Derwent London Plc (DLN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Derwent London 2021 Q1 Business Update. My name is Timo, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Paul Williams. Please go ahead.

Good morning, and thank you for listening into our 2021 Q1 call. I'm here with my fellow executive Directors, Damian Wisniewski, Nigel George, David Silverman and Emily Prideaux. We are ready to answer any questions. But first, let me take you through a few highlights. Despite having [ this all ] completed space available, we have GBP 5.6 million of new lettings or space under offer. The pace of viewings and inspection has picked up significantly since the government's road map was announced and the prospects for the U.K.'s economic recovery has been progressively upgraded. We believe it continues to be a 2 [ TM ] office market with occupier demand focused on long-life, loose-fit, adaptable spaces with good amenities, well-being, customer services and sustainability. There is good interest in our new or refurbished space at ERV or better, whereas older unimproved space faces more competition. We continue to see pre-let inquiries. We're currently seeing stronger demand for West End space than in the City. Our rent collection levels are the strongest since the pandemic started. We have now collected 93% of our March quarter days rents with another 4% due to be received later this month. Rent collection at the office portfolio is close to pre-COVID levels with 95% collected, another 4% payable later in the quarter. This forms 90% of our overall rent. Following the completion of several small refurbishments, the vacancy rate has risen, but is still relatively low at 2.3%. All our current on-site projects remain on track for completion in H1 2022. 87% of Soho Place is pre-let or forward sold, and we expect to commence marketing the retail element at 1 Oxford Street later this year. We continue to see good early interest in a significant part of the office space at the Featherstone Building. Currently procuring the main contractor at 19 to 35 Baker Street. Demolition will start in H2 this year, which will take our on-site schemes to over 700,000 square feet, all of which will be net 0 carbon developments. We have submitted 2 different planning applications at Network Building W1, 1 for offices totaling 130,000 square feet and 1 for Life Sciences totaling 100,000 square feet. A decision by the Planning Committee is expected in June. We have recently added to our potential pipeline with the acquisition of long leasehold interest in Holford Works in the Tech Belt, where we already own the freehold. The property will give us some good medium-term income as well as providing future regeneration opportunities. We remain in a strong financial position with an LTV of 16% and undrawn facilities and cash of over GBP 600 million. Ample capacity to fund our development program as well as invest in new opportunities when we uncover. At the year-end, I reported as well as the positive impetus from our development, we would also benefit from the economic recovery. Since then, I've been very encouraged by several trends. The continued progress of the U.K. vaccination program with over 5 million doses given to Londoners. The eagerness of our occupiers are shown to get back into their buildings. The average occupancy of the portfolio is now 17% from the 5% lower at the beginning of the year. This is increasing week-by-week as we get closer to 21st of June. The marked pickup in our letting and viewing activity in the last few months, which continued to gather pace. The further improvements in our rent collection numbers. So apart from retail and hospitality, which represents only 9% of our total income, we are not far from our pre-COVID levels. And of course, the positive responses we're receiving from our net 0 carbon initiatives. Good progress in these areas will help determine the strength of market recovery and our own 2021 performance. I'm now going to pass back to Timo, our operator, for questions.

[Operator Instructions] There are currently no questions. I hand back to Paul Williams.

Thank you very much. Thank you all for listening. I hope we can all meet up in person soon, and there will be an invitation to your diaries for our Investor Day on the 28th of September at 80 Charlotte Street. If you do have any questions you want to ask us direct, the team is around today, so please be able to feel free to pick up the phone. Hope you all keep you well, keep safe and stay touch. Thank you very much.

Sorry to interrupt. We have 1 question now. And the first question is from Rob Jones with Exane.

I think that's the fastest ever Q1 update I've ever seen. Just a couple. One on ERVs. You mentioned in the statement that you were seeing as we'd expect you say, leasing ahead of ERVs or some kind of new or substantially refurbished space and below ERVs for kind of second-handle unrefurbished product. I wonder if you could kind of quantify the spread? Are we talking kind of plus 5%, minus 5%? Or could the magnitude be greater than that? And second question, I guess, partially in relation to that is, do you also expect a similar trend in terms of capital value diversion for the 2 asset types? We've already obviously seen a greater reduction in capital values for assets where we've got short income, but not necessarily purely in relation to prime grade A product versus slightly more secondhand that might need a refurb. I just want you to comment on both of those, please.

Well, thanks, Rob. I'll do initial comment, and then I may pass it over to Emily on the market stuff. I think in respect to your first question, some of the smaller lettings we've done is sort of back to sort of wait and see a couple of years, and we've taken a view that where we may have developments going forward on those, we'll take a view as to what sort of rent we get. So they will be a bit lower than the minus 5%, but I wouldn't read anything into that apart from -- we've got good engagement with our occupiers, and they're extending their leases. On the new lettings, we're quite reassured about the fact that they are ahead of our ERV. So things that are under offer. But I think it's reflecting the 2 [ TM ] that we've been talking about some time. People are the flight to quality, and people are pushing to take good space and willing to pay the rent for that. Emily, do you want to add to that?

Yes. I think on the ERV comment, obviously, I think you'll hear thereabouts with your minus to plus 5% range. And obviously, our guidance was north to minus 5%. And I think the -- on the quality space, we are seeing positive movement. I think the only other comment I would add to it is at the moment, and Paul referenced at the beginning, there is a difference in how the West End market is performing against the City market, and we expect that to catch up in due course. But at the moment, it is a little slower.

In respect to the investment market and valuations, maybe Nigel, you can add something on the valuation, and then David can talk about what he's seeing in the investment market at the moment because certainly, as we said at the year-end, there's no distress and lots of money not to buy investments. Nigel, on the valuation?

Thank you, Paul. I mean we pointed out in our results at Christmas. We were seeing outperformance from quality and sort of underperformance from the shorter, poor quality space. And I think that trend has continued. However, I think the investment market overall is generally quite a lot stronger, and we can probably see a better yield compression on the quality space. So this sort of gains sort of 2 tier investment market is happening. But there is a lot more money around, which could drive down yields overall, but especially for the quality. David, do you want to just pick up on what's out in the market?

Yes, I think -- I mean, just adding to what Nigel said, I think, so far, transactional volumes are low, but there is a lot of global capital which is circling Central London real estate. And I think what you're seeing is that it's quite a sort of polarized market as much as their -- it's tracking either well let sort of long let assets. Or also at the other end, you're seeing very good activity for sites, et cetera, and situations where you can create first-class stock that's also seeing very good activity. So it's the sort of -- it's the stock in the middle that may be less so, but the whole market is characterized by a lack of distress. And so you're just not seeing a lot of stock on the market as yet. But we continue to actively look and pursue opportunities.

I think Nigel is right. I think you might see a bit of yield contraction this year. London still offers good value to other cities. Thank you, Rob. Any other comment you want to make? Timo, have we got any more questions?

At the moment, we don't have any more questions. [Operator Instructions] There are no further questions. I hand back to Paul Williams for closing comments.

Well, thanks all. Any other subsequent questions, please feel free to pick up the phone, stay in touch with us. We do look forward to catching up with you. Obviously, we've got the interims coming back in August so put that in your diary and as they say keep well, keep safe and keep positive. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.