Derwent London Plc (DLN) Earnings Call Transcript & Summary

Good morning, and I hope you and your families are all well. Thank you for listening to Derwent London's Half Year Results Presentation 2021. I'm sorry we could not hold it in person. This will be a recorded presentation. And I'm joined by Damian Wisniewski, our CFO; Nigel George; David Silverman; and Emily Prideaux. We will then open up the lines for Q&A. At the time of our previous results in March, the Prime Minister's road map has just been published, which boosted confidence, although we remain in lockdown. Such confidence has continued to improve. Derwent's businesses have proved resilient and adapted looking to a new normal. Our office rent collection is almost back to pre-COVID levels. Our recent letting activity is improving and our vacancy rate remains low. The Central London office market appears to be stabilizing with rents before at a higher end of our expectations, particularly for Tier 1 properties with investment demand remaining strong. With this in mind and subject to land and avoiding a further lockdown, we are raising our guidance for our average ERVs across the portfolio to plus 2% to minus 2%, up from 0% to minus 5% as outlined in our March year-end results. Property yields tightened in H1, and we see the remaining firm in H2 with potential further tightening for well let buildings. We have seen an improved performance in our first half results, and Damian will take you through the details. We've also had a very active start to the second half with the set of Angel Square buying in the outstanding leasehold interest at Bush House and today's major acquisition from Lazari investment by 2 properties for GBP 215 million and creating a potential JV to develop 240,000 square feet in Baker Street, which, assuming all goes to plan, could start in 2024. We continue to remain financially strong and upgrade the portfolio, increasing its resilience and are supporting our local communities and those who are occupiers most in need. Don't have a portfolio with many opportunities to grow with approximately 31% or 1.7 million square feet earmarked for future development, which I shall explain later. In the meantime, I shall give you a quick overview of the market. Turning over. The Central London occupier market was severely impacted by the pandemic, but the resilient levels of business confidence and improving economy have seen letting activity increase. However, this activity is still circa 60% of pre-COVID levels and enforced mass working from home has led to many businesses to consider how they use their offices. Our occupiers all expect offices to remain a vital part of their businesses in promoting creativity, teamwork and business culture and attracting and developing their talent. Along with increased agile working, we expect to see more reconfiguring of accommodation and a need to consider peak occupation. We very much believe that this focus means that in future, good design, sustainability, adaptability, amenities, wellness, services and digital connectivity would be even more crucial, leading to a flight to quality. Those buildings that cannot deliver against this menu are likely to underperform. This presents our industry with challenges, but also creates opportunities for those businesses such as ours with excellent occupier relationships and who have the brand, reputation, skill sets and finances to respond. This view gives us the conscious push on with our expanded development pipeline. Turning over the Central London office market. Although turnover was lower, office investment values have remained very stable and improved this year. In part, this reflects a longer-term view taken by many real estate investors of a strength of the London investment market with interest rates remaining very low. There is a positive spread between office property yields and debt costs, which remain wide. London does not see the same fall in investment yields in the last few years as many other European cities have. This is possibly a legacy of Brexit concerns. As a result, London office property has continued to look relatively attractive with circa GBP 41 billion circling the London market. This demand has not just been for well-let, long-term income as assets with development angles have also been well bid. Our new investment activity. The acquisitions announced today as well as providing income will add to our stock of future opportunities while gearing up the balance sheet a little. London's Knowledge Quarter is so-called as it is home to numerous academic research and medical facilities and has been the focus of much interest for its life science potential. We already have opportunities here through our Fitzrovia properties. And these acquisitions, closer to its heart, reinforce our potential. Over on the side of the two acquisitions, we have side a detailed Memorandum of Understanding to create a joint venture with the aim to regenerate a major block in Baker Street. Subject to completion, regearing the head leases and securing planning, this has a potential of 240,000 square feet, which could start in 2024. Slide 6. Our 2 on-site developments are due to complete in the first half of next year. We are now ready to embark on our next phase of major projects and are adding to the future pipeline. There is plenty to follow with still another 31% in of our portfolio earmarked for future schemes, and this is based on predevelopment floor areas. I will go into more detail shortly. Turning over to the next slide. We've been embedding our pathway to net zero across the business having published it 1 year ago. Improving the portfolios' energy performance runs parallel with the government's owned EPC targets. Existing legislation says that all commercial property must have an EPC E rating or better by 2023. Now more demand in legislation is proposed so that by 2030 all commercial buildings should be B or better. Currently, just under half by ERV is compliant. But as part of our refurbishment work, we are retrofitting gas bodies to become all electric, adding double glazing and LED lights. For example, at 6-8 Greencoat Place, recently led to Fora, we have raised the EPC rating from E to B. As long-term investors, we must support the communities with which we work. The pandemic has seen our efforts increase, but it's very important that we give longer-term help as well. One such cause is The Soup Kitchen in Fitzrovia, which provides support to many homeless people. We're also back in the Academy of Real Assets, which aims to encourage a wider range of Africans to pursue a Real Estate career and thereby improve its level of diversity. Now looking at market dynamics in our business. The market recovery has been earlier than expected with rents holding up and values marginally improving. However, within this trend, high-quality buildings are performing better. This market polarization has led us to take a more nuanced look at our portfolio. We expect to retain more of our modern development where we see good long-term demand. They will provide core income for their business and allow us to make meaningful investment, supporting our occupiers, communities and net-zero carbon strategy. Our income-producing pipeline will remain at the heart of our business, offering multiple future opportunities to generate performance. We will continue to advance the active development program and acquire a stock where we fit our skills and resources will allow us to upgrade. We've also been using strength for the investment market to sell those assets where we think we can make better returns elsewhere. Our financial structure will continue to be based on modest gearing, allowing headroom to ensure we can meet our objectives. Developments Slide 9. Now let's take a closer look at our development activity, but firstly, a word on construction innovation. As a reminder, our policy is to agree fixed-price contracts working with many contractors. Both Featherstone and Soho Place projects have fixed prices. Following 3 to 4 years of stagnant inflation, we see construction prioritizes for the next 2 years of approximately 3% per annum. However, inflation is built into our appraisal. H1 2022 completions. Before moving on to our next phase, we still have to deliver 410,000 square feet due for completion in the first half of next year. Soho Place is expected to complete first and all the offices are either prelet or presold. The theater is expected to open next year. We have the retail still to let. But given the current market sentiment in this sector, we are unlikely to start a full letting campaign until closer to completion. At The Featherstone building, we are continuing with our multi-letting strategy, which proved very successful at its White Collar factory neighbor and more recently at Brunel Building. 19-35 Baker Street. In Q4, the group has started its next major project with Architect Hawkins at 19-35 Baker Street W1, which totals 298,000 square feet. The capital expenditure is estimated at GBP 271 million. This will be down net scheme following the demerger of The Portman Estate JV at the end of Q3. The development will benefit from outstanding public rail, a beautiful new courtyard and will build on the successes of Brunel and 88 George Street with exceptional floor-to-ceiling height, and of course, it will be net-zero carbon. It will be delivered against the background of the limited supply of Tier 1 properties in the West End. Slide 13. Network Building W1 recently achieved a resolution to grant to geo-planning asset for either a 137,000 square feet office building or 112,000 square foot lab-enabled project. During the process, we have learned a considerable amount about life science demand. However, demand for grade A office space remains strong. And on this base, it is more likely that we will proceed with the office scheme given its greater efficiency while keeping the door open for a lab-enabled business on part. Slide 14. The building designed by Piercy & Co will have all the hallmarks of a Derwent scheme, a generous reception, fantastic finishes, great floor-to-ceiling height, net zero carbon, many amenities and will be digitally smart. The scheme will benefit with beautiful sculptural facade and plenty of natural light. You'll have an elegance while retaining a contemporary design. Bush House. Though we're looking to submit a planning application with architects Stiff + Trevillion shortly for a refurbishment and extension that could increase the air of the building to circa 130,000 square feet. Subject to planning, this will repurpose the 1930s building and an improving area, and we aim to start this project in mid-2022. As a result, by the end of next year, we would have replaced our existing 410,000 square foot program with a new one of circa 565,000 square feet with more to come in the medium term. Slide 17. Of course, it doesn't end there with more medium-term projects as highlighted here. Holden House, we expect to commit to 150,000 square foot office-led scheme in 2025. At Blue Star, we are considering plans to almost double the space to approximately 110,000 square feet, again for a 2025 start. The White Chapel building, which we discussed last time, our plans involve building a new scheme on top of the existing building, a further 150,000 square feet could be added to existing. And additionally, we also now have the potential for nearly 0.25 million square feet scheme in the expected Baker Street JV. This will bring over 900,000 square foot to the medium-term pipeline, which is in addition to the 565,000 square feet at and above. So lots of possibilities going forward. I will now pass you on to Emily, who will give you more details on the market and some of our asset management opportunities.

Thanks very much, Paul, and good morning, everyone. The first quarter of this year saw a further national lockdown, which unsurprisingly translated into relatively low market activity. However, during the second quarter and since the government road map, the market has certainly shown positive signs of improvement. We have seen a significant uptick in viewings and take up, the latter of which at 3 million square feet at the half year, although still below pre-COVID averages, is 55% upon H2 2020, showing positive momentum as we look ahead into the second half of the year. During the last quarter, we have also seen vacancy rates leveling off. In addition, new tenant control space being added to the market has significantly reduced over the course of the year. And in the last 4 months, we have seen a net withdrawal of almost 400,000 square feet of gross space as the graph here shows. Encouragingly, under offers are at 2.7 million square feet, which is broadly in line with the long-term quarterly average. At half year, CBRE reported Prime Central London office rents growth of minus 1.1%. This reflects modest growth of 1.3% in the West End against a minus 2.2% in the city. Incentives remain stable, albeit vary depending on submarket and quality of product. Finally, and importantly, occupier sentiment continues to improve. And with restrictions continuing to ease, businesses are positively planning ahead and beyond the pandemic. If we move on to the next slide, we can take a closer look at the supply-demand dynamics. Encouragingly, and with good visibility on London's pipeline, supply of new stock in the capital remains relatively constrained. There is currently 11.2 million square feet under construction, of which 3.6 million is pre-let or under offer, leaving 7.6 million available between now and 2024. At circa 3% of total stock, this remains in line with previous years. In respect of demand, we have seen renewed engagement from occupiers in the marketplace over the course of this year, and occupier agents and advisers are encouragingly busy. This is unsurprising given workplace strategies and back-to-work policies are being actively considered by almost all businesses, putting the role of the office very much back on the C-suite agenda. Next slide. To date, we have seen greater flexibility, more agility and hybrid policies being adopted in most cases as opposed to contractual changes to formalized work-from-home models, which are evidently fewer and further between. As the vaccine rollout continues and restrictions eased, a greater return to the office is seemingly being planned for and expected in the autumn through Q4. We are seeing, in some cases, businesses looking to reconfigure their space to accommodate new working practices, and this will no doubt continue as people return to the office and adapt to a new norm. With this in mind, we are seeing more focus from business leaders on what the office needs to provide for their talent, such as addressing mental health, well-being, culture, collaboration and, of course, productivity. We anticipate the discussion around both working policies and how the office is going to be physically used to be ongoing. Many businesses continue to evaluate their individual needs, and these will no doubt evolve over time. Moving on to the next slide and key drivers for occupiers. With a more discerning occupier and continued focus on the role of the office, we have continued to see a flight to quality in the marketplace. We understand the importance of quality space and the value of workplace being architecturally inspiring environment. We also understand the equally important matters, which are driving businesses real estate decisions today, namely amenity, customer service, health, safety and wellness, sustainability, responsibility as well as digital enhancement and tech. Positively, the pandemic has seen change in these agendas accelerate, and we continue to respond to each of them across the portfolio with various initiatives underway. Turning to the next slide, we can touch on these further. In October this year, we'll be launching the first of our shared amenity spaces located in the heart of Fitzrovia within the recently completed 80 Charlotte Street. DL/78 will be a private space for our customers where they will be able to work, meet, socialize, attend events, high meeting rooms and be a part of various wellness initiatives. It will be a beautifully designed and curated environment, offering inspiring space, which is both useful and engaging. In parallel, we will be launching our customer app, enhancing both customer service and community engagement, whilst ensuring we are digitally better connected to the individuals working in our buildings. We continue to develop and grow our furnished and flexible space and the strong lettings at recently completed 19 Fitzroy Street and 3-5 Rathbone Place are a good endorsement to the product, which we believe has an important place in the market as well as offering good opportunity for us to help our existing customers with shorter-term needs. Finally, we are now underway with the rollout of our intelligent buildings with both Soho Place and the Featherstone Building being the first in the pipeline to be delivered in H1 next year. Moving on to the next slide. We have always maintained close lines of communication and strong relationships with our customers. Since the pandemic, we've also conducted a biannual questionnaire with our 50 largest occupiers to understand general sentiment, but also their thoughts on their likely future working policies. In a latest survey, respondents represented just under half our top-up income. We have found what our occupiers have been missing is consistent, principally collaboration and social interaction, but also as time has gone by, wellness, innovation, creativity, trailing and education. The question of productivity has also been noted, and more specifically, the challenges that leadership teams have had with a more remote workforce in measuring individual productivity alongside collective productivity. In terms of general business sentiment, in February, we were positively surprised to find that 51% of respondents intended to increase per headcount. That has not changed, but the percentage of seeing no change has increased from 18% to 29%. As a result, 80% have said they intend to increase or see no change in their overall headcount in the next 6 to 12 months, up from 69% in February. At the other end of the spectrum, just 5% expected to reduce their headcount, which compares to 8% in February. Next slide and on to our letting activity. The improved sentiment has seen recovery in our letting activity from last year's unusually low levels, but absolute levels remain below trend, in part due to our continued low vacancy level. This was 1.8% at the start of the year and rose to 3.3% in June and is now at 2.4%. In the first half, we let just under GBP 4 million of new income. Overall, these were 1.6% below ERV, although our office lettings were marginally above December ERV. Our activity has increased in H2, notably with the lettings to 4 in Victoria and the AMP partnership at Charlotte building. Total lettings are now at GBP 7.7 million with another GBP 1.3 million under offer, bringing overall lettings year-to-date 0.2% ahead of December ERV. Next slide, and on to asset management activity. A year ago, the focus was very much on our 2021 lease expiries, which represented 24% of our rental income. By December 2020, this had reduced to 17% of this year's income. During the first half, we have retained or relet 78% of all expiries and completed the disposal of Johnson Building. As a result, at June 2021, only 9% of our second half income was subject to expiry. After adjusting for the disposal of Angel Square and two buildings being cleared for development, this falls further to 5%. Thereafter, our lease expiry profile follows a more average pattern. The aggregate of our first half asset management activity can be seen in the table. Our activities covered 9% of our income, which saw an uplift of 11.5% to circa GBP 18 million. Reviews and renewals were below ERV, but their performance was dominated by 2 deals: a short-term letting with a landlord's break in the former and a letting to a retail business in the latter. Overall, we are seeing steady up progress in our office portfolio against the background of an occupier base that remains positive about its office use and appears increasingly confident about their business outlook. I will now hand over to Damian to talk through the financials.

Thanks very much, Emily, and good morning, everyone. Financial highlights for the half year are on Slide 27, and I'm pleased to say that they demonstrate an improving situation after 2020's COVID-impacted results. EPRA net tangible assets were up 1.4% over the half year to 38.64p per share to give a total return of 2.7% after adding back dividends paid. Earnings have also recovered with EPRA EPS of 54p, up over 10% compared to H1 2020 and 5.3% ahead of H1 '19. With GBP 527 million of cash and undrawn facilities, interest cover at 4.8x and a low LTV ratio of 17.3%, we're increasing the interim dividend by 4.5% to 23p per share. Slide 28 shows the 6-month movement of EPRA net tangible assets. EPRA earnings were almost matched by payment of the 2020 final dividend, but our developments provided another positive contribution of 36p per share, helping us to an overall 52p revaluation uplift. There were winners and losers in the portfolio, which Nigel will explain in more detail later. Slide 29 shows how EPRA earnings are made up. We have set aside another GBP 1.4 million of impairment charges, over GBP 5 million less than this time last year and mainly against retail, restaurant and leisure tenants. Premiums and other income of GBP 5.1 million include net surrender premiums of GBP 3.6 million in the first half, helping to offset higher admin costs. The latter came from increased headcount and staff incentive charges affected by our higher share price. Most other costs were broadly similar to last year. Slide 30. Gross rents were almost unchanged at GBP 98.1 million. The GBP 9.5 million increase from 80 Charlotte Street was offset by disposals of Johnson Building and Chancery Lane plus higher voids after tenant breaks and expiries. The slightly higher vacancy rate has also driven the reduction in like-for-like gross rental income of around 4%. The like-for-like net rental income was higher than both the first and second halves of 2020. More details are in Appendix 9. We've been publishing our rent collection figures since March 2020, and the latest stats are on Slide 31. There has been a gradually improving position among our office tenants, but with retail and hospitality lagging behind and expected to need further support. It is particularly good to note that all the rents deferred from 2020 under payment plans are being received on time. And there have been a few new requests for plans this year, though some tenants are paying monthly rather than quarterly in advance. We've also barely touched rent deposits so far in 2021, with only GBP 0.5 million drawn and GBP 18.2 million still in place. Slide 32 shows the net reduced direct impact of COVID-19 waivers and impairments on our rents and property costs. Gross rental income was down GBP 0.8 million due to the impact of spreading rent-free periods granted mainly in 2020. Waivers and net impairment of receivables or GBP 1.4 million compared with GBP 6.5 million in H1 2020 and GBP 14.2 million for the whole of 2020. Combined, this gives an overall reduction in net rents of about GBP 2.2 million in the current period. It is also interesting that we've been able to reverse GBP 1.6 million of impairments booked last year as the risks associated with some of our tenants have diminished. With lower impairment charges, our EPRA cost ratios have fallen back and were still above pre-COVID levels. Slide 33. It has been a much stronger period for group cash flow after receipt of the due rents deferred from 2020 under payment plans. Cash from operations was GBP 51.3 million, a full 70% higher than in H1 2020 and 20% above H1 '19. Cash from disposals was GBP 170 million, significantly exceeding acquisitions and CapEx. As a result, net facilities drawn reduced by GBP 51.3 million with drawn facilities at GBP 999 million and cash of GBP 60 million. Our committed project CapEx is on Slide 34. This has now recovered to normal levels with CapEx spend for the half year of GBP 87 million, including capitalized interest. We expect a marginally higher level of CapEx in H2. And it is likely that both Network Building and Bush House will draw the projects shown here in the fairly near future. And exercise is also underway to refine our GBP 5 million to GBP 10 million estimate of future annual spend for those parts of the portfolio that already meet the 2030 EPC limits. As usual, more details of our pipeline are in appendices 43 and 44. Slide 35 shows the proforma financial position after the sale of Angel Square and the acquisition of Bush House plus CapEx on our committed projects. This demonstrates good headroom on our key financing figures. After the acquisitions and new joint venture announced today, the pro forma LTV ratio is expected to move to around 25%. Slide 36 provides an update on the green qualifying expenditure under our green finance framework published in 2019. Qualifying expenditure that met our strict criteria in the first half totaled GBP 70 million, taking the cumulative amount to GBP 489.7 million against amounts drawn of only GBP 83 million, again indicating plenty of headroom. 19-35 Baker Street will become our next qualifying green project later this year, and we expect that subsequent major schemes and our EPC upgrades will also qualify. Finally, our debt summary is on Slide 37. The GBP 28 million loan expiring in July '22 is secured on the Baker Street properties currently owned with the Portman Estate. And as part of the reorganization of these interests in the second half of the year, we expect to repay this loan. Our weighted average maturity remains long at 6.4 years. And in conclusion, the balance sheet is as strong as ever. Thank you very much. I now hand over to Nigel.

Thank you, Damian, and morning. Slide 39. The improvement in London's business confidence over the first half started to feed through into property valuations. There was a pickup in letting activity, especially for better quality space. The investment market remain buoyant, although somewhat starved of product. The hunt for yield continues, and this drove some property yields lower. This translated into a 1.4% valuation uplift for our portfolio in the first half and follows the 2.1% decline seen over the second half of last year. Our on-site developments at Soho Place and the Featherstone Building delivered good surpluses being up 5.8% as these projects near completion. Excluding developments, the balance of the portfolio was up 1.1%. Within this, the retail and hospitality sectors continued to be impacted by the lockdown, although we are seeing signs these valuations may be leveling out. We are seeing a greater focus by the value as an obsolescence and the potential CapEx required to upgrade individual buildings, also a focus on specific EPC ratings and their impact to value. There's a move to be more specific in the valuation rather than use a catch-all yield. This is an evolving area with a new challenge being how to reflect the need to be EPC B or above by 2030. We are undertaking an excise to fully evaluate this. Now our total property return. This improved substantially from the 0.3% for the whole of 2020 and was 3.2% in the first half. It was driven by several factors: good rental income and a low vacancy rate; the release of development surpluses; yield compression on quality assets; continued rent-free run down at our completed developments, such as 80 Charlotte Street and the Brunel Building; also asset management and our multi-let buildings such as the Tea Building. Our retail exposure is also limited. This return was above our MSCI London benchmark of 2.3%, but below the wider all property market where the continued strength of the industrial and logistics sector helped to deliver strong returns. Turning now to the valuation in more detail, Slide 41. ERVs were marginally down by 0.3%, but there was an improving trend from H2 last year. Breaking this down, our offices were up a little. But retail, which is only about 9% of rental income, declined 5.8%. The strength of the investment market, especially for top-quality buildings with secure income streams, helped deliver a 9 basis point of yield tightening, taking the equivalent yield to 4.65%. Properties such as Charlotte Street, Brunel Building, White Collar Factory and Horseferry House all benefited from this. Properties with shorter leases and needing more CapEx, such as Holden House and the White Chapel building saw valuation declines. However, these properties do have the potential for major future schemes. With the high levels of capital looking for a home, coupled with a shortage of stock and London starting to see an element of normality, there is likely to be continued downward pressure on yields over the short term. Finally, a look at the buildup of the portfolios rental value on Slide 42. The chart also shows the change since year-end. A few points on the chart. The contracted rent of GBP 175.8 million was down GBP 13.4 million over 6 months, mainly from the sale of the Johnson Building. Also, income fell at the Portland JV ahead of its restructure and the redevelopment of 35 Baker Street. Contracted uplifts were at a similar level to year-end as there were no major development completions. These developments can add GBP 31.1 million to rental income, of which GBP 17 million is pre-letted Soho Place. Moving across, available vacant space increased from 5 million to 8.4 million mainly following the completion of Greencoat Place. This is now let at GBP 2.2 million. After adding in the space under refurbishment, reviews and expiries, the portfolios' ERV is now just over GBP 282 million. We've then shown the impact of our Baker Street development, deducting the existing ERV and adding back the scheme's ERV. This would take the portfolio ERV to around GBP 295 million. Now over to David to run through investment activity.

Thank you, Nigel, and good morning, everyone. It's been a busy period on the investment side with over GBP 317 million worth of acquisitions agreed so far this year. The majority of these have taken place since June where we've agreed to acquire over GBP 290 million of property in attractive locations, extending our development pipeline by building on long-term relationships and our ability to restructure leasehold interests. Slide 45. The Lazari transaction is a case in point where our long-held relationship with the Lazari family has led to the exciting off-market acquisition and Memorandum of Understanding for the joint venture that we announced today. The combined transactions cover 5 properties totaling just over 300,000 square feet, 243,000 square foot our share. And they comprise the acquisition of 2 freehold properties in London's Knowledge quarter, 250 Houston Road and 171-174 Tottenham Court Road and the signing of an MOU to create a joint venture, which is expected to acquire 3 Baker Street properties owned by Lazari Investments. The initial consideration contains an element of hope value for planning uplift and the regearing of the head leases, and this is outlined in more detail in the appendices. The next slide sets out the largest of the acquisitions, 250 Houston Road, which is a freehold property totaling 165,900 square feet, sitting on a substantial island site of 1.6 acres. The property is letting its entirety to UCLH and at a rent of GBP 4.7 million per annum, which reflects only GBP 28 per square foot. There are fixed annual increases of 2.5% compounded every 5 years. The lease runs until 2039, with attendance break in 2024 and every 5 years thereafter. Slide 47 shows its prime location opposite the hospital, UCLH, The Welcome Trust and within walking distance of the Francis Crick Institute. In the short to medium term, this is an interesting asset management play. Longer term, there will be an opportunity to create an exciting larger scheme on this potential life science site. Turning over. The second acquisition is 171-174 Tottenham Court Road W1. This is a smaller freehold mixed-use property. But together with adjoining UCLH and UCL interest, it forms an interesting strategic holding in a larger island block with longer-term development potential. Located in Fitzrovia opposite our network building, this multi-let building totals 16,200 square feet and currently produces an income of GBP 600,000 per annum. Slide 49. In addition, we've signed a Memorandum of Understanding with Lazari investments to create a 50-50 joint venture, which is expected to acquire the leaseholds to a group of 3 buildings in Baker Street totaling 122,200 square feet. Diagonally opposite our 19-35 Baker Street development, the existing properties comprise 3 multi-let buildings producing a rent of GBP 5.2 million per annum for the 100% share. The total consideration for our 50% interest is GBP 64.4 million. Slide 50. Together with the fourth property owned by the freeholder, the Portman Estate, these buildings form a 1-acre island site capable of substantial development. It's our intention to work with our partner and freeholder to progress our preliminary studies, which suggests this could see a scheme of up to 240,000 square feet. Subjects receiving planning on the larger scheme and a reg of the leasehold a further payment of GBP 7.25 million would be payable to the vendor. With an earlier start on site second half 2024, the commencement would be just before completion of our 19-35 Baker Street development, opposite, which is due to complete mid-2025. Separately, we have acquired the outstanding 7-year head lease interest in Bush House, Southwest Wing WC2 for GBP 13.5 million before costs. Here, the group already own the freehold to this 103,700 square foot property facing The Strand. This acquisition unlocks an interesting development opportunity as Paul has already set out in an area undergoing significant change, with Westminster's plans to pedestrianize The Strand already underway. Combined with our book value for our existing freehold interest, this stands us in at circa GBP 500 per square foot capital value, thereby creating marriage value whilst we work up our plans. Turning over at disposals where we've also been active this year with 2 major sales to date at a premium to book value. Following on from our sale of the Johnson Building in January, we exchanged contracts on the sale of Angel Square in July, to Tishman Spare for GBP 86.5 million before costs. The block, which comprises 3 connected buildings, was originally acquired in November 2014. And following a light-touch refurbishment, the bulk of the property was led to Expedia and The Office Group. Leases were once more due to expire, and we took advantage of today's strong investor demand to monetize these assets, reinvesting the proceeds into projects and new acquisitions, which we felt offered better returns going forward. I will now pass you back to Paul.

Thank you, David. In summary, our market is improving and business confidence has led to increasing activity. Demand continues to focus on good quality buildings, which has led to a 2-tier market. We are raising our average 2021 ERV guidance to plus 2% to minus 2%, and investment demand for central offices has continued to be strong, and we expect our yields to remain firm. We are progressing our pathway to Net Zero Carbon by 2030. This is an improving background for Derwent London. Our occupiers remain very positive about the importance of their offices. We are producing the right product, which continues to evolve, so it remains attractive to a more discerning market. We are gearing ourselves up for the next phase of development with a substantial near-term pipeline to follow and the financial resources to match. I will now hand back to the operator for Q&A.

[Operator Instructions] Your first telephone question today is from the line of Sander Bunck from Barclays.

A couple of questions from my side. Just a quick one on your EPC ratings. And I think you briefly mentioned it, but the phone dropped away. Did I hear that you expect to do cost between GBP 5 million and GBP 10 million per annum to upgrade the portfolio to the -- to revive credentials for 2030? Is that the right number?

That's correct. I mean if we look at 2023. I think we're 99% compliant. I think the 1% relates to just our Baker Street on our network building and a couple of suites of [indiscernible] We're in good track for 2023. And for 2030, I think this is in accordance with previous guidance. I think between GBP 5 million and GBP 10 million per annum over the next 9 years is what we feel. Some of that will be service charge recoverable. But that's the sort of money we'll be spending that will get our EPCs up. And I think we're already in a good place about 50% for 2030 compliance. And it's a call towards our Net Zero Carbon Pathways. So I think that was your first question.

Yes. Yes, please. And just how much of your portfolio is currently EPC A or B compliant?

About 50%. It's on [indiscernible]

[indiscernible]

If you look at [indiscernible] in due course, we obviously don't have much retail, which helps us. I think about 45% is A or B. But as we refurbish and upgrade the portfolio of things we'll prove, you'll notice that our Greencoat Place letting, it went from E to B. So we are increasing. We're take -- we're converting gas to electric and all the rest of it. So I'd say, 2023, great place. 2030, we have a plan.

Okay. Great. That's very helpful. Second question I had was on the availability of space in the London market. I think you made a point of that you've seen quite a lot of withdrawals in the market in terms of the subletting of space. However, if I look at the chart above, I see that the overall availability remains probably flat. Like what is the dynamic that's going on there?

Well, I think obviously, there's a different dynamic between different subsectors of the market. I mean the West End is a lot tighter than the city. I think if you look at the vacancy rate, the West End is, I think, about 6%. I think Emily will correct me, about 13% in the city. There's a shortage of Tier 1 properties in the West End, which is why -- one of the reasons why we are happy to carry on in the next development phase at 565,000 square feet. And we are seeing occupier to draw space from Mark -- I think last year was a bit of a review of what do we need. And now they're thinking actually the office is an important factor for the level off vacancy. Emily, do you want to add anything to those points?

No, I think the encouraging thing is that we are seeing the overall vacancy beginning to level off. And to Paul's point, on the tenant control space, we've actually seen around just over 500,000 withdrawn in the last 3 months against only around 200 or so additionally. So you're net positive there in terms of the overall effect.

Okay. But just on the last that you mentioned, that is understood. If I look at the chart above, in terms of overall availability, that stays broadly flat. Is that right? So are those 2 -- how are those 2 interlinked, I guess, is the question.

Yes. Overall, it's the line on the graph, which is, as you say, remaining more or less flat.

Yes.

Okay. Okay. And then the last question I had is in terms of locations within London. And it seems like you're building up quite a lot at the moment in W1. At the moment, where do you have the most conviction in terms of locations for new development or acquisitions? Where do you feel most confident to kind of deploy your capital going forward? Is it indeed more in the W1 Western area? Or are there other opportunities in or outside of London as well?

Well, I mean the first point I'll make is I've got a great conviction in London. I think it's a fantastic city. We've always been happy to try and expect our portfolio in core areas like Petrova and Chiswick. Obviously, anything near the transport hubs is good. I think the acquisitions announced today in a really good area of the Knowledge Quarter is very exciting. But I -- we've always had an open bar. We've been always happy to invest in new areas. David, do you want to add something to that?

No, I think that's absolutely right. I think all of our locations, obviously, you will have seen the announcement today with the acquisitions in the Knowledge Quarter. And that's certainly with the emerging life science base. I think that's certainly one to watch for the future as well. So yes, all of our areas.

[Operator Instructions] There are no further telephone questions at this time -- excuse me. I spoke too soon. We have another telephone question from the line of Marie Dormeuil from Green Street.

Yes. I just -- I had one question with regard to the Angel Square disposal. So arguably, this could have fit well within your medium-term or near-term pipeline. So just trying to understand why are you selling? Is it because actually the CapEx that you would need -- you would have needed to invest were just far too much or the upgrade to EPC rating was -- just trying to understand how you assess the return of divesting versus putting into a pipeline?

Obviously, given the strength of the balance sheet, we're happy to invest. So I think our view is probably the body will be better spent elsewhere and improving. I think that particular property, and we wish to go well with it, has 3 separate buildings, so I think it's a bit more difficult to improve the area than we hope. And we think our money is better invested in the new acquisitions of Baker Street. David, do you want to add anything to that because it was a good price.

Yes. No, it was a good price. And as Paul said, it really sort of underline the level of investor demand, not just for well-let stock, but also stock that offers opportunity. But I think in the end, we just felt that we had better returns elsewhere. And as Paul said, it's 3 separate buildings. And we're very, very focused on the product that we can create. And we just -- we wanted to reinvested in the acquisitions that you've seen and our development pipeline.

And maybe just a follow-up question then on on your leverage and the strength of the balance sheet. Do you intend them to sell more properties like Angel Square or any other that would bring down your LTV down to the previous level? Or is there [indiscernible]

We're very happy with it. So I think we were looking -- I mean the gearing at 17% is low. We'll go up a bit after these acquisitions. But I think we were happy to gear up rather than gather down. And I think we'd like to be more acquisitive. But Damian, do you want to also add your bit?

Yes. Marie, as you know, we normally recycle. It's part of our business model. So we've been moving leverage up and down a bit. We think the 17% is a bit low. Angel Square will bring it down by roughly 1.5%. The Lazari transaction take it back up to about 20%. And then we've got CapEx on top. And you'll see from the slides if we build out the committed pipeline today that takes us up to something close to the mid-20s. But that's over the next 3 to 4 years. So we're comfortable with our business model. There'll be a bit more selling, I'm sure, from time to time and hopefully a bit more buying as well. In terms of leverage generally, I think we've indicated this over the last year or 2, we'd be comfortable seeing it move up into the mid- to high 20s. And at the moment, I think there's still clearly scope for new exciting acquisitions to be found in the future.