Q2 2026 Derwent London PLC Earnings Call

August 6, 2026

Speaker #1: Damian, Emily, and me, following which we will be happy to take any questions you may have. First, here's some key takeaways: we are delivering against the operational capital allocation targets we outlined in February, including the buyback.

Speaker #1: The London Occupation Market is strong, with active demand remaining above supply driving rental growth across our portfolio. Whilst the investment market is more subdued, impacted by the war in the Middle East, we have sold well in accordance with our targets, and we are pushing ahead with selective West End developments where forecast returns are strong supported by the positive rental outlook.

Speaker #1: Now turning to the key business highlights: we have delivered a very strong operational performance, securing over £30 million of leasing and asset management transactions since the start of the year, and there is more currently under offer.

Speaker #1: New leases have been signed more than 5% above ERB; our asset management activity is extended leases in higher rents. Our per-vacancy rate remains low at 4.4%, and we expect this to reduce further.

Speaker #1: We have continued to deliver value through development: net work completed during Q2, with the offices fully pre-let and delivering an ungeared IRR of around 11%.

Speaker #1: Rents well ahead of our underwrite more than offset the outward movement in market yields during construction. Our next phase of West End developments is firmly underway, with 4 major projects on site totaling half a million square feet.

Speaker #1: Supported by rental growth and fixed-price construction contracts, we forecast ungeared double-ditch IRRs. Looking at the financials, earnings in H1 were ahead of guidance we gave in February, and were upgrading our guidance for 2026.

Paul Williams: Well, good morning everyone, and welcome to the Derwent London H1 2026 results presentation. Today, you will hear from Damian, Emily, and me, following which we will be happy to take any questions you may have. Firstly, some key takeaways. We are delivering against the operational capital allocation targets we outlined in February, including the buyback. The London occupational market is strong with active demand remaining above supply, driving rental growth across our portfolio. Whilst the investment market is more subdued, impacted by the war in the Middle East, we have sold well in accordance with our targets. We are pushing ahead with selective West End developments where forecast returns are strong, supported by the positive rental outlook. Now turning to the key business highlights.

Speaker #1: Well, good morning, everyone, and welcome to the Derwent London H1 2026 results presentation. Today you will hear from Damian, Emily, and me, following which we will be happy to take any questions you may have.

Speaker #1: We also reiterate guidance for 2027 and through to 2030. NTA was down through H1, printly due to the small outward movement in yields following the conflict in the Middle East, and a provisional Old Street quarter, which Damian will provide further details on.

Speaker #1: First, see some key takeaways: we are delivering against the operational capital allocation targets we outlined in February, including the buyback. The London Occupational Market is strong, with active demand remaining above supply driving rental growth across our portfolio.

Speaker #1: Now, in February, we laid out our returns-focused capital series of associated targets. I'm pleased to say that we are executing these strongly. This year, we have completed or contracted some 280 million pounds of disposals within 3% of book value, and more is under offer or is in discussions.

Speaker #1: Whilst the investment market is more subdued, impacted by the war in the Middle East, we have sold well in accordance with our targets, and we are pushing ahead with selective West End developments where forecast returns are strong, supported by the positive rental outlook.

Speaker #1: This compares well with our targets of 400 million in 2026 and 1 billion over 3 years. This provided financial capacity that we launched a 50 million pound share buyback, which is now over halfway through.

Speaker #1: Now, turning to the key business highlights: we have delivered a very strong operational performance, securing over £30 million of leasing and asset management transactions since the start of the year, and there is more currently under offer.

Paul Williams: We have delivered a very strong operational performance, securing over GBP 30 million of leasing and asset management transactions since the start of the year. There is more currently under offer. New leases have been signed more than 5% above ERV. Our asset management activities extend to leases in higher rents. Our EPRA vacancy rate remains low at 4.4%, and we expect this to reduce further. We have continued to deliver value through development. Network was completed during Q2 with the offices fully pre-let and delivering an ungeared IRR of around 11%. Rents well ahead of our underwrite more than offset the outward movement in market yields during construction. Our next phase of West End developments is firmly underway with four major projects on site totaling half a million square feet. Supported by rental growth and fixed price construction contracts, we forecast ungeared double-digit IRRs.

Speaker #1: Further buybacks will be kept under consideration alongside other reinvestment opportunities that may emerge, including potential acquisitions. On developments, I'm building on our success at 25 Baker Street; we committed to 50 Baker Street in Q2.

Speaker #1: New leases have been signed more than 5% above ERV. Our asset management activity has extended leases in higher-end properties. Our vacancy rate remains low at 4.4%, and we expect this to reduce further.

Speaker #1: We have continued to deliver value through development. Network completed during Q2, with the offices fully pre-let and delivering an ungeared IRR of around 11%.

Speaker #1: A project we're really excited about given the strength of the occupational market in Marybone, and which we'll forecast will deliver the highest development return for several years with an ungeared IRR in excess of 12%.

Speaker #1: Rents well ahead of our underwrite more than offset the outward movement in market yields during construction. Our next phase of West End developments is firmly underway, with four major projects on site totaling half a million square feet.

Speaker #1: I'm confident we have been conservative in our underwriting. Underlying this, our balance sheet is well placed. Leverage remains comfortable and our average interest rate reduced in H1 compared to the second half last year, following refinancing activity.

Speaker #1: Supported by rental growth and fixed-price construction contracts, we forecast ungeared double-digit IRRs. Looking at the financials, earnings in H1 were ahead of the guidance we gave in February, and we're upgrading our guidance for 2026.

Speaker #1: I will now hand over to Damian, who will take you through the financial results and evaluation in more detail.

Paul Williams: Looking at the financials, earnings in H1 were ahead of guidance we gave in February. We are upgrading our guidance for 2026. We also reiterate guidance for 2027 and through to 2030. NTA was down through H1, principally due to the small outward movement in yields following the conflict in the Middle East and a provision at Old Street Quarter, which Damian will provide further details on. In February, we laid out our returns focused capital allocation framework alongside a series of associated targets. I am pleased to say that we are executing these strongly. This year we have completed or contracted some GBP 280 million of disposals within 3% of book value. More is under offer or is in discussions. This compares well with our targets of GBP 400 million in 2026 and GBP 1 billion over three years.

Speaker #2: Thank you, Paul, and good morning, everyone. Firstly, some key takeaways from me: as Paula said, we've made good progress against the strategic targets set out in February.

Speaker #1: We also reiterate guidance for '27 and through to 2030. NTA was down through H1, principally due to the small outward movement in yields following the conflict in the Middle East, and a provision at Old Street Quarter, which Damian will provide further details on.

Speaker #2: Disposals have enabled us to commence a 50 million share buyback program in May, while also bringing down our LTV and net debt to EBITDA ratios over the last 6 months.

Speaker #1: Now, in February, we laid out our returns-focused capital allocation framework alongside a series of associated targets. I'm pleased to say that we are executing these strongly.

Speaker #2: The first half EPRA earnings were slightly ahead of guidance, and we are upgrading our 2026 full-year earnings forecast. We've increased the interim dividend again as in every year since the merger in 2007, and it remains well covered by EPRA earnings.

Speaker #1: This year, we have completed or contracted approximately £280 million of disposals within 3% of book value, and more is under offer or in discussions.

Speaker #1: This compares well with our targets of £400 million in 2026 and £1 billion over three years. This provided financial capacity for us to launch a £50 million share buyback, which is now over halfway through.

Speaker #2: In relation to EPRA NTA, two points to make: first of all, the valuation saw 6 basis points of outward yield shift in the period, and we've also booked an early provision against the Old Street quarter site, which we expect to acquire in late 2027.

Paul Williams: This provided financial capacity when we launched our GBP 50 million share buyback, which is now over halfway through. Further buybacks will be kept under consideration alongside other reinvestment opportunities that may emerge, including potential acquisitions. On developments, on building on our success at 25 Baker Street, we committed to 50 Baker Street in Q2. A project we are really excited about, given the strength of the occupational market in Marylebone, and which we forecast will deliver the highest development return for several years, with an ungeared IRR in excess of 12%. I am confident we have been conservative in our underwriting. Underlying this, our balance sheet is well-placed. Leverage remains comfortable. Our average interest rate reduced in H1 compared to the second half last year following financing activity. I would now hand over to Damian, who will take you through the financial results and the valuation in more detail.

Speaker #1: Further buybacks will be kept under consideration alongside other reinvestment opportunities that may emerge, including potential acquisitions. On developments, building on our success at 25 Baker Street, we committed to 50 Baker Street in Q2.

Speaker #2: Finally, the balance sheet remains strong, our credit rating was reaffirmed in May, and we have arranged new or extended bank facilities since June. The financial highlights are shown here, and we'll take a look at each of these over the next few minutes.

Speaker #1: A project we're really excited about given the strength of the occupational market in Marybone, and which we forecast will deliver the highest development return for several years with an ungeared IRR in excess of 12%.

Speaker #2: EPRA NTA at the 30th of June was £31.57 per share. The main reasons for the 2.1% reduction were an overall revaluation deficit after accounting adjustments of 18 pence per share, and the provision booked against Old Street quarter equivalent to £41.

Speaker #1: I will now hand over to Damian, who will take you through the financial results and the valuation in more detail.

Speaker #2: The total accounting return for the period is set out here: the first 3 bars show EPRA earnings, capital growth on the main portfolio excluding yield movements, and development returns seen in the half-year.

Speaker #2: Thank you, Paul, and good morning, everyone. Firstly, some key takeaways from me: as Paul said, we've made good progress against the strategic targets set out in February.

Damian Wisniewski: Thank you, Paul, and good morning, everyone. Firstly, some key takeaways from me. As Paul has said, we've made good progress against the strategic targets set out in February. Disposals have enabled us to commence a GBP 50 million share buyback program in May, while also bringing down our LTV and net debt to EBITDA ratios over the last 6 months. H1 EPRA earnings were slightly ahead of guidance, and we are upgrading our 2026 full-year earnings forecast. We've increased the interim dividend again, as in every year since the merger in 2007, and it remains well-covered by EPRA earnings. In relation to EPRA NTA, two points to make. First of all, the valuation saw 6 basis points of outward yield shift in the period, and we've also booked an early provision against the Old Street Quarter site, which we expect to acquire in late 2027.

Speaker #2: This takes us to a 3.7% total accounting return, indicating how the underlying business performed with neutral yields. On the right-hand side, we show the positive impact of the buyback in H1, our estimate of the outward yield impact, and the Old Street quarter provision.

Speaker #2: Disposals have enabled us to commence a 50 million share buyback program in May, while also bringing down our LTV and net debt-to-EBITDA ratios over the last 6 months.

Speaker #2: This takes us to the reported minus 0.4%. Now looking at the property valuation drivers: underlying ERV growth was 2.6%, the highest first-half increase in the decade.

Speaker #2: First half EPRA earnings were slightly ahead of guidance, and we are upgrading our 2026 full-year earnings forecast. We've increased the interim dividend again, as in every year since the merger in 2007, and it remains well covered by EPRA earnings.

Speaker #2: With the West End outperforming the East. This was offset by overall outward yield shift of 6 basis points, but if you adjust for the large letting at net work and the sale of horse-free house, the movement was effectively 15 basis points.

Speaker #2: In relation to EPRA NTA, two points to make: First of all, the valuation saw a 6 basis point outward yield shift in the period, and we've also booked an early provision against the Old Street Quarter site, which we expect to acquire in late 2027.

Speaker #2: As already mentioned, the developments did well, up 10.3% over the period. Net May, and its valuation was up strongly, the rent achieved being 5% above December ERV.

Damian Wisniewski: Finally, the balance sheet remains strong. Our credit rating was reaffirmed in May, and we have arranged new or extended bank facilities since June. The financial highlights are shown here, and we'll take a look at each of these over the next few minutes. EPRA NTA at 30 June was GBP 3,157 per share. The main reasons for the 2.1% reduction were an overall revaluation deficit after accounting adjustments of GBP 0.18 per share, and the provision booked against Old Street Quarter equivalent of GBP 0.41. The total accounting return for the period is set out here. The first three bars show EPRA earnings, capital growth on the main portfolio excluding yield movements, and development returns seen in H1. This takes us to a 3.7% total accounting return, indicating how the underlying business performed with neutral yields.

Speaker #2: The value was also tightened the investment yield, and we've been able to release some contingency. Other projects on site were up just over 5%.

Speaker #2: EPRA NTA at 30th June was £31.57 per share. The main reasons for the 2.1% reduction were an overall revaluation deficit, after accounting adjustments, of 18 pence per share, and the provision booked against Old Street Quarter equivalent to £41 per share.

Speaker #2: The balance of the portfolio was down 1.3% on average, with the West End and the higher-quality buildings outperforming. Some of our older properties, which were approaching refurbishment or are earmarked for disposal, saw greater declines as leases shortened.

Speaker #2: In addition, investments yields have moved out a bit for some of the larger lot sizes. The yield adjustment we mentioned has also impacted our total property return for the first half.

Speaker #2: The total accounting return for the period is set out here. The first three bars show EPRA earnings, capital growth on the main portfolio excluding yield movements, and development returns seen in the half year.

Speaker #2: Now I want to turn to Old Street. We expect to complete the acquisition of the Old Street site in Q4 2027. The 239 million pound price was set over 4 years ago in May 2022, and at completion the site will be valued on a residual value basis and subsequently held at fair value.

Damian Wisniewski: On the right-hand side, we show the positive impact of the buyback at H1, our estimate of the outward yield impact and the Old Street Quarter provision. This takes us to the reported minus 0.4%. Now looking at the property valuation drivers. Underlying ERV growth was 2.6%, the highest H1 increase in a decade, with the West End outperforming the East. This was offset by overall outward yield shift of 6 basis points. If you adjust for the large letting at Network and the sale of Horseferry House, the movement was effectively 15 basis points. As already mentioned, the developments did well, up 10.3% over the period. Network reached practical completion in May, and its valuation was up strongly. The rent achieved being 5% above December ERV. The valuers also tightened the investment yield, and we've been able to release some contingency.

Speaker #2: This takes us to the reported minus 0.4%. Now, looking at the property valuation drivers: underlying ERV growth was 2.6%, the highest first-half increase in a decade.

Speaker #2: To date, our balance sheet includes the 3 million pound deposit paid, plus 11.9 million of planning, design, and other fees, after impairment. All held within prepayments.

Speaker #2: We regularly consider the expected costs and benefits of the acquisition and the subsequent scheme. At the 30th of June 2026, after updating all the inputs and considering additional strategic delivery options for the site, we've booked a provision of £45.8 million.

Speaker #2: With the West End outperforming the East, this was offset by an overall outward yield shift of 6 basis points. But if you adjust for the large letting at Network and the sale of Horseferry House, the movement was effectively 15 basis points.

Speaker #2: As already mentioned, the developments did well, up 10.3% over the period. Network reached practical completion in May, and its valuation was up strongly, the rent achieved being 5% above December ERV.

Speaker #2: We will update this 6 monthly up to the time of acquisition, at which point it will be offset against any valuation adjustment. At December 2025, it was determined that no provision was required.

Speaker #2: The value also tightened the investment yield, and we've been able to release some contingency. Other projects on site were up just over 5%.

Speaker #2: Now turning to the income statement: as expected, gross rental income was down slightly compared to H1 2025. The positive impact in the period from net work, 25 Baker Street, and other lettings was 12.5 million pounds, and net work's annualized rental income of 10.7 million after incentives will come through more clearly in the second half.

Damian Wisniewski: Other projects on sites were up just over 5%. The balance of the portfolio was down 1.3% on average, with the West End and the higher quality buildings outperforming. Some of our older properties, which were approaching refurbishment or are earmarked for disposal, saw greater declines as leases shortened. In addition, investment yields have moved out a bit for some of the larger lot sizes. The yield adjustment we mentioned has also impacted our total property return for H1. Now on to Old Street. We expect to complete the acquisition of the Old Street site in Q4 2027. The GBP 239 million price was set over 4 years ago in May 2022. At completion, the site will be valued on a residual value basis and subsequently held at fair value.

Speaker #2: However, we have a larger-than-usual number of projects on site, and saw some additional vacancy earlier in the year. Including one Page Street, which is being marketed for sale.

Speaker #2: In addition, investment yields have moved out a bit for some of the larger lot sizes. The yield adjustment we mentioned has also impacted our total property return for the first half.

Speaker #2: These combined to bring rental income down by 13.6 million compared to H1 2025. On a like-for-like basis, compared to this time last year, gross rent was up 1% and net rent 2.7%.

Speaker #2: Now onto Old Street. We expect to complete the acquisition of the Old Street site in Q4 2027. The 239 million pound price was set over 4 years ago in May 2022, and at completion the site will be valued on a residual value basis and subsequently held at fair value.

Speaker #2: More details are in Appendix 3. EPRA earnings for the first half were £54.6 million, or £48.7 per share. Actions taken to reduce costs saw property expenditure and admin expenses 1.5 million lower, and we expect admin costs to fall further in the second half.

Speaker #2: To date, our balance sheet includes the 3 million pound deposit paid, plus 11.9 million of planning, design, and other fees after impairment. All held within prepayments.

Damian Wisniewski: To date, our balance sheet includes the GBP 3 million deposit paid, plus GBP 11.9 million of planning, design, and other fees after impairment, all held within prepayments. We regularly consider the expected costs and benefits of the acquisition and the subsequent scheme. At 30 June 2026, after updating all the inputs and considering additional strategic delivery options for the site, we've booked a provision of GBP 45.8 million. We will update this six monthly up to the time of acquisition, at which point it will be offset against any valuation adjustment. At December 2025, it was determined that no provision was required. Now turning to the income statement. As expected, gross rental income was down slightly compared to H1 2025. The positive impact in the period from Network, 25 Baker Street, and other lettings was GBP 12.5 million.

Speaker #2: Net finance costs increased due partly to a 2.3 million reduction in capitalized interest. H1 2025 also benefited from convertible bonds, with an IFRS rate of 2.3%.

Speaker #2: We regularly consider the expected costs and benefits of the acquisition and the subsequent scheme. At the 30th of June 26, after updating all the inputs and considering additional strategic delivery options for the site, we've booked a provision of £45.8 million.

Speaker #2: These were redeemed in June 2025 and replaced by conventional bonds at 5.25%. Looking ahead, we now expect EPRA earnings per share for 2026 to be between flat and 3% lower than in 2025.

Speaker #2: We will update this 6-monthly up to the time of acquisition, at which point it will be offset against any valuation adjustment. At December 25, it was determined that no provision was required.

Speaker #2: That's a 2 to 3% upgrade from the beginning of the year guidance. Our outlook for earnings up to 2030 has also strengthened slightly, but we've maintained guidance.

Speaker #2: Now turning to the income statement: as expected, gross rental income was down slightly compared to H1 2025. The positive impact in the period from Network, 25 Baker Street, and other lettings was £12.5 million. Network's annualized rental income of £10.7 million after incentives will come through more clearly in the second half.

Speaker #2: The next slide shows where we're allocating capital, including the share buyback. We spent £60 million on projects in H1, and capex is expected to accelerate into the second half as the projects get fully into their stride.

Damian Wisniewski: Network's annualised rental income of GBP 10.7 million after incentives will come through more clearly in H2. However, we have a larger than usual number of projects on site and saw some additional vacancy earlier in the year, including 1 Page Street, which is being marketed for sale. These combined to bring rental income down by GBP 13.6 million compared to H1 2025. On a like-for-like basis, compared to this time last year, gross rent was up 1% and net rent 2.7%. More details are in appendix three. EPRA earnings for H1 were GBP 54.6 million or GBP 0.487 per share. Actions taken to reduce costs saw property expenditure and admin expenses GBP 1.5 million lower, and we expect admin costs to fall further in H2. Network finance costs increased due partly to a GBP 2.3 million reduction in capitalized interest.

Speaker #2: Development returns are looking interesting, and Emily will explain our expectations here later. The share buyback continues, and after 18.1 million of purchases up to the 30th of June, we have now completed about 34 million in total.

Speaker #2: However, we have a larger-than-usual number of projects on site, and saw some additional vacancy earlier in the year. Including one Page Street, which is being marketed for sale.

Speaker #2: These combined to bring rental income down by £13.6 million compared to H1 25. On a like-for-like basis compared to this time last year, gross rent was up 1% and net rent 2.7%.

Speaker #2: The current program of 50 should be finished in a few weeks' time, with a larger positive impact on NTA and earnings in H2 than in H1.

Speaker #2: More details are in Appendix 3. EPRA earnings for the first half were £54.6 million, or 48.7 pence per share. Actions taken to reduce costs saw property expenditure and admin expenses £1.5 million lower, and we expect admin costs to fall further in the second half.

Speaker #2: Further buybacks will be considered in the future, from surplus capital driven by disposals. The buildup of our portfolio ERV is shown here. This is on a net effective basis, total rental reversion has increased to 83.3 million, from 70.9 at year-end, but the capex required has also increased with the commitment at 50 Baker Street.

Speaker #2: Net finance costs increased, due partly to a £2.3 million reduction in capitalized interest. H1 25 also benefited from convertible bonds, with an IFRS rate of 2.3%.

Speaker #2: Moving on to refinancing highlights: in the first half, 230 million of maturing fixed-rate debt was repaid, including the 175 million LMS-secured bonds at 6.5%.

Damian Wisniewski: H1 2025 also benefited from convertible bonds with an IFRS rate of 2.3%. These were redeemed in June 2025 and replaced by conventional bonds at 5.25%. Looking ahead, we now expect EPRA earnings per share for 2026 to be between flat and 3% lower than in 2025. That's a 2% to 3% upgrade from the beginning of the year guidance. Our outlook for earnings up to 2030 has also strengthened slightly, but we've maintained guidance. The next slide shows where we're allocating capital, including the share buyback. We spent GBP 60 million on projects in H1, and CapEx is expected to accelerate into H2 as the projects get fully into their stride. Development returns are looking interesting.

Speaker #2: These have been refinanced with cheaper floating-rate bank debt. As a result, the weighted average interest rate that we paid in H1 2026 was 3.9%.

Speaker #2: That's lower than in H2 2025, but above the first half in 2025. Allowing for one further base rate increase this year, we expect our average interest rate to be 3.8% in H2.

Speaker #2: That's a 2 to 3% upgrade from the beginning of the year guidance. Our outlook for earnings up to 2030 has also strengthened slightly, but we've maintained guidance.

Speaker #2: Since the end of June, we've increased total net facilities by signing a new 100 million 5-year unsecured revolving credit facility, with handles Banken. And have extended our main 450 million group RCF to July 2030.

Speaker #2: The next slide shows where we're allocating capital, including the share buyback. We spent £60 million on projects in H1 and capex is expected to accelerate into the second half as the projects get fully into their stride.

Speaker #2: Finally, from me, our debt summary: cash and undrawn facilities at the 30th of June were 481 million pounds, but with the new facility in place on a proforma basis, that's now up to 581.

Speaker #2: Note also that the sale of 90 Whitfield Street is due to complete in a few weeks' time, and will reduce borrowings by a net 107 million.

Speaker #2: All of our debt is now unsecured, and 71% was at fixed rates at the 30th of June, with a strongly inverted interest rate curve we expect to run higher levels of floating-rate debt than usual from the time being.

Speaker #2: Thank you very much, and now over to Emily.

Speaker #1: Thank you, Damian. The fundamentals of the Occupy market remain strong. In H1, availability and vacancy reduced, with Central London vacancy now below 7% and lower at 5% in the West End.

Speaker #1: Against this, demand has risen further. Now sitting at just under 12 million square feet, supporting strong rental growth, which is now forecast across all London's submarkets.

Speaker #1: Looking a little more closely at demand, it is now at its highest second-highest level on record, with named requirements spanning a broad range of high-quality occupiers across multiple sectors.

Speaker #1: Professional services and financial occupiers dominate, while tech and AI have become increasingly important, which I will come onto in due course. Turning to supply: against a backdrop of reducing availability and a constrained development pipeline in the coming years, there is good reason to be confident of rental growth.

Speaker #1: Current availability is well below the 10-year average, but the first time since Q2 2020 and 33% of the 12 million 13.2 million square feet under construction is already pre-let or under offer.

Speaker #1: West End grade A vacancy is as low as 1.2%, and as ever, we have good visibility on likely completions between now and the end of the decade.

Speaker #1: Supporting our own pipeline. Which we'll come onto later. AI has been a standout theme in the market this year. H1 AI take-up reached 700,000 square foot, nearly double 2025's full-year total, with a further 600,000 square foot of active demand in this sector still to be satisfied.

Speaker #1: London is a beneficiary of this direct demand. When AI companies choose Europe, they choose London. There is no meaningful challenger on the continent, and rival talent deep venture capital and a mature innovation ecosystem.

Speaker #1: And we see this as a trend that will continue. With CBRE currently projecting significant further growth in the sector over the coming years. Turning now to the investment market on slide 24, where the picture is much more subdued.

Speaker #1: And volumes are tracking below long-term averages. Q2 sentiment cooled after a strong start to the year, understandable given the global backdrop. But demand for London offices hasn't gone away.

Speaker #1: Capital is still there, and its global in nature. 25 billion of equity is targeting London, from various geographies. In terms of our own activity across the portfolio, we have been active on sales.

Speaker #1: We're delivering on the strategy set out in February, 280 million of sales transacted, on average 3% below book, with a further circa 100 million to come this year.

Speaker #1: On acquisitions, we remain disciplined, but ready to act on opportunities that can offer strong returns. Maybe value-add or core plus, and such opportunities will always be considered within that same framework and against other options, including share buybacks, where capital may be deployed.

Speaker #1: Operationally, looking first at our leasing activity, it's been a strong year. 22 million of new income has transacted year to date, 5.1% ahead of ERVs, including the pre-let of network to Databricks.

Speaker #1: In addition, we have a further 5.3 million under offer at half-year, setting us up for what's likely to be one of our highest years for new income on record.

Speaker #1: And in terms of activity with our existing occupiers, we have continued to proactively manage our lease-expiry and break profile, and this was reflected in a high level of renewals.

Speaker #1: Our EPRA vacancy remains low at 4.4%, or 3.5% if you exclude 88 to 94 Tottenham Court Road, which is now under offer for sale.

Speaker #1: Finally, a reminder of how we strategically position our portfolio. We proactively shape it to meet London's varied demand. Because we understand what occupiers want.

Speaker #1: Not just from the space itself, but service and immunity around it as well. London is a global HQ city, and that remains our core business: strong and durable Waltz, through long-term lettings to large established businesses.

Speaker #1: And we do flex too. To mirror the market proportionality. Flexible space today sits at around 8.5% of our office portfolio, rising to just over 12% if we include third-party operators such as Fora.

Speaker #1: And underpinning all of it, HQ and Flex alike, is our deal member offer. Which the market now understands and clearly values. In respect to Flex, more specifically, we expect this to continue to grow to around 15%.

Speaker #1: As ever, how we deliver Flex, as with everything else, is returns and margins focused. For Flex and managed space, that means factoring in operational costs as well as the capex.

Speaker #1: Now moving on to our development pipeline. Just to set the scene on development more broadly. The backdrop has been challenging. Outward yield movement, combined with a period where construction cost inflation has outweighed rental growth, has made some development harder to justify.

Speaker #1: Despite that challenging backdrop, and not insignificant outward yield shift, we've delivered strong returns on our recent schemes. 25 Baker Street and network, where rental growth has now been proven.

Speaker #1: And now the landscape is improving. Not necessarily across the board, but for the right development in the right locations. Our approach remains disciplined and returns focused, always aligned to our wider capital allocation strategy, where development can make a genuinely positive contribution to total accounting return, through both development returns and earnings in the medium to long term.

Speaker #1: Add to that the draft London Power and published earlier this quarter, which paints an improved picture for development in London. Alongside progress local authorities, who are actively engaged with our sector.

Speaker #1: The complexities of developments remain, but the case for the right development is building, for those that know their marketplace. We have a strong pipeline, carefully selected, our major projects comprise two redevelopments and two refurbishments, offering attractive returns of a combined IRR of 12%, a profit of cost on 18%, and a development yield of around 7%.

Speaker #1: And I'll briefly talk on each. Following on from our success at 25 Baker Street, we are now on site at 50 Baker Street, delivering unique large office floorplates with strong architectural language and a very special and unique rooftop, in a submarket where supply is very thin.

Speaker #1: We're very confident of strong rental growth here. In terms of the sustainability story, as well as the usual top credentials, we are pioneering a UK-first by transforming concrete from the existing building into structural concrete for the new.

Speaker #1: And are aiming for over 20% of the new building material to be from recycled sources. Holden House is 133,000 square foot redevelopment behind a retained façade, at the southern end of Fitzrovia, bordering Soho and directly opposite the Dean Street entrance to the Elizabeth Line at Tottenham Court Road.

Speaker #1: The scheme includes a beautiful atrium, which supports an innovative servicing strategy, delivering fantastic workspace and again, exemplary green credentials. Green Coat and Gordon gives new life to these characterful Victorian warehouse buildings, in a submarket traditionally dominated by Dutch glass and steel.

Speaker #1: We can offer something genuinely different here, and we expect to deliver a mix of Flex and traditional Cathay space. Finally, Middlesex House, 50,000 square foot within a refurbished 1930s building, complete with a fantastic new terrace and amenity offer.

Speaker #1: Where we'll be looking to provide a self-contained building of flexible workspace. In summary, there's a lot to be excited about across these current schemes.

Speaker #1: We understand that development doesn't work everywhere, but these projects have been selected specifically because they will make a positive contribution to our overall returns.

Speaker #1: Consistent with our wider capital allocation framework. Looking beyond these schemes, alongside any disciplined acquisitions over time, and other refurbishments in the portfolio, we have further opportunity to maximize value, on a number of sites and potential schemes.

Speaker #1: We're getting VP of 20 Farringdon next year. This building sits above the Crossrail station at Farringdon, and we are looking to give it a new life, refurbishing the existing building, with focus on ground floor and rooftop.

Speaker #1: Old Street Quarter, you have heard from others on this today, but we have optionality on delivery here, and there will be more to follow on this as we progress through planning.

Speaker #1: Finally, 230 Blackfriars Road, there is scope to get a good planning permission in respect of bulk and mass, with optionality again around delivery. I shall now hand over to Paul to wrap up.

Speaker #2: Thank you very much, Emily. As you've heard, we are performing strongly delivering against the targets we laid out with our capital allocation framework. Operational momentum is continuing.

Speaker #2: We are capturing the growing reversion and driving income through our leasing asset management activity. We are active in the investment market, executing a decisive plan to further optimize already high-quality portfolio.

Speaker #2: And we're making good progress on four West End projects, which all deliver attractive returns and which are well located to benefit from the strong rental growth we are seeing.

Speaker #2: Now, before allowing for one of items, the portfolio is on track to generate returns of 70% per annum over the medium term. The strength of the occupational market gives us confidence to reiterate our ERV guidance of plus 4 to plus 7% this year, following a 2.6% growth in H1.

Speaker #2: And we are upgrading our 2026 earnings guidance with H1 better than forecast. The building blocks are in place to deliver 25 to 30% growth in EPRA earnings by 2030.

Speaker #2: Earnings this year, I announced my retirement as Chief Executive, and today marks my last set of results after nearly 40 years over on the 1st of September.

Speaker #2: I want to take this opportunity to thank you all for your support and your engagement. I also want to thank the whole of the Derwent team and particularly Damian Emily and Nigel for their friendship and wise counsel.

Speaker #2: I know I'm leaving the business in strong hands and look forward to seeing it continue to thrive. Thank you, and we're now happy to take questions from the floor followed by the webcast.

Speaker #2: Please, Johnny.

Speaker #3: Thanks very much. Johnny Huber from Deutsche Numis. Could I ask firstly, in terms of the strong rental backdrop, are you seeing any indication of a change in incentives?

Speaker #3: In the face of that improvement?

Speaker #1: I think incentives have remained fairly stubborn at around 24 months on 10 years. The large reason for that is the construction cost inflation that we've seen over the cycle, which obviously impacts the tenants as much as us.

Speaker #1: Though actually, them holding firm I see as quite a positive rather than having gone out further in that regard.

Speaker #3: Thanks very much. Second question would be in terms of Old Street Quarter. If the modelling assumed 100% chance of disposal, how would that impact the provision?

Speaker #4: Well, it's very sensitive, that provision. As you sell the scheme without going through the developments, you obviously give up development profits. So that would increase the provision.

Speaker #4: I'm not going to give you an actual number because there are so many other moving parts, but it would be substantially higher than the existing provision.

Speaker #3: Thanks very much. And then just the last one in terms of new developments. Do you think contractors are building in much larger contingency into their bids where they offer a fixed price now, and is it challenging to get a fixed price often?

Speaker #2: Let me ask that question firstly. I think being associated with Derwent product is seen as very positive for contractors. We've got a very good relationship with Tier 1 contractors.

Speaker #2: We've just gone through the process of fixing the price for both Holden and for 50 Baker Street, and we're delighted we fixed the price for contractors that we know well.

Speaker #2: They're obviously a little bit more cautious about the Middle East, but they know that we pay well, we pay well on time, and we're good to work with.

Speaker #2: So we are able to fix without paying a big premium, and we've got some contingency left within the scheme in case a reverse further issues.

Speaker #2: But we feel very positive. We've delivered through some very difficult circumstances, made great profits, and hopefully our contractors will make some money as well.

Speaker #2: Thank you.

Speaker #3: Thanks very much.

Speaker #2: Any other questions? Oh yeah, Paul, thank you.

Speaker #3: All right, it's Paul May from Barclays. First one's a bit of a boring one for you, Damian. Can you explain your capitalised interest policy?

Speaker #3: The rate used, and has anything material changed? How are you going to approach the Old Street Quarter? Will you capitalize against the cost or the lower residual value?

Speaker #3: And will you undertake activities or investment in order to keep capitalised interest artificially high, or is the plan ultimately that it will reduce as capex or development reduces?

Speaker #4: That's a very long question, sorry. Let me try and answer it.

Speaker #1: It's a good question.

Speaker #4: Our policy hasn't changed. And you'll notice that the capitalised interest is actually fallen from H1 25 to H1 26 by about 2 million. It's a little higher than we expected when we did the forecast at the beginning of the year.

Speaker #4: Mainly because network completed later, so we capitalised interest for a couple of months longer. We got a little bit less income from network as a result.

Speaker #4: The net impact was quite small. The policy essentially is unchanged. I think coming back to Old Street Quarter, when we buy the site, that would be a site, I assume we hold it, that would be a site in which we would capitalise interest on the acquisition cost.

Speaker #4: So initially, the impact on earnings would be very small. But remember, we capitalised at an average rate, not at a marginal rate. So currently, we're capitalising at about 4, 4.5%.

Speaker #4: That's including all the costs on top of the interest cost. And given the marginal rates are a little bit higher, there'd be a small earnings impact.

Speaker #4: But relatively small. Does that answer most of your questions? I think there were probably a couple.

Speaker #3: No, that's got all of it, I think, which is good. You highlighted larger writedowns in weaker assets. How overvalued are some of your assets, would you say, on that basis?

Speaker #3: And was this focused on specific assets that you're looking to dispose of, i.e., did assets earmark for disposal, see larger writedowns than the others?

Speaker #4: Do I start that one?

Speaker #1: Yeah. I mean, I think the bifurcation in the market still exists. So you'll certainly see the higher development assets seeing better growth. I think in terms of the read across of the whole portfolio, the volumes have been low.

Speaker #1: Valuation systems are retrospective. To put a number on how far up things are over or undervalued, obviously we can't do. But it's the important thing is that tail.

Speaker #1: And in terms of the assets we're selling, we have third-party valuations. They're valued by Knight Frank and we look at that with them.

Speaker #2: I'll just make the point. As you get towards the end of a lease, the income drops off, values have to take that into account.

Speaker #2: So you move towards there, essentially, a vacant possession value. So it's quite natural to see things like that falling in value. That's really what we're talking about here when we've seen we've got shortening leases, some vacancy, that's got an impact on individual property valuations.

Speaker #2: That's been driving those falls at the tail.

Speaker #4: So some of those are opportunities as well for future refurbishments or for others. Now, if you look at ourselves today, we're quite difficult. Macro environment, just 3% below book, I think, is a pretty positive story with a range of different properties.

Speaker #4: But with a portfolio any portfolio, you're always going to have some really good winners and occasional few losers.

Speaker #3: Yeah, as I say, it's just more on the assets earmarked for disposal. We've seen with others that they write those down quite aggressively, then sell in line with book.

Speaker #3: So I just wondered if that was something that you were doing as well, or looking to do, or whether the valuers were minded to do that to obviously save themselves.

Speaker #4: I wouldn't say we've done it like that, but a building like Page Street, for example, so this time last year, it was occupied by Burberry.

Speaker #4: Currently, it's empty. It's on the market. The value's fallen quite a bit, but that's mainly because it's now vacant. But there we go.

Speaker #3: That makes sense. Cool. Last one. You highlighted an increased confidence in your FY30 EPS target. I assume driven by stronger operational performance. Given your comments, is it fair to assume you're now towards the top end of the 25 to 30% range?

Speaker #3: And what would it take for you to increase that target?

Speaker #2: Well, Damian, you can answer that question.

Speaker #4: Yeah, yeah. Well, you know, I'm usually quite careful with these things. And 2030 is a way away. So our model has strengthened since we last reported.

Speaker #4: Well, I didn't think it was right to upgrade guidance four years in advance. So we're feeling more confident, but we're maintaining guidance. But if you can say I can say I'm a little bit more confident, even than I was in February, if that helps.

Speaker #3: Perfect. Thank you.

Speaker #4: Thank you.

Speaker #2: Thank you, Paul. Back.

Speaker #1: Yeah, thanks. It's Zachary Gauge from UBS. A couple of questions. First one, just to wrap up on the EPRA earnings guidance upgrade for 2026.

Speaker #1: How much of that is driven by the higher capitalised interest versus organic things that we should be thinking about as a run rate into H2?

Speaker #1: Because obviously, you were originally guiding a 20% increase in H2, presumably that's now flattened out largely because of the capitalised interest. But please let me know if there's other things to take into account as a run rate into H2.

Speaker #1: And the second one is on share buybacks. You did mention that sort of still part of the capital allocation framework going forward. But given the shares are now 2021 quid versus where they were when you first announced the intention, do you have a level where you think they actually don't make sense given, in particular, the P&L yield you'd have to sell at for them to make sense is considerably lower than it was three, four months ago?

Speaker #2: If you wanted to start with the.

Speaker #4: Yeah, I'll start. On the earnings, I think there are winners and losers. One of the things that's changed in the second half compared to where we were in February we were expecting a rate cut.

Speaker #4: Later in the year. So our finance costs were a bit lower in H2, which is one of the reasons for the upgrade. In February, for H2 versus H1, that's gone the other way today.

Speaker #4: So I'm now expecting in accordance with the market, probably one rate increase. So that has an impact on H2. H1 was quite a bit stronger than expected.

Speaker #4: The capitalised interest really is offset by the later rent at network, pretty closely. So it's really other things around the portfolio and a bit of cost reduction that's driven that increase.

Speaker #4: So it's basically organic growth in the portfolio. But there has been a shift because of the interest rate, change. That's the main difference. The other point is we've got Page Street on the market.

Speaker #4: It's vacant currently. The longer we hold it, the more that hits earnings in H2. So that's a little bit difficult to be sure. We've modelled it on the basis we sell at the end of the period.

Speaker #4: If we were to sell it a bit earlier, we could perhaps be a bit stronger still. But it depends on individual buildings like that.

Speaker #4: So I hope that helps.

Speaker #2: And do you want to have a go at the mic?

Speaker #4: On the buyback, yeah. I mean, it's still works at this level. But we're only going to look at buybacks in the future if we've got surplus capital.

Speaker #4: The disposals go very well. We've got surplus capital. We then look at the model: where can we best allocate it? If at that stage of buyback still makes sense, we will consider one.

Speaker #4: But I think today, let's finish this one first and we've got lots of interesting things to spend the money on. So take back.

Speaker #1: Thanks.

Speaker #3: Morning, Adam Shapton at Green Street. A quick one on Old Street Quarter. Have you had any approaches to buy the site replanning or buy your option as well?

Speaker #4: Obviously, I would want to really believe in its commercially sensitive. We have had some approaches. There's some interesting things our focus is getting planning permission.

Speaker #4: We've got a very interesting scheme working very well with related argent. So we have been talking to a few people early days because we people it's a two and a half acre site, in central London.

Speaker #4: It's bound to attract certain interest. But we'll let the market know once and if we do anything. But actually, the focus for the time being is obviously to get the planning permission.

Speaker #4: We're working very well. Rich Paul and his team on welfare Islington and GLA. And then we will consider how we might de-risk. And we've always said it is extremely unlikely that we would deliver it ourselves.

Speaker #4: So we would obviously we've got related argent helping us. We'd obviously look at options to de-risk. So we get people knocking on our doors quite regularly, not just on things like that, but also tell me about this, call me about that, because straight from portfolio.

Speaker #4: So we'll let you know when we've got some news.

Speaker #3: That's very clear. Thanks. And then on Flex within the portfolio. So growth, you're indicating growth to 15% of the portfolio. I think six months ago, that was the indication was 10 to 15%.

Speaker #3: I guess if we go back a couple of years, it might have been we're happy at five or whatever it is. So that's growing, and I understand that's the way the market is moving.

Speaker #3: Can you talk a bit about the shape that that takes? Is that going to be 30% of certain buildings, or is it going to be entire buildings?

Speaker #3: And then one technical point on ERVs. When you say the Steven Street Flex letting that happened in the first half was an 11% beat to ERV.

Speaker #3: Is that on a Flex ERV, or a more conventional sort of?

Speaker #1: Yeah. So I'll answer the second bit first, because that's a shorter answer. Yes, we move our ERVs up as we add the capex for the additional capex when we're turning it to Flex.

Speaker #1: So that is against a Flex ERV. It would be a higher beat if it was against the CATA ERV.

Speaker #3: That's a sort of bigger picture follow-up on that. The ERVs, you talk about for the whole portfolio. Does that.

Speaker #1: There'll be a blend of both CATA and Flex.

Speaker #3: Yeah. Okay. But that will naturally move up as well as you convert more.

Speaker #1: Yes. So going back to your first question in terms of the Flex, the growth that we're projecting here is based on growth within our portfolio, i.e., not buying in a specifically for that purpose.

Speaker #1: So as the market's moved, we're praise everything under 10,000 square foot now on the basis of both Flex and CATA. And more often than not, we'll deliver everything under 5,000 square foot, almost certainly.

Speaker #1: And occasionally, we do the largest base takes between five to seven. So that growth factors in those units that we know are coming vacant in the coming years of that size effectively.

Speaker #1: In terms of what the shape of it looks like, we have now more self-contained buildings, particularly in Fitzrovia. Where they will be fully flex buildings, on the smaller side.

Speaker #1: But the growth is also well, two of the schemes we discussed will push some of that growth. So Middlesex House, for example, we were going to deliver 50% flex.

Speaker #1: We're now probably likely to deliver 100%. And Green Coat House is about 50/50 flex to CATA, depending on where the demand lands. So those two are fairly chunky increases, if you like, that are feeding into that number.

Speaker #3: And so the ERVs for those projects.

Speaker #1: The ERVs at the moment are appraised on the 50/50 for both. They will probably move as we agree to sign off the capex for more at Middlesex in the next half.

Speaker #2: Thank you, Adam. Any other questions in the room? Robbie, have you got any questions on the webcast?

Speaker #3: We do. So thank you for that. There's quite a few sort of around the themes. So rather than read the individual questions, what I'm going to do is sort of amalgamate them, combine them.

Speaker #3: So principally, the main one is around the two around share buybacks and around Old Street. Excuse me. So broadly speaking, looking at the economics of a buyback as the share price has gone up, can we talk about how we think about the economics of it and then on a risk-adjusted basis relative to, say, the returns on other sources of capital redeployment, like developments?

Speaker #2: Do you want to deal with that?

Speaker #4: Yeah, I guess I can. I mean, we've obviously announced our first buyback. I think that's gone pretty well. I think going forwards, there's a balance here between short-term gain and the buybacks, even at today's share price, are obviously quite accretive to NTA.

Speaker #4: But what you give up is the ability to grow earnings. We're talking more and more about earnings in this sector. I think it's been interesting having the questions today.

Speaker #4: The important thing for this business is to be really investable. And we're looking at this strong earnings growth through to 2030. That comes from investing in the schemes rather than doing buybacks.

Speaker #4: So I think at the moment, really, the share buyback issue really only arrives when you've got surplus capital. Then we want to make additional disposals over and above our expectations today.

Speaker #4: We then have a decision to make: what do we do with the spare capacity? Do we invest it into new acquisitions? Do we do more development?

Speaker #4: Do we do a buyback? And at the time, we'll look at those things in their entirety, and we'll balance it out.

Speaker #3: Great. Thank you. And then looking at the Old Street quarter provision, you've sort of answered you gave some good detail earlier on. Is there anything that suggests there's going to be more through the second half?

Speaker #4: The provision book to June is based on our views at June and the judgments we've made. If those judgments change, the provision can go up or down.

Speaker #4: So I think we have to wait and see how we feel. Very much the focus today is getting the planning application in. That's the way we can generate the most value, whatever we do.

Speaker #4: So plan for the next six months or so, get that planning application in, maximize the value creation. The provision will largely then come down to how we decide to deliver, how much of this do we do ourselves, how much do we de-risk, as Paul's mentioned, we've got people interested in the site.

Speaker #4: The less we do, the less we can take those development profits ourselves. But then the more capex we save and the more we can do perhaps a share buyback with it.

Speaker #4: So there's a lot of things to balance here. We can't answer where we'll be in six months' time. I'm looking forward to that in six months' time.

Speaker #4: But for the time being, we're comfortable. We've made a good start. The focus is very much on the planning application.

Speaker #3: And then two more technical questions. The first links to total property return versus the MSCI Central London Index. Is there anything specific that led to the underperformance in the first half?

Speaker #3: And the second, sorry, just a second one is, on Page Street, the vacation there, is that within the like-for-like GRI performance that we presented?

Speaker #4: Onto Page Street first?

Speaker #3: Yeah.

Speaker #4: Page Street is currently not in the like-for-like. It's been stripping it out, so it's not available for letters. It's not in the EPRA portfolio.

Speaker #1: In terms of the MSCI, it's a good question. And hopefully, you're aware we do normally comfortably beat the MSCI. We have been in touch with MSCI, as I know others have.

Speaker #1: And we think this is relating to the dataset of this half, where a lot of low-yielding development stock has come into the dataset which we think is slightly distorting the numbers.

Speaker #1: The MSCI pool has also got a bit smaller. But we think it's relative to that low-yielding stock that that's coming through.

Speaker #3: Lovely. And that is all the questions on the webcast. So back to you, Paul.

Speaker #2: Well, thank you very much, everyone attending today. Thank you again for all your friendship and support and interesting questions over the years. I'm going to miss these moments.

Speaker #2: I will watch Joe not from afar, but closely. And I'm very confident good progress. Anyone got any further questions they want to ask later, the team is around.

Speaker #2: And for those who not had a holiday yet, go and have a nice break. Got lovely weather. Enjoy yourself. And thank you again.

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Q2 2026 Derwent London PLC Earnings Call

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