TIDMDLN
RNS Number : 8724R
Derwent London PLC
11 March 2021
11 March 2021
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEARED 31 DECEMBER 2020
WELL POSITIONED FOR A CHANGING WORLD
Financial highlights
-- Total return of -1.8%, from 6.6% in 2019
-- EPRA net tangible assets(1) 3,812p per share, down 3.7% from 3,957p in December 2019
-- Gross rental income of GBP202.9m, up 5.8% from GBP191.7m
-- Net rental income of GBP174.3m, down 2.1% from GBP178.0m,
after GBP14.2m impairment and write-offs
-- Rent collection for 2020 now 92% plus 5% under agreed payment
plans and 3% granted rent-frees
-- EPRA earnings of GBP111.0m, or 99.2p per share, down 3.8% from 103.1p in 2019
-- Proposed final dividend raised 1.9% to 52.45p
-- Full year dividend of 74.45p per share from 72.45p, up 2.8%
-- Two debt facilities arranged or extended totalling GBP550m
-- Interest cover 446%, loan-to-value ratio of 18.4%
-- Undrawn facilities and cash of GBP476m, from GBP511m in December 2019
Portfolio highlights
-- Total property return of 0.3%, compared to our benchmark index(2) of -2.4%
-- EPRA vacancy rate rose to 1.8% from 0.8% in December 2019
-- 2021 lease expiries reduced from 26% of passing rent to 17% at year end, now 13% of which
5% relate to future projects
-- Completion of 80 Charlotte Street W1 in June, our first net zero carbon development
-- 410,000 sq ft under construction - 61% pre-let
-- Committed to 297,000 sq ft redevelopment at 19-35 Baker Street W1, on site H2 2021
-- GBP153m of property disposals completed
-- Portfolio valued at GBP5.4bn, an underlying fall of 3.0%
-- Underlying valuation uplift on the developments of 5.3%
-- True equivalent yield of 4.74%, tightening by 3bp
-- 2.8% decrease in ERV in 2020
Net zero carbon progressed
-- Committed to becoming a net zero carbon business by 2030 in February 2020
-- Published pathway to become net zero carbon business in July 2020
Outlook
-- Our differentiated product is well placed to outperform as lockdown eases
-- Our guidance is for 2021 average ERVs on our portfolio to move 0% to -5%
-- Average investment yields on our portfolio expected to remain firm
(1) Explanations of how EPRA and underlying figures are derived
from IFRS are shown in note 24
(2) MSCI IPD Central London Offices Quarterly Index
John Burns, Chairman, commented:
"From its modest beginnings, Derwent London has grown into a
leading London office investor, focused on sustainable, high
quality and design-led space. This statement is my last after 37
years with the Company and I am proud of the team who have risen to
the challenges of the last year. Whilst economic recovery will take
time, we now have an EU trade deal and an effective vaccination
programme. I have every confidence London will continue to be one
of the world's best cities for living, recreation, education and
business. I leave Derwent London in great shape with an excellent
team, a balanced portfolio and strong finances and have every
confidence in its future success."
Paul Williams, Chief Executive, commented:
"It has been an unprecedented year for London and its
communities, with many businesses recognising the importance of a
return to the office for combined learning, creativity and
productivity. Recent events have accelerated changes required by
our occupiers with a growing emphasis on wellbeing and
environmental performance. With our innovative brand of
well-designed, adaptable offices and our continued focus on
responding to climate change, I believe Derwent London is well
positioned to meet the changes in the modern workplace."
Webcast and conference call
There will be a live webcast together with a conference call for
investors and analysts at 09.00 GMT today. The audio webcast can be
accessed via www.derwentlondon.com
To participate in the call, please register at
www.derwentlondon.com
A recording of the conference call will also be made available
following the conclusion of the call 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
Quentin Freeman, Head of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Nina Coad
Emily Trapnell
CHAIRMAN'S STATEMENT
2020 was an extraordinary year dominated by the Covid-19
pandemic. We experienced our first national lockdown in March and,
almost a year later, we are now in our third and hopefully last.
The costs to the UK economy are considerable and London has been
severely affected with its retail and entertainment venues closed
and most office occupiers working from home. Recovery will take
time, but 2020 ended with the UK leaving the EU with a trade deal
and, at the start of the new year, the roll out of a national
vaccination programme. The success of this should see higher levels
of economic activity later in 2021. There is now a clear strategy
for relaxing the lockdown and the first steps have been taken on
the roadmap to lifting all lockdown restrictions by 21 June,
providing the data allows it.
In difficult circumstances our teams have been working extremely
hard to ensure we have continued to function effectively and to
respond quickly to support our occupiers and other stakeholders.
During 2020, we significantly reduced the amount of income due for
expiry in 2021 through tenant engagement. From an exceptionally low
starting point, our EPRA vacancy rate remains low but has risen in
the last year and we expect it to increase further in 2021. Our
on-site developments are progressing well after some minor delays
in the first lockdown. Climate change will remain the major global
challenge of our time, which is why we made the significant
commitment to become a net zero carbon business by 2030 and, in
July 2020, we published our detailed pathway showing how we propose
to achieve this.
Our developments, including 80 Charlotte Street W1 which
completed in June, led to gross rental income rising 5.8% to
GBP202.9m. However, this growth was more than offset by increased
costs and Covid-related impairment charges which saw our net rents
fall 2.1%. As a result, EPRA earnings per share fell 3.8% to 99.2p.
Our GBP5.4bn portfolio, with good performance from our recent
schemes and its low retail exposure, proved relatively resilient
and outperformed its benchmarks, with underlying values falling
3.0%. This saw EPRA net tangible assets (NTA) per share fall 3.7%
to 3,812p. Overall, the Group reported a total return of -1.8% as
the modest decline in value of the portfolio exceeded our dividends
and other retained income.
We recognise the importance of the dividend for our
shareholders, and we propose raising the final dividend by 1p to
52.45p. This will be paid on 4 June 2021 to shareholders on the
register of members at 30 April 2021. The final dividend would take
the full year's payout to 74.45p, an increase of 2.8%. The increase
was based on the level of dividend cover, the longer-term outlook
and our obligations to our wider stakeholders.
This statement is my last after 37 years with the Company,
either as Chief Executive or latterly as Chairman for the past two
years. From its modest beginnings, Derwent London has grown to
become one of the leading London office providers. It has done
this, in part by focusing on what it knows best and by always
striving for improvement.
A key part of its success is the Derwent London team, whose
members have complemented and supported each other so well. It is
not easy to achieve this and much credit must go to our Chief
Executive, Paul Williams, together with Executive Directors Damian
Wisniewski, Nigel George and David Silverman. They have helped
shape the Group over time and will continue to lead it into the
future. Having worked with them for many years, it has been no
surprise to me to see how the Group has ably navigated the
difficult circumstances in the last year. I wish to thank all the
staff at Derwent London for their exceptional work in 2020 and the
wonderful support that they have given me over the years.
A special 'thank you' is owed to Simon Silver, my co-founder,
who announced in August 2020 his intention to retire from the
Board, stepping down on 26 February 2021. He has invested his
energy in ensuring our projects are innovative and of the highest
quality. He has built up strong relationships with some very
talented architects and has done so much to establish our
design-led Derwent London brand. He will continue to support the
business as a consultant until 31 December 2022, working alongside
our established and talented team as we create the next generation
of office space.
I am delighted with two recent board appointments. Mark Breuer,
who brings significant financial expertise, was appointed as a
Non-Executive Director and Chairman designate on 1 February 2021
and, as part of our succession plans, will take over as Chairman in
May. Emily Prideaux was appointed as Executive Director on 1 March
2021. Emily has been with the Group since 2010 and has played an
important role in our leasing team ever since, leading it for
nearly four years. Both appointments will prove valuable additions
to a strong Board.
With an excellent team, a balanced portfolio and strong
finances, the Group is very well placed to meet the challenges and
take the opportunities that are likely to arise over the next few
years. London will continue to be one of the world's best cities
for living, recreation, education and for business. With the
longer-term focus on everchanging office occupation trends and
climate change, our purpose of helping improve and upgrade the
stock of office space in central London while providing benefits
for all our stakeholders, appears as relevant today as when the
business was created.
I believe that Derwent London can look ahead with confidence as
it continues to provide the offices, amenities and surrounding
environments that London businesses require.
CHIEF EXECUTIVE'S STATEMENT
Derwent London started 2020 in a positive mood, seeing robust
occupier demand and keen investment interest, though few then
imagined how events would unfold. Covid-19 has had a significant
impact on everyone, but given the circumstances, I am pleased by
the resilience the Group has shown.
It was an unprecedented year but, with a clear roadmap out of
lockdown in place, we can now look forward to business confidence
returning and our offices and city centres being vibrant again.
There is much to be done and, like the economy, the London office
market is in a much weaker position than one year ago. The
Government's continued support will help strengthen the recovery
but it will take time before confidence is fully restored.
We supported our stakeholders, made good business progress and
responded to market changes by focusing on reducing our near-term
lease expires. Our 2021 lease expiries have fallen from 26% of cash
rent at the start of 2020 to 17% at year end and now at 13%
following lease re-gears and the sale of Johnson Building EC1. We
made good progress with our development programme, completing 80
Charlotte Street W1 and committing to start our next major scheme
at 19-35 Baker Street W1 later this year. We recycled assets,
completing on GBP153m of disposals and have ensured that our
financial position remains strong. Importantly, we made continued
progress on sustainability following our green financing in 2019.
In February 2020, we committed to becoming a net zero carbon
business by 2030 and subsequently launched our detailed pathway in
July.
Further strengthening our relationships
In response to the pandemic, we quickly introduced Covid-19
compliant protocols in our buildings, and our property management
teams have supported our occupiers as restrictions changed over the
year. In relation to our own office, we adopted an 'agile' working
policy several years ago so were well prepared to work remotely,
though it is increasingly clear to us that virtual meetings are no
match for face-to-face contact. No staff were placed on furlough,
all employees below Director level received their full pay and
benefits throughout the year and we have not accessed any
government support.
This period has clearly demonstrated the value of our
long-lasting relationships which have continued to strengthen as we
supported each other. We provided a 25% service charge discount
across the whole portfolio for two rent quarters and, for those
most in need, we deferred or waived some rents. We increased our
community and sponsorship donations by 179% to GBP1.1m including
the temporary use by NHS staff of 16 flats at Charlotte Apartments.
Other relationships have proven equally important. Work on our
three major development sites paused in March, but the contractors
recommenced work within the new protocols relatively quickly and,
since then, good operational progress has been maintained. We have
also extended or refinanced GBP550m of the Group's revolving credit
facilities.
Derwent London's people
I am enormously proud of our Derwent London team and what they
have achieved this year. Many of my colleagues have worked very
long hours to ensure we met our operational objectives and the
needs of all our stakeholders. The convenience and efficiency of
office contact was replaced by online meetings and fortnightly
Group town hall meetings. Maintaining a work-life balance can be
difficult, and the focus has been on the wellbeing of our teams. I
would like to thank them for responding to the challenges so well,
and also our stakeholders for the continued support they give the
Group.
I would like to give special thanks to John Burns, our Chairman,
and Simon Silver, Executive Director, both of whom, as part of our
succession planning, retire from the Board this year. They have
helped build an enduring brand and developed a strong team with
long-standing relationships. Simon will stay on as a consultant for
two years, so we will continue to benefit from his advice as he
works alongside our experienced team. We have made two excellent
Board appointments: Mark Breuer as Chairman Designate and Emily
Prideaux as Executive Director and I am confident in their future
contributions.
The London office market
The pandemic saw a marked slowdown in office leasing activity as
occupiers adopted a 'wait and see' approach: the overall vacancy
rate for the London office market doubled to 8.1%, rents fell and
incentives moved out. These headlines hide a more complex market
with the majority of the vacancy concentrated on poorer quality
buildings or second-hand space. The UK has left the EU with a trade
deal, but we have yet to see the longer-term impacts and the
financial services relationships are still to be determined. This
is important for the City and Docklands office markets, where we
are not located, but in the future the UK will have some more
flexibility to make its own rules.
Whatever the outcome of these talks, London is a major global
city with a rich and diverse culture and has a record of adapting
well to change. It remains a great place to live and work. These
attributes have given rise to a large and relatively young talent
pool, which benefits a broad range of businesses. In recent years
demand has come from a number of growing innovative sectors and
this remains the case with Tech, Digital Media and Life Sciences
companies looking to expand.
Over the last year, office demand has been particularly affected
by both low economic activity and the enforced and widespread
requirement to work from home. The latest government forecast
predicts that economic activity will recover substantially over the
next two years, as lockdown restrictions ease and confidence
improves.
We are increasingly hearing business leaders recognising the
value of the role offices play in supporting their culture,
collaboration and growth. We also expect more people will work from
home at least some of the time as businesses adopt more hybrid
working practices. This is an acceleration of an existing trend
seen prior to the pandemic. However, the impact on demand is more
complex and will take time to play out.
This message was reinforced by our recent tenant survey which
covered a sample of our major tenants representing over 50% of our
'topped-up' rental income. It found that all respondents were keen
to return to their offices, views which appear to have strengthened
since our previous survey in summer 2020. Collaboration, social
interaction and employee wellbeing are high on the list of what
occupiers missed most, but levels of productivity and mentoring
have been of increasing concern as remote working has
persisted.
We expect offices to be used differently. There will be fewer
desks but more collaboration space, meeting rooms, video conference
facilities and other amenities. There will also be increasing
emphasis on mental health, wellbeing and environmental performance.
There will be less 'max-packing' going forwards. Looking ahead in
respect of changing working practices, we do believe businesses
will adopt more agile working practices and, whilst we think this
may reduce overall office demand to some degree, we do not believe
the impact will be significant.
The buildings we create have the adaptability to meet these
evolving trends and it has been very interesting to see how our
occupiers have been working on their plans for change. Buildings
that are unable to meet these objectives will suffer in value
unless they can be redeveloped or repurposed.
Unlike the letting market, the investment market saw a strong
final quarter, with investors backing London's unique attributes
and with London office yields offering good value compared to other
European cities and alternative asset classes. Overseas demand
remains strong, with Asian and Continental European investors
prominent at the end of 2020. CBRE estimate that there is between
GBP40-GBP45bn of potential demand circling London offices. We
expect activity to pick up once the lockdown lifts.
Outlook
As restrictions ease, economic activity should start to improve.
Concern over the environment and climate change is now recognised
as our most important global issue but also represents an
opportunity for forward-looking businesses. This year Glasgow will
host COP26 which will highlight the necessary responses. However,
in the short term, it is the pace of economic recovery that will be
the most important determinant of the London office market's
performance.
New office supply is anticipated to remain constrained. Larger
businesses are likely to focus on good quality space and, as there
is less availability for these properties, we expect rents here to
hold up. Older and smaller units, where there is greater
availability, may prove more vulnerable. As such, we expect overall
vacancy levels will continue to rise but will remain lower in the
West End than the City.
Our portfolio is weighted towards this adaptable and high
quality space, with most of the remainder comprising our current
and future projects. This is the raw material that can become the
high quality buildings of the future. Allowing for this mix, and
given that retail and hospitality represents only 9% of the
portfolio, we estimate our average 2021 ERVs will move in the range
of 0% to -5% but we may see a particularly wide spread of
performance between our different properties. Beyond this, rents
could bounce back relatively quickly along with the economy. We
expect our investment yields to stay firm or tighten for the better
quality properties, as the positive yield gap with alternative
assets remains wide despite the recent weakness in bond prices.
Although we are on the path to recovery, the effects of the
lockdown together with our policy of recycling some of our mature
assets, may impact our short term EPRA earnings and dividend growth
rates. We believe these will recover relatively quickly as the
economy grows, with the delivery of our value-adding developments
and through income-producing acquisitions.
We continue to evolve our designs to ensure we have the right
product for today's occupiers, and our next major development
commences on site at 19-35 Baker Street W1 later this year. This
innovative, adaptable and environmentally outstanding project will
take our on-site developments to over 700,000 sq ft. On completion
and letting, these schemes are estimated to create a further
GBP131m of development surpluses. Part of our strategy is to make
new acquisitions and we have the financial capacity to fund these
as well as our substantial regeneration programme. We will also
continue to upgrade our portfolio and explore renewable energy
options to meet our net zero carbon commitments. This should ensure
that we continue to deliver above average long-term returns.
CENTRAL LONDON OFFICE MARKET
London's economic outlook
At the start of 2020 the outlook for the London office market
was positive; the vacancy rate was low, demand was good and the
supply pipeline was significantly pre-let. The pandemic has brought
substantial economic contraction with the UK's GDP falling 9.9%, a
hiatus in letting activity and has forced many people to work from
home. For the first time in many years, London's job numbers have
fallen. The future is still uncertain and some of the final
arrangements with the EU undecided, but we are now on a roadmap
that should see the London economy start to recover as the year
progresses. On this basis we can look forward with some
optimism.
London's economy is linked to both the domestic and
international markets. Consensus expects economies to recover as
health concerns reduce, with the UK economy predicted to grow 2-5%
in 2021. In February 2021 the Prime Minister set out a four-step
roadmap to lifting restrictions which, if all goes to plan, would
see all social restrictions lifted by 21 June. Government
projections indicate that the economy should recover to
pre-Covid-19 levels in 2022.
The pandemic's impact on the central London office market
Take-up has been running below previous levels with many
businesses adopting a 'wait and see' approach until they have a
clearer view of the future. This is reflected in CBRE's estimates
of 2020 take-up at 5.6m sq ft, down 57% on 2019. The main sectors
behind last year's activity were business and professional services
40%, TMT 20% and financial services and insurance 20%.
The low take-up contributed to the significant rise in 2020's
overall vacancy rate from 3.9% to 8.1%. As in previous periods of
weaker occupier demand, the City vacancy rate at 10.8% has risen
faster and is higher than in the West End which is 5.8%. There has
also been a significant increase in second hand and 'grey' space.
CBRE defines second hand space as that which is not new, and for a
number of years it has represented an increasing proportion of
vacancy. In December 2020 it was 75% of the total, up from 69% a
year earlier. Even more significant was the rise in tenant
controlled or grey space which has risen over the same period from
26% to 35% of total vacancy.
Flexible office providers have been an important component of
demand over the last five years, but over the course of last year
we saw take-up from the sector more than halve to 6%. The pandemic
and multiple lockdowns have certainly put the short-let business
model under pressure which has already seen casualties among the
more stretched businesses with potentially more to come. Longer
term there will still be demand and we expect flexibly-let space to
remain an important component of the London market.
Taking this into account, headline prime central London office
rents fell 7.6% in the year and rent-free periods moved out from
c.24 to 27 months on a typical 10-year lease producing a fall in
net effective rents of c.10%.
In 2020, 4.7m sq ft of completed development space was added to
the London market. This was only 66% of what was predicted at the
beginning of the year. Looking forward there is 12.1m sq ft under
construction which is slightly below last year's number despite the
high number of schemes carried forward. Of this additional space,
42% is pre-let or under offer, which leaves about 7.0m sq ft
available to let over the next three years. This represents c.3% of
London's total office stock, a figure unchanged from previous
years.
Given the market outlook, we expect the appetite for new
development will reduce and there is evidence that a number of
schemes were deferred in 2020. We believe development specific
funding may prove harder to secure and that some schemes will
become conditional on pre-lets. Conversely demand for better
quality space will continue to promote new activity, which should
mean that well-funded developers remain active.
The London property market will take time to recover and we have
yet to see the impact of the withdrawal of the significant levels
of current government support. However, Knight Frank estimate that
there is 7.7m sq ft of active demand and we have seen an increased
level of activity since the recent roadmap was announced.
London has a rich culture and a large, diversified and
relatively young talent pool which benefits many businesses. It has
proven adaptable in the past with new industries replacing
declining ones. Industries looking to take space in London are Life
Science, Artificial Intelligence (AI), Fintech, Digital Media as
well as the existing Tech Titans.
The impact of working from home
As well as their impact on the economy, multiple lockdowns over
the last year have forced many people to work from home. We
anticipate that businesses will embrace positive change as we come
out of the pandemic and will adopt agile working policies on a
greater scale. This is not the same as full-time working from home.
A more agile workforce does not necessarily mean a reduction in
overall footprint. It will vary from business to business, is quite
complex and will take time to fully determine. To date, we have
found in our buildings these policies tend to lead to a
reconfiguration rather than a reduction in space requirements.
Overall demand for offices will inevitably be affected by both
economic factors and workplace strategies such as a reduction in
workplace densities and a move away from hot-desking. However, it
is peak occupancy that will determine overall space requirements.
Whilst we see that there may be a short-term reduction in demand,
we do not believe this will be significant or long-term.
This is supported by the results of our own recent tenant survey
in which we spoke to business leaders representing over half our
rental income. 82% of those surveyed agreed that they will be
adopting more agile working practices. We also learned that almost
half (44%) of those interviewed will be reducing overall office
densities, meaning more space will be required for each individual.
In terms of headcount, over the past year 39% of those interviewed
have increased their headcount whilst 45% have reduced - the
remaining 16% have seen no change. Encouragingly, looking ahead to
the next 6-12 months, 51% anticipate headcount growing with only 8%
anticipating a decrease, 18% expecting equilibrium and 23%
undecided.
One clear message that came from the survey was that everyone
asked was looking forward to getting back to the office.
Attitudes appear to have changed the longer the lockdowns have
continued, the rhetoric has shifted and more of our occupiers are
highlighting the challenges they face from being away from the
office. These can be summarised as:
-- Talent : this is as important as ever. Office quality,
amenities and surrounding areas play an important part in staff
recruitment, personal development and retention.
-- Culture & identity: a business's culture and identity is
very hard to convey and even harder to build from scratch in a
virtual world. The workplace is an opportunity to showcase company
culture, values and identity. This is important for employees and
customers alike.
-- Communication, collaboration and social interaction: are
greatly missed and are not easy to replicate through remote
working, especially with new colleagues.
-- Wellbeing: an office can help promote this through
face-to-face interaction and create a more distinct work-life
balance.
-- Productivity: space shared with other team members helps
inspire colleagues to produce a much more powerful response to
complex, challenging and creative tasks.
A flight to quality
We believe a two-tier market is developing with occupier demand,
particularly for larger businesses, focused on the best buildings.
These need to provide generous and adaptable spaces as exemplified
by Derwent London's 'long-life loose-fit' approach. In addition,
our projects have expansive reception areas, roof terraces and
amenities such as cafés, ample bike storage and showers.
Today's occupiers are also focused on health and wellbeing and
the impact their workplaces are having on the environment and
climate change in particular. These latter aspects are much better
understood today through the increasing use of digital technology
in new buildings to monitor air quality and energy consumption in
real time.
Property management is another important component especially
for multi-let buildings. Occupiers are expecting a greater sense of
customer service, hospitality and community both inside and outside
their buildings. This is becoming increasingly important as leases
have generally become shorter with occupiers keen to get more
flexibility on at least some of their requirements.
Space that cannot meet the more exacting standards of today's
occupiers may prove slower to let and may need to be redeveloped or
repurposed. We expect this existing trend to have been reinforced
by the lockdowns as businesses emerge with adjusted requirements,
our special product and wider portfolio initiatives standing us in
good position to benefit.
Investment demand expected to remain firm
Investment activity in 2020 at GBP7.6bn was down a third on
2019. However, there was a strong final quarter totalling GBP4.3bn
or 57% of 2020's total activity. Demand has come from Asia and
Europe representing 61% of the total, whereas UK property companies
and North American investors were only 8% in total.
The London office investment market remains attractive globally
for its transparency, liquidity and its yields. The recent CBRE
EMEA 2021 Investor Intentions Survey ranked London as the number
one city for investment. International interest rates and bond
yields remain at very low levels despite some recent price moves.
The strongest demand remains for modern buildings let on long
leases and there is also good interest in development sites. There
is no evidence yet of any bank driven distress in the office
market. CBRE estimate that there is currently GBP40-45bn of equity
circling for London offices which compares to GBP7.1bn of London
office buildings currently available. In the short term, during
lockdown, activity is likely to be lower but interest remains
strong so we expect a significant pick up in transactions as
restrictions are lifted.
Our portfolio's rental and yield outlook for 2021 is included in
the Chief Executive's statement above.
VALUATION
The Group's investment portfolio was valued at GBP5.4bn as at 31
December 2020. There was a deficit for the year of GBP178.5m, which
after accounting adjustments of GBP19.0m (see note 11), gives a
reported deficit of GBP197.5m. Underlying values decreased 3.0%,
compared to a 3.9% uplift in 2019. However, we significantly
outperformed our benchmarks: the MSCI IPD Quarterly Index for
Central London Offices and the wider All UK Property Index which
were down 5.6% and 6.6% respectively. The Royal Institution of
Chartered Surveyors relaxed the requirement to add uncertainty
clauses to central London office valuations, an obligation at the
half year.
By location, our central London properties, which represent 99%
of the portfolio, dropped in value by 2.9% with the West End down
3.3% and City Borders down 2.1%. Our Scottish holdings,
representing just 1% of the portfolio and principally retail,
declined 11.2%.
Using EPRA metrics, our rental values declined 2.8%, as a
subdued leasing market impacted rents. The relatively small retail
and hospitality element, 9% by income, was most affected, down
18.3% as London was in lockdown for much of the year. The office
portfolio was down a more modest 1.2%, with modern quality product
generally holding up well but the lesser quality buildings, mainly
those earmarked for redevelopment or major refurbishment, more
negatively impacted. By location, City Borders' ERVs were down
1.8%, more resilient than the West End down 3.3%.
The portfolio's EPRA initial yield rose by 30bp to 3.7% which,
after allowing for the expiry of rent frees and contractual
uplifts, goes to 4.8% on a 'topped-up' basis, a 10bp increase over
the year. Looking at the true equivalent yield, this moved in
marginally during the year by 3bp from 4.77% to 4.74%. This now
includes 80 Charlotte Street following completion of the
development in June. Given its quality, size (10% of the portfolio)
and long-term income stream, it had a significant impact on the
portfolio's yield. If excluded, the portfolio's equivalent yield
would be 4.80%, a 3bp expansion over the year. This reflects
weakening yields on the retail, shorter-term income and
leaseholds.
Our total property return of 0.3% compares favourably to the
MSCI IPD Index which delivered negative returns of -2.4% for
Central London Offices and -2.3% for UK All Property. This
outperformance came from the release of development surpluses, the
run-off of rent-free periods from earlier developments, such as
Brunel Building, which completed in 2019, and strong asset
management activity extending leases.
At the start of the year, we were on site with three major
developments, 80 Charlotte Street W1, Soho Place W1 and The
Featherstone Building EC1. These were valued at GBP848.3m in
December 2020 and delivered a 5.3% uplift as they progressed and
with further pre-let/forward sales commitments. Excluding these
developments, the underlying portfolio movement was down 4.4%. In
June, 80 Charlotte Street, our largest development to date,
completed and was handed over to its occupiers, principally Arup
and Boston Consulting Group. There is only a small element of space
left to let and there has been good progress made on the disposal
of the apartments in this mixed-use development. This project has
delivered a profit on cost of 27%. The two developments currently
on-site, valued at GBP306.0m, represent 6% of the portfolio. This
year we will add our next major redevelopment project, 19-35 Baker
Street W1, to this category and more detail on this and other
projects can be found under 'Development and Refurbishment'
below.
Our contracted annualised cash rent at 31 December was
GBP189.2m. It increased 5.3% over the year, reflecting contracted
rental uplifts and development income from completions which more
than offset the impact of vacancies and the income lost from
disposals. The portfolio's ERV of GBP291.2m includes GBP102.0m of
potential reversion. Looking at the increase in more detail,
GBP58.0m is contracted through rent-free periods and fixed uplifts,
which under IFRS accounting treatment is already mostly
incorporated in the income statement. Our on-site developments and
major refurbishments could add a further GBP33.2m to future income,
of which GBP17.0m or 51% is already pre-let. Despite the difficult
economic environment, our vacancy rate remains low at only 1.8%
(2019: 0.8%), representing GBP5.0m of reversion. The GBP5.8m
balance is from smaller refurbishments and future lease events.
PORTFOLIO ACTIVITY
Asset management
We value our long-term and positive relationships with our
customers and this has been particularly important for the business
over the last twelve months. In the last few years we have invested
in developing and upskilling our asset management and property
management teams as a key point of contact with our customers.
During 2020 they have been working with our occupiers and we are
delighted with the results of this proactive engagement.
The initial focus has been very much on the health and safety at
our buildings, of the people that use them and their surroundings.
We assisted our occupiers returning to their offices in accordance
with the relevant guidelines. We have seen exceptional levels of
co-operation and collaboration which should further cement our
longer-term relationships. To help support all our customers, we
reduced our service charges by 25% for two quarters and we achieved
additional cost savings. We deferred or waived rents for those most
in need. The latter actions have been primarily focused on the
retail and hospitality sectors, which help, in normal times, make
the ground floors of our buildings such vibrant places.
We entered the year with limited space available and this, as
well as market conditions, meant that our new letting activity was
relatively low.
Letting activity 2020
Let Performance against
Dec 19 ERV (%)
Area Income Open market Overall(1)
sq ft GBPm pa
-------- --------- ------------ -----------
H1 60,700 2.6 20.2 4.3
H2 74,700 4.1 0.0 (3.7)
-------- --------- ------------ -----------
2020 135,400 6.7 6.0 (0.8)
-------- --------- ------------ -----------
(1) Includes short-term lettings at properties earmarked for
redevelopment
Our 2020 new letting activity totalled GBP6.7m which was 0.8%
below December 2019 ERV but, excluding short lettings, was 6.0%
above. The majority of the activity related to existing tenants
demonstrating the importance of long-standing relationships.
TransferWise was our most significant transaction, where as well as
letting 17,250 sq ft we extended the existing lease on 31,700 sq ft
so that their occupation has increased by 54%.
Principal lettings in 2020
Total
Office annual Lease Lease Rent-free
Area rent rent term break equivalent
Property Tenant sq ft GBP psf GBPm Years Year Months
Q1
80 Charlotte
Street W1 Lee & Thompson 13,100 70.00(1) 0.8 11 - 26
Angel Building EC1 Expedia 6,550 40.30(2) 0.3 12.5 5 9
-------------------- ------- ------------- ------------- ------- ------- ------------------
Q2
Tea Building E1 Buckley Gray Yeoman 4,800 70.00 0.3 5 - 9
-------------------- ------- ------------- ------------- ------- ------- ------------------
Q3
88-94 Tottenham 12, plus 6 if no
Court Road W1 UCL 14,100 58.50 0.8 10 5 break
Soho Place W1 Apollo 5,100 Confidential Confidential 15 - Confidential
-------------------- ------- ------------- ------------- ------- ------- ------------------
Q4
Tea Building E1 TransferWise 17,250 59.50 1.0 5 - 13
Tea Building E1 New Wave Capital 7,900 61.00 0.5 4 - 2
68,750
(1) GBP70 psf on ground, GBP47.50 psf on lower ground (2)
Reception area now rentalised as offices let entirely to
Expedia
The bulk of last year's asset management work focused on rent
reviews, renewals and regears. Our rent reviews saw a 9% uplift
over the previous rent. Major reviews included space at 1-2 Stephen
Street W1 and Turnmill EC1. At the beginning of the year, 10% of
our cash rent was due to expire in 2020 with a further 26% in 2021.
Many of these expiries related to potential developments, but we
have since opted to defer a couple of these through extensions and
re-lettings. This demonstrates the optionality within our
portfolio. We have also removed some tenant breaks to extend our
income.
Asset management 2020
Area Previous rent New rent Uplift New rent vs
----------------
'000 sq ft GBPm pa GBPm pa % Dec 19 ERV %
---------------- -------------- --------- ------- -------------
Rent reviews 192.0 11.2 12.2 9.3 (1.0)
Lease renewals 251.0 10.9 11.6 6.0 (11.7)
Lease regears 281.0 14.0 15.1 7.5 (0.9)
---------------- -------------- --------- ------- -------------
Total 724.0 36.1 38.9 7.6 (4.4)
---------------- -------------- --------- ------- -------------
Of the 2020 expiries, 22% related to developments, and of the
remainder we retained or re-let 87%. This leaves 13% available
which contributed to the rise in the EPRA vacancy rate from 0.8% to
1.8%. The other major contributor to the increase was at The White
Chapel Building E1 where the lease with Fotografiska was
surrendered.
Significant progress was also made on our 2021 expiries so that
they fell from 26% of cash rent to 17% during the year ended 31
December 2020 and have since reduced further to 13%. This included
short term lease extensions where we are keeping buildings occupied
prior to redevelopment such as 19-35 Baker Street W1 and Holden
House W1. We also extended a number of leases so that 43% of our
cash rent now expires after five years compared to 30% one year
ago. The latter included UCL at 88-94 Tottenham Court Road W1, City
University at 88 Rosebery Avenue EC1 and the Secretary of State at
401 St. John Street EC1.
We have made further progress in 2021 with Government Digital
Services committing to a further five years on one floor at The
White Chapel Building E1 and the completion of the disposal of
Johnson Building EC1 which had a number of leases expiring in 2021.
However, we do expect to see our vacancy rise in 2021 reflecting
the continuing economic uncertainty.
Investment activity
The Group's strategy is to look to recycle assets with lower
growth potential while reinvesting the proceeds in our developments
and new acquisitions. During the year we sold one major property
and committed to sell two more. The disposal of 40 Chancery Lane
WC2 was covered in last year's Report and Accounts and we give more
detail of the disposal of 2 & 4 Soho Place W1 under
'Development and Refurbishment' below. In December 2020 we
exchanged contracts to dispose of Johnson Building EC1 for GBP170m,
and that disposal completed in January 2021. Johnson Building was
one of our first generation of refurbishments completed 15 years
ago.
Major disposals announced in 2020
Gross Gross
Area proceeds proceeds Net yield to purchaser Rent
Property Date sq ft GBPm GBP psf % GBPm
Completed
40 Chancery Lane WC2 Q1 103,700 121.3 1,170 4.25 5.5
80 Charlotte Street W1 - private
residential Multiple 16,050 29.7 1,850 - -
80 Charlotte Street W1 - affordable
housing Q2 9,470 2.5 270 - -
---------- ---------- ---------- ---------- ----------------------- ------
Total (Completed) 129,220 153.5 1,190 - 5.5
Exchanged
2 & 4 Soho Place W1 Q3 18,400(1) 40.5 2,200 - -
Johnson Building EC1 Q4 192,700 170.0 880 4.1(2) 7.3
---------- ---------- ---------- ---------- ----------------------- ------
Total (Exchanged) 211,100 210.5 1,000 - 7.3
---------- ---------- ---------- ----------------------- ------
Total 340,320 364.0 1,070 - 12.8
---------- ---------- ---------- ----------------------- ------
(1) Office space
(2) Net yield decreases to 2.5% after 40% of income expires in
2021
We completed one major acquisition in February 2020, Blue Star
House in Brixton SW9 for GBP38.1m before costs, which was covered
in the 2019 results.
Major acquisition in 2020
Net Net
Total Total Net rental rental
Area cost cost yield income income
Property Date sq ft GBPm GBP psf % GBPm pa GBP psf
Blue Star House SW9 Q1 53,750 38.1 710 1.9 0.8 14.50(1)
------ ------- ------ --------- ------- --------- ---------
(1) Rent on occupied office floorspace
DEVELOPMENT AND REFURBISHMENT
We continue to create modern and adaptable spaces. Office users
are going through a period of accelerated transformation and are
increasingly aware of climate change. Covid-19 initially brought
some delays, pushing completions out up to 3 months but our on-site
projects are performing to the revised timetable.
In June 2020, we completed our first net zero carbon development
at 80 Charlotte Street W1 totalling 377,000 sq ft. Our profit on
cost for this project was 27%. The offices, 85% of the total space,
are fully let with the tenants fitting out. The bulk of the
building is let to Arup and the Boston Consulting Group for twenty
years and at least twelve years, respectively. We have sold 17 of
the 22 apartments available to sell at Asta House, and donated the
use of 16 rental apartments at 80 Charlotte Street to the NHS for
one year. We offset the 19,790 tonnes of residual embodied carbon
produced by the project in line with our net zero carbon
objectives. The offsets relate to a validated community
reforestation project in East Africa.
The Group has two large developments under construction. Soho
Place W1, comprising 285,000 sq ft, and The Featherstone Building
EC1, totalling 125,000 sq ft. Both are due to be completed in the
first half of 2022 and together are 61% pre-let or forward sold
with capital expenditure to complete of GBP189m.
During 2021 Apollo exercised its option to take additional space
at 1 Soho Place and we disposed of the long leasehold interest in 2
& 4 Soho Place, which comprises 18,400 sq ft of offices and a
theatre pre-let to Nimax. This forward sale will raise GBP40.5m for
the Group upon completion. As a result, the development is 87%
pre-let or forward sold, with 36,000 sq ft of retail remaining to
be let. While we are confident in the long-term attractions of this
retail location sitting over the Elizabeth line station at the
junction of Oxford Street and Charing Cross Road, we have lowered
our retail rental expectations to GBP3.5m which is in line with the
market. The overall profitability of the scheme has benefitted from
the strong performance of the larger office element.
The Featherstone Building has an ERV of GBP8.1m and is our
largest single letting exposure. This 'long-life loose-fit' space,
next to our successful White Collar Factory, has adopted many of
the features of its larger neighbour. These include concrete core
cooling, opening windows and generous 3.1m floor to ceiling
heights. The development will be net zero carbon, include 'smart'
technology and wellness certified. Our main marketing campaign is
scheduled for later in 2021, but there is early letting
interest.
We are committed to commence the development of 19-35 Baker
Street W1 in the second half of 2021. Contracts have been signed to
convert our 55% joint venture interest with the freeholder, The
Portman Estate, into a wholly owned 129-year lease on the
commercial element, paying an initial ground rent of 2.5%. Our
consideration for the enhanced interest is a mixture of property
and cash, which includes pre-selling to them the retail and office
space behind the new Baker Street building.
The scheme will comprise 217,000 sq ft offices, 28,000 sq ft
retail and 52,000 sq ft residential. The total capital expenditure
is estimated at GBP265m. As well as providing adaptable working
spaces with generous 3.1m floor to ceiling heights and significant
natural light, the office property will have all electric HVAC
systems using air source heat pumps, openable windows, energy
sensors and greywater harvesting. It will be our first NABERS UK
certified scheme which will confirm that the building meets a
specific level of energy performance in operation. In addition, we
are creating new public realm, which will run through the centre of
the site.
In late 2020 we applied for planning consent to redevelop
Network Building W1. This project is targeting between 100-130,000
sq ft depending on whether it will be used for Life Sciences or
office use. A decision is expected in H1 2021 and, if approved,
work could start in 2022 for completion in 2025.
In addition to our large schemes, we are continually working on
a number of smaller refurbishments. The two largest presently are:
6-8 Greencoat Place SW1 and Francis House SW1, both on site.
Together they total 70,000 sq ft and form part of our 223,600 sq ft
cluster of buildings. The refurbishment costs to complete are
estimated at GBP19m and include replacing the old gas boilers with
electric heating systems. This work will raise their EPC ratings
from E and C, respectively to B.
We have a further 1.7 million sq ft or 30% of the portfolio
earmarked for future development within our pipeline.
Major developments pipeline
Property Area Capex to complete Comment
sq ft GBPm(1)
Projects completed in 2020
80 Charlotte Street W1 377,000 - 322,000 sq ft offices, 43,000 sq ft
residential and 12,000 sq ft retail - 92%
let / sold overall.
----------- ------------------ ---------------------------------------------
On-site projects completing H1 2022
Soho Place W1 285,000 152(3) 209,000 sq ft offices, 36,000 sq ft retail
and 40,000 sq ft theatre - 87% pre-let /
pre-sold.
The Featherstone Building EC1 125,000 37 110,000 sq ft offices, 13,000 sq ft
workspaces and 2,000 sq ft retail.
----------- ------------------ ---------------------------------------------
410,000 189
----------- ------------------ ---------------------------------------------
Forthcoming projects completing 2025
19-35 Baker Street W1 297,000(2) 265 Consented. 217,000 sq ft offices, 52,000 sq
ft residential and 28,000 sq ft retail.
----------- ------------------ ---------------------------------------------
Planning
Holden House W1 150,000 - Consented. Office and retail scheme.
Network Building W1 130,000 - Planning application submitted. Potential to
increase floorspace from 70,000 sq ft.
----------- ------------------ ---------------------------------------------
280,000 -
----------- ------------------ ---------------------------------------------
Total (excluding completions) 987,000 454
----------- ------------------ ---------------------------------------------
(1) As at 31 December 2020 (2) Total area - Derwent London
currently has a 55% share of the joint venture
(3) Includes remaining site acquisition cost and profit share to
Crossrail
FINANCE REVIEW
Financial overview
After a year of considerable hardship for many individuals,
families, institutions and employers and during which our tenants
have suffered from unprecedented business disruption, Derwent
London has experienced its first negative annual total return in
over a decade at -1.8% or -72p per share. However, our business has
proved relatively resilient, our balance sheet and liquidity remain
very strong and we have been able to provide financial and
practical help to our stakeholder groups while paying an increased
dividend.
The Covid-19 pandemic dominated the past year but 2020 was also
notable for an ever-increasing global awareness of climate change,
the long running trade negotiations between the UK and EU and, for
our sector in particular, a spotlight on the nature of office
occupation.
The occupational market for London offices was impacted by these
factors with vacancy rates rising, ERVs under pressure and lease
incentives increasing. We have also been rebalancing the portfolio
with further disposals and a significant ongoing development
pipeline. Furthermore, our focus has shifted over the past year to
protecting income rather than capturing full reversion, and
extending leases rather than seeking maximum rental levels. Against
this background, the recent development completions at Brunel
Building and 80 Charlotte Street produced an increase in gross
rental income in the year. However, net rents and earnings were
impacted by impairments, waivers and write-offs and this weaker
occupational market has seen our property valuations decline.
Though partly offset by development activity and continuing low
yields, this has led to a 3.6% fall in total net assets.
The impact on operating cash flow in 2020 is also visible with
GBP14.5m of rents deferred to 2021 under agreed payment plans as
well as rent-free periods provided to those tenants most in need,
particularly in the retail and hospitality sectors. So far, we have
collected almost all these deferred amounts as they fall due and,
with the prospect of an improving economic background in the UK
through the rest of 2021, we anticipate that the operating cash
flow for 2021 should be correspondingly stronger than usual.
However, the property disposals made over the last year or so will
have a short-term impact on earnings until we are able to replace
the income with suitable new property acquisitions.
Strong relationships have also helped us extend, increase or
refinance our two revolving credit facilities, together totalling
GBP550m. Our leverage remains low and, though the impairments and
waivers booked have caused irrecoverable property costs to rise,
interest remains almost 4.5 times covered by net rents. As a
result, the Group is particularly well placed to benefit from
opportunities both within the existing portfolio and from potential
acquisitions.
Each year, there is an increasing emphasis on environmental
matters within Derwent London. We have taken further steps in 2020
to understand and mitigate the impact of what we do upon our
environment now and in the future. As well as spending GBP103.2m of
our Green Finance on projects which meet our climate change agenda,
we have invested in carbon credits to support green projects around
the world and to offset the embodied carbon in current and certain
future projects. We have also published our pathway to net zero
carbon which includes a commitment to carbon accounting.
The Brexit trade negotiations rumbled on through most of the
year. An agreement was reached with the EU in December 2020
providing greater certainty in the future. We welcome this while
recognising the increased burden of compliance on some businesses
and the remaining areas still to be resolved such as financial
services.
Property valuation decline reduces net asset value
Our business model is to drive income and create value through
property regeneration predominantly within the central London
office market. By creating modern and adaptable office space, we
aim to achieve long-term growth in earnings and dividends with an
important emphasis on our responsibilities as a business,
particularly with regard to our stakeholders and to climate change.
We believe that total return i.e. dividends paid plus net asset
value growth per share measured using the new EPRA net tangible
assets (NTA) measure, is the best single measure of our performance
but we also focus on our property returns, recurring earnings,
dividend cover and cash flow as well as a number of ESG
metrics.
The main movements in EPRA NTA per share during the year
compared to 2019 are summarised in the chart below. Though earnings
have been affected by additional irrecoverable costs and the IFRS 9
impairments booked against receivable balances (see below), the
main feature of 2020 was the negative revaluation movement of 176p
per share compared to the positive 139p per share in 2019:
2020 2019
p p
-------------------------------------- ------
Opening EPRA NTA 3,957 3,775
Revaluation movement (176) 139
Profit on disposals 5 14
EPRA earnings 99 103
Dividends paid (73) (68)
Redemption of 2019 convertible bonds - (8)
Issue of 2025 convertible bonds - 7
Interest rate swap termination costs (2) (2)
Other 2 (3)
Closing EPRA NTA 3,812 3,957
This has given rise to a 145p or 3.7% decrease in EPRA NTA per
share during the year. Adding back the dividends paid gave a total
return of -72p per share or -1.8%. As noted above, this is the
first time since 2009 that Derwent London's total return has been
negative, reflecting the impact that the year's events have had on
office occupation levels, vacancy rates and rental values. Retail
and restaurants make up c.9% of our portfolio by ERV but the
particular difficulties that these businesses have experienced have
also helped drive a substantial fall in retail values around the
portfolio.
Property portfolio
Our property portfolio was independently valued at GBP5.4bn as
at 31 December 2020 allocated across the balance sheet as
follows:
Dec-20 Dec-19
GBPm GBPm
--------------------------------------- --------
Investment property 5,029.1 5,174.3
Non-current assets held for sale 165.0 118.6
Owner-occupied property 45.6 45.3
Trading property 12.9 40.7
Property carrying value 5,252.6 5,378.9
Accrued income (non-current) 146.4 134.4
Accrued income (current) 19.6 18.7
Grossing up of headlease liabilities (66.5) (59.5)
Revaluation of trading property/other 3.4 2.7
Fair value of property portfolio 5,355.5 5,475.2
Total property additions during the year were GBP205.3m of which
capital expenditure represented GBP161.8m. This was about 28% lower
than anticipated a year ago, another impact of the lockdowns and
other restrictions which have affected construction sites. This may
partially reverse with higher capital expenditure in 2021 but we
expect overall programme extensions on our major schemes of about
one to three months. The principal acquisition was Blue Star House
SW9 in Brixton and the main disposal was 40 Chancery Lane WC2,
which completed in February 2020, plus 17 residential apartments at
Asta House W1. The latter were held as trading properties and the
success of the sales campaign is evidenced by the remaining
December 2020 balance of only GBP12.9m against GBP40.7m a year
earlier. As noted earlier, commercial valuations have declined in
2020 with a total revaluation deficit for the year of GBP195.7m
after accounting adjustments, GBP196.1m relating to the investment
property portfolio with a GBP0.4m surplus at our own offices at
Savile Row. The latter figure is shown in the Group Statement of
Comprehensive Income.
The balance of unamortised legal and letting fees plus the
accrued income from the 'straight-lining' of rental income under
IFRS 16 to spread the effect of incentives over the lease terms has
increased to GBP166.0m (2019: GBP153.1m). This balance rises as
income is recognised through incentive periods and falls gradually
once the cash flows stabilise. This year, it also reflects GBP5.7m
of impairments booked in 2020 against these balances.
We have performed a thorough review of our top 83 tenants as
well as analysing them on a sector-by-sector basis. The nature of
impairment testing is judgemental and, with respect to long-term
receivables under lease commitments, requires us to estimate what
may happen over many years. It should be noted that future tenant
failure has a potential impact upon the recoverability of these
balances. Our approach to impairment testing is considered in more
detail below.
The sale of Johnson Building EC1 had exchanged prior to the year
end with completion in January 2021 and this property has therefore
been reclassified as an 'asset held for sale'.
The Baker Street properties, currently owned with The Portman
Estate, are consolidated within our investment property portfolio
as we hold 55% and have day-to-day control, but with a
non-controlling interest of GBP51.9m included within balance sheet
'equity'. Later in 2021, we expect to acquire the remaining
interest in the development site at 19-35 Baker Street W1 while
disposing of a number of the other Baker Street properties.
Rent collection and impairment of receivables
Over the last few years, the Group has typically collected over
99% of its rent and service charge receivables from tenants within
two weeks of the due date, with negligible bad debts. This pattern
changed dramatically in early 2020 with the pandemic and subsequent
lockdown. The table below shows our rent collection statistics
quarter by quarter and means that we have now collected 92% of
rents demanded for the 2020 rental year, with 5% still to come on
agreed deferred payment plans and 3% written off or granted a
rent-free period. The office collection rates are higher at 94%
collected plus 5% on agreed payment plans. However, the tables
illustrate the particular difficulties faced by our retail,
restaurant and leisure occupiers where we have provided
considerable support through waiving or deferring rents. In
addition, we granted a 25% service charge waiver across the entire
portfolio for the March to June and June to September quarters in
2020 at a cost of GBP4.1m.
Dec 19 quarter Mar 20 quarter Jun 20 quarter Sep 20 quarter
------------------------ ------------------------ ------------------------
Office Retail/ Office Retail/ Office Retail/ Office Retail/
Hospitality Hospitality Hospitality Hospitality
--------- ------------- --------- ------------- --------- -------------
Rent received
to date 100% 100% 92% 34% 91% 48% 94% 71%
Payment plans 0% 0% 6% 2% 8% 4% 5% 2%
Outstanding 0% 0% 0% 4% 0% 7% 0% 9%
Rent free 0% 0% 2% 60% 1% 41% 1% 18%
Total 100% 100% 100% 100% 100% 100% 100% 100%
--------------
GBP38.0m GBP3.7m GBP38.8m GBP3.8m GBP39.5m GBP3.7m GBP41.7m GBP3.3m
--------------
Because our rents are collected in advance, the impairment
review process also includes amounts outstanding relating to the
first quarter of 2021 but due on 25 December 2020. Rent collection
for the first quarter of 2021 was as follows:
Dec 20 quarter
Office Retail/ Hospitality Total
--------------------
Rent received to date 93% 54% 91%
Due later in the quarter(1) 0% 2% 0%
Payment plans 5% 0% 5%
Outstanding 1% 17% 2%
Rent free 1% 27% 2%
Total 100% 100% 100%
-----------------------------
GBP41.1m GBP3.0m GBP44.1m
----------------------------- --------------------
(1) Principally monthly receipts
Our portfolio in Scotland operates on the Scottish quarter days
and the figures are therefore not included in the tables above. The
Scottish estate, which consists of mainly retail properties, has
now collected 90% of 2020 rental income, with 3% deferred under
payment plans, 1% granted rent-free waivers and 6% outstanding.
The higher risks now associated with rent collection have led to
substantial impairments being booked against outstanding receivable
balances in 2020. Impairment reviews of trade receivables and
amounts due under the spreading of lease incentives have been
carried out using the expected credit loss model in accordance with
IFRS 9 for each of our 83 largest tenants, for others where we
believe the risk is greatest (such as retail, hospitality and
leisure operators) with the remaining balances considered according
to their sector.
The result of this analysis, which has been carefully reviewed
by our management team and Audit Committee due to its judgemental
nature, was an impairment charge of GBP8.6m, split GBP2.9m for
trade receivables and GBP5.7m for IFRS 16 lease incentive
receivables. On top of that, receivables written off in 2020 were
GBP1.2m and service charge provisions were GBP0.3m. The resulting
total cost of impairments, write-offs and service charge waivers
for 2020 was GBP14.2m which is taken as a charge against earnings
to arrive at net rental income.
Note that, where rent-free periods have been granted under
existing leases, the cost of this additional incentive is then
required to be spread across the remaining lease term and therefore
subject to impairment testing as described above. This reduced
gross rental income in 2020 by GBP0.9m taking the total impact on
net rents to GBP15.1m.
Property income and earnings
Gross property and other income increased to GBP268.6m from
GBP230.3m in 2019. This reflects a 5.8% increase in gross rental
income to GBP202.9m but has also seen GBP32.3m of sales of trading
properties from the apartments at Asta House included in 2020.
Surrender premiums and rights of light receipts added a further
GBP1.8m compared with GBP1.0m a year earlier. Much of the increase
in gross rents came from the completion of 80 Charlotte Street in
June 2020, adding GBP12.2m in 2020. Brunel Building, which
completed in mid 2019, also added GBP8.4m of rental income in 2020.
With recent lettings like this being subject to tenant incentives,
the income accrued in advance of cash receipts was GBP24.0m in
2020, compared to GBP27.3m in 2019. Acquisitions added GBP0.7m but
the increased rental income from lettings was partly offset by
GBP7.7m of rent lost from property disposals in 2019 and 2020,
additional void costs of GBP6.0m and GBP0.9m recognised in 2020
from additional rent-free periods provided to those tenants who
needed support.
However, it is net rental income that illustrates the real
impact of Covid-19 on the business much more clearly. After booking
GBP10.1m of impairments or waivers against receivables and
deducting the GBP4.1m of service charge waivers referred to
earlier, net rental income fell to GBP174.3m from GBP178.0m in
2019, a 2.1% fall. We estimate that, in the absence of Covid-19,
net rental income would have grown by approximately 6%.
Administrative expenses increased by 2.2% to GBP37.8m against a
12% increase in headcount compared with 2019. The business has
needed additional resource in such areas as corporate
responsibility, sustainability, property management and health and
safety and many of our people have worked considerably longer hours
in 2020 than we would like. This is partly due to the
inefficiencies of remote working for a collaborative business such
as ours and partly due to the extra time and support given to
occupiers this year. Our wellness programmes and other support for
our staff have also had cost implications. As before, we do not
capitalise any of our overheads.
The EPRA cost ratio reflects all the irrecoverable property
costs, impairment amounts and overheads and has therefore increased
substantially. Including direct vacancy costs, it rose to 30.5%
from 23.9% in 2019. If the impairments and service charge waivers
are excluded, the 2020 cost ratio would have been 23.4%.
After accounting adjustments for the straight-lining of
incentives, deferred legal and letting fees and grossing up of
headlease liabilities, the investment portfolio revaluation deficit
was GBP196.1m for the year compared with a surplus of GBP156.4m in
2019. The profit on disposal of investment properties was GBP1.7m
relating mainly to 40 Chancery Lane WC2 which completed in February
2020.
Due mainly to a GBP3.1m reduction in capitalised interest,
finance costs increased by GBP3.6m compared to 2019 to GBP30.3m.
However, the prior year included a GBP7.7m charge for the
redemption of convertible bonds so the total finance charges were
GBP4.1m lower at GBP30.4m compared to GBP34.5m in 2019. Interest
rates fell again in 2020 giving rise to an interest rate swap fair
value deficit of GBP1.9m against GBP0.1m in 2019.
The resulting IFRS loss before tax for the year was GBP83.0m
compared to a profit before tax of GBP280.6m in 2019 and the IFRS
loss per share was 69.34p against earnings of 253.82p in 2019.
EPRA earnings, which exclude fair value movements and profits on
disposals of investment properties, fell by 3.6% to GBP111.0m from
GBP115.1m. EPRA earnings per share decreased by 3.8% to 99.2p from
103.1p in 2019. A table providing a reconciliation of the IFRS
results to EPRA earnings per share is included in note 24 and is
summarised below.
EPRA like-for-like rental income
The EPRA like-for-like gross rental income fell by 0.9% mainly
because of a slightly higher vacancy rate and our focus on
extending income rather than maximising rental levels. The income
from new lettings at 80 Charlotte Street is also excluded from
these figures. After impairments and other costs, EPRA
like-for-like net rental income fell by 9.8%.
Taxation
The corporation tax charge for the year ended 31 December 2020
was GBP0.2m. Most of our portfolio is within the REIT regime but
this charge relates to the Portman joint venture interests held
outside the REIT.
The movement in deferred tax for the year was a credit of
GBP0.7m, (2019: GBP0.6m credit); a GBP1.0m credit was taken through
the income statement mainly due to the release of overage from a
property previously disposed of, GBP0.4m was credited in respect of
future defined benefit pension liabilities and GBP0.6m was credited
through the income statement in relation to employee share schemes.
In addition, GBP1.3m was charged through retained earnings in
relation to future tax deductions for equity-settled share-based
payments, effectively reversing out the 2019 gains.
As well as other taxation paid during the year, in accordance
with our status as a REIT, GBP8.2m of tax was paid to HMRC relating
to tax withheld from shareholders on property income distributions
(PIDs).
Derwent London's principles of good governance extend to a
responsible approach to tax. Our statement of tax principles is
available on our website
www.derwentlondon.com/investors/governance/tax-principles and is
approved by the Board in line with the Group's long-term values,
culture and strategy.
Borrowings, net debt and cash flow
Net debt rose 7% over the year to GBP1.05bn at 31 December 2020
but remains at modest levels with a year end loan-to-value ratio
(LTV) of 18.4%. The sale of Johnson Building in early January 2021
reduced this further to a pro forma level of c.15.8% LTV. Group
borrowings at the 2020 year end were GBP1.03bn and, with leverage
at this level, our balance sheet remains as strong as ever. As a
result, we would be comfortable adding further debt to our capital
structure if we can find suitable acquisition opportunities and are
in a position to move quickly should we need to. Available cash and
undrawn facilities totalled GBP476m at 31 December 2020 (GBP511m at
31 December 2019) and, again, increased further in January 2021 on
the completion of the GBP166m Johnson Building sale.
Borrowings have been kept low due mainly due to GBP157.3m of
cash from disposals, with capex spend of GBP175.2m impacted by
lockdowns and acquisitions of only GBP43.8m in the year.
Operating cash flow and interest cover have both been noticeably
affected by the lower rate of rent collections. Net cash from
operating activities fell from GBP97.1m in 2019 to GBP85.4m, the
reduction due to the rents waived or deferred to 2021 though also
helped by additional cash rents at Brunel Building and 80 Charlotte
Street. Assuming that the GBP14.5m of deferred rents are collected
in 2021, much of this cash flow reduction may reverse over the next
year. Interest cover for the year was 446% compared with 462% for
2019, both figures being a long way above our debt covenant of
145%.
Debt and financing arrangements
After GBP875m of refinancing activity in 2019, including the
publication of our Green Finance Framework and the GBP300m 'green'
tranche in our GBP450m revolving credit facility (RCF), the past
year was quieter but still significant. The strength of our banking
relationships has been evidenced again with a new and enlarged
five-year GBP100m RCF signed with Wells Fargo and the extension of
our GBP450m RCF with HSBC, NatWest and Barclays. These four banks
have been supporting us with their balance sheets and transactional
advice for many years and we see them as key stakeholders in our
business.
The new GBP100m Wells Fargo RCF was signed in November and
replaces their GBP75m facility which was due to expire in July
2022. The new facility incorporates two possible one-year
extensions beyond the current expiry date of November 2025 and
includes an accordion option for another GBP25m. The facility helps
extend our debt maturity profile at a margin only slightly higher
than previously, increases our available facilities and has similar
financial covenants to other unsecured Group borrowings.
In December 2020, we also signed a one-year extension to the
GBP450m Group RCF provided by HSBC, NatWest and Barclays. This
facility incorporates our 'green' finance and we provide a further
update in this report on the progress made so far. This shows the
amounts drawn and the expenditure incurred on green projects, all
of which has been independently assured by Deloitte.
Our remaining bank facility is a GBP28m loan from HSBC secured
on the Baker Street properties. This is due to expire in July 2022
but is likely to be repaid before then as the Baker Street
arrangements with the Portman Estate are unwound. The GBP28m
interest rate swap associated with this loan fell away in March
2020 and, with very low amounts of bank debt drawn, we currently
have no active interest rate swaps in place. The other two swaps
totalling GBP115m have forward start dates and we paid GBP1.7m in
2020 to defer them beyond the balance sheet date.
The Group's weighted average interest rate fell by 20bp over the
year to 3.34% on a cash basis and 3.48% on an IFRS basis. The
average interest rate that we pay is dependent on the amount of
inexpensive floating rate bank debt that we have drawn. The
weighted average maturity of our borrowings was 6.8 years at 31
December 2020 compared to 7.8 years at 31 December 2019.
Qualifying 'green' expenditure
The qualifying 'green' expenditure as at 31 December 2020 for
each project is set out in the table below. This includes an
element of 'look back' capital expenditure on live projects which
had already been incurred as at the refinancing date (October
2019), including the 80 Charlotte Street scheme which commenced in
2015. Soho Place and The Featherstone Building both commenced on
site in 2019. There have been no new Eligible Green Projects (EGPs)
elected in 2020.
Cumulative spend on each EGPs to 31 December 2020
Subsequent spend
-------------------
Project Look back spend Q4 2019 2020 Cumulative spend
spend spend
GBPm GBPm GBPm GBPm
---------------- ---------- ------- -----------------
80 Charlotte Street W1 185.6 16.9 16.9 219.4
Soho Place W1 66.3 13.4 61.5 141.2
The Featherstone Building EC1 29.1 5.2 24.8 59.1
281.0 35.5 103.2 419.7
----------
The cumulative qualifying expenditure on EGPs was GBP419.7m,
with GBP103.2m of this being incurred in 2020.
The drawn borrowings from Green Financing Transactions (GFTs) as
at 31 December 2020 were GBP80m; therefore, there was GBP220m of
available unallocated headroom within the GBP300m green tranche of
the Group's GBP450m revolving credit facility as at 31 December
2020.
A requirement under the Framework and the facility agreement is
for there to be an excess of qualifying spend on EGPs over the
amount of drawn borrowings from GFTs which, as shown above, has
been met.
Dividend
We recognise the importance to our shareholders of a consistent
and sustainable dividend policy. Dividends declared in relation to
2019 earnings were 1.4 times covered by EPRA earnings and
therefore, though EPRA earnings have dropped by 3.6% this year, we
have been able to recommend a 1p per share increase in the final
dividend for 2020 to 52.45p. This will be paid in June 2021 with
35.00p as a PID and the balance of 17.45p as a conventional
dividend. We will not be offering a scrip dividend alternative.
On top of the 1p per share increase in the 2020 interim
dividend, this brings the total dividend for 2020 to 74.45p which
is 1.33 times covered by EPRA earnings. Note that EPRA earnings in
2020 also exclude profits on the sale of investment and trading
properties totalling GBP6.9m; if these are added back, the dividend
cover was 1.4 times.
In arriving at our recommendation, we have also considered our
pension fund obligations, which are not material, the enhanced
amounts paid to charitable institutions and the fact that none of
our employees were furloughed in 2020.
PRINCIPAL RISKS AND UNCERTAINTIES
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 through a combination of internal controls, risk
management and the purchase of insurance cover. These risks are
reviewed and updated on a regular basis and were last formally
assessed by the Board in March 2021.
Covid-19 and the resulting economic and social disruption have
brought unforeseen challenges to London and the wider global
economy. These are extraordinary times with exceptional risks and
heightened uncertainty.
During the year under review, Derwent London responded to the
Covid-19 pandemic through proactive risk identification and
mitigation, and early and continual engagement with our
stakeholders. Our strong financial position and stakeholder-focused
approach has helped us to weather the uncertainty.
The future outlook for London is looking more promising: the
Prime Minister has announced a roadmap to cautiously ease lockdown
restrictions and, as at the date of signing this report, more than
22 million people in the UK have received at least one dose of a
coronavirus vaccine.
The principal risks and uncertainties facing the Group in 2021
are set out on the following pages with the potential impact and
the mitigating actions and controls in place. The Group's approach
to the management and mitigation of risk is included in the 2020
Report and Accounts.
The Board, Risk Committee and Executive Committee have been
actively monitoring the impact of Covid-19 on our business and have
subsequently reassessed its impact on our principal risks and
uncertainties. An overview of the Board's assessment of this on
each principal risk is contained in the tables below. In summary,
Covid-19 has had a considerable impact on the materiality of these
risks and has resulted in the classification as new principal risks
of tenant failure, income decline and the potential impact on our
business from the introduction of a new tax to replace or
complement business rates.
Strategic risks
That 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 strategy is not met due to poor strategy * The Group's development pipeline has a degree of
implementation or a failure to respond flexibility that enables plans for individual
appropriately to internal or external factors such as: properties to be changed to reflect prevailing
* an economic downturn; economic circumstances.
* the Group's development programme being inconsistent * The Group seeks to maintain income from properties
with the current economic cycle; and/or until development commences and has an ongoing
strategy to extend income through lease renewals and
regears.
* London losing its global appeal with a consequential
impact on the property investment or occupational
markets. * The Group aims to de-risk the development programme
through pre-lets, typically during the construction
period.
Although the Covid-19 pandemic did not stop the Group
implementing its strategy in 2020, the
lockdown restrictions have marginally extended the project * The Group conducts an annual strategic review,
length for Soho Place and The Featherstone prepares a budget and provides three two-year rolling
Building, and has caused significant economic disruption. forecasts.
Our strategy currently includes
incorporating a retail element into our buildings to
provide amenity to our tenants and the * The Board considers the sensitivity of the Group KPIs
local community. As Covid-19 has only amplified the to changes in the assumptions underlying our
weaknesses within the retail market, this forecasts in light of anticipated economic
aspect of our strategy is being reviewed. The impact of a conditions. If considered necessary, modifications
potential recession on our strategy, are made.
and other longer-term consequences of the Covid-19
pandemic, is being monitored by the Executive
Committee and the Board. * The Group maintains sufficient headroom in all the
Group's key ratios and financial covenants with a
particular focus on interest cover.
2. Implications of Brexit
International trade negotiations following Brexit result * Trade negotiations are being monitored and potential
in arrangements which are damaging outcomes discussed with external advisers.
to the London economy. As a London-based Group, we are
particularly impacted by factors which
affect London's growth and demand for office space. * The Group's strong financing and covenant headroom
Trade negotiations with the European Union continued enables it to weather a downturn. In addition, the
during 2020 despite the Covid-19 pandemic, Group's diverse and high-quality tenant base provides
and resulted in the UK-EU Trade and Cooperation Agreement resilience against tenant default.
(TCA) being finalised on 24 December
2020. For London, further uncertainty remains until terms
are agreed in respect of financial * Construction cost risk, with the exception of
services. The financial services sector contributes Government tariffs, sits with our main contractors.
approximately GBP130 billion to the UK Early ordering and off-site holding facilities are in
economy, 1.1 million jobs and 40% of the sector's exports place for our development projects.
are to the EU. London's economy,
and its place as one of the world's leading financial
centres, could be damaged if an adverse * The Group focuses on good value properties that are
agreement is reached in respect of financial services. The less susceptible to reductions in tenant demand. The
Group will continue to monitor Group's average 'topped-up' office rent is only
international trade negotiations, including the UK GBP57.71 per sq ft.
application to join the Comprehensive and
Progressive Trans-Pacific Partnership (CPTPP).
* Income is maintained at future development sites for
as long as possible. The Group develops properties in
locations where there is good potential for future
demand, such as near Crossrail stations.
Financial risks
Significant steps have been taken in recent years to reduce or
mitigate the Group's 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
----------------------------- ------------------------
3. Risk of tenants defaulting or tenant failure
The risk that tenants become unable to pay their rents * The Credit Committee perform detailed reviews of all
and/or their businesses fail. In the prospective tenants.
current environment, this risk has increased to be
classified as a principal risk for the
Group. * A "tenants at risk" register is maintained and
Due to the economic impact of Covid-19, and its regularly reviewed by the Executive Committee and the
potential long-term implications, occupiers Board.
could be facing increased financial difficulty.
Restaurants and hospitality occupiers (who
account for approximately 9% of our portfolio income) * Rent deposits are held where considered appropriate;
are of particular concern. Covid-19 the balance at 31 December 2020 was GBP18.8m.
has only amplified the weaknesses within the retail
market and there is a strong likelihood
that retail rents and values could fall even further. * Active rent collection with regular reports to the
Our occupiers perceive the restaurant, Executive Committee.
retail and leisure aspects within our portfolio as
amenities; hence we feel it is important
that they are retained within our building offerings. * We maintain close and frequent contact with our
tenants.
* Insurance for loss of rent is regularly considered.
4. Risks arising from changing macroeconomic factors
A. Income decline (previously, 'Fall in property
values') * The Credit Committee perform detailed reviews of all
Due to the various risk factors, including: prospective tenants.
* Future demand for office space;
* A "tenants at risk" register is maintained and
* Rising 'grey' market vacancy in office space (i. regularly reviewed by the Executive Committee and the
e. Board.
space sublet by tenants);
* Ongoing dialogue is held with tenants to understand
* Weaknesses in retail and hospitality businesses; their concerns and requirements.
* Depth of recession; * The Group's low loan-to-value ratio reduces the
likelihood that falls in property values have a
significant impact on our business continuity.
* Brexit uncertainty; and
* Rising unemployment.
There is a risk that our income could decline which
could lead to lower interest cover under
our debt facility financial covenants. This could also
have an adverse impact upon the property
valuation and future dividend payments. In addition,
depending on how prolonged the adverse
impacts of Covid-19 are on businesses, and how our
occupiers fare during this period, we could
face additional risk of income impairment.
In light of Covid-19, we have been monitoring the
economic outlook, vacancy rates, financial
health of our tenants and the condition of the wider
property market. Given the ongoing uncertainty,
it is difficult to forecast the impact on 2021 EPRA
earnings or cash receipts. Future dividends
will remain under review.
B. The potential impact on our business from the
introduction of a new tax to replace or complement * The Executive Committee and Board monitor
business rates macroeconomic factors, including interest rates and
Due to the ongoing weakness of physical retail tax policy.
trading, the cost of supporting the economy
during Covid-19 and the loss of tax revenues, the
government has been reported as considering * The Group has an experienced Head of Tax who advises
measures to increase tax revenues. One area that has the Board on the implications of tax policy.
dominated the headlines is the reform
of business rates. The government has been seeking
views on how the business rates system
currently works, issues to be addressed, ideas for
change and a number of alternative means
of taxing non-residential property to either replace
or complement the business rates system.
Derwent London is particularly mindful of alternatives
being discussed which could impose
a tax on the landowner rather than the tenant. In this
respect, Derwent London will keep abreast
of any new developments in this area and consider the
impact of the various proposals once
more detail is published.
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
The Group's development projects do not produce * Development appraisals, which include contingencies
the targeted financial returns due to one and inflationary cost increases, are prepared and
or more of the following factors: sensitivity analysis is undertaken to judge whether
* delay on site an adequate return is made in all likely
circumstances.
* increased construction costs
* The procurement process used by the Group includes
the use of highly regarded firms of quantity
* adverse letting conditions surveyors and is designed to minimise uncertainty
regarding costs.
Due to restrictions introduced to prevent the
spread of Covid-19, our on-site developments * Development costs are benchmarked to ensure that the
have been subject to delays of between one to Group obtains competitive pricing and, where
three months. During 2020, our development team appropriate, fixed price contracts are negotiated.
liaised and agreed with our principal
contractors in respect to Covid-19-related
liabilities * Procedures carried out before starting work on site,
and cost sharing. such as site investigations, historical research of
the property and surveys conducted as part of the
planning application, reduce the risk of unidentified
issues causing delays once on site.
* The Group's pre-letting strategy reduces or removes
the letting risk of the development as soon as
possible.
* Detailed reviews are performed on construction
projects to ensure that programme forecasts predicted
by our contractors are aligned with our views.
* Post-completion reviews are carried out for all major
developments to ensure that improvements to the
Group's procedures are identified, implemented and
lessons learned.
B. 'On-site' risk
Risk of project delays and/or cost overruns * Strict Covid-19 protocols have been introduced at all
caused by unidentified issues e.g. asbestos in of our on-site developments, in accordance with Site
refurbishments or ground conditions in Operating Procedures (published by the Construction
developments. For example, our successful Leadership Council).
pre-letting
programme means we could face a loss of rental
income and penalties if projects are delayed. * Productivity is monitored on a monthly basis and our
Due to restrictions introduced to prevent the contractors have been incentivised to achieve the
spread of Covid-19, our on-site developments reset programmes post the Covid-19 site closures.
have been subject to minor delays. 80 Charlotte
Street achieved practical completion in June
2020, and The Featherstone Building and Soho * Prior to construction beginning on site, we conduct
Place are still expected to be completed within site investigations including the building's history
their original budgets under the revised and various surveys to identify any potential issues.
programme.
Sites are now operational but are not at full
capacity due to social distancing measures. * Regular monitoring of our contractors' cash flows.
Despite strict Covid-19 protocols on-site, there
is a risk of labour and resource shortages
as UK cases rise, which could lead to * Off-site inspection of key components to ensure they
productivity disruption and project delay. have been completed to the requisite quality.
* Frequent meetings with key contractors and
subcontractors to review their work programme.
* Monthly reviews of Brexit related supply chain
issues.
C. Contractor/subcontractor default
Returns from the Group's developments are * The financial standing of our main contractors is
reduced due to delays and cost increases caused reviewed prior to awarding the project contract.
by either a main contractor or major
subcontractor defaulting during the project.
There have * Regular monitoring of our contractors, including
been ongoing issues within the construction their project cash flows, is carried out.
industry in respect of the level of risk and
narrow
profit margins being accepted by contractors. We * Key construction packages are acquired early in the
regularly monitor our contractors for any project's life to reduce the risks associated with
trading concerns. later default.
There is an increased risk of insolvencies in
the construction industry when the government's
Covid-19 furlough scheme ceases. Due to this * Regular on-site supervision is undertaken by a
risk, we have been actively monitoring the dedicated Project Manager who monitors contractor
financial performance and identifies problems at an early stage,
health of our main contractors and thereby enabling remedial action to be taken.
subcontractors.
* Payments to contractors to incentivise them to
achieve agreed project timescale and damages agreed
in the event of delays/cost overruns.
* Our main contractors are responsible for, and assume
the immediate risk of, subcontractor default.
* We use known contractors with whom we have
established long-term working relationships.
* Contractors are paid promptly and are encouraged to
pay subcontractors promptly.
6. Risk of business interruption
A. Cyber-attack on our IT systems
The Group is subject to a cyber-attack that * The Group's Business Continuity Plan is regularly
results in it being unable to use its IT systems reviewed and tested.
and/or losing data. This could lead to an
increase in costs whilst a significant diversion
of management time would have a wider impact. * Independent internal and external 'penetration' tests
Considerable time has been spent assessing cyber are regularly conducted to assess the effectiveness
risk and strengthening our controls and of the Group's security.
procedures.
During 2020, there has been an increase in cyber
attacks being perpetrated as cyber criminals * Multi-Factor Authentication exists for remote access
seek to exploit Covid-19. In response, we to our systems.
identified the key IT risks arising from home
working
and implemented additional controls. * Incident response and remediation processes are in
place, which are regularly reviewed and tested.
* The Group's data is regularly backed up and
replicated off-site.
* Our IT systems are protected by anti-virus software,
security anomaly detection and firewalls that are
frequently updated.
* Frequent staff awareness and training programmes.
* Security measures are regularly reviewed by the IT
department.
* The Group has been awarded the 'Cyber Essentials'
badge to demonstrate our commitment to cyber
security.
B. Cyber-attack on our buildings
The Group is subject to a cyber-attack that * Each building has incident management procedures
results in data breaches or significant which are regularly reviewed and tested.
disruption
to IT-enabled tenant services. Buildings are
becoming 'intelligent', with an increase in * Physical segregation between the building's core IT
internet infrastructure and tenants' corporate IT networks.
enabled devices broadening the cyber security
threat landscape.
The potential impact of a cyber-attack on our * Physical segregation of IT infrastructure between
buildings has reduced due to the winding down buildings across the portfolio.
of services and overall low occupancy caused by
Covid-19. Conversely, the potential risk of
this occurring has increased due to low * Inclusion of Building Managers in any cyber security
occupancy levels which could provide an awareness training and phishing simulations.
opportunity
for attack. During the lockdown, 24/7 security
was provided by outsourced providers.
C. Significant business interruption (for
example, pandemic, terrorism-related event or * The Group has comprehensive business continuity and
other incident management procedures both at Group level
business interruption) and for each of our managed buildings which are
(previously, 'Terrorism-related or other regularly reviewed and tested.
business interruption')
The risk that a pandemic, terrorism-related
event or other business interruption causes * Government health guidelines are maintained at all of
significant our construction sites.
business interruption to the Group and/or its
occupiers or supply chain. This could result
in issues such as inability to access or operate * Most of our employees are capable of working remotely
our properties, tenant failures or reduced and have the necessary IT resources.
rental income, share price volatility, loss of
key suppliers, etc.
Covid-19 has caused significant business * Fire protection and access/security procedures are in
interruption for some of our occupiers, place at all of our managed properties.
particularly
retail, travel, restaurants or other leisure
services. During 2020, there has been limited * Comprehensive property damage and business
business interruption for Derwent London; interruption insurance which includes terrorism.
however, the lockdown has caused a delay to our
development activities and reduction in cash
flow due to deferment, concessions or * At least annually, a fire risk assessment and health
non-payment and safety inspection are performed for each property
of rent. in our managed portfolio.
* Robust security at our buildings, including CCTV and
access controls.
7. Reputational damage
The Group's reputation is damaged, for example * Close involvement of senior management in day-to-day
through unauthorised and/or inaccurate media operations and established procedures for approving
coverage or failure to comply with relevant all external announcements.
legislation. We have invested significantly in
developing a well-regarded and respected brand.
Our strong culture, low overall risk tolerance * All new members of staff benefit from an induction
and established procedures and policies mitigate programme and are issued with our Group staff
against the risk of internal wrongdoing. handbook.
How the Group responds to, and manages, the
Covid-19 pandemic could either enhance or damage
our reputation. Feedback on how we have * The Group employs a Head of Investor and Corporate
responded, particularly in respect to our Communications and retains services of an external PR
occupiers, agency, both of whom maintain regular contact with
suppliers, employees and Community Fund, has external media sources.
generally been positive.
* A Group whistleblowing system for staff is maintained
to report wrongdoing anonymously.
* Social media channels are monitored.
* Ongoing engagement with local communities in areas
where the Group operates.
* Staff training and awareness programmes.
8. Our resilience to climate change
The Group fails to respond appropriately, and * The Board and Executive Committee receive regular
sufficiently, to climate change risks or fails updates and presentations on environmental and
to benefit from the potential opportunities. sustainability performance and management matters as
This could lead to damage to our reputation, well as progress against our pathway to becoming net
loss of income and/or property values and loss zero carbon by 2030.
of our licence to operate.
In July we published our Net Zero Carbon
Pathway, which sets out in more detail how we * The Sustainability Committee monitors our performance
will and management controls.
become a net zero carbon business by 2030.
* Strong team led by an experienced Head of
Sustainability.
* The Group monitors its ESG (environmental, social and
governance) reporting against various industry
benchmarks.
* Production of an annual Responsibility Report with
key data and performance points which are externally
assured.
* In 2017 we adopted independently verified
science-based carbon targets which have been approved
by the Science-Based Targets Initiative (SBTi).
9. Non-compliance with regulation
A. Non-compliance with health and safety
legislation * All our properties have the relevant health, safety
The Group's cost base is increased and and fire management procedures in place which are
management time is diverted through an incident reviewed annually.
or
breach of health and safety legislation leading
to reputational damage and/or loss of our * The Group has a qualified health and safety team
licence to operate. whose performance is monitored and managed by the
During 2020, the health and wellbeing of our Health and Safety Committee.
employees, occupiers and other stakeholders has
been a top priority. We have invested
additional resources into health and safety. * Health and safety statutory compliance within our
managed portfolio is managed and monitored using
QUOODA, a software compliance platform. This is
supported by annual property health checks.
* The Construction Health and Safety Manager, with the
support of external advisers, reviews health, safety
and welfare on each construction site on a monthly
basis.
* The Board and Executive Committee receive frequent
updates and presentations on key health and safety
matters.
B. Other regulatory non-compliance
The Group's cost base is increased and * The Board and Risk Committee receive regular reports
management time is diverted through a breach of prepared by the Group's legal advisers identifying
any upcoming legislative/regulatory changes. External
of the legislation that forms the regulatory advice is taken on any new legislation.
framework within which the Group operates. This
could lead to damage to our reputation and/or
loss of our licence to operate. * Staff training and awareness programmes.
During 2020, we followed the UK government's
regulations in respect of social distancing and
safe working practices. In accordance with * Group policies and procedures dealing with all key
disclosure requirements, we ensured our legislation are available on the Group's intranet.
stakeholders
and the wider investment market were kept
appraised of Derwent London's response to * A Group whistleblowing system for staff is maintained
Covid-19 to report wrongdoing anonymously.
and its impact on our business.
* Managing our properties to ensure they are compliant
with the Minimum Energy Efficiency Standards (MEES)
for Energy Performance Certificates (EPCs).
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 all 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.
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.
The impact of Covid-19 has given rise to higher estimated
probabilities of default for some of the Group's occupiers. As a
result, 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 top 83 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 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).
The Group monitors its interest rate exposure on at least a
quarterly basis. Sensitivity analysis performed to ascertain the
impact on profit or loss and net assets of a 50 basis point shift
in interest rates would result in an increase of GBP0.8m (2019:
GBP0.3m) or a decrease of GBP0.7m (2019: GBP0.3m).
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 31 December 2020, the proportion of fixed debt held
by the Group was within this range at 85% (2019: 93%). During both
2020 and 2019, 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, retained earnings and
non-controlling interest).
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
-- 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 2020, the Group's strategy, which was unchanged from
2019, was to maintain the NAV gearing below 80% in normal
circumstances. These two gearing ratios, as well as the net
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 GBP4.3bn (2019: GBP4.4bn) of uncharged
property as at 31 December 2020.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the group and company financial statements in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006. Additionally, the
Financial Conduct Authority's Disclosure Guidance and Transparency
Rules require the Directors to prepare the Group financial
statements in accordance with international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in the European Union.
Under company law, Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and company and of the
profit or loss of the group for that period. In preparing the
financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether, for the Group and Company, international
accounting standards in conformity with the requirements of the
Companies Act 2006 and, for the group, international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union have been followed,
subject to any material departures disclosed and explained in the
financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Company
will continue in business.
The Directors are also responsible for safeguarding the assets
of the Group and Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable
them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity
of the Company's website. 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
11 March 2021
GROUP INCOME STATEMENT
2020 2019
Note GBPm GBPm
Gross property and other income 5 268.6 230.3
----------------------------------------------------------- ---- -------- -------
Net property and other income(1) 5 183.0 182.6
Administrative expenses (37.8) (37.0)
Revaluation (deficit)/surplus 11 (196.1) 156.4
Profit on disposal 6 1.7 13.8
(Loss)/profit from operations (49.2) 315.8
Finance income 7 0.2 0.2
Finance costs 7 (30.3) (26.7)
Bond redemption premium 7 - (7.7)
Loan arrangement costs written off 7 (0.1) (0.1)
Movement in fair value of derivative financial instruments (1.9) (0.1)
Financial derivative termination costs 8 (1.7) (2.7)
Share of results of joint ventures 9 - 1.9
(Loss)/profit before tax (83.0) 280.6
Tax credit/(charge) 10 1.6 (2.5)
(Loss)/profit for the year (81.4) 278.1
Attributable to:
- Equity shareholders (77.6) 283.4
- Non-controlling interest (3.8) (5.3)
(81.4) 278.1
Basic (loss)/earnings per share 24 (69.34p) 253.82p
Diluted (loss)/earnings per share 24 (69.34p) 253.11p
(1) Net property and other income in 2020 includes
write-off/impairment of receivables of GBP10.1m and service charge
waiver of GBP4.1m. See note 3 for additional information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
2020 2019
Note GBPm GBPm
(Loss)/profit for the year (81.4) 278.1
Actuarial losses on defined benefit pension scheme (4.1) (0.6)
Deferred tax credit on pension 19 0.4 -
Revaluation surplus/(deficit) of owner-occupied property 11 0.4 (1.8)
Deferred tax (charge)/credit on revaluation 19 (0.2) 0.1
-------------------------------------------------------------- ---- ------ -----
Other comprehensive expense that will not
be reclassified to profit or loss (3.5) (2.3)
Total comprehensive (expense)/income relating to the year (84.9) 275.8
Attributable to:
- Equity shareholders (81.1) 281.1
- Non-controlling interest (3.8) (5.3)
(84.9) 275.8
GROUP BALANCE SHEET
2020 2019
Note GBPm GBPm
Non-current assets
Investment property 11 5,029.1 5,174.3
Property, plant and equipment 12 50.2 50.2
Investments 13 0.9 1.3
Pension scheme surplus - 0.5
Other receivables 14 146.4 134.4
5,226.6 5,360.7
Current assets
Trading property 11 12.9 40.7
Trade and other receivables 15 76.2 58.6
Cash and cash equivalents 21 50.7 54.5
139.8 153.8
Non-current assets held for sale 16 165.0 118.6
Total assets 5,531.4 5,633.1
Current liabilities
Trade and other payables 17 106.7 112.5
Corporation tax liability 0.5 0.3
Provisions 0.6 0.9
107.8 113.7
Non-current liabilities
Borrowings 18 1,033.2 976.6
Derivative financial instruments 18 5.6 3.7
Leasehold liabilities 18 66.6 59.5
Provisions 0.4 1.5
Pension scheme deficit 2.2 -
Deferred tax 19 0.5 1.2
1,108.5 1,042.5
Total liabilities 1,216.3 1,156.2
Total net assets 4,315.1 4,476.9
Equity
Share capital 5.6 5.6
Share premium 193.7 193.0
Other reserves 939.4 936.2
Retained earnings 3,124.5 3,286.4
Equity shareholders' funds 4,263.2 4,421.2
Non-controlling interest 51.9 55.7
Total equity 4,315.1 4,476.9
GROUP STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
----------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 5.6 193.0 936.2 3,286.4 4,421.2 55.7 4,476.9
Loss for the year - - - (77.6) (77.6) (3.8) (81.4)
Other comprehensive
income/(expense) - - 0.2 (3.7) (3.5) - (3.5)
Share-based payments - 0.7 3.0 1.6 5.3 - 5.3
Dividends paid - - - (82.2) (82.2) - (82.2)
At 31 December 2020 5.6 193.7 939.4 3,124.5 4,263.2 51.9 4,315.1
Attributable to equity shareholders
----------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 5.6 189.6 943.5 3,063.2 4,201.9 61.5 4,263.4
Profit/(loss) for the
year - - - 283.4 283.4 (5.3) 278.1
Other comprehensive
expense - - (1.7) (0.6) (2.3) - (2.3)
Share-based payments - 3.4 (0.8) 4.6 7.2 - 7.2
Bond redemption - - (12.3) 11.4 (0.9) - (0.9)
Bond issue - - 7.5 - 7.5 - 7.5
Dividends paid - - - (75.6) (75.6) (0.5) (76.1)
At 31 December 2019 5.6 193.0 936.2 3,286.4 4,421.2 55.7 4,476.9
GROUP CASH FLOW STATEMENT
2020 2019
Note GBPm GBPm
Operating activities
Rents received 161.9 171.0
Surrender premiums and other property income 2.7 0.5
Property expenses (19.1) (18.6)
Cash paid to and on behalf of employees (27.5) (24.4)
Other administrative expenses (8.0) (9.9)
Interest received 0.2 0.2
Interest paid 7 (25.4) (18.8)
Other finance costs 7 (2.9) (3.0)
Other income 3.5 3.6
Tax paid in respect of operating activities - (3.5)
Net cash from operating activities 85.4 97.1
Investing activities
Acquisition of properties (43.8) (31.6)
Capital expenditure on the property portfolio 7 (175.2) (204.0)
Reimbursement of capital expenditure 0.6 3.5
Disposal of investment properties 125.6 159.3
Disposal of trading properties 31.7 -
Investment in joint ventures - (0.6)
Receipts from joint ventures 0.4 30.3
Purchase of property, plant and equipment (0.4) (0.3)
Disposal of property, plant and equipment - 1.3
VAT paid (0.9) (2.2)
Net cash used in investing activities (62.0) (44.3)
Financing activities
Net proceeds of bond issue - 171.0
Repayment of revolving bank loan (6.5) -
Drawdown of new revolving bank loan 24.2 -
Net movement in revolving bank loans 38.0 (203.1)
Bond redemption - (150.0)
Bond redemption premium - (8.5)
Drawdown of private placement notes - 248.8
Financial derivative termination costs 8 (1.7) (2.7)
Net proceeds of share issues 0.6 3.5
Dividends paid to non-controlling interest holder - (0.5)
Dividends paid 20 (81.8) (75.1)
Net cash used in financing activities (27.2) (16.6)
(Decrease)/increase in cash and cash equivalents in the year (3.8) 36.2
Cash and cash equivalents at the beginning of the year 54.5 18.3
Cash and cash equivalents at the end of the year 21 50.7 54.5
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
The financial information does not constitute the Group's
statutory accounts for either the year ended 31 December 2020 or
the year ended 31 December 2019, but is derived from those
accounts. The Group's statutory accounts for 2019 have been
delivered to the Registrar of Companies and those for 2020 will be
delivered following the Company's Annual General Meeting. The
Auditor's reports on both the 2019 and 2020 accounts were
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 statements have been prepared in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006 ('IFRS') and the applicable
legal requirements of the Companies Act 2006. In addition to
complying with international accounting standards in conformity
with the requirements of the Companies Act 2006, the consolidated
financial statements also comply with international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union. The financial
statements have been prepared under the historical cost convention
as modified by the revaluation of investment properties, property,
plant and equipment, and financial assets and liabilities held at
fair value or amortised cost.
Going concern
The Board continues to adopt the going concern basis in
preparing these consolidated financial statements. In considering
this requirement, the Directors have taken into account the
following:
-- The Group's latest rolling forecast for the next two years,
in particular the cash flows, borrowings and undrawn
facilities.
-- 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 next 12
months.
-- 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 loan-to-value ratio of 18.4%, the interest
cover ratio of 446%, the GBP476m total of undrawn facilities and
cash and the fact that the average maturity of borrowings was 6.8
years at 31 December 2020. They have also considered the impact of
the Covid-19 pandemic and lockdown on the Group's business and
occupiers. There is a risk that income could decline further with
an increased risk of tenant defaults and drop in demand for office
and retail space due to the economic outlook. Based on our
forecasts, rental income would need to decline by 68% and property
values would need to fall by 67% before breaching our financial
covenants. In the scenarios tested, our net interest cover remained
above 385% and our loan-to-value ratio below 40%, both of which are
comfortably within our 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
consolidated 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 2019, 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 year
The following standards, amendments and interpretations endorsed
by the EU were effective for the first time for the Group's current
accounting period and had no material impact on the financial
statements.
References to Conceptual Framework in IFRSs (amended);
IAS 1 and IAS 8 (amended) - Definition of Material;
IFRS 3 (amended) - Definition of a Business;
IFRS 16 (amended) - Covid-19-Related Rent Concessions.
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.
IFRS 17 - Insurance Contracts;
IAS 1 (amended) - Classification of liabilities as current or
non-current;
IFRS 10 and IAS 28 (amended) - Sale or Contribution of Assets
between an investor and its Associate or Joint Venture;
IFRS 3 (amended) - Reference to the Conceptual Framework;
IAS 16 (amended) - Property, Plant and Equipment: Proceeds
before Intended Use.
3. Significant judgments, key assumptions and estimates
The preparation of financial statements in accordance with IFRS
requires the use of certain critical accounting estimates and
judgements. It also requires management to exercise judgement in
the process of applying the Group's accounting policies. Not all of
these accounting policies require management to make difficult,
subjective or complex judgements or estimates. Estimates and
judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results may differ from
those estimates. The following is intended to provide an
understanding of the policies that management consider critical
because of the level of complexity, judgement or estimation
involved in their application and their impact on these condensed
financial statements.
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. Against the backdrop of
the Covid-19 pandemic, the valuers have also considered the impact
of additional rent free periods granted on the valuation, as well
as the impact of occupiers from sectors deemed highest risk. For
example, deductions equal to the rent free granted have been made
to the valuations, being predominantly for retail units,
restaurants and fitness clubs. More information is provided in note
11.
Impairment testing of trade receivables and other financial
assets
Trade receivables and accrued rental income recognised in
advance of receipt are subject to impairment testing. This accrued
rental income arises due to the spreading of rent free and reduced
rent periods, capital contributions and contracted rent uplifts in
accordance with IFRS 16 Leases.
Impairment calculations have been carried out using the
forward-looking, simplified approach to the expected credit loss
model within IFRS 9. Covid-19 and the resulting economic and social
disruption have brought unforeseen challenges to London, the UK and
the wider global economy; it has impacted on our business and in
general our overall risk profile is elevated. Due to the
restrictions arising from the Covid-19 pandemic there is an
increased risk of certain tenants defaulting or failing,
particularly in respect to the leisure/retail/hospitality sectors.
The impact of Covid-19 has given rise to higher estimated
probabilities of default for some of our occupiers, so the
impairment provisions calculated as at 31 December 2020 are higher
than in previous periods (see note 15). In arriving at our
estimates, we have considered the tenants at higher risk,
particularly in the retail or hospitality sectors, those in
administration or CVA, the top 83 tenants by size and have also
considered the remaining balances classified by sector. The
impairment provisions are included within 'Other receivables
(non-current)' (see note 14) and 'Trade and other receivables' (see
note 15) as shown below:
Other
receivables Trade
(non-current) and other receivables Total
GBPm GBPm GBPm
Lease incentive receivables before impairment 137.3 18.9 156.2
Impairment of lease incentive receivables (4.6) (1.1) (5.7)
Write-off (0.4) (0.4) (0.8)
Net lease incentive included within accrued income 132.3 17.4 149.7
Trade receivables before impairment - 31.1 31.1
Impairment of trade receivables - (3.2) (3.2)
Service charge provision - (0.3) (0.3)
Bad debt provision released - 0.3 0.3
Write-off - (0.4) (0.4)
Net trade receivables - 27.5 27.5
Impairment (4.6) (4.3) (8.9)
Write-off (0.4) (0.8) (1.2)
Write-off/impairment of receivables (5.0) (5.1) (10.1)
The assessment considered the risk of tenant failures or
defaults using information on tenants' payment history, deposits
held, the latest known financial position together with forecast
information where available, ongoing dialogue with tenants as well
as other information such as the sector in which they operate.
Following this, tenants were classified as either low, medium or
high risk and the table below provides further information. The
impairment against the lease incentive receivable balance was
GBP5.7m and GBP3.7m against the trade receivables balance.
Lease incentive Lease incentive
receivables receivables
(non-current) (current) Total
GBPm GBPm GBPm
Balance before impairment
Low risk 101.8 10.4 112.2
Medium risk 27.5 6.0 33.5
High risk 7.6 2.1 9.7
136.9 18.5 155.4
Impairment
Low risk - - -
Medium risk (1.6) (0.3) (1.9)
High risk (3.0) (0.8) (3.8)
(4.6) (1.1) (5.7)
Net lease incentive included within accrued income 132.3 17.4 149.7
Trade
receivables
GBPm
Balance before impairment
Low risk 14.2
Medium risk 7.5
High risk 9.0
30.7
Impairment
Low risk -
Medium risk (0.3)
High risk (2.9)
(3.2)
Net trade receivables 27.5
All amounts included within trade receivables are current.
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. More information is provided in note 18.
Significant judgements
Compliance with the real estate investment trust (REIT) taxation
regime
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 in 2020 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.
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 is the
Executive Committee comprising the five executive Directors and
four senior managers) 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. 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 reportable segment in that its performance is monitored
individually.
The Group's property portfolio includes investment property,
owner-occupied property and trading property and comprised 98%
office buildings(1) by value at 31 December 2020 (2019: 97%). The
Directors consider that these individual properties have similar
economic characteristics and therefore have been aggregated into a
single reportable segment. The remaining 2% (2019: 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 regarding the areas contained in
the strategic report. The majority of the Group's properties are
located in London (West End central, West End borders/other and
City borders), with the remainder in Scotland (Provincial).
(1) Some office buildings have an ancillary element such as
retail or residential.
Gross property income
2020 2019
---------------------------------- --------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 104.3 0.1 104.4 87.3 0.1 87.4
West End borders/other 20.4 - 20.4 19.3 - 19.3
City borders 74.9 0.5 75.4 81.1 0.5 81.6
Provincial - 4.5 4.5 - 4.4 4.4
199.6 5.1 204.7 187.7 5.0 192.7
A reconciliation of gross property income to gross property and other income is given in note
5.
Property portfolio
2020 2019
------------------------------------- --------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 2,936.7 45.9 2,982.6 2,933.6 58.0 2,991.6
West End borders/other 447.9 - 447.9 434.8 - 434.8
City borders 1,738.2 8.0 1,746.2 1,860.2 7.7 1,867.9
Provincial - 75.9 75.9 - 84.6 84.6
5,122.8 129.8 5,252.6 5,228.6 150.3 5,378.9
Fair value
West End central 2,966.2 47.4 3,013.6 2,944.1 60.5 3,004.6
West End borders/other 475.4 - 475.4 464.2 - 464.2
City borders 1,781.7 8.1 1,789.8 1,912.8 7.7 1,920.5
Provincial - 76.7 76.7 - 85.9 85.9
5,223.3 132.2 5,355.5 5,321.1 154.1 5,475.2
A reconciliation between the fair value and carrying value of the portfolio is set out in
note 11.
5. Property and other income
2020 2019
GBPm GBPm
Gross rental income 202.9 191.7
Surrender premiums received 0.9 1.0
Other property income 0.9 -
Gross property income 204.7 192.7
Trading property sales proceeds(1) 32.3 -
Service charge income(1) 28.1 34.0
Other income(1) 3.5 3.6
Gross property and other income 268.6 230.3
Gross rental income 202.9 191.7
Write-off/impairment of receivables (10.1) -
Service charge waiver (4.1) -
--------------------------------------- ------ ------
Service charge income(1) 28.1 34.0
Service charge expenses (30.9) (36.1)
--------------------------------------- ------ ------
(2.8) (2.1)
Property costs (11.6) (11.6)
Net rental income 174.3 178.0
--------------------------------------- ------ ------
Trading property sales proceeds(1) 32.3 -
Trading property cost of sales (27.1) -
--------------------------------------- ------ ------
Profit on trading property disposals 5.2 -
Other property income 0.9 -
Other income(1) 3.5 3.6
Surrender premiums received 0.9 1.0
Write-down of trading property (1.8) -
Net property and other income 183.0 182.6
(1) In line with IFRS 15 Revenue from Contracts with Customers,
the Group recognised a total GBP63.9m (2019: GBP37.6m) of other
income, trading property sales proceeds and service charge income,
which relates to expenditure that is directly recoverable from
tenants, within gross property and other income.
Gross rental income includes GBP24.0m (2019: GBP27.3m) relating
to rents recognised in advance of cash receipts.
Other 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.
The write-off/impairment of receivables in the year ended 31
December 2020 of GBP10.1m includes GBP1.2m of receivable balances
written off, a GBP0.3m service charge provision and an impairment
charge of GBP8.6m, GBP2.9m of which relates to trade receivables
and GBP5.7m to lease incentive receivables. The impairment has been
carried out using the expected credit loss model within IFRS 9
Financial Instruments (see note 3 for additional information).
Included in this provision is a charge of GBP1.1m against trade
receivables relating to rental income for the 25 December 2020
quarter day. Most of this income is deferred and has not yet been
recognised in the income statement. A 10% increase/decrease to the
absolute probability rates of tenant default in the year would
result in a GBP4.4m increase and GBP3.3m decrease respectively, in
the Group's loss for the year. This sensitivity has been performed
on the medium to high risk tenants as the significant estimation
uncertainty is wholly related to these (see note 3).
In response to Covid-19, a 25% waiver of two quarters' service
charge was given to support occupiers across the whole portfolio at
a cost of GBP4.1m to the Group in the year to 31 December 2020.
6. Profit on disposal
2020 2019
GBPm GBPm
Investment property
Gross disposal proceeds 120.9 155.2
Costs of disposal (0.6) (1.9)
Net disposal proceeds 120.3 153.3
Carrying value (118.6) (136.8)
Adjustment for lease costs and rents recognised in advance - (3.3)
Profit on disposal of investment property 1.7 13.2
Artwork
Gross disposal proceeds - 1.2
Carrying value - (0.6)
Profit on disposal of artwork - 0.6
Profit on disposal 1.7 13.8
In February 2020, the Group completed the disposal of the long
leasehold interest in 40 Chancery Lane WC2 for GBP120.1m after
rental top-ups. In 2019, gross disposal proceeds included GBP150.7m
after rental top-ups from the disposal of Premier House SW1 and The
Buckley Building EC1.
7. Finance income and total finance costs
2020 2019
GBPm GBPm
Finance income
Bank interest receivable 0.2 -
Other - 0.2
Finance income 0.2 0.2
Finance costs
Bank loans 2.3 2.1
Non-utilisation fees 1.7 2.1
Unsecured convertible bonds 3.9 3.9
Secured bonds 11.4 11.4
Unsecured private placement notes 15.6 15.0
Secured loan 3.3 3.3
Amortisation of issue and arrangement costs 2.2 2.2
Amortisation of the fair value of the secured bonds (1.3) (1.2)
Obligations under headleases 0.9 0.7
Other 0.2 0.2
Gross interest costs 40.2 39.7
Less: interest capitalised (9.9) (13.0)
Finance costs 30.3 26.7
Loan arrangement costs written off 0.1 0.1
Bond redemption premium - 7.7
Total finance costs 30.4 34.5
Finance costs of GBP9.9m (2019: GBP13.0m) have been capitalised
on development projects, in accordance with IAS 23 Borrowing Costs,
using the Group's average cost of borrowings during each quarter.
Total finance costs paid to 31 December 2020 were GBP38.2m (2019:
GBP34.8m) of which GBP9.9m (2019: GBP13.0m) was included in capital
expenditure on the property portfolio in the Group cash flow
statement under investing activities.
8. Financial derivative termination costs
The Group incurred costs of GBP1.7m in the year to 31 December
2020 (2019: GBP2.7m) deferring or terminating interest rate
swaps.
9. Share of results of joint ventures
2020 2019
GBPm GBPm
Profit on disposal of investment property - 1.7
Other profit from operations after tax - 0.2
- 1.9
See note 13 for further details on the Group's joint
ventures.
10. Tax (credit)/charge
2020 2019
GBPm GBPm
Corporation tax
UK corporation tax and income tax in respect of results for the year 0.8 1.0
Other adjustments in respect of prior years' tax (0.6) 0.7
Corporation tax charge 0.2 1.7
Deferred tax
Origination and reversal of temporary differences (2.0) 0.8
Adjustment for changes in estimates 0.2 -
Deferred tax (credit)/charge (1.8) 0.8
Tax (credit)/charge (1.6) 2.5
In addition to the tax credit of GBP1.6m (2019: charge of
GBP2.5m) that passed through the Group income statement, a deferred
tax charge of GBP0.2m (2019: credit of GBP0.1m) was recognised in
the Group statement of comprehensive income relating to the
revaluation of the owner-occupied property at 25 Savile Row W1.
The effective rate of tax for 2020 is lower (2019: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2020 2019
GBPm GBPm
(Loss)/profit before tax (83.0) 280.6
------ ------
Expected tax (credit)/charge based on the standard rate of
corporation tax in the UK of 19.00% (2019: 19.00%)(1) (15.8) 53.3
Difference between tax and accounting profit on disposals 1.2 (2.6)
REIT exempt income (14.7) (11.2)
Revaluation deficit/(surplus) attributable to REIT properties 36.6 (29.2)
Expenses and fair value adjustments not allowable for tax purposes (1.3) (4.4)
Capital allowances (5.3) (5.5)
Other differences (1.7) 1.4
Tax (credit)/charge on current year's (loss)/profit (1.0) 1.8
Adjustments in respect of prior years' tax (0.6) 0.7
Tax (credit)/charge (1.6) 2.5
(1) Changes to the UK corporation tax rates were substantively
enacted as part of the Finance Bill 2015 (on 26 October 2015) and
include reducing the main rate to 19%. The reduction to 17% from 1
April 2020 enacted as part of the Finance Bill 2016 has been
cancelled as announced in the Budget on 11 March 2020, maintaining
the rate of corporation tax at 19%. 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
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
At 1 January 2020 4,121.2 1,053.1 5,174.3 45.3 118.6 40.7 5,378.9
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 43.5 - 43.5 - - - 43.5
Capital expenditure 64.1 87.8 151.9 (0.1) - 0.1 151.9
Interest capitalisation 4.6 5.1 9.7 - - 0.2 9.9
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Additions 112.2 92.9 205.1 (0.1) - 0.3 205.3
Disposals - - - - (118.6) (26.3) (144.9)
Transfers (161.2) - (161.2) - 161.2 - -
Revaluation (178.7) (17.4) (196.1) 0.4 - - (195.7)
Write-down of trading
property - - - - - (1.8) (1.8)
Transfer from prepayments
and accrued income - - - - 3.8 - 3.8
Movement in grossing up of
headlease liabilities - 7.0 7.0 - - - 7.0
At 31 December 2020 3,893.5 1,135.6 5,029.1 45.6 165.0 12.9 5,252.6
At 1 January 2019 4,034.1 994.1 5,028.2 47.0 36.3 5,111.5
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 21.0 11.0 32.0 - - - 32.0
Capital expenditure 110.7 76.8 187.5 0.1 - 3.6 191.2
Interest capitalisation 7.7 4.5 12.2 - - 0.8 13.0
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Additions 139.4 92.3 231.7 0.1 - 4.4 236.2
Disposals (137.1) 0.3 (136.8) - - - (136.8)
Transfers - (107.0) (107.0) - 107.0 - -
Revaluation 84.8 71.6 156.4 (1.8) - - 154.6
Transfer from prepayments
and accrued income - - - - 14.6 - 14.6
Movement in grossing up of
headlease liabilities - 1.8 1.8 - (3.0) - (1.2)
At 31 December 2019 4,121.2 1,053.1 5,174.3 45.3 118.6 40.7 5,378.9
Adjustments from fair value to carrying value
At 31 December 2020
Fair value 4,037.0 1,091.6 5,128.6 45.6 167.0 14.3 5,355.5
Selling costs relating to
assets
held for sale - - - - (2.0) - (2.0)
Revaluation of trading
property - - - - - (1.4) (1.4)
Lease incentives and costs
included in receivables (143.5) (22.5) (166.0) - - - (166.0)
Grossing up of headlease
liabilities - 66.5 66.5 - - - 66.5
Carrying value 3,893.5 1,135.6 5,029.1 45.6 165.0 12.9 5,252.6
At 31 December 2019
Fair value 4,257.7 1,010.2 5,267.9 45.3 119.0 43.0 5,475.2
Selling costs relating to
assets
held for sale - - - (0.4) - (0.4)
Revaluation of trading
property - - - - - (2.3) (2.3)
Lease incentives and costs
included in receivables (136.5) (16.6) (153.1) - - - (153.1)
Grossing up of headlease
liabilities - 59.5 59.5 - - - 59.5
Carrying value 4,121.2 1,053.1 5,174.3 45.3 118.6 40.7 5,378.9
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2020 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.
CBRE Limited valued properties at GBP5,324.5m (2019:
GBP5,443.0m) and other valuers at GBP31.0m (2019: GBP32.2m), giving
a combined value of GBP5,355.5m (2019: GBP5,475.2m). Of the
properties revalued by CBRE, GBP45.6m (2019: GBP45.3m) relating to
owner-occupied property was included within property, plant and
equipment and GBP14.3m (2019: GBP43.0m) was in relation to trading
property.
The total fees, including the fee for this assignment, earned by
CBRE (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.
The Group published its pathway to net zero carbon in July 2020
and has set 2030 as its target date to achieve this. GBP103.2m of
capital expenditure was incurred in 2020 on our major developments
at 80 Charlotte Street W1, Soho Place W1 and The Featherstone
Building EC1. As these have met the criteria to be eligible
qualifying projects under our Green Finance Framework, we have
utilised the green tranche of our GBP450m revolving credit
facility. In addition, the Group has invested in carbon credits to
support externally validated green projects to offset the embedded
carbon in our developments.
Following exchange of contracts in December 2020 for the sale of
its freehold interest in Johnson Building EC1, the Group
transferred GBP161.2m from investment property to assets held for
sale. This subsequently completed in January 2021. A revaluation
deficit of GBP9.5m relating to the asset held for sale is included
within the revaluation deficit of GBP196.1m.
Reconciliation of revaluation (deficit)/surplus
2020 2019
GBPm GBPm
Total revaluation (deficit)/surplus (178.5) 188.5
Less:
Lease incentives and costs (16.7) (32.2)
Assets held for sale selling costs (2.0) (0.4)
Trading property revaluation surplus (0.3) (1.3)
IFRS revaluation (deficit)/surplus (197.5) 154.6
------- ------
Reported in the:
Revaluation (deficit)/surplus (196.1) 156.4
Write-down of trading property (1.8) -
Group income statement (197.9) 156.4
Group statement of comprehensive income 0.4 (1.8)
(197.5) 154.6
Historical cost
2020 2019
GBPm GBPm
Investment property 3,149.2 3,009.7
Owner-occupied property 19.6 19.7
Assets held for sale 65.7 76.2
Trading property 22.6 48.6
Total property portfolio 3,257.1 3,154.2
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.
Against the increased economic uncertainty of the pandemic, a
sensitivity analysis has been performed to ascertain the impact of
a 25 basis point shift in true equivalent yield and a GBP2.50 per
sq ft 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 Provincial
central borders/other borders commercial land Total
---------------------- -------- ------------- ------- ---------- ---------- ------
True equivalent yield
+25bp (5.2%) (4.8%) (5.0%) (2.8%) (2.3%) (5.1%)
-25bp 5.7% 5.3% 5.5% 2.9% 2.4% 5.6%
---------------------- -------- ------------- ------- ---------- ---------- ------
ERV
+GBP2.50 psf 4.2% 5.1% 4.8% 17.9% - 4.7%
-GBP2.50 psf (4.2%) (5.1%) (4.8%) (17.9%) - (4.7%)
---------------------- -------- ------------- ------- ---------- ---------- ------
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2020 45.3 1.0 3.9 50.2
Additions (0.1) - 0.4 0.3
Depreciation - - (0.7) (0.7)
Revaluation 0.4 - - 0.4
At 31 December 2020 45.6 1.0 3.6 50.2
At 1 January 2019 47.0 1.6 4.5 53.1
Additions 0.1 - 0.2 0.3
Disposals - (0.6) (0.1) (0.7)
Depreciation - - (0.7) (0.7)
Revaluation (1.8) - - (1.8)
At 31 December 2019 45.3 1.0 3.9 50.2
Net book value
Cost or valuation 45.6 1.0 7.3 53.9
Accumulated depreciation - - (3.7) (3.7)
At 31 December 2020 45.6 1.0 3.6 50.2
Net book value
Cost or valuation 45.3 1.0 6.9 53.2
Accumulated depreciation - - (3.0) (3.0)
At 31 December 2019 45.3 1.0 3.9 50.2
The artwork is periodically valued by Bonhams on the basis of
fair value using their extensive market knowledge. The latest
valuation was carried out in May 2018 and, after allowing for the
artwork disposal in 2019, the Directors consider that there have
been no material valuation movements since that date. In accordance
with IFRS 13 Fair Value Measurement, the artwork is deemed to be
classified as Level 3.
The historical cost of the artwork in the Group at 31 December
2020 was GBP1.0m (2019: GBP1.0m). See note 11 for the historical
cost of owner-occupied property.
13. Investments
Although the respective property interests have now been
disposed of, the Group has a continuing 50% interest in three joint
venture vehicles, Dorrington Derwent Holdings Limited, Primister
Limited and Prescot Street Limited Partnership.
2020 2019
GBPm GBPm
At 1 January 1.3 29.1
Share of results of joint ventures (see note 9) - 1.9
Additions - 0.6
Repayment of shareholder loan - (21.3)
Distributions received (0.4) (9.0)
At 31 December 0.9 1.3
14. Other receivables (non-current)
2020 2019
GBPm GBPm
Prepayments and accrued income 146.4 134.4
Prepayments and accrued income include GBP132.3m (2019:
GBP119.7m) after impairments (see note 3) 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, GBP14.1m (2019: GBP14.7m) relates to the spreading effect
of the initial direct costs of letting over the same term. Together
with GBP19.6m (2019: GBP18.7m), which was included as accrued
income within trade and other receivables (see note 15), these
amounts totalled GBP166.0m at 31 December 2020 (2019:
GBP153.1m).
The total movement in tenant lease incentives is shown
below:
2020 2019
GBPm GBPm
At 1 January 135.9 123.5
Amounts taken to income statement 23.0 27.3
Capital incentives granted 0.5 1.8
Lease incentive impairment (5.7) -
Adjustment for non-current asset held for sale (3.2) (13.9)
Disposal of investment properties - (2.8)
Write off to bad debt (0.8) -
149.7 135.9
Amounts included in trade and other receivables (see note 15) (17.4) -
At 31 December 132.3 135.9
15. Trade and other receivables
2020 2019
GBPm GBPm
Trade receivables 27.5 7.9
Other receivables 4.1 4.4
Prepayments 22.6 20.6
Accrued income 22.0 25.7
76.2 58.6
Trade receivables are split as follows:
2020 2019
GBPm GBPm
less than three months due 17.4 7.8
between three and six months due 3.5 0.1
between six and twelve months due 6.6 -
27.5 7.9
Trade receivables at 31 December 2020 increased due to a delay
in tenant rent payments resulting from the impact of Covid-19. As a
result, the expected credit loss assessment under IFRS 9 (see note
3) resulted in a higher impairment provision.
The Group has GBP9.3m of provision for bad debts as shown below.
GBP3.6m are included in trade receivables, GBP1.1m in accrued
income and GBP4.6m in prepayments and accrued income within other
receivables (non-current) (note 14).
Provision for bad debts
2020 2019
GBPm GBPm
At 1 January 0.4 0.3
Lease incentive provision 5.7 -
Trade receivables provision 3.2 0.1
Service charge provision 0.3 -
Released (0.3) -
At 31 December 9.3 0.4
The provision for bad debts are split as follows:
2020 2019
GBPm GBPm
less than three months due 3.2 0.4
between three and six months due 0.5 -
between six and twelve months due 1.0 -
greater than twelve months due 4.6 -
9.3 0.4
16. Non-current assets held for sale
2020 2019
GBPm GBPm
Transferred from investment properties (see note 11) 161.2 107.0
Transferred from prepayments and accrued income 3.8 14.6
Movement in grossing up of headlease liabilities - (3.0)
165.0 118.6
In December 2020, the Group exchanged contracts for the sale of
its freehold interest in Johnson Building EC1. The property was
valued at GBP167.0m at 31 December 2020. In accordance with IFRS 5
Non-current Assets Held for Sale, this property was recognised as a
non-current asset held for sale and, after deducting selling costs
of GBP2.0m, the carrying value was GBP165.0m (see note 11).
17. Trade and other payables
2020 2019
GBPm GBPm
Trade payables 2.5 7.2
Other payables 21.2 19.8
Other taxes 4.0 2.1
Accruals 32.0 38.6
Deferred income 47.0 44.8
106.7 112.5
Deferred income primarily relates to rents received in
advance.
18. Net debt and derivative financial instruments
2020 2019
---------------- ---------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Non-current liabilities
1.5% unsecured convertible bonds 2025 166.4 174.2 164.5 183.9
6.5% secured bonds 2026 183.6 220.3 184.8 222.8
Unsecured private placement notes 2026 - 2034 452.9 526.4 452.4 493.7
3.99% secured loan 2024 82.3 89.1 82.1 87.8
Unsecured bank loans 120.1 125.0 65.0 68.5
Secured bank loans 27.9 28.0 27.8 28.0
Borrowings 1,033.2 1,163.0 976.6 1,084.7
Derivative financial instruments expiring in
greater than one year 5.6 5.6 3.7 3.7
Total borrowings and derivative financial instruments 1,038.8 1,168.6 980.3 1,088.4
Reconciliation to net debt:
Borrowings and derivative financial instruments 1,038.8 980.3
Adjustments for:
Leasehold liabilities 66.6 59.5
Derivative financial instruments (5.6) (3.7)
Cash and cash equivalents (50.7) (54.5)
Net debt 1,049.1 981.6
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 value of the Group's bank loans is approximately the
same as their carrying amount, after adjusting for the unamortised
arrangement fees, and also represents Level 2 fair value
measurement.
The fair value 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 2020 or 2019.
At 31 December 2020, the Group's secured bank loan and the 3.99%
secured loan 2024 were secured by a fixed charge over GBP105.2m (31
December 2019: GBP105.7m) and GBP304.5m (31 December 2019:
GBP311.6m), respectively, 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
GBP616.5m (31 December 2019: GBP634.5m) of the Group's
properties.
The Group continue to maintain significant headroom on all
financial covenants.
19. Deferred tax
Revaluation
deficit/(surplus) Other Total
GBPm GBPm GBPm
At 1 January 2020 3.3 (2.1) 1.2
Credited to the income statement (0.3) (1.7) (2.0)
Change in tax rates in the income statement 0.3 (0.1) 0.2
Charged/(credited) to other comprehensive income 0.1 (0.4) (0.3)
Charged to equity - 1.3 1.3
Change in tax rates in other comprehensive income 0.1 - 0.1
At 31 December 2020 3.5 (3.0) 0.5
At 1 January 2019 3.6 (1.8) 1.8
(Credited)/charged to the income statement (0.2) 1.0 0.8
Credited to other comprehensive income (0.1) - (0.1)
Credited to equity - (1.3) (1.3)
At 31 December 2019 3.3 (2.1) 1.2
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.
In 2019, GBP1.3m was credited to equity relating to equity
settled share-based payments and represented the amount by which
the total expected tax deduction exceeded the cumulative IFRS 2
expense. In 2020, the GBP1.3m charge reverses this to a nil
balance.
20. Dividend
Dividend per share
----------------------
Payment PID Non-PID Total 2020 2019
date p p p GBPm GBPm
Current year
2020 final dividend(1) 4 June 2021 35.00 17.45 52.45 - -
2020 interim dividend 16 October 2020 22.00 - 22.00 24.6 -
------ ------- -----
57.00 17.45 74.45
Prior year
2019 final dividend 5 June 2020 34.45 17.00 51.45 57.6 -
2019 interim dividend 18 October 2019 21.00 - 21.00 - 23.4
------ ------- -----
55.45 17.00 72.45
2018 final dividend 7 June 2019 30.00 16.75 46.75 - 52.2
Dividends as reported in the
Group statement of changes in equity 82.2 75.6
----- -----
2020 interim dividend withholding tax 14 January 2021 (3.2) -
2019 interim dividend withholding tax 14 January 2020 2.8 (2.8)
2018 interim dividend withholding tax 14 January 2019 - 2.3
----- -----
Dividends paid as reported in the
Group cash flow statement 81.8 75.1
----- -----
(1) Subject to shareholder approval at the AGM on 14 May 2021
.
21. Cash and cash equivalents
2020 2019
GBPm GBPm
Cash at bank 50.7 54.5
22. Post balance sheet events
In January 2021, the Group completed the disposal of its
freehold interest in Johnson Building EC1 for GBP167.6m.
23. Related parties
There have been no related party transactions for the year ended
31 December 2020 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.
24. EPRA performance measures (unaudited)
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
-------------------- ---------------------------
2020 2019 2020 2019
'000 '000 '000 '000
For use in basic measures 111,912 111,652 111,961 111,773
Dilutive effect of share-based payments 350 315 341 400
For use in diluted measures 112,262 111,967 112,302 112,173
The GBP175m unsecured convertible bonds 2025 ('2025 bonds') have
an initial conversion price set at GBP44.96. The GBP150m unsecured
convertible bonds 2019 ('2019 bonds') were repurchased in 2019.
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 the year ended 31 December 2019 and 2020, the Group
did not recognise the dilutive impact of the conversion of the 2019
bonds or 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 year, the bonds were not expected to convert.
The following tables set out reconciliations between the IFRS
and EPRA earnings for the year 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 and
non-controlling interest.
B - Revaluation movement on investment property and in joint
ventures, write-down of trading property and associated deferred
tax and non-controlling interest.
C - Fair value movement and termination costs relating to
derivative financial instruments, associated non-controlling
interest, the fair value part of the bond redemption premium and
loan arrangement costs written off.
The Group has adopted the new set of EPRA NAV metrics effective
for the period beginning 1 January 2020. A reconciliation between
the new and the previous metrics for both the current and
comparative accounting periods is presented below.
Earnings and earnings per share
Adjustments EPRA
---------------------
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year ended 31 December 2020
Net property and other income 183.0 (5.2) 1.8 - 179.6
Total administrative expenses (37.8) - - - (37.8)
Revaluation deficit (196.1) - 196.1 - -
Profit on disposal of investments 1.7 (1.7) - - -
Net finance costs (30.2) - - 0.1 (30.1)
Movement in fair value of derivative financial instruments (1.9) - - 1.9 -
Financial derivative termination costs (1.7) - - 1.7 -
(Loss)/profit before tax (83.0) (6.9) 197.9 3.7 111.7
Tax credit 1.6 (1.0) - - 0.6
(Loss)/profit for the year (81.4) (7.9) 197.9 3.7 112.3
Non-controlling interest 3.8 - (5.1) - (1.3)
Earnings attributable to equity shareholders (77.6) (7.9) 192.8 3.7 111.0
(Loss)/earnings per share (69.34p) 99.19p
Diluted (loss)/earnings per share (69.34p) 98.88p
The diluted loss per share for the period to 31 December 2020 have been restricted to a loss
of 69.34p per share, as the loss per share cannot be reduced by dilution in accordance with
IAS 33, Earnings per Share.
Adjustments EPRA
---------------------
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year ended 31 December 2019
Net property and other income 182.6 - - - 182.6
Total administrative expenses (37.0) - - - (37.0)
Revaluation surplus 156.4 - (156.4) - -
Profit on disposal of investments 13.8 (13.8) - - -
Net finance costs (34.3) - - 7.8 (26.5)
Movement in fair value of derivative financial instruments (0.1) - - 0.1 -
Financial derivative termination costs (2.7) - - 2.7 -
Share of results of joint ventures 1.9 (1.7) - - 0.2
Profit before tax 280.6 (15.5) (156.4) 10.6 119.3
Tax charge (2.5) 0.7 (0.2) - (2.0)
Profit for the year 278.1 (14.8) (156.6) 10.6 117.3
Non-controlling interest 5.3 - (7.5) - (2.2)
Earnings attributable to equity shareholders 283.4 (14.8) (164.1) 10.6 115.1
Earnings per share 253.82p 103.09p
Diluted earnings per share 253.11p 102.80p
EPRA Net Asset Value metrics
2020 2019
GBPm GBPm
Net assets attributable to equity shareholders 4,263.2 4,421.2
Adjustment for:
Revaluation of trading properties 1.4 2.3
Deferred tax on revaluation surplus(1) 1.8 1.6
Fair value of derivative financial instruments 5.6 3.7
Fair value adjustment to secured bonds 9.3 10.6
Non-controlling interest in respect of the above(1) (0.4) (0.4)
EPRA Net Tangible Assets 4,280.9 4,439.0
Per share measure - diluted 3,812p 3,957p
------- -------
Net assets attributable to equity shareholders 4,263.2 4,421.2
Adjustment for:
Revaluation of trading properties 1.4 2.3
Fair value adjustment to secured bonds 9.3 10.6
Mark-to-market of fixed rate debt (127.8) (107.2)
Unamortised issue and arrangement costs (11.3) (11.5)
EPRA Net Disposal Value 4,134.8 4,315.4
Per share measure - diluted 3,682p 3,847p
------- -------
Net assets attributable to equity shareholders 4,263.2 4,421.2
Adjustment for:
Revaluation of trading properties 1.4 2.3
Deferred tax on revaluation surplus 3.5 3.3
Fair value of derivative financial instruments 5.6 3.7
Fair value adjustment to secured bonds 9.3 10.6
Non-controlling interest in respect of the above (0.7) (0.8)
Purchasers' costs(2) 364.2 372.3
EPRA Net Reinstatement Value 4,646.5 4,812.6
Per share measure - diluted 4,138p 4,290p
------- -------
(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.
Reconciliation of new EPRA Net Asset Value metrics to previous metrics
2020 2019
GBPm GBPm
EPRA Net Tangible Assets 4,280.9 4,439.0
Adjustment for:
Deferred tax on revaluation surplus 1.8 1.7
Non-controlling interest in respect of the above (0.4) (0.4)
EPRA Net Asset Value 4,282.3 4,440.3
Per share measure - diluted 3,813p 3,958p
EPRA Net Reinstatement Value 4,646.5 4,812.6
Adjustment for:
Purchasers' costs (364.2) (372.3)
EPRA Net Asset Value 4,282.3 4,440.3
Per share measure - diluted 3,813p 3,958p
As the Group's EPRA Net Disposal Value is the same as the EPRA Triple Net Asset Value, there
are no reconciling items.
EPRA Net Disposal Value 4,134.8 4,315.4
Per share measure - diluted 3,682p 3,847p
Cost ratios
2020 2019
GBPm GBPm
Administrative expenses 37.8 37.0
Write-off/impairment of receivables (A) 10.1 -
Service charge waiver (A) 4.1 -
Other property costs 10.5 10.1
Net service charge costs 2.8 2.1
Service charge costs recovered through rents but not separately invoiced (0.4) (0.5)
Management fees received less estimated profit element (3.5) (3.6)
Share of joint ventures' expenses - 0.3
EPRA costs (including direct vacancy costs) (B) 61.4 45.4
Direct vacancy costs (9.0) (2.6)
EPRA costs (excluding direct vacancy costs) (C) 52.4 42.8
Gross rental income 202.9 191.7
Ground rent (1.1) (1.5)
Service charge components of rental income (0.4) (0.5)
Share of joint ventures' rental income less ground rent - 0.5
Adjusted gross rental income (D) 201.4 190.2
EPRA cost ratio (including direct vacancy costs) (B/D) 30.5% 23.9%
EPRA cost ratio (excluding direct vacancy costs) (C/D) 26.0% 22.5%
Adjusted EPRA Cost Ratios(1)
Adjusted EPRA Cost Ratio (including direct vacancy costs
and excluding write-off/impairment of receivables) ((B-A)/D) 23.4% 23.9%
Adjusted EPRA Cost Ratio (excluding direct vacancy costs
and excluding write-off/impairment of receivables) ((C-A)/D) 19.0% 22.5%
In addition to the two 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 (E) 5,355.5 5,475.2
Portfolio cost ratio (B/E) 1.1% 0.8%
(1) In addition to the standard EPRA Cost Ratios (both including
and excluding direct vacancy costs), adjusted versions of these
ratios have also been presented which remove the impact of the
write-off/impairment of receivables and service charge waiver.
The Group has not capitalised any overheads in either 2020 or
2019.
Property-related capital expenditure
2020 2019
GBPm GBPm
Acquisitions 43.5 32.0
Development 134.1 167.9
Investment properties
Incremental lettable space - 1.1
No incremental lettable space 16.3 16.0
No incremental lettable space - joint ventures - 0.1
Tenant incentives 1.5 6.1
Capitalised interest 9.9 13.0
Total capital expenditure 205.3 236.2
Conversion from accrual to cash basis 13.1 (4.1)
Total capital expenditure on a cash basis 218.4 232.1
----- -----
25. Gearing and interest cover
NAV gearing
2020 2019
GBPm GBPm
Net debt 1,049.1 981.6
Net assets 4,315.1 4,476.9
NAV gearing 24.3% 21.9%
Loan-to-value ratio
2020 2019
GBPm GBPm
Net debt 1,049.1 981.6
Fair value adjustment of secured bonds (9.3) (10.6)
Unamortised issue and arrangement costs 11.3 11.5
Leasehold liabilities (66.6) (59.5)
Drawn debt net of cash 984.5 923.0
Fair value of property portfolio 5,355.5 5,475.2
Loan-to-value ratio 18.4% 16.9%
Net interest cover ratio
2020 2019
GBPm GBPm
Net property and other income 183.0 182.6
Adjustments for:
Other income (3.5) (3.6)
Other property income (0.9) -
Surrender premiums received (0.9) (1.0)
Write-down of trading property 1.8 -
Profit on disposal of trading properties (5.2) -
Adjusted net property income 174.3 178.0
Finance income (0.2) (0.2)
Finance costs 30.3 26.7
Adjustments for:
Finance income 0.2 0.2
Other finance costs (0.2) (0.2)
Amortisation of fair value adjustment to secured bonds 1.3 1.2
Amortisation of issue and arrangement costs (2.2) (2.2)
Finance costs capitalised 9.9 13.0
Net interest payable 39.1 38.5
Net interest cover ratio 446% 462%
26. Total return
2020 2019
p p
EPRA Net Tangible Assets on a diluted basis
At end of year 3,812 3,957
At start of year (3,957) (3,775)
(Decrease)/increase (145) 182
Dividend per share 73 68
(Decrease)/increase including dividend (72) 250
Total return (1.8%) 6.6%
27. List of definitions
Better Buildings Partnership (BBP)
The BBP is a collaboration of the UK's leading commercial
property owners who are working together to improve the
sustainability of existing commercial building stock.
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.
Carbon emissions Scopes 1, 2 and 3
Scope 1 - direct emissions;
Scope 2 - indirect emissions; and
Scope 3 - other indirect emissions.
CDP
The CDP is an organisation which works with shareholders and
listed companies to facilitate the disclosure and reporting of
climate change data and information.
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.
Department for Environment, Food and Rural Affairs (DEFRA)
The government department responsible for environmental
protection, food production and standards, agriculture, fisheries
and rural communities in the United Kingdom.
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 year attributable
to equity shareholders and are divided by the weighted average
number of ordinary shares in issue during the financial year 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 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
Represent 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 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.
In addition, the Group has adopted the following recommendation
for investment property reporting.
- EPRA like-for-like rental income growth
The growth in rental income on properties owned throughout the
current and previous year under review. This growth rate includes
revenue recognition and lease accounting adjustments but excludes
properties held for development in either year and properties
acquired or disposed of in either year.
Previous EPRA NAV metrics
- EPRA Net Asset Value per share
NAV adjusted to include trading properties and other investment
interests at fair value and to exclude certain items not expected
to crystallise in a long-term investment property business
model.
- EPRA Triple Net Asset Value per share
EPRA NAV adjusted to include the fair values of (i) financial
instruments, (ii) debt and (iii) deferred taxes on revaluations,
where applicable.
Fair value adjustment
An accounting adjustment to change the book value of an asset or
liability to its market value.
Global 100 most sustainable companies
The Global 100 Index is a ranking of the world's most
sustainable corporations. The list is compiled by Toronto-based
media and investment advisory firm Corporate Knights. Each year,
the latest iteration of the index is announced at the World
Economic Forum in Davos, Switzerland.
Global Real Estate Sustainability Benchmark (GRESB)
The Global Real Estate Sustainability Benchmark is an initiative
set up to assess the environmental and social performance of public
and private real estate investments and allow investors to
understand their performance.
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.
Leadership in Energy and Environmental Design (LEED)
LEED is a US based environmental impact assessment method for
buildings. Performance is measured across a series of ratings -
Certified, Silver, Gold and Platinum.
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 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 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 (PID). 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).
Renewable Energy Guarantees of Origin (REGO)
The REGO scheme administered by Ofgem provides transparency to
consumers about the proportion of electricity that suppliers
source/provide from renewable generation.
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.
Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations (RIDDORs)
The regulations place a legal duty on employers to report
work-related deaths, major injuries or over-three-day injuries,
work related diseases and dangerous occurrences (near miss
accidents) to the Health and Safety Executive.
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.
Streamlined energy and carbon reporting (SECR)
The SECR regulations were introduced in April 2019 and require
companies incorporated in the UK to undertake enhanced disclosures
of their energy and carbon emissions in their financial
reporting.
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 year plus
the dividend per share paid during the year 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 year,
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 year (i.e.
excluding any acquisitions or disposals made during the year).
Underlying valuation increase
The valuation increase on the underlying portfolio.
Well to tank (WTT)
The emissions associated 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 to which the net initial yield will rise
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.
Notes to editors
Derwent London plc
Derwent London plc owns 83 buildings in a commercial real estate
portfolio predominantly in central London valued at GBP5.4 billion
(including joint ventures) as at 31 December 2020, making it the
largest London-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 only a few property
companies worldwide to have science-based carbon targets validated
by the Science Based Targets initiative (SBTi).
Landmark schemes in our 5.6 million sq ft portfolio include 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 2021, Derwent London came top of the Property Sector
and 10th position overall in Management Today's Britain's Most
Admired Companies awards 2020. In the year the Group has won
several awards for Brunel Building with the most prominent being
the BCO Best Commercial Workplace award. In 2019 the Group won EG
Offices Company of the Year, the CoStar West End Deal of the Year
for Brunel Building and Westminster Business Council's Best
Achievement in Sustainability award. In 2013 the Company launched a
voluntary Community Fund and has to date supported well over 100
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.
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END
FR DKKBNKBKBBND
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March 11, 2021 02:00 ET (07:00 GMT)
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