• New rent agreed: £10.8 million year-to-date, of which £8.8 million in the first half of the year.
• EPRA vacancy rate: Reduced from 4% in December to 3.2%.
• Rental advice: Upgraded to +3% to +6% for the year.
• EPRA NTA per share: Fell 2.7% to 3,044 pence.
• Total accounting income: Almost unchanged at -1% in the first half of the year.
• EPRA result: Up 6.5% to GBP 59.2 million or 52.7 pence per share.
• Interim dividend: Increased by 2% to 25 pence per share.
• Gross rents: Increased, with property expenses and impairments decreasing by £2.4 million to £12.5 million.
• Gross rental income on a comparable basis: This represents an increase of 1.7% compared to the previous year, with net rents increasing by 3.4%.
• Project expenses: 108.6 million GBP in the first half of 24.
• Estimated future capital expenditure: GBP 103 million is expected in the second half of the year.
• Unused credit lines and unrestricted cash: 566 million GBP in the half year.
• Rating decline: Overall, developments in the West End increased by 4.3%.
• Total return on the property: 0.3%, outperforming the MSCI index.
• Annual rent: £199.4 million, with an ERV of over £311 million.
• Investment activity: The largest sale was through Turnmill for just over £76 million.
• Energy consumption: Decrease of 8%.
• Rental activity: £10.8 million year-to-date, of which £8.8 million in the first half of the year.
• Retention and re-letting rate: 86% in the first half of the year.
• Development return on costs: 6% for local projects.
• Pre-letting at 25 Baker Street: 84% of the main office building.
• Pre-sold units at 25 Baker Street: 13 of 41 units.

Release date: August 8, 2024

For the full transcript of the quarterly earnings call, please see the full transcript of the quarterly earnings call.

Positive points

• Derwent London PLC (DWVYF, Finance) has reached a solution to grant planning permission for the 50 Baker Street project, a joint venture with Lazari.
• The company reported its highest half-yearly rent growth since 2016, recording £10.8 million of new agreed rent year-to-date.
• The EPRA vacancy rate fell to 3.2%, which is significantly below the market vacancy rate of 8.3%.
• The company increased its interim dividend by 2% to 25 pence per share, continuing its track record of gradual dividend increases.
• Derwent London PLC (DWVYF) has a strong balance sheet and acquisition ambitions with undrawn credit facilities and unrestricted cash of GBP 566 million at half-year.

Negative points

• EPRA NTA per share fell 2.7% to 3,044 pence, although the decline was less than the previous year.
• The total return on assets remained almost unchanged at minus 1% in the first half of the year, with earnings almost offsetting the decline in valuation.
• The valuation of fully owned properties fell by 1.7% over the six months.
• Future capital expenditure is expected to be high, with spending of GBP 103 million expected in the second half of the year and GBP 156 million forecast for 2025.
• The company faces difficult planning conditions and limited development potential until 2028.

Questions and Answers – Highlights

Q: Earlier this year, another London office REIT completed a rights issue. Do you see the same opportunities in the market? And if all the tailwinds you mentioned come through, is now the time to go on the offensive?
A: I think we are on the offensive; we are investing a lot in the pipeline and we do have ambitions to buy. We also have a very strong balance sheet, so the need for a rights issue is less pressing. If we saw a really interesting opportunity for a large acquisition, we could look at all sorts of options, including potentially a rights issue. But at the moment we have options and we don’t need to look for money in the market. (Paul Williams, Chief Executive)

Q: You mentioned that smaller spaces are coming to market through distressed sellers. Is it safe to assume that you could be more active in these smaller spaces? And how do these returns from repositioning differ from the returns from more traditional HQ properties?
A: We see more opportunities, including some distressed assets, although not as many as in 2007. There are buildings with shorter leases and ESG question marks that look interesting to us to reposition and boost rents. (Nigel George, Executive Director)

Q: Just a quick question on the yield shift. The 18 basis points. Could you explain the split between City Borders and West End a little bit more?
A: We have seen around 10 basis points on larger properties and a little more on shorter leases at the lower end. The breakdown is more about property sizes than the City and West End. (Nigel George, Managing Director)

Q: You mentioned a total return of 5.73% for the portfolio. Do you think yields, particularly in the West End, will soon start to rise again if interest rates fall as expected?
A: The West End has declined less than the City, around 70 basis points since lower yields. With rates falling there should be the opportunity for some yield decline, although not as low as previously. Investors are increasingly seeing value in London and there is potential for some value growth. (Paul Williams, Chief Executive)

Q: What is your current risk appetite in terms of external growth and flexible space? Would you commit to 50 Baker Street without pre-letting? And what percentage of your gross lettable area should be flexible in the medium to long term?
A: We have always built on a speculative basis and would also start with 50 Baker Street on a speculative basis. In terms of flexible space, our growth is more organic and we value anything under 10,000 sq ft coming back to us, both for Cat A delivery and for furnished and flexible space. We expect growth to be in line with the market and around 5% plus a little more for some of our smaller assets. (Paul Williams, Chief Executive; Emily Prideaux, Executive Director)

Q: If you withdrew an asset because it did not meet the asking price, did the appraisers write down that value to reflect the asking price? And what is the appropriate discount for large assets?
A: The spread between the interest rate and the value was not that wide, just a few percent. The valuers took into account the scarcity of transactions in the market by shifting the yields up by 10 or 15 basis points over the half year. (Nigel George, Managing Director)

Q: You mentioned refinancing activity in the coming years. How has the market for listed bonds or convertible bonds changed as an option compared to traditional bank financing?
A: Most capital markets are open to us and pricing has become more attractive, especially in the bond market. The convertible bond market is also attractive, but before we move in that direction, the share price needs to react a little more. (Damian Wisniewski, Chief Financial Officer)

Q: What is your intention in terms of capital allocation with regard to the disposal of successful developments from the last cycle? How does this fit into the life cycle and depreciation of these buildings?
A: We have chosen to hold on to better buildings for longer and they have performed well. However, nothing lasts forever and we will consider larger disposals when the market is stronger. We regularly review each asset and its asset management opportunities. (Paul Williams, CEO)

Q: How far are you willing to increase LTV to capture new opportunities?
A: We are currently at around 29% LTV and could safely increase this to the early 30s, and possibly even up to 35% given the right opportunities. This will mean an additional GBP 200-400 million of debt, but we prefer to keep it below 35%. (Damian Wisniewski, Chief Financial Officer)

Q: What will unleash the transaction market if not lower interest rates, given that swap rates already reflect significantly lower base rates?
A: Swap rates have been coming down rapidly recently and we are seeing more people looking around and testing the tires. The investment market needs time to come back to life but lower rates are definitely a big help. (Damian Wisniewski, Chief Financial Officer)

For the full transcript of the quarterly earnings call, please see the full transcript of the quarterly earnings call.