TIDMDLN
RNS Number : 8621I
Derwent London PLC
10 August 2023
10 August 2023
Derwent London plc ("Derwent London" / "the Group")
UNAUDITED RESULTS FOR THE SIX MONTHSED 30 JUNE 2023
STRONG LEASING ACTIVITY CONTINUES
Paul Williams, Chief Executive of Derwent London, said:
"We delivered our second highest H1 lettings on record with
momentum maintained into the second half as businesses continue to
commit to our distinctive central London buildings and brand. With
our strong balance sheet, we are well-positioned with the right
product and pipeline to capture London's diverse demand, despite
the uncertain economic outlook."
Letting activity
-- H1 2023 lettings of GBP19.3m (228,000 sq ft); H2 lettings to
date of GBP7.0m (81,200 sq ft); YTD average 8.3% above December
2022 ERV
-- Key transactions in the year to date include:
o PIMCO (106,100 sq ft in H1) and Moelis (49,200 sq ft in H2) at
25 Baker Street W1; commercial 76% pre-let
o Buro Happold (31,100 sq ft in H1) and Tide (14,400 sq ft in
H2) at The Featherstone Building EC1; 70% let
o Uniqlo (22,200 sq ft in H1) at One Oxford Street W1; retail
70% let
Financial highlights
-- EPRA(1) net tangible assets 3,444p per share, down 5.2% from 3,632p at 31 December 2022
-- Gross rental income of GBP105.9m, up 3.9% from GBP101.9m (restated) in H1 2022
-- EPRA(1) earnings GBP55.6m or 49.5p per share, down 7.0% from 53.2p (restated) in H1 2022
-- IFRS loss before tax of GBP143.1m from a profit of GBP137.1m in H1 2022
-- First half dividend of 24.5p, up 2.1% from 24.0p
-- Total return -3.7% from +3.0% in H1 2022
-- Interest cover remains high at 411% (H1 2022: 419%) and
EPRA(1) loan-to-value ratio low at 25.0% (31 December 2022:
23.9%)
-- Net debt of GBP1,274.0m, a marginal increase compared to GBP1,257.2m at 31 December 2022
-- Undrawn facilities and unrestricted cash of GBP562m
Portfolio highlights
-- GBP11.7m of asset management transactions, 4.6% ahead of
December 2022 ERV; 86% retention/re-letting rate
-- EPRA vacancy of 4.5%, from 6.4% at December 2022
-- Portfolio valued at GBP5.2bn, an underlying decline of 3.7%;
development valuations up 10.6% underlying
-- True equivalent yield of 5.13%, a 25bp increase in H1 2023;
total increase since 30 June 2022 of 67bp
-- Portfolio ERV growth of 1.0%
-- Total property return of -2.0%, outperforming our benchmark(2) at -3.2%
-- Project expenditure(3) of GBP68.8m
-- GBP65.6m of disposals
-- Two major on-site developments totalling 435,000 sq ft, due
for completion in 2025 on budget and programme
-- Planning consent received for c.100 acre 18.4MW solar park on our Scottish estate
Outlook
-- Guidance unchanged for average ERV growth across our portfolio at 0% to +3%
-- Our high quality portfolio yield to be more resilient than the wider London office market
(1) Explanations of how EPRA figures are derived from IFRS are
shown in note 24
(2) MSCI Central London Offices Quarterly Index
(3) Including capitalised interest
Webcast and conference call
There will be a live webcast together with a conference call for
investors and analysts at 09:30 BST 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:
Derwent London Paul Williams, Chief Executive
Tel: +44 (0)20 7659 3000 Damian Wisniewski, Chief Financial Officer
Robert Duncan, Head of Investor Relations
Brunswick Group Nina Coad
Tel: +44 (0)20 7404 5959 Emily Trapnell
CHIEF EXECUTIVE'S STATEMENT
Operational performance
In H1, we agreed GBP19.3m of new leases and momentum has been
maintained with a further GBP7.0m of leases signed in H2 to date.
On average, the GBP26.3m of new income agreed since the start of
2023 is 8.3% ahead of December 2022 ERV with a WAULT of 10.3
years.
Key lettings in 2023 to date include:
-- 25 Baker Street W1 pre-lets - both substantially ahead of
ERV; commercial element 76% pre-let or pre-sold
o PIMCO - 106,100 sq ft at GBP103 psf on a 15-year lease (no
break) in H1
o Moelis - 49,200 sq ft at GBP100 psf on a 15-year lease (break
at year 10) on lower floors in H2
-- The Featherstone Building EC1; now 70% leased
o Buro Happold - 31,100 sq ft on levels 5-8 at GBP74 psf on a
15-year lease (break at year 10) in H1
o Tide - 14,400 sq ft on level 4 at GBP71 psf on a 10-year lease
(break at year 5) in H2
-- One Oxford Street W1; retail element now 70% leased
o Uniqlo - 22,200 sq ft on a 10-year lease (break at year 5) in
H1
-- Tea Building E1 - newly refurbished space
o Jones Knowles Ritchie - 8,100 sq ft at GBP60 psf on a 10-year
lease (break at year 5) in H1
o Gemba - 7,100 sq ft (Furnished + Flexible) at GBP64 psf on a
5-year lease (no break) in H2
The first half of 2023 was characterised by increasing caution
as higher UK inflation became more embedded and monetary policy
continued to tighten. Encouragingly, figures released more recently
show the inflation rate reducing and a number of forward-looking
indicators suggest this should continue. There remains a disconnect
between the investment market, where yields came under further
pressure in H1, and the occupational market, where we have
delivered a near record level of leasing in the year to date.
In addition, our Asset Management team agreed GBP11.7m of rent
reviews, renewals and regears on average 4.6% ahead of December
2022 ERV. The portfolio WAULT is 7.2 years (on a 'topped-up' basis)
and our EPRA vacancy rate has reduced from 6.4% during H1 to
4.5%.
Our business model incorporates a disciplined approach to
capital allocation and leverage. Including GBP65.6m of disposals in
H1 2023, we have sold almost GBP900m of assets since 2018. Over the
same period, we have invested over GBP900m in development capex and
have added to our longer-term pipeline with acquisitions of over
GBP500m.
Following the signing of the main construction contract with
Laing O'Rourke in early 2022 at 25 Baker Street W1, we have now
completed the fixed price contract with Kier at Network W1.
Together these projects comprise 435,000 sq ft.
The next phase of our new-build pipeline extends to c.240,000 sq
ft at 50 Baker Street W1, held in a 50/50 joint venture, and
c.150,000 sq ft at Holden House W1. Beyond that, our conditional
GBP239m acquisition of Old Street Quarter EC1, the current
Moorfields Eye Hospital site, is expected to complete from 2027. We
also have a programme of rolling refurbishments which we expect to
deliver attractive rental uplifts.
Valuations
Despite the strong operational performance, against a weak
economic backdrop, our central London focused portfolio reduced in
value by 3.7% in H1, taking the overall decline to 11.4% from H1
2022. The majority of the correction is yield-driven, with the
portfolio EPRA true equivalent yield increasing a further 25bp to
5.13% (up 67bp since 30 June 2022). The portfolio ERV increased
1.0%, partly offsetting the impact of outward yield shift on the
valuation. Our total property return was -2.0%, outperforming the
quarterly MSCI Central London Offices index which was -3.2%. Our
on-site developments increased in value by 10.6%, helped by the
pre-let at 25 Baker Street to PIMCO.
In line with the trend reported at FY2022, our higher quality
properties outperformed. Buildings valued above GBP1,500 psf saw
capital values reduce by only 1.3% compared to properties valued
below GBP1,000 psf, principally our future pipeline, which fell
6.3%.
Financial performance
The Group's EPRA net tangible asset (NTA) value per share
declined 5.2% to 3,444p as at 30 June 2023 from 3,632p as at 31
December 2022. After allowing for the 54.5p dividend paid to
shareholders in June 2023, the total return for the first half was
-3.7% (H1 2022: +3.0%).
The total downward investment property revaluation movement in
H1 2023 was GBP204.1m including owner-occupied property and our
share of joint ventures. This compares with a surplus in H1 2022 of
GBP72.9m (restated from GBP73.0m after a change in accounting
treatment for incentives) but the deficit is less than half the
GBP503.6m seen in H2 2022.
Gross rental income increased to GBP105.9m from GBP101.9m
(restated) in H1 2022 with a GBP4.7m overall increase in
irrecoverable property expenditure the main factor behind the
reduction in EPRA earnings. This cost increase was principally due
to a combination of higher average portfolio vacancy and the
exceptionally high irrecoverable service charges seen through the
first quarter of 2023 when energy pricing was elevated. Energy
prices fell in Q2 2023 to levels closer to those seen in early
2022. The IFRS loss before tax was GBP143.1m in H1 2023 (H1 2022:
GBP137.1m profit) and, after the usual adjustments for fair value
movements and property disposals, EPRA earnings were GBP55.6m (H1
2022: GBP59.7m restated) or 49.5p (H1 2022: 53.2p restated) on a
per share basis.
Our annual dividend remains well covered by EPRA earnings and we
have increased the interim 2023 dividend by 2.1% to 24.5p.
Capital recycling means net debt rose marginally to GBP1.27bn
from GBP1.26bn at December 2022, but is GBP87m below the GBP1.36bn
reported a year ago. Lower property valuations led to a slight
increase in the EPRA loan-to-value (LTV) ratio to 25.0%, compared
to 23.9% at December 2022. It remains comfortably within our target
range.
The balance sheet is very well placed with 98% of borrowings at
fixed rates, GBP562m of undrawn available facilities and
unrestricted cash, and only GBP83m of debt due to expire in October
2024, at a fixed interest rate of 3.99%.
London's global appeal
London is recognised as a world-leading city with broad appeal.
For occupiers, it has a deep talent pool and sophisticated business
ecosystem. This makes it a particularly appealing destination for a
wide range of occupiers, including both UK and European Head
Quarters. For investors, the restrictive planning environment and
strong long-term performance provide a robust investment case.
One of the key drivers of the London office market is job
creation. In 2021 and 2022, c.335,000 net new office-based jobs
were added (CBRE). A further c.235,000 jobs are forecast between
2023 and 2028. In addition, the population of London continues to
grow and is forecast to reach 10.6m by 2035, an 11% increase
compared to 2022. This is significantly higher than the general
rate of growth forecast in most other major European cities.
London attracts a broad range of occupiers while many other
global cities are more reliant on specific sectors. The three
largest sectors currently looking for space in the capital are
banking & finance, business services and creative industries.
There is also good demand from high growth areas such as AI and
life sciences.
London is a major contributor to the UK economy, accounting for
24.4% of UK GDP. Since 2013, it has delivered average economic
growth of 2.8% pa, outperforming the UK as a whole by c.130bp
annually and is expected to continue to outperform the UK overall
over the next five years.
Market backdrop
Businesses are more discerning around their occupational
requirements as the flight to quality gathers pace. Encompassing
many factors including amenity, location and sustainability
credentials, the definition of prime is becoming more nuanced. Set
against this, a large part of the current available supply does not
meet these more stringent needs.
London has recently seen a trend of companies committing to
return to more central, well-located and amenity-rich locations,
notwithstanding the higher occupational costs. The opening of the
Elizabeth line last year has emphasised the importance of location
and connectivity and c.80% of our portfolio is within a 10 minute
walk of an Elizabeth line station.
In a recent Knight Frank report, 77% of businesses surveyed
expect their total floorspace to increase or remain the same over
the next three years. In addition, 87% of businesses believe the
office will play a central role in their future occupational
models. The return to the office is continuing and a rising number
of corporates have issued more prescriptive guidelines to their
employees. The majority of those reported now require a minimum of
three days in the office as businesses plan for peak
occupation.
Vacancy is not evenly spread across central London. While
overall office availability remains elevated at 8.5%, the West End
is very tight at 3.8% compared to the City at 11.7% and Docklands
at 14.3%. New supply, however, is constrained. Only 3.4m sq ft of
projects are due to complete in the West End by the end of 2026, of
which 28% is pre-let. Against long-term average annual take-up of
4.1m sq ft, the West End faces an emerging supply shortage.
Central London office take-up in H1 of 4.2m sq ft was down 36%
compared to H1 2022, but space under offer increased 51% to 4.1m sq
ft through H1. Pre-letting levels across central London are high at
45% as companies with larger requirements increasingly recognise
the forthcoming lack of prime supply, particularly in central
locations. Active demand increased 35% in H1 to 7.7m sq ft, a
positive indicator for future take-up.
Investment volumes of GBP2.9bn in H1 were low against long-term
trends. Market interest rates have increased with the 10-year gilt
yield rising from 3.0% in February to 4.4% at 30 June 2023. Lender
risk appetite has reduced leading to an increase in margins and
contraction in lending volumes. City prime yields increased by 75bp
to 5.25% in the first half. However, reflecting the level of equity
targeting the West End, prime investment yields were unchanged in
H1 2023 at 3.75%, per CBRE.
Derwent's brand and product differentiation
Our distinctive, design-led spaces are focused on the people
that occupy them. Through innovative design and high quality
materials, we continually push boundaries to create architecturally
striking buildings that have a positive impact on businesses and
communities.
Sustainability is embedded throughout our business.
Implementation of our Intelligent Building programme continues
across the portfolio and will play an important role in our journey
to net zero carbon, helping reduce both energy consumption and
costs. We were recently granted planning consent for our 18.4MW
solar park in Scotland which will deliver tangible environmental
benefits for us and our occupiers.
Derwent's offer extends beyond the bricks and mortar: customer
service and our 'member' approach is integral. We maintain strong
relationships with our occupiers at all levels. The second of our
lounges, DL/28, will open this autumn in our Old Street village,
following very positive feedback from our occupiers on DL/78. This
amenity - available to and highly valued by both our members and
potential occupiers - is a significant brand differentiator.
We do not take a 'one size fits all' approach to flex. Rather,
we tailor space to meet market demand across the board. Our
buildings are designed to be flexible, and our 'long-life, low
carbon' approach means space is adaptable to the needs of a diverse
range of occupiers.
As well as leasing space to third party serviced office
providers (163,000 sq ft), we provide a variety of 'Furnished +
Flexible' workspaces, each designed for the relevant sub-market.
This extends to 128,300 sq ft, including 44,200 sq ft which is on
site or committed. Overall, flex comprises 5.4% of our portfolio
floorspace which compares to the wider London market at 5-6%.
Guidance and outlook
Although availability across central London is elevated, supply
of the best space is constrained, particularly in the West End. The
medium-term speculative development pipeline looks thin with some
new starts being delayed. Take-up was lower in H1, but we are
encouraged by the increased amount of space under offer and levels
of active demand.
We expect rents for the best space to continue to rise, with
poorer space to underperform. Our portfolio, which is 72% in the
West End, is well-placed as demonstrated by our near record leasing
activity in the year to date at rents well ahead of ERV. Our
guidance for average ERV growth across the portfolio in 2023 is
unchanged at 0% to +3%.
Our EPRA equivalent yield has increased to 5.13%, up 67bp over
the last 12 months to levels last seen in 2014. We expect our
portfolio to be more resilient than the wider London office market,
with the West End to continue to outperform. Our strong and
well-financed balance sheet means we are well-placed to continue
upgrading our properties through developments and refurbishments
while remaining opportunistic should attractive acquisitions
emerge.
As the flight to quality continues in an increasingly complex
world, we are well positioned with the right product to capture
London's diverse demand.
CENTRAL LONDON OFFICE MARKET
Occupational market
Take-up in H1 2023 totalled 4.2m sq ft across central London,
36% below H1 2022 and 25% lower than the 10-year H1 average.
However, space under offer increased 51% to 4.1m sq ft which is 18%
above the 10-year average. Pre-let space comprised 25% of H1
take-up, and eight of the top 10 lettings. Banking & finance
was the most active sector at 29% of take-up, followed by business
services at 22% and creative industries at 16%. These trends
further underline the flight to quality.
Average vacancy rose through H1 to 8.5% from 7.7% at December
2022. However, performance by sub-market continues to diverge. In
the West End, supply is constrained at 3.8% compared to the City
with availability at 11.7%. Supply is dominated by secondhand space
while demand is focused on prime, green space. According to CBRE,
secondhand space accounts for 67% of total availability.
CBRE estimates 12.7m sq ft of new space will be delivered across
central London by 2026, split 61% new developments and 39%
refurbishments. The 3.4m sq ft in the West End equates to 3.7% of
existing stock and is 28% pre-let. The 2.4m sq ft being delivered
speculatively compares to average annual take-up of 4.1m sq ft. The
5.6m sq ft in the City is equivalent to 7.2% of existing space, and
is 62% pre-let.
Combined with low existing vacancy, there is expected to be an
ongoing shortage of prime supply. New construction starts in H1
2023 were below trend at 1.7m sq ft. The long-term six-monthly
average for new construction starts is 2.3m sq ft.
Investment market
London is an attractive location for international investors. In
H1, overseas capital comprised 71% of investment volume with Asian
investors the most active at 49% in part reflecting their access to
cheaper domestic debt. CBRE estimated prime West End investment
yields were flat in H1 at 3.75%, while in the City there was a 75bp
increase to 5.25%. This compares to prime yields in key European
cities which range between 3.75% and 4.70%.
Investment volumes in H1 2023 of GBP2.9bn were 11% lower than in
H2 2022 (GBP3.3bn) and below the 10-year H1 average of GBP6.0bn. Q1
was stronger at GBP1.7bn as transactions that had been put on hold
at the end of 2022 completed. Q2, however, slowed to GBP1.2bn as
inflation and interest rate concerns added to economic uncertainty.
Deals in the West End represented 29% of the total compared to 45%
in the City.
Market interest rates have increased with the 10-year gilt yield
rising from February's low of 3.0% to 4.4% at the end of H1 2023.
The 5-year swap rate and SONIA experienced similar increases in H1
to 5.3% and 4.9% respectively. UK lending markets remain
constrained in terms of both cost and availability of debt.
Liquidity is focused on the sub-GBP100m lot size 'value-add'
market and is dominated by equity buyers. To date, there has not
been a significant change in the level of market distress but as
refinancing events gather pace the number of motivated vendors is
expected to increase. Lenders are seeking to deleverage facilities
to lower LTVs on refinancing given the rise in investment yields
and decline in capital values.
VALUATION
The Group's investment portfolio was valued at GBP5.2bn on 30
June 2023. There was a deficit of GBP201.5m in the first half
which, after accounting adjustments of GBP2.7m (see note 11),
produced a decline of GBP204.2m including our share of joint
ventures. On an underlying basis the portfolio decreased by 3.7%,
following an 8.0% decline in H2 2022.
The background to this performance continues to be weak economic
conditions with the impact of stickier than expected inflation and
higher interest rates feeding through to the economy. This has
resulted in a further outward movement of property valuation yields
in the first half of the year.
By location, our central London properties, which represent 99%
of the portfolio, reduced in value by 3.7% with the West End -2.4%
and City borders -7.2%. The balance of the portfolio, our Scottish
holdings, was down 2.5%.
Our portfolio capital growth outperformed the MSCI Quarterly
Index for Central London Offices, at -4.9%. The wider MSCI
Quarterly UK All Property Index decreased by 1.8%.
Our leasing activity provided valuation support, with the
strongest occupier demand being for high quality space with strong
ESG credentials. Our EPRA rental value moved up 1.0% in H1, in line
with our guidance and showed an improvement on the 0.5% growth in
H2 2022.
The portfolio's true equivalent yield expanded by 25bp, from
4.88% to 5.13% in H1. The initial yield is 3.9% (December 2022:
3.7%) which, after allowing for the expiry of rent frees and
contractual uplifts, rises to 4.8% on a 'topped-up' basis (December
2022: 4.6%).
The total property return for the six month period was -2.0%,
which compares to the MSCI Quarterly Index of -3.2% for Central
London Offices and 0.5% for UK All Property.
During the first half we were on-site at two West End
developments - 25 Baker Street W1 and Network W1. We are making
good construction progress at each project. 76% of the commercial
space at 25 Baker Street has been pre-let or pre-sold at a
significant premium to the valuer's ERV. The completion date for
each project is 2025 and GBP289m of capital expenditure is required
to complete. Together, they were valued at GBP330.1m at 30 June
2023 and delivered a strong 10.6% valuation uplift, after capital
expenditure. Excluding these projects, the portfolio declined in
value by 4.6% on an underlying basis.
Further details on the progress of our projects are in the
'Developments' section below and additional guidance on the
investment market is laid out in the 'Guidance and outlook' section
above.
Portfolio reversion
Our contracted annualised cash rent at 30 June 2023 was
GBP203.3m. With a portfolio net ERV of GBP305.6m there is GBP102.3m
of potential reversion. Within this, GBP47.3m is contracted through
rent-frees and fixed uplifts, the majority of which is already
straight-lined in the income statement under UK-adopted
international accounting standards. On-site developments and
refurbishments could add GBP35.6m, of which GBP10.7m is pre-let.
The ERV of available space is GBP12.1m. The balance of the
potential reversion of GBP7.3m comes from future reviews and
expiries less future fixed uplifts that are above current ERV.
LEASING, ASSET MANAGEMENT & INVESTMENT ACTIVITY
Lettings - GBP19.3m of new rent, 7.3% above ERV
Leasing activity in H1 2023 was the second strongest first half
since 2007. GBP19.3m of new rent was signed in 33 transactions
covering 228,000 sq ft, of which GBP11.3m (59%) were pre-lets. On
average, new leases were agreed 7.3% above December 2022 ERV, or
8.9% excluding short-term lettings at properties earmarked for
development, principally Holden House. This provides further
evidence that occupiers are prepared to pay a premium rent for the
right space which meets their requirements. The three key
transactions in the period were:
-- 25 Baker Street W1 - 106,100 sq ft pre-let to PIMCO two years ahead of completion;
-- The Featherstone Building EC1 - 31,100 sq ft letting to Buro Happold; and
-- One Oxford Street W1 - 22,200 sq ft letting to Uniqlo.
Our 'Furnished + Flexible' space continues to lease well, with
13 units (21,400 sq ft) leased in H1 for a combined rent of
GBP1.4m, on average 10.9% ahead of December 2022 ERV
Post-H1 lettings - GBP7.0m of new rent, 11.2% above ERV
Since the end of H1, occupier demand for our product has
continued to be strong. We have agreed a further GBP7.0m of
lettings. The two principal lettings in H2 are:
-- 25 Baker Street W1 - 49,200 sq ft pre-let to Moelis at a rent
of GBP4.9m, significantly above June 2023 ERV. The commercial
element is now 76% pre-let/sold; and
-- The Featherstone Building EC1 - 14,400 sq ft letting to Tide
at a rent of GBP1.0m, in line with June 2023 ERV. The building is
now 70% leased.
Leasing activity in 2023 to date
Let Performance against
Dec-22 ERV (%)
Area Income WAULT(1) yrs Open market Overall(2)
sq ft GBPm pa
-------- ------------ -----------
H1 2023 228,000 19.3 11.0 8.9 7.3
-------- --------- ------------- ------------ -----------
H2 to date 81,200 7.0 8.3 11.2 11.2
-------- --------- ------------- ------------ -----------
(1) Weighted average unexpired lease term (to break)
(2) Includes short-term lettings at properties earmarked for
redevelopment
Principal lettings in 2023 to date
Total annual Rent free
Property Tenant Area Rent rent Lease term Lease break equivalent
sq ft GBP psf GBPm Years Year Months
----------------- -------- --------- ---------------- ----------- ------------ ---------------
H1
25 Baker Street
W1 PIMCO 106,100 103.40 11.0 15 - 37
The
Featherstone 24, plus 12 if
Building EC1 Buro Happold 31,100 74.40 2.3 15 10(1) no break
One Oxford
Street W1 Uniqlo 22,200 Conf (2) Conf (2) 10 5 12
Jones Knowles 12, plus 12 if
Tea Building E1 Ritchie 8,100 60.00 0.5 10 5 no break
The White
Chapel 6, plus 1 if
Building E1 Comic Relief 5,000 61.90 0.3 5 3 no break
Middlesex House Zhonging Holding
W1 Group 4,200 81.00 0.3 3 1.5 -
----------------- -------- --------- ---------------- ----------- ------------ ---------------
Q3 to date
25 Baker Street 24, plus 9 if
W1 Moelis 49,200 100.00 4.9 15 10 no break
The
Featherstone 15, plus 11 if
Building EC1 Tide 14,400 71.00 1.0 10 5 no break
Tea Building E1 Gemba 7,100 63.80 0.5 5 - 8
----------------- -------- --------- ---------------- ----------- ------------ ---------------
(1) There is an additional break at year 5 on level eight
subject to a 12-month rent penalty payable by the tenant
(2) Uniqlo will pay a base rent (subject to annual indexation)
plus turnover top-up
Asset management progress - Extending income and capturing
reversion
Overall asset management activity in H1 2023, excluding two
short-term development-linked regears, totalled 195,700 sq ft, 18%
higher than in H1 2022 (166,400 sq ft). There were 15 rent reviews
totalling 145,400 sq ft which were settled on average 3.8% above
the December 2022 ERV.
Rent on lease renewals was 10.1% higher than December 2022 ERV
on average. Lease regears completed in line with the previous rent
but were 4.9% on average above December 2022 ERV. This excludes two
development-linked regears at Holden House where works are expected
to start on site in 2025.
In aggregate, 86% of breaks/expiries were retained or re-let
prior to the end of H1 excluding space taken back for projects and
disposals. The Group's WAULT (to break) is unchanged compared to
FY2022 at 6.4 years, rising to 7.2 years on a 'topped-up'
basis.
The EPRA vacancy rate reduced through H1 to 4.5% from 6.4% at
FY2022.
Asset management activity in H1 2023
Area Previous rent New rent Uplift New rent vs Dec-22 ERV %
'000 sq ft GBPm pa GBPm pa %
Rent reviews 145.4 8.5 9.0 5.8 3.8
Lease renewals 24.0 1.2 1.2 (1.0) 10.1
Lease regears(1) 26.3 1.5 1.5 0.0 4.9
------------ -------------- --------- ------- -------------------------
Total(1) 195.7 11.2 11.7 4.3 4.6
------------ -------------- --------- ------- -------------------------
(1) Excludes two development-linked regears
Investment activity
Investment activity in H1 2023 was quiet with disposals of
GBP65.6m and no acquisitions. The Group takes a proactive approach
to capital recycling with disposal proceeds largely reinvested into
development capex. Since the start of 2018 the Group has made
investment property disposals totalling almost GBP900m, compared to
acquisitions of over GBP500m and development capex of over GBP900m.
This is aligned to our strategy of keeping our prime recently
completed buildings for longer and disposing of buildings with less
repositioning potential.
Disposals
The principal disposal in H1 2023 was the sale of 19
Charterhouse Street EC1 for GBP53.6m, slightly ahead of December
2022 book value, reflecting a net initial yield of 4.6% and a
capital value of GBP850 psf. The other key disposal was 12-16
Fitzroy Street W1 for GBP6.7m, 4.8% below December 2022 book value,
which equates to a yield of 6.9% and a capital value of GBP775 psf.
Other smaller disposals totalled GBP5.3m.
Disposals in H1 2023
Area Total after costs Net yield Net rental income
Property Date sq ft GBPm % GBPm pa
19 Charterhouse Street EC1 Q1 63,200 53.6 4.6 2.6
12-16 Fitzroy Street W1 Q2 8,600 6.7 6.9 0.5
Other 2,200 5.3 - -
------- ------------------ ---------- ------------------
Total H1 2023 74,000 65.6 4.4 3.1
------- ------------------ ---------- ------------------
SUSTAINABILITY
We continue to make meaningful progress in a number of areas on
our journey to net zero carbon.
On our Scottish estate, following receipt of resolution to grant
planning for a c.100 acre 18.4MW solar park in 2022, planning
consent was formally granted in H1. On completion, we expect the
electricity generated, on an annualised basis, to be in excess of
40% of our London managed portfolio's usage. Providing our
occupiers with certifiable renewable electricity will lead to a
lower residual operational carbon footprint.
Implementation of our Intelligent Buildings programme, in
collaboration with Johnson Controls, has been completed at seven
buildings, 29% of our portfolio by area, and we are now starting to
receive integrated data on their performance. This will allow for
greater running efficiency, reducing both operational costs and our
carbon footprint.
Alongside this, our programme of occupier collaboration and
education continues to gather pace. Energy intensity across the
managed portfolio was 67 kWh/sqm in H1 compared to 123 kWh/sqm in
FY 2022. We are on track to again achieve our SBTi-verified targets
in 2023 for the fourth consecutive year.
As refurbishment projects complete, the EPC profile of our
portfolio continues to strengthen. At H1, 67.6% by ERV was rated
EPC A or B (including on-site projects), with a further 18.4% rated
EPC C. Our portfolio is 100% compliant with 2023 EPC legislation.
We have a schedule of works estimated at c.GBP100m to ensure we
remain compliant with evolving environmental legislation.
DEVELOPMENTS
On-site projects - 435,000 sq ft of best-in-class space (43%
pre-let/pre-sold)
At H1 2023, we were on site at two major projects totalling
435,000 sq ft which we currently expect will deliver a 17%
development profit and 5.9% yield on cost. These figures do not
include the impact of the post-H1 pre-let to Moelis at 25 Baker
Street W1 which was agreed significantly ahead of the June 2023
ERV. Our current embodied carbon estimates for both projects are in
line with or ahead of our 2025 target of <=600 kgCO(2)
e/sqm.
25 Baker Street W1 (298,000 sq ft)
This office-led multi-use scheme comprises 218,000 sq ft of
offices, 28,000 sq ft of retail and 52,000 sq ft of residential.
Against an increasingly supply-constrained backdrop for
best-in-class offices with strong sustainability characteristics,
the commercial element of 25 Baker Street is now 76%
pre-let/pre-sold (by floor area) to PIMCO and Moelis. The Courtyard
retail and Gloucester Place offices have been pre-sold to The
Portman Estate. There is also strong early interest in the private
residential units.
Construction is progressing on time and on budget. The private
residential building at 100 George Street has topped out and the
super-structure of 25 Baker Street has reached level 7. Since the
start of the year, a fixed price contract has been signed with Make
One for the 30 Gloucester Place element and we are finalising the
contract for the private residential element. The mid stage 5
embodied carbon estimate is c.600 kgCO(2) e/sqm.
Network W1 (137,000 sq ft)
Demolition works at this office-led project completed in H1 and
ground works have commenced. A fixed price construction contract
was signed with Kier prior to the end of H1. The scheme is
currently being delivered on a speculative basis, but with very
little competing office supply in Fitzrovia and the broader West
End, we are confident in the letting prospects for this high
quality building which is adjacent to 80 Charlotte Street W1 and
DL/78.Fitzrovia. The stage 4 embodied carbon estimate is c.530
kgCO(2) e/sqm.
Major developments pipeline
Project Total 25 Baker Street W1 Network W1
Completion H1 2025 H2 2025
Office (sq ft) 350,000 218,000 132,000
Residential (sq ft) 52,000 52,000 -
Retail (sq ft) 33,000 28,000 5,000
-------- ------------------- ----------------
Total area (sq ft) 435,000 298,000 137,000
-------- ------------------- ----------------
Est. future capex(1) (GBPm) 289 191 98
Total cost(2) (GBPm) 729 483 246
ERV (c.GBP psf) - 95 90
ERV (GBPm pa) 32.4 20.0(3) 12.4
Pre-let/sold area (sq ft) 137,100 137,100(4) -
Pre-let income (GBPm pa, net) 10.7 10.7 -
-------- ------------------- ----------------
Embodied carbon intensity (kgCO(2) e/sqm)(5) c.600 c.530
Target BREEAM rating Outstanding Outstanding
Target NABERS rating 4 Star or above 4 Star or above
Green Finance Elected Elected
-------- ------------------- ----------------
(1) As at 30 June 2023
(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 rent
(4) 19,000 sq ft courtyard retail and 12,000 sq ft Gloucester
Place offices sold to The Portman Estate, 106,100 sq ft pre-let to
PIMCO
(5) Embodied carbon intensity estimate as at stage 4 or 5
Longer-term pipeline - c.1.3m sq ft of space consented or under
appraisal
In addition to our on-site projects, our longer-term pipeline
extends to c.1.3m sq ft across four projects.
The next phase of projects are expected to commence in late 2024
or 2025 and total c.390,000 sq ft (at 100%):
-- 50 Baker Street W1 (c.240,000 sq ft; 50:50 JV with Lazari
Investments) - planning application submitted;
-- Holden House W1 (c.150,000 sq ft) - consented.
In the longer-term, Old Street Quarter EC1 (c.750,000 sq ft)
could commence from 2027 and 230 Blackfriars Road (c.200,000 sq ft)
from 2030.
Refurbishments
Derwent London has a strong and established reputation for both
development and refurbishment. We expect refurbishment projects
will comprise an increasing proportion of capital expenditure over
the coming years as we continue to upgrade the portfolio to meet
both ever higher occupier requirements and evolving EPC
legislation. Larger refurbishments likely to commence over the near
to medium term, on a rolling basis, include 1-2 Stephen Street W1,
20 Farringdon Road EC1 and Middlesex House W1. Through improving
the amenity offer and overall quality, we expect these projects
will deliver substantial uplifts in ERV.
We will continue to appraise sub-10,000 sq ft units for our
'Furnished + Flexible' product where we see strong occupier demand
at an attractive rental level. We currently have 128,300 sq ft of
'Furnished + Flexible' space across the portfolio, which includes
44,200 sq ft which is on-site or committed. This equates to 2.2% of
portfolio floorspace.
FINANCIAL REVIEW
Gross property and other income increased to GBP133.3m in the
first half of 2023 from GBP122.5m in H1 2022 (restated by GBP0.2m
for a change in the accounting treatment relating to Covid-19
incentives in past years). The increase in the first half was
mainly due to much higher service charge income of GBP25.0m when
compared with the GBP16.8m in H1 2022. Much of this came from the
exceptional level of energy costs recharged to tenants after the
price of energy on fixed price green tariffs increased almost
threefold during 2022, but was also impacted by general cost
inflation. Energy tariffs have since returned to a level close to
that in early 2022 and we expect some unwinding of this impact in
H2 2023.
Gross rental income was up by 3.9% to GBP105.9m with additional
income from the occupied offices at Soho Place W1 and The
Featherstone Building EC1, both of which reached practical
completion during H1 2022. However, the level of irrecoverable
property expenditure has risen by GBP4.7m from H1 2022 to H1 2023,
due to higher average vacancy rates combining with these unusually
high service charge levels. Recent lettings at The Featherstone
Building and the majority of the retail space at Soho Place (known
as 1 Oxford Street) together with lower energy tariffs from March
2023 should see this cost move down relative to rental income in H2
2023 but it is likely to remain above the levels generally seen in
recent years. These temporary service charge peaks also meant that
the minority of tenants who have capped service charges paid less
than the full cost; the associated cost borne by us was GBP1.0m in
the first half of 2023. Irrecoverable service charge overruns
totalling GBP1.1m also came through from 2022 in the first half of
2023.
Rent collection for office tenants has remained very strong in
the first half but an increased provision against retail, gyms and
hospitality occupiers, which together make up only 7% of portfolio
income, has led to impairment and bad debt charges totalling
GBP1.9m. This contrasts with a release of impairment provisions in
H1 2022 of GBP0.5m. These all combined to take net rental income to
GBP90.9m in H1 2023 from GBP94.0m (restated) in H1 2022. Net
property and other income moved by a similar amount from GBP96.6m
(restated) in H1 2022 to GBP93.3m in H1 2023.
Administrative expenses increased to GBP19.2m from GBP17.8m in
H1 2022 largely due to higher headcount, wage inflation and GBP1.2m
in relation to 2022 bonuses awarded to directors and executive
committee members. These are calculated and paid in March following
the year to which they relate unlike staff bonuses which are paid
in December.
The revaluation deficit in the income statement was GBP196.7m
relating to our wholly-owned investment property. There was a
further GBP2.6m deficit for the Group's owner-occupied offices at
25 Savile Row W1 plus a GBP4.8m deficit from our 50% share of the
50 Baker Street W1 joint venture. Together, these total GBP204.1m,
a considerable reduction on the GBP503.6m deficit seen in H2 2022
but contrasting strongly with the GBP72.9m (restated) surplus in H1
2022 when market conditions were more favourable.
Gross interest costs were GBP23.0m in H1 2023, marginally lower
than the GBP23.4m in H1 2022. However, capitalised interest of
GBP2.7m in the period was GBP2.0m lower than the GBP4.7m in H1
2022. This is a result of the completion of mature developments in
H1 2022 when the monthly rate of interest capitalisation is at its
peak. As a result, net finance costs were a little higher in H1
2023 at GBP20.3m compared to GBP18.7m in H1 2022.
The resulting IFRS loss before tax for the first half was
GBP143.1m which compares with the profit before tax seen in H1 2022
of GBP137.1m. EPRA earnings, which exclude fair value movements,
fell 7% to GBP55.6m from GBP59.7m (restated) a year earlier and
EPRA earnings per share (EPS) were down to 49.51p per share. In H1
2022, EPRA EPS were 53.22p (restated). As noted above, most of the
decline came from higher irrecoverable property costs.
EPRA like-for-like gross rental income, which excludes the
effect of acquisitions, disposals and developments, was up 1.4%
compared to H2 2022 while like-for-like net rental income was down
1.7% compared with H2 2022.
Irrecoverable property costs, increased overheads and the
impairment charges booked in H1 2023 have also increased our EPRA
cost ratio (including direct vacancy costs); it rose to 28.8% in H1
2023 against 23.3% in both H1 and the whole of 2022. Excluding
direct vacancy costs, it was 23.2% (H1 2022: 20.4%).
Capital expenditure in H1 2023 on wholly-owned investment
properties was GBP54.1m plus capitalised interest of GBP2.3m, lower
than the GBP69.2m and GBP4.4m, respectively, in H1 2022. In
addition, we incurred GBP6.8m plus capitalised interest of GBP0.4m
on our residential trading property at 25 Baker Street plus GBP1.9m
on the development costs to be transferred to The Portman Estate
upon completion. Pre-development design fees also continue at Old
Street Quarter EC1, totalling GBP3.0m in the first half. This
brought the balance of prepaid development expenditure to GBP12.1m,
in advance of our acquisition of the site no earlier than 2027.
The Group's total return over the six-month period, including
the 54.5p dividend paid, was -3.7% compared to 3.0% for H1 2022 and
-6.3% for the full year 2022. The property valuation decline has
also taken the Group's EPRA Net Tangible Asset value per share down
5.2% to 3,444p at 30 June 2023 from 3,632p at 31 December 2022. As
at 30 June 2022, it was 4,023p. As interest rates continued to rise
across the curve, the mark-to-market adjustment for our fixed rate
debt has now increased to GBP190.6m from GBP159.5m in December
2022. As a result, EPRA Net Disposal Value was 3,609p at 30 June
2023, a smaller decline of 4.2% from the 3,768p reported as at 31
December 2022.
Financing and net debt
Lending conditions in the office real estate market have
deteriorated quite sharply in the last few months exacerbated by
higher rates across the curve. As a result, the market is seeing
increasing margins with funders becoming increasingly selective.
Derwent London is in a relatively strong position with low
leverage, 98% of our debt at fixed rates as at 30 June 2023 and
with an additional GBP75m forward start interest rate swap at 1.36%
out to April 2025. Our debt has a weighted average term of 5.6
years, our revolving bank facilities (which are substantially
undrawn) extend to Q4 2026 and Q4 2027, respectively, and we have
only one loan expiry of GBP83m prior to June 2025. That is a
secured loan at 3.99% which falls due in October 2024 and we have
held early and positive discussions to refinance it. The cost of
refinancing would currently be a little over 6% but may vary by the
time we transact.
As a result of property disposals early in the year, our debt
levels have barely increased in H1. Net debt at 30 June 2023 was
GBP1.27bn, only marginally higher than GBP1.26bn at the 2022 year
end and some way below the GBP1.36bn reported at 30 June 2022.
Total borrowings were GBP1.28bn at 30 June 2023, again only just
above the GBP1.25bn in December 2022.
EPRA loan-to-value ratio, which takes account of the lower
property valuations and which also includes a net payables amount
of GBP65.9m in addition to net debt, increased to 25.0% at 30 June
2023 (H1 2022: 23.7% and 23.9% at 31 December 2022).
As at 30 June 2023, the Group had GBP562m of unrestricted cash
and undrawn facilities (31 December 2022: GBP577m).
Interest cover remains very strong at 4.1 times (2022: 4.2
times). Our interest cover debt covenant is at 1.45 times so there
remains very substantial headroom. The weighted average interest
cost was 3.19% as at 30 June 2023 (31 December 2022: 3.14%) on a
cash basis.
The Group's balance sheet strength and debt metrics helped
maintain an unchanged issuer default credit rating from Fitch of
BBB+ in May 2023 with a stable outlook and a senior unsecured
rating of A-.
Qualifying expenditure under our Green Finance Framework
The qualifying expenditure as at 30 June 2023 for each Eligible
Green Project (EGP) is set out in the table below.
Subsequent spend
Look back spend Q4 2019 - FY 2022 2023 Spend Disposals Cumulative Spend
EGP GBPm GBPm GBPm GBPm GBPm
---------------- ------------------ ----------- ---------- -----------------
80 Charlotte Street W1 185.6 52.5 - - 238.1
Soho Place W1 66.3 192.8 (0.9) (34.8) 223.4
The Featherstone Building EC1 29.1 67.6 0.5 - 97.2
25 Baker Street W1 26.5 42.3 35.8 - 104.6
Network W1 14.7 - 9.1 - 23.8
---------------- ------------------ ----------- ---------- -----------------
322.2 355.2 44.5 (34.8) 687.1
---------------- ------------------ ----------- ---------- -----------------
Network W1 commenced on site in 2022 and was elected as an EGP
in 2023. As per our Green Finance Framework, costs incurred on this
development in the periods before election qualify as 'green'
expenditure, and have been included in the 'look-back' spend.
The cumulative qualifying expenditure on EGP's at 30 June 2022
was GBP687.1m, with GBP44.5m of this being incurred in H1 2023.
At 30 June 2023, total drawn borrowings from Green Financing
Transactions were GBP372.5m. This includes GBP22.5m from the green
tranche of the Group's RCF and the GBP350m Green Bonds.
Tax and dividend
We were advised by HMRC in July 2023 that we have been assigned
the lowest risk status across all tax categories following their
business risk review. This recognises the responsible approach to
tax taken by the Group. Our statement of tax principles is
available on the Derwent London website.
After considering our dividend cover and various stakeholder
obligations, we have increased the interim dividend by 2.1% to
24.5p per share from 24.0p last year. It will be paid as a PID on
13 October 2023 to shareholders on the register as at 8 September
2023.
RISK MANAGEMENT AND INTERNAL CONTROLS
We have identified certain principal risks and uncertainties
that could prevent the Group from achieving its strategic
objectives and have assessed how these risks could best be
mitigated, where possible, through a combination of internal
controls, risk management and the purchase of insurance cover.
The principal risks and uncertainties facing the Group for the
remaining six months of the financial year are set out on the
following pages with the potential impact and the mitigating
actions and controls in place. These risks are reviewed and updated
on a regular basis and were last formally assessed by the Board on
8 August 2023. The Group's approach to the management and
mitigation of these risks is included in the 2022 Report &
Accounts. The Board has confirmed that its risk appetite and key
risk indicators remain appropriate.
There has been no significant change to the Group's principal
risks and uncertainties since the publication of our 2022 Report
& Accounts. The last significant change was in August 2022 with
the reinstatement of 'a fall in property values'. There continues
to be a heightened risk to property values over the next six
months.
We are operating in a changed interest rate environment
following a long period of historically low rates. Conditions in
the debt markets have deteriorated with central banks raising rates
in an effort to deal with inflation. With 98% of borrowings at
fixed rates, the Group has minimal current exposure to market
interest rates. Our average interest rate is 3.19% on a cash basis.
Our next refinancing exposure arises in October 2024 on the GBP83m
secured debt currently paying a coupon of 3.99%. We do not consider
the cost of borrowing and the availability of funds to be a
principal risk for the Group during the next six months. In these
turbulent markets, we are helped by our high level of refinancing
activity in previous years, unrestricted cash and undrawn
facilities totalling GBP562m and our strong banking
relationships.
As UK economic growth slows, there is an increasing risk of
recession. A recession is unlikely to have a material impact on the
Group or its tenants in the short-term. However, in the medium to
long-term, a recession could lead to some of our occupiers facing a
more challenging financial situation which could result in Derwent
London having higher vacancy rates and 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.
The principal risks and uncertainties facing the Group for the
remaining six months of the financial year are set out on the
following pages with the potential impact and the mitigating
actions and controls in place.
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.
Risk, effect and progression Controls and mitigation
--------------------------------------------------------- -----------------------------------------------------------
1. Failure to implement the Group's strategy
The Group's success depends on implementing its strategy * The Board maintains a formal schedule of matters
and responding appropriately to internal which are reserved solely for its approval. These
and external factors including changing work practices, matters include decisions relating to the Group's
occupational demand, economic and strategy, capital structure, financing, any major
property cycles. The London office market has generally property acquisition or disposal, the risk appetite
been cyclical in recent decades, with of the Group and the authorisation of capital
strong growth followed by sharp economic downturns, expenditure above the delegated authority limits.
precipitated by rising interest rates.
The impact of these cycles is dependent on the quality
and location of the Group's portfolio. * Frequent strategic and financial reviews. An annual
strategic review and budget is prepared for Board
Should the Group fail to respond and adapt to such approval alongside two-year rolling forecasts which
cycles or execute the projects that underpin are prepared three times a year.
its strategy, it may have a negative impact on the
Group's expected growth and financial performance.
* Assess and monitor the financial strength of
potential and existing occupiers. The Group's diver
se
and high quality occupier base provides resilience
against occupier default.
* Maintain income from properties until development
commences and have an ongoing strategy to extend
income through lease renewals and regears.
Developments are de-risked through pre-lets.
* Maintain sufficient headroom for all the key ratios
and financial covenants, with a particular focus on
interest cover.
* Develop properties in central locations where there
is good potential for future demand, such as near t
he
Elizabeth Line. We do not have any properties in th
e
City Core or Docklands.
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.
Risk, effect and progression Controls and mitigation
------------------------------------------------------- ------------------------------------------------------------
2. Risk of occupiers defaulting or occupier failure
The majority of the Group's revenues comprise rent * Assess and monitor the financial strength of
received from our occupiers and any deterioration potential and existing occupiers. The Group's diverse
in their businesses and/or profitability could in turn and high quality occupier base provides resilience
adversely affect the Group's rental against occupier default.
income or increase the Group's bad debts and/or number
of lease terminations.
* Focus on letting our buildings to large and
In the event that some of our occupiers went into established businesses where the risk of default is
default, we could incur impairments and lower.
write-offs of IFRS 16 lease incentive receivable
balances which arise from the accounting
requirement to spread any rent-free incentives given to * Active in house rent collection, with regular reports
an occupier over the respective lease to the Executive Directors on day 1, 7, 14 and 21.
term, in addition to a loss of rental income.
* Ongoing dialogue is maintained with occupiers to
understand their concerns and requirements.
* Rent deposits are held where considered appropriate.
3. Income decline
Changes in macroeconomic factors may adversely affect * The Credit Committee receives detailed reviews of all
London's overall office market. The prospective occupiers and ensures a variety of
Group is exposed to external factors which are outside occupiers and that focus is on large and established
the Group's control, such as future businesses where the risk of default is lower.
demand for office space, the 'cost of living' crisis,
the 'grey' market in office space (i.e.
occupier controlled vacant space), weaknesses in retail * A 'tenants on watch' register is maintained and
and hospitality businesses, increase regularly reviewed by the Executive Directors and the
in hybrid working, a recession, and subsequent rise in Board.
unemployment and/or interest rates.
Such macroeconomic conditions lead to a general * Ongoing dialogue is maintained with occupiers to
property market contraction, a decline in understand their concerns and requirements.
rental values and Group income, which could impact on
property valuation yields.
* The Group's low loan-to-value ratio and high interest
cover ratio reduces the likelihood that falls in
property values have a significant impact on our
business continuity.
4. Fall in property values
The potential adverse impact of the economic and * The impact of yield changes is considered when
political environment on property yields potential projects are appraised.
has heightened the risk of a fall in property values.
A fall in property values will have an impact on the * The impact of yield changes on the Group's financial
Group's net asset value and gearing levels. covenants and performance is monitored regularly and
subject to sensitivity analysis to ensure that
adequate headroom is preserved.
* The Group's mainly unsecured financing makes
management of our financial covenants more
straightforward.
* The Group's low loan-to-value ratio and high interest
cover ratio reduces the likelihood that falls in
property values have a significant impact on our
business continuity.
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.
Risk, effect and progression Controls and mitigation
------------------------------------------------------ ------------------------------------------------------------------
5. Risks arising from our development activities
A. Reduced development returns
Returns from the Group's developments may be * Our procurement process includes the use of highly
adversely impacted due to: regarded firms of quantity surveyors and is designed
* delays on site; to minimise cost uncertainty.
* increased construction costs; * Development costs are benchmarked to ensure that the
Group obtains competitive pricing and, where
appropriate, fixed price contracts are negotiated.
* material and labour shortages; and
* Post-completion reviews are carried out for all major
* adverse letting conditions. developments to ensure that improvements to the
Group's procedures are identified, implemented and
lessons learned.
Any significant delay in completing the development
projects may result in financial penalties * Investment appraisals are prepared and sensitivity
or a reduction in the Group's targeted financial analysis is undertaken to judge whether an adequate
returns. return is made in all likely circumstances.
* The Group's pre-letting strategy reduces or removes
the letting risk of the development as soon as
possible.
B. 'On-site' risk
Risks that can materialise whilst on site, include: * Prior to construction beginning on site, we conduct
thorough site investigations and surveys to reduce
* unexpected ground conditions the risk of unidentified issues, including
investigating the building's history and adjacent
buildings/sites.
* deleterious material (including asbestos)
* Adequately appraise investments prior to starting
* unidentified issues with the existing building work on site, including through: (1) the benchmarking
of development costs; and (2) following a procurement
process that is properly designed (to minimise
* activity in adjacent sites/buildings uncertainty around costs) and that includes the use
of highly regarded quantity surveyors.
'On-site' risks can cause development projects to be * Regular monitoring of our contractors' cash flows.
significantly delayed and could lead
to penalties and a deferral of rental income.
'On-site' risks typically arise if inadequate * Frequent meetings with key contractors and
contingencies, investment appraisals, or site subcontractors to review their work programme and
investigations have been conducted prior to maintain strong relationships.
starting work on site.
Risk of project delays and/or cost overruns caused * Off-site inspection of key components to ensure they
by unidentified issues. have been completed to the requisite quality.
* Monthly reviews of supply chain issues for each of
our major projects, including in respect to potential
labour shortages.
C. Contractor/subcontractor default
There have been ongoing issues within the * We use known 'Tier 1' contractors with whom we have
construction industry in respect of the level of established working relationships and regular work
risk and narrow profit margins being accepted by with tried and tested sub-contractors.
contractors.
Returns from the Group's developments are reduced due * Regular monitoring of our contractors, including
to delays and cost increases caused their project cash flows, is carried out.
by either a main contractor or major subcontractor
defaulting during the project.
* Key construction packages are acquired early in the
project's life to reduce the risks associated with
later default.
* The financial standing of our main contractors is
reviewed prior to awarding the project contract.
* Our main contractors are responsible, and assume the
immediate risk, for subcontractor default.
* Payments to contractors are in place to incentivise
the achievement of project timescales, with damages
agreed in the event of delay/cost overruns.
* Regular on-site supervision by a dedicated Project
Manager who monitors contractor performance and
identifies problems at an early stage, thereby
enabling remedial action to be taken.
* Contractors are paid promptly and are encouraged to
pay subcontractors promptly. In addition, we
externally publish our payment terms.
6. Risk of business interruption
A. Cyber-attack on our IT systems
The Group may be subject to a cyber attack that * The Group's Business Continuity Plan and cyber
results in it being unable to use its information security incident response procedures are regularly
systems and/or losing data. reviewed and tested.
Such an attack could severely restrict the ability of
the Group to operate, lead to an increase * Independent internal and external
in costs and/or require a significant diversion of penetration/vulnerability tests are regularly
management time. conducted to assess the effectiveness of the Group's
security.
* Multi-Factor Authentication is in place for access to
our systems.
* The Group's data is regularly backed up and
replicated off-site.
* Our IT systems are protected by anti-virus software,
24/7/365 threat hunting, security incident detection
and response, security anomaly detection and
firewalls that are frequently updated.
* Frequent staff awareness and training programmes.
* Security measures are regularly reviewed by the IT
team.
B. Cyber-attack on our buildings
The Group is exposed to cyber attacks on its * The Group's Business Continuity Plan and cyber
properties which may result in data breaches security incident response procedures are regularly
or significant disruption to IT-enabled occupier reviewed and tested.
services.
A major cyber attack against the Group or its * Physical segregation between the building's core IT
properties could negatively impact the Group's infrastructure and occupiers' corporate IT networks.
business, reputation and operating results.
* Physical segregation of IT infrastructure between
buildings across the portfolio.
* Frequent staff awareness and training programmes.
Building Managers are included in any cyber security
awareness training and phishing simulations.
* Sophos Rapid Response team provide unlimited support
to our Cyber Incident Response Team in the event of a
cyber attack.
C. Significant business interruption (for example
pandemic, terrorism-related event or other
business interruption)
Major incidents may significantly interrupt the * Fire protection and access/security procedures are in
Group's business, its occupiers and/or supply place at all of our managed properties. At least
chain. Such incidents could be caused by a wide range annually, a fire risk assessment and health and
of events such as fire, natural catastrophes, safety inspection are performed for each property in
cyber events, terrorism, pandemic outbreak, material our managed portfolio.
supply chain failures and geopolitical
factors.
* The Group has comprehensive business continuity and
This could result in issues such as being unable to incident management procedures both at Group level
access or operate the Group's properties, and for each of our managed buildings which are
occupier failures or reduced rental income, share regularly reviewed and tested.
price volatility or loss of key suppliers.
* Continuous review of property health and safety
statutory compliance.
* Comprehensive property damage and business
interruption insurance which includes terrorism.
* Robust security at our buildings, including CCTV and
access controls.
* Most of our employees are capable of working remotely
and have the necessary IT resources.
7. Reputational damage
The Group's reputation could be damaged, for example, * Social media channels are monitored, and the Group
through unauthorised or inaccurate media retains the services of an external PR agency to
coverage, unethical practices or behaviours by the monitor external media sources.
Group's executives, or failure to comply
with relevant legislation.
* The Executive Directors and Board receive ad hoc
This could lead to a material adverse effect on the social media reports. Our social media strategy is
Group's operating performance and overall approved by the Executive Directors.
financial position. Our strong culture, low overall
risk tolerance and established procedures
and policies mitigate against the risk of internal * Close involvement of senior management in day-to-day
wrongdoing. operations and established procedures for approving
all external announcements.
* All new members of staff attend an induction
programme and are issued with our Group staff
handbook.
* A Group whistleblowing system is in place for staff
to report wrongdoing anonymously.
* Ongoing engagement with local communities in areas
where the Group operates.
* Staff training and awareness programmes.
8. Our resilience to climate change
If the Group fails to respond appropriately, and * The Board and Executive Directors receive regular
sufficiently, to climate-related risks or updates and presentations on environmental and
fails to benefit from the potential opportunities. sustainability performance and management matters as
well as progress against our pathway to becoming net
This could lead to reputational damage, loss of zero carbon by 2030.
income and/or property values. In addition,
there is a risk that the cost of construction
materials and providing energy, water and other * The Sustainability Committee monitors our performance
services to occupiers will rise. and management controls.
* Strong team led by an experienced Head of
Sustainability.
* Production of an annual Responsibility Report with
key data and performance points which are externally
assured.
* In 2017 we adopted independently verified
science-based targets which have been approved by the
Science-Based Targets initiative (SBTi) and will be
updated in 2023 in line with changing methodologies
and guidance.
* Undertake periodic multi-scenario climate risk
assessments (physical and transition risks).
9. Non-compliance with regulation
A. Non-compliance with health and safety legislation
An incident or breach of health and safety
legislation, including in respect of fire safety, * All our properties have the relevant health, safety
water hygiene, asbestos exposure, building safety, and fire management procedures in place, which are
construction design management etc. reviewed annually.
A major health and safety incident could cause
significant business interruption for the Group, * The Group has a qualified Health and Safety team
a risk to life, Company or Director fines or whose performance is monitored and managed by the
imprisonment, reputational damage, and/or loss Health and Safety Committee.
of our licences to operate.
* Health and safety statutory compliance within our
managed portfolio is managed and monitored using
RiskWise, a software compliance platform. This is
supported by a programme of annual property health
checks (internal audits).
* The Managed Portfolio Health and Safety team, with
the support of internal and external stakeholders,
support our Portfolio and Building Managers to ensure
statutory compliance.
* The Construction Health and Safety team, with the
support of internal and external stakeholders, ensure
our Construction (Design and Management) Regulations
(CDM) client duties are executed and monitored and
they will review health, safety and welfare on each
'major' construction site on a monthly basis, with
periodic visits to 'small works' construction
projects also.
* The Board, Risk Committee and Executive Directors
receive frequent updates and presentations on key
health and safety matters, including both physical
and mental health.
B. Other regulatory non-compliance
The Group breaches any of the legislation that forms * The Board and Risk Committee receive regular reports
the regulatory framework within which prepared by the Group's legal advisers identifying
the Group operates. upcoming legislative/regulatory changes. External
advice is taken on any new legislation, if required.
The Group's cost base could increase and management
time could be diverted. This could lead
to damage to our reputation and/or loss of our * Managing our properties to ensure they are compliant
licence to operate. with the Minimum Energy Efficiency Standards (MEES)
for Energy Performance Certificates (EPCs).
* A Group whistleblowing system ('Speak-up') for staff
is maintained to report wrongdoing anonymously.
* Ongoing staff training and awareness programmes.
* Group policies and procedures dealing with all key
legislation are available on the Group's intranet.
* Quarterly review of our anti-bribery and corruption
procedures by the Risk Committee.
10. Financial instruments - risk management
The Group is exposed through its operations to the following
financial risks:
-- credit risk;
-- market risk; and
-- liquidity risk.
In common with other businesses, the Group is exposed to risks
that arise from its use of financial instruments. The following
describes the Group's objectives, policies and processes for
managing those risks and the methods used to measure them. Further
quantitative information in respect of these risks is presented
throughout these financial statements.
There have been no substantive changes in the Group's exposure
to financial instrument risks, its objectives, policies and
processes for managing those risks or the methods used to measure
them from previous years. The Group's EPRA loan-to-value ratio has
increased to 25.0% as at 30 June 2023.
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 largest 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 concentration risk. However, this is
mitigated by the wide range of tenants from a broad spectrum of
business sectors.
Credit risk also arises from cash and cash equivalents and
deposits with banks and financial institutions. For banks and
financial institutions, only independently rated parties with a
minimum rating of investment grade are accepted. This risk is also
reduced by the short periods that money is on deposit at any one
time.
The carrying amount of financial assets recorded in the
financial statements represents the Group's maximum exposure to
credit risk without taking account of the value of any collateral
obtained.
Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate due to changes in market
prices. Market risk arises for the Group from its use of variable
interest bearing instruments (interest rate risk).
It is currently Group policy that generally between 60% and 85%
of external Group borrowings (excluding finance lease payables) are
at fixed rates. Where the Group wishes to vary the amount of
external fixed rate debt it holds (subject to it being generally
between 60% and 85% of expected Group borrowings, as noted above),
the Group makes use of interest rate derivatives to achieve the
desired interest rate profile. Although the Board accepts that this
policy neither protects the Group entirely from the risk of paying
rates in excess of current market rates nor eliminates fully cash
flow risk associated with variability in interest payments, it
considers that it achieves an appropriate balance of exposure to
these risks. At 30 June 2023, the proportion of fixed debt held by
the Group was above this range at 98% (31 December 2022: 100%).
During both 2023 and 2022, 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 support for its other stakeholders;
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 2023, the Group's strategy, which was unchanged from
2022, was to maintain the NAV gearing below 80% in normal
circumstances. These two gearing ratios, as well as the interest
cover ratio, are defined in the list of definitions at the end of
this announcement and are derived in note 25.
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 GBP4.4bn of uncharged property as at 30 June
2023.
Statement of Directors' responsibilities
The Directors' confirm that, to the best of their knowledge,
these condensed interim financial statements have been prepared in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority and that the interim management report includes a
fair review of the information required by DTR 4.2.7 and DTR 4.2.8,
namely:
-- An indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements, and a description of the
principal risks and uncertainties for the remaining six months of
the financial year; and
-- Material related-party transactions in the first six months
of the financial year and any material changes in the related-party
transactions described in the last Annual Report.
The Directors are listed in the Derwent London plc Annual Report
of 31 December 2022 and a list of the current Directors is
maintained on the Derwent London plc website:
www.derwentlondon.com. The maintenance and integrity of the Derwent
London website is the responsibility of the Directors.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
On behalf of the Board
Paul M. Williams Damian M.A. Wisniewski
Chief Executive Chief Financial Officer
9 August 2023
GROUP CONDENSED INCOME STATEMENT
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Unaudited Unaudited Audited
Restated(1)
Note GBPm GBPm GBPm
---------------------------------- ---- ----------------------- ----------------------- ------------------
Gross property and other income 5 133.3 122.5 248.8
---------------------------------- ---- ----------------------- ----------------------- ------------------
Net property and other income(2) 5 93.3 96.6 194.6
Administrative expenses (19.2) (17.8) (36.4)
Revaluation (deficit)/surplus 11 (196.7) 73.3 (422.1)
Profit on disposal 6 1.2 0.5 25.6
(Loss)/profit from operations (121.4) 152.6 (238.3)
Finance income 7 0.7 0.2 0.3
Finance costs 7 (20.3) (18.7) (39.7)
Movement in fair value of derivative
financial instruments 0.7 3.5 5.8
Financial derivative termination
income/(costs) 8 1.0 (0.6) (0.3)
Share of results of joint ventures 9 (3.8) 0.1 (7.3)
(Loss)/profit before tax (143.1) 137.1 (279.5)
Tax charge 10 (0.1) (1.8) (1.0)
(143.2) 135.3 (280.5)
Basic earnings per share 24 (127.53p) 120.61p (249.84p)
Diluted earnings per share 24 (127.53p) 120.35p (249.84p)
(1) Figures for the prior period ended 30 June 2022 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 includes a net charge of
GBP1.9m in relation to the write-off/movement in impairment of
receivables (half year to 30 June 2022 restated: net credit of
GBP0.5m; year to 31 December 2022: net credit of GBP1.0m). See note
3 for additional information.
GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
-------------------------------------- -------- --------------- ----------------------- ------------------
(Loss)/profit for the period (143.2) 135.3 (280.5)
Actuarial loss on defined benefit
pension scheme (0.3) (0.2) (2.0)
Revaluation (deficit)/surplus of
owner-occupied property 11 (2.6) 0.7 0.7
Deferred tax credit/(charge) on
revaluation 20 0.6 (0.2) (0.2)
-------------------------------------- -------- --------------- ----------------------- ------------------
Other comprehensive expense that will
not be
reclassified to profit or loss (2.3) 0.3 (1.5)
Total comprehensive (expense)/income
relating to the period (145.5) 135.6 (282.0)
GROUP CONDENSED BALANCE SHEET
30.06.2023 30.06.2022 31.12.2022
Unaudited Unaudited Audited
Restated(1)
Note GBPm GBPm GBPm
--------------------------------- ---- ---------- ----------- ----------
Non-current assets
Investment property 11 4,852.1 5,497.1 5,002.0
Property, plant and equipment 12 51.4 54.5 54.3
Investments 14 39.2 51.3 43.9
Derivative financial instruments 19 5.7 2.7 5.0
Pension scheme surplus 1.0 1.7 1.2
Other receivables 15 196.4 179.3 188.1
--------------------------------- ---- ---------- ----------- ----------
5,145.8 5,786.6 5,294.5
Current assets
Trading property 11 46.5 31.3 39.4
Trading stock 13 4.2 1.2 2.3
Trade and other receivables 16 51.3 52.5 42.4
Corporation tax asset 0.4 - -
Cash and cash equivalents 22 98.4 82.9 76.6
--------------------------------- ---- ---------- ----------- ----------
200.8 167.9 160.7
Non-current assets held for sale 17 - 115.4 54.2
Total assets 5,346.6 6,069.9 5,509.4
Current liabilities
Leasehold liabilities 19 0.4 - 0.5
Borrowings 19 20.0 14.6 19.7
Trade and other payables 18 164.0 154.9 148.1
Corporation tax liability - 1.2 0.9
Provisions 0.1 0.2 -
--------------------------------- ---- ---------- ----------- ----------
184.5 170.9 169.2
Non-current liabilities
Borrowings 19 1,258.3 1,359.3 1,229.4
Leasehold liabilities 19 34.4 19.6 34.5
Provisions 0.1 0.2 0.2
Deferred tax 20 0.1 1.1 0.6
--------------------------------- ---- ---------- ----------- ----------
1,292.9 1,380.2 1,264.7
Total liabilities 1,477.4 1,551.1 1,433.9
Total net assets 3,869.2 4,518.8 4,075.5
Equity
Share capital 5.6 5.6 5.6
Share premium 196.6 196.6 196.6
Other reserves 938.6 940.8 941.9
Retained earnings 2,728.4 3,375.8 2,931.4
--------------------------------- ---- ---------- ----------- ----------
Total equity 3,869.2 4,518.8 4,075.5
(1) Figures for the prior period ended 30 June 2022 have been
restated for changes in accounting policies. See note 2 for
additional information.
GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
------------------------------------------
Share Share Other Retained Total
capital premium reserves earnings equity
GBPm GBPm GBPm GBPm GBPm
------------------------------------- ----------- ------- -------- ---------- -------
At 1 January 2023 5.6 196.6 941.9 2,931.4 4,075.5
Loss for the period - - - (143.2) (143.2)
Other comprehensive expense - - (2.0) (0.3) (2.3)
Share-based payments - - (1.3) 1.7 0.4
Dividends paid - - - (61.2) (61.2)
At 30 June 2023 (unaudited) 5.6 196.6 938.6 2,728.4 3,869.2
At 1 January 2022 5.6 195.4 941.1 3,299.7 4,441.8
Profit for the period - - - 135.3 135.3
Other comprehensive income/(expense) - - 0.5 (0.2) 0.3
Share-based payments - 1.2 (0.8) 1.1 1.5
Dividends paid - - - (60.1) (60.1)
At 30 June 2022 (unaudited) 5.6 196.6 940.8 3,375.8 4,518.8
At 1 January 2022 5.6 195.4 941.1 3,299.7 4,441.8
Loss for the year - - - (280.5) (280.5)
Other comprehensive income/(expense) - - 0.5 (2.0) (1.5)
Share-based payments - 1.2 0.3 1.2 2.7
Dividends paid - - - (87.0) (87.0)
At 31 December 2022 (audited) 5.6 196.6 941.9 2,931.4 4,075.5
GROUP CONDENSED CASH FLOW STATEMENT
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Unaudited Unaudited Audited
Restated(1)
Note GBPm GBPm GBPm
---------------------------------- ---- ----------------------- ----------------------- ------------------
Operating activities
Rents received 98.5 93.8 193.7
Surrender premiums and other
property income 0.7 0.4 0.7
Property expenses (16.9) (8.4) (22.5)
Costs recoverable from tenants - (4.2) (1.9)
Service charge balance inflows 50.3 26.8 64.5
Service charge balance outflows (42.9) (24.5) (61.5)
Tenant deposit inflows 0.7 12.4 13.9
Tenant deposit outflows (1.0) (1.6) (4.2)
Cash paid to and on behalf of
employees (16.3) (14.0) (25.1)
Other administrative expenses (5.8) (4.7) (8.0)
Interest received 7 0.7 0.2 0.3
Interest paid 7 (13.8) (12.4) (33.7)
Other finance costs 7 (1.9) (1.5) (3.4)
Other income 3.9 1.5 4.2
Disposal of trading properties - 3.0 3.0
Expenditure on trading
properties/stock (8.6) (1.5) (9.7)
Distribution received from joint
venture 0.4 - -
Tax paid in respect of operating
activities (1.3) (0.7) (0.5)
VAT movement (2.9) (2.5) 1.6
Net cash from operating activities 43.8 62.1 111.4
Investing activities
Acquisition of properties (0.9) (137.2) (137.6)
Capital expenditure on the
property portfolio 7 (51.9) (67.7) (120.7)
Disposal of investment properties 65.2 65.0 206.7
Investment in joint ventures - (0.3) (0.3)
Repayment of shareholder loan 0.7 - -
Purchase of property, plant and
equipment (0.4) (0.9) (2.0)
VAT movement (4.6) (9.3) 2.2
Net cash from/(used in) investing
activities 8.1 (150.4) (51.7)
Financing activities
Net movement in revolving bank
loans 27.5 121.0 (10.1)
Proceeds from other loan 0.3 2.3 7.4
Financial derivative termination
income/(costs) 8 1.0 (0.6) (0.3)
Net proceeds of share issues - 1.2 1.2
Dividends paid 21 (58.9) (58.2) (86.8)
Net cash (used in)/from financing
activities (30.1) 65.7 (88.6)
Increase/(decrease) in cash and cash
equivalents in the period 21.8 (22.6) (28.9)
Cash and cash equivalents at the
beginning of the period 76.6 105.5 105.5
Cash and cash equivalents at the
end of the period 22 98.4 82.9 76.6
(1) Figures for the prior period ended 30 June 2022 have been
restated for changes in accounting policies. See note 2 for
additional information.
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
The financial information for the half year to 30 June 2023 and
the half year to 30 June 2022 was not subject to an audit but has
been subject to a review in accordance with the International
Standard on Review Engagements (UK and Ireland) 2410, Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity, issued by the Auditing Practices Board.
The comparative financial information presented herein for the
year to 31 December 2022 does not constitute the Group's statutory
accounts, but is derived from those accounts. The Group's statutory
accounts for the year to 31 December 2022 have been delivered to
the Registrar of Companies. The Auditors' report on those accounts
was unmodified, did not draw attention to any matters by way of an
emphasis of matter and did not contain any statement under Section
498 of the Companies Act 2006.
The financial information in these condensed consolidated
interim financial statements is that of the holding company and all
of its subsidiaries (the 'Group') together with the Group's share
of its joint ventures. The Group's condensed consolidated interim
financial statements have been prepared in accordance with UK
adopted IAS 34 and the Disclosure Guidance and Transparency Rules
sourcebook of the UK's Financial Conduct Authority and should be
read in conjunction with the Annual Report and Accounts for the
year to 31 December 2022, which have been prepared in accordance
with UK-adopted International Accounting Standards, (the
'applicable framework'), and with the provisions of the Companies
Act 2006 (the 'applicable legal requirements'). The financial
statements have been prepared under the historical cost convention
as modified by the revaluation of investment properties, the
revaluation of property, plant and equipment, assets held for sale,
pension scheme, and financial assets and liabilities held at fair
value.
As with most other UK property companies and real estate
investment trusts ('REITs'), the Group presents many of its
financial measures in accordance with the guidance criteria issued
by the European Public Real Estate Association ('EPRA'). These
measures, which provide consistency across the sector, are all
derived from the IFRS figures in note 24.
Going concern
Under Provision 30 of the UK Corporate Governance Code 2018, the
Board needs to report whether the business is a going concern. In
considering this requirement, the Directors have taken into account
the following:
-- The Group's latest rolling forecast for the period to 31
December 2024, in particular the cash flows, borrowings, undrawn
facilities and with no refinancing exposure in the next 12
months.
-- The headroom under the Group's financial covenants.
-- The risks included on the Group's risk register that could
impact on the Group's liquidity and solvency over the 12 months
following approval of these interim financial statements.
-- The risks on the Group's risk register that could be a threat
to the Group's business model and capital adequacy.
The Directors have considered the relatively long-term and
predictable nature of the income receivable under the tenant
leases, the Group's EPRA loan-to-value ratio of 25.0%, the interest
cover ratio of 411%, the GBP562m total of undrawn facilities and
unrestricted cash and the fact that the average maturity of
borrowings was 5.6 years at 30 June 2023. The impact of the current
economic situation, the increases to interest rates and cost
inflation on the business and its occupiers have been considered.
The likely impact of climate change has been incorporated into the
Group's forecasts which have also taken account of a programme of
EPC upgrades across the portfolio. Based on the Group's forecasts,
rental income would need to decline by 64% and property values
would need to fall by 58% before breaching its financial
covenants.
The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the financial
review. In addition, the Group's risks and risk management
processes can be found within the risk management and internal
controls.
Having due regard to these matters and after making appropriate
enquiries, the Directors have reasonable expectation that the Group
has adequate resources to continue in operational existence for a
period of at least 12 months from the date of signing of these
condensed consolidated interim financial statements and, therefore,
the Board continues to adopt the going concern basis in their
preparation.
2. Changes in accounting policies
The accounting policies used by the Group in these condensed
financial statements are consistent with those applied in the
Group's financial statements for the year to 31 December 2022, as
amended to reflect the adoption of new standards, amendments and
interpretations which became effective in the year as shown
below.
New standards adopted during the period
The following standards, amendments and interpretations were
effective for the first time for the Group's current accounting
period and had no material impact on the financial statements.
IAS 1 and IFRS Practice Statement 2 (amended) - Disclosure of
Accounting Policies;
IAS 8 (amended) - Definition of Accounting Estimate;
IAS 12 (amended) - Income Taxes: Deferred Tax Related to Assets
and Liabilities Arising from a Single Transaction;
IAS 12 (amended) - International Tax Reform - Pillar Two Model
Rules;
IFRS 17 (amended) - Insurance Contracts;
IFRS 17 (amended) and IFRS 9 - Comparative Information.
Standards in issue but not yet effective
The following standards, amendments and interpretations were in
issue at the date of approval of these financial statements but
were not yet effective for the current accounting period and have
not been adopted early. Based on the Group's current circumstances,
the Directors do not anticipate that their adoption in future
periods will have a material impact on the financial statements of
the Group.
IAS 1 (amended) - Classification of liabilities as current or
non-current, Non-current Liabilities with Covenants;
IFRS 10 and IAS 28 (amended) - Sale or Contribution of Assets
between an investor and its Associate or Joint Venture;
IFRS 16 (amended) - Lease Liability in a Sale and Leaseback.
Restatement - IFRIC Agenda Decision - Forgiveness of lease
payments
In October 2022, the IFRS Interpretations Committee ('IFRIC')
released its decision on the application of IFRS 9 and IFRS 16 in
relation to how a lessor should account for the forgiveness of
amounts due under leases.
It was determined that, for any rent receivables that are past
their due dates and subsequently forgiven, the lessor should apply
the expected credit loss (ECL) model in IFRS 9. Therefore, the
forgiveness will be subject to the derecognition and impairment
requirements in IFRS 9, and the impact of relevant receivable
amounts written off has been reflected in the income statement. The
Group had previously treated the forgiveness of rent receivables,
in particular Covid-19 concessions that were past their due dates,
as lease modifications under IFRS 16 rather than the updated
guidance of applying IFRS 9.
However, forgiveness of future rent not currently due meets the
definition of a lease modification in IFRS 16. The impact of this
forgiveness is recognised on a straight-line basis over the
remaining term of the lease.
The adjustments required to amounts forgiven for receivables
past their due date, including the remeasurement of the ECL, have
been recalculated and the impact determined to be immaterial for
each individual financial year. As a result of the IFRIC decision,
the Group changed its policy in 2022 and has voluntarily elected to
apply IFRS 9 where applicable. For the year ended 31 December 2022,
the Group adopted the change in accounting policy and accordingly,
the relevant 2021 opening balances and 30 June 2022 comparative
information have been restated. In the income statement, the
restatement has resulted in a change to gross rental income,
movement in impairment of receivables and revaluation surplus with
no impact in the total profit/(loss) in the respective period. In
addition, there is no impact on the total net assets within the
balance sheet, with adjustments in rents recognised in advance
(other receivables and trade and other receivables), provision for
bad debts, and investment property. The impact of these adjustments
is shown on the following page. As the impact is not material,
in
accordance with IAS 1 'Presentation of Financial Statements',
the Group has not presented a revised balance sheet as at 31
December 2021 within the financial statements.
Restatement - IFRIC Agenda Decision - Recognition of Tenant
Deposits as restricted cash
In March 2022, the IFRS Interpretations Committee ('IFRIC')
finalised a decision with respect to the treatment of demand
deposits with restrictions on use, which includes tenant rent
deposits. It was concluded that these deposits, which are subject
to contractual restrictions, meet the definition of 'cash and cash
equivalents' under IAS 7 and should therefore be included as
restricted cash under 'cash and cash equivalents' within the
financial statements. The Group had not previously recognised
tenant rent deposits on its balance sheet as these deposits are
only available upon a tenant defaulting under the terms of its
lease and are normally refunded upon expiry. As a result of the
IFRIC decision, the Group changed its policy in 2022 and includes
tenant rent deposits as restricted cash. For the year ended 31
December 2022, the Group adopted the change in accounting policy
and accordingly, the relevant 2021 opening balances and 30 June
2022 comparative information have been restated. The adjustment has
no impact on the net assets of the Group, but cash and cash
equivalents as at 30 June 2022 have increased by GBP28.4m with a
corresponding increase in other payables. The movement in tenant
rent deposits has been included in net cash from operating
activities in the cash flow statement.
Cash collected on behalf of tenants to fund service charges of
properties in the portfolio was previously recognised within trade
and other receivables. This has now been reclassified and presented
as restricted cash within 'cash and cash equivalents'. For the
prior period ended 30 June 2022, the adjustment has no impact on
the net assets of the Group, with cash and cash equivalents
increasing by GBP21.7m with a corresponding decrease of trade and
other receivables. The movement in service charge balances has been
included in 'net cash from operating activities' in the cash flow
statement.
The impact of these adjustments is shown on the following page.
As the total impact of both tenant deposits and service charge
balances is not material, the Group has not presented a revised
balance sheet as at 31 December 2021 within the financial
statements, in accordance with IAS 1 'Presentation of Financial
Statements'.
The following table shows the impact of these adjustments in the
prior years.
Half year to 30 June 2022
------------------------------------------ --------------------------------------------------------
30 June
30 June Restatement(1) Restatement(2) Restated
GBPm GBPm GBPm GBPm
------------------------------------------ ----------- -------------- -------------- -----------
Group balance sheet (extract)
Investment property 5,495.9 1.2 - 5,497.1
Other receivables 175.8 (0.7) - 175.1
Trade and other receivables 78.9 (0.5) (21.7) 56.7
Cash and cash equivalents 32.8 - 50.1 82.9
Trade and other payables (126.5) - (28.4) (154.9)
5,656.9 - - 5,656.9
Group income statement (extract)
Net property and other income
Gross rental income 101.7 0.2 - 101.9
Movement in impairment of receivables 0.6 (0.1) - 0.5
Revaluation surplus 73.4 (0.1) - 73.3
175.7 - - 175.7
Group cash flow statement (extract)
Net cash from operating activities 51.5 - 13.1 64.6
51.5 - 13.1 64.6
Year to 31 December 2021
------------------------------------------ --------------------------------------------------------
31 December
31 December Restatement(1) Restatement(2) Restated
GBPm GBPm GBPm GBPm
------------------------------------------ ----------- -------------- -------------- -----------
Group balance sheet (extract)
Investment property 5,359.9 1.3 - 5,361.2
Trade and other receivables 61.7 (1.3) (19.4) 41.0
Cash and cash equivalents 68.5 - 37.0 105.5
Trade and other payables (128.3) - (17.6) (145.9)
5,361.8 - - 5,361.8
Group cash flow statement (extract)
Cash and cash equivalents at the end of the
year 68.5 - 37.0 105.5
68.5 - 37.0 105.5
(1) Restatement in relation to IFRIC Agenda Decision -
Forgiveness of lease payments.
(2) Restatement in relation to IFRIC Agenda Decision -
Recognition of Tenant Deposits as restricted cash and service
charge reclassification.
Re-presentation of VAT in Group cash flow statement
The Group has re-presented the cash flow statement for the
period ended 30 June 2022 to separate VAT movements as either
operating activities or investing activities. This has the effect
of decreasing the net cash from operations by GBP2.5m with a
corresponding increase in the net cash used in investing
activities. There is no net impact upon the cash flow statement
overall.
3. Significant judgments, key assumptions and estimates
Some of the significant accounting policies require management
to make difficult, subjective or complex judgments or estimates.
The following is a summary of those policies which management
consider critical because of the level of complexity, judgment or
estimation involved in their application and their impact on the
financial statements. Please note impairment testing of trade
receivables and other financial assets is no longer considered a
key source of estimation uncertainty. This was previously deemed a
key source of estimation uncertainty as a result of the impact of
the Covid-19 pandemic on the Group's business and its occupiers.
The severity of the impact is considerably less than prior periods
as evidenced by rent collection rates being close to that seen
pre-pandemic and office occupation rates gradually recovering.
Key sources of estimation uncertainty
Property portfolio valuation
The Group uses the valuation carried out by external valuers as
the fair value of its property portfolio. The valuation considers a
range of assumptions including future rental income, investment
yields, anticipated outgoings and maintenance costs, future
development expenditure and appropriate discount rates. The
external valuers also make reference to market evidence of
transaction prices for similar properties and take into account the
impact of climate change and related Environmental, Social and
Governance considerations. Knight Frank LLP were appointed to value
the whole London-based portfolio from 31 December 2022. More
information is provided in note 11.
Borrowings and derivatives
The fair values of the Group's borrowings and interest rate
swaps are provided by an independent third party based on
information provided to them by the Group. This includes the terms
of each of the financial instruments and data available in the
financial markets.
Significant judgments
As a REIT, the Group benefits from tax advantages. Income and
chargeable gains on the qualifying property rental business are
exempt from corporation tax. Income that does not qualify as
property income within the REIT rules is subject to corporation tax
in the normal way. There are a number of tests that are applied
annually, and in relation to forecasts, to ensure the Group remains
well within the limits allowed within those tests. The Group met
all the criteria with a substantial margin in each case, thereby
ensuring its REIT status is maintained. The Directors intend that
the Group should continue as a REIT for the foreseeable future.
In July 2023, it was confirmed that the Group has maintained its
low risk rating with HMRC following continued regular dialogue and
a focus on transparency and full disclosure.
4. Segmental information
IFRS 8 Operating Segments requires operating segments to be
identified on the basis of internal financial reports about
components of the Group that are regularly reviewed by the chief
operating decision maker (which in the Group's case are the four
executive Directors assisted by the other eleven members of the
Executive Committee) in order to allocate resources to the segments
and to assess their performance.
The internal financial reports received by the Group's Executive
Committee contain financial information at a Group level as a whole
and there are no reconciling items between the results contained in
these reports and the amounts reported in the financial statements.
These internal financial reports include the IFRS figures but also
report the non-IFRS figures for the EPRA Earnings and Net Asset
Value metrics. Reconciliations of each of these figures to their
statutory equivalents are detailed in note 24. Additionally,
information is provided to the Executive Committee showing gross
property income and property valuation by individual property.
Therefore, for the purposes of IFRS 8, each individual property is
considered to be a separate operating segment in that its
performance is monitored individually.
The Group's property portfolio includes investment property,
owner-occupied property and trading property and comprised 97%
office buildings* in central London by value (30 June 2022: 97%; 31
December 2022: 97%). The Directors consider that these individual
properties have similar economic characteristics and therefore have
been aggregated into a single operating segment. The remaining 3%
(30 June 2022: 3%; 31 December 2022: 3%) represented a mixture of
retail, residential and light industrial properties, as well as
land, each of which is de minimis in its own right and below the
quantitative threshold in aggregate. Therefore, in the view of the
Directors, there is one reportable segment under the provisions of
IFRS 8.
All of the Group's properties are based in the UK. No
geographical grouping is contained in any of the internal financial
reports provided to the Group's Executive Committee and, therefore,
no geographical segmental analysis is required by IFRS 8. However,
geographical analysis is included in the tables below to provide
users with additional information. The majority of the Group's
properties are located in London (West End central, West End
borders/outer and City borders), with the remainder in Scotland
(Provincial).
* Some office buildings have an ancillary element such as retail
or residential.
Gross property income
Office buildings Other Total
GBPm GBPm GBPm
--------------------------------------------- ---------------- ----- -----
Half year to 30 June 2023
West End central 61.2 0.8 62.0
West End borders/other 9.0 - 9.0
City borders 32.5 0.2 32.7
Provincial - 2.2 2.2
Gross property income (excl. joint venture) 102.7 3.2 105.9
Share of joint venture gross property income 1.1 - 1.1
Total 103.8 3.2 107.0
Half year to 30 June 2022 (restated)
West End central 57.4 0.8 58.2
West End borders/other 8.2 - 8.2
City borders 33.3 0.2 33.5
Provincial - 2.4 2.4
Gross property income (excl. joint venture) 98.9 3.4 102.3
Share of joint venture gross property income 1.3 - 1.3
Total 100.2 3.4 103.6
Year to 31 December 2022
West End central 118.3 1.5 119.8
West End borders/other 16.3 - 16.3
City borders 67.2 0.5 67.7
Provincial - 4.6 4.6
Gross property income (excl. joint venture) 201.8 6.6 208.4
Share of joint venture gross property income 2.1 - 2.1
Total 203.9 6.6 210.5
A reconciliation of gross property income to gross property and
other income is given in note 5.
Property portfolio
Carrying value Fair value
------------------------- -------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- --------- ----- ------- --------- ----- -------
30 June 2023
West End central 3,101.2 84.6 3,185.8 3,219.0 88.7 3,307.7
West End borders/other 331.0 - 331.0 348.9 - 348.9
City borders 1,344.8 7.5 1,352.3 1,382.2 7.5 1,389.7
Provincial - 76.9 76.9 - 77.4 77.4
Group (excl. joint venture) 4,777.0 169.0 4,946.0 4,950.1 173.6 5,123.7
Share of joint venture 38.1 - 38.1 38.0 - 38.0
Total 4,815.1 169.0 4,984.1 4,988.1 173.6 5,161.7
30 June 2022
West End central (restated) 3,445.4 80.2 3,525.6 3,562.5 80.9 3,643.4
West End borders/other 400.5 - 400.5 422.0 - 422.0
City borders (restated) 1,677.0 8.1 1,685.1 1,716.5 8.1 1,724.6
Provincial - 82.6 82.6 - 83.4 83.4
Group (excl. joint venture) (restated) 5,522.9 170.9 5,693.8 5,701.0 172.4 5,873.4
Share of joint venture 50.1 - 50.1 50.0 - 50.0
Total (restated) 5,573.0 170.9 5,743.9 5,751.0 172.4 5,923.4
31 December 2022
West End central 3,123.9 81.2 3,205.1 3,234.9 86.3 3,321.2
West End borders/other 356.9 - 356.9 376.6 - 376.6
City borders 1,494.5 10.4 1,504.9 1,534.2 10.4 1,544.6
Provincial - 78.7 78.7 - 79.4 79.4
Group (excl. joint venture) 4,975.3 170.3 5,145.6 5,145.7 176.1 5,321.8
Share of joint venture 42.6 - 42.6 42.4 - 42.4
Total 5,017.9 170.3 5,188.2 5,188.1 176.1 5,364.2
A reconciliation between the fair value and carrying value of
the portfolio is set out in note 11.
5. Property and other income
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Restated
GBPm GBPm GBPm
--------------------------------------- ----------------------- ----------------------- ------------------
Gross rental income 105.9 101.9 207.0
Surrender premiums received - 0.4 1.1
Other property income - - 0.3
Gross property income 105.9 102.3 208.4
Trading property sales proceeds(1) - 1.6 1.6
Service charge income(1) 25.0 16.8 34.6
Other income(1) 2.4 1.8 4.2
Gross property and other income 133.3 122.5 248.8
Gross rental income 105.9 101.9 207.0
Movement in impairment of receivables (1.9) 0.5 1.0
Service charge income(1) 25.0 16.8 34.6
Service charge expenses (29.5) (18.3) (39.7)
---------------------------------------- ----------------------- ----------------------- ------------------
(4.5) (1.5) (5.1)
Property costs (8.6) (6.9) (14.4)
Net rental income 90.9 94.0 188.5
---------------------------------------- ----------------------- ----------------------- ------------------
Trading property sales proceeds(1) - 1.6 1.6
Trading property cost of sales - (1.3) (1.4)
---------------------------------------- ----------------------- ----------------------- ------------------
Profit on disposal of trading properties - 0.3 0.2
Other property income - - 0.3
Other income 2.4 1.8 4.2
Net surrender premiums received - 0.4 1.1
Dilapidation receipts 0.1 0.1 0.5
Write-down of trading property (0.1) - (0.2)
Net property and other income 93.3 96.6 194.6
(1) In line with IFRS 15 Revenue from Contracts with Customers,
the Group recognised GBP27.4m ( half year to 30 June 2022: GBP20.2m
; year to 31 December 2022: GBP40.4m) of other income, trading
property sales proceeds and service charge income within gross
property and other income.
As described in note 2, gross rental income and movement in
impairment of receivables have been restated in accordance with the
guidance provided by the IFRS Interpretations Committee.
Gross rental income includes GBP3.0m (half year to 30 June 2022
restated: GBP11.1m; year to 31 December 2022: GBP20.3m) relating to
rents recognised in advance of cash receipts.
O ther income relates to fees and commissions earned from
tenants in relation to the management of the Group's properties and
was recognised in the Group income statement in accordance with the
delivery of services.
6. Profit on disposal
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
--------------------------------------- ----------------------- ----------------------- ------------------
Investment property
Gross disposal proceeds 66.2 67.3 209.6
Costs of disposal (0.6) (1.4) (3.2)
Net disposal proceeds 65.6 65.9 206.4
Carrying value (64.0) (65.4) (180.8)
Adjustment for lease costs and rents
recognised in advance (0.4) - -
Profit on disposal of investment
property 1.2 0.5 25.6
Included within gross disposal proceeds is GBP54.0m relating to
the disposal of the Group's freehold interest in 19 Charterhouse
Street EC1 in January 2023 and GBP1.8m relating to the disposal of
its freehold interest in 13 Charlotte Mews W1 in May 2023. At 31
December 2022, both properties were classified as non-current
assets held for sale.
7. Finance income and finance costs
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
--------------------------- ----------------------- ----------------------- ------------------
Finance income
Bank interest receivable (0.7) - (0.2)
Other - (0.2) (0.1)
Finance income (0.7) (0.2) (0.3)
Finance costs
Bank loans 0.1 0.9 1.1
Non-utilisation fees 1.1 1.0 2.1
Unsecured convertible bonds 2.0 1.9 3.9
Unsecured green bonds 3.3 3.3 6.7
Secured bonds 5.7 5.7 11.4
Unsecured private placement
notes 7.8 7.8 15.6
Secured loan 1.7 1.7 3.3
Amortisation of issue and
arrangement costs 1.3 1.3 2.6
Amortisation of the fair value
of the secured bonds (0.7) (0.6) (1.4)
Obligations under headleases 0.7 0.4 1.1
Other - - 0.3
Gross interest costs 23.0 23.4 46.7
Less: interest capitalised (2.7) (4.7) (7.0)
Finance costs 20.3 18.7 39.7
Finance costs of GBP2.7m (half year to 30 June 2022: GBP4.7m;
year to 31 December 2022: GBP7.0m) have been capitalised on
development projects, in accordance with IAS 23 Borrowing Costs,
using the Group's average cost of borrowing during each quarter.
Total finance costs paid to 30 June 2023 were GBP18.4m (half year
to 30 June 2022: GBP18.6m; year to 31 December 2022: GBP44.1m) of
which GBP2.7m (half year to 30 June 2022: GBP4.7m; year to 31
December 2022: GBP7.0m) was included in the GBP51.9m ( half year to
30 June 2022: GBP67.7m; year to 31 December 2022: GBP120.7m)
capital expenditure on the property portfolio in the Group cash
flow statement under investing activities.
8. Financial derivative termination income/costs
The Group received GBP1.0m in the half year to 30 June 2023
(half year to 30 June 2022: costs of GBP0.6m; year to 31 December
2022: costs of GBP0.3m) deferring interest rate swaps.
9. Share of results of joint ventures
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
--------------------------- ----------------------- ----------------------- ------------------
Net property income 1.1 1.3 2.1
Administrative expenses (0.1) (0.1) (0.1)
Revaluation deficit (4.8) (1.1) (9.3)
Share of results of joint
ventures (3.8) 0.1 (7.3)
The share of results of joint ventures for the period ended 30
June 2023 includes the Group's 50% share in the Derwent Lazari
Baker Street Limited Partnership. See note 14 for further details
of the Group's joint ventures.
10. Tax charge
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
--------------------------- ----------------------- ----------------------- ------------------
Corporation tax
UK corporation tax and income
tax in respect of result for
the period - 1.3 0.5
Other adjustments in respect of
prior years' tax - - 0.4
Corporation tax charge - 1.3 0.9
Deferred tax
Origination and reversal of
temporary differences 0.1 0.5 0.1
Deferred tax charge 0.1 0.5 0.1
Tax charge 0.1 1.8 1.0
In addition to the tax charge of GBP0.1m (half year to 30 June
2022: charge of GBP1.8m; year to 31 December 2022: charge of
GBP1.0m) that passed through the Group income statement, a deferred
tax credit of GBP0.6m (half year to 30 June 2022: charge of
GBP0.2m; year to 31 December of 2022: charge of GBP0.2m) was
recognised in the Group statement of comprehensive income and a
deferred tax charge of GBPnil (half year to 30 June 2022: charge of
GBP0.7m; year to 31 December 2022: charge of GBP0.6m) was
recognised in the Group statement of changes in equity. See note 20
for further details.
The effective rate of tax for the half year to 30 June 2023 is
lower (half year to 30 June 2022: lower; year to 31 December 2022:
lower) than the standard rate of corporation tax in the UK. The
differences are explained below:
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
--------------------------------------- ------------------------ ----------------------- ------------------
(Loss)/profit before tax (143.1) 137.1 (279.5)
---------------------------------------- ----------------------- ----------------------- ------------------
Expected tax charge/(credit) based on
the standard rate of
corporation tax in the UK of 25.00%
(2022: 19.00%)(1) (33.6) 26.0 (53.1)
Difference between tax and accounting
profit on disposals (0.3) 0.1 (3.1)
REIT exempt income (10.1) (7.2) (16.0)
Revaluation deficit/(surplus)
attributable to REIT properties 46.9 (14.3) 78.6
Expenses and fair value adjustments not
allowable for
tax purposes 0.9 (0.2) 0.4
Capital allowances (4.0) (3.0) (6.5)
Other differences 0.3 0.4 0.3
Tax on current period's (loss)/profit 0.1 1.8 0.6
Adjustments in respect of prior years'
tax - - 0.4
Tax charge 0.1 1.8 1.0
(1) Changes to the UK corporation tax rates were substantively
enacted as part of the Finance Act 2021 (on 24 May 2021) and
include increasing the main rate to 25% effective on or after 1
April 2023. Deferred taxes at the balance sheet date have been
measured using the expected enacted tax rate and this is reflected
in these financial statements.
11. Property portfolio
Carrying value
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- --------- ---------- -------- -------- -------- ---------
At 1 January 2023 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
------------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 0.6 - 0.6 - - - 0.6
Capital expenditure 25.2 28.9 54.1 - - 6.8 60.9
Interest capitalisation 0.5 1.8 2.3 - - 0.4 2.7
-------- --------- ---------- -------- -------- -------- ---------
Additions 26.3 30.7 57.0 - - 7.2 64.2
Disposals (7.3) (2.5) (9.8) - (54.2) - (64.0)
Revaluation (177.6) (19.1) (196.7) (2.6) - - (199.3)
Write-down of trading property - - - - - (0.1) (0.1)
Movement in grossing up of
headlease liabilities - (0.4) (0.4) - - - (0.4)
At 30 June 2023 3,541.9 1,310.2 4,852.1 47.4 - 46.5 4,946.0
At 1 January 2022 (restated) 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
------------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 0.1 132.9 133.0 - - - 133.0
Capital expenditure 26.7 42.5 69.2 - 0.1 0.1 69.4
Interest capitalisation 0.9 3.5 4.4 - - 0.3 4.7
-------- --------- ---------- -------- -------- -------- ---------
Additions 27.7 178.9 206.6 - 0.1 0.4 207.1
Disposals - - - - (65.4) (1.3) (66.7)
Transfers (62.6) (13.3) (75.9) - 75.9 - -
Revaluation (restated) 39.3 32.0 71.3 0.7 2.0 - 74.0
Movement in grossing up of
headlease liabilities - (51.3) (51.3) - - - (51.3)
Movement in grossing up of
other liabilities - (14.8) (14.8) - - - (14.8)
At 30 June 2022 (restated) 4,144.8 1,352.3 5,497.1 50.0 115.4 31.3 5,693.8
At 1 January 2022 (restated) 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
------------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 0.1 132.9 133.0 - - - 133.0
Capital expenditure 47.7 58.8 106.5 - - 8.3 114.8
Interest capitalisation 1.3 3.9 5.2 - 1.4 0.4 7.0
-------- --------- ---------- -------- -------- -------- ---------
Additions 49.1 195.6 244.7 - 1.4 8.7 254.8
Disposals (46.6) (30.0) (76.6) - (104.2) (1.3) (182.1)
Transfers (54.2) - (54.2) - 54.2 - -
Revaluation (388.2) (33.9) (422.1) 0.7 - - (421.4)
Write-down of trading property - - - - - (0.2) (0.2)
Movement in grossing up of
headlease liabilities - (51.0) (51.0) - - - (51.0)
At 31 December 2022 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
Adjustments from fair value to carrying value
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- -------- --------- ---------- -------- -------- -------- ---------
At 30 June 2023
Fair value 3,709.4 1,316.8 5,026.2 47.4 - 50.1 5,123.7
Selling costs relating to assets
Revaluation of trading property - - - - - (3.6) (3.6)
Lease incentives and costs
included in receivables (167.5) (40.5) (208.0) - - - (208.0)
Grossing up of headlease liabilities - 33.9 33.9 - - - 33.9
Carrying value 3,541.9 1,310.2 4,852.1 47.4 - 46.5 4,946.0
At 30 June 2022
Fair value 4,305.9 1,367.2 5,673.1 50.0 118.8 31.5 5,873.4
Selling costs relating to assets
held for sale - - - - (3.4) - (3.4)
Revaluation of trading property - - - - - (0.2) (0.2)
Lease incentives and costs
included in receivables (restated) (161.1) (34.0) (195.1) - - - (195.1)
Grossing up of headlease liabilities - 19.1 19.1 - - - 19.1
Carrying value (restated) 4,144.8 1,352.3 5,497.1 50.0 115.4 31.3 5,693.8
At 31 December 2022
Fair value 3,865.8 1,307.1 5,172.9 50.0 54.7 44.2 5,321.8
Selling costs relating to assets
held for sale - - - - (0.5) - (0.5)
Revaluation of trading property - - - - - (4.8) (4.8)
Lease incentives and costs
included in receivables (165.3) (39.8) (205.1) - - - (205.1)
Grossing up of headlease liabilities - 34.2 34.2 - - - 34.2
Carrying value 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
Reconciliation of fair value
30.06.2023 30.06.2022 31.12.2022
GBPm GBPm GBPm
-------------------------------------------------------- ---------- ---------- ----------
Portfolio including the Group's share of joint ventures 5,161.7 5,923.4 5,364.2
Less: joint ventures (38.0) (50.0) (42.4)
IFRS property portfolio 5,123.7 5,873.4 5,321.8
The property portfolio is subject to semi-annual external
valuations and was revalued at 30 June 2023 by external valuers on
the basis of fair value in accordance with The RICS Valuation -
Professional Standards, which takes account of the properties'
highest and best use. When considering the highest and best use of
a property, the external valuers will consider its existing and
potential uses which are physically, legally and financially
viable. Where the highest and best use differs from the existing
use, the external valuers will consider the costs and the
likelihood of achieving and implementing this change in arriving at
the property valuation. There were no such instances in the
year.
The valuation reports produced by the external valuers are based
on information provided by the Group such as current rents, terms
and conditions of lease agreements, service charges and capital
expenditure. This information is derived from the Group's financial
and property management systems and is subject to the Group's
overall control environment. In addition, the valuation reports are
based on assumptions and valuation models used by the external
valuers. The assumptions are typically market related, such as
yields and discount rates, and are based on their professional
judgement and market observation and take into account the impact
of climate change and related Environmental, Social and Governance
considerations.
The external valuations for the London-based portfolio at June
2023 were carried out by Knight Frank LLP, whilst the June 2022
valuations were carried out by CBRE Limited and Knight Frank LLP.
Knight Frank were appointed to value 100% of the London-based
portfolio from December 2022.
Knight Frank valued the properties at GBP5,087.0m (30 June 2022:
GBP3,156.9m; 31 December 2022: GBP5,285.6m), CBRE at GBPnil (30
June 2022: GBP2,680.4m; 31 December 2022: GBPnil) and other valuers
at GBP36.7m (30 June 2022: GBP36.1m; 31 December 2022: GBP36.2m).
The combined value was GBP5,123.7m (30 June 2022: GBP5,873.4m; 31
December 2022: GBP5,321.8m). Of the properties revalued, GBP47.4m
(30 June 2022: GBP50.0m; 31 December 2022: GBP50.0m) relating to
owner-occupied property was included within property, plant and
equipment, GBPnil (30 June 2022: GBP118.8m; 31 December 2022:
GBP54.7m) was included within non-current assets held for sale and
GBP50.1m (30 June 2022: GBP31.5m; 31 December 2022: GBP44.2m) was
included within trading property.
The total fees, including the fee for this assignment, earned by
each valuer (or other companies forming part of the same group of
companies within the UK) from the Group is less than 5.0% of their
total UK revenues.
As described in note 2, revaluation for the prior period ended
30 June 2022 has been restated in accordance with the guidance
provided by the IFRS Interpretations Committee.
Net zero carbon and EPC compliance
The Group published its pathway to net zero carbon in July 2020
and has set 2030 as its target date to achieve this. GBP44.5m (half
year to 30 June 2022: GBP34.8m; year to 31 December 2022: GBP99.9m)
of eligible 'green' capital expenditure, in accordance with the
Group's Green Finance Framework, was incurred in the half year to
30 June 2023 on the major developments at 80 Charlotte Street W1,
Soho Place W1, The Featherstone Building EC1, 25 Baker Street W1
and Network W1. In addition, the Group continues to hold carbon
credits to support certain externally validated green projects to
offset embodied carbon.
The third party report commissioned in 2021 to determine the
cost of achieving EPC compliance across the portfolio by 2030 was
updated to reflect latest scope changes and cost inflation. A
specific deduction for identified EPC upgrade works of GBP51.6m has
been included within the external valuation at 30 June 2023, with
an additional allowance for further general upgrades to properties
following assumed tenant vacancies.
Reconciliation of revaluation
(deficit)/surplus
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Restated
GBPm GBPm GBPm
--------------------------- ----------------------- ----------------------- ------------------
Total revaluation
(deficit)/surplus (201.5) 87.5 (401.8)
Share of joint ventures 4.7 1.0 9.2
Lease incentives and costs (2.9) (13.0) (23.2)
Trading property revaluation
adjustment 1.0 1.1 (3.3)
Assets held for sale selling
costs - (2.6) (2.5)
Other (0.7) - -
IFRS revaluation
(deficit)/surplus (199.4) 74.0 (421.6)
Reported in the:
Revaluation (deficit)/surplus (196.7) 73.3 (422.1)
Write-down of trading
property (0.1) - (0.2)
Group income statement (196.8) 73.3 (422.3)
Group statement of
comprehensive income (2.6) 0.7 0.7
(199.4) 74.0 (421.6)
Sensitivity of measurement to variations in the significant
unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group's property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Impact on fair value measurement Impact on fair value measurement
Unobservable input of significant increase in input of significant decrease in input
----------------------- ------------------------------------ ------------------------------------
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Reversionary yield Decrease Increase
True equivalent yield Decrease Increase
----------------------- -------------------------------- --------------------------------
There are inter-relationships between these inputs as they are
partially determined by market conditions. An increase in the
reversionary yield may accompany an increase in gross ERV and would
mitigate its impact on the fair value measurement.
A sensitivity analysis was performed to ascertain the impact on
the fair value of a 25 basis point shift in true equivalent yield
and a GBP2.50 psf shift in ERV on the property valuations. The
Group believes this captures the range of variations in these key
valuation assumptions. The results are shown in the tables
below:
West End West End City Provincial
central borders/other borders commercial Total
---------------------- -------- ------------- ------- ---------- ------
True equivalent yield
+25bp (5.0%) (4.1%) (4.3%) (2.5%) (4.7%)
-25bp 5.5% 4.4% 4.8% 2.6% 5.2%
----------------------- -------- ------------- ------- ---------- ------
ERV
+GBP2.50 psf 3.8% 4.8% 4.7% 19.3% 4.4%
-GBP2.50 psf (3.8%) (4.8%) (4.7%) (19.3%) (4.4%)
----------------------- -------- ------------- ------- ---------- ------
12. Property, plant and equipment
Owner-
occupied
property Other Total
GBPm GBPm GBPm
------------------------- -------- ----- -----
At 1 January 2023 50.0 4.3 54.3
Additions - 0.2 0.2
Depreciation - (0.5) (0.5)
Revaluation (2.6) - (2.6)
At 30 June 2023 47.4 4.0 51.4
At 1 January 2022 49.3 4.7 54.0
Additions - 0.3 0.3
Depreciation - (0.5) (0.5)
Revaluation 0.7 - 0.7
At 30 June 2022 50.0 4.5 54.5
At 1 January 2022 49.3 4.7 54.0
Additions - 0.6 0.6
Depreciation - (1.0) (1.0)
Revaluation 0.7 - 0.7
At 31 December 2022 50.0 4.3 54.3
Net book value
Cost or valuation 47.4 8.8 56.2
Accumulated depreciation - (4.8) (4.8)
At 30 June 2023 47.4 4.0 51.4
Net book value
Cost or valuation 50.0 9.1 59.1
Accumulated depreciation - (4.6) (4.6)
At 30 June 2022 50.0 4.5 54.5
Net book value
Cost or valuation 50.0 8.6 58.6
Accumulated depreciation - (4.3) (4.3)
At 31 December 2022 50.0 4.3 54.3
Artwork, which is included within 'Other', is periodically
valued by Bonhams on the basis of fair value using their extensive
market knowledge. The latest valuation was carried out in December
2021. In accordance with IFRS 13 Fair Value Measurement, the
artwork is deemed to be classified as Level 3.
13. Trading stock
30.06.2023 30.06.2022 31.12.2022
GBPm GBPm GBPm
-------------- ---------- ---------- ----------
Trading stock 4.2 1.2 2.3
4.2 1.2 2.3
Trading stock relates to capitalised development expenditure
incurred which is due to be transferred under development
agreements to a third party upon completion. This has been included
in trading stock, as opposed to trading property, as the Group does
not have an ownership interest in the property.
14. Investments
The Group has a 50% interest in four joint venture vehicles,
Derwent Lazari Baker Street Limited Partnership, Dorrington Derwent
Holdings Limited, Primister Limited and Prescot Street Limited
Partnership.
30.06.2023 30.06.2022 31.12.2022
GBPm GBPm GBPm
------------------------------------------ ----- ---------- ----------
At 1 January 43.9 51.1 51.1
Additions - 0.1 0.1
Revaluation deficit (see note 9) (4.8) (1.1) (9.3)
Other profit from operations (see note 9) 1.0 1.2 2.0
Distributions received (0.3) - -
Repayment of shareholder loan (0.6) - -
39.2 51.3 43.9
The Group's share of its investments in joint ventures is
represented by the following amounts in the underlying joint
venture entities.
Joint ventures Group share
---------------------------------- ----------------------------------
30.06.2023 30.06.2022 31.12.2022 30.06.2023 30.06.2022 31.12.2022
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
At 1 January 85.0 100.4 100.4 42.5 50.2 50.2
Additions 0.6 2.0 3.2 0.3 1.0 1.6
Revaluation (9.5) (2.2) (18.6) (4.8) (1.1) (9.3)
Movement in headlease liability 0.2 - - 0.1 - -
Non-current assets 76.3 100.2 85.0 38.1 50.1 42.5
Current assets 5.2 5.0 5.0 2.6 2.5 2.5
Current liabilities (2.5) (3.4) (2.7) (1.3) (1.7) (1.4)
Non-current liabilities (120.9) (120.9) (121.0) (60.4) (60.4) (60.5)
Net liabilities (41.9) (19.1) (33.7) (21.0) (9.5) (16.9)
Loans provided to joint ventures 60.2 60.8 60.8
Total investment in joint ventures 39.2 51.3 43.9
15. Other receivables (non-current)
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
-------------------------------- ----- ---------- ----------
Prepayments and accrued income
Rents recognised in advance 169.5 161.0 165.2
Initial direct letting costs 14.8 14.1 13.8
Other 12.1 4.2 9.1
196.4 179.3 188.1
Prepayments and accrued income include GBP169.5m (30 June 2022
restated: GBP161.0m; 31 December 2022: GBP165.2m) after impairments
relating to rents recognised in advance as a result of spreading
tenant lease incentives over the expected terms of their respective
leases. This includes rent free and reduced rent periods, capital
contributions in lieu of rent free periods and contracted rent
uplifts. In addition, GBP14.8m (30 June 2022: GBP14.1m; 31 December
2022: GBP13.8m) relates to the spreading effect of the initial
direct costs of letting over the same term. Together with GBP23.7m
(30 June 2022 restated: GBP20.0m; 31 December 2022: GBP26.1m),
which was included as accrued income within trade and other
receivables (see note 16), these amounts totalled GBP208.0m at 30
June 2023 (30 June 2022 restated: GBP195.1m; 31 December 2022:
GBP205.1m).
Other prepayments represent GBP12.1m (30 June 2022: GBP4.2m; 31
December 2022: GBP9.1m) of costs incurred in relation to Old Street
Quarter EC1. In May 2022, the Group entered into a conditional
contract to acquire the freehold of Old Street Quarter island site.
The site is being sold by Moorfields Eye Hospital NHS Foundation
Trust and UCL, together the Oriel joint initiative ("Oriel").
Completion is subject to Oriel's receipt of final Treasury approval
(received in February 2023), delivery by Oriel of a new hospital at
St Pancras and subsequent vacant possession of the site, which is
anticipated in 2027.
The total movement in tenant lease incentives is shown
below:
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
-------------------------------------------------------------- ------ ---------- ----------
At 1 January 188.8 167.0 167.0
Amounts taken to income statement 3.0 10.9 20.4
Capital incentives granted - - 0.6
Lease incentive reversal (0.5) 0.8 1.0
Disposal of investment properties (0.3) - -
Write off to bad debt (0.1) (0.1) (0.2)
190.9 178.6 188.8
Amounts included in trade and other receivables (see note 16) (21.4) (17.6) (23.6)
At period end 169.5 161.0 165.2
16. Trade and other receivables
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
------------------------------- ---- ---------- ----------
Trade receivables 13.0 4.9 4.9
Other receivables 4.9 8.5 5.8
Prepayments 8.7 11.9 3.8
Other taxes - 6.0 -
Accrued income
Rents recognised in advance 21.4 17.6 23.6
Initial direct letting costs 2.3 2.4 2.5
Other 1.0 1.2 1.8
51.3 52.5 42.4
Trade receivables are split as follows:
less than three months due 10.5 4.9 4.9
between three and six months due 2.3 - -
between six and twelve months due 0.2 - -
13.0 4.9 4.9
For the prior period ended 30 June 2022, GBP21.7m of cash
collected on behalf of tenants' service charges has been restated
from prepayments to cash and cash equivalents. For further
information refer to note 2. Additionally, GBP4.2m of prepayments
in relation to costs incurred for the conditional acquisition of
Old Street Quarter EC1 have been reclassified as non-current
receivables. For further information refer to note 15.
For the prior period ended 30 June 2022, trade receivables have
been restated by GBP0.5m in relation to amounts forgiven for
receivables past their due date as a result of the IFRIC decision
relating to forgiveness of lease payments. For further information
refer to note 2.
In response to the Group's climate change agenda, costs of
GBP1.1m (30 June 2022: GBP0.4m; 31 December 2022: GBP0.7m) were
incurred in relation to a c.100 acre, 18.4MW solar park on its
Scottish land and have been included within prepayments. Planning
consent for this project was received in June 2023.
The Group has GBP5.8m (30 June 2022: GBP6.8m; 31 December 2022:
GBP5.0m) of provision for bad debts as shown below. GBP2.3m has
been included in trade receivables, GBP0.2m in accrued income and
GBP3.3m in prepayments and accrued income within other receivables
(non-current). See note 15.
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
---------------------------- ----- ---------- ----------
Provision for bad debts
At 1 January 5.0 8.3 8.3
Lease incentive provision 0.5 0.6 (0.8)
Trade receivables provision 0.7 (0.8) (0.2)
Service charge provision 0.5 - (0.2)
Released (0.9) (1.3) (2.1)
At period end 5.8 6.8 5.0
The provision for bad debts are split as follows:
less than three months due 2.5 3.2 2.2
between three and six months due 0.1 0.2 0.1
between six and twelve months due 0.3 0.4 0.3
greater than twelve months due 2.9 3.0 2.4
5.8 6.8 5.0
17. Non-current assets held for sale
30.06.2023 30.06.2022 31.12.2022
GBPm GBPm GBPm
------------------------------------------------ ----------- ---------- ----------
Prior period transfer from investment property - 39.5 -
Transfer from investment property (see note 11) - 75.9 54.2
- 115.4 54.2
18. Trade and other payables
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
--------------------- ----- ---------- ----------
Trade payables 10.2 7.3 0.4
Other payables 33.9 37.5 24.6
Other taxes 5.0 - 11.8
Accruals 34.9 38.3 35.8
Deferred income 53.0 43.4 48.2
Tenant rent deposits 27.0 28.4 27.3
164.0 154.9 148.1
Included within other payables is GBP32.3m (30 June 2022:
GBP21.7m; 31 December 2022: GBP22.4m) of service charge income
received in advance.
Deferred income primarily related to rents received in
advance.
Trade and other payables for the period ended 30 June 2022 have
been restated to include GBP28.4m of tenant rent deposits, which
are subject to contractual restrictions. For further information
refer to note 2.
19. Net debt and derivative financial instruments
30.06.2023 30.06.2022 31.12.2022
---------------- ---------------- ----------------
Book Fair Book Fair Book Fair
value value Value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- ------- ------- ------- ------- -------
Current liabilities
Other loans 20.0 20.0 14.6 14.6 19.7 19.7
20.0 20.0 14.6 14.6 19.7 19.7
Non-current liabilities
1.5% unsecured convertible bonds 2025 171.1 157.3 169.2 156.2 170.1 157.2
6.5% secured bonds 2026 180.3 172.3 181.7 192.2 181.0 179.7
1.875% unsecured green bonds 2031 346.6 242.9 346.2 285.3 346.4 247.3
Unsecured private placement notes 2026 -
2034 453.3 392.8 453.2 452.4 453.3 410.4
3.99% secured loan 2024 82.7 79.5 82.6 85.1 82.7 80.6
Unsecured bank loans 24.3 27.5 126.4 131.0 (4.1) -
1,258.3 1,072.3 1,359.3 1,302.2 1,229.4 1,075.2
Borrowings 1,278.3 1,092.3 1,373.9 1,316.8 1,249.1 1,094.9
Derivative financial instruments expiring
in
greater than one year (5.7) (5.7) (2.7) (2.7) (5.0) (5.0)
Total borrowings and derivative
financial instruments 1,272.6 1,086.6 1,371.2 1,314.1 1,244.1 1,089.9
Reconciliation to net debt:
Borrowings and derivative financial
instruments 1,272.6 1,371.2 1,244.1
Adjustments for:
Leasehold liabilities 34.8 19.6 35.0
Derivative financial instruments 5.7 2.7 5.0
Cash at bank excluding restricted cash (39.1) (32.8) (26.9)
(see note 22)
Net debt 1,274.0 1,360.7 1,257.2
The fair values of the Group's bonds have been estimated on the
basis of quoted market prices, representing Level 1 fair value
measurement as defined by IFRS 13 Fair Value Measurement.
The fair values of the 3.99% secured loan and the unsecured
private placement notes were determined by comparing the discounted
future cash flows using the contracted yield with those of the
reference gilts plus the implied margins, and represent Level 2
fair value measurement.
The fair values of the Group's outstanding interest rate swaps
have been estimated by using the mid-point of the yield curves
prevailing on the reporting date and represent the net present
value of the differences between the contracted rate and the
valuation rate when applied to the projected balances for the
period from the reporting date to the contracted expiry dates.
These represent Level 2 fair value measurement.
The fair values of the Group's bank loans are approximately the
same as their carrying amount, after adjusting for the unamortised
arrangement fees, and also represent Level 2 fair value
measurement.
The fair values of the following financial assets and
liabilities are the same as their carrying amounts:
-- Cash and cash equivalents.
-- Trade receivables, other receivables and accrued income
included within trade and other receivables.
-- Trade payables, other payables and accruals included within trade and other payables.
-- Leasehold liabilities.
There have been no transfers between Level 1 and Level 2 or
Level 2 and Level 3 in either 2023 or 2022.
Unsecured bank borrowings are accounted for at amortised costs.
At 30 June 2023, there was GBP27.5m (30 June 2022: GBP131.0m; 31
December 2022: GBPnil) drawn on the RCFs and the unamortised
arrangement fees were GBP3.4m (30 June 2022: GBP4.6m; 31 December
2022: GBP4.1m), resulting in the carrying value being a GBP24.1m
(30 June 2022: GBP126.4m; 31 December 2022: GBP4.1m debit
balance).
Other loans consist of a GBP20.0m interest-free loan with no
fixed repayment date from a third party providing development
consultancy services on the residential element of the 25 Baker
Street W1 development. The loan will be repaid from the sale
proceeds of these residential apartments after completion of the
scheme. The agreement provides for a profit share on completion of
the sales which, under IFRS 9 Financial Instruments, has been
deemed to have a carrying value of GBPnil at 30 June 2023 (30 June
2022: GBPnil; 31 December 2022: GBPnil). The carrying value of the
loan at 30 June 2023 was GBP20.0m (30 June 2022: GBP14.6m; 31
December 2022: GBP19.7m).
The 3.99% secured loan 2024 was secured by a fixed charge over
GBP258.7m (30 June 2022: GBP302.7m; 31 December 2022: GBP272.8m) of
the Group's properties. In addition, the secured bonds 2026 were
secured by a floating charge over a number of the Group's
subsidiary companies which contained GBP420.5m (30 June 2022:
GBP502.6m; 31 December 2022: GBP448.8m) of the Group's
properties.
All additional drawings in the period have been made from
existing revolving credit facilities, and there are no new debt
facilities in the period. The Group continue to maintain
significant headroom on all financial covenants.
20. Deferred tax
Revaluation
(deficit)/ Other Total
surplus
GBPm GBPm GBPm
----------- ----- -----
At 1 January 2023 3.7 (3.1) 0.6
Charged to the income statement 0.1 - 0.1
Credited to other comprehensive income (0.6) - (0.6)
At 30 June 2023 3.2 (3.1) 0.1
At 1 January 2022 3.3 (3.6) (0.3)
Charged to the income statement 0.3 0.2 0.5
Charged to other comprehensive income 0.2 - 0.2
Charged to equity - 0.7 0.7
At 30 June 2022 3.8 (2.7) 1.1
At 1 January 2022 3.3 (3.6) (0.3)
Charged/(credited) to the income statement 0.2 (0.1) 0.1
Charged to other comprehensive income 0.2 - 0.2
Charged to equity - 0.6 0.6
At 31 December 2022 3.7 (3.1) 0.6
Deferred tax on the balance sheet revaluation surplus is
calculated on the basis of the chargeable gains that would
crystallise on the sale of the property portfolio at each balance
sheet date. The calculation takes account of any available
indexation on the historical cost of the properties. Due to the
Group's REIT status, deferred tax is only provided at each balance
sheet date on properties outside the REIT regime.
Deferred tax assets have been recognised in respect of all tax
losses and other temporary differences where the Directors believe
it is probable that these assets will be recovered.
21. Dividend
Dividend per share
Half year to Half year to Year to
Payment date PID Non-PID Total 30.06.2023 30.06.2022 31.12.2022
p p p GBPm GBPm GBPm
Current period
2023 interim
dividend 13 October 2023 24.50 - 24.50 - - -
Prior year
2022 final
dividend 2 June 2023 38.50 16.00 54.50 61.2 - -
2022 interim
dividend 14 October 2022 24.00 - 24.00 - - 26.9
62.50 16.00 78.50
2021 final
dividend 1 June 2022 35.50 18.00 53.50 - 60.1 60.1
Dividends as
reported in the
Group statement
of changes in
equity 61.2 60.1 87.0
2022 final
dividend
withholding
tax 14 July 2023 (6.0) - -
2022 interim
dividend
withholding
tax 13 January 2023 3.7 - (3.7)
2021 final
dividend
withholding
tax 14 July 2022 - (5.4) -
2021 interim
dividend
withholding
tax 14 January 2022 - 3.5 3.5
Dividends paid as reported in
the
Group cash flow
statement 58.9 58.2 86.8
22. Cash and cash equivalents
30.06.2023 30.06.2022 31.12.2022
Restated
GBPm GBPm GBPm
--------------------------------- ---------- ---------- ----------
Cash at bank 39.1 32.8 26.9
Cash held in restricted accounts
Tenant rent deposits 27.0 28.4 27.3
Service charge balances 32.3 21.7 22.4
98.4 82.9 76.6
Cash and cash equivalents for the period ended 30 June 2022 have
been restated to include GBP28.4m of tenant deposits, which are
subject to contractual restrictions. In addition, GBP21.7m of cash
collected on behalf of tenants to fund the service charge of
properties in the portfolio has now been reclassified from trade
and other receivables and presented as restricted cash. For further
information refer to note 2.
23. Related party disclosure
There have been no related party transactions during the half
year to 30 June 2023 that have materially affected the financial
position or performance of the Group. All related party
transactions are materially consistent with those disclosed by the
Group in its financial statements for the year ended 31 December
2022.
24. EPRA performance measures
Number of shares
Earnings per share measures Net asset value per share measures
Weighted average for the
period ended At period ended
30.06.2023 30.06.2022 31.12.2022 30.06.2023 30.06.2022 31.12.2022
Unaudited Unaudited Audited Unaudited Unaudited Audited
'000 '000 '000 '000 '000 '000
---------- ---------- -------------- ----------- ----------
For use in basic measures 112,291 112,179 112,270 112,291 112,291 112,291
Dilutive effect of
share-based payments 229 244 142 224 203 138
For use in other diluted
measures 112,520 112,423 112,412 112,515 112,494 112,429
The GBP175m unsecured convertible bonds 2025 ('2025 bonds') have
an initial conversion price set at GBP44.96.
The Group recognises the effect of conversion of the bonds if
they are both dilutive and, based on the share price, likely to
convert. For both the half years to 30 June 2023 and 2022 and for
the year ended 31 December 2022, the Group did not recognise the
dilutive impact of the conversion of the 2025 bonds on its earnings
per share (EPS) or net asset value (NAV) per share metrics as,
based on the share price at the end of each period, the bonds were
not expected to convert.
The following tables set out reconciliations between the IFRS
and EPRA Earnings for the period and earnings per share. The
adjustments made between the figures are as follows:
A - Disposal of investment and trading property (including the
Group's share in joint ventures), and associated tax.
B - Revaluation movement on investment property and in joint
ventures, write-down of trading property and associated deferred
tax.
C - Fair value movement and termination costs relating to
derivative financial instruments.
Earnings and earnings per share
-------
Adjustments EPRA
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Half year to 30 June 2023 (unaudited)
Net property and other income 93.3 - 0.1 - 93.4
Administrative expenses (19.2) - - - (19.2)
Revaluation surplus (196.7) - 196.7 - -
Profit on disposal of investments 1.2 (1.2) - - -
Net finance costs (19.6) - - - (19.6)
Movement in fair value of derivative
financial instruments 0.7 - - (0.7) -
Financial derivative termination costs 1.0 - - (1.0) -
Share of results of joint ventures (3.8) - 4.8 - 1.0
Loss before tax (143.1) (1.2) 201.6 (1.7) 55.6
Tax charge (0.1) - 0.1 - -
Loss for the period (143.2) (1.2) 201.7 (1.7) 55.6
Earnings attributable to equity shareholders (143.2) (1.2) 201.7 (1.7) 55.6
Earnings per share (127.53p) 49.51p
Diluted earnings per share (127.53p) 49.41p
The diluted loss per share for the period to 30 June 2023 has been restricted to a loss of
127.53p per share, as the loss per share cannot be reduced by dilution in accordance with
IAS 33, Earnings per Share.
Half year to 30 June 2022 (unaudited)
Net property and other income (restated) 96.6 (0.3) - - 96.3
Administrative expenses (17.8) - - - (17.8)
Revaluation surplus (restated) 73.3 - (73.3) - -
Profit on disposal of investments 0.5 (0.5) - - -
Net finance costs (18.5) - - - (18.5)
Movement in fair value of derivative
financial instruments 3.5 - - (3.5) -
Financial derivative termination costs (0.6) - - 0.2 (0.4)
Share of results of joint ventures 0.1 - 1.1 - 1.2
Profit before tax 137.1 (0.8) (72.2) (3.3) 60.8
Tax charge (1.8) 0.4 0.3 - (1.1)
Earnings attributable to equity shareholders (restated) 135.3 (0.4) (71.9) (3.3) 59.7
Earnings per share (restated) 120.61p 53.22p
Diluted earnings per share (restated) 120.35p 53.10p
Adjustments EPRA
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year to 31 December 2022 (audited)
Net property and other income 194.6 (0.2) 0.2 - 194.6
Administrative expenses (36.4) - - - (36.4)
Revaluation surplus (422.1) - 422.1 - -
Profit on disposal of investments 25.6 (25.6) - - -
Net finance costs (39.4) - - - (39.4)
Movement in fair value of derivative
financial instruments 5.8 - - (5.8) -
Financial derivative termination costs (0.3) - - (0.1) (0.4)
Share of results of joint ventures (7.3) - 9.3 - 2.0
(Loss)/profit before tax (279.5) (25.8) 431.6 (5.9) 120.4
Tax charge (1.0) - 0.3 - (0.7)
(Loss)/profit before tax (280.5) (25.8) 431.9 (5.9) 119.7
Earnings attributable to equity shareholders (280.5) (25.8) 431.9 (5.9) 119.7
Earnings per share (249.84p) 106.62p
Diluted earnings per share (249.84p) 106.48p
The diluted loss per share for the year to 31 December 2022 was restricted to a loss of 249.84p
per share, as the loss per share cannot be reduced by dilution in accordance with IAS 33,
Earnings per Share.
EPRA net asset value metrics
---------- ---------- ----------
30.06.2023 30.06.2022 31.12.2022
Unaudited Unaudited Audited
GBPm GBPm GBPm
Net assets attributable to equity shareholders 3,869.2 4,518.8 4,075.5
Adjustments for:
Revaluation of trading properties 3.6 0.2 4.8
Deferred tax on revaluation surplus(1) 1.6 1.9 1.9
Fair value of derivative financial instruments (5.7) (2.7) (5.0)
Fair value adjustment to secured bonds 5.8 7.3 6.5
EPRA Net Tangible Assets 3,874.5 4,525.5 4,083.7
Per share measure - diluted 3,444p 4,023p 3,632p
Net assets attributable to equity shareholders 3,869.2 4,518.8 4,075.5
Adjustments for:
Revaluation of trading properties 3.6 0.2 4.8
Fair value adjustment to secured bonds 5.8 7.3 6.5
Mark-to-market of fixed rate debt 190.6 62.9 159.5
Unamortised issue and arrangement costs (8.8) (11.3) (10.1)
EPRA Net Disposal Value 4,060.4 4,577.9 4,236.2
Per share measure - diluted 3,609p 4,069p 3,768p
Net assets attributable to equity shareholders 3,869.2 4,518.8 4,075.5
Adjustments for:
Revaluation of trading properties 3.6 0.2 4.8
Deferred tax on revaluation surplus 3.2 3.8 3.7
Fair value of derivative financial instruments (5.7) (2.7) (5.0)
Fair value adjustment to secured bonds 5.8 7.3 6.5
Purchasers' costs(2) 348.4 399.4 361.9
EPRA Net Reinstatement Value 4,224.5 4,926.8 4,447.4
Per share measure - diluted 3,755p 4,380p 3,956p
(1) Only 50% of the deferred tax on the revaluation surplus is
excluded .
(2) Includes Stamp Duty Land Tax. Total costs assumed to be 6.8%
of the portfolio's fair value .
Cost ratios (unaudited)
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Restated
GBPm GBPm GBPm
----------------------- -----------------------
Administrative expenses 19.2 17.8 36.4
Write-off/impairment of
receivables 1.9 (0.5) (1.0)
Other property costs 7.4 6.4 12.7
Dilapidation receipts (0.1) (0.1) (0.5)
Net service charge costs 4.5 1.5 5.1
Service charge costs recovered
through rents
but not separately invoiced (0.3) (0.3) (0.7)
Management fees received less
estimated profit element (2.4) (1.8) (4.2)
Share of joint ventures'
expenses 0.2 0.3 0.5
EPRA Costs (including direct
vacancy costs) (A) 30.4 23.3 48.3
Direct vacancy costs (5.9) (2.9) (7.9)
EPRA Costs (excluding direct
vacancy costs) (B) 24.5 20.4 40.4
Gross rental income 105.9 101.9 207.0
Ground rent (1.2) (0.5) (1.7)
Service charge components of
rental income (0.3) (0.3) (0.7)
Share of joint ventures' rental
income less ground rent 1.2 (1.3) 2.5
Adjusted gross rental income (C) 105.6 99.8 207.1
EPRA Cost Ratio (including direct
vacancy costs) (A/C) 28.8% 23.3% 23.3%
EPRA Cost Ratio (excluding direct
vacancy costs) (B/C) 23.2% 20.4% 19.5%
In addition to the EPRA Cost Ratios, the Group has calculated an additional cost ratio based
on its property portfolio fair value to recognise the 'total return' nature of the Group's
activities.
Property portfolio at fair value
(D) 5,123.7 5,873.4 5,321.8
Portfolio cost ratio (A/D) -
annualised 1.2% 0.8% 0.9%
The Group has not capitalised any overhead or operating expenses
in either 2023 or 2022.
Property-related capital
expenditure (unaudited)
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
GBPm GBPm GBPm
Group (excluding joint ventures)
Acquisitions 0.6 133.0 133.0
Development 51.0 57.4 94.7
Investment properties
Incremental lettable space 1.7 0.1 0.9
No incremental lettable space 8.2 11.7 18.5
Tenant incentives - 0.1 0.8
Capitalised interest 2.7 4.7 6.9
Joint ventures (50% share)
Development 0.3 1.0 1.6
Total capital expenditure 64.5 208.0 256.4
Conversion from accrual to cash
basis
Group (excluding joint
ventures) (4.2) (0.5) 11.1
Joint ventures (50% share) 0.1 (0.1) 0.1
Total capital expenditure on a
cash basis 60.4 207.4 267.6
25. Gearing and interest cover
NAV gearing
30.06.2023 30.06.2022 31.12.2022
Note GBPm GBPm GBPm
Net debt 19 1,274.0 1,360.7 1,257.2
Net assets 3,869.2 4,518.8 4,075.5
NAV gearing 32.9% 30.1% 30.8%
Loan-to-value ratio
30.06.2023 30.06.2022 31.12.2022
Note GBPm GBPm GBPm
Group loan-to-value
Net debt 19 1,274.0 1,360.7 1,257.2
Fair value adjustment of secured bonds (5.8) (7.3) (6.5)
Unamortised discount on unsecured green bonds 1.6 1.8 1.7
Unamortised issue and arrangement costs 8.8 11.3 10.1
Leasehold liabilities 19 (34.8) (19.6) (35.0)
Drawn debt net of cash (A) 1,243.8 1,346.9 1,227.5
Fair value of property portfolio (B) 11 5,123.7 5,873.4 5,321.8
Loan-to-value ratio (A/B) 24.3% 22.9% 23.1%
Proportionally consolidated loan-to-value
Drawn debt net of cash (A) 1,243.8 1,346.9 1,227.5
Share of cash and cash equivalents in joint ventures (1.0) (1.5) (1.6)
Drawn debt net of cash including Group's share of joint ventures (C) 1,242.8 1,345.4 1,225.9
Fair value of property portfolio (B) 5,123.7 5,873.4 5,321.8
Share of fair value of property portfolio of joint venture 38.0 50.0 42.4
Fair value of property portfolio including Group's share of joint
venture (D) 5,161.7 5,923.4 5,364.2
Proportionally consolidated loan-to-value (C/D) 24.1% 22.7% 22.9%
EPRA loan-to-value
Drawn debt net of cash including Group's share of joint ventures (C) 1,242.8 1,345.4 1,225.9
Debt with equity characteristics (20.0) (14.6) (19.7)
Adjustment for hybrid debt instruments 2.6 3.9 3.3
Net payables adjustment 65.9 69.1 74.1
Adjusted debt (E) 1,291.3 1,403.8 1,283.6
Fair value of property portfolio including Group's share of joint
venture (D) 5,161.7 5,923.4 5,364.2
EPRA loan-to-value (E/D) 25.0% 23.7% 23.9%
Net interest cover ratio
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
Restated
Note GBPm GBPm GBPm
Group net interest cover ratio
Net property and other income 5 93.3 96.6 194.6
Adjustments for:
Other income 5 (2.4) (1.8) (4.2)
Other property income 5 - - (0.3)
Net surrender premiums 5 - (0.4) (1.1)
Write-down of trading property 5 0.1 - 0.2
Profit on disposal of trading
properties 5 - (0.3) (0.2)
Adjusted net property income 91.0 94.1 189.0
Finance income 7 (0.7) (0.2) (0.3)
Finance costs 7 20.3 18.7 39.7
19.6 18.5 39.4
Adjustments for:
Finance income 7 0.7 0.2 0.3
Other finance costs 7 - - (0.3)
Amortisation of fair value
adjustment to secured bonds 7 0.7 0.6 1.4
Amortisation of issue and
arrangement costs 7 (1.3) (1.3) (2.6)
Finance costs capitalised 7 2.7 4.7 7.0
22.4 22.7 45.2
Net interest cover ratio 406% 415% 418%
Proportionally consolidated net
interest cover ratio
Adjusted net property income 91.0 94.1 189.0
Share of joint ventures' net
property income 1.1 1.1 2.1
Adjusted net property income
including share of joint
ventures 92.1 95.2 191.1
Net interest payable 22.4 22.7 45.2
Proportionally consolidated net
interest cover ratio 411% 419% 423%
26. Total return
Half year to 30.06.2023 Half year to 30.06.2022 Year to 31.12.2022
p p p
----------------------- ----------------------- ------------------
EPRA Net Tangible Assets on a
diluted basis
At end of period 3,444 4,023 3,632
At start of period (3,632) (3,959) (3,959)
(Decrease)/increase (188) 64 (327)
Dividend per share 55 54 78
(Decrease)/increase including
dividend (133) 118 (249)
Total return (3.7%) 3.0% (6.3%)
27. List of definitions
Building Research Establishment Environmental Assessment Method
(BREEAM)
An environmental impact assessment method for non-domestic
buildings. Performance is measured across a series of ratings;
Good, Very Good, Excellent and Outstanding.
Capital return
The annual valuation movement arising on the Group's portfolio
expressed as a percentage return on the valuation at the beginning
of the year adjusted for acquisitions and capital expenditure.
Company Voluntary Arrangement (CVA)
An insolvency procedure allowing a company with debt problems or
that is insolvent to reach a voluntary agreement with its creditors
to repay its debt over a fixed period.
Diluted figures
Reported results adjusted to include the effects of potential
dilutive shares issuable under the Group's share option schemes and
the convertible bonds.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the period
attributable to equity shareholders and are divided by the weighted
average number of ordinary shares in issue during the financial
period to arrive at earnings per share.
Energy Performance Certificate (EPC)
An EPC is an asset rating detailing how energy efficient a
building is, rated by carbon dioxide emission on a scale of A-G,
where an A rating is the most energy efficient. They are legally
required for any building that is to be put on the market for sale
or rent.
Estimated rental value (ERV)
This is the external valuers' opinion as to the open market rent
which, on the date of valuation, could reasonably be expected to be
obtained on a new letting or rent review of a property.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe's
leading property companies, investors and consultants which strives
to establish best practices in accounting, reporting and corporate
governance and to provide high-quality information to investors.
EPRA's Best Practices Recommendations includes guidelines for the
calculation of the following performance measures which the Group
has adopted.
- EPRA Earnings Per Share
Earnings from operational activities.
- EPRA loan-to-value ratio (LTV)
Debt divided by the property value. Debt is equal to drawn
facilities less cash, adjusted for debt with equity
characteristics, adding back the equity portion of hybrid debt
instruments and including net payables if applicable. Property
value is equal to the fair value of the property portfolio
including net receivables if applicable.
- EPRA Net Reinstatement Value (NRV) per share
NAV adjusted to reflect the value required to rebuild the entity
and assuming that entities never sell assets. Assets and
liabilities, such as fair value movements on financial derivatives
are not expected to crystallise in normal circumstances and
deferred taxes on property valuation surpluses are excluded.
- EPRA Net Tangible Assets (NTA) per share
Assumes that entities buy and sell assets, thereby crystallising
certain levels of unavoidable deferred tax.
- EPRA Net Disposal Value (NDV) per share
Represents the shareholders' value under a disposal scenario,
where deferred tax, financial instruments and certain other
adjustments are calculated to the full extent of their liability,
net of any resulting tax.
- EPRA capital expenditure
The total expenditure incurred on the acquisition, enhancement,
and development of investment properties. This can include amounts
spent on any investment properties under construction or related
development projects, as well as the amounts spent on the completed
(operational) investment property portfolio. Capitalised finance
costs included in the financial statements are also presented
within this total. The costs are presented on both an accrual and a
cash basis, for both the Group and the proportionate share of joint
ventures.
- EPRA Cost Ratio (including direct vacancy costs)
EPRA costs as a percentage of gross rental income less ground
rent (including share of joint venture gross rental income less
ground rent). EPRA costs include administrative expenses, other
property costs, net service charge costs and the share of joint
ventures' overheads and operating expenses (net of any service
charge costs), adjusted for service charge costs recovered through
rents and management fees.
- EPRA Cost Ratio (excluding direct vacancy costs)
Calculated as above, but with an adjustment to exclude direct
vacancy costs.
- EPRA Net Initial Yield (NIY)
Annualised rental income based on the cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the EPRA property
portfolio, increased by estimated purchasers' costs.
- EPRA 'topped-up' Net Initial Yield
This measure incorporates an adjustment to the EPRA NIY in
respect of the expiration of rent free periods (or other unexpired
lease incentives such as discounted rent periods and stepped
rents).
- EPRA Vacancy Rate
Estimated rental value (ERV) of immediately available space
divided by the ERV of the EPRA portfolio.
- EPRA like-for-like rental income growth
The growth in rental income on properties owned throughout the
current and previous periods under review. This growth rate
includes revenue recognition and lease accounting adjustments but
excludes properties held for development in either period and
properties acquired or disposed of in either period.
Fair value adjustment
An accounting adjustment to change the book value of an asset or
liability to its market value.
Ground rent
The rent payable by the Group for its leasehold properties.
Under IFRS, a liability is recognised using the discounted payments
due. Fixed lease payments made are allocated between the interest
payable and the reduction in the outstanding liability. Any
variable payments are recognised in the income statement in the
period to which it relates.
Headroom
This is the amount left to draw under the Group's loan
facilities (i.e. the total loan facilities less amounts already
drawn).
Interest rate swap
A financial instrument where two parties agree to exchange an
interest rate obligation for a predetermined amount of time. These
are generally used by the Group to convert floating rate debt to
fixed rates.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives
and individual goals, against which the performance of the Group is
annually assessed.
Lease incentives
Any incentive offered to occupiers to enter into a lease.
Typically the incentive will be an initial rent free or half rent
period, stepped rents, or a cash contribution to fit-out or similar
costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property
portfolio. Drawn debt is equal to drawn facilities less cash and
the unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability
and its market value.
MSCI Inc. (MSCI IPD)
MSCI Inc. is a company that produces independent benchmarks of
property returns. The Group measures its performance against both
the Central London Offices Index and the UK All Property Index.
National Australian Built Environment Rating System (NABERS)
This is a building performance rating system, introduced into
the UK, which provides an energy performance benchmark using a
simple star rating system on a 1-6 scale. This helps property
owners understand and communicate a building's performance versus
other similar buildings to occupiers. Ratings are validated on an
annual basis.
NAV gearing
Net debt divided by net assets.
Net assets per share or net asset value (NAV)
Equity shareholders' funds divided by the number of ordinary
shares in issue at the balance sheet date.
Net debt
Borrowings plus bank overdraft less unrestricted cash and cash
equivalents.
Net interest cover ratio
Net property income, excluding all non-core items divided by
interest payable on borrowings and non-utilisation fees.
Property income distribution (PID)
Dividends from profits of the Group's tax-exempt property rental
business under the REIT regulations.
Non-PID
Dividends from profits of the Group's taxable residual
business.
Real Estate Investment Trust (REIT )
The UK Real Estate Investment Trust ("REIT") regime was launched
on 1 January 2007. On 1 July 2007, Derwent London plc elected to
convert to REIT status.
The REIT legislation was introduced to provide a structure which
closely mirrors the tax outcomes of direct ownership in property
and removes tax inequalities between different real estate
investors. It provides a liquid and publicly available vehicle
which opens the property market to a wide range of investors.
A REIT is exempt from corporation tax on qualifying income and
gains of its property rental business providing various conditions
are met. It remains subject to corporation tax on non-exempt income
and gains e.g. interest income, trading activity and development
fees.
REITs must distribute at least 90% of the Group's income profits
from its tax exempt property rental business, by way of dividend,
known as a property income distribution. These distributions can be
subject to withholding tax at 20%.
If the Group distributes profits from the non-tax exempt
business, the distribution will be taxed as an ordinary dividend in
the hands of the investors (non-PID).
Rent reviews
Rent reviews take place at intervals agreed in the lease
(typically every five years) and their purpose is usually to adjust
the rent to the current market level at the review date. For
upwards only rent reviews, the rent will either remain at the same
level or increase (if market rents are higher) at the review
date.
Reversion
The reversion is the amount by which ERV is higher than the rent
roll of a property or portfolio. The reversion is derived from
contractual rental increases, rent reviews, lease renewals and the
letting of space that is vacant and available to occupy or under
development or refurbishment.
Scrip dividend
Derwent London plc sometimes offers its shareholders the
opportunity to receive dividends in the form of shares instead of
cash. This is known as a scrip dividend.
Task Force on Climate-related Financial Disclosures (TCFD)
Set up by the Financial Stability Board (FSB) in response to the
G20 Finance Ministers and Central Bank Governors request for
greater levels of decision-useful, climate-related information; the
TCFD was asked to develop climate-related disclosures that could
promote more informed investment, credit (or lending), and
insurance underwriting decisions. In turn, this would enable
stakeholders to understand better the concentrations of
carbon-related assets in the financial sector and the financial
system's exposures to climate-related risks.
'Topped-up' rent
Annualised rents generated by the portfolio plus rent contracted
from expiry of rent free periods and uplifts agreed at the balance
sheet date.
Total property return (TPR)
Total property return is a performance measure calculated by the
MSCI IPD and defined in the MSCI Global Methodology Standards for
Real Estate Investment as 'the percentage value change plus net
income accrual, relative to the capital employed'.
Total return
The movement in EPRA Net Tangible Assets per share on a diluted
basis between the beginning and the end of each financial period
plus the dividend per share paid during the period expressed as a
percentage of the EPRA Net Tangible Assets per share on a diluted
basis at the beginning of the year.
Total shareholder return (TSR)
The growth in the ordinary share price as quoted on the London
Stock Exchange plus dividends per share received for the period,
expressed as a percentage of the share price at the beginning of
the year.
Transmission and distribution (T&D)
The emissions associated with the transmission and distribution
losses in the grid from the transportation of electricity from its
generation source.
Underlying portfolio
Properties that have been held for the whole of the period (i.e.
excluding any acquisitions or disposals made during the
period).
Underlying valuation increase
The valuation increase on the underlying portfolio.
Well to tank (WTT)
The emissions associate with extracting, refining and
transporting raw fuel to the vehicle, asset or process under
scrutiny.
Yields
- Net initial yield
Annualised rental income based on cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the property, increased by
estimated purchasers' costs.
- Reversionary yield
The anticipated yield, which the net initial yield will rise to
once the rent reaches the estimated rental values.
- True equivalent yield
The constant capitalisation rate which, if applied to all cash
flows from the portfolio, including current rent, reversions to
valuers' estimated rental value and such items as voids and
expenditures, equates to the valuation having taken into account
notional purchasers' costs. Rent is assumed to be received
quarterly in advance.
- Yield shift
A movement in the yield of a property asset, or like-for-like
portfolio, over a given period. Yield compression is a
commonly-used term for a reduction in yields.
28. Copies of this announcement will be available on the
company's website, www.derwentlondon.com, from the date of this
statement. Copies will also be available from the Company
Secretary, Derwent London plc, 25 Savile Row, London, W1S 2ER.
Independent review report to Derwent London plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Derwent London plc's condensed consolidated
interim financial statements (the "interim financial statements")
in the Interim Results 2023 Announcement of Derwent London plc for
the 6 month period ended 30 June 2023 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Group Condensed Balance Sheet as at 30 June 2023;
-- the Group Condensed Income Statement and Group Condensed
Statement of Comprehensive Income for the period then ended;
-- the Group Condensed Cash Flow Statement for the period then ended;
-- the Group Condensed Statement of Changes in Equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Results
2023 Announcement of Derwent London plc have been prepared in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom ("ISRE (UK) 2410"). A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim
Results 2023 Announcement and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with ISRE (UK) 2410.
However, future events or conditions may cause the group to cease
to continue as a going concern..
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Interim Results 2023 Announcement, including the interim
financial statements, is the responsibility of, and has been
approved by the directors. The directors are responsible for
preparing the Interim Results 2023 Announcement in accordance with
the Disclosure Guidance and Transparency Rules sourcebook of the
United Kingdom's Financial Conduct Authority. In preparing the
Interim Results 2023 Announcement, including the interim financial
statements, the directors are responsible for assessing the group's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Interim Results 2023 Announcement based
on our review. Our conclusion, including our Conclusions relating
to going concern, is based on procedures that are less extensive
than audit procedures, as described in the Basis for conclusion
paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of
complying with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and
for no other purpose. We do not, in giving this conclusion, accept
or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
9 August 2023
Notes to editors
Derwent London plc
Derwent London plc owns 66 buildings in a commercial real estate
portfolio predominantly in central London valued at GBP5.2 billion
as at 30 June 2023, making it the largest London office-focused
real estate investment trust (REIT).
Our experienced team has a long track record of creating value
throughout the property cycle by regenerating our buildings via
development or refurbishment, effective asset management and
capital recycling.
We typically acquire central London properties off-market with
low capital values and modest rents in improving locations, most of
which are either in the West End or the Tech Belt. We capitalise on
the unique qualities of each of our properties - taking a fresh
approach to the regeneration of every building with a focus on
anticipating tenant requirements and an emphasis on design.
Reflecting and supporting our long-term success, the business
has a strong balance sheet with modest leverage, a robust income
stream and flexible financing.
As part of our commitment to lead the industry in mitigating
climate change, Derwent London has committed to becoming a net zero
carbon business by 2030, publishing its pathway to achieving this
goal in July 2020. In 2019 the Group became the first UK REIT to
sign a Revolving Credit Facility with a 'green' tranche. At the
same time, we also launched our Green Finance Framework and signed
the Better Buildings Partnership's climate change commitment. The
Group is a member of the 'RE100' which recognises Derwent London as
an influential company, committed to 100% renewable power by
purchasing renewable energy, a key step in becoming a net zero
carbon business. Derwent London is one of the property companies
worldwide to have science-based carbon targets validated by the
Science Based Targets initiative (SBTi).
Landmark buildings in our 5.4 million sq ft portfolio include 1
Soho Place W1, 80 Charlotte Street W1, Brunel Building W2, White
Collar Factory EC1, Angel Building EC1, 1-2 Stephen Street W1,
Horseferry House SW1 and Tea Building E1.
In January 2022 we were proud to announce that we had achieved
the National Equality Standard - the UK's highest benchmark for
equality, diversity and inclusion. In May 2023 we were recognised
on the Sunday Times Best Places to Work List 2023 within the
medium-sized organisation category and in the following month we
won two OAS awards - West End New Build for Soho Place W1 and
Developer of the Year whilst we were also highly commended for The
Featherstone Building in the City New Build category. In March 2023
we placed in the top three of the Property Sector in Management
Today's Britain's Most Admired Companies awards 2022. In October
2022, 80 Charlotte Street won the BCO's Best National Commercial
Workplace award 2022. In 2013 the Company launched a voluntary
Community Fund which has to date supported over 150 community
projects in the West End and the Tech Belt. The Company is a public
limited company, which is listed on the London Stock Exchange and
incorporated and domiciled in the UK. The address of its registered
office is 25 Savile Row, London, W1S 2ER.
For further information see www.derwentlondon.com or follow us
on Twitter at @derwentlondon
Forward-looking statements
This document contains certain forward-looking statements about
the future outlook of Derwent London. By their nature, any
statements about future outlook involve risk and uncertainty
because they relate to events and depend on circumstances that may
or may not occur in the future. Actual results, performance or
outcomes may differ materially from any results, performance or
outcomes expressed or implied by such forward-looking
statements.
No representation or warranty is given in relation to any
forward-looking statements made by Derwent London, including as to
their completeness or accuracy. Derwent London does not undertake
to update any forward-looking statements whether as a result of new
information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast.
This information is provided by RNS, the news service of the
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END
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