REG - Derwent London PLC - RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
28/02/2023 07:00
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RNS Number : 2211R Derwent London PLC 28 February 2023
28 February 2023
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
WELL POSITIONED IN THE CONTINUING FLIGHT TO QUALITY
Paul Williams, Chief Executive of Derwent London, said:
"The £14.7m of lettings we have announced today further demonstrate the depth
of demand for our distinctively designed, sustainable offices and we
anticipate rental growth accelerating for the best buildings over the
medium-term. We have an opportunity-rich pipeline, underpinned by our high
quality core portfolio. Our balance sheet remains strong helped by another
year of active capital recycling."
Lettings activity
· 2022 lettings of £9.8m, 13.0% above December 2021 ERV
· 2023 lettings of £14.7m year to date, including:
o PIMCO - 106,100 sq ft pre-let at 25 Baker Street W1, at rent of £11.0m on
a 15-year lease (no breaks)
o Buro Happold - 31,100 sq ft let at The Featherstone Building EC1, at rent
of £2.3m on a 15-year lease with a break at 10
Financial highlights
· EPRA net tangible assets(1) 3,632p per share, down 8.3% from
3,959p at 31 December 2021
· Net rental income of £188.5m, up 6.0% from £177.9m (restated)
· IFRS loss before tax of £279.5m from a profit of £252.5m in
2021
· EPRA earnings £119.7m or 106.6p per share, down 1.8% from 108.5p
(restated)
· Full year dividend of 78.5p, up 2.6% from 76.5p
· Total return -6.3% from 5.8% in 2021
· Interest cover of 423%, EPRA loan-to-value ratio of 23.9%
· Net debt of £1,257.2m, broadly unchanged from £1,251.5m
· Undrawn facilities and cash of £577m(2)
Portfolio highlights
· Portfolio valued at £5.36bn, an underlying decline of 6.8% with
development valuations up 4.8%
· True equivalent yield of 4.88% compared to 4.50% at December 2021
· Portfolio ERV growth of 1.3%
· Total property return of -3.4% outperforming our benchmark(3) at
-8.0%
· £133.0m of property acquisitions and £121.8m(4) of capital
expenditure
· £206.4m(5) of disposals, £25.6m above December 2021 book value;
further £53.6m sold in 2023
· Development pipeline
o Three schemes completed in 2022, totalling 450,500 sq ft
o Two major projects on-site, totalling 435,000 sq ft, due for completion in
2025
· £29.6m of asset management transactions, 5.3% above December
2021 ERV
· EPRA vacancy increased to 6.4% from 1.6% in December 2021;
reduces to 5.0% for 2023 lettings to date
Sustainability
· Fully compliant with 2023 EPC legislation; 65.3% compliant with
expected 2030 requirements
· Energy intensity reduced 4% to 123 kWh/sqm, ahead of target for
third consecutive year
Outlook
· Our guidance is for average ERVs across our portfolio to increase
by 0% to +3%
· Upward yield pressure easing; yields for our portfolio to be more
resilient than wider London office market
(1) Explanations of how EPRA figures are derived from IFRS are shown in note
25
(2) Excludes restricted cash
(3) MSCI Central London Offices Quarterly Index
(4) Including capitalised interest
(5) Disposals exclude the sale of trading property
Webcast and conference call
There will be a live webcast together with a conference call for investors and
analysts at 09:45 GMT today. The 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 webcast will also be made available following the event 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 Nina Coad
Tel: +44 (0)20 7404 5959 Emily Trapnell
CHAIRMAN'S STATEMENT
Derwent London aims to add value to its portfolio through a combination of
major projects and refurbishment schemes, while recycling capital out of
assets where we see lower forward returns. We are committed to delivering high
quality and sustainable offices through the economic cycle.
Global events in 2022 caused a marked increase in uncertainty. However, we
have seen confidence return to the market in recent months as the economic
outlook has improved.
Following the decision in 2021 to retain our larger modern developments for
longer and to dispose of non-core properties, the business made good progress
against this strategic objective and has seen relative outperformance against
its property benchmarks. This, together with our objective of operating with
low leverage, gives us firepower for further development and future investment
opportunities.
Estimated rental values across our portfolio rose by 1.3% over 2022 but the
rapid outward movement in property yields seen in the second half took our
portfolio fair value to £5.36bn after a revaluation deficit for the year of
£430.9m, including our share of joint ventures. This was a reversal from the
£73.0m revaluation surplus seen at the half year and took the Group's EPRA
net tangible asset (NTA) value to 3,632p at 31 December 2022. This equates to
an 8.3% decrease over the year from 3,959p in December 2021.
Gross rental income rose 6.0% to £207.0m for the year. EPRA earnings were
marginally lower than 2021 at 106.6p per share (2021 restated: 108.5p) but,
after deducting premiums received in both years, underlying EPRA earnings were
slightly up year on year.
We propose raising the final dividend by 1.0p to 54.5p, in line with our
progressive and well covered dividend policy. It will be paid on 2 June 2023
to shareholders on the register of members at 28 April 2023. This takes the
full year's dividend to 78.5p, an annual increase of 2.6%. EPRA earnings
covered the 2022 interim and final dividends 1.4 times.
In 2022, we refreshed our Vision, Purpose and Values:
· Vision: We craft inspiring and distinctive space where people
thrive.
· Purpose: We design and curate long-life, low carbon, intelligent
offices that contribute to London's position as a leading global city, while
aiming to deliver above average long-term returns for all our stakeholders.
· Values: We build long-term relationships. We lead by design. We
act with integrity.
Derwent London is an inclusive employer. Our people remain highly engaged and
in our recent employee survey, 91% of respondents said they were 'proud to
work for Derwent London'. I would like to thank all the staff at Derwent
London for their continued hard work and commitment.
In recognition of the challenges faced in the uncertain economic environment,
we made a one-off cost of living payment to eligible employees.
After nine years on the Board, Richard Dakin is stepping down from his
position as a Non-Executive Director of the Company and Chair of the Risk
Committee. The Board thanks Richard for his significant contribution to the
business and wishes him every success in the future. Helen Gordon, who is the
Senior Independent Director and a member of the Risk Committee, will become
Committee Chair.
CEO STATEMENT
Introduction
At the start of 2022, confidence levels in London were strong. In Q1,
occupational and investment markets both recorded high levels of activity. The
outlook weakened as the year progressed following the invasion of Ukraine and
its economic impact globally, as well as changes in the UK political
landscape. In more recent months, the outlook for the UK economy has improved
and confidence is recovering.
London is very busy again. The opening of the Elizabeth line has increased
capacity across the transport network, contributing to substantially higher
footfall around the central stations, benefitting offices, shops and
restaurants.
The flight to quality for London offices continues to gather pace. Data from
CBRE show a clear divergence in demand for new versus secondhand space as
businesses recognise the important role design-led, amenity-rich, low carbon
offices play in attracting and retaining talent. The hybrid working model is
now established and occupiers are planning for peak occupancy with lower
occupational densities.
Letting progress
The 163,000 sq ft of leases signed in 2022, with a combined annual rent of
£9.8m, were agreed on average 13.0% above December 2021 ERV. As well as long
leases, our letting activity included seven 'Furnished + Flexible' lettings -
also at substantial premiums - bringing our total of these smaller units to 27
across 63,600 sq ft.
Activity has accelerated in 2023 with 10 new leases agreed totalling £14.7m
of rent, 7.7-% above December 2022 ERV on average. The two key transactions
are:
· PIMCO (the investment management company) has pre-let 106,100 sq
ft at 25 Baker Street W1 at a rent of £11.0m, well above December 2022 ERV on
a 15-year lease with no breaks (commercial element 56% pre-let/sold ahead of
completion in H1 2025); and
· Buro Happold (a global engineering consultancy) has leased 31,100
sq ft at The Featherstone Building EC1 at a rent of £2.3m in line with
December 2022 ERV on a 15-year lease with a break at year 10.
For further details, refer to the separate RNS announcement we have published
this morning.
We are in detailed negotiations with a number of other occupiers across the
portfolio.
New leases signed in 2022 had a weighted average unexpired lease term to break
(WAULT) of 5.7 years and our 'topped-up' WAULT at year end was 7.2 years. This
will increase with post-year end activity and we see good demand for both long
and short-term leases. Our tenant retention rate remains high, and 79% of
space subject to break or expiry in 2022 was retained or re-let.
Completion of The Featherstone Building EC1, Soho Place W1 and other smaller
refurbishments led to an increase in our EPRA vacancy rate to 6.4%, from 1.6%
at 31 December 2021. Following lettings in 2023, proforma vacancy would
reduce to 5.0%.
Property valuations
Portfolio ERV growth was 1.3% in 2022, in the middle of our guidance range.
However, there was a broad range of outcomes. Buildings with a capital value
above £1,000 psf saw ERVs up 2.5%, while those below £1,000 psf saw ERVs up
0.3%, the latter often being the raw material for future regeneration.
The portfolio's true equivalent yield increased 38bp in 2022 to 4.88%, a level
last seen in 2014. Yields moved down 4bp in H1 and up 42bp in H2. Our
portfolio outperformed the market with a total property return of -3.4%
compared to the MSCI Central London Office index down 8.0%, endorsing our
strategy of keeping our recently completed high quality buildings for longer.
The outward yield shift resulted in underlying values reducing 6.8% in the
year and a revaluation deficit of £430.9m (including share of joint
ventures).
Market overview
London office investment volumes totalled £11.2bn, 12% higher than in 2021,
but this was 71% weighted to the first half. There was a significant pause in
Q4 which comprised just 6% of the annual total.
London is recognised as a leading global city which appeals to a diverse range
of businesses. Many sectors continue to grow and expand in the capital,
including professional services, artificial intelligence (AI), fintech,
education and life sciences.
London office take-up reached 12.3m sq ft in the year, evenly split between H1
and H2, up 29% from 2021 and in line with the 10-year average. The West End
outperformed the City with take-up 23% above the 10-year average at 4.9m sq
ft, while the City was in line at 5.1m sq ft. We have seen an acceleration in
the number of companies committing to moving from outer London to the centre,
particularly in the West End.
Following an increase in 2020 and 2021, central London vacancy reduced
slightly but remains elevated at 8.2%. Looking in more detail, there are two
notable trends. First, vacancy is not evenly spread. West End vacancy at 3.7%
is in line with the 10-year average while in the City it is nearly double its
long-term average at 11.9%. Secondly, the availability of prime space is very
constrained, with 64% of supply being secondhand including tenant-controlled
space.
There is increasing occupier focus on the overall service and amenity
offering. As well as the amenity provided within our individual buildings, all
our occupiers are given exclusive access to shared lounges at DL/78 and DL/28
(due to open in Old Street in Q4 2023). These offer a shared space in which to
work, meet and socialise, as well as bookable meeting rooms, private hire
space and events.
Strong balance sheet with low leverage
Despite a volatile market backdrop, 2022 was an active year for capital
recycling. We invested £133.0m on acquisitions and £121.8m in capex
(including capitalised interest), and were pleased to sell several non-core
assets above book value for £206.4m (excluding trading properties), with a
further £53.6m sold in 2023. We have now made disposals of more than £700m
since the start of the pandemic three years ago.
Our balance sheet remains very strong with high interest cover of 423% for the
year and low EPRA LTV of 23.9% at 31 December 2022. We also have a strong
liquidity position with cash and undrawn facilities at year end of £577m
(excluding restricted cash).
The Group has no current exposure to market interest rates, with 100% of
borrowings at fixed rates. Our average interest rate is 3.14% on a cash basis.
We have little to refinance in the near-term, with our first maturity being an
£83m 3.99% secured facility in October 2024. The average maturity of our
drawn debt is 6.2 years.
Developments and refurbishments
At year end, our portfolio was split 57% 'core income' and 43% 'future
opportunity'. We continue to deliver best in class space that meets the
evolving requirements of our occupiers. In 2022, we completed three
substantial projects delivering an average 27% profit on cost at practical
completion. We are on site at two major projects, 25 Baker Street W1 (298,000
sq ft; commercial element 56% pre-let/sold) and Network W1 (137,000 sq ft;
speculative), both due for completion in 2025.
We have submitted a planning application for a c.240,000 sq ft scheme at our
50 Baker Street W1 50:50 joint venture with Lazari Investments, and are
refreshing our planning for Holden House W1 (c.150,000 sq ft).
We are working on longer term plans for Old Street Quarter EC1 which has
potential for a 750,000+ sq ft mixed-use campus. Our acquisition of the site
for £239m is expected to complete from 2027. In addition, we are planning to
increase the volume of major refurbishment projects in the coming years where
we see the opportunity to substantially raise ERVs reflecting increased
quality, energy efficiency and sustainability credentials.
In 2022, build cost inflation rose to c.11% but is now settling and is
expected to moderate in 2023 and 2024. As previously outlined, at 25 Baker
Street we have fixed 97% of the office element build costs (c.80% of overall)
and we are close to agreeing the contract sum at Network.
Sustainability
We made good further progress in 2022 reducing energy consumption and thus operational carbon. Energy intensity across our managed portfolio fell 4% year on year to 123 kWh/sqm, a 22% reduction compared to our 2019 baseline, ahead of our science-based targets for the third consecutive year. This resulted in a 7% reduction in the operational carbon intensity across our managed portfolio to 31.4 kgCO(2)e/sqm.
At our projects, we account for 100% of the embodied carbon in the year of
completion, at which point any residual is offset using high quality, verified
schemes. In 2022, we completed two major developments (412,300 sq ft), one
large refurbishment (38,200 sq ft) and several small refurbishments. The
weighted average embodied carbon intensity for the major projects was 589
kgCO(2)e/sqm. This is below the target set by the GLA of <600 kgCO(2)e/sqm.
While our regeneration activity leads to the creation of embodied carbon, a
project can take four to five years to deliver and the building will have an
extended design life of over 60 years. In addition, the buildings are designed
to be more energy efficient, and thus generate lower operational carbon in
use, with maximum future flexibility and adaptability.
We were pleased to receive resolution to grant planning consent for a c.100
acre, 18.4MW solar park on our Scottish land which we expect will generate
more than 40% of the electricity needs of our London managed portfolio.
At 31 December 2022, our portfolio was fully compliant with forthcoming
changes to EPC legislation which require a rating of E or higher. These rules
are due to become stricter in 2027 with a minimum rating of C or better. From
2030, it is expected that there will be a further change to a minimum of B.
Including on-site projects, our portfolio is 85.7% 2027 compliant by ERV
(2021: 78.9%) and 65.3% 2030 compliant (2021: 61.0%).
In 2021, we commissioned a third party report that identified c.£97m of works
to achieve 2030 EPC compliance across our London commercial portfolio. This
has since been updated to c.£107m reflecting the latest scope and 2022 cost
inflation. Following the sale of 19 Charterhouse Street EC1 in January 2023,
the figure reduces to c.£99m. Our external valuers have made a specific
deduction of c.£58m for identified EPC works across the portfolio, plus
further amounts for general upgrades on assumed vacancies.
Recognising employee performance
We were delighted to recognise high performance with 17 internal promotions in
2022, including four new appointments to the Executive Committee. Philippa
Davies, Head of Leasing, joined the Committee from 1 July 2022 and there were
a further two appointments with effect from 1 January 2023: Katy Levine, Head
of Human Resources; and Robert Duncan, Head of Investor Relations and
Strategic Planning. Executive Committee member Jay Joshi was also promoted to
Group Financial Controller from Group Treasurer.
Outlook
We expect average ERV growth across our portfolio in 2023 of 0% to +3%, with our higher quality properties continuing to outperform. We anticipate rental growth accelerating for the best buildings over the medium-term, particularly in the West End.
The ongoing weight of global capital looking to invest in London, combined with the recent reduction in volatility across financial markets, is encouraging. This is supported by London's attractive yield relative to other European cities. Upward pressure on yields is easing and we expect our portfolio to be more resilient than the wider London office market.
Derwent London has a well-positioned portfolio, delivering the right product
to meet diverse occupier demand. We have an exciting regeneration pipeline and
the balance sheet capacity to take advantage of acquisition opportunities that
may emerge.
CENTRAL LONDON OFFICE MARKET
Occupational market
Letting activity in 2022 was in line with the 10-year average. The flight to
quality is well established and gathering pace, with nearly 80% of take-up
being of new or good quality space, while availability of secondary remains
elevated, in part due to heightened occupier focus on sustainability
credentials. The constrained development pipeline, alongside occupiers being
focused on high quality buildings in more central locations, is leading to an
increase in pre-letting activity. Together with limited prime supply, we see
good reason for rental growth on higher quality buildings.
Central London take-up of 12.3m sq ft was 29% higher than in 2021 reflecting
continued re-engagement by businesses with longer-term occupational
strategies. This was focused on best quality product, with 39% of the total
being new (including pre-lets) and 40% was Grade A secondhand. In the West End
4.9m sq ft of space was leased, up 36% year-on-year and 23% ahead of the
10-year average. In the City, take-up of 5.1m sq ft rose 33% compared to 2021,
in line with the 10-year average.
Availability remains elevated across central London, with vacancy of 8.2% down
0.4% on the prior year, but this average masks a significant divergence
between the West End and City. Strong demand in the West End led to a 1.1%
decline to 3.7% (10-year average 3.4%). City availability also reduced, but by
only 0.3% to 11.9%, nearly double the 10-year average (6.4%).
The amount of available secondhand space nearly doubled at the start of the
pandemic to a peak of 19.2m sq ft at Q1 2021 and finished 2022 at 16.4m sq ft.
The volume of tenant-controlled space remains high at 28% of total
availability. Overall secondhand availability remains elevated at 64% of the
total, but this compares to a peak of 77% at Q1 2021.
Knight Frank estimate that there will be a 11m sq ft supply shortage of best
quality buildings over the next four years, assuming normal levels of annual
take-up. The committed central London development pipeline between 2023 and
2025 totals 12.7m sq ft with 7.1m sq ft scheduled to complete in 2023 of which
28% is pre-let or under offer. Deliveries in 2024 and 2025 are significantly
below historic levels.
Businesses with large space requirements over the medium-term are engaging at
an increasingly early stage of development in order to secure space that meets
their requirements. Pre-lets comprised 24% of total take-up in 2022 and
accounted for the nine largest transactions. We are also seeing signs of
recentralisation with demand more focused on central and well-connected
locations.
London is well recognised as a leading global city with broad appeal to a
diverse range of occupiers. The key sectors taking space in 2022 were banking
& finance (28%), and professional and creative industries (17% each). This
diversity is also seen in the active demand figures, with banking &
finance, business services and creative industries together accounting for 71%
in total.
Businesses continue to adjust to more hybrid solutions but whilst working
patterns may have changed, the power and function of the office seems to be
more understood now than ever. Occupiers are making decisions based on peak
occupancy with lower occupational densities, whilst also ensuring it is the
right space to support their talent and overall business productivity.
Our experience is that long leases remain important for large occupiers given
high fit-out costs and business continuity. For pre-lets, pre-completion
expansion/contraction options are becoming more common. For smaller
occupiers and in particular those in high growth mode, shorter leases provide
the flexibility they need to adapt their real estate to their rapidly evolving
requirements.
Sustainability credentials, high quality design, amenity, customer service and
experience all remain high on the agenda for occupiers when it comes to making
real estate decisions. That is why we focus on delivering best in class,
design-led and sustainable buildings.
Macro backdrop
2022 was characterised by a spike in global inflation, a rapid increase in
borrowing costs and a cost of living crisis in the UK. Towards the end of the
year, inflationary pressures began to ease, partly driven by a reduction in
both energy and food costs, which has led to expectations of a lower peak in
interest rates than was expected at the height of the political and economic
instability.
Following a strong post-pandemic bounce in 2021, UK GDP was 4.0% in 2022
albeit weighted to Q1. The latest forecasts from Oxford Economics and others
are for both the UK and London to experience a short-lived and mild recession
in 2023 as households and businesses respond to the increase in input costs
from higher costs of materials and utilities, and interest rates. The economy
is then expected to return to growth from 2024, with London to maintain its
outperformance
Job creation is an important indicator for London offices. Forecasts from
Oxford Economics show a small contraction in the number of office- based jobs
in 2023, before a return to growth from 2024. These forecasts should be
viewed, however, in the context of the last two years during which a combined
c.280,000 net new office-based jobs were created.
The opening of the Elizabeth line, which has added c.10% capacity to London's
rail transport network, has driven a surge in footfall around the central
stations along the route. According to TfL data, more than 100m journeys have
already been made since opening and daily usage is above the expected level of
c.600,000. Tottenham Court Road is now in the top five most-used stations in
the TfL network, with its usage increasing by more than 80% since launch.
Approximately 41% of our portfolio is located in nearby Fitzrovia (including
Soho Place).
Office occupancy rose through 2022 according to data from Remit Consulting,
following an initial period of adjustment when work from home guidance was
lifted in mid-January. West End office occupation has increased from c.10% to
in excess of 45%. By contrast, occupation levels in the City continue to lag,
reaching c.30% through Q4.
London remains an attractive place to live as well as to work. In 2022, the
population rose by 1.2% to 9.5m and is forecast to increase to 9.6m in 2023.
Over the longer-term to 2035, the UN is forecasting an annual increase of 0.8%
to 10.6m, an increase of more than 1m people over the next 13 years. This
comes on the back of sustained growth since the early-1980s when the
population was 6.7m.
Long-term capital remains attracted to London
London remains an attractive location for domestic and international investors
and CBRE estimates there is c.£33bn of potential investment demand targeting
London offices. The story of 'the best versus the rest' continues and investor
appetite is polarised.
Well-located and high quality buildings with strong ESG credentials, let on
long leases to strong covenants remain in demand as do those with potential
for regeneration into prime. Investor appetite for secondary assets, however,
is very limited and these are likely to underperform.
Investment activity for 2022 was £11.2bn, 12% above 2021 and in line with the
long-term average of £11.4bn. Unsurprisingly, given the uncertain economic
backdrop, investment volumes were low in the last quarter of the year,
totalling just £0.7bn. Overseas capital dominated investment activity,
accounting for 80% of all transactions, with investors from Asia the most
active at 43%.
Underlying rates and credit spreads both increased significantly in the year
with prospective investors appraising return requirements against the higher
borrowing costs. Consequently, investment yields came under upward pressure
through H2. The West End was more resilient than the City, with prime yields
rising c.50bp to 3.75% compared to City yields up c.75bp to 4.5%.
The rise in yields combined with heightened risk awareness from credit
providers is expected to present potential acquisition opportunities. Owners
who are currently actively marketing assets for sale are primarily driven by a
combination of upcoming refinancing events, future vacancy risk and
EPC/upgrade capex requirements.
Vendor pricing expectations are being reset as transactional evidence starts
to emerge and financial markets show signs of stabilising. In contrast to
previous market corrections, both the development pipeline and the volume of
debt maturing in the short term are relatively low, which is expected to limit
the magnitude of any market correction.
VALUATION
As reported with our H1 2022 results, we have changed our external valuer from
CBRE to Knight Frank. At least half of our London assets were valued by Knight
Frank at H1 and for the year-end valuation they were appointed on all the
London assets. Our Scottish land, less than 1% of the Group's portfolio,
continues to be valued by Savills.
The Group's investment portfolio was valued at £5.36bn as at 31 December
2022. There was a deficit for the year of £401.8m which, after accounting
adjustments of £29.1m, produced a decline of £430.9m including our share of
joint ventures. On an underlying basis the portfolio decreased 6.8%, following
a 3.5% uplift in 2021.
This primarily reflected the weakening economy, with inflation and interest
rates rising significantly in the second half. This had a direct impact on
the commercial property sector with valuation yields moving out. Accordingly,
the positive H1 valuation of 1.4% reversed in H2 to an 8.0% decline. Rental
values generally held up with office occupiers seeking better quality,
environmentally attractive accommodation, which is in short supply.
By location, our central London properties, which represent 99% of the
portfolio, declined by 6.8% with the West End down 5.8% and City Borders 9.2%.
The balance of the portfolio, our Scottish holdings, was down 5.7%.
Our portfolio valuation movement outperformed both the MSCI Quarterly Index
for Central London Offices and the wider UK All Property Index which were down
by 10.9% and 12.8%, respectively. The quality of the portfolio, low vacancy
rate, successful development programme and active asset management all
contributed to this outperformance. The table shows performance trends in more
detail, with the higher capital value (in £ psf) buildings outperforming.
Capital value and ERV performance
Capital value Weighting by value Capital value change ERV growth
£ psf banding
>£1,500 21% -3.5% 2.0%
£1,000 - £1,499 25% -7.4% 2.9%
<£1,000 39% -11.8% 0.3%
Underlying 85% -8.5% 1.4%
Developments 15% 4.8% 0.6%
Portfolio 100% -6.8% 1.3%
Our long-term development pipeline, which provides well designed office space
in central London, is well positioned, with occupiers having a greater focus
on high quality, environmentally attractive space. This was reflected in our
EPRA rental values which moved up 1.3%, an improvement on the 0.2% decline
seen in 2021.
The portfolio's true equivalent yield moved out 38bp from 4.50% to 4.88% over
the year. The initial yield is 3.7% (December 2021: 3.3%) which, after
allowing for the expiry of rent frees and contractual uplifts, rises to 4.6%
on a 'topped-up' basis (December 2021: 4.4%).
Derwent London's total property return for 2022 was -3.4%, which compares to
the MSCI Quarterly Index of -8.0% for Central London Offices and -9.1% for UK
All Property.
Our major development completions in 2022 were Soho Place W1 and The
Featherstone Building EC1, and together these were 71% let or sold at year
end. On-site developments are 25 Baker Street W1 and Network W1, both in the
West End. The latter commenced in June 2022. Both are due to be delivered in
2025 and require £324m of capital expenditure to complete. Together the four
schemes were valued at £790m at December 2022, representing 15% of the
portfolio, and saw a 4.8% valuation uplift after capital expenditure, as
development surpluses were released. Excluding these, the portfolio valuation
decreased by 8.5% on an underlying basis.
Further details on the progress of our projects are in the 'Development and
refurbishment' section below and additional guidance on the investment market
is laid out in the 'Outlook' section above.
Portfolio reversion
Our contracted annualised cash rent as at 31 December 2022 was £204.2m, a 14%
increase over twelve months as the pre-lets at our 2022 development
completions came through. With a portfolio ERV of £304.6m there is £100.4m
of potential reversion. Within this, £46.4m is contracted through a
combination of rent-free expiries and fixed uplifts, the majority of which is
already straight-lined in the income statement under IFRS accounting
standards. On-site developments and refurbishments could add £33.0m. The ERV
of available space is £17.3m. Just over half of this was at our recently
completed developments: £5.9m at The Featherstone Building and £3.2m at Soho
Place (retail). Since year end we have let £2.4m of this space. The balance
of the potential reversion of £3.7m comes from future reviews and expiries
less future fixed uplifts.
LEASING, ASSET AND PROPERTY MANAGEMENT
Lettings - £9.8m of new rent at 13.0% above ERV
Leasing activity in 2022 totalled £9.8m, across 46 transactions, of which
£2.3m were pre-lets. These 163,000 sq ft of lettings were signed on average
13.0% above December 2021 ERV. Nine transactions comprised 68% of the total.
Demand for furnished space is also strong with occupiers prepared to pay a
premium to secure high quality, ready to occupy units. This provides an
excellent solution for our smaller units and we currently operate 63,600 sq ft
of 'Furnished + Flexible' space with a further 34,100 sq ft on site or
committed.
Post-year end letting activity - £14.7m of new rent in 2023 YTD
Since the start of 2023, we have seen a noticeable increase in letting
activity. 10 new leases have been agreed totalling £14.7m of rent on average
7.7% above December 2022 ERV. Key transactions include:
· PIMCO has pre-let 106,100 sq ft at 25 Baker Street W1 at a rent
of £11.0m, well above December 2022 ERV (commercial element now 56%
pre-let/sold); and
· Buro Happold has leased 31,100 sq ft at The Featherstone Building
EC1 at a rent of £2.3m, in line with December 2022 ERV.
Leasing activity
Let Performance against
Dec 21 ERV
Area Income WAULT(1) Overall
sq ft £m pa yrs %
H1 2022 109,300 7.1 6.1 9.3
H2 2022 53,700 2.7 4.2 23.7
2022 163,000 9.8 5.7 13.0
2023 YTD 162,600 14.7 13.4 7.7(2)
( )
(1) Weighted average unexpired lease term (to break)(
2) Performance against Dec 22 ERV
Principal lettings in 2022
Property Tenant Area Rent Total annual rent Lease term Lease break Rent free equivalent
sq ft £ psf £m Years Year Months
H1 2022
90 Whitfield Street W1 Michael Kors 18,850 72.50 1.4 10 - 24
The Featherstone Building EC1 Marshmallow 16,220 71.50 1.2 10 6 15, plus 9 if no break
The Featherstone Building EC1 Dept Agency 11,450 85.25 1.0 10 5 11.5, plus 11.5 if no break
White Collar Factory EC1 Brainlabs 11,540 71.70 0.8 6 - 10.4
White Collar Factory EC1 Adobe 10,180 70.00 0.7 10 6 12, plus 10 if no break
230 Blackfriars Road SE1 Wandle Housing Association 7,290 49.50 0.4 7.5 4 7, plus 6 if no break
80 Charlotte Street W1 NewRiver REIT 4,090 70.00 0.3 5 - 11
Holden House W1 Talon Outdoor 5,120 49.50 0.3 5 3.5 6
H2 2022
43 Whitfield Street W1 Pollination 5,930 85.00 0.5 10 5 5
43 Whitfield Street W1 Sine Digital 5,090 86.00 0.4 10 5 6, plus 5 if no break
Gordon House SW1 VCCP 7,380 52.50 0.4 3 - 7
Sub-total 103,140 71.75 7.4
Other 59,860 40.10 2.4
Total 2022 lettings 163,000 60.40 9.8
Principal lettings in 2023 YTD
Property Tenant Area Rent Total annual rent Lease term Lease break Rent free equivalent
sq ft £ psf £m Years Year Months
25 Baker Street W1 PIMCO 106,100 103.40 11.0 15 - 37
The Featherstone Building EC1 Buro Happold 31,100 74.40 2.3 15 10(1) 24, plus 12 if no break
Tea Building E1 Jones Knowles Ritchie 8,100 60.00 0.5 10 5 12, plus 12 if no break
Other 17,300 51.10 0.9 - -
2023 YTD 162,600 90.10 14.7
( )
(1) There is an additional break at year 5 on level eight subject to a
12-month rent penalty payable by the tenant
Asset management - £29.6m of transactions on average 5.3% above ERV
By March 2022, most Covid-19 restrictions in the UK had been lifted. As office
occupancy levels have increased, businesses have re-engaged with their long
term real estate strategy and, as a result, we are seeing growing demand for
long-term solutions from the short-term extensions and regears experienced
through the pandemic.
We continually review our asset strategies as occupier requirements evolve and
align expiry profiles to facilitate the refresh, upgrade and repositioning of
our portfolio.
At the start of 2022, 9% of passing rent was subject to break or expiry in the
year. After adjusting for disposals and space taken back for schemes, 79% of
income exposed to breaks and expiries were retained or re-let by year end.
This compares to our 10-year average retention/re-let rate of 85%.
10% of passing rent is subject to break or expiry in 2023, a reduction from
the 15% potentially at risk six months earlier.
Rent reviews were settled 6.2% above December 2021 ERV and delivered a 10.1%
uplift over the previous income. The majority of this activity was at White
Collar Factory EC1 where rents increased between 14% and 16%.
Renewals were completed 12.5% above the previous rent and 9.3% above December
2021 ERV. The main lease renewal was the extension of Morningstar's lease at 1
Oliver's Yard EC1 to June 2027. They have agreed a rental uplift reflecting an
18.8% premium to the previous rent.
Regears, excluding the impact of a landlord development facilitation break
clause, completed 0.2% above previous rent and 1.6% above December 2021 ERV.
The main regear was a restructuring of Burberry's break clause at 1 Page
Street SW1.
Asset management activity 2022
Number Area Previous rent New rent Uplift New rent vs
'000 sq ft £m pa £m pa % Dec 21 ERV %
Rent reviews 20 215.7 12.6 13.8 10.1 6.2
Lease renewals 29 112.2 5.5 6.3 12.5 9.3
Lease regears(1) 13 189.0 9.5 9.5 0.2 1.6
Total 62 516.9 27.6 29.6 7.2 5.3
( )
(1) Excludes single development-linked regear in Q1
Vacancy - 6.4% at year end, 5.0% proforma for post-year end lettings
The portfolio EPRA vacancy rate increased to 6.4% at 31 December 2022 from
1.6% at the start of the year. The increase primarily reflects development
completions at The Featherstone Building EC1 and Soho Place W1 as well as
refurbishment completions at Tea Building E1. Together these three projects
contributed 58% to the year end vacancy. Letting activity since the start of
2023 would reduce the EPRA vacancy to 5.0% on a proforma basis.
Occupier survey
In January 2023, we carried out an occupier survey. 41 tenants contributed
with a combined ERV of £103m, equivalent to 50% of ERV (excluding projects
and contracted uplifts). When asked whether any change in the organisation's
real estate footprint was anticipated over the next five years, 40% of
respondents (by ERV) said they expected either a small or significant increase
and 34% expect no change. Our occupier surveys (August 2020, January 2021 and
July 2021) show a clear upward trend since the pandemic in the number of
occupiers expecting their real estate footprint to increase or remain the
same.
Rent collection - At pre-pandemic levels
As outlined with our H1 2022 results, rent collection continues to match
pre-pandemic levels with 98% of the December 2022 quarter rent collected.
Similarly, service charge collection remains strong at 96%.
Property Management
As occupation continued to rise through 2022, the Property Management team
further engaged with our customers hosting a series of events including
workshops and competitions, alongside initiatives to support local
communities. Work has continued to support the Group's journey to net zero
carbon with the development of a portfolio-wide metering strategy to ensure
more robust data capture, supporting our energy reduction programme and
facilitating roll-out of our Intelligent Building infrastructure. The team
also implemented a number of practical measures, including a reduction in
temperature set points, smart lighting initiatives and adjustments to plant
running times, helping exceed our energy reduction targets.
ACQUISITIONS AND DISPOSALS
In 2021, the Group took the decision to retain its modern and recently
upgraded buildings for longer while reducing its exposure to non-core
properties with less repositioning potential. This decision reflected our view
that the flight to quality would gather pace and that higher quality buildings
would deliver stronger returns.
We remain committed to owning a portfolio balanced between core income
properties and those that offer future regeneration potential. At 31 December
2022, the portfolio was split 57% 'core income' and 43% 'future opportunity'
(excluding Old Street Quarter EC1, with an existing floor area of c.400,000 sq
ft, where our acquisition is expected to complete from 2027 for £239m).
Since the start of 2022, we have made good further progress against our
objectives, actively recycling capital out of several smaller non-core
buildings above book value, where there was limited capacity for extra floor
area and amenity.
Disposal proceeds have been recycled into our development pipeline thereby
maintaining conservative gearing, providing firepower for future acquisition
opportunities that may arise. Committed capex relating to our two on-site
major projects totals £324m.
Disposals (excluding trading property)
Property Date Area Net proceeds Net yield Net rental income
sq ft £m % £m pa
New River Yard EC1 Q2 2022 70,700 65.9(1) 4.5 3.3
2 & 4 Soho Place W1 Q3 2022 18,400(2) 39.8 - -
Bush House WC2 Q3 2022 103,700 84.0 - -
Intermediate leasehold interest at Soho Place W1 Q3 2022 - 15.3 - -
Other - 1,600 1.4 - -
Total 2022 disposals 194,400 206.4 3.3
2023 YTD
19 Charterhouse Street EC1 Q1 2023 63,200 53.6 4.6 2.6
( )
(1) After deduction of rental top-ups and sale costs(
2) Office space
Acquisitions
Property Date Area Total after costs Net yield Net rental income Net rental income
sq ft £m % £m pa £ psf
230 Blackfriars Road SE1 Q1 2022 60,400 58.3 3.5 2.1 41.00
Soho Place W1 headlease Q1 2022 - 71.9 - - -
Other - - 2.8 - - -
Total 2022 acquisitions 60,400 133.0 2.1 -
DEVELOPMENT AND REFURBISHMENT
2022 project completions - 450,500 sq ft at an average 27% profit on cost at
completion
In 2022 we completed three major projects:
· Soho Place W1 (285,000 sq ft development) - at 1 Soho Place, the
offices were fully pre-let to G-Research and Apollo Group at an average rent
of £93 psf and 15 year WAULT. The retail is available to let but interest has
strengthened following the opening of the Elizabeth line. At 2 & 4 Soho
Place, the theatre and offices were pre-let to Nimax Theatres and Esselco
respectively and were sold in 2022. The profit on cost at practical completion
was 25% and the embodied carbon intensity of 1 Soho Place was 550
kgCO(2)e/sqm.
· The Featherstone Building EC1 (127,300 sq ft development) - after
lettings to Dept Agency and Marshmallow, and following the lettings to Buro
Happold and the 2,350 sq ft retail unit in early 2023, the building is 59% let
by floorspace. We are encouraged by the level of interest in the remaining
53,000 sq ft of available space. The profit on cost at practical completion
was 30% and the embodied carbon intensity was 539 kgCO(2)e/sqm.
· Francis House SW1 (38,200 sq ft refurbishment) - pre-let to
Edelman at an average rent of £76 psf on a 15-year lease with a break at year
10. The profit on cost at completion was 31%.
Major on-site projects - 435,000 sq ft with an estimated 11% profit on cost
At the end of 2022, we were on site at two major projects totalling 435,000 sq
ft which we currently expect will deliver an 11% development profit and 5.4%
yield on cost (excluding the pre-let to PIMCO at 25 Baker Street).
· 25 Baker Street W1 (298,000 sq ft) - this mixed-use project
comprises 218,000 sq ft of offices, plus residential and retail. As part of
the leasehold regear to a new 129-year headlease, we have agreed to sell the
courtyard retail and the smaller office block on Gloucester Place to the
freeholder, The Portman Estate. The impressive landscaped retail courtyard
forms an important part of this design-led destination in the heart of
Marylebone. Demolition has completed and sub and super-structure works are
progressing well. 97% of construction costs of the office element have been
fixed (80% of total). Following the post year-end pre-let to PIMCO, the
commercial element of the scheme is 56% pre-let/sold. The mid stage 5 embodied
carbon estimate is c.600 kgCO(2)e/sqm.
· Network W1 (137,000 sq ft) - demolition works at this office-led
scheme, adjacent to 80 Charlotte Street W1 and DL/78.Fitzrovia, have completed
and negotiations are at an advanced stage with our preferred main build
contractor. Supply in Fitzrovia is highly constrained and we are encouraged by
the level of early occupier interest. The stage 4 design embodied carbon
estimate is c.530 kgCO(2)e/sqm.
Major on-site development pipeline
Project Total 25 Baker Street W1 Network W1
Completion H1 2025 H2 2025
Office (sq ft) 350,000 218,000 132,000
Residential (sq ft) 52,000 52,000 -
Retail (sq ft) 33,000 28,000 5,000
Total area (sq ft) 435,000 298,000 137,000
Est. future capex(1) (£m) 324 217 107
Total cost(2) (£m) 708 463 245
ERV (c.£ psf) - 90 87.5
ERV (£m pa) 30.3 18.4(3) 11.9
Pre-let/sold area (sq ft) 31,000 31,000(4) -
Embodied carbon intensity (kgCO(2)e/sqm)(5) c.600 c.530
Target BREEAM rating Outstanding Outstanding
Target NABERS rating 4 Star or above 4 Star or above
Green Finance Elected Elect in 2023 (target)
( )
(1) As at 31 December 2022
(2) Comprising book value at commencement, capex, fees and notional interest
on land, voids and other costs. 25 Baker Street W1 includes a profit share to
freeholder The Portman Estate
(3) Long leasehold, net of 2.5% ground rent
(4) 19,000 sq ft courtyard retail and 12,000 sq ft Gloucester Place offices
(5) Embodied carbon intensity estimate as at stage 4 or 5
Future development pipeline - Four schemes totalling c.1.3m sq ft
There are four key schemes that comprise our medium and longer-term
development pipeline. Our medium-term pipeline could deliver c.390,000 sq ft
(at 100%) of high quality office-led space. At 50 Baker Street W1 (c.240,000
sq ft at 100%), which we own in a 50:50 joint venture with Lazari Investments,
we have submitted a planning application for a project approximately double
the existing floor area. This leasehold property is on The Portman Estate and
includes another building in their ownership. A regear of the various
interests would be required to implement any scheme. At Holden House W1
(c.150,000 sq ft), we are working on a revised planning application with new
architects which will have a higher office weighting and stronger
sustainability credentials than the existing planning consent.
Over the longer-term, we continue to progress plans for Old Street Quarter
EC1. Our current appraisals suggest the 2.5 acre island site has potential for
a 750,000+ sq ft mixed commercial use campus targeted at different occupier
sectors, including Life Sciences among others. We have had constructive
engagement with the London Borough of Islington. Our acquisition of the site
is expected to complete from 2027, conditional on delivery of the new eye
hospital at St Pancras and subsequent vacant possession of the site. At 230
Blackfriars Road SE1, our current plans assume a 2030 block date. Our early
appraisals show the site has capacity for a 200,000+ sq ft office-led
development, more than three times the existing floor area.
Refurbishments - an increasing capex component
Refurbishment projects will comprise an increasing proportion of annual
capital expenditure over the next few years as we continue to upgrade the
portfolio to meet ever higher occupier requirements. These projects provide
the opportunity to enhance the ERV through improving the amenity offer and
overall quality. Smaller units will be appraised for our 'Furnished +
Flexible' product. Larger refurbishments likely to commence over the near to
medium term include 1-2 Stephen Street W1, 20 Farringdon Road EC1, 1 Oliver's
Yard EC1 and Greencoat & Gordon House SW1. The floor area of these four
buildings is 756,800 sq ft.
FINANCE REVIEW
Introduction
Derwent London's capital allocation and funding strategies through the last
few years ensured that the Group ended 2022 with low leverage combined with a
long weighted-average unexpired lease and debt profile. We have continued to
balance value creation with resilient earnings and dividend growth while
delivering a high-quality product which appeals to today's occupier with its
combination of location, design, amenity, flexibility in use and customer
focus.
The importance of a strong balance sheet and good long-term planning became
very evident through 2022 as the UK, like most other major economies,
experienced increasing costs and a widespread upward yield shift. Covid-19's
impact, so strongly felt in 2020 and to a lesser extent in 2021, reduced
further in 2022 but we then saw the major conflict in Ukraine, increases to
energy and food prices and the emergence of other global tensions. These
acted as a catalyst for the inflation outlook to change significantly and
caused capital markets to re-look at interest rates and the pricing of credit
risk, particularly during the period of higher UK volatility in late 2022.
This has also not been an easy time for businesses and key public service
providers in the UK who face staff shortages and cost pressures while dealing
with regulatory changes and the long-term climate change and biodiversity
emergencies.
Derwent London's product differentiates us in a central London office market
where a flight towards quality combines with relatively low relevant supply.
This bifurcation looks set to continue and we have the balance sheet capacity
and business model to deliver our major developments while searching for new
value-add opportunities. We also expect to further upgrade amenities and
energy efficiency credentials within some of our more mature properties over
the next few years to help satisfy this occupier demand.
Financial overview
As noted above, the Group's property valuation at 31 December 2022 was
impacted by the significant upward yield shift seen in H2 giving rise to an
8.2% decline in the Group's total net assets over the year. This took our
total return over the year to -6.3% compared to the +5.8% seen in 2021 with
EPRA net tangible assets (NTA) down 8.3% over 2022 to 3,632p per share.
2022 Restated 2021
p p
Opening EPRA NTA 3,959 3,812
Revaluation movement (373) 119
Profit on disposals 23 9
EPRA earnings 107 109
Ordinary dividends paid (78) (75)
Interest rate swap termination costs - (3)
Share of joint venture revaluation movement (8) (12)
Other 2 -
Closing EPRA NTA 3,632 3,959
EPRA Net Disposal Value (NDV), which takes account of the £166m positive fair
value movement on fixed rate debt, was £4.24bn, equivalent to 3,768p per
share. This is only 3.0 per cent lower than the 3,884p per share recorded as
at December 2021.
We have continued to invest in the portfolio with acquisitions and project
spend totalling £258m but property disposal proceeds in 2022 of £210m meant
that our debt levels were almost unchanged compared to December 2021. Our
gearing remains low, all of our year-end debt was at fixed rates and our
weighted average debt maturity was 6.2 years.
Overall estimated rental values rose by 1.3% in 2022 with the highest quality
buildings outperforming. Vacancy levels were also higher in 2022 than in
recent years, partly the result of development completions. However, with
the exception of the property revaluation movement, our income statement
remained robust with EPRA earnings only marginally down on 2021 at £119.7m or
106.6p per share. If the impact of non-recurring surrender and
rights-of-light premiums is ignored, EPRA earnings per share were 1.9 per cent
higher than 2021 on an underlying basis.
Following new guidance issued by the IFRS Interpretations Committee in October
2022, we have restated the results for 2020 and 2021 to reflect the writing
off of Covid-19 concessions such as rent forgiveness that related to historic
receivable balances; our previous accounting policy was to spread the
concession over the remaining life of the relevant lease. Where related to a
future lease obligation, the concession continues to be amortised over the
remaining life of the lease. None of the adjustments is material but the
re-presented figures follow the new guidance and ensure proper comparability
between years.
We have also grossed up cash balances within the balance sheet to include cash
held in tenant deposit accounts. These cash balances are restricted and not
generally available to the Group but, as they are held within accounts which
we control, have been grossed up and the amounts re-presented. 'Cash held in
restricted accounts' also now includes cash within service charge bank
accounts which was previously disclosed within 'trade and other receivables'.
This change of treatment follows guidance from IFRIC issued in March 2022.
Property portfolio and balance sheet
Our wholly-owned property portfolio was externally valued at £5.3bn as at 31
December 2022, allocated across the balance sheet as follows:
Dec 22 Dec 21
Restated
£m £m
Investment property 5,002.0 5,361.2
Non-current assets held for sale 54.2 102.8
Owner-occupied property 50.0 49.3
Trading property 39.4 32.2
Property carrying value 5,145.6 5,545.5
Accrued income (non-current) 165.2 147.0
Accrued income (current) 26.1 22.8
Unamortised direct letting costs 13.8 12.3
Grossing up of headlease liabilities (34.2) (70.4)
Profit share due to TfL - (14.8)
Revaluation of trading property/other 5.3 3.9
Fair value of property portfolio 5,321.8 5,646.3
Fair value of properties held in joint venture (50%) 42.4 50.0
We continued to recycle capital within our property holdings in 2022 with
acquisitions totalling £133.0m, capital expenditure of £114.8m, capitalised
interest of £7.0m and disposals with carrying values totalling £182.1m.
Interest capitalised in 2022 was considerably lower than the £12.0m
recognised in 2021 as the prior year included two major projects close to
completion with correspondingly high cumulative development expenditure while
the current year includes two relatively new schemes at 25 Baker Street W1 and
Network W1.
Disposals included Bush House WC2, sold for £85m (gross) in Q3 2022. At the
beginning of 2022, we had expected to carry out a comprehensive refurbishment
of this property. Selling it instead, for a price that captured most of our
expected development profit, substantially reduced our capital expenditure
requirement and helped keep the Group's gearing at lower levels than those
projected at the beginning of 2022.
Property, plant and equipment of £54.3m (2021: £54.0) includes the £50.0m
owner-occupied property at 25 Savile Row W1 and £4.3m of leasehold
improvements, furniture, equipment and artwork.
Investments of £43.9m (2021: £51.1m) are made up almost entirely of the
carrying value of our 50 per cent holding at 50 Baker Street W1, stated after
a revaluation deficit of £9.3m in the year and retained profits for 2022 of
£2.0m.
The properties classified within 'non-current assets held for sale' totalling
£54.2m at 31 December 2022 were 19 Charterhouse Street EC1, the sale of which
completed in January 2023, and a small property at 13 Charlotte Mews W1.
The £39.4m (2021: £32.2m) trading property at year end comprised residential
units under construction at 25 Baker Street for delivery in 2025 and Welby
House SW1, originally acquired as a potential site for affordable housing and
subject to a write-down in value of £0.2m in 2022. Additional costs have also
been incurred within 'trading stock'; this is distinct from trading property
as we do not own an interest in the property itself but have an agreement in
place to deliver certain retail elements of the 25 Baker Street scheme upon
completion to the freeholder, The Portman Estate, at an agreed price.
Completion of this element of the scheme is expected in 2025.
Other receivables treated as non current increased to £188.1 from £159.3m in
2021. This includes £9.1m (2021: £nil) of design and planning application
costs relating to the Old Street Quarter EC1 scheme which are recoverable up
to a capped amount of £13.0m in the unlikely event that the vendor is unable
to deliver vacant possession of the site. Other receivables also include
accrued income from the 'straight-lining' of rental income under IFRS16 to
spread the effect of incentives and fixed uplifts over the lease terms. The
non-current element has increased to £165.2m from a restated £147.0m in
2021. In addition, £26.1m (restated 2021: £22.8m) is included under current
asset receivables as this accrued income is due to unwind within a year.
Unamortised letting and legal fees, which are also included in receivables,
increased to £13.8m (2021: £12.1m) and are amortised over their respective
remaining lease terms.
Property income and earnings
Gross property and other income increased to £248.8m in 2022 from a restated
£241.3m in the year to 31 December 2021. Gross rental income was up 6.0% to
£207.0m from £195.3m, largely due to new lettings at the two large
developments completed in the first half of 2022. Soho Place W1 added £10.8m
of income in 2022 and The Featherstone Building EC1 £1.0m. Other lettings
across the portfolio provided a further £9.3m. We were very active with
acquisitions and disposals through 2021 and 2022 and the major acquisition at
250 Euston Road W1 in Q4 2021 increased gross rents by £3.9m compared to the
prior year, 230 Blackfriars SE1 added £1.8m and Holford Works WC1 a further
£0.5m. The disposals were at a lower overall value but a higher yield;
rental income reduced by £2.3m year on year due to the sale of Angel Square
EC1, £1.5m at New River Yard EC1 and other disposals an additional £0.7m.
Lease surrender and rights-of-light premiums were unusually high in 2021 at
£5.6m but fell back in 2022 to a more typical total of £1.4m. Property
trading activity has decreased now that all the Asta House W1 residential
units have been sold, the last one completing early in 2022 for £1.6m. In
2021, the corresponding sales turnover was £6.7m and, in 2020, was as high as
£32.3m. The next apartments for sale at our 25 Baker Street scheme are due to
complete in 2025 so trading property disposal proceeds are likely to be very
low for the next two years.
Service charges and energy costs have become a much more significant issue for
many of our tenants in 2022 with energy costs, in particular, rising to
unprecedented levels. Our ability to manage energy tariffs has been impacted
too by our commitment to green energy. For example, we were not able to move
to 'out of contract' energy tariffs when rates spiked in Q4 2022 as those do
not support renewable electricity. Typical cost per kWh for renewable
electricity on six-monthly contracts increased from around 31p at the
beginning of 2022 to about 108p at the end of the year but is now falling back
to below 40p. Gas has seen a similar story, rates moving from about 7p to
25p and now back to around 12p per kWh. We very much hope to be able to pass
on these lower costs to our tenants as soon as possible and have offered some
help with the smoothing out of this price volatility where we can. One
positive outcome is that there is now even more focus on reducing energy use
with landlord and tenant seeking ways to co-operate further.
With our higher average vacancy rate through much of 2022, property costs
borne by us have increased too, irrecoverable property expenditure increasing
from £11.8m in 2021 to £14.4m in 2022. In addition, irrecoverable service
charges, due to units being vacant or where the tenant has negotiated a capped
service charge, increased by 50% to £5.1m in 2022 from £3.4m.
As noted above, we have revised the accounting treatment for rent concessions
granted in relation to historic amounts due and these have now been written
off in the appropriate period (mainly in 2020 and 2021) where they were
previously being spread over their remaining lease terms. The adjustments
have been shown as a prior year adjustment and, while none of the amounts is
material, these have been adjusted so that there is meaningful comparison year
on year.
We carry out full impairment testing of receivable balances using the expected
credit-loss model in accordance with IFRS9. This applies to trade receivables
as well as the balances created by the spreading of lease incentives, now
slightly reduced as a result of the change in accounting policy. These have
been carried out for each of our 64 largest tenants and for others where we
believe the risk is elevated, with the remaining balances considered according
to their sector. With improved conditions affecting many of our tenants,
particularly the smaller ones, and partly because the more significant
receivable risks have now been written off or provided for, we saw a net
reversal in 2022 with a credit to the income statement of £1.0m compared to
restated charges of £2.2m in 2021 and £16.1m in 2020.
As a result of these factors, net rental income increased from a restated
£177.9m in 2021 to £188.5m in 2022. Including surrender premiums,
dilapidation receipts, other property income and management fees, net property
and other income increased 4.0% to £194.6m from £187.2m in 2021.
Salaries have risen both for our own staff and for those of our many
professional advisers and consultants. However, increased headcount and
salaries were offset by lower staff bonus levels and reduced Directors'
remuneration. As a result, administrative expenses were 1.9% lower than the
previous year at £36.4m compared with £37.1, As in previous years, we do not
capitalise any of our overheads.
Lower impairment and administrative expenses have seen our EPRA cost ratio
move back down again in 2022. Including direct vacancy costs, it fell to 23.3%
from 24.9% in 2021.
As noted above, property valuations fell in the second half of 2022 with the
main Group revaluation deficit being £422.1m after accounting adjustments
(2021: surplus of £131.1m). Our share of the property revaluation deficit
at 50 Baker Street was a further £9.3m (2021: deficit of £10.2m) but our
head office at Savile Row showed a valuation rise of £0.7m, shown within the
Group Statement of Comprehensive Income rather than the Income Statement.
The profit on disposal of investment properties increased to £25.6m in 2022
from £10.5m in 2021. Most of this came from the sale of Bush House for
proceeds of £85m in Q3 2022. Further proceeds of £55.8m was due to the
disposal of the Group's leasehold interest in 2 & 4 Soho Place W1 and
£67.2m from New River Yard EC1 in June 2022, both of these two properties
having been disclosed as 'assets held for sale' in the December 2021 balance
sheet.
Net finance costs increased to £39.4m from £28.1m in 2021. This was due to
higher average borrowings though 2022 but was also affected by capitalised
interest falling from £12.0m in 2021 to £7.0m in 2022.
Interest rate increases gave rise to a further £5.8m fair value gain relating
to our remaining interest rate swap.
Our joint venture with Lazari Investments relating to 50 Baker Street W1
properties has produced a loss for the year of £7.3m, impacted by the £9.3m
revaluation deficit noted above.
The resulting IFRS loss for the year before tax was £279.5m compared to a
profit of £252.5m in the prior year. IFRS earnings per share were -249.84p
(2021: 224.99p).
A table providing a reconciliation of the IFRS results to EPRA earnings per
share is included in note 25 and is summarised below.
EPRA like-for-like rental income
EPRA like-for-like (LFL) gross rental income was up 1.1% over the year, partly
because the higher vacancy rate in 2022 came mainly from recently completed
developments which fall outside our EPRA LFL portfolio. EPRA LFL net rental
income was up by 1.1% over the year and EPRA LFL net property income, which
takes account of the unusually high surrender premiums received in 2021, was
down by 1.0%.
Internal controls, assurance and the regulatory environment
We continue to focus on ensuring our internal controls are robust and that we
have a comprehensive approach to assurance across our business, noting the
particular interest in this area from external stakeholders and regulators.
While the exact timing and scope of the forthcoming BEIS reforms are yet to be
finalised, we have commenced a project to map our full assurance environment
and to undertake a risk-based project to enhance the documentation and
evidencing of internal controls.
Independent internal audits continue to have a beneficial impact on our
control environment and we have also summarised our approach to obtaining
other forms of external assurance across the business. Our principal sources
of independent external assurance remain consistent with last year and include
the annual statutory audit, internal audits carried out upon key risk areas
throughout the year, service charge audits and a twice-yearly external
valuation. In line with last year, we have engaged with an independent
external assurance provider in relation to selected sustainability, health and
safety and green finance disclosures.
We are committed to ensuring high-quality reporting that stands up to
scrutiny, both from within the business via robust internal control mechanisms
and from independent review. Activity in this area will be scaled up in 2023
to further strengthen the internal control environment and ensure compliance
with the new requirements as measures and mechanisms for implementation are
finalised.
Taxation
The corporation tax charge for the year ended 31 December 2022 was £0.9m.
Almost all of our portfolio is within the REIT regime but this charge relates
to non-REIT activity, mainly income arising from certain property development
and trading operations.
The movement in deferred tax for the year was a charge of £0.9m, (2021:
£0.8m credit) of which £0.1m was expensed through the income statement. In
addition, £0.6m was charged through equity in relation to future tax
deductions for equity-settled share-based payments. A further £0.2m was
charged through 'other comprehensive income' 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, £9.0m 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
Rental income received from tenants increased to £194m in 2022 from £187m in
2021. However, cash paid out on property costs, administration and interest
payments increased by £18.4m over the 2021 equivalents. In terms of capital
movements, outflows of £258m for project expenditure and additions were
largely offset by £210m of property disposal proceeds. As a result, group
borrowings were almost unchanged at 31 December 2022 compared to a year
earlier.
Group borrowings at both year ends were £1.25bn, the 2022 figure being about
£300,000 less than 2021. Leasehold liabilities reduced in 2022 with the
payment to TfL but long-term leasehold liabilities also increased to £34.5m
after the receipt of a premium from an intermediate leaseholder. The net
impact is that gross debt has fallen from £1.32bn in December 2021 to
£1.28bn in December 2022. After adjusting for unrestricted cash and
derivatives, net debt increased marginally over the year to £1.26bn.
On the new EPRA basis, our loan-to-value ratio increased a little to 23.9%
from 22.3% in December 2021, the main reason for the increase being the
property valuation declines in 2022. Available cash and undrawn facilities
remained significant at £577m as at December 2022 (£608m at 31 December
2021). Interest cover remained strong too at 4.2 times in 2022 (2021: 4.6
times). Our main debt covenant continues to be 1.45 times.
Debt and financing
Conditions in the debt markets deteriorated markedly in the second half of
2022 with central banks raising rates in an effort to deal with rapid
inflation increases. With rates at that time expected to rise further and
stay at these much higher levels for longer, market rates across the curve
increased to levels not seen for many years. More recently, we have seen
markets calm down significantly but are still some way ahead of where they
were a year ago.
The UK 5-year swap rate peaked at around 5.4% in September 2022 but has since
fallen back to around 4%. Similarly, the 10 year gilt increased to 4.6% at
its peak but has since moved back to about 3.6%.
At the same time as rates were rising sharply, there was a sudden and
significant increase in the credit spread that lenders required to accept the
risk associated with typical corporate borrowers over and above the so called
'risk free' rate. Again, these spreads have been closing significantly in
2023 but remain elevated compared to more typical levels of recent years.
In these turbulent markets, we were helped by our high level of refinancing
activity in previous years. Our only debt transaction in 2022 was the second
one-year extension of the unsecured £100m revolving credit facility provided
by Wells Fargo, taking its maturity to November 2027. At a time when loan
extensions of this sort are not taken for granted, this was another indication
of the strength of our banking relationships and we are grateful for the
continuing strong support we have received from Wells Fargo and all of our
lenders throughout 2022.
We have one remaining interest rate swap contract, providing a fixed rate of
1.36% to April 2025 on £75m of borrowings. As we had no floating rate
borrowings at the balance sheet date, this contract has been deferred to start
post the year end. With rates having risen so much in 2022, the fair value
of this swap increased by £5.8m during the year.
Our next refinancing exposure arises in October 2024 on the £83m secured debt
currently attracting a coupon of 3.99%. We will look to refinance this in
due course and current expectations are that the cost of this will be a little
higher than the current level.
At the year end, the Group's weighted average interest rate on a cash basis
was 3.14%, the same as a year earlier, and 3.26% (31 December 2021: 3.27%) on
an IFRS basis which adjusts for the convertible and green bonds. These figures
indicate the advantage of having all of our debt at fixed rates as at the year
end. The weighted average maturity of our borrowings was 6.2 years at 31
December 2022 compared to 7.2 years at 31 December 2021.
Reporting under the Green Finance Framework
Derwent London's Green Finance Framework (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)
Out of our total debt facilities of £1.8bn, £650m satisfy our definition of
Green Financing Transactions (GFTs). The GFTs comprise the £350m Green Bond
issuance in 2021 and a £300m 'green' tranche included within our main
corporate £450m revolving credit facility taken out in 2019. Together these
are used to fund qualifying green expenditure.
In accordance with the reporting requirements set out in the Framework, we are
disclosing the Eligible Green Projects (EGPs) that have benefited from our
Green Financing Transactions, and the allocation of drawn funds to each
project.
The projects eligible for funds from the GFTs are as follows:
Green project 80 Charlotte Street W1 Soho Place W1 The Featherstone Building EC1 25 Baker Street W1(1)
Expected completion date Completed in 2020 Completed in 2022 Completed in 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: 1 Soho Place (Site A) Achieved: Achieved: Offices Achieved
BREEAM - Excellent (post-construction) BREEAM - Outstanding (post-construction) BREEAM - Outstanding (post-construction) BREEAM - Outstanding (design stage)
EPC - B EPC - B EPC - A
LEED - Gold
Expected: Expected: Expected:
LEED - Gold, on target 2&4 Soho Place (Site B) offices - DISPOSED OF IN 2022 LEED - Platinum, on target BREEAM - Outstanding (post-construction)
Achieved: LEED - Gold, on target
BREEAM - Excellent (design stage) EPC - B, on target
EPC - B Private residential
Expected: Expected:
BREEAM - Excellent (post construction), on target Home Quality Mark - 4 Stars (design stage), on target
( )
(1) Previously known as 19-35 Baker Street W1
Qualifying 'green' expenditure
The qualifying expenditure as at 31 December 2022 for each project is set out
in the table below. This includes an element of 'look back' capital
expenditure on projects in which expenditure had been incurred prior to
management's approval of the project as an EGP. This also includes capital
expenditure on projects which had already been incurred as at the original
refinancing date in October 2019.
Soho Place W1 and The Featherstone Building EC1 both commenced on site in 2019
and reached practical completion in H1 2022. Soho Place Site B was disposed
of in the year and, in accordance with section 3.3 of the Framework, the
expenditure allocated to Site B has therefore been removed from the qualifying
expenditure.
The 25 Baker Street W1(1) scheme commenced on site in October 2021 and is due
to reach practical completion in 2025.
Cumulative spend on each EGP as at the reporting date
Subsequent spend
Look back spend Q4 2019 - 2022 Spend Disposals Cumulative Spend
FY 2021
EGP £m £m £m £m £m
80 Charlotte Street W1 185.6 51.6 0.9 - 238.1
Soho Place W1 66.3 137.6 55.2 (34.8) 224.3
The Featherstone Building EC1 29.1 60.3 7.3 - 96.7
25 Baker Street W1(1) 26.5 5.8 36.5 - 68.8
307.5 255.3 99.9 (34.8) 627.9
( )
(1) Previously known as 19-35 Baker Street W1
After deducting all previously eligible expenditure on Soho Place Site B of
£34.8m, the cumulative qualifying expenditure on EGPs was £627.9m. Total
qualifying expenditure incurred in 2022 was £99.9m.
Drawn borrowings from GFTs as at 31 December 2022 were £350m, which comprised
of the £350m Green Bonds with £nil drawn under the green tranche of the
RCF. Therefore, there was £300.0m undrawn under the green tranche of the
Group's RCF as at 31 December 2022, of which £277.9m was available to fund
future cash flow requirements of the Group.
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.
Dividend
We continue to operate a progressive but well covered dividend policy, mindful
also of our pension and other stakeholder obligations and responsibilities.
The board is recommending a 1.0p per share or 1.9% increase in the final
dividend to 54.5p. It will be paid in June 2023 with 38.5p as a PID and the
balance of 16.0p as a conventional dividend. The Company's ISIN reference is
GB0002652740.
After adding in the interim 2022 dividend, the total dividend for the year
amounts to 78.5p, 2.6% higher than for 2021. Dividend cover remains sound with
dividends paid and declared in relation to 2022 earnings 1.36 times covered by
EPRA earnings.
PRINCIPAL RISKS AND UNCERTAINTIES
MANAGING RISKS
We have identified certain principal risks and uncertainties that could
prevent the Group from achieving its strategic objectives and have assessed
how these risks could best be mitigated, where possible, through a combination
of internal controls, risk management and the purchase of insurance cover.
These risks are reviewed and updated on a regular basis and were last formally
assessed by the Board on 24 February 2023. The Board has confirmed that its
risk appetite and key risk indicators remain appropriate.
The Group's risk profile remained elevated during 2022 due partly to political
and economic uncertainty, although the risks arising from the Covid-19
pandemic have lessened. The Board has reinstated a fall in property values as
a principal risk for the Group. The current economic conditions have had an
adverse impact on property yields, and there is a risk that property values
could fall further in 2023.
We are operating in a changed interest rate environment following a long
period of historically low rates. At 31 December 2022, all of our borrowings
were at fixed rates. As a consequence of inflation and economic uncertainty,
some of our occupiers may face a more challenging financial situation, which
could result in Derwent London having higher future vacancy rates and/or
reduced rent receipts. The occupiers deemed to be most at risk are those which
rely heavily on consumer spending such as retail and hospitality, which make
up only 7% of the Group's income. Despite the economic uncertainty, London
remains resilient and occupier demand remains good for the right product as
the 'flight to quality' continues.
Staying ahead of the sustainability curve and delivering on its net zero
carbon commitments is a fundamental part of Derwent London's long-term
strategy. Given that the built environment contributes significantly to the
UK's overall carbon footprint, we are being proactive in finding solutions to
further reduce emissions and develop renewable energy sources. The
Remuneration Committee has introduced sustainability-related metrics (embodied
carbon reduction and energy intensity reduction) into the Executive Directors'
long-term incentive plan.
The principal risks and uncertainties facing the Group in 2023 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 2022 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 Board approves the strategic plan and significant projects,
appropriately to internal and external factors including responding to which includes the development pipeline. The development pipeline has a degree
changing work practices, occupational demand, economic and property cycles, of flexibility that enables plans for individual properties to be changed to
and London's global appeal. The London office market has generally been reflect prevailing economic circumstances.
cyclical in recent decades, with strong growth followed by sharp economic
downturns, precipitated by rising interest rates and often coinciding with · An annual strategic review and budget is prepared for Board
significant oversupply. approval alongside two-year rolling forecasts which are prepared three times a
year. The Board considers the sensitivity of the Group KPIs to changes in the
assumptions underlying our forecasts in light of anticipated economic
conditions. If necessary, modifications are made.
· We develop properties in locations where there is good potential
for future demand, such as near the Elizabeth line. We do not have any
properties in the City or Docklands.
· We maintain income from properties until development commences
and have an ongoing strategy to extend income through lease renewals and
regears. We regularly de-risk developments through pre-lets.
· The Credit Committee, chaired by either the CEO or CFO, assesses
and monitors the financial strength of potential and existing occupiers. The
Group's diverse and high quality occupier base provides resilience against
occupier default. We also maintain close and frequent contact with our
occupiers.
· We maintain sufficient headroom for all the key ratios and
financial covenants, with a particular focus on interest cover.
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 occupiers defaulting or occupier failure
The majority of the Group's revenues comprise rent received from our occupiers
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 debts · The Credit Committee, chaired by either the CEO or CFO, assesses
and/or number of lease terminations. and monitors the financial strength of potential and existing occupiers, with
detailed reviews of all prospective occupiers being performed.
· A 'tenants on watch' register is maintained and regularly
reviewed by the Executive Committee and the Board.
· Active rent collection, with regular reports to the Executive
Committee on day 1, 7, 14 and 21.
· We maintain close and frequent contact with our occupiers.
· Rent deposits and/or guarantors are held where considered
appropriate.
3. Income decline
Changes in macroeconomic factors may adversely affect London's office market. · The Credit Committee receives detailed reviews of all prospective
The Group is exposed to external factors which are outside the Group's occupiers.
control, such as future demand for office space, the 'cost of living' crisis,
the 'grey' market in office space (i.e. occupier controlled vacant space), · A 'tenants on watch' register is maintained and regularly
weaknesses in retail and hospitality businesses, increase in hybrid working reviewed by the Executive Committee and the Board.
and the depth of a recession, and subsequent rise in unemployment and/or
interest rates. · Ongoing dialogue is maintained with occupiers to understand their
concerns and requirements.
· The Group's low loan-to-value ratio reduces the likelihood that
falls in property values have a significant impact on our business continuity.
4. Fall in property values
The potential adverse impact of the economic and political environment on · The impact of yield changes is considered when potential projects
property yields has heightened the risk of a fall in property values. are appraised.
· The impact of yield changes on the Group's financial covenants
and performance is monitored regularly and subject to sensitivity analysis to
ensure that adequate headroom is preserved.
· The Group's mainly unsecured financing makes management of our
financial covenants more straightforward.
· The Group's low loan-to-value ratio reduces the likelihood that
falls in property values have a significant operational impact on our
business.
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 Controls and mitigation
5A. Reduced development returns
Returns from the Group's developments may be adversely impacted due to: delays · Our procurement process includes the use of highly regarded firms
on-site; increased construction costs; material and labour shortages; and of quantity surveyors and is designed to minimise cost uncertainty.
adverse letting conditions.
· Development costs are benchmarked to ensure that the Group
obtains competitive pricing and, where appropriate, fixed price contracts are
negotiated.
· Post-completion reviews are carried out for all major
developments to ensure that improvements to the Group's procedures are
identified, implemented and lessons learned.
· Investment appraisals are prepared and sensitivity analysis is
undertaken to judge whether an adequate return is made in all likely
circumstances.
· The Group's pre-letting strategy reduces or removes the letting
risk of the development as soon as possible.
5B. 'On-site' risk
If the Group fails to: (i) adequately appraise investments prior to starting · Regular monitoring of our contractors' cash flows.
work on-site, including through taking into account contingencies and
inflationary cost increases; (ii) use a procurement process that is properly · Frequent meetings with key contractors and subcontractors to
designed (to minimise uncertainty around costs) and that includes the use of review their work programme and maintain strong relationships.
highly regarded quantity surveyors; (iii) benchmark development costs; (iv)
conduct thorough site investigations to reduce the risk of unidentified issues · Off-site inspection of key components to ensure they have been
such as asbestos; (v) implement its pre-letting strategy; or (vi) conduct completed to the requisite quality.
detailed reviews on construction projects to evaluate programme forecasts made
by contractors, development projects may be significantly delayed and we could · Prior to construction beginning on-site, professional project
face a loss of rental income and penalties. managers conduct site investigations including the building's history and
various surveys to identify any potential issues.
· Monthly reviews of Brexit related supply chain issues for each of
our major projects, including in respect to potential labour shortages.
· Strict Covid-19 protocols are maintained at all of our on-site
developments, in accordance with Site Operating Procedures (published by the
Construction Leadership Council).
5C. Contractor/subcontractor default
There have been ongoing issues within the construction industry in respect of · We use known 'Tier 1' contractors with whom we have established
the level of risk and narrow profit margins being accepted by contractors. working relationships.
· Regular monitoring of our contractors, including their project
cash flows, is carried out.
· Key construction packages are acquired early in the project's
life to reduce the risks associated with later default.
· The financial standing of our main contractors is reviewed prior
to awarding the project contract.
· Our main contractors are responsible, and assume the immediate
risk, for subcontractor default.
· Payments to contractors are in place to incentivise the
achievement of project timescales, with damages agreed in the event of
delay/cost overruns.
· Regular on site supervision by a dedicated Project Manager who
monitors contractor performance and identifies problems at an early stage,
thereby enabling remedial action to be taken.
· Contractors are paid promptly and are encouraged to pay
subcontractors promptly.
6A. 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. tested.
· The Group's Business Continuity Plan and cybersecurity incident
response procedures are regularly reviewed and tested.
· 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
systems.
· Incident response and remediation processes are in place, which
are regularly reviewed and tested.
· The Group's data is regularly backed up and replicated off-site.
· Our IT systems are protected by anti-virus software, 24/7/365
threat hunting, security incident detection and response, security anomaly
detection and firewalls that are frequently updated.
· Frequent staff awareness and training programmes.
· Security measures are regularly reviewed by the IT team.
6B. Cyber-attack on our buildings
The Group is exposed to cyber attacks on its properties which may result in · Our cyber security incident management procedures are regularly
data breaches or significant disruption to IT-enabled occupier services. reviewed and tested.
· Physical segregation between the building's core IT
infrastructure and occupiers' 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.
· Sophos Rapid Response team provide unlimited support to our Cyber
Incident Response Team in the event of a cyber attack.
· Frequent staff awareness and training programmes.
6C. 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 fire, natural catastrophes, cyber events, terrorism,
pandemic outbreak, material supply chain failures and geopolitical factors. · Fire protection and access/security procedures are in place at
all of our managed properties. At least annually, a fire risk assessment and
health and safety inspection are performed for each property in our managed
portfolio.
· The Group has comprehensive business continuity and incident
management procedures both at Group level and for each of our managed
buildings which are regularly reviewed and tested.
· Continuous review of property health and safety statutory
compliance.
· Government health guidelines are maintained at all of our
construction sites.
· Comprehensive property damage and business interruption insurance
which includes terrorism.
· Robust security at our buildings, including CCTV and access
controls.
· Most of our employees are capable of working remotely and have
the necessary IT resources.
7. Reputational damage
The Group's reputation could be damaged, for example, through unauthorised or · Close involvement of senior management in day-to-day operations
inaccurate media coverage, unethical practices or behaviours by the Group's and established procedures for approving all external announcements.
executives, or failure to comply with relevant legislation.
· All new members of staff benefit from an induction programme and
are issued with our Group staff handbook.
· The Group employs a Head of Investor Relations & Strategic
Planning 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
wrongdoing anonymously.
· Social media channels are monitored.
· Ongoing engagement with local communities in areas where the
Group operates.
· Staff training and awareness programmes.
8. Our resilience to climate change
If the Group fails to respond appropriately, and sufficiently, to · The Board and Executive Committee receive regular updates and
climate-related risks or fails to benefit from the potential opportunities. presentations on environmental and sustainability performance and management
matters as well as progress against our pathway to becoming net zero carbon by
2030.
· The Sustainability Committee monitors our performance and
management controls.
· Strong team led by an experienced Head of Sustainability.
· The Group monitors its ESG (environmental, social and governance)
reporting against various industry benchmarks.
· Production of an annual Responsibility Report with key data and
performance points which are externally assured.
· In 2017 we adopted independently verified science-based carbon
targets which have been approved by the Science-Based Targets initiative
(SBTi).
· Undertake periodic multi-scenario climate risk assessments
(physical and transition risks).
9A. Non-compliance with health and safety legislation
An incident or breach of health and safety legislation, including in respect
of fire safety, water hygiene, asbestos exposure, building safety,
construction design management etc. · All properties have the relevant health, safety and fire
management procedures in place which are reviewed annually.
· The Group has a qualified Health and Safety team whose
performance is monitored and managed by a Health & Safety Committee,
chaired by the CEO.
· Health and safety statutory compliance within our managed
portfolio is managed and monitored using a software compliance platform. This
is supported by annual property health checks.
· The Managed Portfolio Health and Safety Manager supports our
Portfolio and Building Managers to ensure statutory compliance.
· The Construction Health and Safety Manager 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 health and safety.
9B. Other regulatory non-compliance
The Group breaches any of the legislation that forms the regulatory framework · We are proactive in adopting new and emerging legislation.
within which the Group operates.
· The Board and Risk Committee receive regular reports prepared by
the Group's legal advisers identifying upcoming legislative/regulatory
changes. External advice is taken on any new legislation, if required.
· Managing our properties to ensure they are compliant with the
Minimum Energy Efficiency Standards (MEES) for Energy Performance Certificates
(EPCs).
· A Group whistleblowing system for staff is maintained to report
wrongdoing anonymously.
· Ongoing staff training and awareness programmes. As part of staff
performance appraisals, all employees are required to confirm they have
reviewed and understood Group policies.
· Group policies and procedures dealing with all key legislation
are available on the Group's intranet.
· Quarterly review of our anti-bribery and corruption procedures by
the Risk Committee.
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
EPRA loan-to-value ratio has increased to 23.9% as at 31 December 2022.
Principal financial instruments
The principal financial instruments used by the Group, from which financial
instrument risk arises, are trade receivables, accrued income arising from the
spreading of lease incentives, cash at bank, trade and other payables,
floating rate bank loans, fixed rate loans and private placement notes,
secured and unsecured bonds and interest rate swaps.
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's risk
management objectives and policies and, whilst retaining ultimate
responsibility for them, it has delegated the authority to executive
management for designing and operating processes that ensure the effective
implementation of the objectives and policies.
The overall objective of the Board is to set policies that seek to reduce risk
as far as possible without unduly affecting the Group's flexibility and its
ability to maximise returns. Further details regarding these policies are set
out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations. The Group is mainly exposed to credit risk from lease contracts
in relation to its property portfolio. It is Group policy to assess the credit
risk of new tenants before entering into such contracts. The Board has a
Credit Committee which assesses each new tenant before a new lease is signed.
The review includes the latest sets of financial statements, external ratings
when available and, in some cases, forecast information and bank or trade
references. The covenant strength of each tenant is determined based on this
review and, if appropriate, a deposit or a guarantee is obtained. The
Committee also reviews existing tenant covenants from time to time.
Impairment calculations have been carried out on trade receivables and 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 64 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 no
increase (2021: £0.1m) or decrease (2021: £0.1m), as all borrowings at the
end of the year were fixed.
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
2022, the proportion of fixed debt held by the Group was above this range at
100% (2021: 99%). During both 2022 and 2021, 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 and retained earnings).
The Group's objectives when maintaining capital are:
to safeguard the entity's ability to continue as a going concern so that it
can continue to provide above average long-term returns for shareholders; and
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 2022, the Group's strategy, which was
unchanged from 2021, 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 £4.6bn (2021:
£4.8bn) of uncharged property as at 31 December 2022.
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
27 February 2023
GROUP INCOME STATEMENT
2022 2021
Restated(1)
Note £m £m
Gross property and other income 5 248.8 241.3
Net property and other income(2) 5 194.6 187.2
Administrative expenses (36.4) (37.1)
Revaluation (deficit)/surplus 11 (422.1) 131.1
Profit on disposal 6 25.6 10.4
(Loss)/profit from operations (238.3) 291.6
Finance income 7 0.3 -
Finance costs 7 (39.7) (28.1)
Movement in fair value of derivative financial instruments 5.8 4.8
Financial derivative termination costs 8 (0.3) (1.9)
Share of results of joint ventures 9 (7.3) (13.9)
(Loss)/profit before tax (279.5) 252.5
Tax (charge)/credit 10 (1.0) 1.3
(Loss)/profit for the year (280.5) 253.8
Attributable to:
- Equity shareholders (280.5) 252.3
- Non-controlling interest - 1.5
(280.5) 253.8
Basic (loss)/earnings per share 25 (249.84p) 224.99p
Diluted (loss)/earnings per share 25 (249.84p) 224.44p
( )
( )
(1) Prior year figures have been restated for a change in accounting policy in
relation to forgiveness of lease payments. See note 2 for additional
information.
(2) Net property and other income in 2022 includes a credit of £1.0m for the
movement in impairment of receivables (2021 restated: charge of £2.2m). See
note 3 for additional information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
2022 2021
Note £m £m
(Loss)/profit for the year (280.5) 253.8
Actuarial (losses)/gains on defined benefit pension scheme (2.0) 2.7
Deferred tax charge on pension 20 - (0.4)
Revaluation surplus of owner-occupied property 11 0.7 3.7
Deferred tax charge on revaluation 20 (0.2) (1.3)
Other comprehensive (expense)/income that will not
be reclassified to profit or loss (1.5) 4.7
Total comprehensive (expense)/income relating to the year (282.0) 258.5
Attributable to:
- Equity shareholders (282.0) 257.0
- Non-controlling interest - 1.5
(282.0) 258.5
GROUP BALANCE SHEET
2022 2021
Restated(1)
Note £m £m
Non-current assets
Investment property 11 5,002.0 5,361.2
Property, plant and equipment 12 54.3 54.0
Investments 14 43.9 51.1
Derivative financial instruments 19 5.0 -
Deferred tax 20 - 0.3
Pension scheme surplus 1.2 1.8
Other receivables 15 188.1 159.3
5,294.5 5,627.7
Current assets
Trading property 11 39.4 32.2
Trading stock 13 2.3 0.4
Trade and other receivables 16 42.4 41.0
Cash and cash equivalents 22 76.6 105.5
160.7 179.1
Non-current assets held for sale 17 54.2 102.8
Total assets 5,509.4 5,909.6
Current liabilities
Borrowings 19 19.7 12.3
Leasehold liabilities 19 0.5 51.2
Trade and other payables 18 148.1 145.9
Corporation tax liability 0.9 0.5
Derivative financial instruments 19 - 0.4
Provisions - 0.3
169.2 210.6
Non-current liabilities
Borrowings 19 1,229.4 1,237.1
Derivative financial instruments 19 - 0.4
Leasehold liabilities 19 34.5 19.4
Provisions 0.2 0.3
Deferred tax 20 0.6 -
1,264.7 1,257.2
Total liabilities 1,433.9 1,467.8
Total net assets 4,075.5 4,441.8
Equity
Share capital 5.6 5.6
Share premium 196.6 195.4
Other reserves 941.9 941.1
Retained earnings 2,931.4 3,299.7
Total equity 4,075.5 4,441.8
(1) Prior year figures have been restated for changes in accounting policies.
See note 2 for additional information.
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 2022 5.6 195.4 941.1 3,299.7 4,441.8 - 4,441.8
Loss for the year - - - (280.5) (280.5) - (280.5)
Other comprehensive
income/(expense) - - 0.5 (2.0) (1.5) - (1.5)
Share-based payments - 1.2 0.3 1.2 2.7 - 2.7
Dividends paid - - - (87.0) (87.0) - (87.0)
At 31 December 2022 5.6 196.6 941.9 2,931.4 4,075.5 - 4,075.5
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
GROUP CASH FLOW STATEMENT
2022 2021
Restated(1)
Note £m £m
Operating activities
Rents received 193.7 187.0
Surrender premiums and other property income 0.7 5.7
Property expenses (22.5) (14.3)
Costs recoverable from tenants (1.9) -
Service charge balance inflows 64.5 49.5
Service charge balance outflows (61.5) (49.1)
Tenant deposit inflows 13.9 1.5
Tenant deposit outflows (4.2) (2.7)
Cash paid to and on behalf of employees (25.1) (26.9)
Other administrative expenses (8.0) (7.8)
Interest received 7 0.3 -
Interest paid 7 (33.7) (21.9)
Other finance costs 7 (3.4) (3.1)
Other income 4.2 4.1
Disposal of trading properties 3.0 5.0
Expenditure on trading properties/stock (9.7) (1.6)
Tax paid in respect of operating activities (0.5) (0.5)
VAT movement 1.6 4.0
Net cash from operating activities 111.4 128.9
Investing activities
Acquisition of properties (137.6) (251.8)
Capital expenditure on the property portfolio 7 (120.7) (172.1)
Disposal of investment properties 206.7 297.3
Investment in joint ventures (0.3) (64.1)
Settlement of shareholder loan - 2.0
Purchase of property, plant and equipment (2.0) (1.6)
Disposal of property, plant and equipment - 0.2
VAT movement 2.2 3.5
Net cash used in investing activities (51.7) (186.6)
Financing activities
Net proceeds of green bond issue - 346.0
Net movement in revolving bank loans (10.1) (117.8)
Proceeds from other loan 7.4 12.3
Repayment of secured bank loan - (28.0)
Financial derivative termination costs 8 (0.3) (1.9)
Acquisition of non-controlling interest - (53.4)
Net proceeds of share issues 1.2 1.8
Dividends paid 21 (86.8) (84.3)
Net cash (used in)/from financing activities (88.6) 74.7
(Decrease)/increase in cash and cash equivalents in the year (28.9) 17.0
Cash and cash equivalents at the beginning of the year 22 105.5 88.5
Cash and cash equivalents at the end of the year 22 76.6 105.5
(1) Prior year figures have been restated for changes in accounting policies.
See note 2 for additional information.
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
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 2022 of 23.9%, the interest cover ratio of 423%, the
£577m total of undrawn facilities and cash and the fact that the average
maturity of borrowings was 6.2 years at 31 December 2022. The impact of the
Covid-19 pandemic on the business and its occupiers has been considered. The
impact in 2022 was considerably less than in 2021 as evidenced by a partial
reversal in impairment charges and rent collection rates now close to that
seen pre-pandemic. Office occupation rates are also gradually recovering.
The likely impact of climate change has been incorporated into the Group's
forecasts and has taken account the impact of EPC upgrades across the
portfolio, estimated at £99m. Based on the Group's forecasts, rental income
would need to decline by 65% and property values would need to fall by 60%
before breaching its financial covenants.
The financial position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the financial review. In addition, the
Group's risks and risk management processes can be found within the risk
management and internal controls.
Having due regard to these matters and after making appropriate enquiries, the
Directors have reasonable expectation that the Group has adequate resources to
continue in operational existence for a period of at least 12 months from the
date of signing of these consolidated financial statements and, therefore, the
Board continues to adopt the going concern basis in their preparation.
2. Changes in accounting policies
The accounting policies used by the Group in these condensed financial
statements are consistent with those applied in the Group's financial
statements for the year to 31 December 2021, 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.
Reference to the Conceptual Framework (amendments to IFRS 3);
IFRS 16 (amended) - Covid-19-related Rent Concessions beyond 30 June 2021;
IAS 37 (amended) - Onerous Contracts - Cost of Fulfilling a Contract;
Annual improvements to IFRS Standards 2018-2020;
IAS 16 (amended) - Property, Plant and Equipment: Proceeds before Intended
Use.
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 (amended) - Insurance Contracts;
IAS 1 (amended) - Classification of liabilities as current or non-current,
Non-current Liabilities with Covenants;
IAS 1 and IFRS Practice Statement 2 (amended) - Disclosure of Accounting
Policies;
IAS 8 (amended) - Definition of Accounting Estimate;
IAS 12 (amended) - Income Taxes: Deferred Tax Related to Assets and
Liabilities Arising from a Single Transaction;
IFRS 16 (amended) - Lease Liability in a Sale and Leaseback;
IFRS 17 (amended) and IFRS 9 - Comparative Information.
Restatement - IFRIC Agenda Decision - Forgiveness of lease payments
In October 2022, the IFRS Interpretations Committee ('IFRIC') released its
decision on the application of IFRS 9 and IFRS 16 in relation to how a lessor
should account for the forgiveness of amounts due under leases.
It was determined that for any rent receivables that are past their due dates
and subsequently forgiven, the lessor should apply the expected credit loss
(ECL) model in IFRS 9. Therefore, the forgiveness will be subject to the
derecognition and impairment requirements in IFRS 9, and the impact of
relevant receivable amounts written off reflected in the income statement. The
Group had previously treated the forgiveness of rent receivables, in
particular Covid-19 concessions, that were past their due dates as lease
modifications under IFRS 16, rather than the updated guidance of applying IFRS
9.
However, forgiveness of future rent not currently due meets the definition of
a lease modification in IFRS 16. The impact of this forgiveness is
recognised on a straight-line basis over the remaining term of the lease,
which is consistent with the Group's treatment.
The adjustments required to amounts forgiven for receivables past their due
date, including the remeasurement of the ECL, have been recalculated and the
impact determined to be immaterial for each individual financial year.
However, the Group has voluntarily elected to apply IFRS 9 where applicable.
This includes adjusting the relevant 2020 opening balances and restating the
2021 comparative information. In the income statement, the restatement has
resulted in a change to gross rental income, write-off/impairment of
receivables and revaluation movement with no impact in the total profit/(loss)
in the respective years. In addition, there is no impact on the total net
assets within the balance sheets, with adjustments in rents recognised in
advance (trade and other receivables), provision for bad debts, and investment
property. The impact of these adjustments is shown on the following page. As
the impact is not material, in accordance with IAS 1 'Presentation of
Financial Statements' the Group has not presented revised balance sheets as at
31 December 2020 within the financial statements.
Restatement - IFRIC Agenda Decision - Recognition of Tenant Deposits as
restricted cash
In March 2022, the IFRS Interpretations Committee ('IFRIC') finalised a
decision with respect to the treatment of demand deposits with restrictions on
use, which includes tenant rent deposits. It was concluded that these
deposits, which are subject to contractual restrictions, meet the definition
of 'cash and cash equivalents' under IAS 7 and should therefore be included as
restricted cash under 'cash and cash equivalents' within the financial
statements. The Group had not previously recognised tenant rent deposits on
its balance sheet as these deposits are only available upon a tenant
defaulting under the terms of its lease and are normally refunded upon expiry.
As a result of the IFRIC decision, the Group has revisited its policy and has
now included tenant rent deposits as restricted cash with a restatement to the
prior year comparatives. The adjustment has no impact on the net assets of the
Group, but cash and cash equivalents have increased by £17.6m (2020: £18.8m)
with a corresponding increase in other payables. The movement in tenant rent
deposits has been included in net cash from operating activities in the cash
flow statement.
Cash collected on behalf of tenants to fund service charges of properties in
the portfolio was previously recognised within trade and other receivables.
This has now been reclassified and presented as restricted cash within 'cash
and cash equivalents'. For the prior year, the adjustment has no impact on the
net assets of the Group, with cash and cash equivalents increasing by £19.4m
(2020: £19.0m) and a corresponding decrease of in trade and other
receivables. The movement in service charge balances has been included in net
cash from operating activities in the cash flow statement.
The impact of these adjustments is shown on the following page. As the total
impact of both tenant deposits and service charge balances is not material,
the Group has not presented a revised balance sheet as at 31 December 2020
within the financial statements, in accordance with IAS 1 'Presentation of
Financial Statements'.
The following table shows the impact of these adjustments in the prior years.
2021
31 December
31 December Restatement(1) Restatement(2) Restated
£m £m £m £m
Group balance sheet (extract)
Investment property 5,359.9 1.3 - 5,361.2
Trade and other receivables 61.7 (1.3) (19.4) 41.0
Cash and cash equivalents 68.5 - 37.0 105.5
Trade and other payables (128.3) - (17.6) (145.9)
5,361.8 - - 5,361.8
Group income statement (extract)
Net property and other income
Gross rental income 194.2 1.1 - 195.3
Movement in impairment of receivables (0.8) (1.4) - (2.2)
Revaluation surplus 130.8 0.3 - 131.1
324.2 - - 324.2
Group cash flow statement (extract)
Net cash from operating activities 125.7 - (0.8) 124.9
125.7 - (0.8) 124.9
2020
31 December
31 December Restatement(1) Restatement(2) Restated
£m £m £m £m
Group balance sheet (extract)
Investment property 5,029.1 1.4 - 5,030.5
Trade and other receivables 76.2 (1.4) (19.0) 55.8
Cash and cash equivalents 50.7 - 37.8 88.5
Trade and other payables (106.7) - (18.8) (125.5)
5,049.3 - - 5,049.3
Group income statement (extract)
Net property and other income
Gross rental income 202.9 0.5 - 203.4
Movement in impairment of receivables (10.1) (1.9) - (12.0)
Revaluation deficit (196.1) 1.4 - (194.7)
(3.3) - - (3.3)
Group cash flow statement (extract)
Cash and cash equivalents at the end of the year 50.7 - 37.8 88.5
50.7 - 37.8 88.5
(1) Restatement in relation to IFRIC Agenda Decision - Forgiveness of lease
payments.
(2) Restatement in relation to IFRIC Agenda Decision - Recognition of Tenant
Deposits as restricted cash and service charge reclassification.
Re-presentation of VAT in Group cash flow statement
The Group has re-presented the cash flow statement for the year ended 31
December 2021, to separate VAT movements as either operating activities or
investing activities. This has the effect of increasing the net cash from
operations in 2021 by £4.0m with a corresponding increase in the net cash
used in investing activities. There is no net impact upon the cash flow
statement overall.
Restatement of Property portfolio, historical cost
The disclosure of historical cost of the property portfolio within Note 11
comparatives have been restated by £69.7m to £3,464.4m to correct an error
in the calculation of the historical cost.
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. Knight Frank LLP were appointed to value the whole
London-based portfolio as at 31 December 2022. 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 2022 the severity of the impact was considerably less
than in 2021 as evidenced by a partial reversal in impairment charges and rent
collection rates now close to that seen pre-pandemic. The result is a £3.3m
reduction in the provision and after adding receivable balances written off of
£2.3m, the total credit to the income statement for 2022 was £1.0m, compared
to the restated £2.2m charge recognised in 2021. 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 64
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 15) and 'Trade and other receivables' (see note 16)
as shown below:
Other Trade Total
receivables and other receivables
(non-current) (current)
£m £m £m
Lease incentive receivables before impairment 167.8 24.3 192.1
Impairment of lease incentive receivables (2.4) (0.7) (3.1)
Write-off (0.2) - (0.2)
Net lease incentive included within accrued income 165.2 23.6 188.8
Trade receivables before impairment - 9.0 9.0
Impairment of trade receivables - (1.8) (1.8)
Service charge provision - (0.1) (0.1)
Write-off - (2.2) (2.2)
Net trade receivables - 4.9 4.9
The assessment considered the risk of tenant failures or defaults using
information on tenants' payment history, deposits held, the latest known
financial position together with forecast information where available, ongoing
dialogue with tenants as well as other information such as the sector in which
they operate. Following this, tenants were classified as either low, medium or
high risk and the table below provides further information. The impairment
against lease incentive receivable balances was £3.1m and against trade
receivable balances was £1.9m.
Lease incentive Lease incentive Trade receivables
receivables receivables (current)
(non-current) (current)
£m £m £m
Balance before impairment
Low risk 158.4 19.5 3.3
Medium risk 4.6 3.2 1.7
High risk 4.6 1.6 1.8
167.6 24.3 6.8
Impairment
Low risk - - -
Medium risk (0.2) (0.1) (0.1)
High risk (2.2) (0.6) (1.8)
(2.4) (0.7) (1.9)
165.2 23.6 4.9
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 19.
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 2022 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 four executive Directors assisted by the other ten
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 2022 (2021: 97%). The Directors consider that these
individual properties have similar economic characteristics and therefore have
been aggregated into a single reportable segment. The remaining 3% (2021: 3%)
represented a mixture of retail, residential and light industrial properties,
as well as land, each of which is de minimis in its own right and below the
quantitative threshold in aggregate. Therefore, in the view of the
Directors, there is one reportable segment under the provisions of IFRS 8.
All of the Group's properties are based in the UK. No geographical grouping is
contained in any of the internal financial reports provided to the Group's
Executive Committee and, therefore, no geographical segmental analysis is
required by IFRS 8. However, geographical analysis is included in the tables
below to provide users with additional information regarding the areas
contained in the strategic report. The majority of the Group's properties
are located in London (West End central, West End borders/other and City
borders), with the remainder in Scotland (Provincial).
(1) Some office buildings have an ancillary element such as retail or
residential.
Gross property income
2022 2021
Restated
Office Office
buildings Other Total buildings Other Total
£m £m £m £m £m £m
West End central 118.3 1.5 119.8 109.5 0.3 109.8
West End borders/other 16.3 - 16.3 18.5 - 18.5
City borders 67.2 0.5 67.7 67.6 0.5 68.1
Provincial - 4.6 4.6 - 4.5 4.5
Gross property income
(excl. joint venture) 201.8 6.6 208.4 195.6 5.3 200.9
Share of joint venture gross
property income 2.1 - 2.1 0.4 - 0.4
203.9 6.6 210.5 196.0 5.3 201.3
A reconciliation of gross property income to gross property and other income
is given in note 5.
Property portfolio
2022 2021
Restated
Office Office
buildings Other Total buildings Other Total
£m £m £m £m £m £m
Carrying value
West End central 3,123.9 81.2 3,205.1 3,314.9 82.2 3,397.1
West End borders/other 356.9 - 356.9 408.1 - 408.1
City borders 1,494.5 10.4 1,504.9 1,649.7 8.4 1,658.1
Provincial - 78.7 78.7 - 82.2 82.2
Group (excl. joint venture) 4,975.3 170.3 5,145.6 5,372.7 172.8 5,545.5
Share of joint venture 42.6 - 42.6 50.2 - 50.2
5,017.9 170.3 5,188.2 5,422.9 172.8 5,595.7
Fair value
West End central 3,234.9 86.3 3,321.2 3,348.9 84.2 3,433.1
West End borders/other 376.6 - 376.6 431.4 - 431.4
City borders 1,534.2 10.4 1,544.6 1,690.4 8.4 1,698.8
Provincial - 79.4 79.4 - 83.0 83.0
Group (excl. joint venture) 5,145.7 176.1 5,321.8 5,470.7 175.6 5,646.3
Share of joint venture 42.4 - 42.4 50.0 - 50.0
5,188.1 176.1 5,364.2 5,520.7 175.6 5,696.3
A reconciliation between the fair value and carrying value of the portfolio is
set out in note 11.
5. Property and other income
2022 2021
Restated
£m £m
Gross rental income 207.0 195.3
Surrender premiums received 1.1 3.6
Other property income 0.3 2.0
Gross property income 208.4 200.9
Trading property sales proceeds(1) 1.6 6.7
Service charge income(1) 34.6 30.2
Other income(1) 4.2 3.5
Gross property and other income 248.8 241.3
Gross rental income 207.0 195.3
Movement in impairment of receivables 1.0 (2.2)
Service charge income(1) 34.6 30.2
Service charge expenses (39.7) (33.6)
(5.1) (3.4)
Property costs (14.4) (11.8)
Net rental income 188.5 177.9
Trading property sales proceeds(1) 1.6 6.7
Trading property cost of sales (1.4) (6.0)
Profit on trading property disposals 0.2 0.7
Other property income 0.3 2.0
Other income(1) 4.2 3.5
Surrender premiums received 1.1 3.6
Dilapidation receipts 0.5 0.9
Write-down of trading property (0.2) (1.4)
Net property and other income 194.6 187.2
(1) In line with IFRS 15 Revenue from Contracts with Customers, the Group
recognised a total of £40.4m (2021: £40.4m) 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.
As described in note 2, gross rental income and movement in impairment of
receivables have been restated in accordance with the guidance provided by the
IFRS Interpretations Committee.
Gross rental income includes £20.3m (2021 restated: £19.5m) 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 16 for additional
information). Included in this provision is a charge of £0.4m against trade
receivables relating to rental income for the 25 December 2022 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 £1.6m increase/decrease and £1.2m
decrease/increase respectively, in the Group's profit/loss for the year. This
sensitivity has been performed on the medium to high risk tenants as the
significant estimation uncertainty is wholly related to these.
6. Profit on disposal
2022 2021
£m £m
Investment property
Gross disposal proceeds 209.6 402.4
Costs of disposal (3.2) (3.7)
Net disposal proceeds 206.4 398.7
Carrying value (180.8) (387.5)
Adjustment for lease costs and rents recognised in advance - (0.7)
Profit on disposal of investment property 25.6 10.5
Artwork
Carrying value - (0.1)
Loss on disposal of artwork - (0.1)
Profit on disposal 25.6 10.4
Included within gross disposal proceeds for 2022 is £67.2m relating to the
disposal of the Group's freehold interest in New River Yard EC1 in June 2022,
£85.0m relating to the disposal of the Group's freehold interest in Bush
House, South West Wing WC2 in July 2022, and £40.5m relating to the disposal
of the Group's leasehold interest in 2 & 4 Soho Place W1 in July 2022. In
addition, gross disposal proceeds also included £15.3m following completion
of the grant of an intermediate long leasehold interest in relation to the
Soho Place W1 development agreement.
7. Finance income and finance costs
2022 2021
£m £m
Finance income
Bank interest receivable (0.2) -
Other (0.1) -
Finance income (0.3) -
Finance costs
Bank loans 1.1 0.9
Non-utilisation fees 2.1 2.1
Unsecured convertible bonds 3.9 3.9
Unsecured green bonds 6.7 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 2.6 2.5
Amortisation of the fair value of the secured bonds (1.4) (1.3)
Obligations under headleases 1.1 0.7
Other 0.3 0.2
Gross finance costs 46.7 40.1
Less: interest capitalised (7.0) (12.0)
Finance costs 39.7 28.1
Finance costs of £7.0m (2021: £12.0m) have been capitalised on development
projects, in accordance with IAS 23 Borrowing Costs, using the Group's average
cost of borrowings during each quarter. Total finance costs paid to 31
December 2022 were £44.1m (2021: £37.0m) of which £7.0m (2021: £12.0m) was
included in capital expenditure on the property portfolio in the Group cash
flow statement under investing activities.
8. Financial derivative termination costs
The Group incurred net costs of £0.3m in the year to 31 December 2022 (2021:
£1.9m) deferring interest rate swaps. Included in this is £0.3m of
receipts and £0.6m of costs.
9. Share of results of joint ventures
2022 2021
£m £m
Net property income 2.1 0.4
Administrative expenses (0.1) (0.1)
Revaluation deficit (9.3) (10.2)
(7.3) (9.9)
Joint venture acquisition costs incurred - (4.0)
(7.3) (13.9)
The share of results of joint ventures for the year ended 31 December 2022
includes the Group's 50% share in the Derwent Lazari Baker Street Limited
Partnership. See note 14 for further details of the Group's joint ventures.
10. Tax charge/(credit)
2022 2021
£m £m
Corporation tax
UK corporation tax and income tax in respect of results for the year 0.5 0.9
Other adjustments in respect of prior years' tax 0.4 (0.4)
Corporation tax charge 0.9 0.5
Deferred tax
Origination and reversal of temporary differences 0.1 (1.1)
Adjustment for changes in estimates - (0.7)
Deferred tax charge/(credit) 0.1 (1.8)
Tax charge/(credit) 1.0 (1.3)
In addition to the tax charge of £1.0m (2021: credit of £1.3m) that passed
through the Group income statement, a deferred tax charge of £0.2m (2021:
£1.3m) relating to the revaluation of the owner-occupied property at 25
Savile Row W1 was recognised in the Group statement of comprehensive income.
In 2021, a charge of £0.4m relating to the future defined benefit pension
liabilities was also recognised in the Group statement of comprehensive
income.
The effective rate of tax for 2022 is lower (2021: lower) than the standard
rate of corporation tax in the UK. The differences are explained below:
2022 2021
£m £m
(Loss)/profit before tax (279.5) 252.5
Expected tax (credit)/charge based on the standard rate of
corporation tax in the UK of 19.00% (2021: 19.00%)(1) (53.1) 48.0
Difference between tax and accounting profit on disposals (3.1) (0.7)
REIT exempt income (16.0) (14.9)
Revaluation deficit/(surplus) attributable to REIT properties 78.6 (32.2)
Expenses and fair value adjustments not allowable for tax purposes 0.4 4.6
Capital allowances (6.5) (4.3)
Other differences 0.3 (1.4)
Tax charge/(credit) in respect of (loss)/profit for the year 0.6 (0.9)
Adjustments in respect of prior years' tax 0.4 (0.4)
Tax charge/(credit) 1.0 (1.3)
(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 2022 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
Acquisitions 0.1 132.9 133.0 - - - 133.0
Capital expenditure 47.7 58.8 106.5 - - 8.3 114.8
Interest capitalisation 1.3 3.9 5.2 - 1.4 0.4 7.0
Additions 49.1 195.6 244.7 - 1.4 8.7 254.8
Disposals (46.6) (30.0) (76.6) - (104.2) (1.3) (182.1)
Transfers (54.2) - (54.2) - 54.2 - -
Revaluation (388.2) (33.9) (422.1) 0.7 - - (421.4)
Write-down of trading property - - - - - (0.2) (0.2)
Movement in grossing up of
headlease liabilities - (51.0) (51.0) - - - (51.0)
At 31 December 2022 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
At 1 January 2021 (restated) 3,894.9 1,135.6 5,030.5 45.6 165.0 12.9 5,254.0
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 (restated) 91.4 39.3 130.7 3.7 - - 134.4
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 (restated) 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
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 2022
Fair value 3,865.8 1,307.1 5,172.9 50.0 54.7 44.2 5,321.8
Selling costs relating to assets
held for sale - - - - (0.5) - (0.5)
Revaluation of trading property - - - - - (4.8) (4.8)
Lease incentives and costs
included in receivables (165.3) (39.8) (205.1) - - - (205.1)
Grossing up of headlease liabilities - 34.2 34.2 - - - 34.2
Carrying value 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
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 (restated) (155.8) (26.3) (182.1) - - - (182.1)
Grossing up of headlease liabilities - 70.4 70.4 - - - 70.4
Grossing up of other liabilities - 14.8 14.8 - - - 14.8
Carrying value (restated) 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
Reconciliation of fair value
2022 2021
£m £m
Portfolio including the Group's share of joint ventures 5,364.2 5,696.3
Less: joint ventures (42.4) (50.0)
IFRS property portfolio 5,321.8 5,646.3
The property portfolio is subject to semi-annual external valuations and was
revalued at 31 December 2022 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.
The external valuations for the London-based portfolio at December 2022 were
carried out by Knight Frank LLP, whilst the December 2021 valuations were
carried out by CBRE Limited.
Knight Frank valued properties at £5,285.6m (2021: £nil), CBRE at £nil
(2021: £5,610.8m) and other valuers at £36.2m (2021: £35.5m), giving a
combined value of £5,321.8m (2021: £5,646.3m). Of the properties revalued,
£50.0m (2021: £49.3m) relating to owner-occupied property was included
within property, plant and equipment and £44.2m (2021: £34.1m) was in
relation to trading property.
The total fees, including the fee for this assignment, earned by Knight Frank
(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.
As described in note 2, the prior year revaluation has been restated in
accordance with the guidance provided by the IFRS Interpretations Committee.
Net zero carbon and EPC compliance
In response to climate change, the Group published its pathway to net zero
carbon in July 2020 and has set 2030 as its target date to achieve this. In
accordance with the Group's Green Finance Framework, £99.9m (year to 31
December 2021: £116.6m) of eligible 'green' expenditure was incurred in the
year to 31 December 2022 on major developments at 80 Charlotte Street W1, Soho
Place W1, The Featherstone Building EC1 and 25 Baker Street W1. As these have
met the criteria to be eligible qualifying projects under the 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
indicated an estimated cost of c.£97m to upgrade the Group's properties to
EPC 'B' or above. This has since been updated to reflect the latest scope
change and 2022 cost inflation, taking the estimate to c.£107m at year end.
This includes £8.0m relating to 19 Charterhouse Street EC1 which was sold in
January 2023. It is expected that a small proportion of this cost will be
recoverable through service charges. A specific deduction of £58.4m for
identified EPC upgrade works across the portfolio has been included within the
external valuation at 31 December 2022, with an additional allowance for
further general upgrades to properties following assumed tenant vacancies.
Reconciliation of revaluation (deficit)/surplus
2022 2021
Restated
£m £m
Total revaluation (deficit)/surplus (401.8) 142.9
Less:
Share of joint ventures 9.2 13.9
Lease incentives and costs (23.2) (19.4)
Assets held for sale selling costs (2.5) (2.0)
Trading property revaluation adjustment (3.3) (2.0)
IFRS revaluation (deficit)/surplus (421.6) 133.4
Reported in the:
Revaluation (deficit)/surplus (422.1) 131.1
Write-down of trading property (0.2) (1.4)
Group income statement (422.3) 129.7
Group statement of comprehensive income 0.7 3.7
(421.6) 133.4
Historical cost
2022 2021
Restated
£m £m
Investment property 3,478.3 3,362.3
Owner-occupied property 19.6 19.6
Assets held for sale 51.5 38.5
Trading property 42.5 44.0
Total property portfolio 3,591.9 3,464.4
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 (5.2%) (4.4%) (4.7%) (2.6%) - (4.9%)
-25bp 5.7% 4.9% 5.2% 2.8% - 5.4%
ERV
+£2.50 psf 3.9% 4.8% 4.7% 19.3% - 4.4%
-£2.50 psf (3.9%) (4.8%) (4.7%) (19.3%) - (4.4%)
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
£m £m £m £m
At 1 January 2022 49.3 0.8 3.9 54.0
Additions - - 0.6 0.6
Depreciation - - (1.0) (1.0)
Revaluation 0.7 - - 0.7
At 31 December 2022 50.0 0.8 3.5 54.3
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
Net book value
Cost or valuation 50.0 0.8 7.8 58.6
Accumulated depreciation - - (4.3) (4.3)
At 31 December 2022 50.0 0.8 3.5 54.3
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
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 2022 was £0.9m
(2021: £0.9m). See note 11 for the historical cost of owner-occupied
property.
13. Trading stock
2022 2021
£m £m
Trading stock 2.3 0.4
Trading stock relates to capitalised development expenditure incurred which is
due to be transferred under development agreements to a third party upon
completion. This has been included in trading stock as the Group does not have
an ownership interest in the property.
14. 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.
2022 2021
£m £m
At 1 January 51.1 0.9
Additions 0.1 64.1
Joint venture acquisition costs - (4.0)
Revaluation deficit (see note 9) (9.3) (10.2)
Other profit from operations (see note 9) 2.0 0.3
At 31 December 43.9 51.1
The Group's share of its investments in joint ventures is represented by the
following amounts in the underlying joint venture entities.
2022 2021
Joint ventures Group share Joint ventures Group share
£m £m £m £m
Non-current assets 85.0 42.5 100.5 50.2
Current assets 5.0 2.5 3.7 1.9
Current liabilities (2.7) (1.4) (2.7) (1.3)
Non-current liabilities (121.0) (60.5) (120.8) (60.4)
Net liabilities (33.7) (16.9) (19.3) (9.6)
Loans provided to joint ventures 60.8 60.7
Total investment in joint ventures 43.9 51.1
15. Other receivables (non-current)
2022 2021
£m £m
Prepayments and accrued income
Rents recognised in advance 165.2 147.0
Initial direct letting costs 13.8 12.3
Prepayments 9.1 -
188.1 159.3
Prepayments and accrued income include £165.2m (2021: £147.0m) 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, £13.8m (2021: £12.3m) relates to the spreading effect of the
initial direct costs of letting over the same term. Together with £26.1m
(2021 restated: £22.8m), which was included as accrued income within trade
and other receivables (see note 16), these amounts totalled £205.1m at 31
December 2022 (2021 restated: £182.1m).
Prepayments represent £9.1m of costs incurred in relation to Old Street
Quarter EC1. In May 2022, the Group entered into a conditional contract to
acquire the freehold of Old Street Quarter island site. The site is being sold
by Moorfields Eye Hospital NHS Foundation Trust and UCL, together the Oriel
joint initiative ("Oriel"). Completion is subject to Oriel's receipt of final
Treasury approval (subsequently received in February 2023), delivery by Oriel
of a new hospital at St Pancras and subsequent vacant possession of the site,
which is anticipated in 2027.
The total movement in tenant lease incentives is shown below:
2022 2021
Restated
£m £m
At 1 January 167.0 148.5
Amounts taken to income statement 20.4 19.9
Capital incentives granted 0.6 0.7
Lease incentive reversal/(impairment) 1.0 (0.1)
Adjustment for non-current asset held for sale - (1.3)
Disposal of investment properties - (0.5)
Write off to bad debt (0.2) (0.2)
188.8 167.0
Amounts included in trade and other receivables (see note 16) (23.6) (20.0)
At 31 December 165.2 147.0
16. Trade and other receivables
2022 2021
Restated
£m £m
Trade receivables 4.9 6.9
Other receivables 5.8 3.7
Prepayments 3.8 5.3
Accrued income 27.9 25.1
42.4 41.0
The prior year prepayments have been restated to reclassify £19.4m of cash
collected on behalf of tenants' service charges within cash and cash
equivalents. For further information refer to note 2.
The prior year accrued income has been restated by £1.3m in relation to
amounts forgiven for receivables past their due date as a result of the IFRIC
decision relating to forgiveness of lease payments. For further information
refer to note 2.
In response to the Group's climate change agenda, costs of £0.7m (2021:
£0.4m) were incurred in relation to a c.100 acre, 18.4MW solar park on its
Scottish land and have been included within prepayments. Resolution to grant
planning consent for this project was received in 2022.
Trade receivables are split as follows:
2022 2021
£m £m
less than three months due 4.9 6.8
between three and six months due - 0.1
4.9 6.9
Trade receivables as at 31 December 2022 are stated net of impairment. As a
result, the expected credit loss assessment under IFRS 9 (see note 3) was
lower than in 2021.
The Group has £5.0m of provision for bad debts as shown below. £1.9m is
included in trade receivables, £0.7m in accrued income and £2.4m in
prepayments and accrued income within other receivables (non-current) (note
15).
Provision for bad debts
2022 2021
Restated
£m £m
At 1 January 8.3 8.4
Trade receivables provision (0.8) (0.4)
Lease incentive provision (0.2) 0.8
Service charge provision (0.2) 0.1
Released (2.1) (0.6)
At 31 December 5.0 8.3
The provision for bad debts are split as follows:
2022 2021
Restated
£m £m
less than three months due 2.2 3.7
between three and six months due 0.1 0.2
between six and twelve months due 0.3 0.3
over twelve months due 2.4 4.1
5.0 8.3
17. Non-current assets held for sale
2022 2021
£m £m
Transferred from investment properties (see note 11) 54.2 101.2
Transferred from prepayments and accrued income - 1.6
54.2 102.8
In January 2023, the Group exchanged contracts and completed on the sale of
its freehold interest in 19 Charterhouse Street EC1. The property was valued
at £53.0m as at 31 December 2022. 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 £0.5m, the carrying value was
£52.5m (see note 11).
At 31 December 2022, the freehold interest in 13 Charlotte Mews W1 was
recognised as a non-current asset held for sale, in accordance with IFRS 5
Non-current Assets Held for Sale. 13 Charlotte Mews is under offer and is
available for sale in its present condition. As at 31 December 2022, the
property was valued at £1.7m and, after deducting selling costs of £0.05m,
the carrying value was £1.65m (see note 11).
18. Trade and other payables
2022 2021
Restated
£m £m
Trade payables 0.4 3.2
Other payables 24.6 38.0
Other taxes 11.8 8.0
Accruals 35.8 37.2
Deferred income 48.2 41.9
Tenant rent deposits 27.3 17.6
148.1 145.9
Deferred income primarily relates to rents received in advance.
Prior year trade and other payables have been restated to reflect the grossing
up of tenant rent deposits of £17.6m. For further information refer to note
2.
19. Net debt and derivative financial instruments
2022 2021
Book Fair Book Fair
value value value value
£m £m £m £m
Current liabilities
Other loans 19.7 19.7 12.3 12.3
19.7 19.7 12.3 12.3
Non-current liabilities
1.5% unsecured convertible bonds 2025 170.1 157.2 168.3 174.0
6.5% secured bonds 2026 181.0 179.7 182.4 205.7
1.875% unsecured green bonds 2031 346.4 247.3 346.0 344.6
Unsecured private placement notes 2026 - 2034 453.3 410.4 453.0 493.1
3.99% secured loan 2024 82.7 80.6 82.5 85.6
Unsecured bank loans (4.1) - 4.9 10.0
1,229.4 1,075.2 1,237.1 1,313.0
Borrowings 1,249.1 1,094.9 1,249.4 1,325.3
Derivative financial instruments expiring in less than one year - - 0.4 0.4
Derivative financial instruments expiring in
greater than one year (5.0) (5.0) 0.4 0.4
Total borrowings and derivative financial instruments 1,244.1 1,089.9 1,250.2 1,326.1
Reconciliation to net debt:
Borrowings and derivative financial instruments 1,244.1 1,250.2
Adjustments for:
Leasehold liabilities 35.0 70.6
Derivative financial instruments 5.0 (0.8)
Cash at bank excluding restricted cash (see note 22) (26.9) (68.5)
Net debt 1,257.2 1,251.5
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 2022 or 2021.
Unsecured bank borrowings are accounted for at amortised cost. At 31 December
2022, there was £nil (2021: £10.0m) drawn on the RCFs and the unamortised
arrangement fees were £4.1m (2021: £5.1m), resulting in the carrying value
being a £4.1m debit balance (2021: credit balance of £4.9m).
Other loans consist of a £19.7m interest-free loan with no fixed repayment
date from a third party providing development consultancy services on the
residential element of the 25 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 2022 (2021: £nil). The carrying
value of the loan at 31 December 2022 was £19.7m (2021: £12.3m).
The 3.99% secured loan 2024 was secured by a fixed charge over £272.8m (31
December 2021: £305.2m) 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 £448.8m (31 December 2021: £571.8m) of
the Group's properties.
Additionally, the Group had a secured bank loan which was settled in the prior
year in advance of the acquisition of the non-controlling interest from The
Portman Estate in 2021.
The Group continues to maintain significant headroom on all financial
covenants.
20. Deferred tax
Revaluation
(deficit)/surplus Other Total
£m £m £m
At 1 January 2022 3.3 (3.6) (0.3)
Charged/(credited) to the income statement 0.2 (0.1) 0.1
Charged to other comprehensive income 0.2 - 0.2
Charged to equity - 0.6 0.6
At 31 December 2022 3.7 (3.1) 0.6
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
Change in tax rates in other comprehensive income 0.4 (0.1) 0.3
Credited to equity - (0.7) (0.7)
At 31 December 2021 3.3 (3.6) (0.3)
Deferred tax on the balance sheet revaluation deficit/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.
21. Dividend
Dividend per share
Payment PID Non-PID Total 2022 2021
date p p p £m £m
Current year
2022 final dividend(1) 2 June 2023 38.50 16.00 54.50 - -
2022 interim dividend 14 October 2022 24.00 - 24.00 26.9 -
62.50 16.00 78.50
Prior year
2021 final dividend 1 June 2022 35.50 18.00 53.50 60.1 -
2021 interim dividend 15 October 2021 23.00 - 23.00 - 25.8
58.50 18.00 76.50
2020 final dividend 4 June 2021 35.00 17.45 52.45 - 58.8
Dividends as reported in the
Group statement of changes in equity 87.0 84.6
2022 interim dividend withholding tax 13 January 2023 (3.7) -
2021 interim dividend withholding tax 14 January 2022 3.5 (3.5)
2020 interim dividend withholding tax 14 January 2021 - 3.2
Dividends paid as reported in the
Group cash flow statement 86.8 84.3
(1) Subject to shareholder approval at the AGM on 12 May 2023.
22. Cash and cash equivalents
2022 2021
Restated
£m £m
Cash at bank 26.9 68.5
Cash held in restricted accounts
Tenant rent deposits 27.3 17.6
Service charge balances 22.4 19.4
76.6 105.5
Prior year cash and cash equivalents have been restated to include £17.6m of
tenant deposits, which are subject to contractual restrictions. In addition,
£19.4m of cash collected on behalf of tenants to fund the service charge of
properties in the portfolio has now been reclassified from trade and other
receivables and presented as restricted cash. For further information refer to
note 2.
23. Post balance sheet events
In January 2023, the Group exchanged contracts and completed the disposal of
its freehold interest in 19 Charterhouse Street EC1 for £54.0m before costs.
24. Related parties
There have been no related party transactions for the year ended 31 December
2022 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 unless stated otherwise.
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
2022 2021 2022 2021
Audited Unaudited Audited Unaudited
'000 '000 '000 '000
For use in basic measures 112,270 112,139 112,291 112,209
Dilutive effect of share-based payments 142 273 138 308
For use in diluted measures 112,412 112,412 112,429 112,517
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 2021 and 2022, 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 2022 (audited)
Net property and other income 194.6 (0.2) 0.2 - 194.6
Total administrative expenses (36.4) - - - (36.4)
Revaluation deficit (422.1) - 422.1 - -
Profit on disposal of investments 25.6 (25.6) - - -
Net finance costs (39.4) - - - (39.4)
Movement in fair value of derivative financial instruments 5.8 - - (5.8) -
Financial derivative termination costs (0.3) - - (0.1) (0.4)
Share of results of joint ventures (7.3) - 9.3 - 2.0
Loss before tax (279.5) (25.8) 431.6 (5.9) 120.4
Tax charge (1.0) - 0.3 - (0.7)
Earnings attributable to equity shareholders (280.5) (25.8) 431.9 (5.9) 119.7
(Loss)/earnings per share (249.84p) 106.62p
Diluted (loss)/earnings per share (249.84p) 106.48p
The diluted loss per share for the period to 31 December 2021 was restricted
to a loss of 249.84p per share, as the loss per share cannot be reduced by
dilution in accordance with IAS 33, Earnings Per Share.
Adjustments EPRA
IFRS A B C basis
£m £m £m £m £m
Year ended 31 December 2021 (unaudited)
Net property and other income (restated) 187.2 (0.7) 1.4 - 187.9
Total administrative expenses (37.1) - - - (37.1)
Revaluation surplus (restated) 131.1 - (131.1) - -
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) (115.5) (2.9) 123.0
Tax credit 1.3 - (1.5) - (0.2)
Profit for the year 253.8 (11.1) (117.0) (2.9) 122.8
Non-controlling interest (1.5) - 0.4 - (1.1)
Earnings attributable to equity shareholders (restated) 252.3 (11.1) (116.6) (2.9) 121.7
Earnings per share (restated) 224.99p 108.53p
Diluted earnings per share (restated) 224.44p 108.26p
EPRA Net Asset Value metrics
2022 2021
Audited Unaudited
£m £m
Net assets attributable to equity shareholders 4,075.5 4,441.8
Adjustment for:
Revaluation of trading properties 4.8 1.9
Deferred tax on revaluation surplus(1) 1.9 1.7
Fair value of derivative financial instruments (5.0) 0.8
Fair value adjustment to secured bonds 6.5 8.0
EPRA Net Tangible Assets 4,083.7 4,454.2
Per share measure - diluted 3,632p 3,959p
Net assets attributable to equity shareholders 4,075.5 4,441.8
Adjustment for:
Revaluation of trading properties 4.8 1.9
Fair value adjustment to secured bonds 6.5 8.0
Mark-to-market of fixed rate debt 159.5 (69.5)
Unamortised issue and arrangement costs (10.1) (12.6)
EPRA Net Disposal Value 4,236.2 4,369.6
Per share measure - diluted 3,768p 3,884p
Net assets attributable to equity shareholders 4,075.5 4,441.8
Adjustment for:
Revaluation of trading properties 4.8 1.9
Deferred tax on revaluation surplus 3.7 3.3
Fair value of derivative financial instruments (5.0) 0.8
Fair value adjustment to secured bonds 6.5 8.0
Purchasers' costs(2) 361.9 383.9
EPRA Net Reinstatement Value 4,447.4 4,839.7
Per share measure - diluted 3,956p 4,301p
( )
( )
( )
(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 (unaudited)
2022 2021
Restated
£m £m
Administrative expenses 36.4 37.1
Write-off/impairment of receivables (1.0) 2.2
Other property costs 12.7 10.4
Dilapidation receipts (0.5) (0.9)
Net service charge costs 5.1 3.4
Service charge costs recovered through rents but not separately invoiced (0.7) (0.6)
Management fees received less estimated profit element (4.2) (3.5)
Share of joint ventures' expenses 0.5 0.1
EPRA costs (including direct vacancy costs) (A) 48.3 48.2
Direct vacancy costs (7.9) (6.1)
EPRA costs (excluding direct vacancy costs) (B) 40.4 42.1
Gross rental income 207.0 195.3
Ground rent (1.7) (1.4)
Service charge components of rental income (0.7) (0.5)
Share of joint ventures' rental income less ground rent 2.5 0.5
Adjusted gross rental income (C) 207.1 193.9
EPRA cost ratio (including direct vacancy costs) (A/C) 23.3% 24.9%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 19.5% 21.7%
In addition to the two EPRA cost ratios, the Group has calculated an
additional cost ratio based on its property portfolio fair value to recognise
the 'total return' nature of the Group's activities.
Property portfolio at fair value (D) 5,321.8 5,646.3
Portfolio cost ratio (A/D) 0.9% 0.9%
The Group has not capitalised any overheads in either 2022 or 2021.
Property-related capital expenditure (unaudited)
2022 2021
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 133.0 - 133.0 353.6 60.0 413.6
Development 94.7 1.6 96.3 146.6 0.2 146.8
Investment properties
Incremental lettable space 0.9 - 0.9 0.1 - 0.1
No incremental lettable space 18.5 - 18.5 16.7 - 16.7
Tenant incentives 0.8 - 0.8 2.5 - 2.5
Capitalised interest 6.9 - 6.9 12.0 - 12.0
Total capital expenditure 254.8 1.6 256.4 531.5 60.2 591.7
Conversion from accrual to
cash basis¹ 11.1 0.1 11.2 (107.6) (0.2) (107.8)
Total capital expenditure
on a cash basis 265.9 1.7 267.6 423.9 60.0 483.9
(1) In the prior year, the conversion from accrual to cash basis figure
includes £100.7m in relation to the regrant of a headlease at 25 Baker Street
W1.
26. Gearing and interest cover
NAV gearing
2022 2021
£m £m
Net debt 1,257.2 1,251.5
Net assets 4,075.5 4,441.8
NAV gearing 30.8% 28.2%
Loan-to-value ratio
2022 2021
£m £m
Group loan-to-value ratio
Net debt 1,257.2 1,251.5
Fair value adjustment of secured bonds (6.5) (8.0)
Unamortised discount on unsecured green bonds 1.7 1.8
Unamortised issue and arrangement costs 10.1 12.6
Leasehold liabilities (35.0) (70.6)
Drawn debt net of cash (A) 1,227.5 1,187.3
Fair value of property portfolio (B) 5,321.8 5,646.3
Group loan-to-value ratio (A/B) 23.1% 21.0%
Proportionally consolidated loan-to-value ratio
Drawn debt net of cash (A) 1,227.5 1,187.3
Share of cash and cash equivalents joint ventures (1.6) (1.2)
Drawn debt net of cash including Group's share of joint ventures (C) 1,225.9 1,186.1
Fair value of property portfolio (B) 5,321.8 5,646.3
Share of fair value of property portfolio of joint ventures 42.4 50.0
Fair value of property portfolio including Group's share of joint ventures (D) 5,364.2 5,696.3
Proportionally consolidated loan-to-value ratio (C/D) 22.9% 20.8%
EPRA loan-to-value ratio
Drawn debt net of cash including Group's share of joint ventures (C) 1,225.9 1,186.1
Debt with equity characteristics (19.7) (12.3)
Adjustment for hybrid debt instruments 3.3 4.5
Net payable adjustment 74.1 91.7
Adjusted debt (E) 1,283.6 1,270.0
Fair value of property portfolio including Group's share of joint ventures (D) 5,364.2 5,696.3
EPRA loan-to-value ratio (E/D) 23.9% 22.3%
Net interest cover ratio
2022 2021
Restated
£m £m
Group net interest cover ratio
Net property and other income 194.6 187.2
Adjustments for:
Other income (4.2) (3.5)
Other property income (0.3) (2.0)
Surrender premiums received (1.1) (3.6)
Write-down of trading property 0.2 1.4
Profit on disposal of trading properties (0.2) (0.7)
Adjusted net property income 189.0 178.8
Finance income (0.3) -
Finance costs 39.7 28.1
Adjustments for:
Finance income 0.3 -
Other finance costs (0.3) (0.2)
Amortisation of fair value adjustment to secured bonds 1.4 1.3
Amortisation of issue and arrangement costs (2.6) (2.5)
Finance costs capitalised 7.0 12.0
Net interest payable 45.2 38.7
Group net interest cover ratio 418% 462%
Proportionally consolidated net interest cover ratio
Adjusted net property income 189.0 178.8
Share of joint ventures' net property income 2.1 0.4
Adjusted net property income including share of joint ventures 191.1 179.2
Net interest payable 45.2 38.7
Proportionally consolidated net interest cover ratio 423% 463%
27. Total return (unaudited)
2022 2021
p p
EPRA Net Tangible Assets on a diluted basis
At end of year 3,632 3,959
At start of year (3,959) (3,812)
(Decrease)/increase (327) 147
Dividend per share 78 75
(Decrease)/increase including dividend (250) 222
Total return (6.3%) 5.8%
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 Loan-to-value (LTV)
Debt divided by the property value. Debt is equal to drawn facilities less
cash, adjusted with equity characteristics, adding back the equity portion of
hybrid debt instruments and including net payables if applicable. Property
value is equal to the fair value of the property portfolio including net
receivables if applicable.
- 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 capital expenditure
The total expenditure incurred on the acquisition, enhancement, and
development of investment properties. This can include amounts spent on any
investment properties under construction or related development projects, as
well as the amounts spent on the completed (operational) investment property
portfolio. Capitalised finance costs included in the financial statements are
also presented within this total. The costs are presented on both an accrual
and a cash basis, for both the Group and the proportionate share of joint
ventures.
- 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 unrestricted 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 unrestricted 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 70 buildings in a commercial real estate portfolio
predominantly in central London valued at £5.36 billion as at 31 December
2022, 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 the
property companies worldwide to have science-based carbon targets validated by
the Science Based Targets initiative (SBTi).
Landmark buildings in our 5.5 million sq ft portfolio include 1 Soho Place W1,
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 2022, 80 Charlotte Street won the BCO's Best National
Commercial Workplace award 2022. In October 2021, the Group won EG's UK
Company of the Year award and in January 2022 came top of the Property Sector
and 38th position overall in Management Today's Britain's Most Admired
Companies awards 2021. In 2013 the Company launched a voluntary Community Fund
which has to date supported over 150 community projects in the West End and
the Tech Belt.
The Company's share capital is comprised of a single class of 5p ordinary
shares (ISIN: GB0002652740).
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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