Derwent London Plc (DLN) Earnings Call Transcript & Summary

Thank you. Good morning, everyone, and thank you for listening in today Derwent London's 2020 Q3 business update. I hope you and your families are all keeping safe and well. I'm sharing the line with my colleagues, Damian Wisniewski, Nigel George and David Silverman. And after I've said a few words, we'll be available to answer questions. The pandemic has meant that 2020 has been a challenging year for us all. The fact that we're starting the second lockdown today demonstrates that the uncertainty that has clouded the market is likely to continue into next year. Against this background, our focus has been on supporting health and safety of our stakeholders. Our relationships are key and have been working closely with our occupiers, business partners and communities. The London Office leasing market continues to be in a wait-and-see mode with a small number of transactions providing limited evidence of market levels. We are seeing the emergence of a 2-tier market with a gap between good and poor quality space widening. However, the investment market has been more active recently with good demand for properties, which provides secure income. For these yields to remain firm, the depth of demand for buildings with shorter-term income may be thinner, but the lack of distress has meant we've not seen any opportunities yet. In August, we set out our plans to maintain and extend our income by negotiating earlier than normal on potential lease expiries and breaks. We have now completed GBP 16 million of lease renewals with a further GBP 5 million under offer. These deals were 6% above passing rent. Longer-term deals have matched ERV, but we've been prepared to sacrifice some growth to maintain income and flexibility on shorter leases. It is also pleasing to note that to date, these occupiers have either maintained or increased their space. We gave you an update on the September quarter rent collection on the 13th of October. We have now received 88% of this year's total rent with another 7% still to be received through agreed payment plans. Our 2 major developments at Soho Place and The Featherstone Building are progressing well and are due to complete in H1 2022. We have now committed GBP 14 million for the detailed design of our next major development of 293,000 square feet at 19-35 Baker Street. We expect to commence on-site later in 2021. We've also been busy further extending our finances with a new 5-year GBP 100 million revolving credit facility. This replaces a GBP 75 million facility that was due to expire in 2022. With a loan-to-value of only 17% and circa GBP 500 million of cash and undrawn facilities, we remain in a great place to pursue new opportunities, both from within our own portfolio and others we might find in the future. The world that emerges from the pandemic is likely to be a different one. However, we believe that our adaptable long life, loose fit product, our customer focus, our pathway to being a net zero carbon business by 2030 and flexible finances mean that we're able to respond to market challenges. We'll now hand back to the operator for questions.

[Operator Instructions] Your first question today is from Max Nimmo with Kempen.

Just wondering if you could comment on the gray space that's coming back to market. If you're you seeing any trends there in terms of who's getting space back and what you kind of -- your outlook is on that?

Thanks, Matt. So good morning, I hope you're well. Yes, obviously, there has been increase in the gray space. We think it represents about 1/3 of the overall vacancy. But obviously, its focus is very much more in Docklands in the city. And those been a relatively large level of gray space, particularly in the Docklands with the banks. We haven't seen a huge growth in our -- it's obviously something we're monitoring. It's not something that's been a big factor within the West End or in the Tech Belt, but we will see it. It's generally tenant-controlled secondary space. And I think there's views of sort of merchants with the 2-tier market and good demand for quality space. So we're obviously keeping an eye. It has increased. And given the economic situation, we expected that. But as I say, it's always been a bit of a factor, particularly in the East. David, do you want to add anything to that? David Silverman, you're on the line?

Yes, I'm here. No, I think that's right. I think it's just the point I was going to make, which is location. And it tends to be very much a sort of a wharf and city phenomenon, I think. There is some in the West End as well, but that's where it majority lies.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Paul Williams for any closing remarks. Excuse me, sorry. We just got some questions. Can I please announce them?

Yes.

Of course. The next question comes from the line of Paul May with Barclays.

Just a quick one on the letting progress. I appreciate that there's a bit of a difference between longer-term and shorter-term lettings. The discounts that you're giving on the shorter-term lettings, was that something that was expected coming into this year, as in did you expect to give short lettings or is that tenants looking to just sort of extend space for a period of time why they decide what they're going to do in terms of future longer-term plan? Just to get a feel for -- is it your decision? Or is it the environment or is it tenants decisions that are sort of driving that?

Well, I think it's a good question. I think, first of all, we've been very pleased with the level of engagement we've had with our tenants to achieve GBP 16 million. I think we were at GBP 8 million earlier in the year. So that's been good. And I think maybe you've seen it, we've beaten our passing. And I think what -- as you know, we've always liked the flexibility within the business to be able to extend some leases and give some optionality going forward. So if any -- somebody wants just a 1-, 2-, 3-year lease extension, then we're relatively relaxed that we get -- beat the passing. And if it's slightly low below ERV, we'll catch up in due course. So we're not been doing some lease extensions long periods at lower rents, and it's just really where we thought we may just extend a bit. Maybe there's a development site. We think to ourselves, we'll roll on the income for a year or 2 just to -- and keep it occupied and make sure the tenant feels that he's got a sensible deal. So the engagement has been good. So the figure you're referring to is very much on the shorter, more flexible space, keeping the voids down, keeping the income going, but they're also giving that optionality. But we've also got some other lease extensions, particularly the ones that are under offer, which are good rents for a longer period of time. So it's really -- it's that balance between maintaining the flexibility for us and for our occupiers and also just making sure that we build out that income. And as to say, we're pleased with the progress. I don't think you need to read anything too much into that overall thing. You'll see also for new lettings, we're still, what, 9% above our ERV. And I think overall, 1.2% down. So I think you just -- you need to be very cautious with that particular figure because of deals with the short-term nature. Damian, do you want to add something to that?

No, I think that's absolutely right. I mean we're responding to this wait-and-see market, and the focus has very much been on maintaining income, as Paul said. So that's really the pattern we're seeing.

Do you -- is there a point in time which valuers would start to look at that or are they still -- or would you expect them still to ignore those shorter-term lettings...

I think we've always talked about it, Nigel?

Yes. I mean if you take something like Baker Street, where I think some of those renewals were, that's the development we want to do. So if anything, sort of positive to having come up until you actually want to go on site, but that's a small amount in the value of the land. Yes, the values have been focused on shorter leases, I think, probably now saw a couple of valuations and have been building in a greater risk factor on expiry, especially on the retail side. So they will be looking at those, but they'll also be looking at the underlying quality of the property and the CapEx that's going to need to be spent. I don't think there'll be an additional focus on it. It's always part of the sort of valuation process.

And just -- sorry, one last one on the valuation as well. Others have sort of mentioned that pricing on average is coming down to sort of 3% to 5% over the last 6 months. So we've seen some deals going through at sort of pre-COVID levels, others at slight discounts. Just wonder what your feeling is on that, whether you're seeing any opportunities for acquisitions or are you still very much focused on the internally generated development side, given obviously the things that you've announced today?

I think it's a balance of the both. I think we've got plenty of opportunities for -- that's been a good focus. And as I said, we've seen no distress yet at all and no great value. And yield to pay remain very firm for particularly well let space. There have been some deals at pre-COVID. We haven't seen any opportunities, but David and his team are out looking. And if we see some, we'd like to see some value, but we haven't seen it yet. David, do you want to add something to that?

No, I think that's right. I think obviously, total transaction levels on the investment side are substantially down on the year. But actually, in recent weeks, there's been a real sort of boost, and there's been quite a lot of activity. But really, it's been focused on the well let secure income. And as Paul said, I think for our sort of traditional opportunities that we look for sort of shorter leases, et cetera, there is no distress at the moment. We haven't seen any real opportunities, but we do expect them. So it's something that we're very focused on.