, property costs borne by us have increased too, irrecoverable property expenditure increasing from £11.8m in 2021 to £14.4m in 2022. In addition, irrecoverable service charges, due to units being vacant or where the tenant has negotiated a capped service charge, increased by 50% to £5.1m in 2022 from £3.4m. 

As noted above, we have revised the accounting treatment for rent concessions granted in relation to historic amounts due and these have now been written off in the appropriate period (mainly in 2020 and 2021) where they were previously being spread over their remaining lease terms. The adjustments have been shown as a prior year adjustment and, while none of the amounts is material, these have been adjusted so that there is meaningful comparison year on year.

We carry out full impairment testing of receivable balances using the expected credit-loss model in accordance with IFRS9. This applies to trade receivables as well as the balances created by the spreading of lease incentives, now slightly reduced as a result of the change in accounting policy. These have been carried out for each of our 64 largest tenants and for others where we believe the risk is elevated, with the remaining balances considered according to their sector. With improved conditions affecting many of our tenants, particularly the smaller ones, and partly because the more significant receivable risks have now been written off or provided for, we saw a net reversal in 2022 with a credit to the income statement of £1.0m compared to restated charges of £2.2m in 2021 and £16.1m in 2020.

As a result of these factors, net rental income increased from a restated £177.9m in 2021 to £188.5m in 2022. Including surrender premiums, dilapidation receipts, other property income and management fees, net property and other income increased 4.0% to £194.6m from £187.2m in 2021.

Salaries have risen both for our own staff and for those of our many professional advisers and consultants. However, increased headcount and salaries were offset by lower staff bonus levels and reduced Directors' remuneration. As a result, administrative expenses were 1.9% lower than the previous year at £36.4m compared with £37.1, As in previous years, we do not capitalise any of our overheads.

Lower impairment and administrative expenses have seen our EPRA cost ratio move back down again in 2022. Including direct vacancy costs, it fell to 23.3% from 24.9% in 2021.

As noted above, property valuations fell in the second half of 2022 with the main Group revaluation deficit being £422.1m after accounting adjustments (2021: surplus of £131.1m). Our share of the property revaluation deficit at 50 Baker Street was a further £9.3m (2021: deficit of £10.2m) but our head office at Savile Row showed a valuation rise of £0.7m, shown within the Group Statement of Comprehensive Income rather than the Income Statement.

The profit on disposal of investment properties increased to £25.6m in 2022 from £10.5m in 2021. Most of this came from the sale of Bush House for proceeds of £85m in Q3 2022. Further proceeds of £55.8m was due to the disposal of the Group's leasehold interest in 2 & 4 Soho Place W1 and £67.2m from New River Yard EC1 in June 2022, both of these two properties having been disclosed as 'assets held for sale' in the December 2021 balance sheet.

Net finance costs increased to £39.4m from £28.1m in 2021. This was due to higher average borrowings though 2022 but was also affected by capitalised interest falling from £12.0m in 2021 to £7.0m in 2022.

Interest rate increases gave rise to a further £5.8m fair value gain relating to our remaining interest rate swap.

Our joint venture with Lazari Investments relating to 50 Baker Street W1 properties has produced a loss for the year of £7.3m, impacted by the £9.3m revaluation deficit noted above.

The resulting IFRS loss for the year before tax was £279.5m compared to a profit of £252.5m in the prior year. IFRS earnings per share were -249.84p (2021: 224.99p).

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

EPRA like-for-like rental income

EPRA like-for-like (LFL) gross rental income was up 1.1% over the year, partly because the higher vacancy rate in 2022 came mainly from recently completed developments which fall outside our EPRA LFL portfolio. EPRA LFL net rental income was up by 1.1% over the year and EPRA LFL net property income, which takes account of the unusually high surrender premiums received in 2021, was down by 1.0%.

Internal controls, assurance and the regulatory environment

We continue to focus on ensuring our internal controls are robust and that we have a comprehensive approach to assurance across our business, noting the particular interest in this area from external stakeholders and regulators.

While the exact timing and scope of the forthcoming BEIS reforms are yet to be finalised, we have commenced a project to map our full assurance environment and to undertake a risk-based project to enhance the documentation and evidencing of internal controls.

Independent internal audits continue to have a beneficial impact on our control environment and we have also summarised our approach to obtaining other forms of external assurance across the business. Our principal sources of independent external assurance remain consistent with last year and include the annual statutory audit, internal audits carried out upon key risk areas throughout the year, service charge audits and a twice-yearly external valuation. In line with last year, we have engaged with an independent external assurance provider in relation to selected sustainability, health and safety and green finance disclosures.

We are committed to ensuring high-quality reporting that stands up to scrutiny, both from within the business via robust internal control mechanisms and from independent review. Activity in this area will be scaled up in 2023 to further strengthen the internal control environment and ensure compliance with the new requirements as measures and mechanisms for implementation are finalised.

Taxation

The corporation tax charge for the year ended 31 December 2022 was £0.9m. Almost all of our portfolio is within the REIT regime but this charge relates to non-REIT activity, mainly income arising from certain property development and trading operations.

The movement in deferred tax for the year was a charge of £0.9m, (2021: £0.8m credit) of which £0.1m was expensed through the income statement. In addition, £0.6m was charged through equity in relation to future tax deductions for equity-settled share-based payments. A further £0.2m was charged through 'other comprehensive income' 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, £9.0m 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

Rental income received from tenants increased to £194m in 2022 from £187m in 2021. However, cash paid out on property costs, administration and interest payments increased by £18.4m over the 2021 equivalents. In terms of capital movements, outflows of £258m for project expenditure and additions were largely offset by £210m of property disposal proceeds. As a result, group borrowings were almost unchanged at 31 December 2022 compared to a year earlier.

Group borrowings at both year ends were £1.25bn, the 2022 figure being about £300,000 less than 2021. Leasehold liabilities reduced in 2022 with the payment to TfL but long-term leasehold liabilities also increased to £34.5m after the receipt of a premium from an intermediate leaseholder. The net impact is that gross debt has fallen from £1.32bn in December 2021 to £1.28bn in December 2022. After adjusting for unrestricted cash and derivatives, net debt increased marginally over the year to £1.26bn.

On the new EPRA basis, our loan-to-value ratio increased a little to 23.9% from 22.3% in December 2021, the main reason for the increase being the property valuation declines in 2022. Available cash and undrawn facilities remained significant at £577m as at December 2022 (£608m at 31 December 2021). Interest cover remained strong too at 4.2 times in 2022 (2021: 4.6 times). Our main debt covenant continues to be 1.45 times.

Debt and financing 

Conditions in the debt markets deteriorated markedly in the second half of 2022 with central banks raising rates in an effort to deal with rapid inflation increases. With rates at that time expected to rise further and stay at these much higher levels for longer, market rates across the curve increased to levels not seen for many years. More recently, we have seen markets calm down significantly but are still some way ahead of where they were a year ago.

The UK 5-year swap rate peaked at around 5.4% in September 2022 but has since fallen back to around 4%. Similarly, the 10 year gilt increased to 4.6% at its peak but has since moved back to about 3.6%.

At the same time as rates were rising sharply, there was a sudden and significant increase in the credit spread that lenders required to accept the risk associated with typical corporate borrowers over and above the so called 'risk free' rate. Again, these spreads have been closing significantly in 2023 but remain elevated compared to more typical levels of recent years.

In these turbulent markets, we were helped by our high level of refinancing activity in previous years. Our only debt transaction in 2022 was the second one-year extension of the unsecured £100m revolving credit facility provided by Wells Fargo, taking its maturity to November 2027. At a time when loan extensions of this sort are not taken for granted, this was another indication of the strength of our banking relationships and we are grateful for the continuing strong support we have received from Wells Fargo and all of our lenders throughout 2022.

We have one remaining interest rate swap contract, providing a fixed rate of 1.36% to April 2025 on £75m of borrowings. As we had no floating rate borrowings at the balance sheet date, this contract has been deferred to start post the year end. With rates having risen so much in 2022, the fair value of this swap increased by £5.8m during the year.

Our next refinancing exposure arises in October 2024 on the £83m secured debt currently attracting a coupon of 3.99%. We will look to refinance this in due course and current expectations are that the cost of this will be a little higher than the current level.

At the year end, the Group's weighted average interest rate on a cash basis was 3.14%, the same as a year earlier, and 3.26% (31 December 2021: 3.27%) on an IFRS basis which adjusts for the convertible and green bonds. These figures indicate the advantage of having all of our debt at fixed rates as at the year end. The weighted average maturity of our borrowings was 6.2 years at 31 December 2022 compared to 7.2 years at 31 December 2021. 

Reporting under the Green Finance Framework

Derwent London's Green Finance Framework (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

Out of our total debt facilities of £1.8bn, £650m satisfy our definition of Green Financing Transactions (GFTs). The GFTs comprise the £350m Green Bond issuance in 2021 and a £300m 'green' tranche included within our main corporate £450m revolving credit facility taken out in 2019. Together these are used to fund qualifying green expenditure.

In accordance with the reporting requirements set out in the Framework, we are disclosing the Eligible Green Projects (EGPs) that have benefited from our Green Financing Transactions, and the allocation of drawn funds to each project.

The projects eligible for funds from the GFTs are as follows:

1 Previously known as 19-35 Baker Street W1

Qualifying 'green' expenditure

The qualifying expenditure as at 31 December 2022 for each project is set out in the table below. This includes an element of 'look back' capital expenditure on projects in which expenditure had been incurred prior to management's approval of the project as an EGP. This also includes capital expenditure on projects which had already been incurred as at the original refinancing date in October 2019.

Soho Place W1 and The Featherstone Building EC1 both commenced on site in 2019 and reached practical completion in H1 2022. Soho Place Site B was disposed of in the year and, in accordance with section 3.3 of the Framework, the expenditure allocated to Site B has therefore been removed from the qualifying expenditure.

The 25 Baker Street W11 scheme commenced on site in October 2021 and is due to reach practical completion in 2025.

Cumulative spend on each EGP as at the reporting date

1 Previously known as 19-35 Baker Street W1

After deducting all previously eligible expenditure on Soho Place Site B of £34.8m, the cumulative qualifying expenditure on EGPs was £627.9m. Total qualifying expenditure incurred in 2022 was £99.9m.

Drawn borrowings from GFTs as at 31 December 2022 were £350m, which comprised of the £350m Green Bonds with £nil drawn under the green tranche of the RCF. Therefore, there was £300.0m undrawn under the green tranche of the Group's RCF as at 31 December 2022, of which £277.9m was available to fund future cash flow requirements of the Group.

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.

Dividend

We continue to operate a progressive but well covered dividend policy, mindful also of our pension and other stakeholder obligations and responsibilities. The board is recommending a 1.0p per share or 1.9% increase in the final dividend to 54.5p. It will be paid in June 2023 with 38.5p as a PID and the balance of 16.0p as a conventional dividend. The Company's ISIN reference is GB0002652740.

After adding in the interim 2022 dividend, the total dividend for the year amounts to 78.5p, 2.6% higher than for 2021. Dividend cover remains sound with dividends paid and declared in relation to 2022 earnings 1.36 times covered by EPRA earnings.

PRINCIPAL RISKS AND UNCERTAINTIES

MANAGING RISKS

We have identified certain principal risks and uncertainties that could prevent the Group from achieving its strategic objectives and have assessed how these risks could best be mitigated, where possible, through a combination of internal controls, risk management and the purchase of insurance cover. These risks are reviewed and updated on a regular basis and were last formally assessed by the Board on 24 February 2023. The Board has confirmed that its risk appetite and key risk indicators remain appropriate.

The Group's risk profile remained elevated during 2022 due partly to political and economic uncertainty, although the risks arising from the Covid-19 pandemic have lessened. The Board has reinstated a fall in property values as a principal risk for the Group. The current economic conditions have had an adverse impact on property yields, and there is a risk that property values could fall further in 2023.

We are operating in a changed interest rate environment following a long period of historically low rates. At 31 December 2022, all of our borrowings were at fixed rates. As a consequence of inflation and economic uncertainty, some of our occupiers may face a more challenging financial situation, which could result in Derwent London having higher future vacancy rates and/or reduced rent receipts. The occupiers deemed to be most at risk are those which rely heavily on consumer spending such as retail and hospitality, which make up only 7% of the Group's income. Despite the economic uncertainty, London remains resilient and occupier demand remains good for the right product as the 'flight to quality' continues.

Staying ahead of the sustainability curve and delivering on its net zero carbon commitments is a fundamental part of Derwent London's long-term strategy. Given that the built environment contributes significantly to the UK's overall carbon footprint, we are being proactive in finding solutions to further reduce emissions and develop renewable energy sources. The Remuneration Committee has introduced sustainability-related metrics (embodied carbon reduction and energy intensity reduction) into the Executive Directors' long-term incentive plan.

The principal risks and uncertainties facing the Group in 2023 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 2022 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

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 EPRA loan-to-value ratio has increased to 23.9% as at 31 December 2022.

Principal financial instruments

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

General objectives, policies and processes

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

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

Credit risk

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

Impairment calculations have been carried out on trade receivables and accrued income arising as a result of the spreading of lease incentives using the forward-looking, simplified approach to the expected credit loss model within IFRS 9. In addition, the Credit Committee has reviewed its register of tenants at higher risk, particularly in the retail or hospitality sectors, those in administration or CVA and the top 64 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 no increase (2021: £0.1m) or decrease (2021: £0.1m), as all borrowings at the end of the year were fixed.

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 2022, the proportion of fixed debt held by the Group was above this range at 100% (2021: 99%). During both 2022 and 2021, the Group's borrowings at variable rate were denominated in sterling.

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

Liquidity risk

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

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

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

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

Capital disclosures

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

The Group's objectives when maintaining capital are:

to safeguard the entity's ability to continue as a going concern so that it can continue to provide above average long-term returns for shareholders; and 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 2022, the Group's strategy, which was unchanged from 2021, 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 £4.6bn (2021: £4.8bn) of uncharged property as at 31 December 2022.

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

27 February 2023

GROUP INCOME STATEMENT

1 Prior year figures have been restated for a change in accounting policy in relation to forgiveness of lease payments. See note 2 for additional information.

2 Net property and other income in 2022 includes a credit of £1.0m for the movement in impairment of receivables (2021 restated: charge of £2.2m). See note 3 for additional information.

GROUP STATEMENT OF COMPREHENSIVE INCOME

GROUP BALANCE SHEET