Approach

We provide new office spaces with an emphasis on quality, environmentally friendly design and, crucially at all times, provide value for tenants. As the planning process is complex and often both protracted and frustrating, it is important to identify potential and undertake appraisals at an early stage in order to ensure an appropriate supply of schemes for the future. While this process progresses, maximum flexibility is maintained to enable us to deliver schemes to the market at the most appropriate time. Whether they are small refurbishments or large redevelopments, our aim is to deliver each scheme on time and within budget. Just prior to completion, we commence the marketing process to let the resulting space. This allows us to complete lettings as soon as possible after the completion of the scheme. For example, at the recently completed Charlotte Building, 84% of the space was let within five months of completion. Often, especially for larger developments, we have pre-let space which de-risks a project. This was the case at the Angel Building where 53% of the space is already let to Cancer Research UK for a project that will only complete in summer 2010.

Key metrics

Throughout the economic downturn, we have continued our schemes, incurring £91.5m and £73.0m of capital expenditure in 2009 and 2008 respectively, compared with £61.0m in 2007. Our portfolio continues to offer a significant level of opportunity for increases in value. Over 50% of space has been identified for either refurbishment, regeneration or redevelopment. When complete these activities will result in value increases as well as generating substantial additional space.

Key performance indicators

BREEAM rating
We require all developments in excess of 5,000m² to be assessed using the Building Research Establishment Environmental Assessment Method (BREEAM) and achieve a ‘Very Good’ rating or above.

We are pleased that all of our recent completions have reached the ‘Very Good’ rating. This reflects our ongoing commitment to sustainable development. More of our initiatives in this regard are detailed in the sustainability section.
(see: Sustainability)

3

Enterprising portfolio management

Approach

A reversionary rental profile with low passing rents is a key characteristic of our portfolio, providing prospects for income growth and value enhancement. We aim to capitalise on these opportunities and work with our tenants to exploit the potential to accommodate expansion, contraction and lease regears. This not only maintains good relationships with our tenants but also maximises rental income in our buildings and enhances capital values.

Key metrics

In order to maximise rental income and to minimise void space it is important that, in cases where we wish to retain income, our tenants do not exercise the breaks built into their leases and that new leases are signed at the end of their existing contracts.

Tenant retention

Where space is identified for refurbishment or redevelopment, we structure leases to expire or contain landlord breaks to coincide with these future plans. Of the 16% vacant at the year end, 4% relates to such circumstances. These figures demonstrate our ability to both retain tenants and act swiftly in order to ensure that any resultant vacant space is minimised.

Key performance indicators

Void management
Our aim is to minimise the space immediately available for letting and that this must not exceed 10% of the portfolio’s estimated rental value.

The available space had a rental value of £4.7m pa (2008: £6.4m pa) at the year end.

4

Financial stability

Approach

We have long believed in the need for flexible and uncomplicated financing. In the last few years, as many investors in real estate moved towards high leverage facilities, a trend fuelled by the rapid expansion in Commercial Mortgage Backed Securities (CMBS) structures, Derwent London has continued to maintain the long-term relationships built up with its core lenders. The other essential components of our financing strategy have been the management of a sustainable level of gearing based on interest cover and the overall group loan-to-value ratio. Our interest-rate hedging policy has been devised to provide adequate protection against unpredictable changes in short-term interest rates. (see: Finance review)

We have been able to manage cashflow requirements to date without the need for relatively expensive and management intensive development loan facilities. This is due to our core discipline of balancing refurbishment and development activity against income generation. However, we will continue to keep all forms of debt finance under review.

The management of our level of gearing is also helped by our record of recycling capital by disposing of properties where we believe the growth prospects are limited or where buildings do not fit our balanced portfolio criteria.

We will continue to consider accessing other sources of finance periodically in order to ensure that the group is appropriately financed. This will ensure that we can move quickly when funds are required without taking undue financial risks.

Key metrics

Gearing

The derivation of both these measures is shown in note 27 and they are defined in the List of definitions.

Available resources

Disposals
Our ability to transact quickly in various market conditions is demonstrated by the £208.3 m of property sold during 2009. The main disposals during the year were 13-17 Fitzroy Street to Arup for £59.4m and The Rotunda, Kingston-upon-Thames for £41.4m.

Key performance indicators

Profit and loss gearing
This figure demonstrates the group’s ability to meet its interest obligations. It is considered to be the more important of the three gearing measures for the board to manage, particularly in respect of the ongoing refurbishment and redevelopment programme and the average lease profile.

As was identified in the 2008 annual report, this ratio has been redefined for 2009 onwards in order to remove the increasing number of valuation and other adjustments that had to be made to calculate the ratio as originally intended. The new definition is designed to show, on a group basis, a ratio similar to that which is included in many of the group’s security-specific bank covenants. In accordance with this change, the benchmark has been revised to 200%.

This measure is derived on note 27 and defined in the List of definitions.

Tenant receipts
These are monitored closely in order to assess the strength of our tenants and to maximise rent collection. Our aim is to collect on average greater than 95% of rent invoiced within 14 days of the due date throughout the year.

A high level of collection was maintained during the year ranging from 95% to 97% (2008: 96% to 98%).

Objective

To achieve above average
long-term returns

Result

Outperformance of
all return measures