- New Rent Agreed: GBP10.8 million since the start of the year, including GBP8.8 million in H1.
- EPRA Vacancy Rate: Reduced to 3.2% from 4% in December.
- Rental Guidance: Upgraded to between +3% and +6% for the year.
- EPRA NTA per Share: Fell 2.7% to 3,044p.
- Total Accounting Return: Almost flat at -1% in H1.
- EPRA Earnings: Increased 6.5% to GBP59.2 million or 52.7p per share.
- Interim Dividend: Increased by 2% to 25p per share.
- Gross Rents: Increased, with property expenditure and impairments falling by GBP2.4 million to GBP12.5 million.
- Like-for-Like Gross Rental Income: Up 1.7% compared to last year, with net rents growing by 3.4%.
- Project Expenditure: GBP108.6 million in H1 '24.
- Future Estimated CapEx: GBP103 million expected in H2.
- Undrawn Facilities and Unrestricted Cash: GBP566 million at the half year.
- Valuation Decline: 1.7% overall, with West End developments up 4.3%.
- Total Property Return: 0.3%, outperforming the MSCI Index.
- Annualized Passing Rent: GBP199.4 million, with an ERV of over GBP311 million.
- Investment Activity: Main disposal was Turnmill for just over GBP76 million.
- Energy Usage: Down 8%.
- Letting Activity: GBP10.8 million year-to-date, including GBP8.8 million in H1.
- Retention and Reletting Rate: 86% in the first half of the year.
- Development Yield on Cost: 6% for on-site projects.
- Pre-Let at 25 Baker Street: 84% of the main office building.
- Pre-Sold Residential Units at 25 Baker Street: 13 out of 41 units.
Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Derwent London PLC (DWVYF, Financial) achieved a resolution to grant planning permission for the 50 Baker Street project, a joint venture with Lazari.
- The company reported the highest half-yearly rental growth since 2016, with GBP10.8 million of new rent agreed since the start of the year.
- EPRA vacancy rate reduced to 3.2%, significantly lower than the market vacancy rate of 8.3%.
- The company increased its interim dividend by 2% to 25p per share, continuing its track record of progressive dividend increases.
- Derwent London PLC (DWVYF) has a strong balance sheet and the ambition to buy, with undrawn facilities and unrestricted cash up to GBP566 million at the half year.
Negative Points
- EPRA NTA per share fell 2.7% to 3,044p, although the decline was smaller than last year.
- Total accounting return in H1 was almost flat at minus 1%, with income close to offsetting the valuation fall.
- The valuation of wholly owned properties declined by 1.7% over the six months.
- Future estimated CapEx is expected to be high, with GBP103 million of spend in H2 and GBP156 million forecast for 2025.
- The company faces a challenging planning backdrop and constrained development pipeline as far out as 2028.
Q & A Highlights
Q: We saw another London office REIT complete a rights issue earlier this year. Do you see the same level of opportunity in the market? And if all these tailwinds that you stated are coming through, is now the time to go on the offensive as well?
A: I think we are on the offensive; we're investing a lot into the pipeline, and we do have an ambition to buy. Also, we have a very strong balance sheet, so the need to go to a rights issue is less pressing. If we saw a really interesting opportunity for a major acquisition, we could consider all sorts of options, including possibly a rights issue. But for now, we have optionality and don't need to look to the market for money. (Paul Williams, Chief Executive)
Q: You commented about smaller spaces coming to market through distressed sellers. Is it fair to assume you could be more active in that smaller space? And how do those repositioning returns differ from more traditional HQ returns?
A: We are seeing more opportunities, including some distressed assets, though not as much as in 2007. There are buildings with shorter leases and ESG question marks that look interesting for us to reposition and drive rent. (Nigel George, Executive Director)
Q: Just a quick one on the yield shift. The 18 bps, if you could explain a little bit about that split between City Borders and the West End?
A: We saw about 10 bps on bigger lot sizes and a bit more on shorter lease stuff at the lower end. The division is more about lot sizes than the city and the West End. (Nigel George, Executive Director)
Q: You talked about being at 5.73% on the portfolio overall. Do you think there's potential for yields to come back in a little bit, especially in the West End, if rates come down as expected?
A: The West End moved out less than the city, about 70 basis points since the lower yields. With interest rates coming down, there should be an opportunity for some yield contraction, though not as low as before. Investors increasingly see value in London, and there is potential for some value growth. (Paul Williams, Chief Executive)
Q: On external growth and flex space, where are you now in terms of risk appetite? Would you commit to 50 Baker Street without a pre-let? And what is the right percentage of your GLA that should be flex-oriented in the medium to long term?
A: We have always built speculatively and would start 50 Baker Street speculatively. Regarding flex space, our growth is more organic, and we appraise everything that comes back to us under 10,000 square feet for both Cat A delivery and furnished and flex. We anticipate it to grow, mirroring the market at around 5% plus a bit more on some of our smaller assets. (Paul Williams, Chief Executive; Emily Prideaux, Executive Director)
Q: When you pulled an asset because it hasn't met the ask price, have the valuers written down those values to reflect the bid pricing? And what is the appropriate discount for large assets?
A: The bandwidth between the interest and the value wasn't that far apart, just a couple of percent. The valuers did reflect the scarcity of transactions in the market by moving yields out by 10 or 15 bps over the half year. (Nigel George, Executive Director)
Q: You mentioned refinancing activity over the coming years. How has the listed bond market or the convertible market changed as an option compared to traditional bank financing?
A: Most capital markets are quite open for us, and pricing has become more attractive, particularly in the bond market. The convertible bond market is also attractive, but we need the share price to respond a bit more before rushing out to do it. (Damian Wisniewski, Chief Financial Officer)
Q: On capital allocation, what is your intention for disposing of successful developments from the last cycle? How does that fit with the lifecycle and depreciation of those buildings?
A: We decided to keep better buildings for longer, and they have performed well. However, nothing is forever, and we will consider bigger disposals when the market is stronger. We regularly review each asset and its asset management opportunities. (Paul Williams, Chief Executive)
Q: How far are you willing to push LTV to acquire new opportunities?
A: We are currently at about 29% LTV and would be comfortable pushing it into the early 30s, possibly up to 35% for the right opportunities. This implies an additional GBP200 million to GBP400 million worth of debt, but we prefer to keep it below 35%. (Damian Wisniewski, Chief Financial Officer)
Q: What will unlock the transaction market if not lower rates, given swap rates already reflect materially lower base rates?
A: Swap rates have come down quickly and recently, and we are seeing more people looking and kicking tires. The investment market needs time to come back to life, but lower rates are definitely a big help. (Damian Wisniewski, Chief Financial Officer)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
