Derwent London PLC

LSE:DLN

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Derwent London 2019 Q3 business update. My name is Stuart, 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.

[Paul Malcolm Williams, CEO & Director]

Good morning, everyone, and thank you for listening in. I'm here with Damian, David and Nigel. I plan to follow the usual format. I will make a few comments and then we will open up the call for questions. 2019 is set to be another good year for Derwent London. Our letting activity is strong as we've let nearly 500,000 square feet and achieved rents of GBP 33.5 million. This means that we've exceeded last year's letting activities by 25%, and equally importantly, these rents achieved 7% above December 2018 ERV. The main contributors were Brunel Building earlier in the year, and of course, most recently, Soho Place. We have secured major long-term 12- to 15-year commitments from Apollo, BCG and G-Research. Demand has held up well despite the political background. This is testament to the quality of our product and the attractions of London as an office location. It's also interesting to note that much of this demand were buildings that will not be completed for another 2 years and that most of our lettings reflected business expansion. Nor is demand just focused on the new space. This could be seen in the very low 0.6% EPRA vacancy rate in our investment portfolio, which includes a wide range of assets across our villages.We have 3 major projects under construction which are all going to plan. They hovered just under 800,000 square feet. And since we last reported, their business has improved from 59% of the commercial space being pre-let to 70% pre-let. We continue to recycle assets with disposals in the year-to-date of around GBP 180 million, which compares to expected CapEx for the year of just over GBP 200 million. As a result of these disposals, our financial position is very strong with an LTV of 16% and GBP 560 million of undrawn facilities and cash. I'm very pleased that the group has led the way to create the first revolving credit facility for a U.K. REIT that includes a very significant green tranche. As you may have seen from our recent announcement, we have also committed to publish our net 0 carbon pathway, and I will give further updates on our plans in this regard when we next meet. In conclusion, we remain very active and have positioned ourselves to exploit existing opportunities and to seek fresh ones while supporting our position as a leading responsible investor and developer. Thank you. I now open up for any questions. Please start with the procedures.

[Operator]

[Operator Instructions] Your first telephone question today is from Osmaan Malik from UBS.

[Osmaan Malik]

Could you just expand a little bit on that last point to exploiting existing opportunities and finding fresh ones? Maybe just give us a bit more on where pricing is in the market for development sites. Anything interesting coming up? Just a little bit more detail there, please.

[Paul Malcolm Williams, CEO & Director]

Well, I think -- firstly, thank you, Osmaan. I mean we've got a great site in Baker Street, and you would have seen earlier in this year that we announced our first part of our transaction with our existing joint venture partner. That's what we've secured a planning permission, which could start in 2021, circa 300,000 square feet of commercial space with residential. And that's on schedule to start. Then we're doing some pre-construction work at the moment in a very good place. We also secured a planning permission again for Holden House, which is in the Oxford Street location, just close by Soho Place. And there are other opportunities within the portfolio we've been looking at.Buying is still tricky. I think there's a lot of demand for the product. And maybe David could just give you a bit more flavor on that.

[David G. Silverman, Property Director & Executive Director]

Yes. And thanks, Paul. As you can see, we've talked about the GBP 180 million worth of sales that we've done, which shows good depth of the market. But as Paul says, that the demand for our sort of deals is certainly strong. People see the positive leasing market and they want to get into that. So we keep -- we're out there. We're looking. We will remain acquisitive and we will remain disciplined on our buying.

[Paul Malcolm Williams, CEO & Director]

Yes. We're in a great position to buy, but we've got to find the right type of product. We continuously look. And -- but there's plenty to do from within.

[Osmaan Malik]

Good. Good. Second question is just to talk a little bit more around the WeWork fallout as the glasses come off, what you're seeing in the market. And maybe just a little bit about -- around the risk around how the situation there is unfolding.

[Paul Malcolm Williams, CEO & Director]

I mean obviously they've taken -- there's been a reasonable large level of take-up for them. And they represent only about 2% of the market when you talk about what they've got at the moment and their pre-lettings. There are plenty of other opportunities. You're aware that we have The Office Group within 3 or 4 our buildings and they're performing extremely well. So we see the whole co-working thing as complementary to the offer we make. We think it might be a good opportunity for us, I think, in some of that properties. I suspect there are some sort of landlords that may not wish to take forward the risk. We've got very low vacancy rates so we see it as an opportunity. We are aware of other co-working, having looked at their sites.So I think co-working is here to stay. Undoubtedly, WeWork will be taking less space in the future that they have been taking. But I say it's probably an opportunity. We will continue to focus on what we're doing. We'll continue to offer a whole range of leasing profile that goes well with -- and people still hold their front doors, and we're letting for 15 years.

[Operator]

[Operator Instructions] Next question comes from the line of Jonathan Kownator from Goldman Sachs.

[Jonathan Sacha Kownator, Financial Analyst]

I just wanted to ask perhaps your view on the new supply coming through in terms of development. Do you see the new supply increase in the market? And is that a strength going forward? Or on the contrary, do you think there's not been an acceleration as new supply currently in the market isn't supporting new development?

[Paul Malcolm Williams, CEO & Director]

Jonathan, yes. I mean obviously in the market, there has been [ new supply ] in the city. But it's interesting to see that in 22 Bishopsgate, they've announced some further lettings. So it's not just us that are doing the pre-letting. So I see that Apple have taken 104,000 square feet.Planning remains pretty restrictive. If you look at the new city plan both from Westminster Council and also from the GLA, I think the ability to expand the products from others is difficult. We have secured our product. So that is good. So I suppose one of the benefits, if you call it, of Brexit has been there has been bit of a little break on the supply. And what we see is demand remains very robust. There's lots of inquiries out there for new space, and there still seems to be people who very much want to kind of relocate within London.

[Jonathan Sacha Kownator, Financial Analyst]

Okay. So no acceleration in construction starts then?

[Paul Malcolm Williams, CEO & Director]

No. We don't see that. You could see some people have sort of -- and obviously we've been pretty consistent in our policy for the last 3 years and continued building. And I think that's been the right strategy. We see others now trying to do a bit more, which is good, but confidence is there.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Williams for any closing remarks. Please go ahead.

[Paul Malcolm Williams, CEO & Director]

Thank you, everyone, for listening in. I hope that you find it helpful. If you want to wish any -- raise any more of the questions today, we're all around. Please make a call. And have a good day, everyone. Thank you very much.

[Operator]

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