REG - Derwent London PLC - Results for the Year Ended 31 December 2021
24/02/2022 07:18
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RNS Number : 6863C Derwent London PLC 24 February 2022
24 February 2022
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEAR ENDED 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 £178.2m, up 2.2% from £174.3m
· EPRA earnings of £122.0m, or 108.8p per share, up 9.7% from
99.2p in 2020
· IFRS profit before tax of £252.5m from a loss of £83.0m in 2020
· Full year dividend of 76.50p per share from 74.45p, up 2.8%
· £350m 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 £608m, up from £476m in December
2020
Portfolio highlights
· Total property return of 6.3%, compared to our benchmark index(2)
of 5.9%
· Portfolio valued at £5.7bn, 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
· £417.5m of property acquisitions
· £405.1m of property disposals £9.7m 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
· £13.7m of new lettings at +3.6% above December 2020 ERV
· £31.9m 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 (http://www.derwentlondon.com)
To participate in the call, please register at www.derwentlondon.com
(http://www.derwentlondon.com)
A recording of the conference call will also be made available following the
conclusion of the call on www.derwentlondon.com (http://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 £187.5m for the year ended 31
December 2021 from £183.0m in 2020. This was helped by impairment charges
and write-offs against tenant receivables of only £0.8m against £14.2m in
2020. Gross rental income fell 4.3% to £194.2m 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 £252.5m, more than reversing the
£83.0m loss reported in 2020.
Capital values across our £5.7bn 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 £4.4bn 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 £405.1m of buildings, for £9.7m above book value,
where we expected to see lower returns.
We secured £13.7m of new lettings in 2021 at an average +3.6% above December
2020 ERV, with a further £31.9m 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.£97m 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 £350m for 10 years at a 1.875% coupon. This increased our total green
debt potential to £650m.
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 £17.0m, 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 £8.6m, 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 £5.1m.
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 £10.0bn 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.£40bn of potential investment demand targeting London offices which
compares to current supply of £3.7bn. 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 £5.7bn on 31 December 2021.
There was a valuation surplus of £142.9m for the year, which after accounting
adjustments of £9.8m (see note 11), gives a reported surplus of £133.1m.
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 £577.1m in
December 2021 and delivered a 9.2% valuation uplift over the year, after
adjusting for capital expenditure. An additional £355m is required to
complete these projects. Their combined ERV is £47.1m, 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 £178.4m. 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 £293.9m there is £115.5m of potential cash
reversion. Within this, £54.6m 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 £50.0m, of which
£17.0m is pre-lettings at Soho Place W1 and £2.9m at Francis House SW1.
There is then £7.2m of potential income from several ongoing smaller projects
across the portfolio. ERV on space available to occupy is relatively small
at £3.8m, 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 £5.8m of reversion from anticipated rent reviews and expiries. However,
this is offset by £5.9m 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 £13.7m 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 £5.8m 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 £1.9m 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
£m 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
Property Tenant Area Rent Total annual rent Lease term Lease break Rent free equivalent
sq ft £ psf £m Years Year Months
H1
20 Farringdon Road EC1 Depop (pre-let) 33,500 52.50 1.8 5 3 9, plus 4 if no break
Tea Building E1 Soho House 7,600 50.00 0.4 10 - 24
H2
Francis House SW1 Edelman (pre-let) 38,200 76.00 2.9 15 10 25, plus 9 if no break
6-8 Greencoat Place SW1 Fora (pre-let) 32,400 68.50 2.2 15 - 34
Charlotte Building W1 The & 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 Building E1 Emperor Design 12,700 49.50 0.6 10 5 12, plus 6 if 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 £m pa £m 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 £417.5m 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
Property Date Area Total after costs Net Net Net rental income £psf
sq ft
£m
yield
rental income £m pa
%
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 (headlease regear) Q4 n/a 100.7 n/a n/a n/a
- 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 £396.4m, rising to
£405.1m 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
£66.0m.
Major disposals
Property Date Area Net Net yield to Rent
sq ft
proceeds
purchaser
£m
£m
%
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 £6.2m. 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 £3.1m.
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 £8.6m. 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 £266m 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.£100m.
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 £350m 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 £4.44bn.
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 £5.6bn (excluding the new
joint venture) as at 31 December 2021, allocated across the balance sheet as
follows:
Dec-21 Dec-20
£m £m
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% £53.4m 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 £45.2m 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 £100.7m 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 £6.2m. 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 £190.3m and 171-174 Tottenham
Court Road W1 for £24.3m, 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 £64.0m but was
subsequently revalued at £50.0m as at 31 December 2021 giving a JV
revaluation deficit for the year of £14.0m. 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 £23.8m for the long leasehold interest at Holford Works WC1 and
£14.5m for the short leasehold interest at Bush House. Altogether,
acquisitions totalled £353.6m. Capital expenditure in 2021 increased to
£166.1m plus £12.0m of capitalised interest bringing total additions to
£531.7m 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 £63.7m and £37.5m, 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 £1.4m 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
£130.8m after accounting adjustments, of which £3.7m 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 £183.4m
(2020: £166.0m). 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 £70.4m (2020: £66.5m) 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 £14.8m 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/ Hospitality Office Retail/ Hospitality Office Retail/ Hospitality Office Retail/ 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%
£41.4m £2.9m £40.0m £3.0m £38.8m £2.6m £38.5m £2.5m
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%
£40.3m £2.3m £42.6m
(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 £14.2m were incurred
against receivable balances in 2020. In 2021, these amounts have reduced
considerably to £0.8m, this total amount including £2.4m 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 £6.9m as at 31 December 2021, 75% lower than the £27.5m a year
earlier.
Property income and earnings
Net property and other income increased to £187.5m for the year ended 31
December 2021 from £183.0m 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 £240.2m for the year to 31 December
2021 from £268.6m 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 £32.3m in 2020 to £6.7m 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
£194.2m from £202.9m 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
£5.6m in 2021 from £1.8m in 2020, helping offset some of the lower gross
rents. Other factors were service charge income rising to £30.2m in 2021
against £28.1m in 2020 and other income of £3.5m, 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 £0.8m in 2021, a significant improvement from
the £10.1m booked in 2020. Irrecoverable service charges also fell from
£6.9m in 2020 to £3.4m in 2021 as we did not repeat the £4.1m service
charge 'holiday' that we allowed tenants in 2020. Other property costs were
broadly unchanged at £11.8m against £11.6m in 2020. As a result, net
rental income increased to £178.2m in 2021, a 2.2% increase over the year.
Lower profits from the Asta House apartment 'trading' sales of £0.7m in 2021
against £5.2m 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 £187.5m from £183.0m in 2020.
Administrative expenses were 1.9% lower than in 2020 at £37.1m, 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 £130.8m for the year compared with a
deficit of £196.1m in 2020. The profit on disposal, relating mainly to Angel
Square which completed in August 2021, was £10.4m (2020: £1.7m).
Net finance costs were £28.1m in 2021 after capitalised interest of £12.0m,
a decrease of £2.0m over the net charge of £30.1m in 2020. With slightly
higher interest rates across the swap curve, the fair value of forward-start
swaps moved in our favour by £4.8m, or £2.9m 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
£10.2m and, after profit from operations of £0.3m, the net result for the
period attributable to the Group was a loss of £9.9m. After allowing for
acquisition costs of £4.0m, the total IFRS loss attributable to our share of
the joint venture was £13.9m.
The Group's resulting IFRS profit before tax for the year was £252.5m after
the loss before tax of £83.0m 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 £0.5m.
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 £0.8m (2020: £0.7m
credit).
A £1.8m 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, £0.7m was credited through equity in relation to
future tax deductions for equity-settled share-based payments, £0.4m was
charged in respect of future defined benefit pension liabilities, and £1.3m
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, £8.6m 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
(http://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 £251.8m plus £53.4m
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 £172.1m on capital expenditure including capitalised interest and
incurred a further £1.6m 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 £478.9m was spent on property
acquisitions and development expenditure, compared with £219.6m in 2020.
This cash outflow was offset by £297.3m of property disposal proceeds. As a
result, Group borrowings increased by £216.2m to £1.25bn 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 £608m compared with £476m 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 £31.7m of cash
receipts and £1.2m 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 £85.4m to £115.9m with a
corresponding increase in the net cash outflow in investing activities from
£62.0m to £92.5m. 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 £25.1m
higher than 2020 at £187.0m. Net cash from operating activities further
increased in 2021 to £125.7m from the restated £115.9m 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 £550m 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 £450m RCF
provided by HSBC, NatWest and Barclays, taking the maturity out to October
2026. This facility incorporates a £300m '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 £100m 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 £115m have commencement dates in January 2022 and £1.9m 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 £4.8m.
In advance of the unwinding of the 55%/45% joint investment with the Portman
Estate, the £28m 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 £450m RCF.
The main financing activity in 2021 was a debut green bond. This was very
well received and raised just under £350m 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 (http://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 £450m RCF and £350m 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 W1 Soho Place W1 The Featherstone Building EC1 19-35 Baker Street W1
Expected completion date Completed in 2020 2022 2022 2025
Category for eligibility Green building, criterion 1 of section 3.1 of the Framework (excludes Asta Green building, criterion 1 of section 3.1 of the Framework (excludes Site B - Green building, criterion 1 of section 3.1 of the Framework Green building, criterion 1 of section 3.1 of the Framework (excludes retail
House and Charlotte Apartments) Theatre) and refurbished residential)
Impact reporting indicator Building certification achieved (system & rating) Building certification achieved (system & rating) Building certification achieved (system & rating) Building certification achieved (system & rating)
Green credentials Achieved: Site A Achieved: Achieved: Offices Expected:
BREEAM - Excellent EPC - B BREEAM - Outstanding (design stage) BREEAM - Outstanding (design stage) BREEAM - Excellent (design stage), on target
Expected: Expected: Expected: LEED - Gold, on target
LEED - Gold, on target BREEAM - Outstanding (post construction), on target BREEAM - Outstanding (post construction), on target EPC - A, on target
LEED - Gold, on target LEED - Platinum, on target Private residential 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 £m Cumulative spend
EGP £m £m £m
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 £562.8m, with £116.6m 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 £300m green tranche,
thereby refinancing the EGPs in line with our Green Finance Framework.
The drawn borrowings from GFTs as at 31 December 2021 were £360m, which
included £10m from the green tranche of the RCF and the £350m Green Bonds.
Therefore, there was £290m of headroom within the £300m green tranche of the
Group's £450m revolving credit facility as at 31 December 2021, of which
£203m 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 strategy and responding · The Group's development pipeline has a degree of flexibility that
appropriately to internal or external factors including responding to changing enables plans for individual properties to be changed to reflect prevailing
work practices, occupational demand and London's global appeal. economic circumstances.
· The Group seeks generally to maintain income from properties
until development commences and has an ongoing strategy to extend income
While it is not yet possible to fully evaluate the impact that Brexit will through lease renewals and regears.
have on the Group's operations, the main risk to the Group posed by Brexit is
that economic growth in the UK may be negatively impacted which may in turn · The Group aims to de-risk the development programme through
affect London's growth and demand for office space. pre-lets, typically during the construction period.
· The Group conducts an annual strategic review, prepares a budget
and provides two-year rolling forecasts three times a year.
In addition, the Group must respond and/or adapt appropriately to economic
cycles as the London office market has generally been cyclical in recent · The Board considers the sensitivity of the Group KPIs to changes
decades, with strong growth followed by sharp economic downturns precipitated in the assumptions underlying our forecasts in light of anticipated economic
by rising interest rates coinciding with significant oversupply. Should the conditions. If considered necessary, modifications are made.
Group fail to respond and adapt to such cycles or execute the projects that
underpin its strategy, this may have a negative impact on the Group's expected · The Group maintains sufficient headroom in all the Group's key
growth and financial performance. ratios and financial covenants with a particular focus on interest cover.
· The Group focuses on good value properties that are less
susceptible to reductions in tenant demand. The Group's average 'topped-up'
Although the Covid-19 pandemic has not stopped the Group implementing its office rent is only £59.69 per sq ft.
strategy, the lockdown restrictions have marginally extended the project
length for Soho Place and The Featherstone Building, and has caused · International trade negotiations are being monitored and
significant disruption to the economy. Covid-19 has only amplified weaknesses potential outcomes discussed with external advisers.
within the retail market, and we are reviewing on an ongoing basis the retail
elements in our buildings. Our occupiers perceive the restaurant, retail and · The Group's diverse and high-quality tenant base provides
leisure aspects within our portfolio as amenities; hence we feel it is resilience against tenant default.
important that they are retained within our building offerings. The impact of
a potential recession on our strategy, and other longer-term consequences of · The Group develops properties in locations where there is good
the Covid-19 pandemic, is being monitored by the Executive Committee and the potential for future demand, such as near Crossrail stations. We do not have
Board. In respect to Brexit, the Group continued to monitor international any properties in the City or Docklands.
trade negotiations. During 2021, labour shortages occurred due to the
relocation of European labour back to the EU which had an impact on supply
chains and the construction industry.
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 comprised of rent received from its · Detailed reviews of all prospective tenants are performed.
tenants and any deterioration in their businesses and/or profitability could
in turn adversely affect the Group's rental income or increase the Group's bad · A "tenants on watch" register is maintained and regularly
debts and/or number of lease terminations. In the event that some of our reviewed by the Executive Committee and the Board.
tenants went into default, we could incur impairments and write-offs of IFRS
16 lease incentive receivable balances which arise from the accounting · Rent deposits are held where considered appropriate; the balance
requirement to spread any rent-free incentives given to a tenant over the at 31 December 2021 was £17.6m.
respective lease term.
· Active rent collection with regular reports to the Executive
Committee.
Due to the economic impact of Covid-19, and its potential long-term · We maintain close and frequent contact with our tenants.
implications, occupiers could be facing increased financial difficulty.
Restaurants and hospitality tenants account for approximately 6% of the
Group's portfolio 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 affect London's office market. · The Credit Committee perform detailed reviews of all prospective
The Group is exposed to external factors which are outside the Group's tenants.
control, such as future demand for office space, the 'grey' market in office
space (i.e. tenant controlled vacant space), weaknesses in retail and · A "tenants on watch" register is maintained and regularly
hospitality businesses, increase in homeworking and the depth of any future reviewed by the Executive Committee and the Board.
recession and subsequent rise in unemployment and/or interest rates. Such
macroeconomic conditions may lead to a general property market contraction, a · Ongoing dialogue and proactive internal management is maintained
decline in rental values, decline in Group income and potentially property with tenants to understand their concerns and requirements.
values. Any reduction in property income could also have an adverse impact on
the value of the Group's properties and may hinder any future dividend · The Group's low loan-to-value ratio reduces the likelihood that
payments. falls in property values have a significant impact on our business continuity.
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 impacted due to: · Detailed reviews are performed on construction projects to ensure
that programme forecasts predicted by our contractors are aligned with our
· delay on-site; 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
· labour shortages; uncertainty 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
· adverse letting conditions. negotiated.
· Post-completion reviews are carried out for all major
developments to ensure that improvements to the Group's procedures are
Despite strict Covid-19 protocols on-site, there is a risk of labour and identified, implemented and lessons learned.
resource shortages both on-site and in the supply chain, which could lead to
productivity disruption and project delay. Any significant delay in completing · Procedures carried out before starting work on-site, such as site
the development projects may result in financial penalties or a reduction in investigations, historical research of the property and surveys conducted as
the Group's targeted financial return. part of the planning application, reduce the risk of unidentified issues
causing delays once on-site.
· Investment appraisals, which include contingencies and
During 2021, our Development team liaised and agreed processes to mitigate inflationary cost increases, are prepared and sensitivity analysis is
against delays or cost increases with our principal contractors due to undertaken to judge whether an adequate return is made in all likely
potential material and labour shortages. 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 unidentified issues. For · Strict Covid-19 protocols at all of our on-site developments, in
example, if the Group fails to: accordance with Site Operating Procedures (published by the Construction
Leadership Council).
· adequately appraise investments prior to starting work on-site,
including through taking into account contingencies and inflationary cost · Regular monitoring of our contractors' cash flows.
increases;
· Frequent meetings with key contractors and subcontractors to
· use a procurement process that is properly designed (to minimise review their work programme and maintain strong relationships.
uncertainty around costs) and that includes the use of highly regarded
quantity surveyors; · Off-site inspection of key components to ensure they have been
completed to the requisite quality.
· benchmark development costs;
· Prior to construction beginning on-site, professional project
· conduct thorough site investigations to reduce the risk of managers conduct site investigations including the building's history and
unidentified issues such as asbestos; various surveys to identify any potential issues.
· implement its pre-letting strategy; or · Monthly reviews of Brexit related supply chain issues for each of
our major projects, including in respect to potential labour shortages.
· conduct detailed reviews on construction projects to evaluate
programme forecasts made by contractors, development projects may be
significantly delayed and 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 delays and cost · Regular monitoring of our contractors, including their project
increases caused by either a main contractor or major subcontractor defaulting cash flows, is carried out.
during the project. There have been ongoing issues within the construction
industry in respect of the level of risk and narrow profit margins being · Key construction packages are acquired early in the project's
accepted by contractors. life to reduce the risks associated with later default.
· The financial standing of our main contractors is reviewed prior
to awarding the project contract.
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 main · Our main contractors are responsible, and assume the immediate
contractors and subcontractors. 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 it being unable to · The Group's Business Continuity Plan is regularly reviewed and
use its information systems and/or losing data. Such an attack could severely tested.
restrict the ability of the Group to operate, lead to an increase in costs
and/or require a significant diversion of management time. · Independent internal and external penetration/vulnerability tests
are regularly conducted to assess the effectiveness of the Group's security.
· Multi-Factor Authentication exists for remote access to our
This risk has been heightened during the Covid-19 pandemic, as cyber-criminals systems.
seek to exploit the disruption caused by employees working from home. In
response, we identified the key IT risks arising from homeworking and · Incident response and remediation processes are in place, which
implemented additional controls. 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 which may result in · Each building has incident management procedures which are
data breaches or significant disruption to IT-enabled tenant services. A major regularly reviewed and tested.
cyber-attack against the Group or its properties could negatively impact the
Group's business, reputation and operating results. · Physical segregation between the building's core IT
infrastructure and tenants' corporate IT networks.
· 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 business interruption)
Major incidents may significantly interrupt the Group's business, its
occupiers and/or supply 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 issues such as being unable to access or · The Group has comprehensive business continuity and incident
operate the Group's properties, tenant failures or reduced rental income, management procedures both at Group level and for each of our managed
share price volatility or loss of key suppliers. buildings which are regularly reviewed and tested.
· Government health guidelines are maintained at all of our
construction sites.
The ramifications of the Covid-19 outbreak have been far-reaching across all
sectors and the pandemic has created extreme economic volatility. The Group · Most of our employees are capable of working remotely and have
has suffered minimal disruption due to Covid-19 and has been capable of the necessary IT resources.
operating successfully remotely during lockdown restrictions. However, the
lockdowns have caused a delay to our development activities and reduction in · Fire protection and access/security procedures are in place at
cash flow due to deferment or non-payment of rent. all of our managed properties.
· Comprehensive property damage and business 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 well-regarded and · Close involvement of senior management in day-to-day operations
respected brand. The Group's reputation could be damaged, for example, through and established procedures for approving all external announcements.
unauthorised or inaccurate media coverage, unethical practices or behaviours
by the Group's executives, or failure to comply with relevant legislation. · All new members of staff benefit from an induction programme and
This could lead to a material adverse effect on the Group's operating are issued with our Group staff 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 Communications
mitigate against the risk of internal wrongdoing. and retains services of an external PR agency, both of whom maintain regular
contact with external media sources.
· A Group whistleblowing system for staff is maintained to report
Feedback on how we have responded to the Covid-19 pandemic, particularly in wrongdoing anonymously.
respect to our occupiers, suppliers, employees and Community Fund, has
generally been positive. · 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 sufficiently, to climate · The Board and Executive Committee receive regular updates and
change risks or fails to benefit from the potential opportunities. This could presentations on ESG (environmental, social and governance) matters as well as
lead to damage to our reputation, loss of income and/or property values and progress against our pathway to becoming net zero carbon by 2030.
loss of our licence to operate. In addition, there is a risk that the cost of
construction materials and providing energy, water and other services to · The Sustainability Committee monitors our performance and
occupiers will rise as a consequence of climate change. management controls.
· Strong team led by an experienced Head of Sustainability.
Overall, climate change risk continues to increase in prominence and · The Group monitors its ESG reporting against various industry
importance. The UK Government continues to introduce more legislative aspects benchmarks.
linked to climate risk e.g. from 2022 certain listed entities will have to
disclose in line with the TCFD and the latest energy white paper is setting · Production of an annual Responsibility Report with key data and
out higher standards for energy efficiency in commercial and residential performance points which are externally assured.
properties.
· 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 diverted through an
incident or breach of health, safety and fire legislation leading to
reputational damage and/or loss of our licence to operate. For example, a · All our properties have the relevant health, safety and fire
major health and safety incident could cause significant business interruption management procedures in place which are reviewed annually.
for the Group.
· The Group has a qualified Health and Safety team whose
performance is monitored and managed by the Health and Safety Committee.
During 2021, the health and wellbeing of our employees, occupiers and other · Health and safety statutory compliance within our managed
stakeholders has been a top priority. We have invested additional resources portfolio is managed and monitored using RiskWise, a software compliance
into health and safety. Our accident frequency rate (AFR) for development platform. This is supported by annual property health checks.
projects in 2021 was 1.26 (2020: 2.72) a reduction of 53.7%.
· 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 regulatory · The Board and Risk Committee receive regular reports prepared by
framework within which the Group operates, the Group's cost base could the Group's legal advisers identifying upcoming legislative/regulatory
increase and management time could be diverted. This could lead to damage to changes. External advice is taken on any new legislation.
our reputation and/or loss of our licence to operate.
· Staff training and awareness programmes.
· Group policies and procedures dealing with all key legislation
During 2020 and 2021, we have followed the UK Government's regulations in are available on the Group's intranet.
respect of social distancing and safe working practices. In accordance with
disclosure requirements, we ensured our stakeholders and the wider investment · A Group whistleblowing system for staff is maintained to report
market were kept appraised of Derwent London's response to Covid-19 and its wrongdoing anonymously.
impact on our business.
· Managing our properties to ensure they are compliant with the
Minimum Energy Efficiency Standards (MEES) for Energy Performance Certificates
(EPCs).
During 2021, the Competition and Markets Authority (the "CMA") has been
investigating uncompetitive behaviour in the construction industry, including
price fixing, marketing sharing and bid rigging. Although the Group seeks
assurances from prospective contractors on the status of any CMA
investigations in which they are involved, the use 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 £0.1m (2020: £0.8m) or a decrease of £0.1m (2020: £0.7m).
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 £4.8bn (2020:
£4.3bn) 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 £m £m
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 £0.8m (2020: £10.1m plus a service charge waiver of £4.1m).
See note 3 for additional information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
2021 2020
Note £m £m
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 £m £m
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
£m £m £m £m £m £m £m
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
£m £m £m £m £m £m £m
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 £m £m
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
£608m 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
£31.7m of cash receipts and £1.2m 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 £85.4m to £115.9m with
a corresponding increase in the net cash used in investing activities from
£62.0m to £92.5m. 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 £0.2m for 2021. After adding receivable
balances written off of £0.6m, the total charge for provisions and write-offs
in 2021 was £0.8m, lower than the £10.1m 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 Total
receivables and other receivables
(non-current) (current)
£m £m £m
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 £5.4m and against
trade receivable balances was £4.1m.
Lease incentive Lease incentive Trade receivables
receivables receivables (current)
(non-current) (current)
£m £m £m
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
£m £m £m £m £m £m
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 £0.4m 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
£m £m £m £m £m £m
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
£50.2m and a fair value of £50.0m. See notes 11 and 13.
5. Property and other income
2021 2020
£m £m
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 £40.4m (2020: £63.9m) 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 £20.2m (2020: £24.0m) 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 £0.6m 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 £1.8m increase and £1.9m 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 £4.1m to the Group.
6. Profit on disposal
2021 2020
£m £m
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 £167.6m 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 £86.5m 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 £100.7m 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 £45.2m (see note 22).
7. Finance income and total finance costs
2021 2020
£m £m
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 £12.0m (2020: £9.9m) 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 £37.0m (2020: £38.2m) of which £12.0m (2020: £9.9m) 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 £1.9m in the year to 31 December 2021 (2020:
£1.7m) deferring interest rate swaps.
9. Share of results of joint ventures
2021 2020
£m £m
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
£m £m
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 £1.3m (2020: £1.6m) that passed through the
Group income statement, a deferred tax charge of £1.3m (2020: £0.2m)
relating to the revaluation of the owner-occupied property at 25 Savile Row W1
and a charge of £0.4m (2020: credit of £0.4m) 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
£m £m
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 )Changes 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
£m £m £m £m £m £m £m
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
£m £m £m £m £m £m £m
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
£m £m
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 £5,610.8m (2020: £5,324.5m) and other
valuers at £35.5m (2020: £31.0m), giving a combined value of £5,646.3m
(2020: £5,355.5m). Of the properties revalued by CBRE, £49.3m (2020:
£45.6m) relating to owner-occupied property was included within property,
plant and equipment and £34.1m (2020: £14.3m) 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 £14.8m 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 £63.7m from investment
property to assets held for sale. This subsequently completed in January 2022.
A revaluation deficit of £1.2m relating to the asset held for sale is
included within the revaluation surplus of £130.8m.
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 £37.5m from investment property to assets held for sale. A
revaluation deficit of £0.8m relating to the asset held for sale is included
within the revaluation surplus of £130.8m.
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. £116.6m (year to 31 December 2020:
£103.2m) 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 £450m revolving credit
facility and the £350m 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.£97m 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
£m £m
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
£m £m
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 £2.50 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
+£2.50 psf 4.2% 4.8% 4.9% 19.3% - 4.7%
-£2.50 psf (4.2%) (4.8%) (4.9%) (19.3%) - (4.7%)
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
£m £m £m £m
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 £0.9m
(2020: £1.0m). 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
£m £m
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 £64.1m, including £4.0m
of acquisition costs and fees and £0.1m 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
£m £m £m £m
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
£m £m
Prepayments and accrued income 159.3 146.4
Prepayments and accrued income include £147.0m (2020: £132.3m) 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, £12.3m (2020: £14.1m) relates to the spreading effect of the
initial direct costs of letting over the same term. Together with £24.1m
(2020: £19.6m), which was included as accrued income within trade and other
receivables (see note 15), these amounts totalled £183.4m at 31 December 2021
(2020: £166.0m).
The total movement in tenant lease incentives is shown below:
2021 2020
£m £m
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
£m £m
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
£m £m
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 £9.5m of provision for bad debts as shown below. £4.1m are
included in trade receivables, £0.7m in accrued income and £4.7m in
prepayments and accrued income within other receivables (non-current) (note
14).
Provision for bad debts
2021 2020
£m £m
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
£m £m
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
£m £m
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 £66.5m 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 £1.2m, the carrying value was £65.3m (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 £38.3m 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 £0.8m, the carrying value at 31 December 2021 was £37.5m (see note 11).
17. Trade and other payables
2021 2020
£m £m
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 £14.8m 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
£m £m £m £m
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 £12.3m 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 £nil at 31 December 2021 (2020: £nil). The carrying
value of the loan at 31 December 2021 was £12.3m (2020: £nil).
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 £105.2m of the
Group's properties as at 31 December 2020. The 3.99% secured loan 2024 was
secured by a fixed charge over £305.2m (31 December 2020: £304.5m) 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 £571.8m (31 December 2020: £616.5m) of the Group's properties.
The Group continues to maintain significant headroom on all financial
covenants.
19. Deferred tax
Revaluation
surplus/(deficit) Other Total
£m £m £m
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 £m £m
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
£m £m
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 £53.4m 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
£45.2m. 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 £100.7m 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 £55.0m before costs.
In January 2022, the Group exchanged contracts for the disposal of its
freehold interest in New River Yard EC1 for £67.5m 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 £158.4m.
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 £175m unsecured convertible bonds 2025 ('2025 bonds') have an initial
conversion price set at £44.96.
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
£m £m £m £m £m
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
£m £m £m £m £m
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
£m £m
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
£m £m
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
£m £m £m £m £m £m
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 basis¹ (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 £100.7m 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
£m £m
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
£m £m
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
£m £m
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 £5.7 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
(http://www.derwentlondon.com) or follow us on Twitter at @derwentlondon
Forward-looking statements
This document contains certain forward-looking statements about the future
outlook of Derwent London. By their nature, any statements about future
outlook involve risk and uncertainty because they relate to events and depend
on circumstances that may or may not occur in the future. Actual results,
performance or outcomes may differ materially from any results, performance or
outcomes expressed or implied by such forward-looking statements.
No representation or warranty is given in relation to any forward-looking
statements made by Derwent London, including as to their completeness or
accuracy. Derwent London does not undertake to update any forward-looking
statements whether as a result of new information, future events or
otherwise. Nothing in this announcement should be construed as a profit
forecast.
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