TIDMDLN
RNS Number : 6863C
Derwent London PLC
24 February 2022
24 February 2022
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEARED 31 DECEMBER 2021
IMPROVING CONFIDENCE, ADDING TO THE PIPELINE
Financial highlights
-- Total return of 5.8%, from -1.8% in 2020
-- EPRA net tangible assets(1) 3,959p per share, up 3.9% from 3,812p in December 2020
-- Net rental income of GBP178.2m, up 2.2% from GBP174.3m
-- EPRA earnings of GBP122.0m, or 108.8p per share, up 9.7% from 99.2p in 2020
-- IFRS profit before tax of GBP252.5m from a loss of GBP83.0m in 2020
-- Full year dividend of 76.50p per share from 74.45p, up 2.8%
-- GBP350m 10-year 1.875% green bond issued in November with strong investor demand
-- Interest cover 464%, loan-to-value ratio of 20.8%
-- Undrawn facilities and cash of GBP608m, up from GBP476m in December 2020
Portfolio highlights
-- Total property return of 6.3%, compared to our benchmark index(2) of 5.9%
-- Portfolio valued at GBP5.7bn, an underlying rise of 3.5% with
development valuations up 9.2%
-- True equivalent yield of 4.50%, tightening by 24bp
-- 0.2% increase in office ERVs
-- Significant portfolio reshaping activity
-- GBP417.5m of property acquisitions
-- GBP405.1m of property disposals GBP9.7m above December 2020 book value
-- 708,000 sq ft under construction - two major schemes
completing in H1 2022 and 19-35 Baker Street W1 commenced in H2
2021
-- GBP13.7m of new lettings at +3.6% above December 2020 ERV
-- GBP31.9m of asset management transactions in line with December 2020 ERV
-- EPRA vacancy rate fell to 1.6% from 1.8% in December 2020
Sustainability
-- Portfolio 99% compliant with 2023 EPC legislation and 61% 2030 compliant including projects
-- Detailed EPC upgrade costings received
Outlook
-- Our guidance is for 2022 average ERVs on our portfolio to move by 0% to +3%
-- Average investment yields on our portfolio expected to remain firm
(1) Explanations of how EPRA figures are derived from IFRS are
shown in note 25
(2) MSCI Central London Offices Quarterly Index
Paul Williams, Chief Executive, commented:
"London is a vibrant and global city that attracts world class
talent. We are increasingly hearing from businesses across
different sectors demanding modern, adaptable and environmentally
responsible space. Our collaborative approach and our distinctively
design-led product are well placed in this flight to quality and
give us confidence to push ahead with our pipeline."
Webcast and conference call
There will be a live webcast together with a conference call for
investors and analysts at 09.30 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
Robert Duncan, Head of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Nina Coad
Emily Trapnell
CHAIRMAN'S STATEMENT
Derwent London is an entrepreneurial business, with an open,
collaborative and inclusive approach.
With confidence in the medium term outlook, despite some
near-term uncertainty, the Group proceeded with portfolio reshaping
and restocking the pipeline. We also progressed on-site and future
schemes while maintaining a focus on income. Our financial results
demonstrate the progress we have made.
Net property and other income increased to GBP187.5m for the
year ended 31 December 2021 from GBP183.0m in 2020. This was helped
by impairment charges and write-offs against tenant receivables of
only GBP0.8m against GBP14.2m in 2020. Gross rental income fell
4.3% to GBP194.2m as we took lease surrenders for new schemes and
disposed of several higher yielding low growth properties. EPRA
earnings per share increased 9.7% to 108.8p from 99.2p in 2020 and
the IFRS profit before tax was GBP252.5m, more than reversing the
GBP83.0m loss reported in 2020.
Capital values across our GBP5.7bn portfolio rose by an
underlying 3.5% with the main drivers being development surpluses
and downward valuation yield shift. This has taken total net assets
to GBP4.4bn with an increase in EPRA net tangible assets (NTA) of
3.9% to 3,959p per share from 3,812p in December 2020.
Recognising its importance to our shareholders, we propose
raising the final dividend by 1.05p to 53.5p, in line with our
progressive and well covered dividend policy. It will be paid on 1
June 2022 to shareholders on the register of members at 29 April
2022. This takes the full year's dividend to 76.5p, an increase of
2.8% over the prior year.
We have a strong team and a portfolio including many high
quality buildings which we believe meet the ever more demanding
requirements of occupiers. We have a pipeline of schemes that will
deliver modern, adaptable and sustainable space. All of this is
supported by a lowly geared balance sheet with substantial capacity
to finance growth.
The Group has a long and consistent track record of value
creation and effective capital allocation through property cycles.
We also have considerable experience in acquiring the right assets
in locations with supportive fundamentals. The Group is known for
targeting emerging sub-markets gaining early mover advantage,
delivering prime space in a supply-constrained market.
The schemes created by the Group over the long term show a clear
determination to ensure each is an improvement on the last and to
future-proof buildings as far as possible. This may come through
the design, the technology or the green credentials. Our investment
approach is supported by our in-house property management and asset
management teams who focus on creating and strengthening close
occupier relationships. Sustainability has been a core element of
our activity for many years, incorporated across all elements of
the business from our buildings to our finances.
We have close relationships with asset owners, occupiers and
local communities. Our track record and long-term collaborative
approach has helped us uncover new off-market opportunities such as
the recent transactions with Lazari Investments and 230 Blackfriars
Road SE1. We have also been selected as preferred bidder for The
Moorfields Estate EC1.
The 2021 employee survey again demonstrated a high level of
engagement and widespread job satisfaction and, as we come back
together after the lockdowns of the last two years, our common
focus and culture have been preserved and strengthened.
I wish to thank all the staff at Derwent London for their
continuing hard work through 2021. I would also like to
congratulate Emily Prideaux on her appointment as an Executive
Director in March 2021, and Sanjeev Sharma who joined the Board as
Non-Executive Director in October. Simon Fraser retired as
Non-Executive Director in October and the Board thanks him for his
substantial contribution over nine years. He was replaced as Senior
Independent Director by Helen Gordon. In addition, I would like to
say thank you on behalf of the Board to David Silverman who has
played an integral role in our investment acquisitions and
disposals and will be stepping down as an Executive Director and
leaving the Group in April 2022.
The board is confident that Derwent London has the right
strategy and business model to meet evolving occupier and wider
stakeholder requirements and to continue to deliver above average
long-term returns for shareholders.
Mark Breuer
Chairman
CEO STATEMENT
The past year was an important one for Derwent London and was
our busiest period for portfolio activity for many years.
There was a significant recovery in net asset values, valuations
and profitability in 2021. The improvement in occupational and
investment markets, backed by rental collection returning to close
to pre-pandemic levels, has given us the confidence to progress
acquisitions and development plans. Projects include commencement
of 19-35 Baker Street W1 and design finalisation following
resolution to grant planning consent at Network Building W1. In
addition, we are progressing plans for Bush House WC2 plus other
smaller projects including Environmental Performance Certificate
(EPC) upgrades.
Investment activity has been focused on restocking our
development pipeline with future 'super-sites'. These are
substantial regeneration schemes where we see potential to at least
double the floor area. We have favoured locations benefitting from
the twin drivers of strong forecast demand and low availability of
high quality space. Based on early appraisals, these have potential
for attractive development returns. Several should also appeal to
the Life Sciences sector, a market where we have undertaken
considerable research. We have sold GBP405.1m of buildings, for
GBP9.7m above book value, where we expected to see lower
returns.
We secured GBP13.7m of new lettings in 2021 at an average +3.6%
above December 2020 ERV, with a further GBP31.9m of asset
management activity in line with ERV. There was a distinct shift of
emphasis among our occupiers to taking a more strategic and
longer-term approach to their occupational needs.
Return to the office and changing working patterns
Our buildings are getting busier. Hybrid working is here to
stay, but our occupiers are planning for peak occupancy as daily
utilisation varies through the week. Tenants are increasingly
demanding of their space, requiring it to fulfil multiple
functions. Offices need to be design-led and amenity-rich, and able
to adapt to a more agile workforce. We believe our approach of
delivering 'long-life, loose-fit, low carbon' space with enhanced
amenity, 'Intelligent Building' infrastructure, and employee
wellbeing at its core will exceed these evolving requirements, as
we are seeing in DL/78 in W1.
London is a vibrant global city, with world class restaurants,
theatres and culture, whose resilience has been underscored by the
speed with which activity has returned. We look forward to the
opening of the Elizabeth line and capacity returning to the wider
transport network.
Sustainability and net zero carbon
In 2021 the Group made good progress towards its net zero carbon
ambitions following publication of our pathway in 2020. In the
short term, our portfolio emissions will likely increase as office
occupation levels continue to rise, but we remain well within our
science-based targets.
Our portfolio is 99% compliant with 2023 EPC legislation (EPC
'E' or better). Including projects, 61% of the portfolio is
compliant with potential 2030 legislation ('A' or 'B') by ERV. This
compares with JLL's estimates for the wider London office market
that only 23% is 2030 compliant by floor area. For those buildings
with EPC 'C' or below, external consultants have now completed
their initial report into capex requirements to uplift EPC ratings
to 'B' or above. In line with our previous indications, we expect
to invest c.GBP97m to 2030, prior to any service charge recovery. A
proportion is already reflected in our valuations and existing
capex plans.
As part of our sustainability agenda, we progressed Company-led
initiatives this year as well as participation at COP26 to bring
greater focus on the actions required across the industry. Our
inaugural Stakeholder Day and net zero carbon occupier survey
identified a number of potential collaboration opportunities to
reduce our combined impact on the environment, ambitions shared by
many of our occupiers. We also successfully issued a Green Bond,
raising GBP350m for 10 years at a 1.875% coupon. This increased our
total green debt potential to GBP650m.
Development projects
We have two large developments and one smaller refurbishment due
to complete in H1 2022. At Soho Place W1, the offices are either
pre-let or pre-sold with a rent of GBP17.0m, leaving the retail
element still available. We are confident of leasing the retail
space given its excellent location and prospects with the opening
this year of the Elizabeth line and a recovery in international
tourism.
At The Featherstone Building EC1, which has an ERV of GBP8.6m,
there has been a marked increase in enquiries as the latest work
from home (WFH) guidance was lifted. Interest has come for a range
of size requirements and business sectors and we are in no doubt as
to the building's prospects supported by a positive outlook for the
Tech Belt.
We have pre-let the entirety of Francis House SW1 to Edelman at
a substantial premium to ERV. This follows our letting earlier in
the year to Fora at our adjoining recently refurbished 6-8
Greencoat Place SW1, also comfortably above ERV. The combined rent
roll of these two buildings is GBP5.1m.
In Q4 we commenced our latest major development at 19-35 Baker
Street W1 which extends to 298,000 sq ft. Completion is expected in
2025. We also progressed plans for our next two projects. At
Network Building W1, resolution to grant planning consent was
secured for both offices and a Life Sciences scheme. Depending on
the outcome of early occupier discussions for each option, a
decision will be made shortly on which we take forward. At Bush
House WC2, we await the outcome of our planning application for a
refurbishment and extension. Together, these two projects have the
potential to deliver up to 267,000 sq ft of high quality space.
While the economy is recovering, short and medium-term
inflationary pressures are becoming embedded in market
expectations. Build cost inflation picked up in the year and we
expect this to rise further. At 19-35 Baker Street, the demolition
and build contracts have been signed and 97% of capex on the office
element is now fixed, within budget.
Derwent London's high quality team
The events of the last two years have provided clear
demonstration of the quality of the Derwent London team. Employees
across the business responded with energy and commitment to
minimise disruption and provide pragmatic and practical solutions
to the challenges that arose. Derwent London is an inclusive and
respectful employer that welcomes diversity and promotes equality.
We were particularly pleased that the Group was awarded National
Equality Standard accreditation in 2021, coming in the top 5% of
accredited companies.
I am delighted that Mark Breuer, Emily Prideaux and Sanjeev
Sharma all joined the board in the year. Helen Gordon was appointed
as Senior Independent Director replacing Simon Fraser who retired.
I was also pleased to announce three internal promotions to the
Executive Committee: Vasiliki Arvaniti, Head of Asset Management;
Victoria Steventon, Head of Property Management; and, John Davies,
Head of Sustainability.
Finally, I want to thank David Silverman who will step down from
the Board and, after almost 20 years of service, will leave the
Group in April 2022. David has made a considerable contribution to
the Group's success and we wish him well for the future.
Outlook
Our forward ERV guidance has improved through the last 12
months. We estimate our ERVs will grow in the range 0% to +3% in
2022 as an average across our portfolio. As the economic recovery
gathers pace, we expect this will translate into sustained future
growth. With continuing strong investment demand, we expect
investment yields to remain firm.
London is firmly coming back to life. It continues to attract
global talent as a leading city where people want to live and work.
Our 'long-life, loose-fit, low carbon' approach, combined with the
delivery of distinctive next generation developments, puts us in an
excellent position to benefit from the emergence of rental growth
for the best properties.
Paul Williams
Chief Executive
CENTRAL LONDON OFFICE MARKET
With a strong finish in Q4, both leasing transactions and
investment volumes in 2021 more closely resembled long-term
averages than in 2020 when Covid-19 pandemic disruption was at its
greatest.
Whilst the UK started 2021 in lockdown this was gradually eased
as the year progressed. With the success of the UK Government's
vaccination programme, restrictions were lifted in July and only
temporary and less severe restrictions re-imposed in response to
emergence of the Omicron variant in December. Confidence has
subsequently rebounded.
According to CBRE, office take-up across central London in 2021
was 9.1m sq ft, up 63% on 2020, 26% below the long-term average
(12.3m sq ft). This was well spread across a number of different
business sectors: Creative industries (TMT) accounted for 22% with
Banking & Finance at 21% and Professional at 20%. As 2021
progressed, the level of active requirements rose and demand began
to crystallise. The amount of space under offer at year end nearly
doubled from 2.1m sq ft at December 2020 to 3.8m sq ft which is
+28% above the long-term average of 3.0m sq ft.
Vacancy rates remain high at 9.3% (December 2020: 7.9%) against
the longer-term average of 5.2% but empty space was concentrated in
the City core and Docklands which represents 56% of the total. The
West End vacancy rate was lower at 5.2% (December 2020: 5.5%;
long-term average: 4.2%). In line with recent trends, lower quality
tier two space makes up the majority of the vacancy at 74% of the
total. Tenant-controlled space accounted for over one-third of the
vacancy at the start of 2021, but since May there has been a steady
removal of this space from the market, finishing the year at 29%.
This suggests that occupiers view their space as increasingly
important. Availability of tier one space remains restricted and
below trend emphasising a polarisation of the market.
Commitment to speculative developments thinned through the year
with several schemes deferred. At December 2020, CBRE estimated
that 23.8m sq ft of space would complete between 2022 and 2024 but
by December 2021 this had fallen by 11% to 21.3m sq ft. Of this,
11.6m sq ft was under construction of which 4.0m sq ft (34%) was
pre-let and a further 9.7m sq ft was proposed. This leaves 7.6m sq
ft of speculative space which is below the longer-term trend and
less than the level of active demand estimated by JLL at 8.3m sq
ft.
Headline prime rental growth for central London was 7.4% in 2021
and typical rent-free incentives reduced from c.27 months on a
10-year term to c.24 months. This market average masks differences
by location as well as a divergence between tier one and tier two
space. Rents for the former performed more strongly and we
anticipate this trend will continue in the future.
There has been much debate about the 'green premium' vs the
'brown discount'. Recent analysis by both Knight Frank and JLL,
corroborated by our own experience, suggest a building's leasing
potential is increasingly influenced by environmental credentials,
such as BREEAM and EPC ratings and importantly wellness and amenity
provision. As changes to EPC legislation draw closer, the focus on
sustainability is widely expected to increase.
We have outlined our expectations for rental growth in 2022 in
the Chief Executive's statement.
London a diverse city with broad appeal to business
London is a truly global city which appeals to a broad range of
businesses. Over the last five years, Business Services has
accounted for 24% of take-up, Creative Industries 22% and Banking
& Finance 20%.
The last few years have seen a number of occupiers eschew
traditional sub-markets in the flight to quality and focus on
emerging areas such as King's Cross and Paddington which have
responded with substantial amounts of new development. These new
areas are approaching their natural capacity and the volume of
development is consequently reducing. Established areas such as the
Tech Belt and emerging areas such as Southbank, which benefit from
strong transport links and connectivity but which have not seen the
same levels of overall regeneration, are firmly on occupiers'
radars.
The pattern of 'foot loose' occupiers being location agnostic
has been well documented. Occupiers are predominantly focused on
the quality of space and its environmental credentials along with
amenity and transport links rather than just location.
Since the EU referendum in June 2016, despite cautious
expectations from a range of economic forecasters, London has
experienced growth in both its population (+233,000 between 2016
and 2020) and jobs (+177,000 between June 2016 and September 2021).
The outlook for employment and economic growth is positive. Oxford
Economics and Experian both forecast a strong recovery in economic
output and employment for the UK and for London.
A strong London economy with high and growing employment is
supportive of the office sector over the longer-term. With
constrained availability of high quality space, rental growth
forecasts across the major firms of agents rebounded through 2021.
Most now expect positive rental growth in 2022 and 2023. With our
strategy of providing best in class differentiated buildings we are
well placed to capture this.
Agile working & the war for talent
From engagement with our occupiers, it is clear that the office
fulfils multiple functions. It is a place to work, collaborate,
innovate, interact, produce and mentor. Some of these tasks can be
fulfilled remotely but often with less positive outcomes. We have
also heard consistently how the office needs to be representative
of a business' culture and brand and our occupiers have stated that
returning to the office is positive for business.
Global lockdowns have shone the spotlight on agile working but
this is not an entirely new trend. Employers have responded by
offering employees greater flexibility, in part to aid staff
retention and recruitment in the war for talent, as technology has
emerged that supports hybrid working.
Prior to the reimposition of WFH guidance at the end of 2021,
there were clear signs of a return to the office for an increasing
proportion of the workforce. Few businesses had formally mandated
employees to return given the associated risks, but office
utilisation was on a clear upward trend with the West End busier
than the City core, in line with trends seen across our villages.
Mid-week office utilisation was noticeably higher than on Mondays
or Fridays, demonstrating more agility amongst the workforce. Our
experience, in common with findings of market research by the
agents, is that occupational decisions are being based on peak
occupancy requirements and mid-week utilisation levels.
Within our portfolio we have seen a reconfiguration of spaces
with a shift in the ratio away from fixed desks towards more
collaboration space and meeting rooms with video-conference
facilities. At the same time, occupational densities are being
reduced in a reversal of the 'max-packing' trend from recent years.
Our own experiences show that, as businesses return to looking to
the future, there is a clear recognition of the importance of the
role the office plays in bringing people and teams together to
enhance communication, mentoring, creativity and importantly
productivity.
London Underground usage gathered momentum following the lifting
of WFH guidance in July 2021, reaching in excess of 60% of
pre-Covid levels in October and November. Since the latest WFH
guidance was rescinded in mid-January 2022, travel has begun to
recover.
A return to normal service levels on the broader transport
network will be crucial in facilitating the return to the office.
The additional capacity that will be created with the opening of
the Elizabeth line will also help. Provision of 'end of trip'
amenity, such as bike facilities and showers, has come more into
focus as increasing numbers have switched away from public
transport to bicycle commuting.
London an attractive investment market
Investment volumes were weighted towards H2 2021 and in
particular Q4 with the completion of several large deals. CBRE
estimates GBP10.0bn of transactions completed in the year, +33%
above 2020 although 16% below the long-term average. Investor
demand is concentrated on either high quality buildings with long
leases let to good covenants or 'value-add' opportunities,
including 'build to prime' schemes, with strong competition for
these buildings. According to CBRE prime yields compressed 25bp
over the year in the City and West End to 3.75% and 3.25%
respectively.
London's positive yield gap compared to other global cities,
combined with its other attributes, namely a high level of market
transparency, strong historic liquidity, long lease lengths and
robust legal system, have helped it retain its relative
attractiveness to global investors. CBRE estimates there is
c.GBP40bn of potential investment demand targeting London offices
which compares to current supply of GBP3.7bn. Asian investors
account for 46% of overall demand, followed by Europeans at 32%,
North Americans at 17% and Middle Eastern investors at 5%. UK
investors were most active in 2021 accounting for 35% of activity
followed by North Americans at 26%, Europeans at 22% and Asians at
14%. As air travel restrictions continue to ease, we expect the
level of international investment to rise.
VALUATION
The Group's investment portfolio was valued at GBP5.7bn on 31
December 2021. There was a valuation surplus of GBP142.9m for the
year, which after accounting adjustments of GBP9.8m (see note 11),
gives a reported surplus of GBP133.1m. This performance represents
an underlying valuation increase of 3.5%, and a reversal of the
3.0% decline seen in 2020. By location, our central London
properties, which represent 99% of the portfolio, increased in
value by 3.4% with the West End +3.9% and City Borders +2.5%. The
balance of the portfolio, our Scottish holdings, was up 9.9%.
Our portfolio's underlying capital growth outperformed the MSCI
Quarterly Index for Central London Offices, at 2.5%, but
underperformed the wider UK All Property Index which increased by
an exceptional 11.5%.
Looking at EPRA metrics, our estimated rental values (ERV) in
2021 fell marginally by 0.2% against a decline of 2.8% in 2020. Our
office ERVs were up slightly at 0.2%. Our retail rental values,
where our exposure is limited, fell by 5.8% focused in H1.
The investment market remained buoyant, especially for quality
buildings and secure income streams, which helped drive the
portfolio's valuation yields lower. Accordingly, the true
equivalent yield tightened 24 basis points from 4.74% to 4.50% over
the year. It is worth noting that the 250 Euston Road NW1
acquisition accounted for 7 basis points of the yield movement. The
EPRA initial yield is 3.3% which, after allowing for the expiry of
rent frees and contractual uplifts, rises to 4.4% on a 'topped-up'
basis.
The total property return for the year was 6.3%, which compares
to the MSCI Index of 5.9% for Central London Offices and 16.5% for
UK All Property, the latter driven mainly by very strong yield
compression and rental growth for industrials and logistics.
We are on site with three major developments, each at different
stages of delivery. Soho Place W1 and The Featherstone Building EC1
are nearing completion with delivery scheduled for H1 2022.
Following demerger of our properties held with The Portman Estate,
we obtained vacant possession of 19-35 Baker Street W1 in September
2021, commenced demolition and have recently signed the main
building contract. Completion is scheduled for 2025. Further
details on all these projects are set out under 'Development &
Refurbishment' below. Combined, they were valued at GBP577.1m in
December 2021 and delivered a 9.2% valuation uplift over the year,
after adjusting for capital expenditure. An additional GBP355m is
required to complete these projects. Their combined ERV is
GBP47.1m, of which 36% is pre-let. Excluding these developments,
the portfolio valuation increased by 2.9% on an underlying
basis.
Portfolio reversion
Our contracted annualised cash rent on 31 December 2021 was
GBP178.4m. This 5.7% decrease in the year was principally due to
the loss of income from the disposal of the Johnson Building EC1
and Angel Square EC1 and obtaining vacant possession of 19-35 Baker
Street, ahead of redevelopment.
With a portfolio ERV of GBP293.9m there is GBP115.5m of
potential cash reversion. Within this, GBP54.6m is contracted
through rent-frees, fixed uplifts and indexation. Under IFRS, a
large proportion of this contracted income is already recognised
within the accounting gross rental income. Our on-site developments
and major refurbishments could add GBP50.0m, of which GBP17.0m is
pre-lettings at Soho Place W1 and GBP2.9m at Francis House SW1.
There is then GBP7.2m of potential income from several ongoing
smaller projects across the portfolio. ERV on space available to
occupy is relatively small at GBP3.8m, reflecting our EPRA vacancy
rate of 1.6%, which is down slightly from the 1.8% at the start of
the year. With Soho Place and The Featherstone Building being
delivered in the next few months, if no further pre-lets are
secured the vacancy rate would rise to 5.9% upon their completion.
There is then GBP5.8m of reversion from anticipated rent reviews
and expiries. However, this is offset by GBP5.9m already included
within contracted uplifts where there is rental indexation and
minimum uplifts on rent reviews to levels above their current
ERV.
LEASING, ASSET & PROPERTY MANAGEMENT
Rent collection
Prior to Covid-19, the Group typically collected over 99% of its
rent from tenants within two weeks of the quarter date, with
negligible bad debts. This pattern changed in early 2020 with the
pandemic and subsequent lockdown as we supported those of our
occupiers most in need. Staying close to our customers, combined
with the subsequent recovery in 2021, helped us deliver a high
level of recovery of deferrals agreed in 2020. Through 2021, office
collection rates improved and have now returned to pre-Covid levels
while retail (only 8% of income) continued to lag. Refer to
Appendix 4.
Lettings
Leasing activity in 2021 totalled GBP13.7m across 50
transactions despite having little space available. Activity,
however, picked up following publication by the Government of the
'Roadmap out of lockdown' at the end of Q1. Three deals - to Depop
at 20 Farringdon Road EC1, Fora at 6-8 Greencoat Place SW1 and
Edelman at Francis House SW1 - accounted for half of new rent
secured. On average, new leases were signed at +3.6% above December
2020 ERV. Pre-lettings accounted for GBP5.8m or 43% by value in six
transactions.
Since the start of 2022, a further four leases across 28,300 sq
ft have been signed with a rent roll of GBP1.9m pa at +8.7% above
December 2021 ERV.
Letting activity 2021
Let Performance against
Dec 20 ERV (%)
Area Income Open market Overall(1)
sq ft GBPm pa
-------- --------- ------------ -----------
H1 79,200 3.9 (1.0) (1.6)
H2 159,000 9.8 5.9 5.9
-------- --------- ------------ -----------
2021 238,200 13.7 3.9 3.6
-------- --------- ------------ -----------
(1) Includes short-term lettings at properties earmarked for
redevelopment
Principal lettings in 2021
Total annual Rent free
Property Tenant Area Rent rent Lease term Lease break equivalent
sq ft GBP psf GBPm Years Year Months
----------------- -------- -------- ---------------- ----------- ------------ ----------------
H1
20 Farringdon 9, plus 4 if no
Road EC1 Depop (pre-let) 33,500 52.50 1.8 5 3 break
Tea Building E1 Soho House 7,600 50.00 0.4 10 - 24
----------------- -------- -------- ---------------- ----------- ------------ ----------------
H2
Francis House Edelman 25, plus 9 if
SW1 (pre-let) 38,200 76.00 2.9 15 10 no break
6-8 Greencoat
Place SW1 Fora (pre-let) 32,400 68.50 2.2 15 - 34
Charlotte The &
Building W1 Partnership 14,900 67.50 1.0 5 - 10
80 Charlotte
Street W1
(resi) Q Apartments 13,400 52.10 0.7 10 - 3
The White
Chapel 12, plus 6 if
Building E1 Emperor Design 12,700 49.50 0.6 10 5 no break
Total 152,700 62.90 9.6
Asset management
At the start of 2021, 17% of passing rent was subject to break
or expiry in the year. In aggregate, 77% of breaks and expiries
were retained or re-let in the year. Looking forward, breaks and
expiries in 2022 account for 9% of passing rent, already
considerably below the 13% at June 2021.
In Q1, renewals and regears were mainly short-term roll overs as
occupiers continued to adopt a 'wait and see' approach to their
office space. As the year progressed, there was a notable shift
towards longer-term solutions. 27 lease renewals and 43 lease
regears completed in 2021. The table below provides further
details.
Asset management 2021
Area Previous rent New rent Uplift New rent vs
----------------
'000 sq ft GBPm pa GBPm pa % Dec 20 ERV %
---------------- ----------- -------------- --------- ------- -------------
Rent reviews 251,500 9.9 11.9 20.2 1.1
Lease renewals 114,000 5.2 5.5 7.3 (0.9)
Lease regears 287,200 14.1 14.5 2.3 (0.5)
Total 652,700 29.2 31.9 9.2 0.0
Excludes transactions on assets subsequently sold or taken back
for major redevelopment
Property management
Property management is the main point of contact with our
occupiers. 2020 and 2021 were busy years for the team who responded
proactively to provide pragmatic and practical solutions for
occupiers while also rolling out and maintaining Covid-19 secure
protocols across our estate. We have also embraced new technologies
to enhance cleaning and air safety. The team has introduced new
initiatives to drive customer engagement. As well as encouraging a
return to the office, some of these events have helped raise money
to support local charities.
We re-tendered major contracts to ensure high and consistent
quality and value for our occupiers and to ensure that high
standards of customer experience are delivered consistently. Our
property managers work closely with our Sustainability team to
deliver on our net zero carbon ambitions, for example through
co-ordination of plant maintenance.
ACQUISITIONS AND DISPOSALS
Through 2021, a nuanced change was made to the Group's strategy.
For the time being we expect to retain more of our larger recent
developments where we see good growth. At the same time, we may
look to sell some of those buildings where we believe returns will
be more limited. Disposal proceeds will be reinvested into new
acquisitions and the development programme. Our investment activity
through 2021 has been closely aligned to this.
The Group's investment team had a very busy year. We invested
GBP417.5m in the acquisition of eight buildings. The Lazari Baker
Street JV and 230 Blackfriars Road are potential future
'super-sites' where we see substantial uplifts in floor area when
compared to the existing buildings.
Acquisitions
Net
Area Total after costs yield Net Net rental income
Property Date sq ft GBPm % rental income GBPm pa GBPpsf
H1 2021
Holford Works WC1
(long leasehold) Q2 41,600 23.7 6.9 1.6 40.00
------ ---------- ------------------ ------- ---------------------- ---------------------
H2 2021
Bush House WC2
(leasehold) Q3 103,700 14.5 - - -
250 Euston Road NW1 Q3 165,900 190.3 2.5 4.7 28.30
171-174 Tottenham
Court Road W1 Q3 16,200 24.3 2.6 0.6 57.50
Baker Street W1 JV
(50% share) Q4 61,100(1) 64.0 4.0 2.6 42.50
388,500 316.8 - 9.5 -
19-35 Baker Street W1 Q4 n/a 100.7 n/a n/a n/a
(headlease regear)
- 417.5 - 9.5 -
2022
230 Blackfriars Road
SE1 Q1 60,300 58.3 3.5 2.1 41.00
------ ---------- ------------------ ------- ---------------------- ---------------------
(1) Group 50% share
In addition, the Group was selected as preferred bidder for The
Moorfields Estate EC1 in December 2021. The c.400,000 sq ft of
buildings, on a 2.5 acre site, has potential for a substantial
redevelopment and is considered another future 'super-site'.
Major disposals completed in 2021 realised net proceeds of
GBP396.4m, rising to GBP405.1m including smaller sales. After
year-end, contracts were exchanged for the sale of New River Yard
EC1 for net proceeds (after rental top ups) of GBP66.0m.
Major disposals
Net Net yield to
Area proceeds purchaser Rent
Property Date sq ft GBPm % GBPm
2021
--------------------------------------------- ------ -------- ---------- ------------- --------
Johnson Building EC1 Q1 192,700 165.6 4.1 7.3
Angel Square EC1 Q3 126,200 85.0 - 0.0 (1)
The Portman Estate properties(2) Q4 50,600 45.1 - -
369,500 295.7 - 7.3
19-35 Baker Street W1 (headlease surrender) Q4 n/a 100.7 n/a n/a
------ -------- ---------- ------------- --------
369,500 396.4 - 7.3
---------------------------------------------------- -------- ---------- ------------- --------
2022 exchanged
New River Yard EC1 Q1 70,700 66.0(3) 4.5 3.3
------ -------- ---------- ------------- --------
(1) Sold with vacant possession
(2) Includes 16-20 Baker Street, 27-33 Robert Adam Street, 17-39
George Street and 26-27 Castlereagh Street W1
(3) After rental top ups
Restructuring of The Portman Estate Baker Street holdings
At the end of Q3 2021, our Baker Street holdings with The
Portman Estate (TPE) was restructured. This was a longstanding
55:45 jointly owned company with TPE which owned properties in
Baker Street W1 and the surrounding area. The restructuring
involved Derwent London buying in the 45% of shares previously
owned by TPE, resulting in the Group taking full ownership of the
development site at 19-35 Baker Street and TPE granting a new
129-year headlease over the site. Other properties owned within the
company were transferred to TPE and the Group made a balancing
payment of GBP6.2m. Refer to the Finance section for further
details. This set of transactions are excluded from the tables
above.
DEVELOPMENT & REFURBISHMENT
At the end of 2021 we were on site at three major projects: Soho
Place W1, The Featherstone Building EC1 and 19-35 Baker Street
W1.
Soho Place is due to complete in H1 2022. The office space at 1
Soho Place was pre-let to Apollo Group and G-Research in 2019. When
combined with the forward-sale of 2 & 4 Soho Place, which
comprises 18,400 sq ft of offices and a 40,000 sq ft theatre
pre-let to Nimax, all of the office space is either pre-let or
forward-sold. Scheme profitability has benefitted from the strong
performance of the office element. The marketing campaign for the
36,000 sq ft of retail space is due to be launched in April. We are
confident in the long-term attractions of this retail location
above the Elizabeth line station at the junction of Oxford Street
and Charing Cross Road. The ERV of this space stabilised through H2
2021 with CBRE's rental expectation now GBP3.1m. The development
will be net zero carbon and we are targeting a BREEAM 'Outstanding'
rating on the commercial element.
The Featherstone Building is due to reach practical completion
in H1 2022 with an ERV of GBP8.6m. The space incorporates many of
the features of White Collar Factory EC1, such as concrete core
cooling, openable windows and generous floor to ceiling heights as
well as high quality amenities. Combined with the location in the
heart of the Tech Belt, we remain confident in the prospects for
this building. Current enquiries are for a range of different size
requirements and we have seen an increase over recent weeks in
enquiry levels. The development will also be net zero carbon, while
also incorporating our 'Intelligent Building' infrastructure and
with WELL 'Enabled' credentials. We are targeting a BREEAM
'Outstanding' rating.
On-site works at 19-35 Baker Street W1 commenced in Q4 2021.
This scheme extends to 298,000 sq ft, a 108% uplift on the
pre-existing space, the majority of which is offices (218,000 sq
ft). Most of the retail is subject to a forward sale agreement with
The Portman Estate. The Group has entered an agreement for Native
Land to act as our development partner for the private residential,
providing funding as well as development and marketing advice in
exchange for which they will receive a share of the profits.
The 19-35 Baker Street demolition contract was secured below
budget and the main building contract, which was finalised in Q1
2022, was in line with budget. 97% of capex on the office element
is now fixed effectively mitigating our exposure to further build
cost inflation. Capital expenditure is estimated at GBP266m and we
will use capacity under our green finance facilities to fund
eligible expenditure. The development has been designed to be
'long-life, loose-fit' with 3.2m floor to ceiling heights,
integrated 'Intelligent Building' infrastructure, double height
lobby, roof terraces and generous public realm. The building will
be net zero carbon with a target of BREEAM 'Outstanding', NABERS 4
Star (our first NABERS UK certified scheme) and WELL 'Enabled'
credentials on the office element. Completion is due in 2025.
We completed our 32,400 sq ft refurbishment at 6-8 Greencoat
Place SW1 in June 2021 which was effectively pre-let to Fora. In Q4
2021, we pre-let the whole of our on-site refurbishment at Francis
House SW1 (38,200 sq ft) to Edelman. Both these transactions were
at premiums to ERV.
In 2021, the Group secured a dual planning consent for Network
Building W1: offices (137,000 sq ft) and lab-enabled Life Sciences
(112,000 sq ft). Both benefit from ground floor retail. On a
speculative basis, we would expect to deliver the office scheme but
we have had an early approach from a life sciences operator.
On-site works are expected to commence in H2 2022 with capex for
either option of c.GBP100m.
At Bush House WC2, a planning application was submitted in 2021
for a c.26,000 sq ft extension to the current building which would
increase the overall floor area from 103,700 sq ft to c.130,000 sq
ft. On-site works are expected to commence later this year on
either the larger scheme, subject to planning, or refurbishment of
the existing building.
Beyond the near-term pipeline, a further 1.7m sq ft, or 31% of
the portfolio, has development potential.
FINANCE REVIEW
Introduction
The past year has seen a return towards more normal business
conditions punctuated by periods of elevated uncertainty when
levels of Covid-19 infection increased. With lockdowns having eased
and the UK's very successful vaccination programme providing some
protection from the worst impacts of 2021's Covid-19 variants,
activity across most of our stakeholder groups has gradually
recovered. This is evidenced by many economic indicators including
GDP growth, employment and investment. Our own experiences have
borne this out with office rental collections now almost at
pre-Covid levels and most of our occupiers planning further ahead
once more. We have responded with a substantial investment
programme in new future projects and have reshaped the business
more than in any year since the LMS merger in 2007.
Challenges remain with businesses facing increased compliance
requirements and staff shortages while also tackling the climate
change and biodiversity emergencies. We take these issues very
seriously but also see them as opportunities to differentiate our
product and business while becoming ever more customer focused.
Cost inflation is now also being widely felt, though views differ
on how long it will last. However, the economy is expected to grow
and many of London's businesses are actively recruiting and
expressing greater confidence in the future than for some time.
Financial overview
As noted in last year's report and with a subtle change in
emphasis announced during 2021, we have continued to rebalance the
portfolio. We have made disposals where we see more challenging
future returns and replaced them with some new acquisitions to
provide future projects and 'super-sites' for the next decade or
so. This reshaping is not finished and we hope to secure further
value-add opportunities in the future which may see balance sheet
gearing rise a little higher. I have previously noted our shift in
focus, with future value creation a higher current priority than
income growth; this may provide some short-term impact on earnings
until we are able to replace all the income lost from recent
disposals. However, we now anticipate income reversion increasing
as meaningful rental growth comes through for the strongest office
product.
Our asset and property managers continue to engage with our
occupiers to extend leases, remove breaks and minimise voids. With
relatively strong property revaluations and much lower impairment
provisions booked in 2021 than in 2020, this has helped 2021
earnings rise significantly with IFRS earnings up 294.33p to
224.99p per share and EPRA earnings per share up 9.7% to 108.8p. I
cannot recall a more active year for our development team either
and all this activity helped the Group produce a total return of
5.8%.
Turning to liquidity, as expected the Group's rental collections
bounced back well in 2021 but we also executed some very successful
treasury transactions, notably our new GBP350m 1.875% 10-year
unsecured green bond issue in November. This is further evidence of
our commitment across the business to a net zero carbon future.
Return to growth
The portfolio showed a return to revaluation growth in 2021.
This came from downward yield shift for well let offices together
with development profits from recent schemes and modest ERV growth
for the best properties. With IFRS earnings comfortably exceeding
dividends paid, the closing EPRA net tangible assets (NTA) per
share was 3,959p, up 3.9% from December 2020. Similarly, IFRS
equity shareholders' funds increased over the year by 4.2% to
GBP4.44bn.
2021 2020
p p
------ ------
Opening EPRA NTA 3,812 3,957
Revaluation movement 119 (176)
Profit on disposals 9 5
EPRA earnings 109 99
Ordinary dividends paid (75) (73)
Interest rate swap termination costs (2) (2)
Share of joint venture results (12) -
Other (1) 2
------ ------
Closing EPRA NTA 3,959 3,812
------ ------
Derwent London continues to focus on property returns, recurring
earnings, sustained dividend growth and modest leverage as well as
our Net Zero Carbon Pathway and a number of other ESG and
stakeholder-focused metrics. However, we believe that total return
(ie dividends paid plus EPRA Net Tangible Assets growth per share)
is the best single measure of our financial performance. After
adding back the dividends paid, the Group's total return (see note
27) recovered to 5.8% in 2021 after the 1.8% decline seen in
2020.
Property portfolio
Our property portfolio was externally valued at GBP5.6bn
(excluding the new joint venture) as at 31 December 2021, allocated
across the balance sheet as follows:
Dec-21 Dec-20
GBPm GBPm
------------------------------------------------------ --------
Investment property 5,359.9 5,029.1
Non-current assets held for sale 102.8 165.0
Owner-occupied property 49.3 45.6
Trading property 32.2 12.9
Property carrying value 5,544.2 5,252.6
Accrued income (non-current) 159.3 146.4
Accrued income (current) 24.1 19.6
Grossing up of headlease liabilities (70.4) (66.5)
Profit share due to TfL (14.8) -
Revaluation of trading property/other 3.9 3.4
Fair value of property portfolio 5,646.3 5,355.5
Fair value of properties held in joint venture (50%) 50.0 -
------------------------------------------------------ --------
The year was marked by transactions with The Portman Estate
(TPE) and Lazari Investments Ltd (Lazari) which have helped unlock
two different and large-scale development opportunities in Baker
Street W1. Further opportunities for future growth have also come
from acquisitions announced subsequently in 2021 but their impact
will be felt more in the medium term.
Firstly, we acquired TPE's 45% GBP53.4m non-controlling interest
in Portman Investments Baker Street Ltd (PIBS) on 30 September
2021. PIBS was a longstanding 55%/45% joint company holding
properties in two main blocks adjoining Baker Street and George
Street. Because it was majority owned and controlled by the Derwent
London plc group, it was consolidated within our accounts for many
years subject to a non-controlling interest. As part of this
overall transaction, properties in George Street, Baker Street,
Robert Adam Street and Castlereagh Street W1 totalling GBP45.2m
were disposed of to TPE. The last part of the transaction was to
surrender the existing headleases to TPE with a new 129 year
headlease being granted by TPE across the 19-35 Baker Street site.
This surrender and regrant of the headleases has been treated as a
GBP100.7m disposal and subsequent acquisition though no cash passed
between the parties on this element as the transactions netted off;
the net cash that passed from Derwent to TPE on completion of the
various steps outlined here was GBP6.2m. The result is that the
Group now has a long leasehold interest in the newly geared
development site at 19-35 Baker Street where work is underway to
demolish the old buildings.
The other major transaction was the acquisition of two buildings
from Lazari Investments in October 2021 and the formation of a
50/50 joint venture. The buildings acquired were 250 Euston Road
NW1 for GBP190.3m and 171-174 Tottenham Court Road W1 for GBP24.3m,
both inclusive of costs. The joint venture was formed in October as
a Limited Partnership; each partner has an effective 50% share in a
deadlocked structure and our 50% interest is therefore held within
Investments (note 13) rather than being included within the
Property portfolio (note 11). The joint venture holds three
leasehold properties in Baker Street W1 which are currently income
producing but where the intention is to work up a major new scheme
subject to planning, site assembly and regearing of the headlease.
The Group's share of the properties acquired cost GBP64.0m but was
subsequently revalued at GBP50.0m as at 31 December 2021 giving a
JV revaluation deficit for the year of GBP14.0m. It is expected
that the valuation should rise in due course upon a successful
planning and headlease gearing outcome.
In addition to the transactions above, other property
acquisitions during the year included GBP23.8m for the long
leasehold interest at Holford Works WC1 and GBP14.5m for the short
leasehold interest at Bush House. Altogether, acquisitions totalled
GBP353.6m. Capital expenditure in 2021 increased to GBP166.1m plus
GBP12.0m of capitalised interest bringing total additions to
GBP531.7m in the year. Disposals included the Johnson Building EC1,
which was disclosed as an 'asset held for sale' at the start of
2021, and Angel Square EC1, which completed in August 2021. The
properties within 'non-current assets held for sale' at 31 December
2021 were New River Yard and 2 & 4 Soho Place W1, with carrying
values of GBP63.7m and GBP37.5m, respectively. New River Yard
exchanged in January 2022 with completion expected in Q2 2022 and
contracts for the sale of 2 & 4 Soho Place have been exchanged
with completion expected later in 2022.
The trading property held at 31 December 2021 included the last
remaining residential apartment at Asta House W1. This was
subsequently sold post the year-end and brings to an end our
development of these units connected with the 80 Charlotte Street
scheme. The other item in trading stock was Welby House SW1 which
was written down by GBP1.4m in 2021.
The overall wholly-owned property portfolio valuation performed
much better than in 2020 and gave rise to a total revaluation
surplus for the year of GBP130.8m after accounting adjustments, of
which GBP3.7m related to our owner-occupied head office at Savile
Row. The latter figure is shown in the Group Statement of
Comprehensive Income rather than the Income Statement.
The balance of unamortised letting and legal fees plus the
accrued income from the 'straight-lining' of rental income under
IFRS 16 to spread the effect of incentives and fixed uplifts over
the lease terms has increased to GBP183.4m (2020: GBP166.0m). This
balance rises as income is recognized through incentive periods and
falls gradually once the cash flows stabilize. The grossing up of
headlease liabilities increased the carrying values of the
leasehold properties by GBP70.4m (2020: GBP66.5m) but there is an
equal and opposite liability within 'net debt' (note 18) and the
profit share payable to TfL on the Soho Place scheme of GBP14.8m
makes up the remaining balance.
Rent collection and impairment of receivables
One of the clearest barometers of the Covid-19 period for the
real estate sector has been the impact on rent collection rates.
This was very noticeable in the early lockdown days of H1 2020,
particularly for retail and hospitality tenants or for those in the
travel and entertainment businesses, but had already started to
recover significantly in H2 2020. It is good to report that rent
collection rates have continued to move back towards pre-Covid
levels for our office portfolio through 2021 and into 2022. For the
December 2021 quarter day rents, we have now collected 98% of
office rents and 97% of overall rents, including our share of the
new joint venture. The retail and hospitality sectors continue to
lag but are showing much stronger payment performances than in 2020
and occupiers are now generally not asking for concessions beyond
some requests for monthly rental payments.
Dec 20 quarter Mar 21 quarter Jun 21 quarter Sep 21 quarter
------------------------ ------------------------
Office Retail/ Office Retail/ Office Retail/ Office Retail/
Hospitality Hospitality Hospitality Hospitality
------------- --------- --------- ---------
Rent received
to date 99% 73% 98% 68% 99% 81% 100% 88%
Outstanding 1% 9% 1% 13% 1% 12% 0% 11%
Rent free
granted 0% 18% 1% 19% 0% 7% 0% 1%
Total 100% 100% 100% 100% 100% 100% 100% 100%
-------------- ------------- --------- ---------
GBP41.4m GBP2.9m GBP40.0m GBP3.0m GBP38.8m GBP2.6m GBP38.5m GBP2.5m
-------------- --------- ------------- --------- --------- ---------
Dec 21 quarter
Office Retail/ Hospitality Total
--------------------
Rent received to date 98% 83% 97%
Due later in the quarter(1) 1% 4% 1%
Outstanding 1% 13% 2%
Rent free granted 0% 0% 0%
Total 100% 100% 100%
-----------------------------
GBP40.3m GBP2.3m GBP42.6m
----------------------------- --------------------
(1) Principally monthly receipts
Impairment reviews using the expected credit-loss model in
accordance with IFRS 9 have continued in 2021 against trade
receivables as well as amounts due under the spreading of lease
incentives. These have been carried out for each of our 50 largest
tenants and for others where we believe the risk is elevated, with
the remaining balances considered according to their sector.
Substantial impairment charges and write-offs totalling GBP14.2m
were incurred against receivable balances in 2020. In 2021, these
amounts have reduced considerably to GBP0.8m, this total amount
including GBP2.4m of charges reversed from 2020. This pattern is
due to an improved assessment of the risks as the financial health
of tenants has improved as well as lower outstanding balances. For
example, net trade receivables were back to normal year-end levels
at GBP6.9m as at 31 December 2021, 75% lower than the GBP27.5m a
year earlier.
Property income and earnings
Net property and other income increased to GBP187.5m for the
year ended 31 December 2021 from GBP183.0m in 2020. However, there
are several different themes underlying this overall increase, set
out in note 5 and explained briefly below.
Gross property and other income fell to GBP240.2m for the year
to 31 December 2021 from GBP268.6m in the prior year, the main
reason for this being significantly lower sales of trading
properties at Asta House. Most of the apartments were disposed of
in 2020, hence the reduction in disposal proceeds from GBP32.3m in
2020 to GBP6.7m in 2021. The next apartments that we will undertake
are those at our 19-35 Baker Street scheme where the main building
contract will commence shortly. These are due to complete in 2025
so trading property disposal proceeds are expected to be very low
for the next few years. In addition, gross rental income fell back
a little in 2021 to GBP194.2m from GBP202.9m in 2020. This was
mainly the result of property disposals where the income yields
were relatively higher and acquisitions where they were lower.
Gross rents have also been impacted by the 'softer' letting and
lease extension transactions undertaken through 2020 and early 2021
when the pandemic was affecting occupier sentiment. In particular,
we undertook a number of transactions to extend leases at passing
rental levels while offering incentives that took the net effective
rents a little lower than previously. Combined with a small
increase in the average vacancy rate, this also explains why EPRA
like-for-like gross rental income has declined over the year.
Surrender premiums and other property income increased to GBP5.6m
in 2021 from GBP1.8m in 2020, helping offset some of the lower
gross rents. Other factors were service charge income rising to
GBP30.2m in 2021 against GBP28.1m in 2020 and other income of
GBP3.5m, the same as in 2020. Together, these movements account for
the reduction in gross property and other income referred to
above.
However, as in 2020, it is net property income that shows the
full impact of the Covid-19 pandemic on our business. As noted
above, with much stronger rent collection and occupation levels
among most of our occupiers, impairment charges and bad debts fell
to GBP0.8m in 2021, a significant improvement from the GBP10.1m
booked in 2020. Irrecoverable service charges also fell from
GBP6.9m in 2020 to GBP3.4m in 2021 as we did not repeat the GBP4.1m
service charge 'holiday' that we allowed tenants in 2020. Other
property costs were broadly unchanged at GBP11.8m against GBP11.6m
in 2020. As a result, net rental income increased to GBP178.2m in
2021, a 2.2% increase over the year.
Lower profits from the Asta House apartment 'trading' sales of
GBP0.7m in 2021 against GBP5.2m in 2020 were largely offset by
higher surrender premiums recognised. As a result, net property and
other income also saw a rise of 2.5% to GBP187.5m from GBP183.0m in
2020.
Administrative expenses were 1.9% lower than in 2020 at
GBP37.1m, with increased headcount and staff salaries/bonus offset
by lower Directors' remuneration. Cost pressure is being seen
across the business and professional salaries are rising at a rate
above general inflation. This is impacting our own staff cost but
also those of the many professional advisers, consultants and
contractors that work with us. As before, we do not capitalise any
of our overhead.
Lower impairment and administrative expenses have seen our EPRA
cost ratio move back down to a more normal level compared to the
'spike' in 2020. Including direct vacancy costs, it fell to 24.3%
from 30.5% in 2020.
The investment portfolio revaluation surplus after accounting
adjustments for the straight-lining of incentives, deferred
legal/letting fees and the grossing up of headlease rentals was
GBP130.8m for the year compared with a deficit of GBP196.1m in
2020. The profit on disposal, relating mainly to Angel Square which
completed in August 2021, was GBP10.4m (2020: GBP1.7m).
Net finance costs were GBP28.1m in 2021 after capitalised
interest of GBP12.0m, a decrease of GBP2.0m over the net charge of
GBP30.1m in 2020. With slightly higher interest rates across the
swap curve, the fair value of forward-start swaps moved in our
favour by GBP4.8m, or GBP2.9m after netting off derivative
termination costs.
When the new joint venture transaction with Lazari Investments
in relation to the Baker Street properties was announced, we
anticipated a revaluation deficit for the first accounting period.
The Group's share of that was GBP10.2m and, after profit from
operations of GBP0.3m, the net result for the period attributable
to the Group was a loss of GBP9.9m. After allowing for acquisition
costs of GBP4.0m, the total IFRS loss attributable to our share of
the joint venture was GBP13.9m.
The Group's resulting IFRS profit before tax for the year was
GBP252.5m after the loss before tax of GBP83.0m in 2020 and IFRS
earnings per share were 224.99p against a loss of 69.34p in the
prior year.
A table providing a reconciliation of the IFRS results to EPRA
earnings per share is included in note 25.
EPRA like-for-like rental income
EPRA like-for-like gross rental income was down by 3.9% over the
year, due mainly to our decision to extend leases through the
pandemic in 2020 and early 2021 with incentives higher than usual
and slightly increased average vacancy levels. However, EPRA
like-for-like net rental income was up by 2.7% over the year,
benefitting from the lower impairment charges. Likewise, EPRA net
property income, which includes surrender premiums, was up by 5.9%
on a like-for-like basis.
Internal controls, assurance and the regulatory environment
We have recently seen a widespread increase in stakeholder focus
on assurance and internal controls, linked partly to the BEIS
review. Internal audits over the past two years have already had a
beneficial impact on our control environment and, while no
financial loss or reputational damage has been noted from this
work, we recognise that the evidencing and documentation of robust
controls are of increasing interest to our stakeholders and to
regulators more widely.
We provided feedback in relation to the BEIS review and await
the final conclusions and recommendations of their report with
interest. In parallel, we have also been working on a draft audit
and assurance policy which tackles our assurance approach for those
limited parts of the business which are not yet subject to external
assurance. Our principal third party checks include the annual
statutory audit, internal audit procedures carried out throughout
the year, service charge audits, a twice-yearly external valuation
plus the assurance work carried out on our ESG data and procedures,
health and safety reports and green finance. We recognise the
importance of high-quality reporting that stands up to scrutiny,
both from within the business through robust internal control
mechanisms and also from third-party verification. This work is
ongoing and is expected to escalate.
Taxation
The corporation tax charge for the year ended 31 December 2021
was GBP0.5m. Most of our portfolio is within the REIT regime but
this charge relates to the Portman Estate non-controlling interest
held outside the REIT up until it was acquired by us at the end of
Q3 as well as income from property trading operations.
The movement in deferred tax for the year was a credit of
GBP0.8m (2020: GBP0.7m credit).
A GBP1.8m credit was taken through the income statement mainly
due to the reversal of the deferred tax liability once the Portman
Estate's 45% interest in the jointly-owned company was acquired,
bringing the asset fully within the REIT regime. In addition,
GBP0.7m was credited through equity in relation to future tax
deductions for equity-settled share-based payments, GBP0.4m was
charged in respect of future defined benefit pension liabilities,
and GBP1.3m was charged in relation to the owner-occupied property
at Savile Row.
As well as other taxation paid during the year, in accordance
with our status as a REIT, GBP8.6m 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
In last year's report, I noted that our low leverage meant that
we would be comfortable adding further debt to our capital
structure if the right acquisition opportunities were identified.
In 2021, those opportunities crystallised in the form of
acquisitions totalling GBP251.8m plus GBP53.4m arising on the
acquisition of The Portman Estate's 45% interest in PIBS. Because
the latter was already consolidated within the Group accounts and
did not result in a change of control, it is required by IAS 7 to
be shown in 'financing' activities rather than 'investing'
activities. In addition, we spent GBP172.1m on capital expenditure
including capitalised interest and incurred a further GBP1.6m on
trading stock additions. The latter arises when we invest in
properties where the intention upon completion is to sell rather
than hold. Altogether, this meant that GBP478.9m was spent on
property acquisitions and development expenditure, compared with
GBP219.6m in 2020.
This cash outflow was offset by GBP297.3m of property disposal
proceeds. As a result, Group borrowings increased by GBP216.2m to
GBP1.25bn at 31 December 2021. This is the highest level the Group
has seen but it remains relatively modest, equivalent to a
loan-to-value (LTV) ratio of 20.8% against 18.4% a year earlier.
Moreover, the level of headroom under debt facilities has increased
after the financing activities noted below; as at 31 December 2021,
available cash and undrawn facilities totalled GBP608m compared
with GBP476m at 31 December 2020.
Following correspondence during Q4 2021 with the Corporate
Reporting Review Team of the Financial Reporting Council, we have
agreed to reclassify the cash flows relating to the investment in,
and disposal of, trading properties within the Group Cash Flow
Statement. Accordingly we have re-presented the Statement for the
year ended 31 December 2020 to reclassify GBP31.7m of cash receipts
and GBP1.2m of expenditure on trading properties from 'investing
activities' to 'operating activities'. This has the effect of
increasing the net cash inflow from operations in 2020 from
GBP85.4m to GBP115.9m with a corresponding increase in the net cash
outflow in investing activities from GBP62.0m to GBP92.5m. There is
no net impact upon the cash flow statement overall and there is no
impact on any balance sheet or income statement figures.
As reported last year, net cash from operations was adversely
impacted in 2020 from the immediate effects of the pandemic. Our
response at the time was to agree cash deferrals and other forms of
tenant support that reduced cash rental receipts in 2020. Almost
all of that deferred rent has subsequently been collected in 2021
such that the rents received in 2021 were GBP25.1m higher than 2020
at GBP187.0m. Net cash from operating activities further increased
in 2021 to GBP125.7m from the restated GBP115.9m in 2020. Note that
the cash flow from operations may be affected in the next few years
by the build-up of trading stock at our 19-35 Baker Street
development with both residential and some retail components of the
scheme earmarked for onward sale.
The lower levels of impairment in 2021 have helped interest
cover recover to 464% for the year compared to 446% in 2020 and
462% in the pre-Covid 2019. Our debt covenant remains at 145%.
Debt and financing
The Group had another year of active and successful refinancing
in 2021. Both of the unsecured revolving credit facilities (RCFs)
totalling GBP550m were extended for a year to fresh five year
terms, evidence of the continuing excellent relationships we have
with our four longstanding and valued lending banks. They have
provided further support and advice through the year and remain key
stakeholders in our business.
We documented the second and final one-year extension to the
GBP450m RCF provided by HSBC, NatWest and Barclays, taking the
maturity out to October 2026. This facility incorporates a GBP300m
'green' tranche and details of the qualifying projects, expenditure
incurred and amounts drawn are shown below. As before, these
disclosures have been subject to a 'reasonable' level of assurance
by Deloitte.
We also documented our first one-year extension for the GBP100m
RCF provided by Wells Fargo taking its term out to November
2026.
In Q4, both the RCFs and their associated interest rate swaps
were transitioned from a LIBOR to a SONIA basis. These two
forward-start swaps totalling GBP115m have commencement dates in
January 2022 and GBP1.9m was paid in 2021 to defer their effective
starting dates. Rates have moved in our favour during the year such
that the mark-to-market fair value on these swaps improved by
GBP4.8m.
In advance of the unwinding of the 55%/45% joint investment with
the Portman Estate, the GBP28m secured loan provided by HSBC was
repaid and cancelled. As noted earlier, the main Baker Street
island site under development is now wholly-owned and subject to a
new headlease. Development expenditure is being funded from
existing Group revolving debt facilities, including the green
tranche of our GBP450m RCF.
The main financing activity in 2021 was a debut green bond. This
was very well received and raised just under GBP350m at 1.875% for
10 years to November 2031. The bonds were rated 'A' by Fitch and
will be utilised in accordance with our Green Finance Framework,
updated as required to deal with the green bonds as well as the
existing green RCF tranche.
As a result of this financing activity, the Group's weighted
average interest rate fell by 20bp over the year to 3.14% on a cash
basis and 3.27% on an IFRS basis which adjusts for the convertible
bonds. In addition, the weighted average maturity of our borrowings
increased to 7.2 years at 31 December 2021 compared to 6.8 years at
31 December 2020.
Reporting under the Green Finance Framework
Derwent London's Green Finance Framework (the Framework) has
been updated again this year as a result of the green bond issuance
in November 2021. The Framework has been prepared in line with the
LMA Green Loan Principles and ICMA Green Bond Principles guidance
document, has been externally reviewed and a second party opinion
has been obtained. The latest Framework is available on our website
at www.derwentlondon.com .
In accordance with the reporting requirements set out in the
Framework, we are disclosing the Eligible Green Projects (EGPs)
that have benefited from the green funding element of our GBP450m
RCF and GBP350m green bonds 2031 (together the Green Financing
Transactions (GFTs)) and the allocation of drawn funds to each
project.
The projects benefiting from the GFTs are as follows:
Green project 80 Charlotte Street Soho Place W1 The Featherstone 19-35 Baker Street W1
W1 Building EC1
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Expected completion Completed in 2020 2022 2022 2025
date
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Category for Green building, Green building, Green building, Green building,
eligibility criterion 1 of criterion 1 of criterion 1 of criterion 1 of
section 3.1 of the section 3.1 of the section 3.1 of the section 3.1 of the
Framework (excludes Framework (excludes Framework Framework (excludes
Asta House and Site B - Theatre) retail and
Charlotte refurbished
Apartments) residential)
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Impact reporting Building Building Building Building
indicator certification certification certification certification
achieved (system & achieved (system & achieved (system & achieved (system &
rating) rating) rating) rating)
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Green credentials Achieved: Site A Achieved: Achieved: Offices Expected:
----------------------
BREEAM - Excellent BREEAM - Outstanding BREEAM - Outstanding BREEAM - Excellent
EPC - B (design stage) (design stage) (design stage), on
target
----------------------
Expected: Expected: Expected: LEED - Gold, on
target
LEED - Gold, on BREEAM - Outstanding BREEAM - Outstanding EPC - A, on target
target (post construction), (post construction),
on target on target
LEED - Gold, on LEED - Platinum, on Private residential
target target Expected:
EPC - B, on target EPC - A, on target Home Quality Mark - 4
Stars (design stage),
on target
Site B - Offices
Achieved:
BREEAM - Excellent
(design stage)
Expected:
BREEAM - Excellent
(post construction),
on target
EPC - B, on target
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
The 19-35 Baker Street project includes part new development and
part refurbishment. The project will be assessed under the BREEAM,
LEED and Home Quality Mark standards where applicable. Sections of
this project do not qualify as eligible expenditure under the
Framework, relating mainly to the retail and refurbished
residential elements, and these have been excluded from the
qualifying green expenditure.
Qualifying 'green' expenditure
The qualifying expenditure as at 31 December 2021 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 original refinancing date in October 2019.
Soho Place and The Featherstone Building both commenced on site in
2019 and are due to reach practical completion in H1 2022.
The 19-35 Baker Street scheme commenced on site in October 2021.
Costs incurred on the eligible sections of this development prior
to October 2021 have been included in the 'look-back' spend for
this project as they occurred prior to the project being formally
elected.
Cumulative spend on each EGP as at the reporting date
Subsequent spend
-----------------------------------
Q4 19 - 2021 spend
Look back spend FY 2020 GBPm Cumulative spend
EGP GBPm GBPm GBPm
80 Charlotte Street W1 185.6 33.8 17.8 237.2
Soho Place W1 66.3 74.9 62.7 203.9
--------------------------- ---------------- ----------------- ---------------------------
The Featherstone
Building EC1 29.1 30.0 30.3 89.4
--------------------------- ---------------- ----------------- ---------------------------
19-35 Baker Street W1 26.5 - 5.8 32.3
--------------------------- ---------------- ----------------- ---------------------------
307.5 138.7 116.6 562.8
--------------------------- ---------------- ----------------- ---------------------------
The cumulative qualifying expenditure on EGPs was GBP562.8m,
with GBP116.6m of this being incurred in 2021 (excluding
expenditure incurred on 19-35 Baker Street prior to October).
The net proceeds of the Bonds were initially used to repay
amounts drawn under the Group's revolving credit facilities,
including the GBP300m green tranche, thereby refinancing the EGPs
in line with our Green Finance Framework.
The drawn borrowings from GFTs as at 31 December 2021 were
GBP360m, which included GBP10m from the green tranche of the RCF
and the GBP350m Green Bonds. Therefore, there was GBP290m of
headroom within the GBP300m green tranche of the Group's GBP450m
revolving credit facility as at 31 December 2021, of which GBP203m
is available green headroom.
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 all GFTs which, as shown above, has
been met.
More information can be found in the Responsibility Report
2021.
Dividend
We continue to operate a progressive and sustainable dividend
policy. After considering our pension funding obligations and other
stakeholder requirements, the board is recommending a 1.05p per
share or 2.0% increase in the final dividend to 53.5p. This will be
paid in June 2022 with 35.5p as a PID and the balance of 18.0p as a
conventional dividend. We will not be offering a scrip dividend
alternative.
This takes the total dividend for 2021 to 76.5p, 2.8% higher
than 2020. Dividends declared in relation to 2021 earnings were
1.42 times covered by EPRA earnings and 2.94 times covered by IFRS
earnings.
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 February 2022. The Board has confirmed
that its risk appetite and key risk indicators remain
appropriate.
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.
In the second half of 2021, as the Government completed its
roadmap to ease lockdown restrictions, London's business confidence
and the wider economy started to rebound. Individuals and
businesses are starting to adapt to 'living with Covid-19' with
assistance from the vaccination and booster programmes.
Arising from the upturn in the economy, the new challenges
facing the Group and the wider economy are, material and labour
shortages and inflation. Overall, our risk profile remains elevated
but is expected to slowly stabilise to pre-Covid levels during
2022.
Demand for office buildings remains polarised. Well-designed,
energy efficient, amenity rich, modern buildings with adaptable
floor plans and good floor-to-ceiling heights are proving more
desirable and easier to lease than older, less attractive buildings
which may require refurbishment. Without additional capital
expenditure to improve energy efficiency, our ability to lease
certain properties in our portfolio could be impacted.
The principal risks and uncertainties facing the Group in 2022
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 2021
Report & Accounts.
Strategic risks
The Group's business model and/or strategy does not create the
anticipated shareholder value or fails to meet investors' and other
stakeholders' expectations.
Risk, effect and progression Controls and mitigation
------------------------------------------------------- -------------------------------------------------------------
1. Failure to implement the Group's strategy
The Group's success depends on implementing its * The Group's development pipeline has a degree of
strategy and responding appropriately to internal flexibility that enables plans for individual
or external factors including responding to changing properties to be changed to reflect prevailing
work practices, occupational demand and economic circumstances.
London's global appeal.
While it is not yet possible to fully evaluate the
impact that Brexit will have on the Group's * The Group seeks generally to maintain income from
operations, the main risk to the Group posed by Brexit properties until development commences and has an
is that economic growth in the UK may ongoing strategy to extend income through lease
be negatively impacted which may in turn affect renewals and regears.
London's growth and demand for office space.
In addition, the Group must respond and/or adapt
appropriately to economic cycles as the London * The Group aims to de-risk the development programme
office market has generally been cyclical in recent through pre-lets, typically during the construction
decades, with strong growth followed by period.
sharp economic downturns precipitated by rising
interest rates coinciding with significant
oversupply. Should the Group fail to respond and adapt * The Group conducts an annual strategic review,
to such cycles or execute the projects prepares a budget and provides two-year rolling
that underpin its strategy, this may have a negative forecasts three times a year.
impact on the Group's expected growth
and financial performance.
Although the Covid-19 pandemic has not stopped the * The Board considers the sensitivity of the Group KPIs
Group implementing its strategy, the lockdown to changes in the assumptions underlying our
restrictions have marginally extended the project forecasts in light of anticipated economic
length for Soho Place and The Featherstone conditions. If considered necessary, modifications
Building, and has caused significant disruption to the are made.
economy. Covid-19 has only amplified
weaknesses within the retail market, and we are
reviewing on an ongoing basis the retail elements * The Group maintains sufficient headroom in all the
in our buildings. Our occupiers perceive the Group's key ratios and financial covenants with a
restaurant, retail and leisure aspects within particular focus on interest cover.
our portfolio as amenities; hence we feel it is
important that they are retained within our
building offerings. The impact of a potential * The Group focuses on good value properties that are
recession on our strategy, and other longer-term less susceptible to reductions in tenant demand. The
consequences of the Covid-19 pandemic, is being Group's average 'topped-up' office rent is only
monitored by the Executive Committee and the GBP59.69 per sq ft.
Board. In respect to Brexit, the Group continued to
monitor international trade negotiations.
During 2021, labour shortages occurred due to the * International trade negotiations are being monitored
relocation of European labour back to the and potential outcomes discussed with external
EU which had an impact on supply chains and the advisers.
construction industry.
* The Group's diverse and high-quality tenant base
provides resilience against tenant default.
* The Group develops properties in locations where
there is good potential for future demand, such as
near Crossrail stations. We do not have any
properties in the City or Docklands.
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
----------------------------- ------------------------
2. Risk of tenants defaulting or tenant failure
The majority of the Group's revenues are * Detailed reviews of all prospective tenants are
comprised of rent received from its tenants and performed.
any
deterioration in their businesses and/or
profitability could in turn adversely affect the * A "tenants on watch" register is maintained and
Group's rental income or increase the Group's bad regularly reviewed by the Executive Committee and the
debts and/or number of lease terminations. Board.
In the event that some of our tenants went into
default, we could incur impairments and
write-offs * Rent deposits are held where considered appropriate;
of IFRS 16 lease incentive receivable balances the balance at 31 December 2021 was GBP17.6m.
which arise from the accounting requirement
to spread any rent-free incentives given to a
tenant over the respective lease term. * Active rent collection with regular reports to the
Due to the economic impact of Covid-19, and its Executive Committee.
potential long-term implications, occupiers
could be facing increased financial difficulty.
Restaurants and hospitality tenants account * We maintain close and frequent contact with our
for approximately 6% of the Group's portfolio tenants.
income. Despite re-opening restaurants, retail
and leisure properties, footfall is lower than
pre-Covid-19 levels, disproportionately impacting
on the revenues and operations of such tenants.
3. Income decline
Changes in macroeconomic factors may adversely * The Credit Committee perform detailed reviews of all
affect London's office market. The Group is prospective tenants.
exposed to external factors which are outside the
Group's control, such as future demand for
office space, the 'grey' market in office space * A "tenants on watch" register is maintained and
(i.e. tenant controlled vacant space), weaknesses regularly reviewed by the Executive Committee and the
in retail and hospitality businesses, increase in Board.
homeworking and the depth of any future
recession and subsequent rise in unemployment
and/or interest rates. Such macroeconomic * Ongoing dialogue and proactive internal management is
conditions maintained with tenants to understand their concerns
may lead to a general property market and requirements.
contraction, a decline in rental values, decline
in
Group income and potentially property values. Any * The Group's low loan-to-value ratio reduces the
reduction in property income could also likelihood that falls in property values have a
have an adverse impact on the value of the significant impact on our business continuity.
Group's properties and may hinder any future
dividend
payments.
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.
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
----------------------------- ------------------------
4. Risks arising from our development activities
A. Reduced development returns
Returns from the Group's developments may be adversely * Detailed reviews are performed on construction
impacted due to: projects to ensure that programme forecasts predicted
* delay on-site; by our contractors are aligned with our views.
* increased construction costs; * The procurement process used by the Group includes
the use of highly regarded firms of quantity
surveyors and is designed to minimise uncertainty
* labour shortages; regarding costs.
* materials and material shortages; and * Development costs are benchmarked to ensure that the
Group obtains competitive pricing and, where
appropriate, fixed price contracts are negotiated.
* adverse letting conditions.
* Post-completion reviews are carried out for all major
Despite strict Covid-19 protocols on-site, there is a risk developments to ensure that improvements to the
of labour and resource shortages Group's procedures are identified, implemented and
both on-site and in the supply chain, which could lead to lessons learned.
productivity disruption and project
delay. Any significant delay in completing the development
projects may result in financial * Procedures carried out before starting work on-site,
penalties or a reduction in the Group's targeted financial such as site investigations, historical research of
return. the property and surveys conducted as part of the
During 2021, our Development team liaised and agreed planning application, reduce the risk of unidentified
processes to mitigate against delays issues causing delays once on-site.
or cost increases with our principal contractors due to
potential material and labour shortages.
* Investment appraisals, which include contingencies
and inflationary cost increases, are prepared and
sensitivity analysis is undertaken to judge whether
an adequate return is made in all likely
circumstances.
* The Group's pre-letting strategy reduces or removes
the letting risk of the development as soon as
possible.
B. 'On-site' risk
Risk of project delays and/or cost overruns caused by * Strict Covid-19 protocols at all of our on-site
unidentified issues. For example, if developments, in accordance with Site Operating
the Group fails to: Procedures (published by the Construction Leadership
* adequately appraise investments prior to starting Council).
work on-site, including through taking into account
contingencies and inflationary cost increases;
* Regular monitoring of our contractors' cash flows.
* use a procurement process that is properly designed
(to minimise uncertainty around costs) and that * Frequent meetings with key contractors and
includes the use of highly regarded quantity subcontractors to review their work programme and
surveyors; maintain strong relationships.
* benchmark development costs; * Off-site inspection of key components to ensure they
have been completed to the requisite quality.
* conduct thorough site investigations to reduce the
risk of unidentified issues such as asbestos; * Prior to construction beginning on-site, professional
project managers conduct site investigations
including the building's history and various surveys
* implement its pre-letting strategy; or to identify any potential issues.
* conduct detailed reviews on construction projects to * Monthly reviews of Brexit related supply chain issues
evaluate programme forecasts made by contractors, for each of our major projects, including in respect
development projects may be significantly delayed and to potential labour shortages.
we could face a loss of rental income and penalties.
Due to the restrictions introduced to prevent the spread of
Covid-19, our on-site developments
have been subject to minor delays. The Featherstone
Building and Soho Place are aiming to
achieve practical completion in H1 2022 and are still
expected to be completed within their
original budgets. Sites are now fully operational in
accordance with Site Operating Procedures
Version 9. Despite strict Covid-19 protocols on-site, there
is a risk of labour and resource
shortages both on-site and in the supply chain, which could
lead to productivity disruption
and project delay.
C. Contractor/subcontractor default
Returns from the Group's developments are reduced due to * Regular monitoring of our contractors, including
delays and cost increases caused their project cash flows, is carried out.
by either a main contractor or major subcontractor
defaulting during the project. There have
been ongoing issues within the construction industry in * Key construction packages are acquired early in the
respect of the level of risk and narrow project's life to reduce the risks associated with
profit margins being accepted by contractors. later default.
There is an ongoing risk of insolvencies in the
construction industry. Due to this risk, we
have been actively monitoring the financial health of our * The financial standing of our main contractors is
main contractors and subcontractors. reviewed prior to awarding the project contract.
* Our main contractors are responsible, and assume the
immediate risk, for subcontractor default.
* Payments to contractors are in place to incentivise
the achievement of project timescales, with damages
agreed in the event of delay/cost overruns.
* Regular on-site supervision by a dedicated Project
Manager who monitors contractor performance and
identifies problems at an early stage, thereby
enabling remedial action to be taken.
* We use known contractors with whom we have
established long-term working relationships.
* Contractors are paid promptly and are encouraged to
pay subcontractors promptly.
5. Risk of business interruption
A. Cyber-attack on our IT systems
The Group may be subject to a cyber-attack that results in * The Group's Business Continuity Plan is regularly
it being unable to use its information reviewed and tested.
systems and/or losing data. Such an attack could severely
restrict the ability of the Group
to operate, lead to an increase in costs and/or require a * Independent internal and external
significant diversion of management penetration/vulnerability tests are regularly
time. conducted to assess the effectiveness of the Group's
This risk has been heightened during the Covid-19 pandemic, security.
as cyber-criminals seek to exploit
the disruption caused by employees working from home. In
response, we identified the key IT * Multi-Factor Authentication exists for remote access
risks arising from homeworking and implemented additional to our systems.
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 DIT
department.
* The Group has been awarded the 'Cyber Essentials'
accreditation which demonstrates our commitment to
cyber security.
B. Cyber-attack on our buildings
The Group is exposed to cyber-attacks on its properties * Each building has incident management procedures
which may result in data breaches which are regularly reviewed and tested.
or significant disruption to IT-enabled tenant services. A
major cyber-attack against the
Group or its properties could negatively impact the Group's * Physical segregation between the building's core IT
business, reputation and operating infrastructure and tenants' corporate IT networks.
results.
* Physical segregation of IT infrastructure between
buildings across the portfolio.
* Inclusion of Building Managers in any cyber security
awareness training and phishing simulations.
C. Significant business interruption (for example,
pandemic, terrorism-related event or other * The Group has comprehensive business continuity and
business interruption) incident management procedures both at Group level
Major incidents may significantly interrupt the Group's and for each of our managed buildings which are
business, its occupiers and/or supply regularly reviewed and tested.
chain. Such incidents could be caused by a wide range of
events such as a pandemic, terrorism-related
events, natural catastrophes or fires. This could result in * Government health guidelines are maintained at all of
issues such as being unable to our construction sites.
access or operate the Group's properties, tenant failures
or reduced rental income, share
price volatility or loss of key suppliers. * Most of our employees are capable of working remotely
The ramifications of the Covid-19 outbreak have been and have the necessary IT resources.
far-reaching across all sectors and the
pandemic has created extreme economic volatility. The Group
has suffered minimal disruption * Fire protection and access/security procedures are in
due to Covid-19 and has been capable of operating place at all of our managed properties.
successfully remotely during lockdown restrictions.
However, the lockdowns have caused a delay to our
development activities and reduction in * Comprehensive property damage and business
cash flow due to deferment or non-payment of rent. interruption insurance which includes terrorism.
* At least annually, a fire risk assessment and health
and safety inspection are performed for each property
in our managed portfolio, in addition to annual
Planned Preventive Maintenance surveys.
* Robust security at our buildings, including CCTV and
access controls.
6. Reputational damage
The Group has invested significantly in developing a * Close involvement of senior management in day-to-day
well-regarded and respected brand. The operations and established procedures for approving
Group's reputation could be damaged, for example, through all external announcements.
unauthorised or inaccurate media
coverage, unethical practices or behaviours by the Group's
executives, or failure to comply * All new members of staff benefit from an induction
with relevant legislation. This could lead to a material programme and are issued with our Group staff
adverse effect on the Group's operating handbook.
performance and the overall financial position of the
Group. Our strong culture, low overall
risk tolerance and established procedures and policies * The Group employs a Head of Investor and Corporate
mitigate against the risk of internal Communications and retains services of an external PR
wrongdoing. agency, both of whom maintain regular contact with
Feedback on how we have responded to the Covid-19 pandemic, external media sources.
particularly in respect to our
occupiers, suppliers, employees and Community Fund, has
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.
7. Our resilience to climate change
If the Group fails to respond appropriately, and * The Board and Executive Committee receive regular
sufficiently, to climate change risks or updates and presentations on ESG (environmental,
fails to benefit from the potential opportunities. This social and governance) matters as well as progress
could lead to damage to our reputation, against our pathway to becoming net zero carbon by
loss of income and/or property values and loss of our 2030.
licence to operate. In addition, there
is a risk that the cost of construction materials and
providing energy, water and other services * The Sustainability Committee monitors our performance
to occupiers will rise as a consequence of climate change. and management controls.
Overall, climate change risk continues to increase in
prominence and importance. The UK Government
continues to introduce more legislative aspects linked to * Strong team led by an experienced Head of
climate risk e.g. from 2022 certain Sustainability.
listed entities will have to disclose in line with the TCFD
and the latest energy white paper
is setting out higher standards for energy efficiency in * The Group monitors its ESG reporting against various
commercial and residential properties. industry benchmarks.
* Production of an annual Responsibility Report with
key data and performance points which are externally
assured.
* In 2017 we adopted science-based carbon targets which
have been independently verified by the Science-Based
Targets initiative (SBTi).
8. Non-compliance with regulation
A. Non-compliance with health and safety legislation
The Group's cost base is increased, and management time is * All our properties have the relevant health, safety
diverted through an incident or and fire management procedures in place which are
breach of health, safety and fire legislation leading to reviewed annually.
reputational damage and/or loss of
our licence to operate. For example, a major health and
safety incident could cause significant * The Group has a qualified Health and Safety team
business interruption for the Group. whose performance is monitored and managed by the
During 2021, the health and wellbeing of our employees, Health and Safety Committee.
occupiers and other stakeholders has
been a top priority. We have invested additional resources
into health and safety. Our accident * Health and safety statutory compliance within our
frequency rate (AFR) for development projects in 2021 was managed portfolio is managed and monitored using
1.26 (2020: 2.72) a reduction of RiskWise, a software compliance platform. This is
53.7%. supported by annual property health checks.
* The Managed Portfolio Health and Safety Manager with
the support of internal and external stakeholders
supports our Portfolio and Building Managers to
ensure statutory compliance.
* The Construction Health and Safety Manager, with the
support of internal and external stakeholders,
ensures our Construction (Design and Management)
Regulations (CDM) client duties are executed and
monitored and 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, including both physical and mental health.
B. Other regulatory non-compliance
Should the Group breach any of the legislation that forms * The Board and Risk Committee receive regular reports
the regulatory framework within prepared by the Group's legal advisers identifying
which the Group operates, the Group's cost base could upcoming legislative/regulatory changes. External
increase and management time could be advice is taken on any new legislation.
diverted. This could lead to damage to our reputation
and/or loss of our licence to operate.
During 2020 and 2021, we have followed the UK Government's * Staff training and awareness programmes.
regulations in respect of social
distancing and safe working practices. In accordance with
disclosure requirements, we ensured * Group policies and procedures dealing with all key
our stakeholders and the wider investment market were kept legislation are available on the Group's intranet.
appraised of Derwent London's response
to Covid-19 and its impact on our business.
During 2021, the Competition and Markets Authority (the * A Group whistleblowing system for staff is maintained
"CMA") has been investigating uncompetitive to report wrongdoing anonymously.
behaviour in the construction industry, including price
fixing, marketing sharing and bid
rigging. Although the Group seeks assurances from * Managing our properties to ensure they are compliant
prospective contractors on the status of with the Minimum Energy Efficiency Standards (MEES)
any CMA investigations in which they are involved, the use for Energy Performance Certificates (EPCs).
of contractors which are found
to be engaging in uncompetitive behaviour could lead to
reputational damage for the Group.
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. The Group's loan-to-value ratio has
increased to 20.8% as at 31 December 2021 but remains modest.
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 though
the estimated risk is considered lower than in 2020. 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 69 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 GBP0.1m (2020:
GBP0.8m) or a decrease of GBP0.1m (2020: GBP0.7m).
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 2021, the proportion of fixed debt held
by the Group was above this range at 99% (2020: 85%) following the
green bond issue in November 2021 which has a fixed interest rate.
It initially used to repay amounts drawn under the Group's
revolving credit facilities, which have a floating interest rate.
During both 2021 and 2020, 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 2021, the Group's strategy, which was unchanged from
2020, 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 26.
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 GBP4.8bn (2020: GBP4.3bn) of uncharged
property as at 31 December 2021.
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 the Company financial statements in
accordance with UK-adopted international accounting standards.
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 applicable UK-adopted international accounting
standards 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 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 also responsible for keeping adequate
accounting records that are sufficient to show and explain the
Group's 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
24 February 2022
GROUP INCOME STATEMENT
2021 2020
Note GBPm GBPm
Gross property and other income 5 240.2 268.6
----------------------------------------------------------- ---- ------- --------
Net property and other income(1) 5 187.5 183.0
Administrative expenses (37.1) (37.8)
Revaluation surplus/(deficit) 11 130.8 (196.1)
Profit on disposal 6 10.4 1.7
Profit/(loss) from operations 291.6 (49.2)
Finance income 7 - 0.2
Finance costs 7 (28.1) (30.3)
Loan arrangement costs written off 7 - (0.1)
Movement in fair value of derivative financial instruments 4.8 (1.9)
Financial derivative termination costs 8 (1.9) (1.7)
Share of results of joint ventures 9 (13.9) -
Profit/(loss) before tax 252.5 (83.0)
Tax credit 10 1.3 1.6
Profit/(loss) for the year 253.8 (81.4)
Attributable to:
- Equity shareholders 252.3 (77.6)
- Non-controlling interest 1.5 (3.8)
253.8 (81.4)
Basic earnings/(loss) per share 25 224.99p (69.34p)
------- --------
Diluted earnings/(loss) per share 25 224.44p (69.34p)
------- --------
(1) Net property and other income in 2021 includes
write-off/impairment of receivables of GBP0.8m (2020: GBP10.1m plus
a service charge waiver of GBP4.1m). See note 3 for additional
information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
2021 2020
Note GBPm GBPm
Profit/(loss) for the year 253.8 (81.4)
Actuarial gains/(losses) on defined benefit pension scheme 2.7 (4.1)
Deferred tax (charge)/credit on pension 19 (0.4) 0.4
Revaluation surplus of owner-occupied property 11 3.7 0.4
Deferred tax charge on revaluation 19 (1.3) (0.2)
--------------------------------------------------------------- ---- ----- ------
Other comprehensive income/(expense) that will not
be reclassified to profit or loss 4.7 (3.5)
Total comprehensive income/(expense) relating to the year 258.5 (84.9)
Attributable to:
- Equity shareholders 257.0 (81.1)
- Non-controlling interest 1.5 (3.8)
258.5 (84.9)
GROUP BALANCE SHEET
2021 2020
Note GBPm GBPm
Non-current assets
Investment property 11 5,359.9 5,029.1
Property, plant and equipment 12 54.0 50.2
Investments 13 51.1 0.9
Deferred tax 19 0.3 -
Pension scheme surplus 1.8 -
Other receivables 14 159.3 146.4
5,626.4 5,226.6
Current assets
Trading property 11 32.2 12.9
Trading stock 22 0.4 -
Trade and other receivables 15 61.7 76.2
Cash and cash equivalents 21 68.5 50.7
162.8 139.8
Non-current assets held for sale 16 102.8 165.0
Total assets 5,892.0 5,531.4
Current liabilities
Borrowings 18 12.3 -
Leasehold liabilities 18 51.2 -
Trade and other payables 17 128.3 106.7
Corporation tax liability 0.5 0.5
Derivative financial instruments 18 0.4 -
Provisions 0.3 0.6
193.0 107.8
Non-current liabilities
Borrowings 18 1,237.1 1,033.2
Derivative financial instruments 18 0.4 5.6
Leasehold liabilities 18 19.4 66.6
Provisions 0.3 0.4
Pension scheme deficit - 2.2
Deferred tax 19 - 0.5
1,257.2 1,108.5
Total liabilities 1,450.2 1,216.3
Total net assets 4,441.8 4,315.1
Equity
Share capital 5.6 5.6
Share premium 195.4 193.7
Other reserves 941.1 939.4
Retained earnings 3,299.7 3,124.5
Equity shareholders' funds 4,441.8 4,263.2
Non-controlling interest 22 - 51.9
Total equity 4,441.8 4,315.1
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 2021 5.6 193.7 939.4 3,124.5 4,263.2 51.9 4,315.1
Profit for the year - - - 252.3 252.3 1.5 253.8
Other comprehensive
income - - 2.4 2.3 4.7 - 4.7
Share-based payments - 1.7 (0.7) 5.2 6.2 - 6.2
Dividends paid - - - (84.6) (84.6) - (84.6)
Acquisition of
non-controlling
interest - - - - - (53.4) (53.4)
At 31 December 2021 5.6 195.4 941.1 3,299.7 4,441.8 - 4,441.8
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
GROUP CASH FLOW STATEMENT
2021 2020
Restated
Note GBPm GBPm
Operating activities
Rents received 187.0 161.9
Surrender premiums and other property income 5.7 2.7
Property expenses (14.3) (19.1)
Cash paid to and on behalf of employees (26.9) (27.5)
Other administrative expenses (7.8) (8.0)
Interest received - 0.2
Interest paid 7 (21.9) (25.4)
Other finance costs 7 (3.1) (2.9)
Other income 4.1 3.5
Disposal of trading property 1 5.0 31.7
Expenditure on trading properties 1 (1.6) (1.2)
Tax paid in respect of operating activities (0.5) -
Net cash from operating activities 1 125.7 115.9
Investing activities
Acquisition of properties (251.8) (43.8)
Capital expenditure on the property portfolio 7 (172.1) (173.4)
Disposal of investment properties 297.3 125.6
Investment in joint ventures (64.1) -
Settlement of shareholder loan 2.0 -
Receipts from joint ventures - 0.4
Purchase of property, plant and equipment (1.6) (0.4)
Disposal of property, plant and equipment 0.2 -
VAT received/(paid) 7.5 (0.9)
Net cash used in investing activities (182.6) (92.5)
Financing activities
Net proceeds of green bond issue 346.0 -
Repayment of revolving bank loan - (6.5)
Drawdown of new revolving bank loan - 24.2
Net movement in revolving bank loans (117.8) 38.0
Proceeds from other loan 12.3 -
Repayment of secured bank loan (28.0) -
Financial derivative termination costs 8 (1.9) (1.7)
Acquisition of non-controlling interest 22 (53.4) -
Net proceeds of share issues 1.8 0.6
Dividends paid 20 (84.3) (81.8)
Timing differences on indirect taxes
Net cash from/(used in) financing activities 74.7 (27.2)
Increase/(decrease) in cash and cash equivalents in the year 17.8 (3.8)
Cash and cash equivalents at the beginning of the year 50.7 54.5
Cash and cash equivalents at the end of the year 21 68.5 50.7
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
On 31 December 2020, IFRS as adopted by the European Union at
that date was brought into UK law and became UK-adopted
International Accounting Standards, with future changes being
subject to endorsement by the UK Endorsement Board. The Group
transitioned to UK-adopted International Accounting Standards in
its consolidated financial statements on 1 January 2021. This
change constitutes a change in accounting framework however, there
is no impact on recognition, measurement or disclosure.
The financial statements have been prepared in accordance with
UK-adopted International Accounting Standards, (the "applicable
framework"), and have been prepared in accordance with the
provisions of the Companies Act 2006 (the "applicable legal
requirements"). The financial statements have been prepared under
the historical cost convention as modified by the revaluation of
investment properties, the revaluation of property, plant and
equipment, assets held for sale, pension scheme, and financial
assets and liabilities held at fair value.
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 year-end loan-to-value ratio for 2021 of 21.0%,
the interest cover ratio of 463%, the GBP608m total of undrawn
facilities and cash and the fact that the average maturity of
borrowings was 7.2 years at 31 December 2021. The impact of the
Covid-19 pandemic on the business and its occupiers has been
considered. The impact in 2021 was considerably less than in 2020
as evidenced by lower impairment charges and stronger rent
collection rates. Rent collection has improved quarter by quarter
and, for our office occupiers, is now close to that seen
pre-pandemic. Office occupation rates are also gradually
recovering. The likely impact of climate change has been
incorporated in our forecasts and an exercise has been carried out
to better understand the cost of upgrading those properties in our
portfolio with lower EPC ratings. There is a risk that, without
capital investment, some of the buildings with lower EPC ratings
could in future suffer from higher vacancy rates and
income/valuation decline. Based on our forecasts, rental income
would need to decline by 69% and property values would need to fall
by 63% before breaching our financial covenants. When subjected to
a 15% fall in both rental income and property values our interest
cover remained above 300% 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.
Presentation of cash flow statement
Following correspondence in late 2021 and early 2022 with the
Corporate Reporting Review Team of the Financial Reporting Council
("FRC"), we have agreed to classify the cash flows relating to the
additions to, and disposal of, trading properties within the Group
Cash Flow Statement within 'net operating activities' rather than
'investing activities'. We have re-presented the statement for the
year ended 31 December 2020 to reclassify GBP31.7m of cash receipts
and GBP1.2m of expenditure on trading properties from 'investing
activities' to 'operating activities'. This has the effect of
increasing the net cash from operations in 2020 from GBP85.4m to
GBP115.9m with a corresponding increase in the net cash used in
investing activities from GBP62.0m to GBP92.5m. This presentation
has also been adopted for the year ended 31 December 2021 and will
be applied consistently in future. There is no net impact upon the
cash flow statement overall and there is no impact on any balance
sheet or income statement figures. The review conducted by the FRC
was based solely on the Group's published 2020 annual report and
accounts and does not provide any assurance that the report and
accounts are correct in all material respects.
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 2020, 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 were
effective for the first time for the Group's current accounting
period and had no material impact on the financial statements.
IFRS 16 (amended) - Covid-19-related Rent Concessions;
IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (amended) - Interest
Rate Benchmark Reform - Phase 2.
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;
IAS 1 and IFRS Practice Statement 2 (amended) - Disclosure of
Accounting Policy;
IAS 8 (amended) - Definition of Accounting Estimate;
IFRS 10 and IAS 28 (amended) - Sale or Contribution of Assets
between an investor and its Associate or Joint Venture;
IFRS 3 (amended) - Business Combinations;
IAS 16 (amended) - Property, plant and equipment;
IAS 37 (amended) - Provision, contingent liabilities and
contingent assets;
IFRS 1, IFRS 9, IAS 41 and IFRS 16 annual improvements;
IAS 12 (amended) - deferred tax related to assets and
liabilities arising from a single transaction;
Annual improvements to IFRS Standards 2018-2020.
3. Significant judgments, key assumptions and estimates
The preparation of financial statements in accordance with the
applicable framework requires the use of certain significant
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 and take into account the
impact of climate change and related Environmental, Social and
Governance considerations. 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. The impact of the Covid-19 pandemic on the
Group's business and its occupiers has been considered and in 2021
the severity of the impact has reduced and the charge to the income
statement was lower than in 2020. Rent collection rates have
improved and are close to pre-Covid levels. However, there remains
an elevated risk of certain tenants defaulting or failing,
particularly in respect to the retail and hospitality sectors. This
has resulted in an additional provision totalling GBP0.2m for 2021.
After adding receivable balances written off of GBP0.6m, the total
charge for provisions and write-offs in 2021 was GBP0.8m, lower
than the GBP10.1m recognised in 2020. In arriving at the estimates,
the Group considered the tenants at higher risk, particularly in
the retail or hospitality sectors, those in administration or CVA,
the top 69 tenants by size and has 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 Trade
receivables and other receivables
(non-current) (current) Total
GBPm GBPm GBPm
Lease incentive receivables before impairment 151.9 22.0 173.9
Impairment of lease incentive receivables (4.7) (0.7) (5.4)
Write-off (0.2) (0.1) (0.3)
Net lease incentive included within accrued income 147.0 21.2 168.2
Trade receivables before impairment - 11.3 11.3
Impairment of trade receivables - (3.8) (3.8)
Service charge provision - (0.3) (0.3)
Write-off - (0.3) (0.3)
Net trade receivables - 6.9 6.9
Impairment (4.7) (4.5) (9.2)
Service charge provision - (0.3) (0.3)
----------------------------------------------------- -------------- ---------------------- -----
Write-off/impairment of receivables (4.7) (4.8) (9.5)
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
cumulative impairment against lease incentive receivable balances
was GBP5.4m and against trade receivable balances was GBP4.1m.
Lease incentive Lease incentive
receivables receivables Trade receivables
(non-current) (current) (current)
GBPm GBPm GBPm
Balance before impairment
Low risk 138.0 17.4 3.7
Medium risk 6.3 3.2 2.3
High risk 7.4 1.3 5.0
151.7 21.9 11.0
Impairment
Low risk (0.2) - -
Medium risk (0.4) (0.1) (0.1)
High risk (4.1) (0.6) (4.0)
(4.7) (0.7) (4.1)
147.0 21.2 6.9
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 2021 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 makers (which in the Group's case are the five
executive Directors assisted by the other seven members of the
Executive Committee) in order to allocate resources to the segments
and to assess their performance.
The internal financial reports received by the Group's Executive
Committee contain financial information at a Group level as a whole
and there are no reconciling items between the results contained in
these reports and the amounts reported in the financial statements.
These internal financial reports include IFRS figures but also
report 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 25. 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 97%
office buildings(1) by value at 31 December 2021 (2020: 98%). The
Directors consider that these individual properties have similar
economic characteristics and therefore have been aggregated into a
single reportable segment. The remaining 3% (2020: 2%) 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
2021 2020
----------------------- -----------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 108.4 0.3 108.7 104.3 0.1 104.4
West End borders/other 18.5 - 18.5 20.4 - 20.4
City borders 67.6 0.5 68.1 74.9 0.5 75.4
Provincial - 4.5 4.5 - 4.5 4.5
194.5 5.3 199.8 199.6 5.1 204.7
A reconciliation of gross property income to gross property and
other income is given in note 5.
Excluded from the table above is GBP0.4m of the Group's share of
gross property income in relation to joint ventures located within
West End central. See note 9.
Property portfolio
2021 2020
------------------------- -------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 3,313.6 82.2 3,395.8 2,936.7 45.9 2,982.6
West End borders/other 408.1 - 408.1 447.9 - 447.9
City borders 1,649.7 8.4 1,658.1 1,738.2 8.0 1,746.2
Provincial - 82.2 82.2 - 75.9 75.9
5,371.4 172.8 5,544.2 5,122.8 129.8 5,252.6
Fair value
West End central 3,348.9 84.2 3,433.1 2,966.2 47.4 3,013.6
West End borders/other 431.4 - 431.4 475.4 - 475.4
City borders 1,690.4 8.4 1,698.8 1,781.7 8.1 1,789.8
Provincial - 83.0 83.0 - 76.7 76.7
5,470.7 175.6 5,646.3 5,223.3 132.2 5,355.5
A reconciliation between the fair value and carrying value of
the portfolio is set out in note 11.
Excluded from the table above is property in relation to the
Group's share of joint ventures located within West End central,
with a carrying value of GBP50.2m and a fair value of GBP50.0m. See
notes 11 and 13.
5. Property and other income
2021 2020
GBPm GBPm
Gross rental income 194.2 202.9
Surrender premiums received 3.6 0.9
Other property income 2.0 0.9
Gross property income 199.8 204.7
Trading property sales proceeds(1) 6.7 32.3
Service charge income(1) 30.2 28.1
Other income(1) 3.5 3.5
Gross property and other income 240.2 268.6
Gross rental income 194.2 202.9
Write-off/impairment of receivables (0.8) (10.1)
Service charge waiver - (4.1)
--------------------------------------- ------ ------
Service charge income(1) 30.2 28.1
Service charge expenses (33.6) (30.9)
--------------------------------------- ------ ------
(3.4) (2.8)
Property costs (11.8) (11.6)
Net rental income 178.2 174.3
--------------------------------------- ------ ------
Trading property sales proceeds(1) 6.7 32.3
Trading property cost of sales (6.0) (27.1)
--------------------------------------- ------ ------
Profit on trading property disposals 0.7 5.2
Other property income 2.0 0.9
Other income(1) 3.5 3.5
Surrender premiums received 3.6 0.9
Dilapidation receipts 0.9 -
Write-down of trading property (1.4) (1.8)
Net property and other income 187.5 183.0
(1) In line with IFRS 15 Revenue from Contracts with Customers,
the Group recognised a total of GBP40.4m (2020: GBP63.9m) 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 GBP20.2m (2020: GBP24.0m) 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 impairment review has been carried out using the expected
credit loss model within IFRS 9 Financial Instruments (see notes 3
and 15 for additional information). Included in this provision is a
charge of GBP0.6m against trade receivables relating to rental
income for the 25 December 2021 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 GBP1.8m increase and GBP1.9m
decrease respectively, in the Group's profit for the period. This
sensitivity has been performed on the medium to high risk tenants
as the significant estimation uncertainty is wholly related to
these.
In the year to 31 December 2020, a 25% waiver of two quarters'
service charge was given to support occupiers across the whole
portfolio in response to Covid-19 at a cost of GBP4.1m to the
Group.
6. Profit on disposal
2021 2020
GBPm GBPm
Investment property
Gross disposal proceeds 402.4 120.9
Costs of disposal (3.7) (0.6)
Net disposal proceeds 398.7 120.3
Carrying value (387.5) (118.6)
Adjustment for lease costs and rents recognised in advance (0.7) -
Profit on disposal of investment property 10.5 1.7
Artwork
Carrying value (0.1) -
Loss on disposal of artwork (0.1) -
Profit on disposal 10.4 1.7
Included within gross disposal proceeds for 2021 is GBP167.6m
relating to the disposal of the Group's freehold interest in
Johnson Building EC1 in January 2021, which was classified as a
non-current asset held for sale at 31 December 2020 and GBP86.5m
relating to the disposal of the Group's freehold interest in Angel
Square EC1 in August 2021.
Also included within gross disposal proceeds for 2021 is
GBP100.7m relating to the surrender of headleases at 19-35 Baker
Street W1. A new headlease was subsequently regranted and is
included in 'additions' in Note 11. In addition, the Group also
disposed of its leasehold interest in 17-39 George Street, 16-20
Baker Street, 27-33 Robert Adam Street and 26-27 Castlereagh Street
W1 for gross proceeds of GBP45.2m (see note 22).
7. Finance income and total finance costs
2021 2020
GBPm GBPm
Finance income
Bank interest receivable - 0.2
Finance income - 0.2
Finance costs
Bank loans 0.9 2.3
Non-utilisation fees 2.1 1.7
Unsecured convertible bonds 3.9 3.9
Unsecured green bonds 0.8 -
Secured bonds 11.4 11.4
Unsecured private placement notes 15.6 15.6
Secured loan 3.3 3.3
Amortisation of issue and arrangement costs 2.5 2.2
Amortisation of the fair value of the secured bonds (1.3) (1.3)
Obligations under headleases 0.7 0.9
Other 0.2 0.2
Gross interest costs 40.1 40.2
Less: interest capitalised (12.0) (9.9)
Finance costs 28.1 30.3
Loan arrangement costs written off - 0.1
Total finance costs 28.1 30.4
Finance costs of GBP12.0m (2020: GBP9.9m) 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 2021 were GBP37.0m (2020:
GBP38.2m) of which GBP12.0m (2020: GBP9.9m) 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 GBP1.9m in the year to 31 December
2021 (2020: GBP1.7m) deferring interest rate swaps.
9. Share of results of joint ventures
2021 2020
GBPm GBPm
Income 0.4 -
Administrative expenses (0.1) -
Revaluation deficit (10.2) -
(9.9) -
Joint venture acquisition costs incurred (4.0) -
(13.9) -
The share of results of joint ventures for the year ended 31
December 2021 includes the Group's 50% share in the Derwent Lazari
Baker Street Limited Partnership since its formation in October
2021. See note 13 for further details of the Group's joint
ventures.
10. Tax credit
2021 2020
GBPm GBPm
Corporation tax
UK corporation tax and income tax in respect of results for the year 0.9 0.8
Other adjustments in respect of prior years' tax (0.4) (0.6)
Corporation tax charge 0.5 0.2
Deferred tax
Origination and reversal of temporary differences (1.1) (2.0)
Adjustment for changes in estimates (0.7) 0.2
Deferred tax credit (1.8) (1.8)
Tax credit (1.3) (1.6)
In addition to the tax credit of GBP1.3m (2020: GBP1.6m) that
passed through the Group income statement, a deferred tax charge of
GBP1.3m (2020: GBP0.2m) relating to the revaluation of the
owner-occupied property at 25 Savile Row W1 and a charge of GBP0.4m
(2020: credit of GBP0.4m) relating to the future defined benefit
pension liabilities were recognised in the Group statement of
comprehensive income.
The effective rate of tax for 2021 is lower (2020: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2021 2020
GBPm GBPm
Profit/(loss) before tax 252.5 (83.0)
------ ------
Expected tax charge/(credit) based on the standard rate of
corporation tax in the UK of 19.00% (2020: 19.00%)(1) 48.0 (15.8)
Difference between tax and accounting profit on disposals (0.7) 1.2
REIT exempt income (14.9) (14.7)
Revaluation (surplus)/deficit attributable to REIT properties (32.2) 36.6
Expenses and fair value adjustments not allowable for tax purposes 4.6 (1.3)
Capital allowances (4.3) (5.3)
Other differences (1.4) (1.7)
Tax credit on current year's profit/(loss) (0.9) (1.0)
Adjustments in respect of prior years' tax (0.4) (0.6)
Tax credit (1.3) (1.6)
(1) C hanges to the UK corporation tax rates were substantively
enacted as part of the Finance Bill 2021 (on 24 May 2021) and
include increasing the main rate to 25% effective on or after 1
April 2023. Deferred taxes at the balance sheet date have been
measured using the expected enacted tax rate and this is reflected
in these financial statements.
11. Property portfolio
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 2021 3,893.5 1,135.6 5,029.1 45.6 165.0 12.9 5,252.6
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 214.6 139.0 353.6 - - - 353.6
Capital expenditure 76.6 88.4 165.0 - - 1.1 166.1
Interest capitalisation 2.4 9.6 12.0 - - - 12.0
---------------------------- -------- --------- ---------- -------- -------- -------- ---------
Additions 293.6 237.0 530.6 - - 1.1 531.7
Disposals (75.8) (146.7) (222.5) - (165.0) (5.9) (393.4)
Transfers (63.7) (63.0) (126.7) - 101.2 25.5 -
Revaluation 91.5 39.3 130.8 3.7 - - 134.5
Write-down of trading
property - - - - - (1.4) (1.4)
Transfer from prepayments
and accrued income - - - - 1.6 - 1.6
Movement in grossing up of
headlease liabilities - 3.8 3.8 - - - 3.8
Movement in grossing up of
other liabilities - 14.8 14.8 - - - 14.8
At 31 December 2021 4,139.1 1,220.8 5,359.9 49.3 102.8 32.2 5,544.2
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
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Adjustments from fair value to carrying value
At 31 December 2021
Fair value 4,296.2 1,161.9 5,458.1 49.3 104.8 34.1 5,646.3
Selling costs relating to
assets
held for sale - - - - (2.0) - (2.0)
Revaluation of trading
property - - - - - (1.9) (1.9)
Lease incentives and costs
included in receivables (157.1) (26.3) (183.4) - - - (183.4)
Grossing up of headlease
liabilities - 70.4 70.4 - - - 70.4
Grossing up of other
liabilities - 14.8 14.8 - - - 14.8
Carrying value 4,139.1 1,220.8 5,359.9 49.3 102.8 32.2 5,544.2
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
Reconciliation of fair value
2021 2020
GBPm GBPm
Portfolio including the Group's share of joint ventures and trading stock 5,696.7 5,355.5
Less: trading stock (0.4) -
Portfolio including the Group's share of joint ventures 5,696.3 5,355.5
Less: joint ventures (50.0) -
IFRS property portfolio 5,646.3 5,355.5
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2021 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 GBP5,610.8m (2020:
GBP5,324.5m) and other valuers at GBP35.5m (2020: GBP31.0m), giving
a combined value of GBP5,646.3m (2020: GBP5,355.5m). Of the
properties revalued by CBRE, GBP49.3m (2020: GBP45.6m) relating to
owner-occupied property was included within property, plant and
equipment and GBP34.1m (2020: GBP14.3m) 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.
At 31 December 2021, the grossing up of other liabilities of
GBP14.8m related to the discounted profit share to TfL for the
development at Soho Place W1.
Following exchange of contracts in December 2021 for the sale of
its freehold interest in New River Yard EC1, the Group transferred
GBP63.7m from investment property to assets held for sale. This
subsequently completed in January 2022. A revaluation deficit of
GBP1.2m relating to the asset held for sale is included within the
revaluation surplus of GBP130.8m.
Contracts exchanged in July 2020 for the sale of its leasehold
interest in 2 & 4 Soho Place W1, with completion expected in
2022. As a result the Group transferred GBP37.5m from investment
property to assets held for sale. A revaluation deficit of GBP0.8m
relating to the asset held for sale is included within the
revaluation surplus of GBP130.8m.
Net zero carbon and EPC compliance
The Group published its pathway to net zero carbon in July 2020
and has set 2030 as its target date to achieve this. GBP116.6m
(year to 31 December 2020: GBP103.2m) of eligible 'green'
expenditure was incurred in the year to 31 December 2021 on major
developments at 80 Charlotte Street W1, Soho Place W1, The
Featherstone Building EC1 and 19-35 Baker Street W1. As these have
met the criteria to be eligible qualifying projects under the Green
Finance Framework, the Group has utilised the green tranche of the
GBP450m revolving credit facility and the GBP350m green bonds.
In 2021, the Group commissioned a third-party report to
determine the costs of achieving EPC compliance across the
portfolio by 2030. Results of the study indicate an estimated cost
of c.GBP97m to upgrade the Group's properties to EPC 'B' or above.
An exercise is underway to estimate the amount of capital
expenditure that is recoverable through service charges or not
already included within future planned refurbishment projects.
Therefore, the amount has not been included as committed capital
expenditure in 2021.
Reconciliation of revaluation surplus/(deficit)
2021 2020
GBPm GBPm
Total revaluation surplus/(deficit) 142.9 (178.5)
Less:
Share of joint ventures 13.9 -
Lease incentives and costs (19.7) (16.7)
Assets held for sale selling costs (2.0) (2.0)
Trading property revaluation surplus (2.0) (0.3)
IFRS revaluation surplus/(deficit) 133.1 (197.5)
------ -------
Reported in the:
Revaluation surplus/(deficit) 130.8 (196.1)
Write-down of trading property (1.4) (1.8)
Group income statement 129.4 (197.9)
Group statement of comprehensive income 3.7 0.4
133.1 (197.5)
Historical cost
2021 2020
GBPm GBPm
Investment property 3,292.6 3,149.2
Owner-occupied property 19.6 19.6
Assets held for sale 38.5 65.7
Trading property 44.0 22.6
Total property portfolio 3,394.7 3,257.1
Sensitivity of measurement to variations in the significant
unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group's property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Impact on fair value measurement Impact on fair value measurement
Unobservable input of significant increase in input of significant decrease in input
----------------------- ------------------------------------ ------------------------------------
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Reversionary yield Decrease Increase
True equivalent yield Decrease Increase
----------------------- -------------------------------- --------------------------------
There are inter-relationships between these inputs as they are
partially determined by market conditions. An increase in the
reversionary yield may accompany an increase in gross ERV and would
mitigate its impact on the fair value measurement.
A sensitivity analysis 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 (5.5%) (4.9%) (5.1%) (3.0%) (2.3%) (5.3%)
-25bp 6.2% 5.4% 5.6% 3.2% 2.5% 5.9%
---------------------- -------- ------------- ------- ---------- ---------- ------
ERV
+GBP2.50 psf 4.2% 4.8% 4.9% 19.3% - 4.7%
-GBP2.50 psf (4.2%) (4.8%) (4.9%) (19.3%) - (4.7%)
---------------------- -------- ------------- ------- ---------- ---------- ------
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2021 45.6 1.0 3.6 50.2
Additions - - 1.3 1.3
Disposals - (0.1) (0.1) (0.2)
Depreciation - - (0.9) (0.9)
Revaluation 3.7 (0.1) - 3.6
At 31 December 2021 49.3 0.8 3.9 54.0
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
Net book value
Cost or valuation 49.3 0.8 8.0 58.1
Accumulated depreciation - - (4.1) (4.1)
At 31 December 2021 49.3 0.8 3.9 54.0
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
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 December 2021. 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
2021 was GBP0.9m (2020: GBP1.0m). See note 11 for the historical
cost of owner-occupied property.
13. Investments
The Group has a 50% interest in four joint venture vehicles,
Derwent Lazari Baker Street Limited Partnership, Dorrington Derwent
Holdings Limited, Primister Limited and Prescot Street Limited
Partnership.
2021 2020
GBPm GBPm
At 1 January 0.9 1.3
Additions 64.1 -
Joint venture acquisition costs (4.0) -
Revaluation deficit (see note 9) (10.2) -
Other profit from operations (see note 9) 0.3 -
Distributions received - (0.4)
At 31 December 51.1 0.9
In October 2021, the Group entered into a 50:50 joint venture
with Lazari Investments Limited to establish the Derwent Lazari
Baker Street Limited Partnership. The Group's 50% share was
acquired for GBP64.1m, including GBP4.0m of acquisition costs and
fees and GBP0.1m of working capital contributions. The joint
venture holds three properties, 38-52 Baker Street W1, 54-60 Baker
Street W1 and 66-70 Baker Street W1, is funded by loans from its
partners and has no third party borrowings.
The Group's share of its investments in joint ventures is
represented by the following amounts in the underlying joint
venture entities.
2021 2020
--------------------------- ---------------------------
Joint ventures Group share Joint ventures Group share
GBPm GBPm GBPm GBPm
Non-current assets 100.5 50.2 - -
Current assets 3.7 1.9 1.2 0.6
Current liabilities (2.7) (1.3) (0.7) (0.3)
Non-current liabilities (120.8) (60.4) - -
Net assets (19.3) (9.6) 0.5 0.3
Loans provided to joint ventures 60.7 0.6
Total investment in joint ventures 51.1 0.9
14. Other receivables (non-current)
2021 2020
GBPm GBPm
Prepayments and accrued income 159.3 146.4
Prepayments and accrued income include GBP147.0m (2020:
GBP132.3m) 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, GBP12.3m (2020: GBP14.1m) relates to the spreading effect
of the initial direct costs of letting over the same term. Together
with GBP24.1m (2020: GBP19.6m), which was included as accrued
income within trade and other receivables (see note 15), these
amounts totalled GBP183.4m at 31 December 2021 (2020:
GBP166.0m).
The total movement in tenant lease incentives is shown
below:
2021 2020
GBPm GBPm
At 1 January 149.7 135.9
Amounts taken to income statement 19.9 23.0
Capital incentives granted 0.7 0.5
Lease incentive impairment 0.3 (5.7)
Adjustment for non-current asset held for sale (1.6) (3.2)
Disposal of investment properties (0.5) -
Write off to bad debt (0.3) (0.8)
168.2 149.7
Amounts included in trade and other receivables (see note 15) (21.2) (17.4)
At 31 December 147.0 132.3
15. Trade and other receivables
2021 2020
GBPm GBPm
Trade receivables 6.9 27.5
Other receivables 3.7 4.1
Prepayments 24.7 22.6
Accrued income 26.4 22.0
61.7 76.2
Trade receivables are split as follows:
2021 2020
GBPm GBPm
less than three months due 6.8 17.4
between three and six months due 0.1 3.5
between six and twelve months due - 6.6
6.9 27.5
Trade receivables as at 31 December 2021 are stated net of
impairment. The balances have reduced over the year as amounts
deferred or uncollected in 2020 were received. As a result, the
expected credit loss assessment under IFRS 9 (see note 3) was lower
than in 2020.
The Group has GBP9.5m of provision for bad debts as shown below.
GBP4.1m are included in trade receivables, GBP0.7m in accrued
income and GBP4.7m in prepayments and accrued income within other
receivables (non-current) (note 14).
Provision for bad debts
2021 2020
GBPm GBPm
At 1 January 9.3 0.4
Lease incentive provision (0.2) 5.7
Trade receivables provision 0.8 3.2
Service charge provision 0.1 0.3
Released (0.5) (0.3)
At 31 December 9.5 9.3
The provision for bad debts are split as follows:
2021 2020
GBPm GBPm
less than three months due 4.3 3.2
between three and six months due 0.2 0.5
between six and twelve months due 0.3 1.0
greater than twelve months due 4.7 4.6
9.5 9.3
16. Non-current assets held for sale
2021 2020
GBPm GBPm
Transferred from investment properties (see note 11) 101.2 161.2
Transferred from prepayments and accrued income 1.6 3.8
102.8 165.0
In December 2021, the Group exchanged contracts for the sale of
its freehold interest in New River Yard EC1. The property was
valued at GBP66.5m as at 31 December 2021. 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 GBP1.2m, the carrying value was GBP65.3m (see note
11).
In July 2020, the Group exchanged contracts on the sale of its
leasehold interest in 2 & 4 Soho Place W1. The property was
valued at GBP38.3m as at 31 December 2021. The disposal is expected
to complete in 2022 and therefore, in accordance with IFRS 5
Non-current Assets Held for Sale, this property was recognised as a
non-current asset held for sale. After deducting selling costs of
GBP0.8m, the carrying value at 31 December 2021 was GBP37.5m (see
note 11).
17. Trade and other payables
2021 2020
GBPm GBPm
Trade payables 3.2 2.5
Other payables 38.0 21.2
Other taxes 8.0 4.0
Accruals 37.2 32.0
Deferred income 41.9 47.0
128.3 106.7
Deferred income primarily relates to rents received in
advance.
At 31 December 2021, other payables included GBP14.8m discounted
profit share for the development at Soho Place W1 (see note
11).
18. Net debt and derivative financial instruments
2021 2020
---------------- ----------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Current liabilities
Other loans 12.3 12.3 - -
12.3 12.3 - -
Non-current liabilities
1.5% unsecured convertible bonds 2025 168.3 174.0 166.4 174.2
6.5% secured bonds 2026 182.4 205.7 183.6 220.3
1.875% unsecured green bonds 2031 346.0 344.6 - -
Unsecured private placement notes 2026 - 2034 453.0 493.1 452.9 526.4
3.99% secured loan 2024 82.5 85.6 82.3 89.1
Unsecured bank loans 4.9 10.0 120.1 125.0
Secured bank loans - - 27.9 28.0
Borrowings 1,249.4 1,325.3 1,033.2 1,163.0
Derivative financial instruments expiring in less than one year 0.4 0.4 - -
Derivative financial instruments expiring in
greater than one year 0.4 0.4 5.6 5.6
Total borrowings and derivative financial instruments 1,250.2 1,326.1 1,038.8 1,168.6
Reconciliation to net debt:
Borrowings and derivative financial instruments 1,250.2 1,038.8
Adjustments for:
Leasehold liabilities 70.6 66.6
Derivative financial instruments (0.8) (5.6)
Cash and cash equivalents (68.5) (50.7)
Net debt 1,251.5 1,049.1
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 2021 or 2020.
Other loans consist of a GBP12.3m interest-free loan with no
fixed repayment date from a third party providing development
consultancy services on the residential element of the 19-35 Baker
Street W1 development. The loan will be repaid from the sale
proceeds of these residential apartments after completion of the
scheme. The agreement provides for a profit share on completion of
the sales which, under IFRS 9 Financial Instruments, has been
deemed to have a carrying value of GBPnil at 31 December 2021
(2020: GBPnil). The carrying value of the loan at 31 December 2021
was GBP12.3m (2020: GBPnil).
The Group's secured bank loan was settled during the year in
advance of the acquisition of the non-controlling interest from The
Portman Estate, see note 22. The loan was previously secured by a
fixed charge over GBP105.2m of the Group's properties as at 31
December 2020. The 3.99% secured loan 2024 was secured by a fixed
charge over GBP305.2m (31 December 2020: GBP304.5m) 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 GBP571.8m (31 December 2020: GBP616.5m) of the
Group's properties.
The Group continues to maintain significant headroom on all
financial covenants.
19. Deferred tax
Revaluation
surplus/(deficit) Other Total
GBPm GBPm GBPm
At 1 January 2021 3.5 (3.0) 0.5
(Credited)/charged to the income statement (1.6) 0.5 (1.1)
Change in tax rates in the income statement 0.1 (0.8) (0.7)
Charged to other comprehensive income 0.9 0.5 1.4
Credited to equity - (0.7) (0.7)
Change in tax rates in other comprehensive income 0.4 (0.1) 0.3
At 31 December 2021 3.3 (3.6) (0.3)
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
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 ring-fence.
20. Dividend
Dividend per share
----------------------
Payment PID Non-PID Total 2021 2020
date p p p GBPm GBPm
Current year
2021 final dividend(1) 1 June 2022 35.50 18.00 53.50 - -
2021 interim dividend 15 October 2021 23.00 - 23.00 25.8 -
------ ------- -----
58.50 18.00 76.50
Prior year
2020 final dividend 4 June 2021 35.00 17.45 52.45 58.8 -
2020 interim dividend 16 October 2020 22.00 - 22.00 - 24.6
------ ------- -----
57.00 17.45 74.45
2019 final dividend 5 June 2020 34.45 17.00 51.45 - 57.6
Dividends as reported in the
Group statement of changes in equity 84.6 82.2
----- -----
2021 interim dividend withholding tax 14 January 2022 (3.5) -
2020 interim dividend withholding tax 14 January 2021 3.2 (3.2)
2019 interim dividend withholding tax 14 January 2020 - 2.8
----- -----
Dividends paid as reported in the
Group cash flow statement 84.3 81.8
----- -----
(1) Subject to shareholder approval at the AGM on 13 May 2022
.
21. Cash and cash equivalents
2021 2020
GBPm GBPm
Cash at bank 68.5 50.7
22. Non-controlling interest
In September 2021, the Group exercised its development option at
19-35 Baker Street W1 with The Portman Estate ("TPE"). As per the
agreement, the Group acquired TPE's 45% non-controlling interest
for a consideration of GBP53.4m and disposed of properties in 17-39
George Street, 16-20 Baker Street, 27-33 Robert Adam Street and
26-27 Castlereagh Street W1 for gross proceeds of GBP45.2m. The
Group's original headleases for the development site were
surrendered and a new 129-year headlease was subsequently granted
providing additional development rights across the 19-35 Baker
Street W1 site. This surrender and regrant of the headleases was a
non-cash transaction and has been treated as a GBP100.7m disposal
and subsequent acquisition. As part of the scheme, the Group will
develop a portion of the site for TPE and the costs associated with
this are recognised as trading stock per IAS 2 Inventories.
23. Post balance sheet events
In January 2022, the Group acquired the leasehold interest in
230 Blackfriars Road SE1 for GBP55.0m before costs.
In January 2022, the Group exchanged contracts for the disposal
of its freehold interest in New River Yard EC1 for GBP67.5m before
costs and rental top-ups.
In January 2022, the Group signed the main construction contract
for the 19-35 Baker Street W1 development amounting to
GBP158.4m.
24. Related parties
There have been no related party transactions for the year ended
31 December 2021 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.
25. EPRA performance measures (unaudited)
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
-------------------- ---------------------------
2021 2020 2021 2020
'000 '000 '000 '000
For use in basic measures 112,139 111,912 112,209 111,961
Dilutive effect of share-based payments 273 350 308 341
For use in diluted measures 112,412 112,262 112,517 112,302
The GBP175m unsecured convertible bonds 2025 ('2025 bonds') have
an initial conversion price set at GBP44.96.
The Group recognises the effect of conversion of the bonds if
they are both dilutive and, based on the share price, likely to
convert. For the year ended 31 December 2020 and 2021, the Group
did not recognise the dilutive impact of the conversion of the 2025
bonds on its earnings per share (EPS) or net asset value (NAV) per
share metrics as, based on the share price at the end of each 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 and loan arrangement costs written off.
Earnings and earnings per share
Adjustments EPRA
----------------------
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year ended 31 December 2021
Net property and other income 187.5 (0.7) 1.4 - 188.2
Total administrative expenses (37.1) - - - (37.1)
Revaluation surplus 130.8 - (130.8) - -
Profit on disposal of investments 10.4 (10.4) - - -
Net finance costs (28.1) - - - (28.1)
Movement in fair value of derivative financial instruments 4.8 - - (4.8) -
Financial derivative termination costs (1.9) - - 1.9 -
Share of results of joint ventures (13.9) - 14.2 - 0.3
Profit before tax 252.5 (11.1) (115.2) (2.9) 123.3
Tax credit 1.3 - (1.5) - (0.2)
Profit for the year 253.8 (11.1) (116.7) (2.9) 123.1
Non-controlling interest (1.5) - 0.4 - (1.1)
Earnings attributable to equity shareholders 252.3 (11.1) (116.3) (2.9) 122.0
Earnings per share 224.99p 108.79p
Diluted earnings per share 224.44p 108.53p
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 was 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.
EPRA Net Asset Value metrics
2021 2020
GBPm GBPm
Net assets attributable to equity shareholders 4,441.8 4,263.2
Adjustment for:
Revaluation of trading properties 1.9 1.4
Deferred tax on revaluation surplus(1) 1.7 1.8
Fair value of derivative financial instruments 0.8 5.6
Fair value adjustment to secured bonds 8.0 9.3
Non-controlling interest in respect of the above(1) - (0.4)
EPRA Net Tangible Assets 4,454.2 4,280.9
Per share measure - diluted 3,959p 3,812p
Net assets attributable to equity shareholders 4,441.8 4,263.2
Adjustment for:
Revaluation of trading properties 1.9 1.4
Fair value adjustment to secured bonds 8.0 9.3
Mark-to-market of fixed rate debt (69.5) (127.8)
Unamortised issue and arrangement costs (12.6) (11.3)
EPRA Net Disposal Value 4,369.6 4,134.8
Per share measure - diluted 3,884p 3,682p
Net assets attributable to equity shareholders 4,441.8 4,263.2
Adjustment for:
Revaluation of trading properties 1.9 1.4
Deferred tax on revaluation surplus 3.3 3.5
Fair value of derivative financial instruments 0.8 5.6
Fair value adjustment to secured bonds 8.0 9.3
Non-controlling interest in respect of the above - (0.7)
Purchasers' costs(2) 383.9 364.2
EPRA Net Reinstatement Value 4,839.7 4,646.5
Per share measure - diluted 4,301p 4,138p
(1) Only 50% of the deferred tax on the revaluation surplus is
excluded .
(2) Includes Stamp Duty Land Tax. Total costs assumed to be 6.8%
of the portfolio's fair value.
Cost ratios
2021 2020
GBPm GBPm
Administrative expenses 37.1 37.8
Write-off/impairment of receivables 0.8 10.1
Service charge waiver - 4.1
Other property costs 10.4 10.5
Dilapidation receipts (0.9) -
Net service charge costs 3.4 2.8
Service charge costs recovered through rents but not separately invoiced (0.6) (0.4)
Management fees received less estimated profit element (3.5) (3.5)
Share of joint ventures' expenses (0.1) -
EPRA costs (including direct vacancy costs) (A) 46.6 61.4
Direct vacancy costs (6.1) (9.0)
EPRA costs (excluding direct vacancy costs) (B) 40.5 52.4
Gross rental income 194.2 202.9
Ground rent (1.4) (1.1)
Service charge components of rental income (0.5) (0.4)
Share of joint ventures' rental income less ground rent (0.5) -
Adjusted gross rental income (C) 191.8 201.4
EPRA cost ratio (including direct vacancy costs) (A/C) 24.3% 30.5%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 21.1% 26.0%
Property portfolio at fair value (D) 5,646.3 5,355.5
Portfolio cost ratio (A/D) 0.8% 1.1%
The Group has not capitalised any overheads in either 2021 or
2020.
Property-related capital expenditure
2021 2020
Group Joint Group Joint
(excl. Joint ventures Total (excl. Joint ventures Total
ventures) (50% share) Group ventures) (50% share) Group
GBPm GBPm GBPm GBPm GBPm GBPm
Acquisitions 353.6 60.0 413.6 43.5 - 43.5
Development 146.6 0.2 146.8 134.1 - 134.1
Investment properties
Incremental lettable space 0.1 - 0.1 - - -
No incremental lettable space 16.7 - 16.7 16.3 - 16.3
Tenant incentives 2.5 - 2.5 1.5 - 1.5
Capitalised interest 12.0 - 12.0 9.9 - 9.9
Total capital expenditure 531.5 60.2 591.7 205.3 - 205.3
Conversion from accrual to
cash basis (1) (107.6) (0.2) (107.8) 11.9 - 11.9
Total capital expenditure
on a cash basis 423.9 60.0 483.9 217.2 - 217.2
(1) The conversion from accrual to cash basis figure includes
GBP100.7m in relation to the regrant of a headlease at 19-35 Baker
Street W1, see note 22.
26. Gearing and interest cover
NAV gearing
2021 2020
GBPm GBPm
Net debt 1,251.5 1,049.1
Net assets 4,441.8 4,315.1
NAV gearing 28.2% 24.3%
Loan-to-value ratio
2021 2020
GBPm GBPm
Group loan-to-value
Net debt 1,251.5 1,049.1
Fair value adjustment of secured bonds (8.0) (9.3)
Unamortised discount on unsecured green bonds 1.8 -
Unamortised issue and arrangement costs 12.6 11.3
Leasehold liabilities (70.6) (66.6)
Drawn debt net of cash 1,187.3 984.5
Fair value of property portfolio 5,646.3 5,355.5
Group loan-to-value ratio 21.0% 18.4%
Proportionally consolidated loan-to-value
Drawn debt net of cash 1,187.3 984.5
Share of joint ventures cash and cash equivalents (1.2) (0.6)
Drawn debt net of cash 1,186.1 984.5
Fair value of property portfolio 5,646.3 5,355.5
Share of fair value of property portfolio of joint ventures 50.0 -
Fair value of property portfolio including Group's share of joint ventures 5,696.3 5,355.5
Proportionally consolidated loan-to-value 20.8% 18.4%
Net interest cover ratio
2021 2020
GBPm GBPm
Group net interest cover ratio
Net property and other income 187.5 183.0
Adjustments for:
Other income (3.5) (3.5)
Other property income (2.0) (0.9)
Surrender premiums received (3.6) (0.9)
Write-down of trading property 1.4 1.8
Profit on disposal of trading properties (0.7) (5.2)
Adjusted net property income 179.1 174.3
Finance income - (0.2)
Finance costs 28.1 30.3
Adjustments for:
Finance income - 0.2
Other finance costs (0.2) (0.2)
Amortisation of fair value adjustment to secured bonds 1.3 1.3
Amortisation of issue and arrangement costs (2.5) (2.2)
Finance costs capitalised 12.0 9.9
Net interest payable 38.7 39.1
Group net interest cover ratio 463% 446%
Proportionally consolidated net interest cover ratio
Adjusted net property income 179.1 174.3
Share of joint ventures' net property income 0.4 -
Adjusted net property income including share of joint ventures 179.5 174.3
Net interest payable 38.7 39.1
Proportionally consolidated net interest cover ratio 464% 446%
27. Total return (unaudited)
2021 2020
p p
EPRA Net Tangible Assets on a diluted basis
At end of year 3,959 3,812
At start of year (3,812) (3,957)
Increase/(decrease) 147 (145)
Dividend per share 75 73
Increase/(decrease) including dividend 222 (72)
Total return 5.8% (1.8%)
28. List of definitions
Building Research Establishment Environmental Assessment Method
(BREEAM)
An environmental impact assessment method for non-domestic
buildings. Performance is measured across a series of ratings;
Good, Very Good, Excellent and Outstanding.
Capital return
The annual valuation movement arising on the Group's portfolio
expressed as a percentage return on the valuation at the beginning
of the year adjusted for acquisitions and capital expenditure.
Company Voluntary Arrangement (CVA)
An insolvency procedure allowing a company with debt problems or
that is insolvent to reach a voluntary agreement with its creditors
to repay its debt over a fixed period.
Diluted figures
Reported results adjusted to include the effects of potential
dilutive shares issuable under the Group's share option schemes and
the convertible bonds.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the 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.
Fair value adjustment
An accounting adjustment to change the book value of an asset or
liability to its market value.
Ground rent
The rent payable by the Group for its leasehold properties.
Under IFRS, a liability is recognised using the discounted payments
due. Fixed lease payments made are allocated between the interest
payable and the reduction in the outstanding liability. Any
variable payments are recognised in the income statement in the
period to which it relates.
Headroom
This is the amount left to draw under the Group's loan
facilities (i.e. the total loan facilities less amounts already
drawn).
Interest rate swap
A financial instrument where two parties agree to exchange an
interest rate obligation for a predetermined amount of time. These
are generally used by the Group to convert floating rate debt to
fixed rates.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives
and individual goals, against which the performance of the Group is
annually assessed.
Lease incentives
Any incentive offered to occupiers to enter into a lease.
Typically the incentive will be an initial rent free or half rent
period, stepped rents, or a cash contribution to fit-out or similar
costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property
portfolio. Drawn debt is equal to drawn facilities less cash and
the unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability
and its market value.
MSCI Inc. (MSCI IPD)
MSCI Inc. is a company that produces independent benchmarks of
property returns. The Group measures its performance against both
the Central London Offices Index and the UK All Property Index.
National Australian Built Environment Rating System (NABERS)
This is a building performance rating system 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).
Rent reviews
Rent reviews take place at intervals agreed in the lease
(typically every five years) and their purpose is usually to adjust
the rent to the current market level at the review date. For
upwards only rent reviews, the rent will either remain at the same
level or increase (if market rents are higher) at the review
date.
Reversion
The reversion is the amount by which ERV is higher than the rent
roll of a property or portfolio. The reversion is derived from
contractual rental increases, rent reviews, lease renewals and the
letting of space that is vacant and available to occupy or under
development or refurbishment.
Scrip dividend
Derwent London plc sometimes offers its shareholders the
opportunity to receive dividends in the form of shares instead of
cash. This is known as a scrip dividend.
Task Force on Climate-related Financial Disclosures (TCFD)
Set up by the Financial Stability Board (FSB) in response to the
G20 Finance Ministers and Central Bank Governors request for
greater levels of decision-useful, climate-related information; the
TCFD was asked to develop climate-related disclosures that could
promote more informed investment, credit (or lending), and
insurance underwriting decisions. In turn, this would enable
stakeholders to understand better the concentrations of
carbon-related assets in the financial sector and the financial
system's exposures to climate-related risks.
'Topped-up' rent
Annualised rents generated by the portfolio plus rent contracted
from expiry of rent free periods and uplifts agreed at the balance
sheet date.
Total property return (TPR)
Total property return is a performance measure calculated by the
MSCI IPD and defined in the MSCI Global Methodology Standards for
Real Estate Investment as 'the percentage value change plus net
income accrual, relative to the capital employed'.
Total return
The movement in EPRA Net Tangible Assets per share on a diluted
basis between the beginning and the end of each financial 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.
29. 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 77 buildings in a commercial real estate
portfolio predominantly in central London valued at GBP5.7 billion
as at 31 December 2021, 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 2022 we were proud to announce that we had achieved
the National Equality Standard - the UK's highest benchmark for
equality, diversity and inclusion. In October 2021 Derwent London
won EG's UK Company of the Year award and in January 2021 came top
of the Property Sector and 10th position overall in Management
Today's Britain's Most Admired Companies awards 2020. In 2020 the
Group 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.
This information is provided by RNS, the news service of the
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END
FR USAVRUWUUURR
(END) Dow Jones Newswires
February 24, 2022 02:01 ET (07:01 GMT)
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