Chairman’s statement

Derwent London’s strong performance demonstrates the robustness of the group’s business model even in extreme market conditions. The strength and potential of our portfolio, and the resilience of its rental income, provide us with an engine for managed growth.

Overview

Derwent London’s strong performance during the year demonstrates the robustness of the group’s business model even in extreme market conditions. This, together with the flexibility of the group’s financing arrangements and management’s ability to operate successfully in challenging circumstances, meant that Derwent is the only REIT in the FTSE 350 not to have raised equity during 2009.

The group excels in creating a unique brand of well-designed offices in favoured central London locations that provide tenants with contemporary space at mid-market rents. This attention to value and design contributed to the completion of over 100 lettings during 2009. Taken with the strong performance in 2008 when we completed 82 lettings, this is testament to the success of our product in a tough economic environment.

The focus of our portfolio was sharpened and our balance sheet strengthened after £208.3m of sales of non-core properties. Overall, these sales showed a discount of 7.4% from the December 2008 valuations.

The momentum of the group’s regeneration programme was maintained during the year with capital expenditure of £91.5m being invested on various projects throughout the portfolio.

These achievements were reflected in the company’s share price performance which resulted in a total shareholder return of 87%, making Derwent the top performing REIT in the FTSE 350 in 2009.

No major acquisitions were made in the year as we did not identify any opportunities that were sufficiently attractive to us. However, the group has many potential schemes within its portfolio of income-producing assets that can be developed to commence a new phase of innovative regeneration projects. Capital expenditure for 2010 is anticipated to be approximately £63m with a further £200m which could be incurred from 2011 onwards on identified schemes.

Results

Following a first half in which property values declined sharply, the second half of the year saw a strong rebound in our operational area of central London, with an upward revaluation of our portfolio from the half year of 9.8%. The net result was that, after a fall of 22.1% in 2008, the value of properties held throughout the year contracted by only 3.3% during 2009. This compares to a fall of 5.4% in the IPD Central London Offices Capital Growth Index.

Adjusted net asset value per share at 31st December 2009 was 1,168p against 1,226p a year earlier, a decrease of 4.7%.

Recurring profit before tax for the year, which excludes a number of items described in the finance review, was £60.2m against £23.3m in 2008. Consequently, recurring earnings per share rose to 55.55p from 22.83p. The board is proposing an increase in the final dividend of 15% to 18.85p which, as a REIT, will all be paid as a Property Income Distribution on 17th June 2010 to shareholders on the register on 21st May 2010. Together with the interim dividend, which was maintained at 8.15p per share, this makes a total dividend for the year of 27.00p per share, an increase of 10% on 2008. This reflects the board’s commitment to a progressive dividend policy balanced by prudent cash management.

The group continues to be in excellent financial health. Balance sheet gearing has been reduced to 62.2% from 71.2% a year earlier and unutilised, committed bank facilities increased to £425m as at 31st December 2009 from £291m last year. All financial covenants were exceeded comfortably throughout the year, a reflection of the attention given to our financing arrangements to ensure that we have a stable financial structure. This approach continues to be a key feature of the group’s business model.

The board

As announced in September 2009, Chris Odom, our Finance Director for almost 22 years, has decided to retire and he will be leaving the company after the annual general meeting in May 2010. Chris has been a key member of both the board and the executive management team, overseeing the successful financing of the business through recession and expansion. We wish him well in his retirement. Chris’s successor, Damian Wisniewski, joined the board on 1st February 2010 when Chris stepped down as a director. Damian has had considerable experience within the property sector and is a welcome addition to our well regarded management team.

Outlook

Economic indicators have yet to demonstrate a sustained recovery but rents within our central London villages have virtually stabilised and, for the first time since early 2008, an anticipation of rental growth is emerging. We have seen a significant recovery in property values in our operational area with yields reduced through a strong demand for investment property, albeit with bank finance to the real estate sector remaining in limited supply.

The strength and potential of our existing portfolio, and the resilience of its rental income, provide us with an engine for managed growth that can respond to the prevailing economic conditions. As the recovery of the central London economy appears to be gathering momentum, we continue to seek buildings where we can implement Derwent’s distinctive brand of regeneration and are preparing to advance the timing of some of our schemes. I am confident that with their skills, flair and experience, your management team will continue to position the group successfully through the next phase of the central London property cycle.

R.A. Rayne
17th March 2010