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Edited Transcript of DLN.L earnings conference call or presentation 8-Aug-19 8:00am GMT

Half Year 2019 Derwent London PLC Earnings Call

London Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Derwent London PLC earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Damian Mark Alan Wisniewski

Derwent London Plc - Finance Director & Executive Director

* David G. Silverman

Derwent London Plc - Property Director & Executive Director

* Nigel Quentin George

Derwent London Plc - Property Director & Executive Director

* Paul Malcolm Williams

Derwent London Plc - CEO & Director

* Richard Baldwin

Derwent London Plc - Head of Development

* Simon P. Silver

Derwent London Plc - Property Director & Executive Director

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Conference Call Participants

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* Kieran Adrian Lee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Miranda Sarah Cockburn

Panmure Gordon (UK) Limited, Research Division - Analyst

* Osmaan Malik

UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director

* Paul J. May

Barclays Bank PLC, Research Division - Analyst

* Rubinder Singh Virdee

Green Street Advisors, LLC, Research Division - Analyst of Research

* Timothy Leckie

JP Morgan Chase & Co, Research Division - Head of European Property

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Presentation

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [1]

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Good morning, everyone. First decision I had to make is to upgrade the room, so I hope you like the new venue. Anyway, good morning, and welcome, everybody. Thank you for attending today, or those listening into our 2019 half year results. We're going to continue with our usual format, with all the executive directors presenting. But first, let me we say it's an absolute pleasure to be here to the opening proceedings.

Now I've taken on the role of Chief Executive at a busy time for the group, with lots of positive activity across the portfolio. Despite Brexit and other uncertainties, we continue to see excellent occupational demand for our space. On this basis, we have committed to our large development program, which is letting very well, adding to our earnings potential. At the same time, we have preserved our balance sheet strength through disposals and debt refinancing.

Now good progress in the first half, Slide 2. Our activity continues to deliver positive returns, Damian and Nigel will talk you through the details. Our letting progress demonstrates the good occupier demand for our design-led buildings, priced and middle market rents. We've achieved at least 10 to 15-year leases on circa 90% of this year's lettings to date. And in January, we started over 400,000 square feet of new development. Our leasing, asset and property management teams have made an important contribution to our EPRA vacancy rate is down.

Central London occupier demand. Let's start with our view on the underlying property market. Demand for our space remains good, but in the market, overall take-up is a little lower than in recent years. Flexible office lettings continue to be significant, but financial increases remained strong. Rental levels have been robust, particularly for new space. This is a product-led market. You will see from the slide, there are some well-known names with active demand, totaling nearly 10 million square feet, which should suggest there should be more activity in the second half. For instance, the [Viaggio] have recently come back into town, taking 100,000 square feet in the west end, another business stating they need to be in Central London to attract their staff.

Moving on to supply. The supply outlook is relatively benign, which paradoxically may have been one positive outcome of the EU referendum. Under 2 million square feet of new space was delivered in H1, so the vacancy rate has fallen. Looking ahead over the next few years, the level of committed schemes seems remarkably consistent, with high pre-letting levels becoming the new norm. As a result, there's only 5 million square feet of construction still available to let. This could increase over time, but given construction time scales, the earliest additional suppliers are likely to complete before 2022.

The investment market. Investment activity is sharply down this year, in part due to less stock available, but Brexit and other uncertainties have created a hiatus and has led to potential investors being ever more rigorous and disciplined in their approach. One feat over the last 12 months, however, has been an increased number of value-added opportunities that have come to the market. These are being well bid, which shows the broader confidence in the underlying letting market. Valuations are supported by an array of factors that make Central London property yields attractive on a relative basis. London's economy remains robust. We are seeing tenants expand.

Outlook. Slide 6. Despite the good progress, we have made this year and the demand for our product, any prediction today must be tempered against the ongoing uncertainty. However, on the back of our strong tenant interest, we are leaving our 2019 estimates unchanged, with ERV guidance at plus 1% to minus 2%.

Our developments. Our development activities are one of the areas we don't expect to outperform. We have been investing significantly in our pipeline and we now have 790,000 square feet under construction, with an ERV of GBP 56.4 million, which is 60% pre-let. And we continue to see good interest in our projects. This strength of interest can be seen by the Boston Consulting Group's recent decision to exercise their option at taking Charlotte Street, increasing their commitment by almost 1/3. We're also encouraged by the strong interest for the remaining office space at Soho Place, some 2.5 years ahead of completion.

Progressing the business. Derwent London's reputation is being built on many levels. Its innovative design-led projects, our reversionary portfolio underpinning a growing earnings and dividend stream, a talented team, our responsible ethos and strong and flexible financing. How we deliver on these projects and objectives evolves over time.

I have broader responsibilities within the new executive team now. Nigel is taking on development and David, leasing, asset and property management. Simon will continue to do what he does best, heading up regeneration, directing architects and developing the Derwent brand. And Damian, whose title has recently changed to CFO, will be working alongside me on strategic and operational matters.

Now the group are looking at what measures we need to introduce to achieve a net carbon target in 2030, following the progress we've already made. Our leasing, asset and property management teams are actively looking at ways of enhancing the amenities and services for our occupiers. We have continued to recycle assets to reinvest in our development program, with today's announcement on the sale of the Buckley Building.

We're always looking to add fresh opportunities to the portfolio, both internally and externally. By following these objectives, we believe we can continue to grow this long-term and sustainable business.

I'll now pass over to Damian to talk you through the numbers. Thank you.

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Damian Mark Alan Wisniewski, Derwent London Plc - Finance Director & Executive Director [2]

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Thank you, Paul, and good morning, everyone. Derwent London's net asset value was up 2% over the first 6 months, helped by strong development valuation uplifts. Adding back the final dividend paid in June, our first half total return was 123 p per share or 3.3% against 3.1% in H1 '18 and 5.3% for the whole of last year. You may recall that EPRA earnings last year were unusually high, boosted by some nonrecurring property income. Rental income has continued to grow this year, up 7.1% from H1 '18 and both EPRA and underlying earnings were ahead of our projections.

They're due to step-up in H2 '19, with rents flowing from Brunel Building and again, in 2020, once the leases commence at 80 Charlotte Street. As a result, and with continuing good dividend cover expected for 2019, we have increased this year's interim dividend by 9.9% to 21 p per share.

Our gearing increased marginally with LTV at 17.6%, but it remains low. Interest cover was above our expectations at just over 4.5x, and an active period of refinancing has usefully increased our debt maturities and undrawn facilities.

Slide 11 shows the 2% rise in EPRA NAV to 3,852 p per share. The first half saw 69p per share of revaluation surplus after accounting adjustments, including 48 p, or almost 70% of the total from Brunel Building alone. Our 3 developments of Brunel, 80 Charlotte Street and White Collar Factory have now generated surpluses of 240 p per share since January 16. Disposals continued above book value, with Premier House in Victoria giving a profit overbook of 4 p per share.

The refinancing of our convertible bonds largely netted out in NAV terms, and we will look at that in more detail later.

Slide 12. Last year, we received some exceptional premiums, and so we also presented underlying figures which took out nonrecurring amounts of GBP 16.9 million from EPRA earnings. After big increases in recent years, growth in underlying earnings paused in H1, mainly because surrender premiums and dilapidations receipts, which we consider to be recurring in nature, were GBP 4.4 million lower than in H1 '18. Without any premiums or dilaps in either year, underlying earnings would have been GBP 4 million higher in H1 '19 than in H1 '18. Net rental income was up 7.1% in the first half, only partially offset by higher administration and finance costs, and our EPRA cost ratio was the same as for 2018 at 23.3%.

Slide 13. The increase in rental income came mainly from our asset managers. Reversion captured from lettings, rent reviews and regears were GBP 6.3 million across a number of our buildings, giving a like-for-like net rental income growth of 5.2% compared with H2 '18 and 3.2% with H1. By contrast, lettings from our recent developments had little impact on rental income in the first half, but Brunel Building's rents kicked in strongly in the second half.

The cash flow movements are shown on Slide 14. Net debt increasing by GBP 46.6 million over the half year, as we continue to invest heavily in project CapEx. Disposal proceeds totaled GBP 57.9 million and GBP 28.8 million was also passed up from the Prescot Street joint venture after the sale of #9. The sale of #16 completed in H2. We expect total CapEx in the second half to be about GBP 126 million, plus GBP 181 million in 2020. As usual, more details are in Appendix 34.

Page 15 has been updated to show on the left-hand side, the pro forma impact of Brunel Building's recompletion and the sale of the Buckley Building announced today. On the right-hand side, we show the 3 remaining projects on site, including Soho Place and Featherstone Building, which commenced this year. As you can see, the financial risk from our current development program remains modest.

A summary of our debt is on Page 16. We drew the new GBP 250 million U.S. private placement notes in January and have subsequently refinanced our 2019 convertible bonds. The 2019 bonds were due to expire in July, with a conversion price of GBP 31.43 a share. To avoid the risk of dilution, we tended for them in June with a concurrent new issue of 6-year convertible bonds. The tender picked up 98.5% of those bonds, the remaining ones being redeemed at par on the 24th of July.

The premium paid was GBP 8.5 million, which when added to the cash coupon, gave a total interest cost over their life of 2.1% per annum. GBP 7.7 million of the premium has been expensed through the income statement. That does not impact our profits, and the balance has been taken to equity.

Our new issue was also well received, raising GBP 175 million at a cash cost of 1.5%. Bifurcating for accounting purposes gave an equity uplift of GBP 7.5 million and an IFRS interest rate of 2.3%. We believe that the initial conversion price of GBP 44.96 a share is the highest percentage conversion premium achieved so far by a U.K. REIT.

Overall, our undrawn facilities and cash increased to GBP 495 million at the 30th of June, and the sale of the Buckley Building in September will fund most of the second half CapEx. As the slide shows, there remains very substantial headroom over our financial covenants.

Slide '17. Another advantage of the refinancing is that the weighted average maturity of our borrowings has increased to 8.2 years from 5.9 at December '18. And our next refinancing date is in 2022. Thank you very much, and now over to Nigel.

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Nigel Quentin George, Derwent London Plc - Property Director & Executive Director [3]

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Thank you, Damian, and good morning. Slide '19. There was an underlying capital growth of 1.9% for the first half and a portfolio valuation of just under GBP 5.4 billion. With the quieter leasing and investment markets translating into flattish yields and flattish rents, it was our strong development returns that drove this performance.

Our 4 developments were up 13.6%. All saw good construction delivery and progress. Brunel completed and achieved further lettings, and at Soho Place, we made our first pre-let. Excluding developments, the portfolio saw a modest decline of 0.2%. The valuation themes were slight outward yield movements on leasehold properties. These were down 1.1% with freeholds were up marginally. Also in the uncertain climate, there's still a continued focus on lease expiries and associated income and risks for voids.

Total property return. Our first half total property return was a respectable 3.6%. This was comfortably ahead of the IPD Central London Office Index of 1.9% and a 0.8% of the old property index. This was heavily impacted by the difficult retail market. Our approach of owning a balanced portfolio between core income properties with opportunities and properties earmarked for development continues to deliver attractive long-term property returns, as shown on the graph on the right.

Turning on to yield, Slide 21. We saw a 1-basis point outward movement of our equivalent yield to 4.74%. This is more down to property-specific events than market movements. For example, rent-free runoffs being positive and leasehold tenures being negative. Our yield profile remains similar to year-end. However, the topped-up yield moved up a little to 4.7% on the back of activity.

Moving on to rental growth. This was up marginally at 0.4% over the half year, supported by our modest average office rents. As set out in the table, our topped-up office rent was about GBP 56. The more dynamic spaces with good amenities such as our developments were in good demand. However, spaces generally in buildings identified for potential projects were a little slower. These offer value though, at GBP 40 a square foot, but on some, we have to work a little harder.

Finally, we look at ER at the reversion, Slide 23. As shown on the chart, the net rent at June was GBP 163.2 million. This was up 2% from December on the back of lettings and asset management. Our reversion now stands at GBP 140.1 million, which takes the portfolio ERV to over GBP 300 million for the first time. Our contracted element was up 30% to GBP 71.8 million, following the recent lettings and asset management. There is then a further GBP 68.3 million of reversion. GBP 30.3 million of this is our pre-let on-site developments, and this is at a similar level to year-end. Here, Brunel has moved out of developments into contracted uplifts but was replaced by the pre-let at Soho Place.

There is then a further GBP 26.1 million of potential reversion at these developments. And as shown, GBP 3.4 million of this was pre-let with -- in quarter 3, that's the BCG letting. Our available space at GBP 3.8 million reflects our low vacancy rate of 1.6%. And again, as shown, we've made good progress since half year, with letting a further GBP 1.7 million of this. Finally, there is GBP 6.6 million of rent review and lease reversion. This stood at GBP 11.1 million at year-end. With underlying ERVs marginally up, this movement shows what a very successful 6 months we've had capturing reversion.

I'll now hand you over to David, who will look at this activity in more detail.

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David G. Silverman, Derwent London Plc - Property Director & Executive Director [4]

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Thank you, Nigel. Good morning. It's been a busy first half across the board for the business, and I will be looking at the leasing, asset management and investment aspects.

Slide 25, letting activity. We've achieved just over 270,000 square feet of lettings in half 1, producing a rent of GBP 18.1 million per annum. Overall, our lettings were transacted 7.5% above ERV. In addition to completing the office lettings at our wonderful new Brunel Building, Paddington, we made the first pre-letting at Soho Place W1 to G-Research, where we achieved a rent of GBP 95 per square foot. In the second half, we have let a further 78,000 square feet to date at a rent of GBP 5.1 million per annum. Over 50% by area is accounted for by BCG exercising their option to take another floor of 80 Charlotte Street at GBP 82.50 per square foot, and we also completed the letting of the remaining refurbished space at the Johnson Building EC1.

The graph on the right highlights that the market remains strong for pre-lets in what is still a supply-constrained market for quality product. And we're encouraged that our GBP 23.2 million of new income year-to-date compares to GBP 26.8 million of lettings for the whole of 2018, confirming the ongoing appeal for our product and our brand.

Slide 26. This delves a little deeper into the occupiers who have chosen Brunel as their new home, and what is driving occupier demand. Interesting points to note are one, the range of industries, most of whom have signed leases for a minimum of 12 years at record rents for the area.

Secondly, as the map shows, they've been attracted from a range of London locations. Some such as Sony Pictures have come from the heart of the West End. We've talked for some time about our market being a product-driven market, and we believe this demonstrates the fact that today, it's quality of space and amenity for staff that is more important than the business address. In large part, you'll see it's also expansion-driven. With the exception of Sony who replicated their previous space stake, all the other occupiers are growing so that on average, the occupiers are increasing their occupation by 42%. And finally, you'll see there are some new friends and some old faces. We always enjoy welcoming new names to our portfolio but equally, working with existing tenants such as the Premier League to satisfy their growing requirements is high on our list to do.

Slide 27. We've previously discussed our flexible office strategy. Today, I'm going to focus on one aspect of it, which is our plug-and-play space. We've adopted this approach on a number of our smaller units as we realize we need to remove barriers to entry for many smaller businesses. This means pre-furnished space, short length lease documents fitted out and ready to go, but not a fully serviced product. Businesses still like their own front door, and they want to stamp their identity on their space. Although only modest in number at this stage, currently only 9 units totaling circa 20,000 square feet, we've certainly been encouraged by the uptake in these units. There is the potential to grow this concept across our core villages as one of a number of Derwent leasing options as we continue to respond to our occupiers' requirements, ranging from 15-year leases at Soho Place to 1-year leases at Morelands.

Turning to Slide 28. Asset management remains a key driver of growth for our business. During the period, our asset management team dealt with 59 lease events, over just under 500,000 square feet of the portfolio. This covered GBP 20 million worth of income, nearly 7% of our ERV and produced an increase of over 20% over the passing rent, broadly in line with ERV. And our renewal activity was particularly strong and is one reason why our vacancy rate remains low at only 1.6%.

A major piece of asset management during the period was a milestone achieved advancing our scheme at 19-35 Baker Street on Slide 29, where we have a 55% interest in a joint venture with a freehold in the Portman Estate. The existing buildings total 143,000 square feet, and we won a planning consent for a new 293,000 square foot mixed-use development. Here, we have agreed an option, which allows us to regear the head lease with the Portman Estate. This would involve a demerger of the JV. At which point, Derwent would be granted a new 129-year lease on the commercial element and a 154-year lease on the residential. There will be an initial gearing of 2.5%, which will rise to 6% on the 29th anniversary of the agreement. And this regear facilitates what will be a very exciting future West end redevelopment.

We continue to look for opportunities that match our acquisition criteria. Our sole acquisition in the first half was the strategic purchase of 3-5 Rathbone Place on Slide 30. As you can see from the plan, the building sits in a cluster of our existing holdings. In the short to medium term, there are asset management plays looking to drive the income of the low rents. Longer term, and as with our site assembly at Soho Place just to the south, this is an area that will benefit from Crossrail and potentially could benefit from Crossrail 2 in due course.

We continue with our strategy of recycling assets, Slide 31. In the first half, we sold Premier House Victoria for GBP 40 million. This showed a 10% surplus to book value, and was a price that we believe reflected most of the gains that we would have expected had we have carried out the refurbishment. We also sold 9 Prescot Street Whitechapel, which was held in the joint venture, and therefore, had limited impact on our business.

You would have seen that today, we announced the sale of the Buckley Building Clerkenwell for GBP 103 million. The net proceeds reflects a healthy 4.8% surplus to December book value. Having carried out comprehensive refurbishment of the block in 2013, our recent activity is focused on asset management, both rent reviews and regears, capturing just under GBP 70 per square foot. This means that there's unlikely to be any significant active management upside for a number of years. This disposal fits our strategy of realizing mature assets to reinvest into our higher-yielding development program, which feels a good point to hand you over to Simon.

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Simon P. Silver, Derwent London Plc - Property Director & Executive Director [5]

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Thank you, David, and good morning, everyone. Project update on Slide 33. Having completed exciting developments like the White Collar Factory and more recently, the Brunel Building, it might be difficult to believe that the best is still to come. However, with major current schemes at both 80 Charlotte Street and our Soho Place project on the corner of Oxford Street and Charing Cross Road, I'm confident that these latest developments will prove as good, if not better, than any of their predecessors. Apart from their high level of quality design and architecture, they will still occupy great locations within the West End of London.

At Derwent, we also have a strong future development pipeline. Planning permissions have been secured for our large Baker Street site as well as Holden House, which is on the corner of Oxford Street and Rathbone Place, giving us plenty of firepower for the future.

The Brunel building. The Brunel building is complete and for those who have not yet visited, I would urge you come and have a look around. It is the only building in Paddington to have its main entrance fronting the canal, which is further complemented by joint automatic sliding doors that open up our large reception area to the waterway when the weather permits. Our successful letting campaign has seen the building fully let prior to practical completion, producing a net income of GBP 17.2 million per annum, with a profit on cost of 55%.

Slide 35. This slide shows the extensive communal roof terrace, with panoramic views over Central London, and where we are now building a small pavilion which will offer a food and beverage facility available to all the tenants in the building. There will also be a new 5,500 square foot restaurant on ground floor level adjacent to our main reception.

80 Charlotte. This scheme will provide our 2 new tenants, Arup and Boston Consulting Group, with unrivaled office facilities in Fitzrovia. Apart from generous floor plates with above-average volumes of 2.9 meters, there were 3 internal atriums that will flood all the office space with additional natural light. There will also be multiple roof terracing to the 3 upper floors as well as an extensive communal roof terrace offering food and beverage facilities. This slide shows the main facade on the corner of Howland Street and Charlotte Street, finished in the beautifully smooth form of shuttered concrete. This will eventually be complemented with a variety of pieces and brick facades on Whitfield Street and Chitty Street, which will assist in visually breaking down the mass of the overall development, so that it blends in with the character of Fitzrovia.

The ground floor entrance is approached through a generous and unique court end still canopy, inspired by the American artist, Donald Judd. The reception area will house a bar facility for beverages and light meals and benefit from a large atrium, with beautiful Dinesen timber flooring. The offices, which are now 92% pre-let, produced GBP 24.3 million per annum. Completion is due in the first half of 2020.

Slide 40, One Soho Place. I don't believe Derwent have ever owned a more dynamic site in our 35-year history. Here, the new shop and office building should prove something special. Apart from its generous volumes, the main building, to be known as One Soho Place, will be approached through a vibrant 7-meter tall entrance hall, finished in a bush hammered concrete, and with a bandsaw and timber flooring. There will be a new piece of public realm immediately outside the main entrance that leads into Soho Square, and the opposite will be the West End's first new built theater in over 40 years. The development sits above the new Crossrail station on the corner of Tottenham Court Road and Oxford Street and where we will have 5 large retail units, totaling 36,000 square feet. It doesn't come much better than this.

Not surprisingly, therefore, we have already let 102,000 square feet out of the total of GBP 209,000 and currently have strong interest in all the remaining office floors. Construction is now well underway, with completion scheduled in the first half of 2022. The total ERV is in the order of GBP 23 million per annum.

The Featherstone Building. This project is now on-site, with the demolition of the former building nearly complete. Sitting adjacent to the White Collar Factory, this new 125,000 square foot project will take its inspiration from the warehouses of the 19th century that punctuated this location. To be constructed in a variety of beautiful brick finishes, the building will, in true Derwent fashion, benefit from extremely generous proportions. Office floors with ceiling heights of 3.2 meters will be well above the industry average. The entrance hall is trademark Derwent, with great volume and finishes. We're confident that the Featherstone Building will continue where the success of the White Collar Factory left off. The ERV is GBP 8 million per annum, with completion in the first half of 2022.

Slide 44, Baker Street. This proposed development, which has already won planning permission, comprises a virtual island site on Baker Street, George Street, Gloucester Place and Blandford Street, and offers a wonderful opportunity of place making. As well as constructing a new shop and office building of 206,000 square feet, the development will also include 15 retail units on Baker Street and George Street, combined with 51 residential apartments above. There will also be a new public realm in the center of the site, which will have public access from both Gloucester Place and Baker Street and provide an attractive landscape courtyard with access to the retail and restaurant units.

The main office building will have a beautiful roach bed Portland stand facade, together with many exciting features, all designed by Hopkins Architects. We are hopeful that this exciting new development will commence by September 2021.

Looking to the future. As mentioned earlier, we still have plenty of potential elsewhere within our portfolio. This slide shows the scale of different opportunities we are studying, which covers 1.4 million square feet, either under appraisal or for future consideration and which should keep the company busy for many years ahead.

Thank you. And I'll now pass you back to Paul.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [6]

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Thank you, Simon. We're encouraged by the levels of occupational demand we see for our product, particularly the strong interest in the office space at Soho Place. We believe that we're very well placed. We have an excellent established team, which I think, paired with a unique culture. We continue to create exceptional buildings with the aim of being the landlord of choice. Our great strengths include innovation, flexibility, positive relationships with all our stakeholders. Our investment transactions are down and whilst we do not need to rush into further capital recycling activity, we continue to look out for attractive opportunities to match our criteria. We are in the position to act quickly. Our strong balance sheet leaves us well positioned to deliver on the many opportunities we have in the existing portfolio as well as add to these through potential acquisitions.

We're now happy to take some questions. Now you've all got a microphone, but there's a little trick to the microphone. You have to press the button, but hold the button. Because if you just press the button once, you'll be cut out. So please, please do that. Thank you very much.

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Questions and Answers

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [1]

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Paul May from Barclays. Just a couple of questions on the lettings, and then I've got one on the reversion potential. I think you highlighted in the statement that the larger proportion of straight lining in your accounts is a result of rent freeze for trade-offs for longer leases. Just wondered if there's a change in the market? Or just a change in your approach? Or just a change in the fact you've got more developments that are coming through in the income statement?

Second one is, you mentioned the asset management letting is now coming in below ERV. I appreciate this is obviously a small miss relative to ERV. And I just recall that previously, you used to beat ERV quite materially on this number and wondered, again, if that's a change in the market or just a factor of the averages?

And then a final one on Slide 22. Again, I might be reading it incorrectly, but it looks like your core income and developments are now considered to be over-rented, is that the position? Or is it just a factor, again, of the averaging of the numbers?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [2]

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We're going to answer questions in different orders. First of all, the asset managers have been incredibly busy. And I think what's been really positive is that our tenant retention has been extremely high. And I think the miss is point-something of a percent. So there'll be very busy lease renewals, with a very strong rent reviews. Likewise, we've been doing a lot of regears.

So whilst focusing on the development program and building that out, our team has been very busy, making sure that our existing customers are happy over margins to help build out leases. Not really much of a worry to us to us at all.

You've got 2 other questions, I believe. One of which was to do with our developments?

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [3]

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Yes. So it's on the rent freeze, and you're highlighting the straight lining.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [4]

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Well, I think regarding the rent freeze, I think some of us will think that we give too much. We don't think we give too much. I think we're quite lean on our rent-free periods. But getting decent leases, 15 years, that also reflects -- if someone's going to take a pre-let 2.5 years ahead of development completion, they're going to want something. So I'm very satisfied that our rent-free periods are acceptable.

We haven't seen any pushing out of rent-free periods. We haven't been extending them at all. And I think the other point, of course, is our pre-lettings have been on big substantial spaces. And I think when intending just committing to 112,000 square foot, you will want to do it in a rent-free period.

And I think last point on that is our lettings. They are 7.5% ahead of our ERV. They're really good strong rents. If you look at the record rents we're creating, the Brunel Building, the great rent we created at Soho Place, I think we're satisfied with little bit of rent-free period. And I don't believe that we've got any over-rationalization. Is that something that you can answer, Nigel?

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Nigel Quentin George, Derwent London Plc - Property Director & Executive Director [5]

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No, the portfolio, there is reversion in the portfolio. I mean there's a chart in the back that shows the reversion. If you look at page -- it breaks down to a bit more detail, if I can find it. Bear with me, Slide 68. This sets out, basically, the reversion.

You can see in '20, whenever it was '23-plus, there is that negative there. Now that negative there is really just re-basing the fixed increases we have under contracted. So for example, if we have 2% compound interest, that comes in through the income, but at some -- but that will be below currently of the ultimate figure. So that's just reversing that. But in terms if you actually look at the ERV today against rent parsing, there isn't I think -- I can't think of anything that's got a negative reversion.

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Paul J. May, Barclays Bank PLC, Research Division - Analyst [6]

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No, I suppose it was just highlighting on Slide 22, the core income topped up rent square foot being ahead of ERV. And also on your on-site development, your topped up rent is ahead of the ERV per square foot. Just wondered, is that...

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Nigel Quentin George, Derwent London Plc - Property Director & Executive Director [7]

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Absolutely, because the topped-up rent also includes those uplifts going into the future. Whereas the ERV, of course, is to date, assumed to be flat into the future.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [8]

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Yes, clearly. There's no growth in the ERV. It's the valuation to date of the ERV.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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Kieran Lee from Berenberg. Just a quick one for me. We've seen about sort of GBP 200 million of asset disposals year-to-date. How should we think about the future levels of portfolio churn? And are we many -- sort of should we see those increase, stay pretty constant in the second half? Or are we basically going to match up CapEx obligations with disposals?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [10]

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Well, we think that was the aspiration. I mean, obviously, we've got low balance -- a strong balance sheet, low LTV. I don't think -- where we see an asset, we think, we have enough with like the Buckley Building, and then I think we've said it. But I think our view is, if we could acquire, we would do. And we'd certainly be very happy to sort of invest into the development pipeline. So I don't see any particular changes structurally. If we felt that, that asset was beyond it, we could do anything more with it, then we might look at it. But no change of strategy there.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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And sir, just one more. Nigel, you touched on the sort of some of the older, less new buildings being harder to lease and taking a bit longer. Could you quantify sort of the extra time taken and have valuers sort of reflected any of that in?

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Nigel Quentin George, Derwent London Plc - Property Director & Executive Director [12]

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I think if you go back 3 or 4 years and look at the assumptions, the valuers have to make an assumption on every lease expiry. Are they going to stay? Are they going to go? What's the rent? And if you look at the ratio then compared to now, they're sort of a bit more cautious.

So maybe 3 or 4 years ago, that's a 75, they're going to stay. Now they may be saying 65, they're going to say. So they're being a bit more cautious on their assumptions. And therefore, if they assume they're going to go, they build in an extra board and a little bit of CapEx.

Generally speaking, we've -- there's again, there's a chart in the back, we've actually preserved. We've regeared or renewed on more than their assumptions have pointed towards. So it's just a fine nuance, I'm going to say. It's not a complete sea change.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [13]

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Osmaan Malik from UBS. Just a quick one on this push into more flexible office. I know it's something you've been doing for a bit of time already. But just how far could you see that go? And is it in some respect due to competition that you're seeing from the WeWorks and the other flexible office providers? Could you just talk a little bit more about the competitive threat from those?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [14]

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I think, David, could you answer that question?

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David G. Silverman, Derwent London Plc - Property Director & Executive Director [15]

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Yes, sure. Thanks, Paul. So as you said, I mean, we have talked about it before. It's something which we very much feel like we've done for a long time. Flexibility is very much part of what we do. As far as I mentioned that it's fairly modest at this stage, it's 9 units, 20,000 square-foot. We're very pleased with the take-up and therefore, we are keen to grow it across our villages.

But I guess we see it as one of a number of sort of leasing options that we've got. It's very much just responding to what our customers are looking for. And I think the point that I made is we see it very much as sort of reducing barriers to entry. And it's about ease, and it's about going and looking at the space on a Monday and being in it on a Wednesday. And it's hence, the sort of plug-and-play. And it's very much part of what people are looking for today, but it sits very firmly in the sort of -- in the context of people happy to take much longer lease as well as we see at Soho Place.

So it's something which I think we will grow. We will grow it incrementally as and when we can. And as I say, it sort of fits as part of our package.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [16]

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And just on the competitive threat side, do I just take that as you remain relaxed?

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David G. Silverman, Derwent London Plc - Property Director & Executive Director [17]

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Yes. I think what we've seen, the interesting thing is, we've seen that people -- I mean this tends to be smaller businesses. It tends to be smaller units. So I would say, up to about 2,500 square feet. But what we've seen is that people are still looking for their own front doors. And they're looking for space that they can stamp their identity on, their brand, which is very different to some of the sort of very highly branded service office things. So it's very different. It's very much about our portfolio, our tenants. So no, it's not a threat.

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Miranda Sarah Cockburn, Panmure Gordon (UK) Limited, Research Division - Analyst [18]

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Miranda Cockburn from Panmure. Just a question on the Buckley Building. Can you give us an indication of what kind of levels of interest you had at that, just to get a feel for where the market is at the moment, please?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [19]

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I mean we had very good levels of interest. It is -- I think the -- obviously, the levels are down as far as turnover generally. But actually, it's sort of -- it conceals a dynamic that for quality product, there is good demand. There is strengthened demand, and there is a lot of money as it so happens. Well, there's been a lot of U.K. buyers but a lot of global money is still sitting there and looking to do something. So it was good demand.

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Nigel Quentin George, Derwent London Plc - Property Director & Executive Director [20]

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And the other point on that, it was committed very quickly. I think that we were very focused on acquiring it, so it's good.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [21]

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It's Rob Virdee from Green Street Advisors. So a question on the investment market second-hand space. I can see the occupied market is still pretty weak for second-hand space. Is that coming through to the investment market? You talked about some good value-add opportunities out there. Can you just talk about pricing there?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [22]

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I think, first they play to our strengths because I think one of the great things we've been able to do over many years is adapt buildings and refresh them and make them good. So I wouldn't necessarily agree it's weak.

I think where it might be weak is where it's not necessarily landlord-controlled or it's not controlled by a landlord who is able to invest or refresh it. So I think it's still pretty healthy demand. If you look at our vacancy rate, which is, I think, about 1.6% in terms of renewing the lease and take-up for our smaller suites or refurbished space, it's still pretty strong.

I think where the weakness is in the second-hand space and I think there's a discussion behind about what secondhand means, is that space that is not well presented, doesn't necessarily offer the amenities that David's been talking about and gives modern terms as a sort of requirements they need.

But we're still seeing healthy demand for Derwent product and for us, all the buildings we were able to refresh and get good new lettings.

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Rubinder Singh Virdee, Green Street Advisors, LLC, Research Division - Analyst of Research [23]

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Sure. That wasn't a Derwent-specific comment. That's more the general London office market. So I'm just trying to understand, is that transpiring into the investment market now? You talk about some...

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [24]

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Do you want do this one, answer David?

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David G. Silverman, Derwent London Plc - Property Director & Executive Director [25]

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No, I think what the investment market is still seeing is that if there is a perceived opportunity to reposition space and to get into it quickly, then it's actually very strong. And actually, I would highlight our Premier House sale. So we really saw pretty much all of the uplifts we would have expected had we have actually refurbished it because that was in the price that the buyer paid us.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [26]

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I think it's reflective of the strong tenant demand for buildings. That's where people see the upside.

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Timothy Leckie, JP Morgan Chase & Co, Research Division - Head of European Property [27]

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Tim Leckie, JPMorgan. Just a question on Brexit, but perhaps, one you can answer.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [28]

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I hope.

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Timothy Leckie, JP Morgan Chase & Co, Research Division - Head of European Property [29]

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Which will be an achievement in itself. The GBP 400 million of future CapEx on the 3 on-site projects. Can you talk to us about any contingency plans about if there's border blocks, how much of the materials are coming from outside U.K.? How your builders are finding what plans, what discussions you're having with them to secure delivery of key materials on time, should there be a hard Brexit and blocks at the border? And then on the future pipeline, how are you managing sterling risk? If there is hard Brexit, and we see continued weakness in the sterling, how can you mitigate that for the future projects?

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [30]

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Very good question. I'm not sure I can resolve Brexit, but I think -- very well, I think it's a question for either them or Richard Baldwin. Because obviously, we have been looking at what we'd do. So Richard, do you want to just answer Tim's question?

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Richard Baldwin, Derwent London Plc - Head of Development [31]

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Yes, on all of our items -- on all of our projects, we break the Brexit risk down into the 3 components of currency, labor and materials. If for instance, you just take materials, which is probably the heightened risk of a potential hard Brexit at the end of October, we have arrangements in place with all of our contractors that we effectively have staging warehouses for components and materials to be stored upfront.

Typically, on a construction project, everything is just-in-time delivery. So we've moved to a position of actually having 6 months' worth of supply of the major materials and components that get delivered from Europe. It should also be noted, I know there's lots scary stories about Dover. The vast majority of construction components of materials as we come through Tilbury and Phoenix.

So I could go on with a lot of detail about how the contractors are dealing with it, but we contractually cover the position. But we also then draw the curtain back to make sure that they are actually mitigating beyond that contractual risk that we've laid off.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [32]

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The currency risk...

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Richard Baldwin, Derwent London Plc - Head of Development [33]

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Currency risk, we always identify the amount of euro content and typically, it's the euro content on construction projects in the U.K. We then seek to get the key shell contractors to hedge that with their banks. We pay a small arrangement fee. But we then follow that hedging all the way back to the key shell contractors' bank. And typically, it's accounting subcontractors working out of Germany or Austria.

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Paul Malcolm Williams, Derwent London Plc - CEO & Director [34]

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Any more questions? No? Well, we're all around if anyone wants to ask us later. Thank you very much, indeed, for attending. I hope you find it useful and helpful. Have a good day.