Derwent London Plc (DLN) Earnings Call Transcript

Good morning, and thank you for watching our 2020 presentation this morning, which owing to the current lockdown restrictions has been recorded. I'm sorry that we cannot meet in person, but I'm hopeful that given the government pathway and progress with the vaccination program, we'll be able to meet again for the interims in August. After the presentation, we'll open up the line for questions. My fellow directors, Damian Wisniewski, Nigel George, David Silverman and Emily Prideaux will all be on the line as well as Simon Silver. 2020 headlines. We began 2020 in an optimistic mood and the London office market was well-placed. But in March, the seriousness of the pandemic became apparent. And since then, it was a much more challenging year for all. This impacted our results of both EPRA EPS and NTA per share marginally lower, so that our total return was slightly down at minus 1.8%. However, given the strength and resilience of our business, we raised the dividend. Damian and Nigel will take you through the details. The group responded well to the challenges, and the underlying business made good progress. With excellent tenant engagement, we substantially reduced this year's lease expiries. And after some minor delays, we maintained progress on our developments and are committed to our next big project at 19-35 Baker Street. ESG and sustainability play a very important part in our business and strategy. And consequently, we published our pathway to net zero carbon by 2030. Importantly, we remain in a strong financial position. Slide 3. During 2020, we supported and engaged with all our stakeholders. We collaborated with our suppliers, whilst we supported our communities, including the NHS. Our employees met the new challenges and have worked extremely hard to achieve our objectives. All below director level received full pay and benefits and none were furloughed. Our tenant engagement helped our rent collection, which, given the circumstances, remained strong, with only 3% of rents waived and less than 1% outstanding. Our vacancy rate is still low at below 2%. Overall, I believe our relationships have emerged stronger as we continue to mutually support each other through these difficult times. The London office market was impacted in 2020. Lockdowns curtailed a lot of activity, and many occupiers adopted a wait-and-see approach. Reduced letting activity contributed to a sharp rise in vacancy, which is now estimated at 8% overall. Net effective rents circa 10% last year with headlines down and rent freeze increasing, although this is not true of the whole market. The quality of our product was a differentiator, which meant our only ERVs were down just 2.8%. The investment market also saw lower activity, but the strength of the final quarter with GBP 4.3 billion of transactions show that investment demand was still there. And recent transactions continue to support the view that yields remain firm for pre-let buildings. Turning now to Slide 5. Although we are now on a path to recovery, it will take time for the benefits to be fully felt. We expect vacancy rates will continue to rise. However, as the first chart shows, there are a number of different patterns below the headline. Sitting vacancy at 10.8% is higher than in the West End at 5.8%. We expect this differential will continue. Second-hand space and tenant controlled or gray space represents a substantial proportion. Not all this space is lower quality, but the majority is, which we expect will lead to a letting market that is stronger for the best, but weaker for the poorer quality space, a continuation of the emerging 2-tier market. One benefit of a more subdued market is that development starts are likely to climb. There is already some evidence of this. The second chart shows how space under construction falls over the next 3 years, and a significant proportion is pre-let. This suggests that 2023 and 2024 looks set to be years of relatively no supply and endorses our commitment to proceed with 19-35 Baker Street. Drivers in London's recovery. London is a great global city with a large, diverse and relatively young talent pool. The recent CBRE MEA 2021 investor survey ranked London #1 again as the most attractive city for investment. As the vaccination program progresses, London will reopen and people will return to their offices. Active demand at 7.7 million square feet is down 15%, but is still significant. We expect supply to remain constrained, particularly in our core areas. So new space will be relatively rare. Since the government issued the road map out of lockdown 3 weeks ago, we have seen an increase in inquiries and viewings. London has proved adaptable, supporting new industries as other industries have retreated. New sectors, such as life science, artificial intelligence, fintech and digital media are looking to expand. Many companies will adopt a hybrid model with a more agile workforce. The message we are hearing in the third lockdown has changed. We are seeing more companies highlighting the importance of offices and to borrow a phrase, permanent working from home will be seen as an aberration for the vast majority. So what are our occupiers saying? It is important to stress that agile working is not the same as working from home. Too many confuse it the two. With this in mind, it is worth highlighting what our tenants said in response to the survey we completed last month. Responses covered over half our topped-up rents. Collaboration, associate interaction and employee well-being are missed the most. No surprises there. But interestingly, collective productivity and mentoring are rising up the list, whereas last summer, the responses were pretty neutral in these respects. So what will change? 82% said they would adopt more agile working practices. This is an acceleration from what we've seen before. In terms of headcount, 39% of those interviewed have increased their headcount since the pandemic, 45% reduced, with the remainder unchanged. But encouragingly, 51% expect to increase headcount over the next 6 to 12 months and only 8% expect to reduce. We anticipate that business will make positive changes as we come out of the pandemic adopting agile working policies on a greater scale. But a more agile workforce does not necessarily mean a reduction of overall footprint. The answer will vary from business to business, is complex and will take time to fully determine. Tenants will need to allow for peak occupancy, and we foresee a reversal of previous densification policies. To date, we have found out in our buildings these policies often lean towards a reconfiguration rather than a reduction with a rise in amenities, collaboration space and DC rooms. We have seen this in recent fit-outs. So how are we responding? Our long-life, loose-fit buildings are well sophisticated for changing working practices, but that does not mean we're standing still. We are progressing with many portfolio initiatives, which will serve to further enhance our brand offering, greater value to our customers, positioning us well to capture London's future demand. We continue to invest in our digital strategy, delivering smart buildings with integrated systems and sensor capabilities, which enable us, along with our customers, to use data more effectively. To complement our Furnished + Flexible offer, which is already well developed across our smaller units, we're also developing out more shareability across the portfolio. You will learn more of this later this year when we launch [ our gallery at White Chapel. ] Slide 9. This time last year, we announced our commitment to becoming a net zero carbon business by 2030. It is good in our sector are committing to the same journey. In July, we were the first U.K. REIT to issue our detailed pathway setting out how we will get there. This strategy is embedded across the portfolio and our teams, and despite the challenges of COVID-19, I'm delighted by our progress. We have delivered our first net zero building at 80 Charlotte Street. Soho Place, Firestone Building and Baker Street will all follow. The pathway also includes our managed portfolio, and we are retrofitting buildings to all-electric heating systems. We're unable to do this alone and our occupiers are an essential part of this journey and the reactions so far have been very positive. Slide 10, market dynamics and outlook. We see a continued flight to quality and increasingly a 2-tier market. Modern adaptable buildings will continue to appeal to large occupiers. Their limited supply should see rents hold up for this space. Older unadaptable space and smaller suites may prove more vulnerable as vacancy rates are higher. It will take time, but the economic recovery will be the main driver of demand. On this basis, we think our average portfolio ERV will move between 0% and minus 5% this year with a wider than normal range of performance, but we think they could bounce back quite quickly. Our recent developments, such as White Collar Factory and Brunel buildings, have seen their ERVs hold up well. We believe our portfolio is well placed to meet the challenges of the workplace and has a relatively low proportion of retail. We expect our investment yields to remain firm. Slide 11. Derwent London is well placed. We have created and earned some great assets with the right attributes in locations that modern occupiers want. We have established a brand by creating adaptable design-led amenity-rich and sustainable buildings. Our commitment to net zero carbon and our strong ESG credentials will keep us ahead. Our focus on customer relationships will stand us in good stead for the future. We are committed to a substantial pipeline, which we believe will meet today's and tomorrow's occupiers' needs. More growth will come from the economic recovery, which will support all our portfolio. The completion of our developments, our existing developments and major refurbishments have an ERV of GBP 33 million per annum, which over half is pre-let. And Baker Street will add GBP 12 million to our potential ERV. We have a further GBP 131 million of potential development capital returns to come. And the third driver is from potential acquisitions, which we continue to look for. I will now pass over to Damian to run through the numbers.

Thank you, Paul, and good morning, everyone. Financial headlines are on Page 13. EPRA net tangible assets or NTA fell by 3.7% to 38.12p per share after a 3% decline in our property valuations. This brought the total return to its first negative figure since 2009 at minus 1.8%. Gross rental income was up 5.8%, boosted by rents from recent developments, but net rents were impacted by waivers and impairments on some of our receivable balances. Overall, EPRA earnings per share were relatively resilient, down 3.8% to 99.19p. And we are proposing a 1p increase in the final dividend to 52.45p. After the similar step in the interim dividend, this gives a 2.8% increase in the total dividend for the year. It remains over 1.3x covered by EPRA earnings. Our balance sheet and liquidity are both very strong, but the impairment charges caused a small decrease in interest cover to just under 4.5x. The LTV ratio was a little higher than the previous year at 18.4%, but the sale of the Johnson building on the 8th of January brought this down below 16%. Slide 14 shows the movement in EPRA NTA for the year. Note that this new measure is only GBP 0.01 per share different from the old EPRA NAV, and all calculations are in the notes to the accounts. The fall in EPRA NTA was due mainly to a 176p revaluation deficit for the year. The big developments increased in value by 32p per share and a few others like Tea Building were up modestly 2p. However, the general trend was down, and Nigel will take us through that later. Profits on disposals came mainly from the 17 apartments at Asta House that completed in 2020. EPRA earnings are set out on Slide 15. Gross rental income was up to GBP 202.9 million, and most of the other figures very close to 2019, though net finance costs reflect capitalized interest, GBP 3.1 million lower than last year on reduced CapEx. However, it was a GBP 14.2 million of rental waivers and impairments that caused EPRA earnings to dip to GBP 111 million. The GBP 11.2 million increase in gross rents is set out on Slide 16. The completion of 80 Charlotte Street in June plus a full year's rental income from Brunel Building added GBP 20.6 million to 2019's figure. And there was another GBP 3.6 million from other lettings and lease renewals. However, a GBP 6 million reduction came from breaks, expiries and voids, and we have sold more property than we acquired, reducing rents by GBP 7 million. The like-for-like figure, which strips out the recent developments, was marginally down, partly due to a small rise in vacancy rates. On Slide 17, we summarize the rent collection for 2020, taking the 4 English quarter days from December '19 to September '20. We've also shown December 2020's collections, which cover the quarter to March '21. After a normal December 2019, the impact of the pandemic and lockdown was felt from March 2020 onwards, not as deep as we initially feared but longer lasting. It is clear from the data that our retail and hospitality tenants, around 9% of the total, have suffered considerably more than our office occupiers. Overall rent collection for 2020 is now 92% with a further 5% due under agreed payment plans. Cash collected from agreed plan has been excellent to date and we remain confident that we will collect this later in 2021. After rent-free waivers on 3% of the total, the balance outstanding is now less than 1%. December 2020 quarter day rent collections covering the period of March '21 now stands at 91% with offices at 93% plus 5% on deferred payment plans. Note that the amounts drawn from rent deposits so far are relatively low at GBP 1.8 million, and the remaining deposit balances totaled GBP 18.8 million. The Scottish Estate has different quarter days and mainly retail, 90% of 2020 rents have been collected with 3% on payment plans. Slide 18 shows the impact of this on our rents and property costs. We estimate that gross rental income was only down by about GBP 4.4 million, a combination of rents waived and a 2-month delay in completing 80 Charlotte Street. Under IFRS 16, rents waived are required to be spread across their remaining lease terms. The impact on property costs was larger at GBP 14.2 million. This came from service charge waivers and impairments, a write-off of amounts due from tenants who have ceased trading and GBP 8.6 million of impairments on receivable balances. This follows a detailed look at our largest 83 tenants, who make up 92% of the rent roll, specific provisions for those on our tenants at risk list and the balance dealt with according to their sector. Adding this all up, we estimate that in a more normal year, net rental income could have been around GBP 18.6 million higher than reported. As a result, the EPRA cost ratio has risen to 30.5%, including the vacancy cost impairments and waivers. If the latter 2 are excluded, it was 23.4% or a touch lower than 2019. The GBP 60.3 million increase in our drawn debt facilities net of cash is shown on Slide 19. Cash from operations fell 12% to GBP 85.4 million, mainly as a result of uncollected rents and GBP 14.5 million of rents deferred to 2021 under payment plans. Assuming our record of collecting these deferred amounts remains excellent, cash rent in '21 should be higher than normal. Acquisitions and CapEx of GBP 218 million exceeded the GBP 157 million cash from property disposals in 2020. But the sale of Johnson Building in January provided a further cash injection of GBP 166 million. Slide 20. CapEx spend was affected by lockdown restrictions and ended the year at GBP 175 million, including capitalized interest. We anticipate GBP 184 million of CapEx spend in 2021 with the total to committed major schemes of GBP 473 million. More details of these and potential future projects in Appendices 38 and 39. Slide 21 shows our usual pro forma. The first, taking account of remaining costs and a full year's income with 80 Charlotte Street and removing Johnson Building. The second pro forma then shows the effect of committed CapEx, contracted disposals, rents on Soho Place and void costs, assuming no further lettings. The next spend is all covered by available facilities, and both interest cover and LTV ratio remain at comfortable levels. Slide 22. We arranged a new GBP 100 million facility with Wells Fargo during 2020, replacing the previous GBP 75 million facility due to expire in July '22. The new 5-year facility has two 1-year extension options and an accordion option to increase by a further GBP 25 million. We also extended our GBP 450 million revolving credit facility, which includes the GBP 300 million green tranche by a year to October 2025. Both these transactions demonstrate the value of long-standing funding relationships. We also set out here the status of our green facility, showing qualifying green expenditure of over GBP 400 million, which has been externally assured, but with only GBP 80 million drawn at year-end. Finally, the debt summary is on Slide 23 with further details in the appendices. In conclusion, our balance sheet is very strong with low gearing. Cash rents for the year ahead should be higher than usual, and the committed projects are showing substantial uplift still to come. We're therefore ready to invest more in the development pipeline and to add to the portfolio. Thank you, and now over to Nigel.

Thank you, Damian, and good morning. Valuation on Slide 25. With a difficult year for the leasing markets, especially the retail and hospitality sectors, it was not surprising that Central London valuations would be impacted. We were not immune and saw a 3% valuation decline. However, this was a relatively strong performance against the MSCI London index, which was down 5.6%. There were several valuation themes worth touching on. As anticipated, on-site developments continue to deliver despite a couple of months delay following lockdowns. They were up 5.3% as surpluses were released. We completed 80 Charlotte Street, which was up 6.1%. Also, there was good performance from our recent high-quality developments, such as Brunel Building, White Collar Factory and Turnmill. Here, rental values held up, there was rent-free runoff and some yield timing. Shorter income properties and those generally needing CapEx were impacted and saw valuation falls. However, many of these have long-term development potential and form part of our pipeline. Retail elements suffered from both rising yields and rental declines, but our exposure is limited. Slide 26. The quality of our portfolio and the significant development program, which has delivered over 800,000 square feet of retained product over the last 5 years helped produce a small positive property return of 0.3%. As shown on the bar chart, this comfortably outperformed the London and all property indexes, both of which were negative. Now looking at rental values and yields, Slide 27. The underlying ERVs were down by 2.8%, the first decline since 2009. Our offices were generally resilient, down only 1.2% overall, with quality space holding up. Retail, however, was severely impacted from lack of footfall, store closures and online demand. Here, there was a significant 18% drop in ERV. Our office rents continue to be attractive at GBP 42.30 per square foot, but were up 11% over the year as the completed 80 Charlotte Street project fed through. These competitive levels and our good value, high-quality model play to our strengths on managing renewals. David will pick up on this. Looking now at the valuation yield profile, our initial yield moved up 30 basis points to 3.7% on asset management activity and the valuation decline. The topped-up also rose to stand at 4.8%. Equivalent yield actually tightened 3 basis points to 4.74%, but this does now include 80 Charlotte Street, which is top-quality long-term income. Excluding this, the yield would have moved out over the year to 4.8%. This would have been due to outward yield movements on retail elements and shorter lease properties. On Slide 28, we showed the good progress made on capturing the reversion. This helped increase valuation yield profile. The chart on the right shows the breakdown. A couple of points. Net rents, as shown in the gray, rose 11.9% to GBP 189.2 million, and this was despite the impact from increased vacancy, GBP 2.4 million from disposals against only GBP 0.9 million from acquisitions. Several contracted uplifts came through from rent-free runoffs or fixed uplifts, such as Angel Building and Brunel. As shown in green, the movement of these impacted the contracted element. However, this was partly offset with the lease completions at Charlotte Street contributing GBP 20 million. So combined, our net rents and contracted uplifts were up GBP 12.4 million or 5.3%, taking this element of the income profile to GBP 247.2 million at year-end. Finally, on Slide 29, we show how this income flows through to the buildup of portfolio ERV. This now stands at GBP 291 million. As shown on the bridge, there is GBP 102 million of reversion. We have already touched on the first element of the contracted uplift of GBP 58 million. There are then the GBP 17 million of pre-lets from our development, which is all the offices at Soho Place. Available space remains low, but has increased over the year to GBP 5 million from GBP 2.1 million, mainly following the gallery space at White Chapel building coming back to us. There are then GBP 2.7 million of small refurbishments across the portfolio and GBP 3.1 million from reviews and expiries. Finally, we've set out the impact of Baker Street development and Simon will cover this exciting scheme. Essentially, we lose GBP 6.2 million of current ERV upon demolition to be replaced with GBP 18.4 million of scheme ERV. But first over to David to put more color on last year's portfolio activity.

Thank you, Nigel. Good morning, everyone. Slide 31. Our asset management and property management teams are a key point of contact with our customers, with a focus on long-term relationships with our occupiers. In the last few years, we've built up our capacity to ensure we continue to deliver excellent service as customer needs evolve. The focus initially in 2020 was on health and safety, ensuring our buildings followed all the latest protocols, and were as safe as we could make them. We looked to help our occupiers by reducing service charge costs by 25% across the board for 2 quarters. And we also made additional cost savings during the year. For those tenants particularly impacted by lockdown, we have offered rent deferrals or rent-free periods to help with their cash flow. The majority of these have been in the retail and hospitality sectors. Each situation was dealt with on a case-by-case basis, and we directed our assistance to those most in need. Slide 32. Flexibility in our income has always been at the heart of our business model, allowing us to roll on income or bring forward to unlock schemes when necessary. Prior to lockdown, we have built flexibility into the leases on a number of our larger buildings with breaks or expiries in 2021 to enable development projects. As a result, 36% of our cash rent was due to expire over 2020 and 2021, representing GBP 60 million worth of income. This compared to our long-term average expiry profile of closer to 20%. Our teams were tasked to negotiate with our tenants earlier than normal to reduce our 2021 exposure. Addressing 2020 expiries, after adjusting for space for development, we extended or relet 87% of our potential lease expiries, very similar levels to previous years. By the year-end, our cash rent due for expiry in 2021 had fallen from GBP 44.5 million to GBP 33.3 million or 17% of our income. This has since dropped to 13%, which we go into in greater detail on the next slide. It is worth noting that as a result of our activities, our income due to expire after 5 years has now increased to 43% compared with 30% a year ago. Turning over. Here, we drill down our 2021 expiries in more detail as well as bring you up to date with where this number stands today given post year-end transactions. If you adjust for the sale of the Johnson Building, the income associated with the Baker Street properties, and further regears completed this year, there remains GBP 25 million or 13% of income expiries. A further 5% covers future projects, including the Network Building and Angel Square. This would then leave a balance of 8%, which is GBP 16.7 million. Slide 34. Last year, our asset management activities of rent reviews, lease renewals and regears covered 1/3 of our rent or over 700,000 square feet. Income increased by 7.6% to GBP 39 million. This was just over 4% below ERV. As with a number of shorter regears and extensions, we opted to extend at the same rent. We had limited immediate availability, so our new letting activity was well below recent levels, totaling GBP 6.7 million on 135,000 square feet. Open market transactions, including the outstanding office space at 80 Charlotte Street and 1 Soho Place, was 6% above ERV. But adjusting for the shorter lettings, overall, we were in line. Our rent reviews were one of the main contributors to the growth in income. The most significant of these was the review at Turnmill with Publicis, where the review was settled at a 12% increase to GBP 3.5 million per annum. We were also pleased to extend leases at Tea Building with TransferWise, who were looking to expand and took a new 5-year lease, increasing both its space and its rent by over 50%. Here, we were able to accommodate them by absorbing space that we knew was going to be vacated. Turning to Slide 35. We covered most of last year's investment activity in previous presentations, such as the acquisition of Blue Star House in Brixton. Likewise, with our sales of Chancery Lane and the forward sale of 2 and 4 Soho Place. The exception, on Slide 36, is the sale of the Johnson Building in Hatton Garden, where we exchanged last year and completed in January this year. At a headline price of GBP 170 million, this was the disposal of one of our first-generation schemes with a mix of refurbished and new space. It's multi-let with approximately 40% of the income due to expire this year. The price reflected a net initial yield of 4.1%, which upon the space becoming vacant would fall to 2.5%. This strong sales supported our strategy of focusing on quality buildings, whilst recycling capital back into our development pipeline and providing good firepower for future acquisition opportunities. I will now pass you over to Simon.

Thank you, David, and good morning, everyone. Derwent London is strongly associated with good architecture and design excellence. Many of our office buildings are considered to be amongst the best in Central London. It is a great legacy that has evolved over more than 30 years and one that is essential that we continue to maintain. Quite simply, architecture, good design and sustainability are at the core of Derwent's DNA and has helped us drive the value of our company forward year-on-year. In order to continue this aspect of the business, it is imperative to have a deep pipeline of future projects. I'm both pleased and proud to say that we have always managed to do this, and the current era is no exception with a strong and robust pipeline of existing and future projects. Slide 38, projects overview. Firstly, as most people know, 80 Charlotte Street, our largest ever development and first net zero scheme, completed last June with 92% of total floor space let or in the case of the residential apartments sold. We have 2 major schemes on the site, both on target complete as planned in H1 2022. Firstly, in the West End, the Soho Place, comprising 285,000 square feet, where 87% is already pre-let or pre-sold. Moving East, close to Old Street roundabout, there is the Featherstone building, comprising of 125,000 square feet where we already have some healthy interest. These 2 schemes represent 7% of our portfolio. Another 4% is made up of 2 consented West End schemes, 19-35 Baker Street, which commences in H2 2021 and Holden House on the corner of Rathbone Place and Oxford Street, which has a potential start date in 2025. Finally, we have a further 8% of the portfolio under appraisal, which includes the Network Building in Fitzrovia, where we have submitted a planning application. Blue Star House in Brixton, where we have appointed architects to consider comprehensive redevelopment and then there's the White Chapel building, where we are studying and assessing the possibility of increasing the floor space by circa 150,000 square feet. Overall, this means we have almost 20% of our entire portfolio actively involved within our future project pipeline, and that comprises existing area of just under 1 million square feet with a proposed area subject to planning permission of at least 1.3 million square feet. This could mean an overall increase in floor area of over 30%. Slide 39, Soho Place. Another West End development located on the corner of Oxford Street with Charing Cross Road and laying directly opposite center point. This project comprises 285,000 square feet of mainly offices and includes 36,000 square feet of retail. The total ERV is GBP 20.5 million per annum with an office ERV averaging GBP 92.50 per square foot. CapEx to complete is circa GBP 152 million, and completion of the scheme is anticipated in H1 2022. As you can see from this photo, the new structural frame of the office building has been completed, and we look forward to the installation of our beautiful travertine cladding within the next phase of works. I believe our architects at have designed for us yet another top-class building, which I'm sure will be very well received upon completion. This photo shows the West End's first new build theater in many a year. Apart from its 650-seat auditorium, there are also 3 stories of brand-new office space above, which will be accessed by its own entrance. As David already mentioned, the self-contained office element of circa 18,000 square feet has already been presold to a private investor for circa GBP 40.5 million. Slide 42, the Featherstone building. A new office development adjacent to Old Street roundabout and also to our White Collar Factory that will deliver 125,000 square feet of retail and offices. A beautifully designed and vibrant brick facade by architects Morris+Co will enhance the stretch of City Road and will continue the popular regeneration of this ever-improving location. Completion is in H1 2022 with GBP 37 million of CapEx required to complete the project. This photo shows current progress on site with the main structural frame now virtually complete. Completion is anticipated in H1 2022. Slide 44, 19-35 Baker Street. Back in the West End and close to Portman Square, this exciting 297,000 square feet project is due to get underway in October 2021 with the demolition of our existing buildings. The proposed scheme will provide 217,000 square feet of offices, 52,000 square feet comprising 41 luxury residential apartments and a further 28,000 square feet of new retail. This island site development will also include extensive public realm that will stretch from Baker Street all the way to Gloucester Place. The new building is to be planned in a combination of white Portland stone and a more robust Whit Bed stone and has all been expertly designed by Hopkins Architects. This photo shows the proposed entrance and main reception area to the building, still work in progress, but already looking the part. This is an interesting slide, which better explains the extent of our site. As you can see, it involves a large island site lot #1, this front is Baker Street, where our new retail and office building will be located. The smaller building, lot #3 in orange, fronts Gloucester Place and will include the affordable housing development. The luxury residential apartments are in the cream-colored building, lot #2, on the right-hand side of the plan and front George Street. There will also be new shop units, including those around a new public realm, lot #4. Like all our new projects, this will be a net zero carbon development. It will incorporate features such as all-electric heating systems, air source heat pumps, openable windows, energy sensors and gray water collection. This development is a strong example of place-making and on completion, will offer an exciting variety of shop, office and residential uses. Located in a prominent position, it should prove a new and popular destination with easy pedestrian access throughout the site. Completion of this dynamic development is anticipated in H1 2025. Slide 47, the Network Building. Yet another exciting West End scheme. This time, in the heart of Fitzrovia, where we are studying 2 options: Firstly, a life science-led scheme involving a potential 56% uplift on existing floor area; secondly, and alternatively, an office-led scheme that increases to 70% uplift of existing floor area due to lower volume being required when compared to the life science model. Both schemes include ancillary retail and, depending on use, range between 100,000 to 130,000 square feet. Our dual planning application was submitted last November and is expected to be determined this May. Commencement for the new development is potentially scheduled for H2 2022 with completion in 2025. Architects for this project are Piercy&Company, who are the same firm that worked on our stunning Turnmill development. Slide 49, our future pipeline. As always, the Derwent pipeline is full of opportunities with many potential schemes spread over several years ahead. Two such schemes are Blue Star House in Brixton and the White Chapel building in East London. Starting with Brixton, where we own a 54,000 square foot office building. Here, we will be making a planning application for new office and retail development, totaling 110,000 square feet in this vibrant location. An up and coming young firm of architects, Carmody Groarke, have been commissioned on this exciting project following an architectural competition. The White Chapel building. At the moment, we are all suffering from the effects that the pandemic has brought upon us. I therefore thought I would finish on a bright and optimistic note, especially saying as this is my last results presentation for the company. So I return to our White Chapel building, which has become a particularly interesting and fascinating story. We commissioned our architects Fletcher Priest and engineers Elliott Wood to study the possibility of adding a floor or 2 to the substantial [ bridgeless ] building. The ensuing study revealed that the building contained an over elaborate structural grid with unusually strong and fortified foundations, which were a requirement of the previous owners, RBS. Our consultants then concluded that we could add as many as 8 or 9 new floors. The net result was that we could potentially increase the total net area of the building from the existing 273,000 square feet to some 420,000 square feet. Quite incredible if we can succeed, and it will certainly prove to be one of the great stories in my time of over 35 years with the company. On that high note, I bid you au revoir but not goodbye. I will be staying on at Derwent as a special consultant for at least 2 years and overseeing what is a unique and potentially lucrative pipeline of wonderful buildings. Thank you very much. And over to Paul.

Thank you. Before wrapping up, I would like to say a few words about Simon as he's recently stepped down from the Board. It's been a privilege to work alongside Simon for over 35 years. And during that time, Derwent London has created what I believe is a leading brand and a reputation for developing best-in-class buildings. Simon has been a core part of that journey, and we're very grateful with this man's contribution. I'm delighted he is agreed to stay on as a consultant or as I refer to him our special adviser. And as you've just heard, there has been no decline in this level of enthusiasm. There is much more to come. We have built up a wonderful team around Simon, all of whom are ready to help us write the next chapter of our developments. So in conclusion, the road map and vaccination program should support our recovery, but will probably take a little longer than we wish. There will be more agile working, and this will impact levels of demand and the number of desks. Our own experience has seen this balance by increasing other uses. Whilst we believe investment yields should remain firm in the short term, rents will remain under pressure and vacancy rates rise, but this will change as the economic recovery strengthens. Derwent London is well placed with our innovative brand of well-designed and adaptable offices and exciting pipeline and a strong balance sheet. Economic recovery will take time, but when it does, I believe London with its deep talent pool will benefit strongly, and I'm excited by our ability to optimize the opportunity that this will offer. Thank you. I should now hand you back to the operator for Q&A.

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

2 questions for me, please. The first one is on your ERV guidance, and I appreciate it's an overall ERV guidance. But I was just wondering if you could give a bit more color on the split that you expect in that between offices and retail. That's the first one. And then the second one is on the portfolio. And I was just wondering, given that you highlighted the differential between shorter- and longer-term let assets. I'm just wondering how -- and the difference in performance in that. And I'm just wondering how much of your current portfolio and the percentage of [ gap ] do you effectively expect potentially no longer fit-for-purpose in its current state? Do you think ultimately it needs redevelopment or prefer to sell versus the type of property that you think will not necessarily be affected in the short term because of strong underlying fundamentals.

Good questions. Firstly, on your question about the guidance. Obviously, it's an average ERV across the portfolio. If you look at our ERVs for the last year, our offices were only down 1.2%. And some of our recent developments, as I said, with Brunel Building, White Collar Factory and 80 Charlotte Street performed very well. So I think there is going a bit of a range. Our ERVs for retail went down 18%. I think retail obviously has had a difficult time over the last few years and probably expect it to continue to be so, but it represents a very small proportion of our business, but an important part as it's an amenity for our offices above. So I suspect there will be a differential going forward. But what's encouraging is that we've seen some inquiries for our Featherstone and other things. So we're seeing it very much a flight to quality. We are seeing good demand, but good quality space. So we expect that differentiator to carry on. Nigel can give you some more to do in respect of the portfolio, the big picture about performance. Having to support our properties is an opportunity for me. So obviously, Barclays building actually might need to repurposing is an opportunity rather than necessarily a challenge. If you look at Baker Street at the moment, I think knocking it down and starting with new building is a great thing. So Nigel?

I think I'd draw your attention to appendix -- the appendix on 23. I mean essentially, our core income is pretty well all top-quality properties. So that's 57%. And then the gray is really the sort of Tier 2 type properties. But you need to -- if you look at the gray, you need -- you can see there's about 8% of that where we're on site. So by floor area, if you have 57% and the 8%, you get to 65%, but that's on floor area. So by value, it's probably about 75% of our properties by value, I would say, of quality properties. 25% is where we need the CapEx, but they are where we can have the value. I mean in terms of performance on that ratio, 75% were just down slightly. I think it was about 0.5%, and the balance were down about 6% or 7%.

Okay. And in the current market, your preference would be for that 25%, would it be to redevelop? Or are you looking more approaches like, for example, sale like the Johnson Building you did earlier? What will be your preference at this point in time?

Yes. Our appetite is to buy, if we can. We're not seeing any bargains in a moment, but the appetite would be new opportunities. We are going to be redeveloping. So if you look at both Baker Street, but also look at Network Building, that building, Network Building at 19-60 is, that's an opportunity for too going forward. So we'd rather buy than sell. We sold, I think, Johnson at a very good price. I wouldn't look to be saying anything else, particularly if that's on when someone came up with it at good price. So the aspiration is buying rather than selling.

Yes. I mean, in terms of the grade, most of them would be redeveloped, but there are some extensive refurbishments in there. I mean take Bush House, which you wouldn't -- is it conservation there. You do an extensive refurbishment on that, virtually redevelopment, that you'd have to keep [ at the start. ] But most of them are redevelopment as opposed to refurbishment.

Okay. Understood. And just very quickly on the first point. I'm not sure if I entirely understood, but basically, does that mean that the ERV guidance for this year you expect a broadly similar split as you had seen in 2020? So slightly down for offices, but much more down for retail? Or do you expect offices to deteriorate a bit further as well?

I think we will probably expect some similar things. I think a recent acquisition -- our recent developments should continue to perform well. Maybe the poorer quality buildings a bit down more, a wider proportion. But as I say, we see good demand.

Next question comes from the line of Christopher Fremantle of Morgan Stanley.

I just wanted to ask a couple of minor questions about earnings and income trajectory just near term. So you've been very specific about the rent expiring in 2021. But unless I missed it, I don't think you've said much about how worried you really are about losing that income. Should we worry about it? Or are you confident you can roll or re-let some of that expiry? So if you could just give a little bit more color on that. And then just on Page 21, where you give the pro forma slide, it looks as though you're basically going as far as you can without actually giving earnings guidance, but you're basically indicating a sort of flattish earnings trajectory based on that slide. Have I understood that correctly? Or is there anything that's going to impact earnings you think that is not included on that slide? So if you could just give a broader comment about the 2021 earnings trajectory, that would be helpful, please.

Chris, it's Paul. I share this question between David and Damian. Just firstly, on the I have to say that quality of our relationships is fantastic. I think what the asset management team achieved last year was really very good 87% retention rate. Our customers are lucky that's been a portfolio where we've got an active landlord working with them. So I'm not worried about that, but they tend to seem to be very happy to review with us. David, do you want to add some more flavor to that?

Yes, Chris. As we said, and as Paul just said, the activity of the asset management team last year was really excellent, bringing the GBP 44 million down to GBP 33 million. And then Slide 33 takes you to the current position I mean I think what we were saying is, if you exclude the 5%, which covers schemes, which we -- we get on with Network Building and others, we're left with circa 8%. And I think what we saw last year is probably earlier engagement with our tenants than we would normally see. We've talked about this wait-and-see market. And I think this is definitely the kind of the positive side of it, and it plays to our strength of engagement with our tenants. So no -- also, we're not worried about it. We think that there will be further engagement on '21, and we're already talking about '22 as well. And I would expect our retention or reletting to be at similar levels to last year.

I'll now pass over to Damian on the earnings.

Chris, in relation to earnings, we are expecting it to be relatively flat in '21 before they start to move forward in '22 when we've got Soho Place and the Featherstone building fully let. And it's a little bit difficult to be completely predicting at the moment because of the impact of the waivers and impairments. You've seen we had about GBP 14 million of waivers and impairment in 2020. And we also had a slightly delayed rent start date at 80 Charlotte Street because it took a couple of months longer to complete. So overall, there's quite a big earnings impact in 2020. Going forward, we're clearly hoping to make some further acquisitions. If we can, we can grow earnings more. But I think for now, until we announce that, you should assume earnings are essentially fairly flat in 2021, but we'll have to keep an eye on what happens with impairments. Impairments, we may need to book a bit more, but we may be able to reverse some. It's quite a riddle to tell today, and the bottom then would come down to the way the economic recovery plays out in 2021. It's looking more positive there than it was 2 or 3 months ago, but we'll keep you posted.

The next question comes from the line of Robbie Duncan with Numis.

Just one from me. And looking at Slide 93, which is Appendix 40. I see the ERV, you're targeting on is unchanged at about GBP 70 a square foot headline. Just kind of coming back to the comments you made around there being some interest in the space. As we're now within about 12 months of actual completion, we expect sort of middle of the first half. Can you give any more granularity around that? Because clearly, if we're looking across the business, you've done a very good job of derisking Soho. You've obviously touched on a lot of detail on your forward expiry profile. But that's the one, I suppose, element of risk that's not being touched on in the same level of detail.

I will pass the -- Robbie, I hope you're well. We're going to pass to [ over to Emily on there. ] I mean, first of all, I'm very excited about Featherstone. It follows what the great success we have in White Collar Factory. It's going to be a really interesting adaptability with some of the things you put in White Collar. Emily, commenting on [ rent, so... ]

So just on the rental point initially, I think going back to the points covered in the presentation around flight to quality, I think we are feeling fairly confident in terms of the products, in terms of what we're delivering in at Featherstone. So robust still on the rental levels themselves. In terms of interest and timing of derisking, I think for the [ same ] building, we were always anticipating being closer to PC target just due to the nature of the floor plate, the size of the building, et cetera. And so obviously, there's been an impact through the year in terms of wait and see and people being slightly paused. But encouragingly, we have had a number of presentations and more recently in the last month or so, we're seeing those kind of larger longer-term requirements really coming back to life.

Okay. I. And then secondly, just another question around your ERV guidance. Obviously, that's at the portfolio level, and I appreciate Sander's question at the beginning. Could you give -- or I don't know if you'd be open to give, but how would you split that guidance between, say, the different submarkets of the West End, city borders, et cetera?