Derwent offers long-term value

Derwent has suffered a shortfall in rent collection since the end of March, but has held up better than the broader industry. According to property management platform Re-leased, commercial landlords collected on average 54 per cent and 57 per cent of second and third quarter rent, respectively. By mid-August, Derwent had received 81 per cent of its second quarter rent, with a further 11 per cent expected from agreed payment plans. For the third quarter, it collected 78 per cent of rent, with another 6 per cent due by the end of September and 9 per cent due under agreed deferrals.

The majority of rent still outstanding or subject to rent-free periods is attributable to retail and hospitality tenants. Retail and restaurants account for just 9 per cent of Derwent’s annualised rental income, although travel and leisure comprise a further 14 per cent. Retail exposure was behind the 0.9 per cent portfolio devaluation in the first half of the year (excluding acquisitions and disposals), but that compares to a 2.3 per cent decline in its benchmark, the MSCI IPD Central London offices quarterly index.

Derwent’s vacancy rate is just 1.1 per cent, although this could rise, with almost a quarter of June passing rent set to expire next year and higher unemployment and business closures are expected. Income is somewhat protected by the pre-letting of new developments. The mixed-used Charlotte Street scheme is 91 per cent let – including all the office space – and the remaining two schemes currently being developed are 60 per cent pre-let or forward sold. With £502m of cash and undrawn facilities, this is more than the £337m of capital expenditure required to finish these two schemes and the Baker Street development due to start in 2021.

Derwent estimates that rental income and property values would have to fall by 70 per cent and 71 per cent, respectively, before it breached its lending covenants. These state that ‘NAV gearing’ (net debt as a proportion of NAV) should be less than 145 per cent and interest payable on borrowings be covered at least 1.45 times by net property income (excluding non-core items). At the end of June, NAV gearing was 22.5 per cent, while the interest cover ratio was 4.35.