8 August 2024

Derwent London plc ("Derwent London" / "the Group")
UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2024

UPGRADING RENTAL GUIDANCE IN A STRENGTHENING MARKET

Paul Williams, Chief Executive of Derwent London, said:

"The pace of rental growth accelerated in H1 for the best offices in the right locations whilst investment yields have recently stabilised, helping drive greater confidence across the sector.

We have delivered another strong leasing performance, agreeing £8.8m of new rent in H1 with open-market lettings more than 10% above the December 2023 ERV, including the third pre-let at 25 Baker Street W1. YTD lettings total £10.8m, with a further £3.4m under offer. This more positive backdrop fed through into the strongest ERV growth since 2016, giving us confidence to upgrade our 2024 rental guidance to '3% to 6%'.

London is a world-class city with broad appeal to both international and domestic businesses. Our design-led and amenity-rich best in class offices are in demand, supported by London's high quality transport network. Supply of space that meets occupier needs is relatively low. Our predominantly West End portfolio is well-placed to benefit, in particular our on-site projects in Marylebone and Fitzrovia.

In February 2024, we said we were nearing this cycle's valuation low point. The outlook has continued to improve, supported by a strengthening of the UK economic environment and an initial interest rate cut, with yields on London offices looking increasingly attractive to a range of investors.

With our strong balance sheet and 40-year track record, we have the capacity and ambition to accelerate our growth plans and are exploring a number of opportunities while also continuing to build out our substantial pipeline. Combined with rising rents, we expect to deliver increasingly attractive total returns over the coming years."

¹ Explanations of how EPRA figures are derived from IFRS are shown in note 24.

² 12-month figure, split -3.7% in H1 and -7.2% in H2.

³ 12-month figure, split 0.9% in H1 and 1.2% in H2.

Portfolio highlights

·      Underlying ERV growth 2.0%; strongest six-monthly performance since 2016

·      Equivalent yield 5.73%, up 18bp in H1

·      Capital values down 1.7%, with development values up 4.3%

·      EPRA vacancy rate reduced to 3.2% (December 2023: 4.0%)

·      Tenant retention/re-letting rate of 86%

Developments

·      Resolution to grant planning at our c.240,000 sq ft 50 Baker Street W1 development received on 6 August 2024

·      25 Baker Street W1 offices 84% pre-let, 14.6% above appraisal ERV; 13 apartments exchanged for £68.0m

·      On-site and next phase of major projects total 0.9m sq ft, all in the West End

Outlook

·      2024 ERV guidance upgraded, now '3% to 6%'

·      Office yields increasingly attractive as the UK economic and political environment continues to stabilise

·      Attractive total returns anticipated over the coming years

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:00 BST today.

To participate in the call or to access the webcast, 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:

CHIEF EXECUTIVE'S STATEMENT

¹ Performance against Dec 2023 ERV excludes short-term development lettings.

Central London office occupational market gaining further momentum

The central London office market has strengthened further with the key occupier themes continuing to be quality, location and amenity. At the same time, existing supply that satisfies these requirements is limited and the market development pipeline is constrained, driving rental growth for the best space.

We delivered another good leasing performance in H1, signing £8.8m of new leases at an average 7.8% premium to December 2023 ERV, and 10.3% excluding short-term development lettings. This follows the £28.4m of activity in 2023 (8.0% above ERV). As at June 2024, a further £4.5m of space was under offer, of which £2.0m has subsequently completed, taking YTD leasing activity to £10.8m.

Activity was well spread across the portfolio and key transactions in H1 include:

·    25 Baker Street W1 - Cushman & Wakefield pre-let 17,100 sq ft at a headline rent of £107.50 psf, substantially above December 2023 ERV, on a 15-year lease without breaks;

·   The White Chapel Building E1 - Three new tenants have leased a combined 64,100 sq ft at an average headline rent of £51 psf, 5% ahead of ERV; and

·    Furnished + Flexible - 10 new leases signed for a combined £2.5m, 11.9% above December 2023 net rent (adjusted for capex).

The Group's EPRA vacancy rate was 3.2% at 30 June 2024, a reduction of 80bp compared to 31 December 2023. Our tenant retention/re-let rate was high at 86%, ahead of our long-term average.

Property yields now stabilised; rents to support growth in values

The UK economic environment continued to improve through H1 having begun to recover late last year. With inflation now in line with the Bank of England's 2% target following a substantial reduction from its peak of 11% in October 2022, the UK base rate was cut by 25bp in August to 5.0%, and there are further cuts on the horizon.

The 5-year swap rate has responded favourably and is now 3.6%. Further declines in the cost of debt and improving availability should be expected to encourage a recovery in investment activity. At £1.9bn, transaction volumes in H1 were 65% below the 10-year H1 average. However, since the start of H2, enquiry levels are picking up with CBRE reporting £19.2bn of global equity targeting London offices.

In February, we highlighted with our 2023 full year results that "valuations are now approaching this cycle's lows". In H1, the pace of MSCI capital value declines slowed to 2.1%. Looking forward we expect a recovery in capital values, principally driven by rental growth.

Balance sheet well positioned and growth in earnings

EPRA NTA decreased by 2.7% in H1 to 3,044p as underlying capital values across our portfolio declined 1.7%. This was considerably lower than seen in 2023. ERV growth of 2.0% partly offset 18bp of outward yield shift. Development valuations rose 4.3% principally due to development surpluses coming through, increased rental assumptions and the signing of a further pre-let at 25 Baker Street W1, well above ERV.

Net debt was broadly flat in H1 at £1.37bn (2023: £1.36bn) as disposal proceeds, mainly from the sale of Turnmill EC1, and retained earnings broadly offset capital expenditure and payment of the 2023 final dividend. Together with the movement in capital values, EPRA LTV increased marginally to 29.0% (FY 2023: 27.9%).

EPRA earnings rose 6.5% to £59.2m or 52.7p per share (H1 2023: £55.6m or 49.5p), as gross rental income increased 1.5% to £107.5m compared to H1 2023, and net rental income was up 4.5% to £95.0m as direct property costs came down. The net debt/EBITDA ratio reduced slightly to 8.4 times (FY 2023: 8.8 times).

Our annual dividend remains well covered by EPRA earnings and we have increased the 2024 interim dividend by 2.0% to 25.0p. In line with our progressive policy, this is the 17^th consecutive increase in our interim dividend.

Delivering the right product

We remain focused on delivering the very best office space to meet London's varied demand.

Whether it is refurbishing or delivering new-build, we are design-focused, creating 'long-life, low carbon, intelligent' buildings that meet the evolving requirements of occupiers, large or small, across a broad variety of sectors. We are always mindful to deliver the right product for the relevant submarket and know that one size does not fit all.

At the larger end, we deliver best-in-class HQ offices on long leases where we have a strong track record of working closely with occupiers to provide bespoke solutions. Well-established businesses require longer leases to assist their long-term planning and financing, a trend we do not see changing.

At the smaller end, we offer our 'Furnished + Flexible' solution, which is tailored to the building and the submarket within which it sits. This currently extends to c.170,000 sq ft either operational or under construction (3.2% of the portfolio). Over the next five years, this should increase to c.300,000 sq ft (c.6%). In addition, we have c.160,000 sq ft (3.1%) leased to third party operators, such as Fora and Soho Works, which takes our current overall 'flex' weighting to 6.3%.

Providing a mix of this longer-term Cat A space as well as shorter term, flexible and fitted space meets demand in the market, while providing us with a well-balanced portfolio and longer WAULT.

Over the last five years we have developed the DL/Member offer to further enhance our product. We know that businesses attribute as much value to the quality of the landlord, amenity and service as they do the core office space. We take a portfolio approach to the overall Derwent product, considering the full offer not just the individual building or unit.

All our occupiers, irrespective of size, benefit from portfolio amenity, community and experience via our DL/Member offering. For larger businesses, this provides opportunity for activity outside of the HQ. For smaller businesses, it offers flexible space where they can use amenity that they are unlikely to have in their own demise. In addition, each individual that occupies a Derwent building benefits from being part of a community which provides access to social responsibility and charity initiatives, social events, wellness agendas and local retail offers. DL/Member benefits include:

·    DL/ Lounges (DL/78 and DL/28) - touch down work areas, pay as you go meeting rooms and private event space;

·      DL/ Service - café and catering facilities;

·      DL/ App - curated retail offers and our digital community; and

·      DL/ Experience - a full programme of community events.

Since launching these initiatives, we have had very positive feedback from occupiers and the market, proving their value in attracting and retaining tenants, and demonstrating strong demand for our product and brand.

Outlook and guidance - rental growth upgrade and strengthening total returns

The significant rise in space under offer shows substantial pent-up demand, with occupiers prioritising high quality space in core central locations. At the same time, supply of space that meets these criteria, whether existing or under development, is low. The market is adjusting to this, and businesses with large space requirements are committing earlier, putting further pressure on supply.

Rental growth is accelerating for the best buildings. Our portfolio ERV increased 2.0% in H1, the strongest half year performance since 2016. Consequently, we are today upgrading our 2024 rental guidance to '3% to 6%'.

At 30 June 2024, our portfolio equivalent yield was 5.73%, an 18bp outward movement from 31 December 2023. With the economic outlook continuing to strengthen, the recent base rate cut plus further reductions on the horizon, we expect the yield on London offices to be increasingly attractive to a range of investors.

Looking ahead, we anticipate delivering attractive future accounting returns, given the combination of growing rents, an improved yield outlook, and visibility on development returns and earnings, underpinned by our long average lease term.

CENTRAL LONDON OFFICE MARKET

Occupational market

The imbalance between supply and demand across the London office market remains pronounced. Grade A vacancy is 1.8% and there are only 7.3m sq ft of speculative development completions due by the end of 2027. While leasing transactions are taking longer, the increase in space under offer suggests the lower take-up in H1 should be temporary.

Overall vacancy has levelled off at 8.3%, with the West End at 4.5% and the City at 10.8%. According to CBRE, lower quality, secondhand space comprises over two-thirds of supply. The Grade A vacancy rate in the West End is only 1.2% and in the City is 2.1%. The central London development pipeline is constrained, with 12.6m sq ft of space under construction and due to complete by 2027. Of this, 42%, or 5.3m sq ft, is pre-let or under offer, rising to 54% for projects due to complete in H2 2024. In line with longer-term trends, pre-letting levels in the West End (23%) are below the City (62%).

Q2 take-up, which was 20% higher than Q1, benefited from some large Financial pre-lets in the City, and since the start of H2 the West End has seen some of the space under offer convert with the completion of several substantial pre-lets, including BDO. Occupier enquiry levels remain high across a broad range of sectors backed up by active demand rising 14% through H1 to 11.2m sq ft, 56% above the five-year average.

Investment market

Liquidity across the market has been focused on smaller lot sizes where there is less of a requirement for leverage. With £1.9bn of transactions completing in H1, below the long-term average, the average lot size was only £29m. The availability of debt has begun to improve in recent months. Last week we saw the first cut in base rates and the 5-year swap rate has fallen back to 3.6%. In a global context, London continues to enjoy a reputation as a safe haven. As a result, sentiment is improving and a rising number of investors are switching from a 'wait and see' approach to being more acquisitive.

Prime yields were unchanged in H1. At 4.0%, West End yields have increased 75bp compared to June 2022 while City yields have moved out 200bp to 5.75%.

VALUATION

The Group's investment portfolio was valued at £4.8bn on 30 June 2024, an underlying decrease in value of 1.7% in H1 which compares to a decline of 7.2% in H2 2023. This resulted in an £89.8m deficit in the first half which, after accounting adjustments of £0.6m (note 11), produced an overall decline of £89.2m including our share of joint ventures.

By location, our central London properties, which represent 98% of the portfolio, were down 1.8% with the West End
-1.5% and City Borders -2.7%. The balance of the portfolio, our Scottish holdings, was up 3.6%.

Our portfolio's capital growth outperformed the MSCI Central London Office Quarterly Index which was down 2.1%. The wider UK All Property Index decreased by 0.6%. Since the peak of the cycle in June 2022, capital values have fallen 23% according to the MSCI Central London Office quarterly index, mainly as the result of a material correction in yields. Our portfolio has outperformed the index, with capital values down 19% since the peak.

Improvements in the occupational market fed through to a 2.0% increase in our EPRA rental values in H1, in line with earlier guidance, and ahead of the 1.2% growth in H2 2023. This is the strongest six-monthly performance since 2016.

The portfolio true equivalent yield expanded by 18bp, from 5.55% to 5.73% over the first half, a smaller increase compared to the 42bp outward movement in the second half of 2023. The initial yield is 4.3% (December 2023: 4.3%) which, after allowing for the expiry of rent frees and contractual uplifts, rises to 5.3% on a 'topped-up' basis (December 2023: 5.2%).

The total property return for the first six months was +0.3%, which compares to the MSCI Quarterly Index of -0.1% for Central London Offices and +1.9% for UK All Property.

Our better buildings continue to outperform. The valuation of those with a value in excess of £1,500 psf declined by only 0.8%, compared to those valued at sub-£1,000 psf where values fell 3.5%.

Valuation movement by capital value banding in H1 2024

Our two on-site West End developments at 25 Baker Street W1 and Network W1 continued to make good progress. At 25 Baker Street, a third office pre-let was signed and the forward sale of a further eight of the private residential units was agreed. Together, these two projects are now 52% let or sold. Both are due to complete in 2025 and require £153m of capital expenditure to complete. They were valued at £487.3m at June 2024 and delivered a 4.3% valuation uplift, after adjusting for capital expenditure. Performance was driven by letting activity at improved rental values, additional residential forward sales at 25 Baker Street and construction progress. Excluding development properties, the portfolio declined 2.4% in value, on an underlying basis.

Portfolio reversion

Our contracted annualised cash rent as at 30 June 2024 was £199.4m. With a portfolio ERV of £311.1m there is £111.7m of potential reversion. Within this, £48.6m is contracted through rent-frees and fixed uplifts, the majority of which is already straight-lined in the income statement under IFRS accounting standards. Our annualised accounting rent roll is £206.5m. On-site developments and refurbishments could add £43.7m, of which £17.4m is pre-let. The ERV of immediately available space is £8.4m. The balance of the potential reversion of £11.0m comes from future reviews and expiries less future fixed uplifts.

LEASING & ASSET MANAGEMENT

Lettings

H1 2024 saw good letting activity across the portfolio, with 27 leases signed totalling £8.8m of rent, on average 7.8% ahead of December 2023 ERV. This rises to 10.3% excluding short-term lettings at properties earmarked for development, principally Holden House W1. Activity in both the West End and City borders was ahead of December 2023 ERV. 'Furnished + Flexible' leasing activity increased to £2.5m across 10 units (35,100 sq ft), on average 11.9% ahead of December 2023 ERV.

Since the end of H1, we have agreed a further £2.0m of lettings on average 4.0% ahead of ERV, taking YTD leasing to £10.8m, and there is currently £3.4m under offer.

Leasing activity in 2024 to date

¹ Weighted average unexpired lease term (to break).

² Includes short-term lettings at properties earmarked for redevelopment.

Principal lettings in 2024 to date

¹ Space leased on a 'Furnished + Flexible' basis.

Leasing by location in H1 2024

Asset management progress

Asset management activity in H1 2024 totalled £6.0m across 30 transactions. There were five rent reviews which were settled on average 3.9% above the previous rent. Lease regears were agreed 5.4% above December 2023 ERV, and lease renewals were 7.9% below ERV, although a number of these were short-term development deals at 50 Baker Street W1 where works are expected to start on site in 2026, following receipt of resolution to grant planning consent on 6 August 2024.

Asset management activity in H1 2024

¹ Headline rent, shown prior to lease incentives.

During H1, the EPRA vacancy rate reduced from 4.0% to 3.2%. In total, 86% of breaks/expiries were retained or re-let prior to the end of H1, excluding space taken back for projects and disposals, in line with longer-term levels. The Group's WAULT (to break) remains attractive at 6.0 years, rising to 7.1 years when 'topped-up' for incentives and pre-lets.

Rent and service charge collection rates are 100% for the December and March quarters.

INVESTMENT

Developments and refurbishments

Major on-site projects - 437,000 sq ft (52% pre-let/sold)

We made good further progress in H1 2024 at our two on-site West End development projects, 25 Baker Street W1 and Network W1, which together total 437,000 sq ft. 25 Baker Street is now 84% pre-let and demand is positive for Network. We currently expect these to deliver a combined 14% development profit and 6.0% yield on cost. As a sensitivity, every £10 psf movement in the rent achieved on the remaining speculative space relative to the latest ERV would change the yield on cost by c.30bp.

·   25 Baker Street W1 (298,000 sq ft) - an office-led scheme in Marylebone, expected to complete in H1 2025. It comprises 218,000 sq ft of best-in-class offices, 28,000 sq ft of new destination retail around a central landscaped courtyard (part of which is being delivered for the freeholder, The Portman Estate) and 52,000 sq ft of residential, of which 45,000 sq ft is private. Occupier demand for the office space is high, with 84% pre-let at an average headline rent of £103 psf, 14.6% ahead of the appraisal ERV. In addition, the sale of the residential units is progressing well, with contracts exchanged on 13 of the 41 private units for £68.0m. This reflects an average capital value of £3,770 psf, 16% ahead of the appraisal value.

·   Network W1 (139,000 sq ft) - an office-led scheme in Fitzrovia, targeted for completion in H2 2025, comprising 134,000 sq ft of adaptable offices and 5,000 sq ft of retail. Super structure works are progressing well and the project remains on programme. We have adopted a number of circular economy measures including the reconditioning and re-use of raised access flooring, among others. There have been a number of pre-let enquiries from multiple occupiers across a variety of sectors and against a backdrop of a constrained development pipeline in the West End, especially Fitzrovia, we are confident in the leasing prospects for this high-quality space.

Major on-site development projects

¹ As at 30 June 2024.

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 Includes pre-lets to PIMCO, Moelis and Cushman & Wakefield, and forward sale of 13 private residential units at 30 June 2024, the pre-sold affordable housing plus the courtyard retail and Gloucester Place offices pre-sold to The Portman Estate.

⁵ Excludes offices at 30 Gloucester Place.

Future development projects

In addition to our on-site projects, our medium to longer-term pipeline extends to c.1.3m sq ft across four projects.

Medium-term pipeline

·    Holden House W1 (c.150,000 sq ft) - from mid-2025: our updated plans for this 'behind the façade' project have a higher office weighting and better sustainability credentials.

·    50 Baker Street W1 (c.240,000 sq ft at 100%) - from early 2026: held in a 50:50 joint venture with Lazari Investments, this leasehold property is on The Portman Estate and headlease regear negotiations are making positive progress. Resolution to grant planning consent was secured on 6 August.

Long-term pipeline

·    Old Street Quarter EC1 (c.750,000 sq ft) could commence from 2028: Our acquisition of this 2.5-acre island site is expected to complete from 2027, conditional on delivery of the new eye hospital at St Pancras and subsequent vacant possession of the existing site. Our studies suggest there is potential for a substantial mixed-use campus development comprising both commercial and 'living' components.

·    230 Blackfriars Road SE1 (c.200,000 sq ft) from 2030: our early appraisals show capacity for a large office-led development for this 1960s building, more than three times the existing floor area.

Refurbishments

Refurbishment projects comprise a greater proportion of capital expenditure as we continue to upgrade the portfolio to meet the evolving requirements of an increasingly selective occupier base. We expect these projects to deliver an attractive rental uplift driven by improved amenity offer, overall quality and upgraded EPCs. Comprehensive refurbishments likely to commence over the coming years include Greencoat & Gordon House SW1 and 20 Farringdon Road EC1. Larger rolling refurbishments include 1-2 Stephen Street W1 and Middlesex House W1.

We will continue to appraise smaller units, typically <10,000 sq ft, for our 'Furnished + Flexible' product where occupiers are willing to pay a premium rent for flexible, high-quality space with their own front door. We currently have c.170,000 sq ft of this space either operational or under construction, with a further c.130,000 sq ft expected to be delivered over the coming years.

Acquisitions and disposals

Disposal activity in H1 totalled £80.7m (after costs), of which the principal transaction was the sale of Turnmill EC1 for £76.6m at a slight premium to the December 2023 book value. The sale price reflects a net yield of 4.9% and a capital value of £1,100 psf. There were no acquisitions in the period.

Major disposals in 2024 to date

SUSTAINABILITY

Reduction in energy intensity

We made positive progress reducing energy consumption across the London managed portfolio in the first half. Ongoing engagement with occupiers and the completion of a variety of initiatives such as installation of the first phase of air source heat pumps at 1-2 Stephen Street W1, has delivered an 8% reduction in consumption to 27.7m kWh compared to H1 2023 (30.2m kWh). This resulted in energy intensity of 73 kWh/sqm, 8% below H1 2023 (79 kWh/sqm). 

To facilitate the conversion of energy usage into a (location-based) carbon equivalent figure, DEFRA releases an updated set of carbon factors each year based on the evolving carbon intensity of the UK's energy mix. In 2023, there was a c.7% increase in carbon intensity for electricity, the first increase since 2014, linked to the impact of geopolitical instability. The 2024 carbon factors for electricity are broadly unchanged compared to 2023.

Self generating electricity - making progress with solar park delivery

Following receipt of planning consent for a c.100 acre 18.4MW solar park on our land in Scotland in 2023, our formal planning obligations have now been discharged and site preparation and infrastructure works are underway. On completion, we expect the electricity generated to be in excess of 40% of our London managed portfolio's usage, on an annualised basis.

Our approach to the circular economy

For several years we have applied circular economy principles wherever possible to our regeneration activity as part of our holistic approach to reducing embodied carbon emissions. To advance this further, our internal 'Circular Economy Group', which has representation from across the business, is formalising our strategy to enable re-use both across our portfolio as well as with the wider community. Some examples of circular economy measures already underway include the re-condition and re-use of raised access floor, maximisation of the re-use of in-situ concrete formwork and re-use of MEP within the portfolio.

Forward purchase of high quality carbon removal credits

As part of our Net Zero Carbon by 2030 pathway, we have set ourselves stretching targets to reduce the embodied carbon footprint of our regeneration activity. New builds completing from 2025 are targeting an embodied carbon intensity of ≤600 kgCO₂e/sqm, which reduces to ≤500 kgCO₂e/sqm from 2030. We have committed to offset the residual embodied carbon using robust verified carbon offset schemes, focused on carbon removal rather than avoidance or mitigation. Based on our current forecast project profile, we estimate annual embodied carbon emissions of c.15,000 tCO₂e from our regeneration activities over the coming years.

As part of our strategic planning, we forward-purchased credits, on a phased basis, equivalent to 105,000 tCO₂e for a total amount of £3.9m or c.£35/tCO₂e in H1. This follows our procurement of 81,600 credits in 2020 for £1.0m which have been used to offset the embodied carbon at a series of completed projects.

70% of our portfolio now rated EPC A or B

In 2021, we outlined a c.£100m phased programme of works to ensure compliance with evolving EPC legislation (Minimum Energy Efficiency Standards, MEES). As at 30 June 2024, 70% of the portfolio was rated A or B (including our projects at 25 Baker Street W1 and Network W1) in line with expected 2030 legislation, which compares to the wider London office market at sub-30%. A further 18% are rated C, taking our compliance with expected 2027 legislation (EPC C or above) to 88%. The remainder of the portfolio is rated D or E, in line with current MEES requirements.

FINANCIAL REVIEW

The financial results for the first half of 2024 reflect an improving background for our brand of high-quality central London offices.

Property income and costs

Gross property and other income increased 5% to £139.9m in the first half of 2024 from £133.3m in H1 2023.  Gross rental income rose to £107.5m, up 1.5% over H1 2023, and trading property sales proceeds of £3.7m (H1 2023: £nil) were recognised on the sale of Welby House SW1.  Service charge income increased modestly to £26.0m from £25.0m in H1 2023 but the high energy costs seen last year have moderated.  Service charge increases this year were largely due to other cost items, particularly those where wages make up a substantial proportion of the cost, such as cleaning, maintenance and security.

Net rental income increased 4.5% to £95.0m from £90.9m in H1 2023 after reductions in irrecoverable service charges and impairment costs.  In H1 2023, irrecoverable service charges were higher than usual due partly to a spike in energy costs but also to higher average vacancy rates.  In H1 2023, they reached £4.5m, reducing to £2.1m in H2 2023 and totalled £2.8m in the current period to 30 June 2024.  Impairment charges reduced to £0.4m in H1 2024 from £1.9m in H1 2023 with only minor impairments required for retail, gym and hospitality occupiers.

Other property costs increased to £9.3m in H1 2024 from £8.6m in H1 2023.  These were made up of legal and letting costs, rates, ground rent and repairs but the main increase was due to the running costs at DL/28 in The Featherstone Building EC1 which opened in Q4 2023.  Amenities such as this and our DL/ Service food and beverage offer are primarily designed to support rental income and help attract and retain occupiers rather than to be separate profit centres.  The cost of running DL/28, its DL/78 sister lounge in the West End and DL/ Service was £1.2m in H1 2024 compared to £0.3m in H1 2023 when only the smaller DL/78 lounge was operating.

EPRA like-for-like gross rental income, which excludes the effect of acquisitions, disposals and developments, was up 1.7% compared to H1 2023 and the lower overall property costs helped like-for-like net rental income grow 3.4% compared with H1 2023. 

With £0.2m of net surrender premiums recognised in the first half of 2024, net property and other income increased 4.7% to £97.7m in H1 2024 compared to £93.3m in H1 2023.

Rent and service charge receipts have been strong in 2024 with collection rates now at almost 100% for the December and March quarter days.

Administrative expenses increased modestly to £19.8m from £19.2m in H1 2023.  This is mainly due to headcount growth through 2023 and pay rises in January 2024 averaging 6.1% across our workforce.

The lower irrecoverable property costs have also helped bring our EPRA cost ratios down to 26.6% in H1 2024 (H1 2023: 28.8%) including direct vacancy costs and 21.7% (H1 2023: 23.2%) excluding direct vacancy costs.  As before, we have not capitalised any of our internal development department costs in 2024 to date.

We saw significant upward movement in property investment yields from H2 2022 to the end of 2023.  This continued into early 2024 but at a slower pace and yield movements have been almost flat in the last few months.  The revaluation movement overall in H1 2024 was still a deficit but, at £87.2m after accounting adjustments, was significantly lower than the £196.7m in H1 2023 and £581.5m for the whole of 2023.  The Group's owner-occupied office at 25 Savile Row W1 showed a £2.0m (H1 2023: £2.6m) reduction but our 50% share of the 50 Baker Street W1 joint venture showed no revaluation movement in H1 2024 after a £4.8m decline in H1 2023.

The profit on disposal of investment property of £1.5m after costs came from the sales of Turnmill EC1 and a small property in Mallow Street EC1, the proceeds together totalling £77.9m.  Gross interest costs increased to £24.8m in H1 2024 from £23.0m in H1 2023 but interest capitalised rose to £5.0m from £2.7m in H1 2023 due to higher cumulative development expenditure on which interest is capitalised.  This brought net finance costs in H1 2024 down to £19.8m (H1 2023: £20.3m).

The substantially lower revaluation deficit has reduced the IFRS loss before tax for the first half to £27.2m from a much larger loss of £143.1m in H1 2023.  EPRA earnings, which exclude fair value movements, increased 6.5% to £59.2m from £55.6m in H1 2023 and EPRA earnings per share (EPS) were also up 6.5% to 52.74p compared to 49.51p per share in H1 2023. 

Project expenditure

Capital expenditure increased to £73.7m plus £4.0m of capitalised interest on wholly-owned investment properties from £54.1m plus capitalised interest of £2.3m in H1 2023.  In addition, we incurred £25.1m plus capitalised interest of £0.8m on our residential trading property at 25 Baker Street and a further £4.1m, including £0.2m of capitalised interest, on the development costs to be transferred to The Portman Estate upon completion of their retail element.  Prepaid development expenditure on the Old Street Quarter site, due to be acquired no earlier than 2027, increased to £12.7m (30 June 2023: £12.1m and 31 December 2023: £12.6m).

Total return and EPRA NTA

Altogether, the Group's total accounting return for the first half of 2024 was -1.0% or -30p per share.  This contrasts with -3.7% in H1 2023 and -11.7% for the whole of 2023. 

EPRA Net Tangible Asset value per share fell to 3,044p, down 2.7% from 3,129p at 31 December 2023.  This takes account of the 55p per share final dividend for 2023 which was paid in May 2024.

Financing and net debt

Conditions in the lending environment for real estate and offices more specifically have improved through the first half of 2024.  This is notable in the number of positive refinancing discussions we have held and is also visible in the yield on our 2031 green bonds; this has reduced to about 5.2% at the time of reporting, having been as high as 5.6% in the first half of 2024 when political and economic uncertainty was elevated.

Last week's 25bp cut in the Bank of England's base rate was welcome.  However, at the time of our 2023 full year results announcement in February, our outlook was that UK base rates would have fallen further by now.  Uncertainty remains with the market suggesting one or more rate cuts over the next few months followed by further reductions in 2025.  This is broadly positive for us and could also encourage more investment and refinancing activity in the market more generally.

With rates having stayed higher through H1 2024, we opted to put in place some relatively short-term financing.  We signed a new £100m unsecured 3-year term facility plus two 1-year extension options with NatWest in June 2024.  This is another example of the excellent support we receive from our relationship lending banks.  It increased our available cash and undrawn facilities to £566m at 30 June 2024 (31 December 2023: £480m) in anticipation of the repayment of our £83m fixed rate loan which matures in October 2024.  We have applied the £75m 1.36% interest rate swaps to this new term loan bringing the current blended cost to 3.58%.  The funds were drawn in July to repay existing revolving credit facilities.

Group debt has increased slightly due mainly to the capital expenditure invested in the portfolio partly offset by the sales of Turnmill and Mallow Street for £77.1m (net).  Total borrowing and derivative financial instruments were £1.37bn at 30 June 2024 against £1.36bn as at 31 December 2023.  Our £175m convertible bonds mature in June 2025 and we intend to put in place additional borrowings over the next year.

Derwent London remains in a strong financial position, evidenced by Fitch confirming an unchanged credit rating in May 2024 at BBB+ for the main issuer default rating and A- for our senior unsecured debt rating, both with a stable outlook. As at 30 June 2024, 98% of our debt was at fixed rates or hedged with a weighted average term of 4.5 years, the £550m revolving bank facilities extending to between Q4 2026 and Q4 2027.

EPRA loan-to-value ratio takes account of the property valuation declines plus a 'net payables' amount of £75.6m in addition to net debt.  Accordingly, it increased slightly to 29.0% at 30 June 2024 (H1 2023: 25.0% and FY 2023: 27.9%). 

Interest costs remained well covered by income in H1 2024 with interest cover, excluding joint ventures, at 3.9 times (FY 2023: 4.1 times) against our covenant of 1.45 times.  Including our share of the joint ventures, interest cover was 4.0 times.  The weighted average interest cost on a cash basis was 3.15% as at 30 June 2024 (31 December 2023: 3.17%).  On an IFRS basis, it was 3.27% against 3.29% at 31 December 2023.

Qualifying expenditure under our Green Finance Framework

Qualifying expenditure as at 30 June 2024 for each Eligible Green Project (EGP) is shown below:

The cumulative qualifying expenditure on EGP's at 30 June 2024 was £829.9m, with £75.8m of this being incurred in H1 2024. 80 Charlotte Street, Soho Place and The Featherstone Building are all completed projects and are fully operational.  25 Baker Street, which commenced on site in 2021, is due to reach practical completion in H1 2025 and Network, which commenced on site in 2022 and was elected as an EGP in 2023, is due to reach practical completion in H2 2025.

At 30 June 2024, total drawn borrowings from Green Financing Transactions were £443.5m. This included £93.5m from the green tranche of the Group's main £450m revolving credit facility plus the £350m Green Bonds.

Dividend

The interim dividend has been increased by 2.0% to 25.0p per share from 24.5p in 2023.  It will be paid as a PID on 11 October 2024 to shareholders on the register as at 6 September 2024.  The dividend remains well covered by EPRA earnings and the board has also considered our other stakeholder obligations when setting the level.

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 6 August 2024. The Group's approach to the management and mitigation of these risks is included in the 2023 Report & Accounts. The Board has confirmed that its risk appetite and key risk indicators remain appropriate.

During 2024, the Board and Risk Committee identified opportunities to consolidate and simplify the principal risks and uncertainties. As a result, the number of standalone principal risks identified by the Group has reduced from 15 to 10.

Macroeconomics have continued to have a major impact on UK real estate, with the cost of new finance remaining relatively high and property investment yields consequently rising a little further in H1 2024. We anticipate that the risk of falling property values will continue to reduce further during H2 2024. 

Refinancing risk has previously been identified as a risk for the Group. Our next refinancing event is the £83m secured loan debt in October 2024. In June 2024, we entered into a £100m unsecured term loan facility to refinance the £83m secured debt.

Investment volumes in the wider market have been low in 2024 to date. Over the last five years to December 2023, we have sold £894.0m of property, primarily focused on smaller non-core buildings where there was limited capacity for extra floor area and amenity. Disposal proceeds have been recycled into our development pipeline. With property values now close to their cyclical lows, limited investment market activity and our EPRA loan-to-value at 29%, our capital strategy may consider additional debt finance as well as the recycling of assets.

Strategic risks

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

Financial risks

The main financial risk is that the Group becomes unable to meet its financial obligations. The probability of this occurring is low due to our significant covenant headroom, low leverage, and strong credit metrics. Financial risks can arise from movements in the financial markets in which we operate and inefficient management of capital resources.

Operational risks

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

11. 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. Largely due to decrease in property valuations, the Group's EPRA loan-to-value ratio has increased to 29.0% as at 30 June 2024.

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 lease incentive receivables, applying IFRS 9 and IAS 36, respectively. In addition, the Credit Committee has reviewed its register of tenants at higher risk, particularly in the retail or hospitality sectors, those in administration or CVA and the top 50 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), it 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 2024, the proportion of fixed debt held by the Group was above this range at 98% (31 December 2023: 98%). During both 2024 and 2023, 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 two-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 2024, the Group's strategy, which was unchanged from 2023, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio and net debt to EBITDA, 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 £4.2bn of uncharged property as at 30 June 2024.

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 2023 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

7 August 2024

GROUP CONDENSED INCOME STATEMENT

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

GROUP CONDENSED BALANCE SHEET

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

GROUP CONDENSED CASH FLOW STATEMENT