Derwent London, the largest London-focused REIT (real estate investment trust) today affirmed that demand remains strong and vacancy rates near historic lows, even if Brexit and the related political and economic uncertainties mean would-be occupiers are proving selective when it comes to their choice of site and city – a trend which may favour the company’s portfolio, which has existing assets or development properties in Soho, Fitzrovia, Mayfair, Holborn and Clerkenwell, among others.
From a first take, the Derwent London REIT reported NAV/share largely in line with expectations, but underlying earnings well below. FY2019 dividend guidance is c. 2% above some analysts’ forecasts and c. 1% above company-compiled consensus. FY2018 ERV growth of 1.1% was in the top half, but not at the top of the previous guidance of -1% to +2%. FY2019 guidance is for a slowdown.
Derwent London: solid rather than strong trends
Key aspects of Derwent London include solid, rather than strong trends. This is evidence of the importance of developments and good balance sheet capacity. Derwent’s portfolio valuation grew 2.2%, down from 3.9% in 2017. Stripping out its two committed developments, its portfolio valuation would have been up 0.4%. These developments, which saw an increase of 18% from revaluations, are now 75% pre-let. Derwent also had two significant development starts in 2019.
“Derwent’s increased exposure to developments compensates for relatively limited reversion in accounting rents to be captured from its current portfolio in the near term,” comments Royal Bank of Canada’s Julian Livingston-Booth. “However, it also increases Derwent’s sensitivity to the unusually gradual declines in London office market rents we forecast. We forecast small annual declines in Derwent’s NAV/share, consistent with a bigger discount to NAV than the 14% implied by its current share price, given the historic correlation with NAV/share growth.”
He says that CEO John Burns‘ outlook comments on the analysts call were “very brief relative to past results,” perhaps reflecting his upcoming retirement. In Burns’ call with analysts he noted the significant uncertainty in the market and said that a repeat of 2018 conditions is likely if demand is maintained.
Shares in the Derwent London REIT are trading at a discount of 13%.