Derwent London Earnings Call Balances Growth and Pressure

Derwent London plc REIT ((GB:DLN)) has held its Q4 earnings call. Read on for the main highlights of the call.

Derwent London’s latest earnings call struck an optimistic but measured tone, with management highlighting record leasing, upgraded rental growth expectations and a well‑funded development pipeline, while acknowledging near‑term earnings pressure from higher finance costs, increased CapEx and a modest rise in vacancy that will delay the full benefits of today’s investments until 2027 and beyond.

Prime West End footprint underpins portfolio strategy

Derwent stressed that its portfolio remains heavily weighted to London’s most resilient markets, with around 75% of assets in the West End and 81% within a 10‑minute walk of an Elizabeth line station, positioning the group to capture occupier demand for well‑located, modern space and supporting confidence in long‑term rental growth.

Record asset management drives rental income growth

The company reported a record year for asset‑management activity, delivering about £59m of rental income for 2025, including £37.4m of rent reviews achieved at more than 7% above previous levels and £11.3m of new lettings struck roughly 10% above estimated rental values, underscoring robust demand for its best‑in‑class buildings.

Upgraded 2026 ERV outlook signals rental strength

On the back of improving occupational and investment market dynamics, management raised its 2026 estimated rental value guidance to a healthy 4%–7% for the portfolio, reflecting confidence that Derwent’s locations and product will continue to outperform, particularly in the West End where recent ERV growth has already been stronger.

Flagship developments set to add meaningful income

The development pipeline is moving from construction to cash flow, with 25 Baker Street expected to deliver around £18m of net‑effective annual rent and an ungeared IRR of 11.3%, while Network is projected to contribute about £11m net‑effective with an 8%–9% IRR, together adding roughly £18m of extra rental income in 2026 versus 2025.

Accelerated capital recycling to unlock value

Derwent outlined an ambitious plan to recycle up to £1bn of assets over three years, a step‑up from its historical £200m per annum pace, after selling £216m in 2025 and exchanging roughly £140m–£145m so far this year, with more under offer, a programme that could generate up to £250m of surplus capital for redeployment into higher‑return opportunities.

Strong liquidity and disciplined leverage maintained

The balance sheet remains a key support, with cash and undrawn facilities rising to £627m, Fitch maintaining an A‑ rating on senior unsecured debt, a weighted average debt maturity of 4.2 years and net debt‑to‑EBITDA reduced to 9x, with management reiterating its intention to keep leverage below 9.5x as capital is recycled.

EPRA NTA growth and positive total return

Despite market headwinds, EPRA net tangible assets increased to 3,225p per share, representing a 2.4% uplift over the year, and the group generated a 5% total accounting return for 2025, demonstrating that rental growth and development progress are translating into steady value creation even as valuations remain relatively muted.

Momentum carried into early 2026

Operationally, the company has carried strong momentum into 2026, completing £1.5m of new leases, securing a further £14.4m under offer, including Network, and negotiating another £4.4m, while an active disposals pipeline aims to fund selective schemes with higher returns and sustain the pace of portfolio upgrade.

Rising finance costs weigh on earnings

Financing headwinds were a clear theme, with the weighted average interest rate increasing to about 3.8% from 3.3% after refinancing, including the conversion of £175m of convertibles into seven‑year bonds at 5.25%, which lifted the average cost by roughly 50 basis points and contributed to higher net finance costs and a drop in EPRA earnings to 98.4p per share.

Short‑term earnings dip before recovery

Management acknowledged that 2026 EPRA earnings per share are expected to be 3%–5% below 2025, with guidance of 42p–44p in the first half and 52p in the second, implying a softer near term but also signalling a rebound later in the year and the foundation for a more substantial earnings step‑up from 2027.

Vacancy uptick and modest like‑for‑like rental growth

Operational metrics showed some softness, with EPRA vacancy rising from 3.1% to 4.1% during 2025 and like‑for‑like gross rents increasing only 2.4%, while net property and other income fell by £1.7m compared with 2024 as surrender premiums were £2.5m lower, illustrating the drag from temporary voids and tenant churn.

Heavy CapEx and development‑related earnings dilution

Capital expenditure reached £182m in 2025, almost half directed to 25 Baker Street and Network, and is expected to be about £142m in 2026, with further West End projects such as Holden House and the Middlesex refurbishment, plus voids at Page Street and 50 Baker Street, causing short‑term earnings dilution before their longer‑term income benefits emerge.

Higher average debt and reduced capitalised interest

Average borrowings were around £110m higher than in 2024, and the recent refinancing has not only increased the interest bill but will also cut the amount of interest capitalised, with management estimating roughly £6m less capitalised interest in 2026 than in 2025, another factor pressing on short‑term reported earnings.

Limited capital value gains despite ERV growth

While the portfolio achieved around 4% ERV growth, led by the West End, capital value growth in 2025 was modest as valuations absorbed heavier‑than‑usual deductions for CapEx and void costs, which management quantified as equivalent to roughly 40p per share, tempering the translation of rental upside into headline valuation gains.

Buyback optionality but no firm commitment

Share buybacks remain on the table but clearly contingent, with management indicating it would only consider returning capital once a number of disposals have completed and surplus funds are confirmed, meaning no buybacks are assumed in the 2030 guidance and investors should view them as upside optionality rather than a base‑case outcome.

Back‑loaded returns and execution risk

The strategy involves a degree of timing risk, as the most meaningful uplift in earnings and returns is expected closer to 2030 once developments are let and redevelopments fully bedded in, leaving a multi‑year execution challenge during which market conditions, letting progress and cost control will be closely scrutinised by investors.

Guidance highlights rental growth and capital recycling

For the near term, Derwent is guiding 2026 ERV growth of 4%–7% and EPRA earnings per share of 42p–44p in the first half and 52p in the second, supported by roughly £18m of additional rent from 25 Baker Street and Network, a £70.9m reversionary opportunity, a £1bn three‑year disposal plan that could free about £250m of excess capital and continued discipline on leverage, costs and selective development spend.

The overall message from Derwent London’s call is of a landlord trading well operationally and investing heavily for future growth while accepting a modest earnings dip in the short term, with strong locations, rising rents, solid liquidity and a visible development pipeline set against higher finance costs, temporary vacancy and execution risk, a trade‑off that long‑term investors may find compelling if the group delivers on its 2027–2030 ambitions.