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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Derwent London Plc | LSE:DLN | London | Ordinary Share | GB0002652740 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 38.00 | 1.91% | 2,030.00 | 2,028.00 | 2,036.00 | 2,036.00 | 2,010.00 | 2,036.00 | 7,971 | 10:04:26 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Investment Trust | 190.5M | -476.4M | -4.2426 | -4.78 | 2.28B |
From Apr 2019 to Apr 2024
TIDMDLN
RNS Number : 5845N
Derwent London PLC
10 August 2017
10 August 2017
Derwent London plc ("Derwent London" / "the Group")
INTERIM RESULTS FOR THE HALF YEARED 30 JUNE 2017
EXCELLENT OPERATIONAL PROGRESS AT DERWENT LONDON
Financial highlights
-- EPRA(1) net asset value per share increased 0.9% to 3,582p from 3,551p at 31 December 2016
-- A total return of 3.4% including the 2016 final and special dividends totalling 90.5p per share
-- Net rental income increased 9.2% to GBP79.3m from GBP72.6m in H1 2016 -- EPRA earnings rose 22.5% to GBP50.6m from GBP41.3m -- EPRA earnings per share increased 22.3% to 45.42p per share from 37.13p -- Interim dividend per share raised 25% to 17.33p
First half activity
-- Record six months of lettings totalling GBP23.4m, on average 0.5% above December 2016 ERV -- Investment property disposals totalled GBP327m in H1, 6.0% above December 2016 values -- Agreed second half disposals takes the total to GBP492m, 10% above December 2016 values -- Capital expenditure in H1 of GBP87.2m including capitalised interest of GBP4.7m -- Capital expenditure to complete programme of projects on site GBP324m
-- Potential surplus of GBP170m still to come on successful execution of two projects for delivery 2019
-- Continuing good interest from potential occupiers
Portfolio update
-- Portfolio valued at GBP4.8bn; an underlying valuation increase of 1.9% in H1 -- Underlying valuation uplift on developments was 9.5% in the half year
-- Total property return in H1 was 3.6% which was ahead of the IPD Central London Offices Quarterly Index of 3.3%
-- True equivalent yield was 4.79%: tightening by 4bp since December 2016 -- The portfolio's EPRA vacancy rate fell from 2.6% to 1.9% in the six months to 30 June 2017 -- Estimated rental values (ERV) on an EPRA basis increased by 1.1% in H1 2017 -- Guidance for 2017 ERV raised to a range of 2% to -3% from 0% to -5%
Advancing the development of Soho Place W1
-- Progressing detailed design and engaging with potential contractors at Soho Place W1 (previously 1 Oxford Street) for expected start in H2 2018
-- Significant 285,000 sq ft mixed use scheme over Tottenham Court Road Elizabeth Line station -- Estimated additional capital expenditure of c.GBP260m
Robust financial position
-- Interest cover 4.3x and loan-to-value (LTV) ratio 14.9% -- Net debt down to GBP733.7m at 30 June 2017 from GBP904.8m at 31 December 2016 -- Cash and undrawn facilities up to GBP446m on 30 June 2017 -- Expect to raise 2017 final dividend by 10%
(1) Explanations of how EPRA figures are derived from IFRS are shown in note 23
Robbie Rayne, Chairman, commented:
"Derwent London's strong recurring earnings growth underpins today's 25% increase in the interim dividend. In addition, with almost GBP500m of disposals or forward sales above book values already this year, the Group has further strengthened its financial position."
John Burns, Chief Executive Officer, commented:
"We have achieved a record GBP23.4m of new lettings in the first half. Following this success, we have marginally raised market guidance for both rents and yields in 2017.
Despite continuing political uncertainty, we have made strong progress in capturing reversion and de-risking the pipeline which highlights the appeal of our product. This has given us the confidence to advance with our next major development at Soho Place W1, above Tottenham Court Road Elizabeth Line station."
Webcast and conference call
There will be a live webcast together with a conference call for investors and analysts at 09:00 BST today. The audio webcast can be accessed via www.derwentlondon.com.
To participate in the call, please dial the following number: +44 (0)20 3059 8125
A recording of the conference call will also be made available following the conclusion of the call on www.derwentlondon.com.
For further information, please contact:
Hot Features
Premium
Derwent London John Burns, Chief Executive
Tel: +44 (0)20 7659 3000 Officer
Damian Wisniewski, Finance
Director
Quentin Freeman, Head
of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Tim Danaher
Emily Trapnell
OVERVIEW AND OUTLOOK
Derwent London continues to take advantage of the many opportunities within its portfolio to grow income and, with our particular brand of space seeing strong demand, we have set a new record for half year lettings. We have also extended leases on a number of major holdings and have seen good rent review progress too. This is an endorsement both of our product and the skills of our teams. The recently completed White Collar Factory EC1 is a clear example of where we believe the Group sets the pace for new office design and execution.
The general political and economic background remains uncertain with domestic politics dominating the last six months. The recent General Election led to further changes in the political landscape, and all this while the UK is negotiating its exit from the EU. London has also been directly impacted by a number of tragic incidents, which have heightened awareness of security and housing issues.
From a commercial perspective businesses continue to believe that London will remain a major and open European and global city. This confidence can be seen with our letting and sales activity this year. There have been major additional commitments from our existing occupiers: Arup and Expedia, as well as the decision of Fotografiska to launch its first gallery outside Stockholm at The White Chapel Building E1 announced today. These are significant international groups choosing to invest in London. We recently announced the forward sale of The Copyright Building W1 to Union Investment for GBP165m, which has taken our property disposals in the year to date to over GBP490m, over 9% of December's portfolio, all above book value.
Our leasing progress and disposals have further de-risked a significant part of our development programme thereby increasing our capacity for new opportunities. The contracted growth in our rental income has also been boosted by a number of asset management initiatives, notably at Angel Building EC1 and the Tea Building E1 that have crystallised reversion and extended income.
First half EPRA earnings per share were up 22.3% to 45.42p. As guided last year, the strong recurring earnings growth has enabled us to increase the interim dividend by 25.0% to 17.33p per share. It will be paid as a PID on 20 October 2017 to shareholders on the register as at 15 September 2017. This follows the 25% increase in last year's final dividend and the 52.0p per share special dividend paid in June 2017. We expect that the 2017 final dividend will increase by 10%.
Despite the dividend payments and the general market uncertainty in the first half of 2017, EPRA NAV rose by 0.9% to 3,582p per share helped by a strong performance from our continuing development activity.
We still have significant further upside to capture from our projects due to be delivered in 2019. Successful execution of these schemes is expected to add GBP40.6m pa to rents and we are seeing good interest from potential occupiers. Completion will require some GBP279m of capital expenditure, which is covered by our cash and undrawn facilities of GBP446m, and this will be supplemented by the proceeds from the disposal of The Copyright Building W1 in the second half.
Our letting achievements and strong finances mean that we have decided to press ahead with the detailed design and early procurement at Soho Place W1. This site is located above the Tottenham Court Road Elizabeth Line station, which is due to open in less than 18 months. In addition, we continue to enhance our portfolio's potential and have recently submitted planning applications for two further West End projects.
In April we announced the introduction of our new long-term science-based carbon reduction targets, which align the Group with the outcomes of the COP21 global agreement on climate change, and ensure we are taking a proactive approach to reducing our carbon footprint. Our community fund continues to support numerous grass roots projects and initiatives. In May we announced the latest round of funding which supported 13 projects across our Fitzrovia and Tech Belt villages.
Following the retirement of Stuart Corbyn after our Annual General Meeting in May, the Nominations Committee commenced the process to recruit his replacement. We have initiated a search, a shortlist of candidates has been identified and it is intended to appoint the successful applicant by the year end. Tim Kite, who has been with the Group for 28 years and has been Company Secretary since 1995, will be retiring in October 2017 and we wish to thank him very much for his valuable contribution. We look forward to welcoming his successor, David Lawler, who brings with him considerable experience in a similar role.
We have slightly raised our ERV estimates for 2017 to +2% to -3%, and are now of the view that yields are likely to remain firm this year. Against this background we will continue to focus on extracting value from the portfolio and our strong project pipeline. The strength of our balance sheet also puts the Group in a good position to make future acquisitions which will further enhance the portfolio.
OUR CENTRAL LONDON OFFICE MARKET
Occupier demand and lettings remain the drivers of our business. These continue to hold up well against the background of the EU referendum result one year ago and the imposition of new business rates in April this year. Absolute levels of central London office take-up at 5.8m sq ft in the first six months, as measured by CBRE, were 5% above last year's levels, but below the exceptional levels recorded in 2014 and 2015. We have continued to see good demand for our product but rental growth, as predicted, has slowed with lettings taking longer to conclude and incentives increasing.
Encouragingly, the amount of space under offer has steadily risen this year to 3.5m sq ft of which 42% is in the West End and 39% in the City. However this demand is against the background of increased supply, which has seen central London vacancy rates rise from 4.2% to 4.6% in H1. This compares to the ten-year average of 4.4% and the fifteen-year average of 5.4%.
The current year is expected to represent a short-term peak of supply with delivery of 6.2m sq ft of which 43% has already completed. In the following two years annual completions are expected to fall to 4.7m sq ft and 3.6m sq ft, respectively, based on space under construction at 30 June 2017. Of this future supply, 48% is pre-let, which leaves 6.2m sq ft or under 3% of central London's total office stock available. The West End, where our development programme is located, has a proportionately much smaller share of supply. Its current estimated speculative space under construction is 0.9m sq ft or c.1% of local stock, which compares to the current West End vacancy rate of 3.9%. These figures could change with new starts, especially for 2019, and there remains the potential for further substantial amounts of space to be delivered in 2020 and 2021, but as yet few of these schemes are committed.
The investment market has proved very robust with GBP8.2bn of deals, which is a first half level exceeded only once since 2007. Overseas buyers have dominated with domestic investors having been net sellers now for two years. There remains significant interest in central London with CBRE monitoring c.GBP40bn of global equity targeting London offices of which over half derives from Asia. Thus demand continues to significantly exceed the amount of stock on the market and has helped create substantial liquidity.
VALUATION
Against the backdrop of a robust investment market and significant Group activity, our portfolio was valued at GBP4.84bn at 30 June 2017. This produced a surplus of GBP85.1m, or GBP67.7m after accounting adjustments (see note 11). The underlying capital growth on the portfolio was 1.9% reversing the 1.7% fall witnessed in H2 2016. This outperformed the 1.7% increase in the IPD Quarterly Index for Central London Offices but was below the wider IPD UK All Property Index which was up 2.1%. Our first half total property return was 3.6% which compares to the IPD Central London offices total return of 3.3% and 4.6% for All UK Property.
By location, our central London properties, which represent 98% of the portfolio, increased in value by 1.9% with the City Borders up 2.4% and the West End up 1.6%. The balance of the portfolio comprising our non-core Scottish holdings was up 0.5%.
Our rental values, on an EPRA basis, rose by 1.1%, similar to the 1.0% growth seen in the second half of last year. Again the City Borders, up 1.7%, saw stronger momentum than the West End, up 0.7%.
The portfolio's initial yield on an EPRA basis was 3.2% which, after contractual uplifts and allowing for the expiry of rent free and half rent periods, rises to 4.4% on a 'topped-up' basis. In December the comparable numbers were 3.4% and 4.1% respectively. The true equivalent yield came in 4bp in the first half to 4.79%, halting last year's trend when the equivalent yield rose 31bp.
In December 2016 we had four properties under development and these were revalued at GBP785m in June 2017, delivering a strong surplus of 9.5%. This result was helped by our letting activity and the forward disposal of The Copyright Building W1. Excluding the impact of developments, our underlying investment portfolio rose 0.5% in the period. Following the completion of the White Collar Factory EC1 we have three developments under construction with a June 2017 value of GBP478m and an ERV of GBP47.9m. These require further capital expenditure of GBP286m to complete. There is more detail on our development properties below.
We continued to lock in reversion so that our contracted cash rent at 30 June was GBP145.8m. This was an increase of 3.1% over six months after adjusting for the impact of disposals. The portfolio's ERV was GBP275.9m giving a cash reversion of GBP130.1m, of which 53.6% is contracted.
Composition of portfolio ERV 30 June 2017
Contracted Potential Rent
GBPm GBPm GBPm
----------------------------------- ----------- ---------- ------
Contracted net rental
income at 30 June 2017 145.8
Contractual rental uplifts 50.6
Pre-let element of refurbishments 2.9
Pre-let element of on-site
developments 16.2 69.7
Topped-up rental income
and pre-lets 215.5
Vacant space including
refurbishments 9.2
On-site developments
not pre-let 31.7
Rent reviews and lease
expiries 19.5 60.4
Estimated rental value 275.9
Of this reversion, GBP50.6m is contractual through rent free or half rent periods and fixed uplifts which are incorporated in the income statement using the straight line basis adopted under IFRS accounting. This explains the difference between the annualised accounting rent of GBP170.0m and our contracted cash rent of GBP145.8m above. There is also a further GBP19.1m of pre-let income which should contribute to rents after the projects are completed. Together these take our 'topped-up' rent including pre-lets to GBP215.5m. We expect to complete the disposal of The Copyright Building in the second half, which will reduce the above ERV by GBP7.4m, of which GBP6.5m is pre-let.
PORTFOLIO MANAGEMENT
We have had an exceptional first six months of letting activity which totalled 439,200 sq ft producing rents of GBP23.4m pa. This is 40% ahead of the same period last year, which was our previous record six month period. It is also 38%, or GBP6.4m, higher than we reported in May this year. On average our lettings were 0.5% above December 2016 ERV, or 1.9% ahead excluding the major pre-let to Arup.
Principal lettings H1 2017
Total Min / fixed
annual uplift at Lease Lease Rent free
Area Rent rent first review term break equivalent
Property Tenant sq ft GBP psf GBPm GBP psf Years Year Months
------------------ -------------- -------- --------- -------- -------------- ------- ------- -----------------
Q1
80 Charlotte
Street W1 Arup 133,600 72.90 9.7(1) 81.50 20 - 33
White Collar
Factory EC1 Adobe 14,900 67.50 1.0 74.50 11.5 - 22
Angel Building
EC1 Expedia 12,500 62.50 0.8 - 13.3 - 18
Greencoat &
Gordon House SW1 VCCP 12,800 55.00 0.7 - 8.5 - 13
20 Farringdon 9, plus 9
Road EC1 Accenture 11,500 55.00 0.6 - 10 5 if no break
------------------ -------------- -------- --------- -------- -------------- ------- ------- -----------------
Q2
The White Chapel
Building E1
Phase 2 - lower 30, plus 6
ground floors Fotografiska 89,000 27.00 2.4 27.70 15 12 if no break
White Collar 18, plus 5
Factory EC1 Box.com 28,500 75.00 2.1 - 15 10 if no break
The White Chapel
Building E1 Wilmington 27,000 52.00 1.4 - 10 - 20
The White Chapel 11, plus 8
Building E1 ComeOn! 12,700 50.00 0.6 - 10 5 if no break
White Collar 9.5, plus 5
Factory EC1(2) Red Badger 7,700 62.50 0.5 65.60 10 5 if no break
78 Whitfield
Street W1 Made Thought 4,800 63.50 0.3 - 10 4.5 8
78 Whitfield
Street W1 Yoyo Wallet 4,800 63.00 0.3 - 4.5 - 8
78 Chamber Street
E1(3) NetBooster 6,700 40.00 0.3 - 10 5 10
------------------ -------------- -------- --------- -------- -------------- ------- ------- -----------------
(1) Annual increases of 2.25% for the first 15 years (2) Low rise buildings (3) Joint venture - Derwent London share
Our developments and refurbishments have seen the bulk of letting activity demonstrating the attractiveness of our product. We announced our largest single transaction, the pre-letting of 133,600 sq ft to Arup at 80 Charlotte Street W1, earlier in the year.
Phase 1 of The White Chapel Building E1 is now fully let, and today we announce the pre-letting of Phase 2 to Fotografiska, which has taken the lower ground floors as Fotografiska - The London Museum of Photography. We are very pleased to house this exciting cultural and leisure hub which will add further vibrancy to the building and enhance the Whitechapel experience.
We have also captured growth through active asset management, increasing our annual rents by GBP5.9m. In February we reported the major regearing of leases at Angel Building EC1 which saw Expedia increase and extend their commitment until 2030. In the last six months we have also renewed the lease with the advertising agency, Mother, at Tea Building E1 extending its term by 10 years to 2028. Mother is an important anchor to the property, occupying 49,650 sq ft, and has helped create the building's successful identity. We are very pleased that this association is set to continue for at least another decade. In addition we renewed the lease on 19-35 Baker Street W1 at a relatively modest rental increase, but with a mutual break from 2020 to enable us to gain access to the site should we wish to pursue a scheme. In this latter case we opted for flexibility rather than maximising the rent on the space.
Asset management H1 2017
Area Previous New rent Change Income
sq ft rent GBPm v
GBPm pa Dec
pa 16 ERV
---------------- -------- --------- --------- ------- ----------
Rent reviews 60,100 2.1 3.1 +45.5% +3.5%
---------------- -------- --------- --------- ------- ----------
Lease renewals 124,300 5.2 6.3 +21.1% (4.7)%(1)
---------------- -------- --------- --------- ------- ----------
Lease regears 254,400 11.5 15.3 +33.3% +8.6%
---------------- -------- --------- --------- ------- ----------
Total 438,800 18.8 24.7 +31.3% +4.2%
---------------- -------- --------- --------- ------- ----------
(1) Includes 19-35 Baker Street (see text)
At 30 June 2017 the EPRA vacancy rate was 1.9%, down from 2.6% in December despite the completion of White Collar Factory.
PROJECTS
We have recently completed White Collar Factory EC1, which we believe to be one of the most progressive new office buildings in London. It incorporates a number of special features such as 3.5m floor to ceiling heights, concrete core cooling and opening windows which combine to make this a very environmentally efficient building as well as providing the long-life loose-fit space capable of adapting to the fast changing patterns of office use. Some of the design was so ground breaking that we installed and ran a prototype for 12 months. The 237,000 sq ft tower is now 92% let with the remaining space under offer. Adjacent to the tower is Old Street Yard, creating new public realm, surrounded by lower rise buildings providing 39,000 sq ft of offices, 9,000 sq ft of restaurants and 9 residential units. Together these have turned a group of obsolete office buildings into a vibrant Tech Belt campus beside Silicon roundabout. The lower rise commercial space is 66% let and we will look to let the residential space once the office fit-out phase is completed later this year. Assuming the properties are fully let we will have achieved commercial rents of GBP17.4m, which is 25% above our target at the outset of the development three and a half years ago.
At our other project due for completion in 2017, The Copyright Building W1, one of the three retail units is let with a further unit under offer and the office space was pre-let last year. In July we announced the forward sale of this property and have provided a 20 month rent guarantee for the remaining unlet retail units which, together, have a gross ERV of c.GBP0.7m pa.
Major developments pipeline
Property Area Delivery Capex to complete Comment
sq ft GBPm(1)
------------------------------------- ----------- --------- ------------------ -----------------------------------
Completed projects
White Collar Factory, Old Street 293,000 H1 2017 7 276,000 sq ft offices, 9,000 sq ft
Yard EC1 retail, 8,000 sq ft residential -
87% let overall
Projects on site
The Copyright Building, 30 Berners 107,000 H2 2017 7 87,000 sq ft offices and 20,000 sq
Street W1 ft retail - 90% pre-let overall
Brunel Building, 55 North Wharf Road
W2 240,000 H1 2019 85 Offices
80 Charlotte Street W1 380,000 H2 2019 194 321,000 sq ft offices, 45,000 sq
ft residential and 14,000 sq ft
retail - 35% pre-let overall
------------------------------------- ----------- --------- ------------------ -----------------------------------
727,000 286
------------------------------------- ----------- --------- ------------------ -----------------------------------
Other projects
Soho Place W1 285,000 260 209,000 sq ft offices, 36,000 sq
ft retail and 40,000 sq ft theatre
Other consents
Monmouth House EC1 125,000 Offices, workspaces and retail
------------------------------------- ----------- --------- ------------------ -----------------------------------
410,000
------------------------------------- ----------- --------- ------------------ -----------------------------------
Planning applications
19-35 Baker Street W1 293,000(2) 206,000 sq ft offices, 52,000 sq
ft residential and 35,000 sq ft
retail
Holden House W1 150,000 Retail scheme or retail and office
scheme
------------------------------------- ----------- --------- ------------------ -----------------------------------
443,000
------------------------------------- ----------- --------- ------------------ -----------------------------------
Grand total (excluding completed
projects) 1,580,000
------------------------------------- ----------- --------- ------------------ -----------------------------------
(1) As at 30 June 2017 (2) Total area - Derwent London has a 55% share of the joint venture
The immediate focus is now on the two schemes totalling 620,000 sq ft due for delivery in 2019 where, in aggregate, 22% of the space is pre-let. Based on the June valuation there is the potential for a further GBP170m surplus once these properties are completed and let.
The largest is 80 Charlotte Street W1, where we announced the pre-letting of 133,600 sq ft to Arup on a 20-year lease in February. This project is in the centre of Fitzrovia, which is currently benefitting from major changes including its location close to the Elizabeth Line. The project's ERV is GBP25.8m and the remaining capital expenditure is GBP194m, of which 94% has been fixed or instructed. Following the pre-letting we estimate the breakeven office rent on the remainder of the project has fallen from GBP58 per sq ft to GBP45 per sq ft, and we are seeing good interest in the balance of the office space.
The other major project for delivery in 2019 is Brunel Building, Paddington W2 with a diagrid external structure enabling column-free floors. This area was not a beneficiary of the rental growth seen in the early part of this cycle but, as a result, has enjoyed relatively strong growth in the last two years. We believe current rental levels remain attractive, and the opening of the Elizabeth Line in 2018 will significantly enhance eastward public transport links to central West End and the City. Remaining capital expenditure, which is all fixed, totals GBP85m and the ERV is GBP14.8m net or GBP62.50 per sq ft. We estimate our breakeven rent to be c.GBP48 per sq ft.
The success we have enjoyed at our on-site schemes is encouraging us to advance new projects. We expect to be granted access to our Soho Place W1 (previously 1 Oxford Street) site later this year and this would enable us to carry out further preliminary work with the intention of starting construction in H2 2018. The development is on one of the most strategic sites in the West End. We estimate the capital expenditure at c.GBP260m and the ERV at c.GBP22m pa net. We have also advanced two additional schemes by applying for planning permission at 19-35 Baker Street W1 and Holden House, 54-68 Oxford Street W1. These latter two schemes are unlikely to start before 2020, and our Baker Street project is a 55% interest held in a joint venture with our partner, The Portman Estate.
INVESTMENT ACTIVITY
So far this year we have sold or agreed to sell GBP492m of property at an average price 10% above December 2016 book value. The two disposals announced with our results in February have since completed and, in June, we exchanged contracts for the sale of The Copyright Building, 30 Berners Street W1 to Union Investment Real Estate GmbH for GBP165.0m or GBP148.7m net of top-ups relating to rent free periods and a rent guarantee on the vacant retail space. After allowing for the 12.5% ground rent payable to the freeholder, this represented a net initial yield to the purchaser of 4.2%. Completion will occur once the building is finished in Q4 2017. Allowing for this disposal we have sold or agreed to sell GBP700m of property since last year's referendum, all above December 2015 book values.
Disposals H1 2017
Gross Gross Net yield to purchaser
Property Date Area proceeds proceeds % Rent
sq ft GBPm GBP psf GBPm pa
---------------------------- ------- -------- ---------- ---------- ----------------------- ---------
132-142 Hampstead Road NW1 Q1 219,700 130.1 590 1.2 1.7
8 Fitzroy Street W1 Q2 147,900 197.0 1,330 3.4 7.2
---------------------------- ------- -------- ---------- ---------- ----------------------- ---------
We are finding few purchasing opportunities that meet our acquisition criteria, but we remain active in the pursuit of them.
FINANCIAL REVIEW
Our half year to 30 June 2017 was characterised by continued strong underlying earnings growth, a substantial level of property disposals which has further reduced gearing and a modest upward revaluation of property fair values backed by stable yields and development activity.
Gross rental income rose to GBP85.4m for the first half of 2017, up 11.3% over the corresponding period in 2016 and 8.5% above H2 2016. This was helped by the recent lettings at The White Chapel Building and White Collar Factory, but also supported by many other letting and asset management successes across the portfolio which more than offset the impact of recent disposals. Net rental income was also up substantially at GBP79.3m compared to GBP72.6m in H1 2016 and, though we had no residential apartments to sell this time, net property and other income rose to GBP81.5m from GBP74.2m in H1 2016.
Excluding the effect of acquisitions, disposals and developments, EPRA like-for-like net rental income grew by 5.6% against H1 2016 and 3.0% over the six months from H2 2016.
Administration expenses fell by 16.3% to GBP12.8m for the 2017 half year, mainly a function of lower bonus and incentive payments. This has reduced our EPRA cost ratio to 20.9% compared with 23.4% for the first half of 2016 and 24.0% for the 2016 full year. Overall finance costs were almost unchanged at GBP14.3m for the half year, lower interest costs offset by less interest capitalised, with the latter at GBP4.7m compared with GBP6.3m in H1 2016. EPRA earnings have increased strongly, by 22.5% to GBP50.6m from GBP41.3m in H1 2016, and EPRA earnings per share were up by 22.3% over the same period to 45.42p from 37.13p in H1 2016.
The overall revaluation surplus for our investment properties in the first half of 2017 was GBP66.7m after accounting adjustments for incentives. This was very slightly higher than H1 2016 and reversed the downward movement seen in H2 2016 following the EU referendum vote. Joint ventures showed a GBP3.4m gain on revaluation. We have also seen substantial profits booked on our investment property disposals so far in 2017 with a combined GBP19.1m uplift on gross proceeds of GBP327.1m from 132-142 Hampstead Road NW1 and 8 Fitzroy Street W1. Together with a small overall positive impact from interest rate derivative fair value movements, the IFRS profit before tax for the first half was GBP145.8m compared with GBP98.5m in H1 2016.
Though impacted by first half dividend payments totalling GBP100.8m including the 52.0p per share special, total net assets grew by GBP43.6m over the six months to 30 June 2017 and EPRA net asset value per share was also up, by 0.9%, to 3,582p per share from 3,551p in December 2016. This represents a total return, including the dividends, over the six month period of 3.4% compared with 2.7% for H1 2016.
Capital expenditure totalled GBP79.5m in H1 2017, against GBP100.8m in H1 2016. We anticipate incurring a further GBP104m in the second half of 2017, principally at 80 Charlotte Street W1 and Brunel Building W2, with GBP206m expected in 2018. The property disposals referred to earlier have reduced the overall portfolio carrying value to GBP4.7bn as at 30 June 2017, including GBP132.0m transferred to 'assets held for sale' following the exchange of contracts on The Copyright Building W1. Our recent head office refurbishment at Savile RowW1 and the move from two upper floors to three lower floors has also increased the carrying value of 'owner occupied property' to GBP44.7m at the half year. Investment property carrying values have therefore reduced by almost GBP300m to GBP4.5bn over the six months to 30 June 2017.
Altogether, this has brought our gearing down again and further improved interest cover while increasing available and undrawn facilities. This puts us in a very strong position from which to commit to further development activity and to fund future acquisitions.
Financing and net debt
The property disposals in H1 reduced net debt by GBP171.1m to GBP733.7m at 30 June 2017 from GBP904.8m on 31 December 2016 and from GBP1,008.6m at 30 June 2016. It is worth noting that both of these transactions were somewhat unusual, one being the result of a compulsory purchase in connection with HS2 and the other being linked to a major letting agreement. After The Copyright Building W1 completes in H2 2017, we are not currently anticipating further significant disposals and expect to see net debt trend upwards as future capital expenditure is incurred on our pipeline. With interest rates remaining very low, we have chosen to retain GBP203m of swaps to provide future rate protection and, as we have a policy of being not more than 100% hedged on our bank debt, we held an unusually large cash balance at 30 June 2017.
Our principal financing metrics have improved again. The Group's LTV ratio was only 14.9% at 30 June 2017, down from 19.1% a year earlier and 17.7% at the 2016 year end. LTV including our share of joint ventures was also 14.9%. Interest cover has risen to 431% for the six months to June 2017 compared to 370% for the 2016 full year and available undrawn facilities and cash increased to GBP446m from GBP383m at December 2016. Net cash from operating activities also increased to GBP37.2m for the half year compared to GBP29.5m in H1 2016 though the latter was affected by a GBP5.3m incentive payment to the incoming tenant at The Copyright Building to facilitate their move.
During the first half, we extended the maturity of our GBP75m unsecured revolving facility from Wells Fargo by a further year to July 2022 and cancelled GBP100m of the GBP550m revolving bank facility for which we received a fee rebate of GBP750,000. A GBP40m interest rate swap was also terminated as part of these arrangements at a slightly discounted cost of GBP3.2m. The remaining GBP450m facility runs to January 2022. We have also agreed and signed a new GBP15m development loan facility with Barclays for our Primister joint venture and a new 5 year GBP28m loan facility with HSBC secured on assets that we hold with the Portman Estate. The latter was signed in July 2017 and the old facility was due for repayment in June 2018, hence the current liability shown in the June 2017 balance sheet.
A GBP70m swap with a forward start date has also been deferred to September 2017 at a cost of GBP1.3m.
A summary of the overall debt position at 30 June 2017 is shown in the following table:
Jun Jun Dec
2017 2016 2016
----------------------------- ------ ------ ------
Hedging profile (%)
Fixed 74 61 68
Swaps 25 25 27
99 86 95
Percentage of debt that is
unsecured (%) 65 71 68
Percentage of non-bank debt
(%) 75 61 68
Weighted average interest
rate - cash basis (%) 3.71 3.65 3.65
Weighted average interest
rate - IFRS basis (%) 3.99 3.88 3.90
Weighted average maturity
of facilities (years) 6.7 7.0 6.9
Weighted average maturity
of borrowings (years) 7.5 7.7 7.7
Undrawn facilities and cash
(GBPm) 446 279 383
Uncharged properties (GBPm) 3,828 3,868 3,777
RISK MANAGEMENT AND INTERNAL CONTROL
Derwent London aims to deliver its strategic objectives whilst operating within a risk envelope defined by the Group's risk appetite. The Board recognises that risks are inherent in running any business and uses the Group's risk management system to ensure that risks to the Group's strategy are identified, understood and managed.
The Board has overall responsibility for risk management and the Group's system of internal controls. To assist with carrying out this task, the Board has delegated responsibility to the Audit Committee and the Risk Committee. Executive management is responsible for developing and operating the Group's risk management system and for designing, implementing, maintaining and evaluating the systems of internal control.
The Board is responsible for managing the Group's risk profile in an environment that reflects the culture and management structure of the business. Key factors to note in this regard are:
-- Senior management encourages an open and transparent culture throughout the business.
-- The close day-to-day involvement of the Directors in the business allows any system weaknesses to be identified quickly.
-- The Group mainly operates from a single office in Central London which is within close proximity to most of its properties.
-- The senior management team is experienced and stable and overall staff turnover is low. -- The Group has a whistleblowing policy which is supported by an independent advice line. -- The Group has clearly defined levels of responsibility and authority.
The Group's risk management framework consists of its Risk Management Policy, Risk Appetite Statement and Risk Management Process document. The framework is designed to identify and manage the risks faced by the business recognising that not all risks can be eliminated at an acceptable cost and that there are some risks that, given its experience, the Board will choose to manage and accept.
In compliance with Code Provision C.2.1 of The UK Corporate Governance Code, the Board has carried out a robust assessment of the principal risks and uncertainties facing the Group. The core element of this assessment is the Group's risk register which is prepared by the Executive Committee in accordance with the Risk Management document. The first stage in its preparation is for the Committee to identify the risks facing the Group. An assessment is then made collectively by the Committee of the following matters:
-- The likelihood of each risk occurring. -- The potential impact of the risk on each different area of the business.
-- The strength of the controls operating over the risk and the effectiveness of any mitigating actions.
This approach allows the final assessment to reflect the effect of the controls and any mitigating procedures that are in place. If the controls and mitigating actions over a risk are deemed inadequate, the Committee will agree a target risk profile together with supplementary controls/actions and a timetable for their implementation.
The register and its method of preparation have been reviewed by the Risk Committee. In order to gain a more comprehensive understanding of the risks facing the business and the management thereof, the Risk Committee periodically receives presentations from senior managers and external advisers. The Risk Committee has also monitored the Company's risk management and internal control systems primarily by regularly reviewing the set of key risk indicators that were implemented in 2015. This was supplemented by reviews of the top ten risks on the Group's risk register and the adequacy of the controls operating over these risks.
Following these reviews, the Board is satisfied that the Group's risk management and internal control systems operated effectively throughout the period.
The Group's risk register includes 47 risks split between strategic risks, operational risks and finance risks.
The principal risks and uncertainties facing the Group in 2017 are set out on the following pages together with the potential effects, controls and mitigating factors.
Strategic risks
That the Group's Business Model does not create the anticipated shareholder value or fails to meet investors' expectations.
Risk, effect Controls and mitigation Action
and
progression
-------------- --------------------------------------------------------------- ---------------------------------------------------------------
1. * The Group carries out a five-year strategic review * The last annual strategic review was carried out by
Inconsistent each year and also prepares a budget and three the Board in June 2017. This considered the
strategy rolling forecasts which cover the next two years. In sensitivity of five key measures to changes in
the course of preparing these documents the Board underlying assumptions, including interest rates and
The Group's considers the sensitivity of the Group's KPIs and key borrowing margins, timing of projects, level of
strategy ratios to changes in the main assumptions underlying capital expenditure and the extent of capital
is the forecast thereby modelling different economic recycling.
inconsistent scenarios.
with the
state * The three rolling forecasts prepared during the year
of its * The Group's plans are then set so as to best realise focus on the same key measures but may consider the
market. its long-term strategic goals given the most likely effect of varying different assumptions to reflect
economic and market conditions and the Group's risk changing economic and market conditions.
2. appetite. This flexibility is largely derived from
Inconsistent the Group's policy of maintaining income from
development properties for as long as possible until development * The timing of the Group's development programme and
programme starts. the strategies for individual properties reflect the
outcome of these considerations.
The Group's
development * The level of future redevelopment opportunities in
programme is the Group's portfolio enables the Board to delay * 41% of the Group's portfolio has been identified for
not marginal projects until market conditions are future redevelopment.
consistent favourable.
with
the economic * During the period the Group's loan-to-value ratio
cycle. * The Board pays particular attention, when setting its reduced to approximately 15%, its net interest cover
Throughout plans, to maintaining sufficient headroom in all the ratio was 431% and the REIT ratios were comfortably
the Group's key ratios and financial covenants. met.
first half
of
2017, the * Pre-lets are sought to de-risk major projects. * Pre-lets were secured over 247,000 sq ft during H1
Group 2017.
continued to
benefit
from a
resilient
central
London
market.
However,
the result
of
the General
Election
in May
increased
the level of
economic
uncertainty
and
the
likelihood
of the
London
market being
adversely
affected by
one
or more of a
number
of
high-level
economic
factors
remained
high.
If this were
to
occur, it
would
reduce the
value
of the
Group's
portfolio
and
the returns
from
its
developments
.
This would
affect
two of the
Group's
KPIs - total
return
and total
property
return.
Overall, the
Board
sees the
level
of both
these
risks to be
broadly
unchanged
over
the period.
3. Adverse
Brexit
settlement * The Group's strong financing and covenant headroom * At the 30 June 2017, the Group had undrawn facilities
enables it to weather a downturn. and cash of GBP446m.
Negotiations
to
leave the * The Group's diverse and high-quality tenant base * Income is maintained at future developments until the
European provides resilience against tenant default. scheme is ready to start.
Union result
in
arrangements * The Group's development pipeline has a degree of
that flexibility that enables the strategy for individual
are damaging properties to be changed to reflect the prevailing
to economic circumstances.
the UK
economy
and/or * Financially strong and reputable contractors are used
Central which have good access to available labour.
London.
Negotiations
will * The Group's focus on good value, middle market
take at properties makes it less susceptible to reductions in
least tenant demand.
two years
and
the
operating
framework
facing
UK
businesses
thereafter
cannot
be
predicted.
This risk
would
primarily
affect
the Group's
total
return and
total
property
return
KPIs.
4.
Reputational
damage * All new members of staff benefit from an induction * The Group employs a Head of Investor and Corporate
programme and are issued with the Group's Staff Communications and retains the services of an
The Group's Handbook. external PR agency. Both maintain regular contact
reputation with external media sources.
is damaged
through * Social media channels are monitored by the Group's
unauthorised investor relations department. * The Company engages with a number of local community
and bodies in areas where it operates as part of its CSR
inaccurate activity.
media * The Group takes advice on technological changes in
coverage. the use of social media and adapts its approach
It would accordingly.
most
directly
impact * There is an agreed procedure for approving all
on the external statements.
Group's
total
shareholder
return - one
of
its key
metrics.
Indirectly
it
could impact
on
a number of
the
formal KPIs.
The Board
considers
the risk to
be
unchanged
over
the period.
Financial risks
That the Group becomes unable to meet its financial obligations or finance the business appropriately.
Risk, effect and Controls and mitigation Action
progression
----------------------------------- ------------------------------------------------------------- ---------------------------------------------------------------
5. Increase in
property yields
* The impact of changes in property values on the * The Group produces three rolling forecasts each year
Increased property Group's financial covenants and performance are which contain detailed sensitivity analyses,
yields, which monitored regularly and are subject to sensitivity including the effect of changes to yields.
may be a consequence analysis to ensure that adequate headroom is
of rising interest preserved.
rates, would cause * Quarterly management accounts report the Group's
property values performance against covenants.
to fall. * The impact of yield changes is considered when
Interest rates potential projects are appraised.
have remained * Project appraisals are regularly reviewed and updated
low for an extended in order to monitor the effect of yield changes.
period and are * The Group's move towards mainly unsecured financing
expected to rise over the past few years has made management of its
within the next financial covenants less complicated.
two years. Though
there is no direct
relationship,
this may cause
property yields
to increase in
due course.
It would affect
the following
KPIs:
* Loan-to-value ratio.
* Total return.
* Total property return.
The Board continues
to assess this
risk as high.
Operational risks
The Group suffers either a financial loss or adverse consequences due to processes being inadequate or not operating correctly.
Risk, effect and Controls and mitigation Action
progression
------------------------------------------ --------------------------------------------------------------- ---------------------------------------------------------------
6. Reduced development
returns
* Standardised appraisals, which include contingencies * The procurement process used by the Group includes
The Group's development and inflationary cost increases, are prepared for all the use of highly regarded firms of quantity
projects do not investments and sensitivity analysis is undertaken to surveyors and is designed to minimise uncertainty
produce the targeted ensure that an adequate return is made in all regarding costs.
financial return circumstances considered likely to occur.
due to one or
more of the following * The Group's style of accommodation remains in demand
factors: * Development costs are benchmarked to ensure that the as evidenced by the 33 lettings achieved in H1 2017
* Delays on site. Group obtains competitive pricing and, where which totalled 439,200 sq ft.
appropriate, fixed-price contracts are entered into.
* Increased construction costs. * The Group has often secured significant pre-lets of
* Procedures carried out before starting work on site, the space in its development programme which
such as pre-work investigations, historical research significantly 'de-risks' those projects. 5 pre-lets
* Adverse letting conditions. of the property and surveys, etc. conducted as part were secured in H1 2017 on 247,000 sq ft.
of the planning application, reduce the risk of
unidentified issues causing delays once on site.
This would have
an effect on the
Group's total * The Group's pre-letting strategy reduces or removes
return and total the letting risk of the development as soon as
property return possible.
KPIs.
The Board considers * Post-completion reviews are carried out for all major
this risk to have developments to ensure that improvements to the
remained broadly Group's procedures can be identified and implemented.
the same over
the period.
7. Cyber attack
The Group is the * The Group's IT systems are protected by anti-virus * Independent internal and external penetration tests
victim of a cyber-attack software and firewalls that are continually updated. are regularly conducted to assess the effectiveness
that results in of the Group's security. No matters were raised as a
it being unable result of the 2016 test.
to use its IT * The Group's data is regularly backed up and
systems. replicated.
* The switchover of the IT system to the Group's backup
This would lead facility was successfully tested in 2016.
to an increase * The Group's Business Continuity Plan was revised and
in costs and a tested during 2015.
diversion of management * Staff awareness programmes and presentations are
time. Increased delivered to alert staff to the techniques that may
costs would have * Multifactor authentication has been introduced for be used to gain unauthorised access to the Group's
an impact on the both internal and external access to the systems. systems.
Group's total
return KPI whilst
a significant * The Group's IT department has access to cyber threat * Security measures are regularly reviewed by the IT
diversion of management intelligence and analytics data. Security Committee.
time would have
a wider effect.
* Incident response and remediation policies are in * The Head of IT regularly reports to the Executive
Although controls place. Committee.
and procedures
over the Group's
IT infrastructure * An independent benchmarking review of the Group's
continue to be cyber security has been carried out.
improved, the
elevated profile
of such risks
means that the
Board considers
the risk to have
remained high
over the period.
8. Regulatory
non-compliance
* Each year the Group's Risk Committee receives a * A Health and Safety report is presented at all
The Group's cost report prepared by the Group's lawyers identifying Executive Committee and main Board meetings.
base is increased legislative/regulatory changes expected over the next
and management 12 months and reports to the Board concerning
time diverted regulatory risk. * The Executive Committee receives regular reports from
through a breach the Head of Sustainability.
of any of the
legislation that * The Group employs a Head of Health and Safety who
forms the regulatory reports to the Board. * The Group pays considerable attention to
framework within sustainability issues and produces an annual
which the Group sustainability report.
operates. * The Group employs a Head of Sustainability who
reports to the sustainability committee which is
An increase in chaired by Paul Williams. * No incidents were reported under the Group's
costs would directly whistleblowing policy in the period.
impact on the
Group's total * The Company's policies including those on the Bribery
return KPI. A Act, Health and Safety, Equal Opportunities, * The Group has considered the requirements of the
significant diversion Harassment and Whistleblowing are available to all Modern Slavery Act and revised its policies where
of management staff on the Company intranet. appropriate in order to comply with the legislation.
time could affect
a wider range
of key metrics. * Members of staff attend external briefings in order * The Groups' Health and Safety processes were reviewed
to be updated on regulatory changes. and improved in 2016 and a new external consultant
The Board considers was appointed.
this risk to be
unchanged over
the period.
9. Contractor/sub-contractor
default
Returns from the * Whenever possible the Group uses * As the size of the Group's projects has increased so
Group's developments contractors/sub-contractors that it has previously the contractors have become more substantial.
are reduced due worked with successfully.
to delays and
cost increases * The financial accounts of both main contractors and
caused by either * The resilience of a project's critical path is major sub-contractors are reviewed.
a main contractor improved by establishing procedures to manage any
or major sub-contractor sub-contractor default effectively.
defaulting during * The Group's development managers are regularly on
the project. site and conduct surprise visits.
* Key construction packages are acquired early in the
This would primarily project.
affect the Group's
total property
return KPI. * Performance bonds are sought if considered necessary.
The risk is considered
to have remained * Regular on-site supervision by Derwent London
at the same level personnel increases the likelihood of identifying any
in the period. problems at an early stage, thereby enabling remedial
action to be taken sooner.
10. Shortage of
key staff
* The Nominations Committee consider succession matters * The Group has recruited eight new members of staff in
The Group is unable as a standing agenda item. the year to date.
successfully to
implement its
strategy due to * Requirements for senior management succession are * Staff turnover in the first half of 2017 was low at
a failure to recruit considered as part of the five-year strategic review. 3%.
and retain key
staff with appropriate
skills. * The remuneration packages of all employees are * The average length of employment is 7.3 years.
benchmarked regularly.
This risk could
impact on any
or all of the * Six-monthly appraisals identify training requirements
Group's KPIs. which are fulfilled over the next six months.
The risk is seen
to be unchanged
over the period.
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.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, 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 established 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 and trade references. The covenant strength of each tenant is determined based on this review and, if appropriate, a deposit or a guarantee is obtained.
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).
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 30 June 2017, the proportion of fixed debt held by the Group was above this range at 99% (31 December 2016: 95%) following a property disposal in June. During both 2017 and 2016, the Group's borrowings at variable rate were denominated in sterling.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. When the Group raises long-term borrowings, it is generally at fixed rates.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.
The Group's policy is to ensure that it will always have sufficient headroom in its loan facilities to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain committed facilities to meet the expected requirements. The Group also seeks to reduce liquidity risk by fixing interest rates (and hence cash flows) on a portion of its long-term borrowings. This is further explained in the 'market risk' section above.
Executive management receives rolling three-year projections of cash flow and loan balances on a regular basis as part of the Group's forecasting processes. At the balance sheet date, these projections indicated that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.
The Group's loan facilities and other borrowings are spread across a range of banks and financial institutions so as to minimise any potential concentration of risk. The liquidity risk of the Group is managed centrally by the finance department.
Capital disclosures
The Group's capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and non-controlling interest).
The Group's objectives when maintaining capital are:
-- to safeguard the entity's ability to continue as a going concern so that it can continue to provide above average long-term returns for shareholders; and
-- to provide an above average annualised long-term 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 2017, the Group's strategy, which was unchanged from 2016, 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 at the end of this announcement and are derived in note 24.
Statement of Directors' responsibilities
The Directors' confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules (DTR) 4.2.7 and 4.2.8, namely:
-- An indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-- Material related-party transactions in the first six months of the financial year and any material changes in the related-party transactions described in the last Annual Report.
The Directors are listed in the Derwent London plc Annual Report of 31 December 2016 and a list of the current Directors is maintained on the Derwent London plc website: www.derwentlondon.com. The maintenance and integrity of the Derwent London website is the responsibility of the Directors.
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
John D. Burns Damian M.A. Wisniewski
Chief Executive Officer Finance Director
10 August 2017
GROUP CONDENSED INCOME STATEMENT
Half year to 30.06.2017 Half year to 30.06.2016 Year to 31.12.2016
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
--------------------------------- ----- ----------------------- ----------------------- ------------------
Gross property and other income 5 99.4 101.4 193.7
--------------------------------- ----- ----------------------- ----------------------- ------------------
Net property and other income 5 81.5 74.2 149.2
Administrative expenses (12.8) (15.3) (30.9)
Revaluation surplus/(deficit) 11 66.7 64.5 (37.1)
Profit on disposal of investment
property 6 19.1 2.5 7.5
Profit from operations 154.5 125.9 88.7
Finance costs 7 (14.3) (13.9) (27.8)
Movement in fair value of derivative
financial instruments 6.4 (12.8) 0.3
Financial derivative termination
costs 8 (4.5) (1.2) (9.0)
Share of results of joint
ventures 9 3.7 0.5 2.3
Profit before tax 145.8 98.5 54.5
Tax charge 10 (0.6) (1.0) (0.9)
Profit for the period 145.2 97.5 53.6
Attributable to:
- Equity shareholders 146.4 98.5 58.7
- Non-controlling interest (1.2) (1.0) (5.1)
145.2 97.5 53.6
Earnings per share 23 131.42p 88.55p 52.73p
Diluted earnings per share 23 131.04p 86.50p 52.59p
GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Half year to 30.06.2017 Half year to 30.06.2016 Year to 31.12.2016
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
-------------------------------------- -------- --------------- ----------------------- ------------------
Profit for the period 145.2 97.5 53.6
Actuarial losses on defined benefit
pension scheme (1.1) (1.3) (2.1)
Revaluation surplus/(deficit) of
owner-occupied property 11 - 0.5 (5.5)
Deferred tax (charge)/credit on
revaluation 19 (0.4) 0.2 1.3
-------------------------------------- -------- --------------- ----------------------- ------------------
Other comprehensive expense that will
not be
reclassified to profit or loss (1.5) (0.6) (6.3)
Total comprehensive income relating to
the period 143.7 96.9 47.3
Attributable to:
- Equity shareholders 144.9 97.9 52.4
- Non-controlling interest (1.2) (1.0) (5.1)
143.7 96.9 47.3
GROUP CONDENSED BALANCE SHEET
30.06.2017 30.06.2016 31.12.2016
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
--------------------------------- ---- ---------- ---------- ----------
Non-current assets
Investment property 11 4,509.6 4,997.0 4,803.8
Property, plant and equipment 12 50.5 39.6 38.1
Investments 13 38.5 32.9 36.0
Other receivables 14 100.6 101.8 109.1
--------------------------------- ---- ---------- ---------- ----------
4,699.2 5,171.3 4,987.0
Current assets
Trading property 11 14.1 9.6 11.7
Trade and other receivables 15 43.9 40.7 38.5
Cash and cash equivalents 102.8 12.7 17.7
--------------------------------- ---- ---------- ---------- ----------
160.8 63.0 67.9
Non-current assets held for sale 16 132.0 - -
Total assets 4,992.0 5,234.3 5,054.9
Current liabilities
Borrowings 18 28.0 - -
Trade and other payables 17 95.2 113.0 110.0
Corporation tax liability 1.8 1.2 1.6
Provisions 0.3 0.3 0.4
--------------------------------- ---- ---------- ---------- ----------
125.3 114.5 112.0
Non-current liabilities
Borrowings 18 808.5 1,021.3 922.5
Derivative financial instruments 18 11.0 30.4 17.3
Provisions 0.2 0.2 0.3
Pension scheme deficit 1.4 0.2 0.3
Deferred tax 19 2.6 5.4 3.1
--------------------------------- ---- ---------- ---------- ----------
823.7 1,057.5 943.5
Total liabilities 949.0 1,172.0 1,055.5
Total net assets 4,043.0 4,062.3 3,999.4
Equity
Share capital 5.6 5.6 5.6
Share premium 188.7 188.2 188.4
Other reserves 940.9 952.7 950.4
Retained earnings 2,841.9 2,843.9 2,787.9
--------------------------------- ---- ---------- ---------- ----------
Equity shareholders' funds 3,977.1 3,990.4 3,932.3
Non-controlling interest 65.9 71.9 67.1
Total equity 4,043.0 4,062.3 3,999.4
GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
----------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ -------- ------- -------- -------- ------------- ----------- -------
At 1 January 2017 5.6 188.4 950.4 2,787.9 3,932.3 67.1 3,999.4
Profit/(loss) for the period - - - 146.4 146.4 (1.2) 145.2
Other comprehensive expense - - (0.4) (1.1) (1.5) - (1.5)
Transfer of owner-occupied
property - - (6.9) 6.9 - - -
Share-based payments - 0.3 (2.2) 2.6 0.7 - 0.7
Dividends paid - - - (100.8) (100.8) - (100.8)
At 30 June 2017 (unaudited) 5.6 188.7 940.9 2,841.9 3,977.1 65.9 4,043.0
At 1 January 2016 5.6 186.3 952.9 2,777.7 3,922.5 72.9 3,995.4
Profit/(loss) for the period - - - 98.5 98.5 (1.0) 97.5
Other comprehensive
income/(expense) - - 0.7 (1.3) (0.6) - (0.6)
Share-based payments - 0.8 (0.9) 3.2 3.1 - 3.1
Dividends paid - - - (33.1) (33.1) - (33.1)
Scrip dividends - 1.1 - (1.1) - - -
At 30 June 2016 (unaudited) 5.6 188.2 952.7 2,843.9 3,990.4 71.9 4,062.3
At 1 January 2016 5.6 186.3 952.9 2,777.7 3,922.5 72.9 3,995.4
Profit/(loss) for the year - - - 58.7 58.7 (5.1) 53.6
Other comprehensive expense - - (4.2) (2.1) (6.3) - (6.3)
Share-based payments - 1.0 1.7 3.3 6.0 - 6.0
Dividends paid - - - (48.6) (48.6) (0.7) (49.3)
Scrip dividends - 1.1 - (1.1) - - -
At 31 December 2016 (audited) 5.6 188.4 950.4 2,787.9 3,932.3 67.1 3,999.4
GROUP CONDENSED CASH FLOW STATEMENT
Half year to 30.06.2017 Half year to 30.06.2016 Year to 31.12.2016
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
---------------------------------- ---- ----------------------- ----------------------- ------------------
Operating activities
Property income 74.1 70.1 147.1
Property expenses (11.2) (12.6) (18.0)
Cash paid to and on behalf of
employees (9.2) (13.5) (21.8)
Other administrative expenses (3.2) (1.9) (5.6)
Interest paid 7 (11.6) (10.8) (22.0)
Other finance costs 7 (1.7) (1.4) (2.3)
Other income 1.2 1.0 2.4
Tax paid in respect of operating
activities (1.2) (1.4) (2.1)
Net cash from operating activities 37.2 29.5 77.7
Investing activities
Acquisition of investment
properties (0.9) (18.0) (18.0)
Capital expenditure on the
property portfolio 7 (87.2) (93.2) (213.5)
Disposal of investment and trading
properties 324.8 20.4 224.7
Investment in joint ventures - (1.7) (3.0)
Repayment of loan by joint venture 1.2 - -
Purchase of property, plant and
equipment (4.7) (0.3) (4.5)
Tax (paid)/received in respect of
investing activities (4.8) - 4.8
Net cash from/(used in) investing
activities 228.4 (92.8) (9.5)
Financing activities
Net movement in revolving bank
loans (77.8) (3.5) (103.9)
Drawdown of private placement
notes - 104.3 104.3 Financial derivative termination costs (4.5) (1.2) (9.0) Net proceeds of share issues 0.3 0.8 1.0 Dividends paid to non-controlling interest holder - - (0.8) Dividends paid 20 (98.5) (30.9) (48.6) Net cash (used in)/from financing activities (180.5) 69.5 (57.0) Increase in cash and cash equivalents in the period 85.1 6.2 11.2 Cash and cash equivalents at the beginning of the period 17.7 6.5 6.5 Cash and cash equivalents at the end of the period 102.8 12.7 17.7
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
Neither the financial information for the half year to 30 June 2017 nor the half year to 30 June 2016 was subject to an audit but has been subject to a review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.
The comparative financial information presented herein for the year to 31 December 2016 does not constitute the Group's statutory accounts, but is derived from those accounts. The Group's statutory accounts for the year to 31 December 2016 have been delivered to the Registrar of Companies. The Auditor's report on those accounts was unmodified, did not draw attention to any matters by way of an emphasis of matter and did not contain any statement under Section 498 of the Companies Act 2006.
The financial information in these condensed consolidated financial statements is that of the holding company and all of its subsidiaries (the "Group") together with the Group's share of its joint ventures. It has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting and should be read in conjunction with the annual report and accounts for the year to 31 December 2016 which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRS IC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, property, plant and equipment and financial assets and liabilities held for trading.
As with most other UK property companies and REITs, the Group presents many of its financial measures in accordance with the guidance criteria issued by the European Public Real Estate Association ('EPRA'). These measures, which provide consistency across the sector, are all derived from the IFRS figures in note 23.
Going concern
Under Provision C.1.3 of the UK Corporate Governance Code 2014, the Board needs to report whether the business is a going concern. 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.
In particular the Directors have considered the relatively long-term and stable nature of the cash flows receivable under the tenant leases, the Group's loan-to-value ratio of 14.9%, the interest cover ratio of 431% and the GBP446m total of undrawn facilities and cash at 30 June 2017. They have also considered the fact that the average maturity of borrowings was 7.5 years at 30 June 2017.
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 condensed 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 consolidated financial statements are consistent with those applied by the Group in its financial statements for the year to 31 December 2016.
Standards in issue but not yet effective
The following standards, amendments and interpretations were in issue at the date of approval of the condensed consolidated 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 2 (amended) - Share Based Payments;
IFRS 4 (amended) - Insurance Contracts;
IFRIC 22 - Foreign Currency Transactions and Advance Consideration;
IAS 7 (amended) - Statement of Cash Flows;
IAS 12 (amended) - Income Taxes;
IAS 40 (amended) - Investment Property; and
Annual Improvements to IFRSs (2014 - 2016 cycle).
In addition to the above, IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases were in issue at the date of approval of these condensed consolidated financial statements but were not yet effective for the current accounting period and have not been adopted early.
IFRS 9 Financial Instruments (effective from 1 January 2018)
This standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting. The Group has completed its preliminary assessment of the impact of IFRS 9 and believes that the main area of impact relates to impairment provisioning which may affect measurement and presentation of trade receivables and balances due from subsidiaries within the Company financial statements. By December 2017, the Group will have determined how it will estimate expected credit losses and the sources of forward-looking data, but does not expect the standard to have a material impact on the financial statements.
IFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018)
This standard combines a number of previous standards, setting out a five step model for the recognition of revenue and establishing principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue. The standard is applicable to service charge income, facilities management income, investment property disposals and trading property disposals, but excludes rent receivable, which is within the scope of IFRS 16. The Group has completed its preliminary assessment of IFRS 15 and does not expect its adoption to have a material impact on the financial statements, but it may result in changes to presentation and disclosure.
IFRS 16 Leases (effective 1 January 2019)
This standard does not substantially affect the current accounting for rental income earned by the Group as lessor. The main impact of the standard is the removal of the distinction between operating and finance leases for lessees, which will result in almost all leases being recognised on the balance sheet. As the Group does not hold any material operating leases as lessee, the impact of the standard is not expected to be material to the financial statements.
3. Significant judgments, key assumptions and estimates
Some of the significant accounting policies require management to make difficult, subjective or complex judgments or estimates. The following is intended to provide a summary of those policies which management consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements.
-- Property portfolio valuation. -- Compliance with the real estate investment trust (REIT) taxation regime. -- Outstanding rent reviews. -- Contingent consideration.
These are the same policies identified at the previous year end and a full discussion of these policies is included in the 2016 financial statements.
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 maker (which in the Group's case is the Executive Committee comprising the six executive Directors and five senior managers) 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 the IFRS figures but also report the 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 23. 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 operating segment in that its performance is monitored individually.
The Group's property portfolio includes investment property, owner-occupied property, assets held for sale and trading property and comprised 97% office buildings* in central London by value (30 June 2016: 94%; 31 December 2016: 95%). Therefore, the Directors consider that these individual properties have similar economic characteristics and have aggregated them into a single operating segment. The remaining 3% (30 June 2016: 6%; 31 December 2016: 5%) represented a mixture of retail, hotel, 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. The majority of the Group's properties are located in London (West End central, West End borders and City borders), with the remainder in Scotland (Provincial).
* Some office buildings have an ancillary element such as retail or residential.
Gross property income
Office
buildings Other Total
GBPm GBPm GBPm
------------------------- ---------- ----- -----
Half year to 30 June
2017
West End central 41.2 0.3 41.5
West End borders 9.2 - 9.2
City borders 32.2 0.2 32.4
Provincial - 2.3 2.3
82.6 2.8 85.4
Half year to 30 June
2016
West End central 40.8 2.2 43.0
West End borders 8.1 - 8.1
City borders 23.0 0.1 23.1
Provincial - 2.5 2.5
71.9 4.8 76.7
Year to 31 December 2016
West End central 81.4 4.2 85.6
West End borders 17.2 - 17.2
City borders 48.0 0.2 48.2
Provincial - 5.0 5.0
146.6 9.4 156.0
A reconciliation of gross property income to gross property and other income is given in note 5.
Property portfolio
Carrying value Fair value
------------------------- -------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------- --------- ----- ------- --------- ----- -------
30 June 2017
West End
central 2,432.9 28.5 2,461.4 2,470.7 28.7 2,499.4
West End
borders 428.3 - 428.3 446.9 - 446.9
City borders 1,706.2 6.5 1,712.7 1,744.0 6.5 1,750.5
Provincial - 98.0 98.0 - 101.0 101.0
4,567.4 133.0 4,700.4 4,661.6 136.2 4,797.8
30 June 2016
West End
central 2,675.5 177.4 2,852.9 2,717.0 179.4 2,896.4
West End
borders 435.2 14.0 449.2 454.2 14.0 468.2
City borders 1,637.2 6.2 1,643.4 1,656.3 6.2 1,662.5
Provincial - 97.7 97.7 - 101.2 101.2
4,747.9 295.3 5,043.2 4,827.5 300.8 5,128.3
31 December
2016
West End
central 2,531.5 141.1 2,672.6 2,573.9 142.1 2,716.0
West End
borders 408.3 - 408.3 426.5 - 426.5
City borders 1,665.4 6.4 1,671.8 1,693.6 6.3 1,699.9
Provincial - 97.0 97.0 - 100.3 100.3
4,605.2 244.5 4,849.7 4,694.0 248.7 4,942.7
A reconciliation between the fair value and carrying value of the portfolio is set out in note 11.
5. Property and other income
Half year Half year Year to
to 30.06.2017 to 30.06.2016 31.12.2016
GBPm GBPm GBPm
------------------------------------ -------------- -------------- -----------
Gross rental income 85.4 76.7 155.4
Surrender premiums received - - 0.1
Other property income - - 0.5
Gross property income 85.4 76.7 156.0
Trading property sales proceeds - 12.5 12.5
Service charge income 12.8 11.1 22.8
Other income 1.2 1.1 2.4
Gross property and other
income 99.4 101.4 193.7
Gross rental income 85.4 76.7 155.4
Ground rent credit/(expense) 0.1 (0.3) (0.7)
------------------------------------- -------------- -------------- -----------
Service charge income 12.8 11.1 22.8
Service charge expenses (14.0) (11.8) (24.1)
------------------------------------- -------------- -------------- -----------
(1.2) (0.7) (1.3)
Other property costs (5.0) (3.1) (7.5)
Net rental income 79.3 72.6 145.9
------------------------------------- -------------- -------------- -----------
Trading property sales proceeds - 12.5 12.5
Trading property cost of
sales - (10.6) (10.6)
------------------------------------- -------------- -------------- -----------
Profit on trading property
disposals - 1.9 1.9
Reversal of write-down/(write-down)
of trading property 1.0 (1.4) (1.6)
Other property income - - 0.5
Other income 1.2 1.1 2.4
Surrender premiums received - - 0.1
Reverse surrender premiums - (0.1) (0.1)
Dilapidation receipts - 0.1 0.1
Net property and other income 81.5 74.2 149.2
Rental income included GBP8.8m (half year to 30 June 2016: GBP5.5m; year to 31 December 2016: GBP10.3m) relating to rents recognised in advance of cash receipts. Other income relates to fees and commissions earned 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.
6. Profit on disposal of investment property
Half year Half year Year
to 30.06.2017 to 30.06.2016 to 31.12.2016
GBPm GBPm GBPm
-------------------------------- -------------- -------------- --------------
Investment property
Gross disposal proceeds 327.1 5.2 210.6
Costs of disposal (1.3) (0.1) (2.6)
Net disposal proceeds 325.8 5.1 208.0
Carrying value (295.6) (2.6) (198.8)
Adjustment for rents recognised
in advance (11.1) - (1.7)
19.1 2.5 7.5
7. Finance costs
Half year Half year Year to
to 30.06.2017 to 30.06.2016 31.12.2016
GBPm GBPm GBPm
---------------------------- -------------- -------------- -----------
Finance costs
Bank loans and overdraft 3.7 6.3 11.8
Non-utilisation fees 0.8 0.6 1.2
Unsecured convertible
bonds 1.9 1.9 3.8
Secured bonds 5.7 5.7 11.4
Unsecured private placement
notes 4.1 2.9 7.0
Secured loan 1.7 1.7 3.3
Amortisation of issue
and arrangement costs 1.0 1.1 2.2
Amortisation of the fair
value of the secured
bonds (0.5) (0.5) (1.0)
Finance lease costs 0.5 0.5 1.0
Other 0.1 - 0.1
Gross interest costs 19.0 20.2 40.8
Less: interest capitalised (4.7) (6.3) (13.0)
Finance costs 14.3 13.9 27.8
Finance costs of GBP4.7m (half year to 30 June 2016: GBP6.3m; year to 31 December 2016: GBP13.0m) have been capitalised on development projects, in accordance with IAS 23 Borrowing Costs, using the Group's average cost of borrowing during each quarter. Total finance costs paid to 30 June 2017 were GBP18.0m (half year to 30 June 2016: GBP18.5m; year to 31 December 2016: GBP37.3m) of which GBP4.7m (half year to 30 June 2016: GBP6.3m; year to 31 December 2016: GBP13.0m) 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 costs of GBP4.5m in the half year to 30 June 2017 (half year to 30 June 2016: GBP1.2m; year to 31 December 2016: GBP9.0m) deferring, re-couponing or terminating interest rate swaps.
9. Share of results of joint ventures
Half year Half year Year
to 30.06.2017 to 30.06.2016 to 31.12.2016
GBPm GBPm GBPm
----------------------- -------------- -------------- --------------
Revaluation surplus 3.4 0.2 1.8
Other profit after tax
from operations 0.3 0.3 0.5
3.7 0.5 2.3
See note 13 for further details on the Group's joint ventures.
10. Tax charge
Half year Half year Year
to 30.06.2017 to 30.06.2016 to 31.12.2016
GBPm GBPm GBPm
------------------------------ -------------- -------------- --------------
Corporation tax
UK corporation tax and income
tax in respect of profit for
the period 1.5 0.9 1.9
Other adjustments in respect
of prior years' tax - - 0.1
Corporation tax charge 1.5 0.9 2.0
Deferred tax
Origination and reversal
of temporary differences (0.6) 0.5 (0.9)
Adjustment for changes
in estimates (0.3) (0.4) (0.2)
Deferred tax (credit)/charge (0.9) 0.1 (1.1)
Tax charge 0.6 1.0 0.9
In addition to the tax charge of GBP0.6m (half year to 30 June 2016: GBP1.0m; year to 31 December 2016: GBP0.9m) that passed through the Group income statement, a deferred tax charge of GBP0.4m (half year to 30 June 2016: credit of GBP0.2m; year to 31 December of 2016: credit of GBP1.3m) was recognised in the Group statement of comprehensive income relating to the revaluation of the owner-occupied property at 25 Savile Row W1.
The effective rate of tax for the half year to 30 June 2017 is lower (half year to 30 June 2016: lower; year to 31 December 2016: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
Half year Half year Year to
to 30.06.2017 to 30.06.2016 31.12.2016
GBPm GBPm GBPm
-------------------------------- --------------- -------------- -----------
Profit before tax 145.8 98.5 54.5
--------------------------------- -------------- -------------- -----------
Expected tax charge based
on the standard rate of
corporation tax in the UK
of 19.25% (2016: 20%)* 28.1 19.7 10.9
Difference between tax and
accounting profit on disposals (4.0) (0.5) (1.2)
REIT exempt income (5.3) (3.8) (7.8)
Revaluation attributable
to REIT properties (13.1) (12.9) 7.2
Expenses and fair value
adjustments not allowable
for
tax purposes (2.2) 0.4 (2.8)
Capital allowances (2.1) (2.5) (5.3)
Other differences (0.8) 0.6 (0.2)
Tax charge on current period's
profit 0.6 1.0 0.8
Adjustments in respect of
prior years' tax - - 0.1
0.6 1.0 0.9
*Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2015 (on 26 October 2015) and the Finance Bill 2016 (on 7 September 2016). These include reductions in the main rate to 19% from 1 April 2017 and then to 17% from 1 April 2020. 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
Carrying value
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
At 1 January 2017 3,959.9 843.9 4,803.8 34.2 - 11.7 4,849.7
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 0.8 0.2 1.0 - - - 1.0
Capital expenditure 34.6 36.5 71.1 2.3 - 1.4 74.8
Interest capitalisation 2.6 2.1 4.7 - - - 4.7
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Additions 38.0 38.8 76.8 2.3 - 1.4 80.5
Disposals (295.6) - (295.6) - - - (295.6)
Transfers (8.2) (133.9) (142.1) 8.2 133.9 - -
Revaluation 43.4 23.3 66.7 - - - 66.7
Reversal of write-down of trading property - - - - - 1.0 1.0
Adjustment to assets held for sale - - - - (1.9) - (1.9)
At 30 June 2017 3,737.5 772.1 4,509.6 44.7 132.0 14.1 4,700.4
At 1 January 2016 4,006.8 825.5 4,832.3 36.1 - 10.5 4,878.9
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 12.0 - 12.0 - - - 12.0
Capital expenditure 63.8 30.1 93.9 - - 0.6 94.5
Interest capitalisation 5.4 0.9 6.3 - - - 6.3
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Additions 81.2 31.0 112.2 - - 0.6 112.8
Disposals (2.6) - (2.6) - - (10.2) (12.8)
Transfers (10.1) - (10.1) - - 10.1 -
Revaluation 66.6 (2.1) 64.5 0.5 - - 65.0
Write-down of trading property - - - - - (1.4) (1.4)
Movement in grossing up of
headlease liabilities - 0.7 0.7 - - - 0.7
At 30 June 2016 4,141.9 855.1 4,997.0 36.6 - 9.6 5,043.2
At 1 January 2016 4,006.8 825.5 4,832.3 36.1 - 10.5 4,878.9
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Acquisitions 12.0 - 12.0 - - - 12.0
Capital expenditure 116.1 75.7 191.8 3.6 - 2.9 198.3
Interest capitalisation 10.6 2.4 13.0 - - - 13.0
------------------------------------------ -------- --------- ---------- -------- -------- -------- ---------
Additions 138.7 78.1 216.8 3.6 - 2.9 223.3
Disposals (158.1) (40.7) (198.8) - - (10.2) (209.0)
Transfers (10.1) - (10.1) - - 10.1 -
Revaluation (17.4) (19.7) (37.1) (5.5) - - (42.6)
Write-down of trading property - - - - - (1.6) (1.6)
Movement in grossing up of
headlease liabilities - 0.7 0.7 - - - 0.7
At 31 December 2016 3,959.9 843.9 4,803.8 34.2 - 11.7 4,849.7
Adjustments from fair value to carrying value
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- -------- --------- ---------- -------- -------- -------- ---------
At 30 June 2017
Fair value 3,829.8 775.5 4,605.3 44.7 133.7 14.1 4,797.8
Selling costs relating to assets
held for sale - - - - (1.7) - (1.7)
Lease incentives and costs
included in receivables (92.3) (17.5) (109.8) - - - (109.8)
Grossing up of headlease liabilities - 14.1 14.1 - - - 14.1
Carrying value 3,737.5 772.1 4,509.6 44.7 132.0 14.1 4,700.4
At 30 June 2016
Fair value 4,232.8 849.3 5,082.1 36.6 - 9.6 5,128.3
Lease incentives and costs
included in receivables (90.9) (18.1) (109.0) - - - (109.0)
Grossing up of headlease liabilities - 23.9 23.9 - - - 23.9
Carrying value 4,141.9 855.1 4,997.0 36.6 - 9.6 5,043.2
At 31 December 2016
Fair value 4,054.0 842.8 4,896.8 34.2 - 11.7 4,942.7
Lease incentives and costs
included in receivables (94.1) (22.8) (116.9) - - - (116.9)
Grossing up of headlease liabilities - 23.9 23.9 - - - 23.9
Carrying value 3,959.9 843.9 4,803.8 34.2 - 11.7 4,849.7
Reconciliation of fair value
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
-------------------------------------------------------- ---------- ---------- ----------
Portfolio including the Group's share of joint ventures 4,842.2 5,164.0 4,980.5
Joint ventures (44.4) (35.7) (37.8)
IFRS property portfolio 4,797.8 5,128.3 4,942.7
The property portfolio is subject to semi-annual external valuations and was revalued at 30 June 2017 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.
CBRE Limited valued properties at GBP4,765.2m (30 June 2016: GBP5,097.6m; 31 December 2016: GBP4,910.7m) and other valuers at GBP32.6m (30 June 2016: GBP30.7m; 31 December 2016: GBP32.0m). Of the properties revalued by CBRE, GBP44.7m (30 June 2016: GBP36.6m; 31 December 2016: GBP34.2m) relating to owner-occupied property was included within property, plant and equipment, GBP133.7m (30 June 2016: GBPnil; 31 December 2016: GBPnil) was included within non-current assets held for sale, and GBP14.1m (30 June 2016: GBP9.6m; 31 December 2016: GBP11.7m) was included within trading property.
The total fees, including the fee for this assignment, earned by CBRE (or other companies forming part of the same group of companies within the UK) from the Group is less than 5.0% of their total UK revenues.
During the year ended 31 December 2016, the Group transferred from investment property to trading property, at market value, the residential element of the 80 Charlotte Street development which it intends to sell. Any future revaluation surplus relating to the trading property will be recognised as an adjustment to EPRA net asset value, but, in accordance with IAS 2 Inventories, will not be recognised in the carrying value of the property as trading properties are stated at the lower of cost and net realisable value.
Reconciliation of revaluation
surplus/(deficit)
Half year Half year Year to
to 30.06.2017 to 30.06.2016 31.12.2016
GBPm GBPm GBPm
------------------------------------ -------------- -------------- -----------
Total revaluation surplus/(deficit) 85.1 75.6 (20.9)
Share of joint ventures (3.6) (0.2) (1.8)
Lease incentives and
costs (12.1) (12.0) (21.5)
Assets held for sale
selling costs (1.7) - -
Other - 0.2 -
IFRS revaluation surplus/(deficit) 67.7 63.6 (44.2)
Reported in the:
Revaluation surplus/(deficit) 66.7 64.5 (37.1)
Reversal of write-down/(write-down)
of trading property 1.0 (1.4) (1.6)
Group income statement 67.7 63.1 (38.7)
Group statement of comprehensive
income - 0.5 (5.5)
67.7 63.6 (44.2)
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
------------------------- -------- ------- ----- -----
At 1 January 2017 34.2 1.5 2.4 38.1
Additions 2.3 - 2.4 4.7
Disposals - - (0.2) (0.2)
Transfers 8.2 - - 8.2
Depreciation - - (0.3) (0.3)
At 30 June 2017 44.7 1.5 4.3 50.5
At 1 January 2016 36.1 1.5 1.5 39.1
Additions - - 0.1 0.1
Depreciation - - (0.1) (0.1)
Revaluation 0.5 - - 0.5
At 30 June 2016 36.6 1.5 1.5 39.6
At 1 January 2016 36.1 1.5 1.5 39.1
Additions 3.6 - 1.3 4.9
Depreciation - - (0.4) (0.4)
Revaluation (5.5) - - (5.5)
At 31 December
2016 34.2 1.5 2.4 38.1
Net book value
Cost or valuation 44.7 1.5 5.8 52.0
Accumulated depreciation - - (1.5) (1.5)
At 30 June 2017 44.7 1.5 4.3 50.5
Net book value Cost or valuation 36.6 1.5 3.7 41.8 Accumulated depreciation - - (2.2) (2.2) At 30 June 2016 36.6 1.5 1.5 39.6 Net book value Cost or valuation 34.2 1.5 4.8 40.5 Accumulated depreciation - - (2.4) (2.4) At 31 December 2016 34.2 1.5 2.4 38.1
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 October 2016 and the Directors consider that there have been no material valuation movements since that date. In accordance with IFRS 13 Fair Value Measurement, the artwork is deemed to be classified as Level 3.
13. Investments
The Group has a 50% interest in two joint ventures, Primister Limited and Prescot Street Limited Partnership.
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
------------------------------ ---------- ---------- ----------
At 1 January 36.0 30.7 30.7
Additions - 1.7 3.0
Share of results of joint
ventures (see note 9) 3.7 0.5 2.3
Repayment of shareholder loan (1.2) - -
38.5 32.9 36.0
14. Other receivables (non-current)
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
------------------------------- ----- ---------- ----------
Prepayments and accrued income 96.9 98.1 105.4
Other 3.7 3.7 3.7
100.6 101.8 109.1
Prepayments and accrued income relates to rents recognised in advance as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts, as well as the initial direct costs of the letting, over the expected terms of their respective leases. Together with GBP12.9m (30 June 2016: GBP10.9m; 31 December 2016: GBP11.5m), which was included as current assets within trade and other receivables, these amounts totalled GBP109.8m at 30 June 2017 (30 June 2016: GBP109.0m; 31 December 2016: GBP116.9m).
15. Trade and other receivables
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
------------------ ---- ---------- ----------
Trade receivables 7.3 4.5 5.1
Other receivables 2.6 2.4 2.7
Prepayments 19.2 19.6 15.5
Accrued income 14.8 14.2 15.2
43.9 40.7 38.5
16. Non-current assets held for sale
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
---------------------------------- ---------- ---------- ----------
Transfer from investment property
(see note 11) 132.0 - -
In June 2017, the Group exchanged contracts on the sale of a long leasehold interest for a total of GBP165.0m, or GBP148.7m before costs and net of adjustments relating to rent free periods and a rent guarantee on the vacant retail space. After costs to complete and a risk premium, the property was valued at GBP133.7m at 30 June 2017.
In accordance with IFRS 5 Non-current Assets Held for Sale, this property was recognised as a non-current asset held for sale and, after deducting selling costs of GBP1.7m, the carrying value was GBP132.0m.
17. Trade and other payables
30.06.2017 30.06.2016 31.12.2016
GBPm GBPm GBPm
---------------- ---- ---------- ----------
Trade payables 2.5 5.1 2.0
Other payables 16.6 15.7 16.7
Other taxes 3.4 0.3 6.5
Accruals 35.7 55.3 45.9
Deferred income 37.0 36.6 38.9
95.2 113.0 110.0
18. Borrowings and derivative financial instruments
30.06.2017 30.06.2016 31.12.2016
-------------- ---------------- ---------------
Book Fair Book Fair Book Fair
value value Value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------- ----- ------- ------- ------ -------
Current liabilities
Secured bank loan 28.0 28.0 - - - -
28.0 28.0 - - - -
Non-current liabilities
1.125% unsecured convertible bonds 2019 144.2 151.1 141.5 148.6 142.9 152.4
6.5% secured bonds 2026 187.4 225.4 188.4 232.1 187.9 225.6
3.46% unsecured private placement notes 2028 29.8 30.8 29.8 31.4 29.8 30.8
4.41% unsecured private placement notes 2029 24.8 28.8 24.8 29.6 24.8 28.8
3.57% unsecured private placement notes 2031 74.5 75.7 74.5 76.8 74.5 75.6
4.68% unsecured private placement notes 2034 74.3 88.4 74.3 90.4 74.3 88.5
3.99% secured loan 2024 81.9 88.1 82.1 89.6 82.1 88.2
Unsecured bank loans 177.5 181.5 354.0 359.0 254.3 259.5
Secured bank loan - - 28.0 28.0 28.0 28.0
Leasehold liabilities 14.1 14.1 23.9 23.9 23.9 23.9
Borrowings 808.5 883.9 1,021.3 1,109.4 922.5 1,001.3
Derivative financial instruments
expiring in greater than one year 11.0 11.0 30.4 30.4 17.3 17.3
Total borrowings and derivative
financial instruments 847.5 922.9 1,051.7 1,139.8 939.8 1,018.6
Reconciliation to net debt:
Borrowings and derivative
financial instruments 847.5 1,051.7 939.8
Less:
Derivative financial instruments (11.0) (30.4) (17.3)
Cash and cash equivalents (102.8) (12.7) (17.7)
Net debt 733.7 1,008.6 904.8
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 values of the Group's bank loans are approximately the same as their carrying amount, after adjusting for the unamortised arrangement fees, and also represent Level 2 fair value measurement.
The fair values 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 2017 or 2016.
19. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
--------------------------------- ----------- ----- -----
At 1 January 2017 5.3 (2.2) 3.1
(Credited)/charged to the
income statement (0.7) 0.1 (0.6)
Change in tax rates in the
income statement (0.5) 0.2 (0.3)
Charged to other comprehensive
income 0.5 - 0.5
Change in tax rates in other
comprehensive income (0.1) - (0.1)
At 30 June 2017 4.5 (1.9) 2.6
At 1 January 2016 8.7 (3.2) 5.5
(Credited)/charged to the income
statement (0.5) 1.0 0.5
Change in tax rates in the
income statement (0.7) 0.3 (0.4)
Change in tax rates in other
comprehensive income (0.2) - (0.2)
At 30 June 2016 7.3 (1.9) 5.4
At 1 January 2016 8.7 (3.2) 5.5
(Credited)/charged to the income
statement (1.8) 0.9 (0.9)
Change in tax rates in the
income statement (0.3) 0.1 (0.2) Credited to other comprehensive income (1.2) - (1.2) Change in tax rates in other comprehensive income (0.1) - (0.1) At 31 December 2016 5.3 (2.2) 3.1
Deferred tax on the revaluation surplus is calculated on the basis of the chargeable gains that would crystallise on the sale of the property portfolio at each balance sheet date. The calculation takes account of any available indexation on the historic 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 regime.
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences where the Directors believe it is probable that these assets will be recovered.
20. Dividend
Dividend per share
----------------------
Half year to Half year to Year to
Payment date PID Non-PID Total 30.06.2017 30.06.2016 31.12.2016
p p p GBPm GBPm GBPm
-------------- ------------- ----- ------- ------ -------------- -------------- --------------
Current period
2017 interim
dividend 20/10/2017 17.33 - 17.33 - - -
----- ------- ------
Distribution of
current period
profit 17.33 - 17.33
----- ------- ------
Prior period
2016 interim
dividend 21/10/2016 13.86 - 13.86 - - 15.5
----- ------- ------
Distribution of
prior period
profit 13.86 - 13.86
Prior year
2016 final
dividend 09/06/2017 32.70 5.80 38.50 42.9 - -
2016 special
dividend 09/06/2017 - 52.00 52.00 57.9 - -
----- ------- ------
Distribution of
prior year
profit 46.56 57.80 104.36
----- ------- ------
2015 final
dividend 10/06/2016 30.80 - 30.80 - 34.2 34.2
Dividends as
reported in the
Group statement
of changes in
equity 100.8 34.2 49.7
---------------- ------------- ----- ------- ------ -------------- -------------- --------------
2016 final
dividend
withholding tax 14/07/2017 (4.0) - -
2016 interim
dividend
withholding tax 14/01/2017 1.7 - (1.7)
2015 final scrip
dividend 10/06/2016 - (1.1) (1.1)
2015 final scrip
dividend
withholding tax 14/07/2016 - (0.2) -
2015 final
dividend
withholding tax 14/07/2016 - (3.7) -
2015 interim
dividend
withholding tax 14/01/2016 - 1.7 1.7
Dividends paid as reported in
the
Group cash flow
statement 98.5 30.9 48.6
---------------- ------------- ----- ------- ------ -------------- -------------- --------------
21. Post balance sheet events
In July 2017, the Group refinanced the GBP28.0m secured bank loan, shown in current liabilities at 30 June 2017, with a new GBP28.0m five-year facility from the same lender.
22. Related party disclosure
There have been no related party transactions during the half year to 30 June 2017 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 for the year ended 31 December 2016.
23. EPRA performance measures
Number of shares
-------------------------- ------- ---------- ---------- ---------- ---------- ----------
Earnings per share Net asset value
measures per share measures
------------------------- ------------------------------- ----------------------------------
Weighted average
for the
period ended At period ended
------------------------------- ----------------------------------
30.06.2017 30.06.2016 31.12.2016 30.06.2017 30.06.2016 31.12.2016
'000 '000 '000 '000 '000 '000
------------------------- ------- ---------- ---------- ---------- ---------- ----------
For use in basic
measures 111,402 111,242 111,315 111,454 111,383 111,390
Dilutive effect
of convertible bonds - 4,498 - - 4,498 -
Dilutive effect
of share-based payments 321 331 296 321 319 291
For use in measures
for which
bond conversion
is dilutive 111,723 116,071 111,611 111,775 116,200 111,681
Less dilutive effect
of convertible bonds - (4,498) - - (4,498) -
For use in other
diluted measures 111,723 111,573 111,611 111,775 111,702 111,681
The GBP150m unsecured convertible bonds 2019 ('2019 bonds') have a current conversion price of GBP32.73. 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 half year to 30 June 2017 and for the year ended 31 December 2016, the Group did not recognise the dilutive impact of the conversion of the 2019 bonds on its earnings per share (EPS) or net asset value (NAV) per share measures as, based on the recent share price, the bonds were not expected to convert.
For the half year to 30 June 2016, the 2019 bonds were dilutive for all NAV per share measures and IFRS EPS, but anti-dilutive for EPRA EPS.
The following tables set out reconciliations between the IFRS and EPRA earnings for the period and earnings per share. The adjustments made between the figures are as follows:
A - Disposal of investment and trading property and associated tax and non-controlling interest
B - Revaluation movement on investment property and in joint ventures, (reversal of write-down)/ write-down in 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 the dilutive effect of convertible bonds
Earnings and earnings per share
------------------------------------------------------- ----- ------
Adjustments EPRA
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- ------ ------ ----- ------
Half year to 30 June
2017
Net property and other
income 81.5 - (1.0) - 80.5
Total administrative
expenses (12.8) - - - (12.8)
Revaluation surplus 66.7 - (66.7) - -
Profit on disposal of
investment property 19.1 (19.1) - - -
Net finance costs (14.3) - - - (14.3)
Movement in fair value
of derivative
financial instruments 6.4 - - (6.4) -
Financial derivative
termination costs (4.5) - - 4.5 -
Share of results of
joint ventures 3.7 - (3.4) - 0.3
Profit before tax 145.8 (19.1) (71.1) (1.9) 53.7
Tax charge (0.6) - (1.2) - (1.8)
Profit for the period 145.2 (19.1) (72.3) (1.9) 51.9
Non-controlling interest 1.2 - (2.7) 0.2 (1.3)
Earnings attributable
to equity shareholders 146.4 (19.1) (75.0) (1.7) 50.6
Earnings per share 131.42p 45.42p
Diluted earnings per
share 131.04p 45.29p
Half year to 30 June
2016
Net property and other
income 74.2 (1.9) 1.4 - 73.7
Total administrative
expenses (15.3) - - - (15.3)
Revaluation surplus 64.5 - (64.5) - -
Profit on disposal of
investment property 2.5 (2.5) - - -
Net finance costs (13.9) - - - (13.9)
Movement in fair value
of derivative
financial instruments (12.8) - - 12.8 -
Financial derivative
termination costs (1.2) - - 1.2 -
Share of results of
joint ventures 0.5 - (0.2) - 0.3
Profit before tax 98.5 (4.4) (63.3) 14.0 44.8
Tax charge (1.0) - (1.2) - (2.2)
Profit for the period 97.5 (4.4) (64.5) 14.0 42.6
Non-controlling interest 1.0 - (2.1) (0.2) (1.3)
Earnings attributable
to equity shareholders 98.5 (4.4) (66.6) 13.8 41.3
Interest effect of dilutive
convertible bonds 1.9 - - (1.9) -
Diluted earnings 100.4 (4.4) (66.6) 11.9 41.3
Earnings per share 88.55p 37.13p
Diluted earnings per
share 86.50p 37.02p
Year to 31 December
2016
Net property and other
income 149.2 (1.9) 1.6 - 148.9
Total administrative
expenses (30.9) - - - (30.9)
Revaluation deficit (37.1) - 37.1 - -
Profit on disposal of
investment property 7.5 (7.5) - - -
Net finance costs (27.8) - - - (27.8)
Movement in fair value
of derivative
financial instruments 0.3 - - (0.3) -
Financial derivative
termination costs (9.0) - - 9.0 -
Share of results of
joint ventures 2.3 - (1.8) - 0.5
Profit before tax 54.5 (9.4) 36.9 8.7 90.7
Tax charge (0.9) 0.5 (2.2) - (2.6)
Profit for the year 53.6 (8.9) 34.7 8.7 88.1
Non-controlling interest 5.1 - (7.6) 0.1 (2.4)
Earnings attributable
to equity shareholders 58.7 (8.9) 27.1 8.8 85.7
Earnings per share 52.73p 76.99p
Diluted earnings per
share 52.59p 76.78p
Net asset value and net asset value per share
------------------------------------------------------------------- ------- --------- -------
Undiluted Diluted
GBPm p p
------------------------------------------------------------------ ------- --------- -------
At 30 June 2017
Net assets attributable to equity shareholders 3,977.1 3,568 3,558
Adjustment for:
Deferred tax on revaluation surplus 4.5
Fair value of derivative financial instruments 11.0
Fair value adjustment to secured bonds 13.5
Non-controlling interest in respect of the above (1.9)
EPRA net asset value 4,004.2 3,593 3,582
Adjustment for:
Mark-to-market of secured bonds 2026 (50.5)
Mark-to-market of secured loan 2024 (5.1)
Mark-to-market of unsecured private placement notes 2029 and 2034 (17.2)
Mark-to-market of unsecured private placement notes 2028 and 2031 (1.5)
Mark-to-market of 1.125% unsecured convertible bonds 2019 (5.7)
Deferred tax on revaluation surplus (4.5)
Fair value of derivative financial instruments (11.0)
Unamortised issue and arrangement costs (8.9)
Non-controlling interest in respect of the above 1.9
------------------------------------------------------------------ ------- --------- -------
EPRA triple net asset value 3,901.7 3,501 3,491
Undiluted Diluted
GBPm p p
------------------------------------------------------------------ ------- --------- -------
At 30 June 2016
Net assets attributable to equity shareholders - diluted 4,131.9 3,556
Remove conversion of 1.125% unsecured convertible bonds 2019 (141.5)
------------------------------------------------------------------ ------- --------- -------
Net assets attributable to equity shareholders - undiluted 3,990.4 3,583
Adjustment for:
Deferred tax on revaluation surplus 7.3
Fair value of derivative financial instruments 30.4
Fair value adjustment to secured bonds 14.5
Non-controlling interest in respect of the above (3.3)
------------------------------------------------------------------ ------- --------- -------
EPRA net asset value - undiluted 4,039.3 3,626
Adjustment for:
Potential conversion of 1.125% unsecured convertible bonds 2019 141.5
------------------------------------------------------------------ ------- --------- -------
EPRA net asset value - diluted 4,180.8 3,598
Adjustment for:
Mark-to-market of secured bonds 2026 (57.1)
Mark-to-market of secured loan 2024 (6.6)
Mark-to-market of unsecured private placement notes 2029 and 2034 (20.0)
Mark-to-market of unsecured private placement notes 2028 and 2031 (3.2)
Deferred tax on revaluation surplus (7.3)
Fair value of derivative financial instruments (30.4)
Unamortised issue and arrangement costs (8.6)
Non-controlling interest in respect of the above 3.3
------------------------------------------------------------------ ------- --------- -------
EPRA triple net asset value - diluted 4,050.9 3,486
Adjustment for 1.125% unsecured convertible bonds 2019:
Remove conversion of bonds (141.5)
Unamortised issue and arrangement costs (1.8)
Mark-to-market of bonds (5.3)
------------------------------------------------------------------ ------- --------- -------
EPRA triple net asset value - undiluted 3,902.3 3,503
At 31 December 2016
Net assets attributable to equity shareholders 3,932.3 3,530 3,521
------------------------------------------------------------------- ------- --------- -------
Adjustment for:
Deferred tax on revaluation surplus 5.3
Fair value of derivative financial instruments 17.3
Fair value adjustment to secured bonds 14.0
Non-controlling interest in respect of the above (2.6)
------------------------------------------------------------------ ------- --------- -------
EPRA net asset value 3,966.3 3,561 3,551
Adjustment for:
Mark-to-market of secured bonds 2026 (50.6)
Mark-to-market of secured loan 2024 (5.2)
Mark-to-market of unsecured private placement notes 2029 and 2034 (17.3)
Mark-to-market of unsecured private placement notes 2028 and 2031 (1.4)
Mark-to-market of 1.125% unsecured convertible bonds 2019 (8.0)
Deferred tax on revaluation surplus (5.3)
Fair value of derivative financial instruments (17.3)
Unamortised issue and arrangement costs (10.3)
Non-controlling interest in respect of the above 2.6
------------------------------------------------------------------ ------- --------- -------
EPRA triple net asset value 3,853.5 3,459 3,450
Cost ratios
------------------------------------ -------------- -------------- -----------
Half year Half year Year to
to 30.06.2017 to 30.06.2016 31.12.2016
GBPm GBPm GBPm
--------------------------------- -------------- -------------- -----------
Administrative expenses 12.8 15.3 30.9
Other property costs 5.0 3.1 7.5
Dilapidation receipts - (0.1) (0.1)
Net service charge costs 1.2 0.7 1.3
Service charge costs recovered
through rents
but not separately invoiced (0.1) (0.1) (0.3)
Management fees received less
estimated profit element (1.2) (1.1) (2.4)
Share of joint ventures'
expenses 0.3 0.2 0.5
EPRA costs (including
direct vacancy costs)
(A) 18.0 18.0 37.4
Direct vacancy costs (2.0) (1.2) (2.5)
EPRA costs (excluding
direct vacancy costs)
(B) 16.0 16.8 34.9
Gross rental income 85.4 76.7 155.4
Ground rent 0.1 (0.3) (0.7)
Service charge components
of rental income (0.1) (0.1) (0.3) Share of joint ventures' rental income less ground rent 0.8 0.6 1.3 Adjusted gross rental income (C) 86.2 76.9 155.7 EPRA cost ratio (including direct vacancy costs) (A/C) 20.9% 23.4% 24.0% EPRA cost ratio (excluding direct vacancy costs) (B/C) 18.6% 21.8% 22.4% 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) 4,797.8 5,128.3 4,942.7 Portfolio cost ratio (A/D) - annualised 0.8% 0.7% 0.8% The Group has not capitalised any overhead or operating expenses in either 2017 or 2016.
24. Gearing and interest cover
NAV gearing
30.06.2017 30.06.2016 31.12.2016
Note GBPm GBPm GBPm
------------ ---- ------- ---------- ----------
Net debt 18 733.7 1,008.6 904.8
Net assets 4,043.0 4,062.3 3,999.4
NAV gearing 18.1% 24.8% 22.6%
Loan-to-value ratio
30.06.2017 30.06.2016 31.12.2016
Note GBPm GBPm GBPm
-------------------------------------------------------- ------ ---------- ---------- ----------
Net debt 18 733.7 1,008.6 904.8
Fair value adjustment of secured bonds (13.5) (14.5) (14.0)
Unamortised issue and arrangement costs 8.9 10.4 10.3
Leasehold liabilities 18 (14.1) (23.9) (23.9)
Drawn debt 715.0 980.6 877.2
Fair value of property portfolio 11 4,797.8 5,128.3 4,942.7
Loan-to-value ratio 14.9% 19.1% 17.7%
At 30 June 2017, the loan-to-value ratio including the Group's share of joint ventures was
14.9%.
Net interest cover ratio
Half year to Half year to
30.06.2017 30.06.2016 Year to 31.12.2016
Note GBPm GBPm GBPm
------------------------------------ ---- ----------------- ------------------ ------------------
Net property and other income 5 81.5 74.2 149.2
Adjustments for:
Other income 5 (1.2) (1.1) (2.4)
Other property income 5 - - (0.5)
Net surrender premiums received 5 - - (0.1)
Profit on disposal of trading
properties 5 - (1.9) (1.9)
(Reversal of write-down)/write-down of
trading property 5 (1.0) 1.4 1.6
Reverse surrender premiums 5 - 0.1 0.1
Adjusted net property income 79.3 72.7 146.0
Finance costs 7 14.3 13.9 27.8
Adjustments for:
Other finance costs 7 (0.1) - (0.1)
Amortisation of fair value adjustment
to secured bonds 7 0.5 0.5 1.0
Amortisation of issue and arrangement
costs 7 (1.0) (1.1) (2.2)
Finance costs capitalised 7 4.7 6.3 13.0
18.4 19.6 39.5
Net interest cover ratio 431% 371% 370%
For the half year ended 30 June 2017, the net interest cover ratio including the Group's share of joint ventures was 433%.
25. Total return
Half year to 30.06.2017 Half year to 30.06.2016 Year to 31.12.2016
p p p
------------------------------ ----------------------- ----------------------- ------------------
EPRA net asset value on a diluted
basis
At end of period 3,582 3,598 3,551
At start of period (3,551) (3,535) (3,535)
Increase 31 63 16
Dividend per share 91 31 45
Increase including dividend 122 94 61
Total return 3.4% 2.7% 1.7%
26. List of definitions
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.
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 period attributable to equity shareholders and are divided by the weighted average number of ordinary shares in issue during the financial period to arrive at earnings per share.
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 published its latest Best Practices Recommendations in November 2016. This includes guidelines for the calculation of the following performance measures which the Group has adopted.
- EPRA earnings per share
Earnings from operational activities.
- EPRA net asset value per share
NAV adjusted to include trading properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business model.
- EPRA triple net asset value per share
EPRA NAV adjusted to include the fair values of (i) financial instruments, (ii) debt and (iii) deferred taxes on revaluations, where applicable.
- 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 periods under review. This growth rate includes revenue recognition and lease accounting adjustments but excludes properties held for development in either period and properties acquired or disposed of in either period.
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, these leases are treated as finance leases and the cost allocated between interest payable and property outgoings.
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.
Investment Property Databank Limited (IPD)
IPD is a company that produces independent benchmarks of property returns. The Group measures its performance against both the Central London Offices Index and the All UK Property Index.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives and individual goals, against which the performance of the Group is annually assessed.
Lease incentives
Any incentive offered to occupiers to enter into a lease. Typically the incentive will be an initial rent free or half rent period, stepped rents, or a cash contribution to fit-out or similar costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property portfolio. Drawn debt is equal to drawn facilities less cash and the unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability and its market value.
NAV gearing
Net debt divided by net assets.
Net assets per share or net asset value (NAV)
Equity shareholders' funds divided by the number of ordinary shares in issue at the balance sheet date.
Net debt
Borrowings plus bank overdraft less cash and cash equivalents.
Net interest cover ratio
Net property income, excluding all non-core items divided by interest payable on borrowings and non-utilisation fees.
Property income distribution (PID)
Dividends from profits of the Group's tax-exempt property rental business under the REIT regulations.
Non-PID
Dividends from profits of the Group's taxable residual business.
Real Estate Investment Trust (REIT)
The UK Real Estate Investment Trust ("REIT") regime was launched on 1 January 2007. On 1 July 2007, Derwent London plc elected to convert to REIT status.
The REIT legislation was introduced to provide a structure which closely mirrors the tax outcomes of direct ownership in property and removes tax inequalities between different real estate investors. It provides a liquid and publically 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. 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.
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.
Total property return (TPR)
Total property return is a performance measure calculated by the 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 adjusted net asset value per share on a diluted basis between the beginning and the end of each financial period plus the dividend per share paid during the period expressed as a percentage of the EPRA net asset value 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 period, expressed as a percentage of the share price at the beginning of the year.
Underlying portfolio
Properties that have been held for the whole of the period (i.e. excluding any acquisitions or disposals made during the period).
Underlying valuation increase
The valuation increase on the underlying portfolio.
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, which the net initial yield will rise to 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.
27. 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.
Independent review report to Derwent London plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Derwent London plc's condensed consolidated interim financial statements (the "interim financial statements") in the interim results of Derwent London plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the Group condensed balance sheet as at 30 June 2017;
-- the Group condensed income statement and statement of comprehensive income for the period then ended;
-- the Group condensed cash flow statement for the period then ended; -- the Group condensed statement of changes in equity for the period then ended; and -- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the Directors
The interim results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
10 August 2017
Notes:
a) The maintenance and integrity of the Derwent London plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Notes to editors
Derwent London plc
Derwent London plc owns a portfolio of commercial real estate predominantly in central London valued at GBP4.8 billion (including joint ventures) as at 30 June 2017, 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.
Landmark schemes in our 5.6 million sq ft portfolio include Angel Building EC1, The Buckley Building EC1, White Collar Factory EC1, 1-2 Stephen Street W1, Horseferry House SW1 and Tea Building E1.
In 2017 the Group won the Property Week Developer of the Year award and was listed 12th out of 4,000 in the Corporate Knights Global 100 of the world's most sustainable companies. In 2016 the Group won Estates Gazette National Company of the Year and London awards as well as awards from Architects' Journal, British Council for Offices, Civic Trust and RIBA and achieved EPRA Gold for corporate and sustainability reporting.
As part of its wider sustainability programme, in 2013 Derwent London launched a dedicated GBP250,000 voluntary Community Fund and, in 2016, made a further commitment of GBP300,000 for the next three years for Fitzrovia and the Tech Belt.
The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The address of its registered office is 25 Savile Row, London, W1S 2ER.
For further information see www.derwentlondon.com or follow us on Twitter at @derwentlondon
Forward-looking statements
This document contains certain forward-looking statements about the future outlook of Derwent London. By their nature, any statements about future outlook involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Actual results, performance or outcomes may differ materially from any results, performance or outcomes expressed or implied by such forward-looking statements.
No representation or warranty is given in relation to any forward-looking statements made by Derwent London, including as to their completeness or accuracy. Derwent London does not undertake to update any forward-looking statements whether as a result of new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UGUAARUPMGQB
(END) Dow Jones Newswires
August 10, 2017 02:00 ET (06:00 GMT)
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