Derwent London Plc (DLN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Derwent London 2022 Q1 Business Update. My name is Nora, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Paul Williams, Chief Executive. Please go ahead, sir.

Thank you. Good morning, everybody, and welcome to our Q1 2022 business update call. I'm pleased to report that against an uncertain political and macroeconomic backdrop, now this buzz is back, and it is firmly open for business. Workers are returning to the office, and we're seeing occupation levels across our buildings continue to rise. Now the flight to quality we've talked about has gathered further momentum. These trends are translating into occupiers agreeing new leases for the right space on rent meaningfully above ERV. A clear example of this, it is Featherstone, where nearly 30,000 square feet of the space is under offer at rent significantly above ERV, and there is further space under negotiation. From the start of the year, we have signed just under GBP 4 million in new leases at 8% above ERV. Occupiers' requirements are becoming more selective and more demanding and a flex is entering the conversation more frequently. Part of our suite of flexible options and high-quality occupant immunity is the community hub at DL 78, which is already demonstrating its value with a number of occupiers specifically referring to it when signing new leases or re-gears. In addition, the environmental performance is a critical element of an occupier's decision-making process and both our recent developments at Soho Place and Featherstone Building are Net 0 Carbon, reflecting our long-life, loose-fit, low-carbon approach. As you flagged with our results, our vacancy moved up through Q1 to 3.1% from 1.6%. The main driver was small refurbishments, which completed towards the end of the quarter. Positively, 1/3 of the space available at the year-end has already been let or is under offer. Completion of the Featherstone Building adds 3.3% to our vacancy rate. However, as I've already discussed, nearly a quarter of this space is under offer and it's expected to complete inventory. In total, we have GBP 3.3 million of space under offer across the portfolio. We continue to restock our development pipeline. Following our selection as preferred bidder, I am delighted to have now exchanged contracts -- conditional contracts, the acquisition of the strategic City Road Island regeneration opportunity in the [indiscernible] GBP 239 million. You'll notice is Moorfields. This is an area we know well. Our early appraisal study suggests a scheme of 750,000 square feet or more and the doubling of the existing space and with generous profit room. We have also completed the purchase of another exciting super site at 230 Blackfriars Road in SE1, which we bought for GBP 58 million on a yield of 3.5%. There is a scope to deliver a new building in excess of 200,000 square feet. Our portfolio has full opportunity to continue adding value for our shareholders. On developments, Featherstone and Soho Place have now completed and 2-4 Soho Place, which includes a theater will reach completion this month. At 1 Soho Place, the office has been handed over to their tenants and pitting out works have begun. The [indiscernible] Cross Road on the 24th of May, and London's ongoing recovery support our positive letting outlook for this flagship Oxford Street retail space. And Network Building in the heart of our Fitzrovia estate, we have now committed to the 137,000 square feet office scheme and will start on site in June. The supply of top-quality Tier 1 properties in this location is very tight, and we will believe -- we believe we will benefit from the flight to quality. At 19-35 Baker Street, demolition works are approaching completion and having signed the build contract, 97% of office CapEx is fixed, in line with budget, largely mitigating our exposure to further build cost inflation. We've already received a number of early occupier inquiries, which is a clear demonstration of the quality space we are developing. It doesn't complete until 2025. Lastly, our balance sheet remains strongly positioned with 23% LTV with GBP 441 million and undrawn facilities giving us substantial capacity to execute our growth plans. In summary, we are well positioned in a market with attractive growth prospects and our letting and asset management activity in the year-to-date is comfortably above ERV. Thank you. I will now hand back to the operator for questions.

[Operator Instructions] The first question is from Pieter Runneboom from Kempen.

I had a question about Appendix 4, the major developments pipeline. There you have the CapEx to complete and if the CapEx as at 31st of December. On the developments where there are no fixed contracts, could you maybe shine some light on where you already see some pressure of construction costs?

Well, Baker Street I've just said, is 97% fixed. I assume you've read the original tenders, the original tender figures for the demolishing of Network Building, is about 20% of the construction costs. And they're within budget, which is good. I think one of the benefits Derwent has got is that we work with Tier 1 contractors with vertical supply chains and we give them a lot of repeat business. So -- and the level of sort of the inquiries from our contractors is pretty strong. They're not working with such quality buildings, with obviously our brand and stuff. So yes, we are going to see some inflation, but I'm feeling reasonably comfortable that we wouldn’t mitigate that. Of course, the other thing, of course, is the inflation is -- tends to be quite good for rents. So there are 2 sides to that particular circle.

Another question on investment yield. Do you already maybe see some transactional evidence in the market on whether yields are already moving up due to maybe higher risk-free rates? Or is it not the case?

I think first of all, I'm going to get Nigel to add his 2 pennies here. I mean, there still seem to be a wall of capital looking to invest in to London. You'll see some great prices being achieved from assets during -- I think we've one of the busiest years to date. So we haven't seen yields moving. I think this polarization of the market of this flat quality will continue. Obviously, London is also seen a bit of a safe haven for global capital. So I've not seen a move out yields. The yields are still relatively good value compared to France and Germany. Nigel do you want to add to your...

I think it is worth commenting on the first quarter. I mean annual investments normally GBP 10 billion to GBP 12 billion. In the first quarter of this year it's almost GBP 5.7 billion, which is, I think, highest quarter on record. Now within that there were 2 or 3 big [indiscernible] the UBS building. The other read-through from that was -- there were income deals, value-add deals and asset management deals. So it was across the spectrum, which really underpins a good investment demand. So we're not seeing any -- you might get a little tightening on a few things, but generally speaking, they're holding firm.

[Operator Instructions] The next question is from Jonathan Kownator from GS.

Would it be possible for you to elaborate on the strength of the demand and the new enquiries that you've been noticing? Are they coming from any specific sector? Are they focused on new development? Are they price sensitive? A bit of color would be much appreciated.

I think there's been a real pick up in tenant enquiries in the space. If you look at the number of units we're [indiscernible] and the whole range of occupiers looking for the space, media, tech. And I don't get [indiscernible] bit. And then the other thing we're seeing is the recentralization of people coming back into town with some very substantial requirements people like Microsoft, I think it will be in the 50,000 to 60,000 square foot they're in renting in the moment. So it's a whole lot of checkers we had a good letting in [indiscernible] the fashion brand. So I think what's interesting from our point of view is a lot of our portfolio they are all occupiers are in growth mode. If you look at our White Collar Factory, where we've got about 25,000 square feet of space to -- available. We're not marketing. We've got people in the building taking it. So Emily, do you want to add to your -- a bit of flavor on where you'll see tenant demand from?

Yes. I think interestingly, the Q1 stats across the market show a broader spectrum across mixed sectors that may have done for 24 months or so. So whereas we've had very dominant sectors, normally, we have got a really broad spectrum now across almost all sectors. We obviously saw last year a big activity in the legal sector. They are still continuing to be fairly active, but also the tech AI continue to be in growth mode.

And does that mean that -- there is a chance that it could revise upward [indiscernible].

Well, obviously, what we are looking to -- at our guidance in June, I mean we are very encouraged with what we've seen so far. If we look at transactions, we're doing good 8% above ERV. Asset managers are already busy. So we are very comfortable where we're sitting at the moment, we will update the market [indiscernible] at interim at that stage but sitting here today, we're feeling pretty positive.

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Paul Williams for any closing remarks.

Well, firstly, thank you, everyone, for listening in. Anyone wants to come and see some of the recent asset Soho Place et cetera, please come and do that. Featherstone is looking absolutely fantastic. It's a really great place. We're all busy. We're excited about our [indiscernible] acquisition, which we will now be working up our planning, we'll update you in due course. Their potential look -- a great scheme there of 750-odd thousand square foot in a good place. Thank you for your support, and please stay in touch.

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