DERWENT LONDON PLC Cover Image: White Collar Factory EC1 This Page: the White Chapel Building E1
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REPORT & ACCOUNTS 2016 DERWENT LONDON PLC Cover image: White Collar Factory EC1 This page: The White Chapel Building E1 Building a brand Innovative solutions Middle market rents Active management Well-designed spaces Supporting communities Environmentally responsible STRATEGIC REPORT 01 Derwent London plc is the largest central STRATEGIC REPORT At a glance 04 London focused REIT. Our portfolio 06 Year in review 10 Chairman’s statement 12 Over many years, we have built up a London’s enduring appeal 14 Creating value: our business model 18 £5 billion predominantly office portfolio Delivery of our strategy 20 in 14 ‘villages’ in London’s West End Lettings 22 Asset management 24 and Tech Belt. The majority of the Developments for delivery in 2019 26 Acquisitions and disposals 28 portfolio is income producing, balanced Measuring our performance 30 between regenerated properties with Chief Executive’s statement 36 Our market 38 further upside potential and properties Property review 40 Valuation 40 for future redevelopment. Our business Portfolio management 43 Projects 47 is founded on a strong balance sheet Investment activity 50 with low leverage and flexible financing. Finance review 52 Risk management 60 We aim to provide above average Sustainability 66 long-term returns for our shareholders, Our people 68 while delivering benefits for all our GOVERNANCE Board of Directors 74 other stakeholders. Senior management 76 Corporate governance 77 Report of the Remuneration Committee 85 Our portfolio balance and resilient Letter from the Chairman of the business model mean we are well placed Nominations Committee 104 Report of the Nominations Committee 104 to deal with the significant changes being Letter from the Chairman of the Risk Committee 105 seen in today’s office market. Report of the Risk Committee 105 Letter from the Chairman of the Audit Committee 106 Report of the Audit Committee 107 Directors’ report 109 FINANCIAL STATEMENTS Statement of Directors’ responsibilities 116 Independent Auditor’s report 117 Group income statement 122 Group statement of comprehensive income 122 Balance sheets 123 Statements of changes in equity 124 Cash flow statements 125 Notes to the financial statements 126 OTHER INFORMATION Nine-year summary 169 EPRA summary 170 Principal properties 171 List of definitions 173 Derwent London plc Report & Accounts 2016 02 03 20 FARRINGDON ROAD EC1 The Group acquired a long leasehold interest in this 170,000 sq ft property in February 2015 for £92.7m. We have since painted the façade and refurbished half the office space, adding a new entrance and terraces. This has increased net rental income from £3.2m to £6.2m with a further £0.6m of ERV still available to let. The building sits opposite report Strategic the entrance to Farringdon Crossrail station (opening in 2018) and there is the longer term possibility to add additional space. In two years we have completed our short term objective, virtually doubling our income. At a glance 04 Our portfolio 06 Year in review 10 Chairman’s statement 12 London’s enduring appeal 14 Creating value: our business model1 18 Delivery of our strategy 20 Lettings 22 Asset management 24 Developments for delivery in 2019 26 Acquisitions and disposals 28 Measuring our performance 30 Chief Executive’s statement 36 Our market 38 Property review 40 Valuation 40 Portfolio management 43 Projects 47 Investment activity 50 Finance review 52 Risk management 60 Sustainability 66 Our people 68 Derwent London plc Report & Accounts 2016 04 STRATEGIC REPORT At a glance In 2016 the Group achieved £31.4m of new lettings, generated strong recurring earnings growth and is proposing a substantial increase in the final dividend. Net assets Maintained net asset value Portfolio valuation1 In a year of market uncertainty caused partly by the EU referendum, we have maintained net asset £4.0bn value (NAV), demonstrating the resilience of our £5.0bn 2015: £4.0bn business model. 2015: £5.0bn Revaluation (deficit)/surplus Active asset management Profit for the year The impact of a 31bp outward yield shift was partially offset by 5.1% rental value growth, £(37.1) m lettings, rent reviews and development profits. £53.6m 2015: £650.0m 2015: £777.2m Operational earnings growth Growth in earnings from operations EPRA EPS As a result of an increase in net property income and lower finance costs, EPRA earnings per share 8% (EPS) grew by 8%. 76.99p 2015: 25% 2015: 71.34p Growth in final dividend Increased cash returns to shareholders Dividend per share Strong earnings growth in recent years and letting activity that has considerably de-risked 25% the development pipeline have enabled us to 52.36p 2015: 10% propose a 25% increase in the final dividend. 2015: 43.40p Total return Positive total return despite market uncertainty EPRA NAV per share NAV growth and dividends paid in 2016 1.7% provided a total return of 1.7%. 3,551p 2015: 23.0% 2015: 3,535p Net assets (£m) Net debt (£m) and NAV gearing (%) Our approach 5,000 1,200 60 to sustainability 1,000 1,013 50 4,000 3,995 3,999 949 912 905 875 Read more on page 800 40 3,000 3,076 2,371 600 30 66 2,000 1,918 400 20 1,000 200 10 0 2012 2013 2014 2015 2016 0 2012 2013 2014 2015 2016 0 1 Including Group share of joint ventures. STRATEGIC REPORT 05 Our strategic objectives We are proposing a Acquire properties and special dividend of 52p unlock their value Maintain strong and per share to be paid flexible financing along with the final Create well- dividend in June 2017. designed space Optimise income Recycle capital Read more on page 18 Net interest cover Maintained strong financial ratios LTV ratio We recycled capital by funding £213.5m of capital expenditure through cash raised from property 370% disposals, thereby retaining low gearing levels. 17.7% 2015: 362% 2015: 17.8% Disposal proceeds Property disposals above book value Profit on disposal of We raised £224.7m of cash from property investment property disposals in 2016. Net proceeds from four major £224.7m investment property sales completed after the 2015: £277.2m EU Referendum were £199.0m, 2.3% above £7.5 m December 2015 book value. 2015: £40.2m Cash & undrawn facilities Strengthened financial capacity Average maturity of borrowings We arranged £105m of long-term fixed rate debt in 2016 and had a weighted average maturity £383m of borrowings at the year end of 7.7 years. 7.7 years 2015: £269m 2015: 7.3 years New lettings Record lettings EPRA vacancy rate We set a new record for lettings during a year – 63 transactions on floorspace of 547,500 sq ft 5 47, 5 0 0 sq ft with annual income of £31.4m. Available space 2.6% 2015: 523,800 sq ft remained low at 2.6%. 2015: 1.3% Contracted net rent Increased contracted rental income EPRA like-for-like net rental income We converted £19.9m of rental reversion into cash flow during the year, taking the contracted £150.3m rent roll to £150.3m at 31 December 2016. 5.7% 2015: £137.1m 2015: 5.2% EPRA earnings per share (p) Dividend per share – relating to year (p) 80 60 76.99 Our experienced 71.34 52.36 team 50 60 Read more on page 57.08 43.40 53.87 40 39.65 50.36 36.50 33.70 40 30 68 20 20 10 0 2012 2013 2014 2015 2016 0 2012 2013 2014 2015 2016 Derwent London plc Report & Accounts 2016 06 STRATEGIC REPORT 98% of our portfolio is located in central London, grouped in 14 ‘villages’, each with its own individual identity. ISLINGTON 63% can be found in the West End and Paddington 35% in the City Borders. The balance Site of Brunel Building, relates to properties and land held on the opposite new Crossrail entrance, for completion King’s Cross northern outskirts of Glasgow in Scotland. in 2019. EUSTON 91 6.0m sq ft1 Buildings Area OLD 1 Includes 1.0m sq ft of on-site developments. STREET SHOREDITCH CLERKENWELL c.700 c.450 FITZROVIA BLOOMSBURY Leases Tenants Whitechapel Farringdon Liverpool Street BAKER STREET/ MARYLEBONE NORTH OF £150.3m £284.5m OXFORD Contracted net Estimated STREET 1 Tottenham Court Road rental income rental value Paddington 2015: £137.1m 2015: £278.1m PADDINGTON HOLBORN THE CITY 1 After additional capex of £363m. WHITECHAPEL SOHO/ 3.4% 4.8% Bond Street COVENT GARDEN EPRA net initial yield True equivalent yield 2015: 3.1% 2015: 4.5% MAYFAIR 6.5 years 7.8 years 2015: 7.0 years 2015: 7.3 years WAULT 1 WAULT 1 including pre-lets ST JAMES’S 1 Weighted average unexpired lease term. Property values Over £200m 22% Our £100-£200m 41% £50-£100m 22% Victoria portfolio Below £50m 15% VICTORIA STRATEGIC REPORT 07 Fitzrovia The Group’s largest village, with 35% of our portfolio, is benefitting from the major planned improvements to Tottenham Court Road and the eastern end of Oxford Street ahead of the opening ISLINGTON of the new Tottenham Court Road Crossrail station. It is also the location of our developments at 80 Charlotte Street and The Copyright Building. King’s Cross EUSTON OLD STREET SHOREDITCH CLERKENWELL FITZROVIA BLOOMSBURY Whitechapel Farringdon Liverpool Street BAKER STREET/ MARYLEBONE NORTH OF OXFORD STREET Tottenham Court Road Paddington PADDINGTON HOLBORN THE CITY WHITECHAPEL SOHO/ Bond Street COVENT GARDEN MAYFAIR ST JAMES’S Crossrail Crossrail is set to open in 2018 increasing London’s rail capacity by 10%, and significantly improving connectivity. Over 70% of our properties are located close to a Crossrail station. Victoria VICTORIA STRATEGIC REPORT 08 Tech Belt Central London office rent banding ‘Topped-up’ income % We own a number of clusters in this vastly improved area £0-£30 per sq ft 6 ISLINGTON of London, all located close £30-£40 per sq ft 12 to transport hubs.