GPOR.L Regulatory News (GPOR)

Press Release

 15 November 2018

Strong operational performance in H1 driven by leasing successes with continued capital discipline

The Directors of Great Portland Estates plc announce the results for the Group for the six months ended 30 September 2018. Highlights1 for the six months:

Valuation up 0.6%, driven by rental value growth; upgrading rental value guidance

· Portfolio valuation up 0.6%2 (developments: up 2.1%2)

· Rental value growth of 0.7%2 (0.4% offices, 1.6% retail); yield compression of 1 bp

· Total property return of 2.2%, with capital return of 0.6% v IPD Central London (quarterly index) of 1.3%

· Upgrading rental value growth guidance for financial year; range now +1.5% to minus 1%

Solid financial performance; interim dividend up 7.5%

· EPRA3 NAV per share of 849 pence, up 0.5% over six months; net assets of £2,381.4 million

· EPRA3 earnings of £25.3 million, down 19.9% on H1 2017 following asset sales. EPRA3 EPS of 9.0 pence, down 6.3%. Cash EPS of 8.3 pence, up 15.3%

· After revaluation surplus, IFRS profit after tax of £33.7 million (2017: £25.3 million)

· Total accounting return of 1.3% over six months; interim dividend per share of 4.3 pence, up 7.5%

Further leasing successes, market lettings 4.8% ahead of March 2018 ERV

· 37 new lettings (annual rent of £8.4 million, 135,400 sq ft), market lettings 4.8% above March 2018 ERV

· £1.6 million let since September 2018 and a further £2.7 million under offer; together 4.8% ahead of March 2018 ERV

· Flex space and co-working commitments of 64,500 sq ft securing rent at a premium of 36%5; appraising further 100,000 sq ft

· 17 rent reviews securing £7.6 million, 20.6% ahead of passing rent, 4.1% ahead of ERV at the review date

· £1.9 million reversion captured since March 2018; further reversionary potential of 9.8% (£9.8 million)

· Vacancy rate of 4.8%, average office rent of £54.10 per sq ft, average lease length of 5.0 years

· Rent roll of £99.3 million (up 2.5%2), with total potential future growth of 52% to £151.2 million

Good progress on committed schemes; extensive pipeline of opportunities (53% of portfolio)

· 160 Old Street, EC1 (161,700 sq ft) completed in April, now 87% let; 19.6% profit of cost

· Good progress across our three committed schemes (412,000 sq ft), including land buyback completed at Hanover Square, W1; all located near to Crossrail stations, 16.7% forecast profit on cost, capital expenditure to come of £206.1 million. 11% pre-let with encouraging levels of occupier interest

· Exceptional and flexible development pipeline of 11 schemes (1.3 million sq ft), currently income producing, with 3.4 years average lease length, 13.5% reversionary (existing use)

Continued recycling; £329 million of sales since 1 April, broadly in line with book value

· 160 Great Portland Street, W1 sold for headline price of £127.3 million, crystallising a surplus since development commitment of 101%

· 55 Wells Street, W1 sold for £64.6 million, net initial yield of 3.99% and capital value of £1,674 per sq ft

· Four smaller sales, all W1, totalling £137.4 million, 2.0% above March 2018 book value

· Likely net seller in H2; approximately £120 million in the market for sale

Unprecedented financial strength; maintaining balance sheet discipline with proposed share buyback of up to £200 million

· Property loan-to-value of 5.8%, weighted average interest rate of 2.7%, weighted average debt maturity of 6.9 years, cash and undrawn facilities of £682 million (incl. amended and extended £450 million RCF)

· £306 million returned to shareholders via B-share scheme in April; further return of surplus equity via share buyback of up to £200 million launched today

1 All values include share of joint ventures unless otherwise stated 2 On a like-for-like basis 3 In accordance with EPRA guidance 4 See our Financial Results EPRA and adjusted metrics: we prepare our financial statements using IFRS, however we also use a number of adjusted measures in assessing and managing the performance of the business. These include measures defined by EPRA, which are designed to enhance transparency and comparability across the European real estate sector, see note 8 to the financial statements. 5 Comparison to a combination of outperformance of March 2018 net effective ERV and net effective rent achievable on short term letting ahead of development.

Toby Courtauld, Chief Executive, said:

"We are pleased to report another strong operational performance, led by leasing successes and development progress, delivering a solid set of financial results for the first half and continued capital discipline through a further return of surplus capital to shareholders.

With healthy occupier demand, we maintained our strong leasing momentum across our high quality, sensibly priced office and retail portfolio, capturing reversion and leasing well ahead of ERV. We also continued the roll-out of our flexible space offering, meeting the evolving needs of our occupiers, and we have a further 100,000 sq ft being evaluated for the product. When combined with £2.7 million of investment lettings currently under offer at a 6.9% premium to ERV and good onsite progress across our three committed development schemes which are already 11% pre-let, we have raised the interim dividend by 7.5% and increased our rental guidance for the financial year. Taking advantage of a still competitive investment market, we have also crystallised further surpluses with £329 million of net sales so far this financial year, reducing our LTV to only 5.8%, and we expect further sales in the second half. As a result, we currently intend to return up to £200 million of surplus equity to shareholders through a share buyback programme, which will be kept under regular review by the Board.

Whilst we expect, and are planning for, continued political and economic uncertainty, particularly given the ongoing Brexit negotiations, GPE remains exceptionally well positioned: Our well-located portfolio is full of opportunity, with 92% in close proximity to a Crossrail station; our properties are let off low rents with significant further reversionary potential; our exceptional income-producing development pipeline offers nearly 1.3 million sq ft of flexible future growth potential, meaning that we have no need to buy. But if any market weakness should emerge, we retain significant financial capacity to exploit it; meanwhile, our talented team remains focused on maximising the opportunity we have to generate long-term value across our business."

A conference call facility will be available to listen to the presentation at 9.00am today on the following numbers:

UK: 0808 109 0700 (freephone)

International: +44 (0) 20 3003 2666

For further information see www.gpe.co.uk or follow us on Twitter at @GPE_plc

This announcement contains inside information. The person responsible for arranging the release of this announcement on behalf of GPE is Desna Martin, Company Secretary.

Disclaimer

This announcement contains certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.

Any forward-looking statements made by or on behalf of Great Portland Estates plc ("GPE") speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

To view the accompanying appendices please paste the below into your web browser:

http://www.rns-pdf.londonstockexchange.com/rns/4069H_1-2018-11-14.pdf

Half Year Results

Our market

Introduction 

London's commercial real estate markets have continued to lack clear direction as the ongoing Brexit negotiations have yet to provide clarity regarding the UK's future relationship with the EU and the potential implications on both the UK economy and political landscape. Business confidence surveys have deteriorated as the perceived likelihood of no deal with the EU being reached has increased. Notwithstanding this unsettled backdrop, activity in London's commercial property markets was maintained over the last six months, with transaction levels in both the occupational and investment markets remaining above the 10 year average, supporting property valuations.

For the remainder of the financial year, absent any economic disruption from an adverse settlement with the EU, we expect capital values and rental levels to continue to trend broadly flat, although we expect a softening in some secondary yields. However, whilst the near-term economic and political outlook is challenging to predict, over the longer term we believe London will remain a truly global city, adapting to prevailing market conditions and continuing to attract a diverse range of businesses and investors as Europe's business capital. Moreover, its population continues to grow and Oxford Economics forecast the creation of 152,000 new office-based jobs in inner London over the next five years (up from 140,500 at May 2018).

Low levels of economic growth

While the global economy continues to grow at above trend rates, downside risks have increased over the last six months with an escalation in the trade war between the US and China, rising US interest rates and weakness in emerging markets. Closer to home, with employment levels at a record high and real wage growth starting to emerge, UK base rates were increased to their highest level since 2009 over the summer. However, the most recent Deloitte UK CFO survey undertaken in September indicated a further deterioration in business confidence, with only 12% of CFOs believing now is a good time to take greater risk and Brexit being rated as the biggest threat over the next twelve months. As a result, UK GDP forecasts have decreased marginally over the period with Oxford Economics forecasting annual GDP growth over the next three years of 1.6%, down from 1.7% in March. However, London's forecast outperformance has been maintained with annual GDP growth of 2.1% forecast over the next three years.

The attractions of investing in central London real estate, particularly to the overseas buyer, remain intact, with transaction volumes of £4.3 billion in the quarter to 30 September 2018. Investor demand has largely been focused at the prime end of the market, albeit more recently we have also seen strong demand for secondary assets with redevelopment or refurbishment potential. With the level of equity capital looking to invest in London remaining at elevated levels, prime office yields were unchanged over the period.

Occupational markets; open for business

Our occupational markets remained resilient over the six months to 30 September 2018, with businesses continuing to commit to London despite the uncertain backdrop. Central London office take-up was 6.9 million sq ft, in line with the preceding six months and 9.5% above the ten-year average of 6.3 million sq ft. Central London availability marginally reduced over the six months to 13.7 million sq ft at 30 September 2018, down 0.6 million sq ft and below the ten-year average of 14.9 million sq ft. This has helped broadly maintain rental values and pre-letting activity across our markets. Furthermore, tenant incentives (including rent frees) remain largely unchanged.

In the central London office market as a whole, development completions in the six months to 30 September 2018 were 2.1 million sq ft, with an overall vacancy rate of 4.8%. However, in the core of the West End, the focus of our development activities, completions totalled only 0.3 million sq ft in the six month period. This supply shortage has meant that occupiers continue to secure space well in advance of building completion, with 48.7% of the 13.8 million sq ft of space under construction already pre-let or under offer. Looking ahead, the speculative development pipeline continues to be modest. In central London, we estimate that 10.3 million sq ft of new speculative space could be delivered over the period to December 2022, of which only 2.1 million sq ft is in the West End core, equating to only 0.7% of core stock per annum.

West End occupational market

Over the six months to 30 September 2018, West End office take-up was 1.7 million sq ft, down 22.6% on the preceding six months and marginally below the 10 year average, albeit current availability of 4.3 million sq ft is 0.6 million sq ft also below the ten-year average. Vacancy rates remain low at 3.7% at 30 September 2018, with grade A vacancy estimated by CBRE to be only 2.5%. CBRE reported that prime office rental values remain unchanged over the last six months at £105 per sq ft with rent frees increasing on average by around one month to 24 months on a ten-year lease.

Although the squeeze on UK consumer spending has continued, with a number of high profile retailer administrations during the period, the West End retail market (where 40.1% of our West End portfolio by value is located) has continued to demonstrate relative strength. Vacancy on Oxford Street, Regent Street and Bond Street remains low at c.3.5% with prime Zone A rents on Oxford Street and Bond Street stable at £1,000 per sq ft and £2,200 per sq ft respectively.

City, Midtown and Southbank occupational markets

Over the six months to 30 September 2018, City office take up of 3.0 million sq ft is well ahead of the ten-year average of 2.6 million sq ft. Availability reduced to 5.2 million sq ft (from 6.4 million sq ft at 31 March 2018), with the amount of space under offer at 1.7 million sq ft, 42% above the 10-year average, suggesting a potentially strong final leasing quarter for 2018. The City vacancy rate was greater than that of the West End at 5.4%, although grade A vacancy was estimated by CBRE to be 3.5%, down from 4.1% at March. CBRE also reported that City prime rental values remained stable at £68.50 per sq ft, unchanged since December 2017, with rent free periods on a ten-year lease also unchanged at 24 months.

Take-up in Midtown and Southbank was strong, up 63.7% on the preceding six months, at 1.8 million sq ft, with the increase attributable to a small number of large pre-lets in Kings Cross. Prime office rental values remained £80 and £65 per sq ft for Midtown and Southbank respectively. Rent frees also remained unchanged at 24 months on average on a ten-year lease.

Investment market activity supported by overseas purchasers

The investment market continues to be robust with £9.4 billion of transactions in the last six months, up from £5.8 billion in the preceding six months. Interest from overseas investors continues to dominate transactional activity, accounting for 85% of transactions over the last six months (and 90% over the last three months). London's relative value, the low value of Sterling and London's safe haven status continued to attract international interest, particularly from Asian and continental European investors.

We reported in May 2018 that we estimated £37.0 billion of equity capital was seeking to invest in commercial property across central London compared to only £6.0 billion of stock on the market available to buy. Today we estimate that there is currently £4.3 billion of stock on the market available to buy, whilst the weight of money seeking to invest remains strong at £34.0 billion. With levels of equity demand at elevated levels and debt availability still good for prime quality assets and sponsors, investment yields for office properties remain unchanged. At 30 September 2018, prime yields were 3.75% and 4.00% in the West End and City respectively, according to CBRE.

Poor visibility on market outlook continues

Given the cyclical nature of our markets, we actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last six months, our property capital value indicators are largely unchanged and continue to provide limited market visibility. Investment activity in the central London commercial property market remains healthy and the real yield spread over gilt yields continues to be supportive. However, we expect to witness some modest expansion in the medium term, given the uncertain macro-economic backdrop and the challenging rental outlook. We do not expect significant rental value movements in the very near-term and, given the rental performance of the portfolio in the first half of the year, we have marginally upgraded our rental value growth range for the financial year to 31 March 2019 to +1.5% to minus 1.0% (previously +1.0% to minus 2.5%) (see Portfolio Management below).

Our business

Our business is accompanied by graphics (see Appendix 1 and 3)

Investment management

Investor demand for long-let, well-located, prime assets remained strong during the six months to 30 September 2018. As a result, we have continued to take advantage of these supportive market conditions by selling assets and crystallising further surpluses. We made no acquisitions in the period.

£329 million of disposals since 1 April 2018, 0.6% below book value

In April, we sold the freehold of the recently redeveloped and long let 78/92 Great Portland Street and 15/19 Riding House Street, W1 to a UK institution. The headline price of £49.6 million, equated to £48.2 million after deductions for tenant incentives or 2.4% ahead of the 31 March 2018 book value. This reflected a net initial yield of 3.9% on a topped up basis and a capital value of £1,362 per sq ft. Over the course of the six months, we also sold five residential units, adjoining the office space, for a combined price of £6.8 million.

In August, we sold 160 Great Portland Street, W1 to a Middle Eastern investor. We comprehensively refurbished the property in 2012 to provide 95,923 sq ft of Grade A office and restaurant space. The building was fully let with the offices, accounting for 97% of the income, let to Double Negative Limited until May 2032. The headline price of £127.3 million was 2.0% below the 31 March 2018 book value, reflecting a headline net initial yield of 4.08% and a capital value of £1,328 per sq ft.

In October, we completed the sale of 55 Wells Street, W1 to a European investor for a headline sale price of £65.5 million, equating to £64.6 million after deduction of tenants' incentives and vendor top ups, 3.0% below the 31 March 2018 book value. The headline price reflects a net initial yield of 3.99% and a capital value of £1,674 per sq ft. The BREEAM 'Excellent' building was developed by GPE in 2017 and comprises 39,095 sq ft of high quality office space arranged over six upper floors, a ground floor restaurant unit and D1 accommodation at lower ground floor. The offices are let to Williams Lea Limited and Synova Capital, and the ground floor is home to Yotam Ottolenghi's new flagship restaurant ROVI.

We also sold three smaller buildings for a total of £82.4 million, where our portfolio management activities were complete and the resulting forward look returns muted:

· 32/36 Great Portland Street, W1 for £18.9 million, 7.3% above book value, reflecting a net initial yield of 3.94% and a capital value of £1,465 sq ft;

· 27/35 Mortimer Street, W1 for £38.5 million, 0.8% above book value, reflecting a net initial yield of 3.90% and a capital value of £1,242 sq ft; and

· Percy House, 33/34 Gresse Street, W1 for a headline price of £25.0 million, in line with book value after deductions for rent guarantees, reflecting a net initial yield of 3.76% and a capital value of £1,445 per sq ft.

Likely net seller for the second half of the year

Our sales since 1 April 2018 have further reduced the proportion of the portfolio represented by long-dated properties, from 16% of the portfolio at March to 9% today following the sale of 55 Wells Street, W1. With investment pricing strong and prime yields currently trending flat, we are likely to remain a net seller as we continue to explore opportunities to crystallise further returns from the long-dated portfolio as it continues to see robust demand from international capital. We currently have c.£90.0 million (our share) of commercial property in the market for sale, with a further c.£30.0 million of residential property.

Portfolio management

During the six months to 30 September 2018, our leasing activity has remained healthy, letting ahead of ERV and continuing to capture the reversion across the portfolio. Key highlights include:

· 37 new leases were signed during the first half (2017: 37 leases), generating annual rent of £8.4 million (our share: £6.6 million; 2017: £9.8 million), with market lettings 4.8% above March 2018 ERVs;

· 17 rent reviews securing £7.6 million (our share: £6.1 million; 2017: £7.9 million) of rent were settled during the half year, representing an annualised increase of £1.3 million per annum, or 20.6% above the previous passing rent and 4.1% above the ERV at the review date;

· total space covered by new lettings, reviews and renewals during the first half was 243,400 sq ft (2017: 310,200 sq ft);

· £1.9 million of reversion was captured (our share) in the six months to 30 September 2018, with a further reversionary potential of £9.8 million (9.8%) of which 85% is available in the next 18 months; and

· 95% (by area) of the 101 leases with breaks or expiries in the twelve months to 30 September 2018 were retained, re-let, under offer or under refurbishment, leaving only 5% still to transact.

As we continued to be a net seller over the period, Group rent roll decreased by 7.5% to £99.3 million at 30 September 2018 (31 March 2018: £107.3 million). However, after adjusting for sales, the rent roll has increased by 2.5% on a like-for-like basis.

Key leasing transactions

The notable transactions during the six months included:

· at 160 Old Street, EC1, further to the 116,500 sq ft of space pre-let to Turner Broadcasting, we completed two office lettings to Pusher and Bosch totalling 23,350 sq ft of space for a combined rent of £1.5 million, equating to £66.00 per sq ft and 9.1% above March 2018 ERV;

· at Kingsland House, Regent Street, W1, we settled a rent review with Folli Follie (UK) Limited, capturing reversion of £0.3 million, an increase of 102% on the previous passing rent and 29% above ERV at the review date;

· the continued roll out of our flexible offering:

o at Elm Yard, WC1, we completed three flex space lettings (11,900 sq ft) at a combined annual rent of £0.7 million, 14.2% ahead of March 2018 ERV or 35% ahead on a net effective basis; and

o at New City Court, SE1, we entered into a partnership arrangement with Runway East, a co-working and flexible office provider, for 26,000 sq ft of the office space (including 6,000 sq ft signed in October) on a three year term. Runway East will operate the space and we will share the revenue that is paid by the businesses in occupation.

We are currently appraising a further 100,000 sq ft of flex and co-working space across our existing portfolio.

The Group's vacancy rate has marginally decreased to 4.8% at 30 September 2018 (31 March 2018: 4.9%) due to our letting successes offset by refurbishment and development completions. At 30 September 2018, the average rent across our office portfolio was £54.10 per sq ft, up from £52.80 per sq ft at 30 September 2017.

The table below summarises our leasing transactions in the period:

Note: Includes joint ventures at share

Since 30 September 2018, our leasing momentum has continued:

· We have completed 6 new leases generating £1.6 million (our share: £1.6 million) of annual rent (22,200 sq ft), with market lettings in line with March 2018 ERVs; and

· a further 30,100 sq ft of space is currently under offer which would deliver approximately £2.7 million p.a. in rent (our share: £2.6 million), with market lettings 6.9% above March 2018 ERVs.

Everything else being equal, should we complete all of these transactions, the vacancy rate would fall to 2.9%.

Development management

As we have continued to sell mature, long-dated assets, the proportion of the portfolio in the development programme has continued to grow and now represents 53% of the portfolio, providing significant development opportunities today and for the future. Since the start of the financial year, we have successfully completed one scheme and have continued to make good progress on our committed schemes. Currently we have three committed schemes on site, set to deliver 412,000 sq ft of high-quality space, all near Crossrail stations, which are expected to generate a profit on cost of 16.7%. Beyond this, the team is busy preparing the further 11 schemes with prospective deliveries into the early 2020s and beyond.

One development profitably completed

At 160 Old Street, EC1, owned in our Great Ropemaker Partnership, we completed the 161,700 sq ft of office, retail and restaurant space in late April, delivering a profit on cost of 19.6%. Following the lettings to Turner Broadcasting, Pusher and Bosch, the building is now 87% let on a blended average remaining lease term of 13.3 years with only two office floors remaining.

Three committed schemes all to benefit from Crossrail

In May, we obtained vacant possession at Oxford House, 76 Oxford Street, W1 and have commenced demolition of the building. During the period, we have successfully settled all of the neighbourly matters with adjoining owners and have appointed Lendlease as the main contractor. The new building will deliver 78,100 sq ft of new offices and 37,900 sq ft of retail space directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station and completion is targeted for Q3 2021, with an expected profit on cost of 17.9%. Early occupier interest for the retail element of the scheme is good, with formal marketing commencing in the new year.

At Hanover Square, W1, we have now taken back control of the entire site as Crossrail have completed their preparatory works. During October, to enable the development, we completed the purchase of the land under existing agreements that sits directly above the eastern entrance of the Bond Street Crossrail. The scheme will deliver 221,300 sq ft in total, comprising 167,200 sq ft of offices, 41,900 sq ft of retail and restaurant space and 12,200 sq ft of residential apartments. Following the pre-let of 57,200 sq ft of offices in the over station office building to KKR in March, we have launched the marketing campaign for the Bond Street retail and early leasing interest is very encouraging. The project is expected to deliver a profit on cost of 15.8%.

At Cityside House, E1, having improved the design we inherited, we have now stripped out the building, commenced demolition and awarded the main construction contract. Our activities will transform the existing building into 74,700 sq ft of Grade A office and retail space. We are targeting a profit on costs of 15.1% with average office rents across the building of around £51.40 per sq ft, with delivery expected in Q4 2019 following the opening of the nearby Whitechapel Crossrail station.

At 30 September 2018, the three committed development properties required £206.1 million of capital expenditure to complete.

Substantial development pipeline

Our development pipeline includes a further 11 uncommitted projects (1.3 million sq ft). These schemes include a number of exciting projects, including New City Court, SE1 in the London Bridge Quarter, where we hope to materially increase the size of the existing 97,800 sq ft building to more than 370,000 sq ft and will be submitting a planning application early next year. At Mount Royal, W1, located at the western end of Oxford Street, we are drawing up early plans to redevelop this two-acre site into a retail-led development scheme. All but one of these buildings is income producing today, with an average lease length of 3.4 years, and they provide a substantial opportunity to add value stretching into the 2020s.

Valuation

Valuation is accompanied by graphics (see Appendix 2)

The valuation of the Group's properties was £2,595.7 million as at 30 September 2018, reflecting a valuation increase of 0.6% on a like-for-like basis since 31 March 2018. At 30 September 2018, the wholly-owned portfolio was valued at £2,066.6 million and the Group had three active joint ventures which owned properties valued at £529.1 million (our share) by CBRE.

The key drivers behind the Group's valuation movement for the six-month period were:

· rental value increase - since the start of the financial year, rental values have increased by 0.7%, with office and retail rental values rising by 0.4% and 1.6% respectively. At 30 September 2018, the portfolio was 9.8% reversionary;

· intensive portfolio management - during the period, 54 new leases, rent reviews and renewals were completed, securing £12.7 million (our share) of annual income which helped to support the valuation;

· good progress across our development properties - the valuation of current committed development properties increased by 2.1% to £355.8 million; and

· yield compression - equivalent yields decreased very marginally by 1 basis point over the period largely driven by our repositioning activities. At 30 September 2018, the portfolio true equivalent yield was 4.6%.

Including rent from pre-lets and leases currently in rent free periods, the adjusted initial yield of the investment portfolio at 30 September 2018 was 4.0%, unchanged from the start of the financial year.

Our West End investment portfolio produced the most robust performance by geographic sector over the period, increasing in value by 0.5% on a like-for-like basis, in part driven by our portfolio management activity as set out above. Our City, Midtown and Southbank properties increased by 0.1%. Our joint venture properties increased in value by 0.9% over the period while the wholly-owned portfolio increased by 0.5% on a like-for-like basis.

The Group delivered a total property return (TPR) for the six months to 30 September 2018 of 2.2% (2017: minus 2.4%), compared to the Central London IPD quarterly benchmark of 2.9%, and a capital return of 0.6% (versus 1.3% for IPD). This relative under-performance resulted from our higher than benchmark exposure to investment properties with shorter lease lengths, where valuations were less resilient given the potential leasing risk. These properties form our development pipeline and active portfolio management opportunities where income is necessarily shorter to enable us to unlock the future longer-term value upside.

Our financial results

Our financial results are accompanied by graphics, see Appendix 3, and details on our approach to risk are set out in Appendix 1

We calculate adjusted net assets and earnings per share in accordance with the Best Practice Recommendations issued by the European Public Real Estate Association (EPRA). The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. We consider these standard metrics to be the most appropriate method of reporting the value and performance of the business and a reconciliation to the IFRS numbers is included in note 8 to the accounts.

EPRA NAV growth of 0.5%

EPRA net assets per share (NAV) at 30 September 2018 was 849 pence per share, an increase of 0.5% over the last six months, largely due to the 0.6% like-for-like increase in value of the property portfolio. The main drivers of the 4 pence per share increase in NAV from 31 March 2018 were:

· the increase of 6 pence per share arising from the revaluation of the property portfolio. Of this amount, development properties increased NAV by around 3 pence;

· EPRA earnings for the period of 9 pence per share enhanced NAV;

· the final dividend of 7 pence per share reduced NAV;

· tax, predominantly associated with property sales, reduced NAV by 3 pence per share; and

· other movements reduced NAV by 1 pence per share.

EPRA NAV growth of 0.5%, combined with the payment of last year's final dividend of 7.3 pence per share, delivered a total accounting return for the six months to 30 September 2018 of 1.3%.

At 30 September 2018, the Group's net assets were £2,381.4 million, up from £2,366.9 million at 31 March 2018, with the increase largely attributable to the revaluation of the property portfolio and net earnings for the period. EPRA triple net assets per share (NNNAV) was 847 pence at 30 September 2018 compared to 842 pence at 31 March 2018 (up 0.6%). At the period end, the difference between NAV and NNNAV was the net impact of the mark to market of debt of 2 pence per share, mainly arising from the Group's 2029 debenture (coupon of 5.63%) and deferred tax. There was a £1.5 million decrease in deferred tax liabilities during the period.

EPRA earnings given net sales activity

EPRA earnings were £25.3 million, 19.9% lower than for the same period last year, predominantly due to reduced rental income as a result of property sales and securing vacant possession of buildings ahead of redevelopment.

Rental income from wholly-owned properties was £40.0 million, down £4.7 million or 10.5% on last year, principally as a result of property sales during the period, the sale of 30 Broadwick Street, W1 in the prior year and securing vacant possession at Oxford House, W1 ahead of development. Joint venture fees were £2.5 million, up £1.4 million on last year due to higher levels of transaction activity in the joint ventures, including the commencement of the Turner lease at 160 Old Street, EC1. Taken together, rental income from wholly-owned properties and joint venture fees totalled £42.5 million, down 7.2% on the prior period. Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) increased 1.7% on the prior period.

Property expenses increased by £2.4 million to £6.1 million, principally due to increased costs associated with our leasing initiatives and empty rates returning to more normalised levels as the benefits of prior year rates rebates were not repeated in the current period. Administration costs were £12.8 million, an increase of £0.9 million, primarily as a result of higher marketing costs associated with our development activities, including the opening of our new marketing suite at Kent House, W1.

EPRA profits from joint ventures (excluding fair value movements) were £2.5 million, up from £1.0 million last year predominantly due to reduced finance costs as a result of the repayment of joint venture balances with the proceeds of property sales (including 240 Blackfriars Road, SE1).

Gross interest paid on our debt facilities was £6.3 million, down £2.7 million on the prior period. The reduction in interest paid was due to the prepayment of 85% of the Group's £142.9 million 5.63% debenture in the latter part of the prior year. We capitalised interest of £1.9 million (2017: £4.5 million), a £2.6 million reduction reflecting our reduced wholly-owned development exposure when compared to the prior period. As a result, the Group had underlying net finance charge (including interest receivable on joint ventures balances) of £0.7 million (2017: £0.7 million income).

Revaluation gains together with increased underlying earnings resulted in an accounting profit after tax of £33.7 million (2017: £25.3 million). The basic earnings per share for the period was 12.0 pence, compared to 7.7 pence for 2017. The diluted earnings per share for the period was 11.1 pence, compared to 5.7 pence per share for 2017. Diluted EPRA earnings per share was 9.0 pence (2017: 9.6 pence), a reduction of 6.3%, and cash earnings per share was up 15.3% at 8.3 pence (2017: 7.2 pence).

Results of joint ventures

The Group's net investment in joint ventures was £484.4 million, an increase from £423.7 million at 31 March 2018, due to a 0.9% like-for-like increase in value of the property portfolio and an increase in partner loan contributions to fund the Hanover Square land buy back and development expenditure. Our share of joint venture net rental income was £6.9 million, down £1.7 million on last year as a result of the sale of 240 Blackfriars Road, SE1 last year, offset by positive asset management activity. The underlying joint venture profits are stated after charging £2.5 million of GPE management fees (2017: £1.1 million).

Overall, our three active joint ventures represent an important proportion of the Group's business. At 30 September 2018, joint ventures represented 20.4% of the portfolio valuation, 20.3% of net assets and 18.9% of rent roll (31 March 2018: 18.1%, 17.9% and 13.6% respectively).

Robust financial position with continued active balance sheet management

In June, we drew down £100.0 million of new unsecured US private placement notes. The notes were placed with seven US institutional investors and mature in 10, 12 and 15 years, with a weighted average fixed rate coupon of 2.8%.

In September, the Group's £150.0 million convertible bond matured. Bonds with a face value of £136.9 million were repaid on maturity at par and £13.1 million of bonds converted. The Group opted to pay a cash amount in respect of the converted bonds rather than issue new shares. The quantum of the cash payment was based on GPE's share price between 7 September and 4 October. As a result, the final amount payable was £12.6 million, which was paid in early October, with the £0.5 million discount on maturity recognised in the income statement for the period.

At September 2018, Group consolidated net debt was £116.3 million, up from £(5.2) million net cash at 31 March 2018 (30 September 2017: £502.8 million). The increase was due to the payment of £306.0 million in respect of the Group's B share scheme and development capital expenditure of £48.1 million in the period more than offsetting receipts from property sales. Group gearing increased to 4.9% at 30 September 2018 (31 March 2018: 0%) due to higher levels of on-balance sheet debt more than offsetting the increase in the portfolio value. Including the non-recourse debt in the joint ventures, total net debt was £149.6 million (31 March 2018: £67.5 million) equivalent to a loan to property value of 5.8% (31 March 2018: 2.4%). The proportion of the Group's total net debt represented by our share of joint venture net debt was 22.3% at 30 September 2018. At 30 September 2018, the Group, including our share of joint ventures, had cash and undrawn committed credit facilities of £682 million.

Pro forma for the receipt of the sales proceeds of 55 Wells Street, W1, which was sold in October 2018 and the payment of the remaining £12.6 million in respect of the convertible bond, the Group's loan to property value is 3.9%.

The Group's weighted average cost of debt, including fees and joint venture debt, for the period was 2.8%, 50 basis points lower than at 31 March 2018 due to the partial prepayment of the Group's debenture as mentioned above. The weighted average interest rate (excluding fees) at the period end was 2.7% up from 2.1% at 31 March 2018, as a result of drawing down our new private placement notes and redemption of the 1.0% coupon convertible bond. At 30 September 2018, 72% of the Group's total drawn debt (including non-recourse joint venture debt) was provided on an unsecured basis (31 March 2018: 89% pro forma) and 88% was from non-bank sources (31 March 2018: 90%).

At 30 September 2018, 100% of the Group's total drawn debt (including non-recourse joint ventures) was at fixed or hedged rates (31 March 2018: 100%). Due to our low levels of debt and the treatment of capitalised interest under our Group covenants, our net interest cover ratio was 67 times (31 March 2018: n/a). Our weighted average drawn debt maturity was 6.9 years at 30 September 2018 (31 March 2018: 3.9 years).

Since the period end, the Group signed a £450 million unsecured revolving credit facility ("RCF") at a headline margin of 92.5 basis points over LIBOR with a group of six existing relationship banks. The facility has an initial five-year term which may be extended to a maximum of seven years at our request, subject to bank consent. This facility includes our standard unsecured financial covenants and is an amendment and extension of the Group's £450 million RCF signed in October 2014 which had a headline margin of 105 basis points and was due to mature in October 2021.

Maintaining balance sheet discipline; share buyback of up to £200 million

We have already completed £329 million of net sales so far this financial year, crystallising profits from properties where we have delivered our business plans and reducing our LTV to less than 6%, with more than £200 million of cash on deposit yielding a very low return.

As a result, we currently intend to return up to £200 million of equity which is surplus to our present needs to shareholders over the next 12 months through a share buyback. The proposed on-market share buyback programme reflects our ongoing commitment to capital allocation and balance sheet discipline, whilst also ensuring that we retain our significant financial flexibility to deliver our development programme and fund potential acquisition opportunities which may emerge given the ongoing economic and political uncertainty.

Adjusting for this proposed return of capital, pro forma LTV would rise to 11.8% (or 18.4% when including existing development capex commitments), although we expect to continue to be a net seller for the rest of the financial year.

Over the coming months, we expect to review regularly the size and timing of the buyback, including potentially ceasing the programme, as the future direction of the UK economy becomes clearer and should the scale and speed of our property sales and acquisitions evolve from our expected path.

A further announcement containing more detailed information regarding the share buyback will be released before the start of any dealing under the share buyback programme.

99.7% rent collection and robust tenant base

The quarterly cash collection performance has continued to be very strong throughout 2018. We secured 99.7% of rent due within seven working days following the September quarter day, compared with 99.9% and 99.0% at March and June respectively earlier this year. Tenants on monthly payment terms represent around 5.6% of our rent roll (30 September 2017: 3.1%). We had one tenant delinquency in the first half of the six month period (0.1% of rent roll) and we remain vigilant, regularly monitoring the financial position of our tenants. In addition, we have further protection from any tenant defaults with £23.6 million of rent deposits and bank guarantees, representing around 24% of rent roll.

Taxation

The tax charge in the income statement for the half year was £6.7 million (2017: £2.5 million credit) and the effective tax rate on EPRA earnings was 0% (2017: 0%). The tax charge for the period results from property sales which fall outside our REIT ring-fence and the maturity of the convertible bond.

In general, as a REIT, the Group is broadly exempt from corporation tax in respect of its rental profits and chargeable gains relating to its property rental business but is otherwise subject to corporation tax. In particular, the Group is subject to corporation tax in respect of (i) any profits arising from trading properties (including the sale of the residential units at Rathbone Square, W1) and (ii) any gains arising on the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years (including 78/92 Great Portland Street, W1 and 55 Wells Street, W1).

Dividends

The Board has declared an interim ordinary dividend of 4.3 pence per share (2017: 4.0 pence) which will be paid on 2 January 2019. All of this dividend will be a REIT Property Income Distribution (PID) in respect of the Group's tax-exempt property rental business. 

Condensed group income statement

For the six months ended 30 September 2018

Condensed group statement of comprehensive income

For the six months ended 30 September 2018

Condensed group balance sheet

At 30 September 2018

Condensed group statement of cash flows

For the six months ended 30 September 2018

Comparative re-presented: see note 22.

Condensed group statement of changes in equity

For the six months ended 30 September 2018 (unaudited)

Condensed group statement of changes in equity

For the six months ended 30 September 2017 (unaudited)

Condensed group statement of changes in equity

For the year ended 31 March 2018 (audited)

Condensed notes forming part of the half year results

1 Basis of preparation

The information for the year ended 31 March 2018 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The annual financial statements of Great Portland Estates plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union. The accounting policies and methods of computation applied are consistent with those applied in the Group's latest annual audited financial statements other than the accounting policy for sales and purchases of property which has been amended to the following: the Group recognises sales and purchases of property when control of the asset transfers. The nature of the Significant Judgements and Key Sources of Estimation Uncertainty applied in the condensed financial statements have remained consistent with those applied in the Group's latest annual audited financial statements with the exception of the recognition of sales and purchases of property which is no longer considered a significant judgement.

This is the Group's first set of financial statements where IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. There have been no retrospective adjustments made to the prior year figures. The impact on the six month results on adoption of these standards are set out below:

· IFRS 9 Financial instruments: This standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. The adoption of this standard has not had a material impact on the condensed financial statements; and

· IFRS 15 Revenue from Contracts with Customers: The standard is applicable to service charge income, joint venture fee income, trading property revenue and development management revenue, but excludes lease rental income arising from contracts with the Group's tenants as well as the spreading of lease incentives. The adoption of this standard has not had a material impact on the condensed financial statements.

A number of standards and amendments to standards have been issued but are not yet effective for the current period. The most significant of these is set out below:

· IFRS 16 replaces IAS 17 Leases and requires all operating leases in excess of one year, where the Group is the lessee, to be included on the Group's balance sheet, and recognise a right-of-use asset and a related lease liability representing the obligation to make lease payments. The right-of-use asset will be assessed for impairment annually (incorporating any onerous lease assessments) and amortised on a straight-line basis, with the lease liability being amortised using the effective interest method. The accounting for lessors will not significantly change. The Group has completed its impact assessment of the standard and concluded that as the Group is primarily a lessor, holds a limited number of operating leases and the standard does not impact the recognition of rental income, the impact on the financial statements will be immaterial.

The Group's performance is not subject to seasonal fluctuations.

Going concern

Details of the market in which the Group operates, together with factors likely to affect its future development and performance, are set out in the "Our market" and "Our business" sections of this report. The financial position of the Group, its liquidity position and borrowing facilities are described in "Our financial results" and in the notes of the half year results.

The Directors have reviewed the current and projected financial position of the Group, making reasonable assumptions about future trading performance. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-year results.

2 Total revenue

3 Net rental income

4 Property expenses

5 Finance income

6 Finance costs

7 Tax

The difference between the standard rate of tax and the effective rate of tax arises from the items set out below:

7 Tax (continued)

The Group's deferred tax assets and liabilities have been calculated using tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the liability is settled or the asset is realised.

During the period £0.2 million (2017: £nil) of deferred tax was debited directly to equity. The Group's net deferred tax at 30 September 2018 was a liability of £0.3 million (2017: an asset of £4.5 million). This consists of deferred tax liabilities of £0.3 million (2017: £2.8 million) and deferred tax assets of £nil (2017: £7.3 million).

Movement in deferred tax:

A further deferred tax asset of £2.3 million, relating to revenue losses and contingent share awards, was not recognised because it is uncertain whether future taxable profits will arise against which this asset can be utilised.

As a REIT, the Group is largely exempt from corporation tax in respect of its rental profits and chargeable gains relating to its property rental business. The Group is otherwise subject to corporation tax. In particular, the Group's REIT exemption does not extend to either profits arising from the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years (including 78/92 Great Portland Street, W1 and 55 Wells Street, W1) or profits arising from trading properties (including the sale of the residential units at Rathbone Square, W1).

In order to ensure that the Group is able to both retain its status as a REIT and to avoid financial charges being imposed, a number of tests (including a minimum distribution test) must be met by both Great Portland Estates plc and by the Group as a whole on an ongoing basis. These conditions are detailed in the Corporation Tax Act 2010.

8 Performance measures and EPRA metrics

Adjusted earnings and net assets per share are calculated in accordance with the Best Practice Recommendations issued by the European Public Real Estate Association (EPRA). The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. The directors consider these standard metrics to be the most appropriate method of reporting the value and performance of the business the reconciliations between these measures and the equivalent IFRS figures are shown in the tables below. 

Weighted average number of ordinary shares

Basic and diluted earnings per share

EPRA Earnings per share

8 Performance measures and EPRA metrics (continued)

EPRA Net assets per share

The Group had £150.0 million of convertible bonds in issue during the period with a conversion price of £7.13 per share. The dilutive effect of the contingently issuable shares within the convertible bond is required to be recognised in accordance with IAS 33 - Earnings per Share.

Total Accounting return

8 Performance measures and EPRA metrics (continued)

Cash earnings per share

Net debt and loan-to-property value

9 Investment property

Investment property

Investment property under development

Surplus from investment property

On the settlement of all outstanding payments on the completion of Rathbone Square, W1, the allocation of costs between the residential and commercial elements of the scheme has been finalised. This resulted in £8.2 million of further costs being allocated to the residential element of the scheme (from the commercial element), resulting in a £8.2 million profit on disposal of the commercial element and an equal loss on disposal being recognised on the residential element. There is no overall impact on the income statement from this adjustment.

The Group's investment properties, including those held in joint ventures (note 11), were valued on the basis of Fair Value by CBRE Limited (CBRE), external valuers, as at 30 September 2018. At 30 September 2018, £64.6 million of investment property was held for sale. The valuations have been prepared in accordance with the RICS Valuation - Global Standards 2017 which incorporate the International Valuation Standards and the RICS Valuation - Professional Standards UK January 2014 (revised April 2015) ("the Red Book") and have been primarily derived using comparable recent market transactions on arm's length terms. CBRE have advised us that the total fees paid to CBRE by the Group represent less than five per cent of their total revenue in any year.

Real estate valuations are complex and derived using comparable market transactions, which are not publicly available and involve an element of judgement. Therefore, in line with EPRA guidance, we have classified the valuation of the property portfolio as Level 3 as defined by IFRS 13. There were no transfers between levels during the period. Inputs to the valuation, including capitalisation yields (typically the true equivalent yield) and rental values, are defined as 'unobservable' as defined by IFRS 13.

A decrease in the capitalisation yield by 25 basis points would result in an increase in the fair value of the Group's investment property by around £158 million, whilst a 25 basis point increase would reduce the fair value by around £141 million. There are interrelationships between these inputs as they are determined by market conditions, and the valuation movement in any one period depends on the balance between them. 

9 Investment property (continued)

Key inputs to the valuation (by building)

Everything else being equal, there is a positive relationship between rental values and the property valuation, such that an increase in rental values will increase the valuation of a property and a decrease in rental values will reduce the valuation of a property. However, the relationship between capitalisation yields and the property valuation is negative; therefore, an increase in capitalisation yields will reduce the valuation of a property and a reduction will increase its valuation. There are interrelationships between these inputs as they are determined by market conditions and the valuation movement in any one period depends on the balance between them. If these inputs move in opposite directions (i.e. rental values increase and yields decrease) valuation movements can be amplified whereas if they move in the same direction they may offset reducing the overall net valuation movement.

The book value of investment properties includes £40.8 million (2017: £40.7 million) in respect of the present value of future ground rents. Net of these amounts, the market value of the investment properties together with the market value of the trading properties was £2,066.6 million. During the period, the Group capitalised £0.3 million (2017: £0.4 million) of employee costs in respect of its development team into investment properties under development. At 30 September 2018, the Group had capital commitments of £104.4 million (2017: £9.9 million).

10 Trading property

The Group has developed a large mixed-use scheme at Rathbone Square, W1. Part of the approved scheme consists of residential units, which the Group holds for sale. As a result, the residential element of the scheme is held as trading property. The fair value of the trading property was £18.9 million at 30 September 2018, representing a revaluation above cost of £1.2 million.

11 Investment in joint ventures

The investments in joint ventures comprise the following:

The non-recourse loans of the joint ventures at 30 September 2018 are set out below:

The Great Ropemaker Partnership has entered into two interest rate swaps with a fixed rate of 1.42%, which expire conterminously with the bank loan in 2020, with a notional principal amount of £90.0 million. The loan has an all-in hedged coupon of 2.67%.

At 30 September 2018, the Great Victoria Partnership loan had a fair value of £82.2 million (2017: £83.3 million). All interest-bearing loans are in sterling. At 30 September 2018, the joint ventures had £nil undrawn facilities (2017: £nil).

The investment properties include £5.2 million (2017: £5.2 million) in respect of the present value of future ground rents, net of these amounts the market value of our share of the total joint venture properties is £529.1 million. At 30 September 2018, the Group's share of joint venture capital commitments was £101.7 million (2017: £37.4 million).

Transactions during the period between the Group and its joint ventures, who are related parties, are set out below:

The joint venture balances bear interest as follows: the GHS Limited Partnership at 5.3% p.a. on balances at inception and 4.0% on any subsequent balances and the Great Ropemaker Partnership at 4.0% p.a.

The Group earns fee income from its joint ventures for the provision of management services. All of the above transactions are made on terms equivalent to those that prevail in arm's length transactions.

11 Investment in joint ventures (continued)

Summarised balance sheets