Derwent London has announced interim figures covering the six months ended 30 June 2016. Its EPRA net asset value per share increased by 1.8% to 3,598p from 3,535p at 31 December 2015. Net rental income increased by 8.5% to GBP72.6m (from GBP66.9m in the equivalent period in 2015). This fed through into EPRA adjusted profits before tax of GBP44.8m (+14.9%) and EPRA adjusted earnings per share of 37.13p, up 9.3% from 33.97p in H1 2015. The interim dividend per share has been increased by 10% to 13.86p.
Over the period they achieved lettings of 267,700 sq ft which will generate rents of GBP16.7m pa. Although activity slowed marginally in Q2, the first half produced their highest ever lettings in a six month reporting period. On average these lettings were 7.4% above December 2015 estimated rental values (ERV).
The end June valuation came just seven days after the EU referendum. This showed capital growth of 1.6% in the first six months driven by a 4.1% increase in ERV’s and progress on their advanced developments. This was offset by a small outward yield shift and widening prospective margins on early stage projects. The valuers caution that the valuation is based on the limited transactional evidence available since the EU referendum and that it is too early to gauge the vote’s full impact. The majority of the office portfolio is let at, what they describe as, undemanding rents (averaging GBP43 per sq ft on a ‘topped-up’ basis). Average lease lengths are 6.8 years (8.1 years including pre-lets), and their EPRA vacancy rate is 2.0%. Derwent’s exposure to London’s financial sector is modest at just 2.3% of June rental income. Taking current market conditions into consideration, they have lowered the rental growth expectations on the portfolio in 2016 to 1-5%, and believe that investment yields could rise marginally in response to lower growth, although this move may be mitigated by falling bond yields. On 23 June they had c.113,000 sq ft of space under offer all of which has now been let, securing rents of GBP4.6m pa.
Future capital expenditure divides into three categories:
Advanced developments and refurbishments due for completion in the next 18 months which have an ERV of GBP42.7m and where there remains c.GBP125m of capital expenditure to complete. These include White Collar Factory EC1, The Copyright Building W1, The White Chapel Building E1 and 20 Farringdon Road EC1 which are 58% pre-let.
Early stage developments, comprising major schemes at 80 Charlotte Street W1 and Brunel Building, Paddington W2. Both projects are due to be delivered in 2019. These account for the bulk of future capital expenditure at GBP338m, and also GBP41.2m of ERV. There is some flexibility with the timing of the Paddington scheme, which could be slowed down or even deferred if necessary.
The final category is preparatory work on consented schemes and appraisal studies. These are properties that are predominantly income producing, where there is no intention to commit to schemes for now. This comprises 13% of the portfolio by area.
Derwent’s LTV ratio was 19.1% at 30 June 2016, and it had cash/undrawn facilities of GBP279m.
DLN : Derwent takes comfort from low financial sector exposure