Derwent London’s dividend provides another capital return

Another dividend hike, which adds to a formidable run of increases that runs back well over 20 years, suggests that Derwent London has every confidence in its £5.4 billion portfolio of prime properties in the nation’s capital, even if investors are still unsure of the long-term outlook for office space. To back up management’s dividend decision, net asset value per share fell by just 1%, net rental income slipped by just 2% and new lettings activity at developments in Charlotte Street, W1 and EC1 remained strong.

Source: Company accounts

With its broad spread of tenants between the media industry, professional services, retail head offices and retail and leisure sites Derwent London looks a good litmus test of how the capital’s commercial property landlords are faring during the pandemic and the economic downturn. On this evidence the signs are more encouraging than many would have thought, although with the HM Government as its single-biggest individual tenant the commercial landlord does have one major client who should always be good for paying its bills.

Other leading tenants include Burberry, Expedia, Publicis, WPP, Ticketmaster and Sony Picture across a portfolio that it split across the West End of London (63%), borders of the City of London (35%). Office space rents look to be holding up well and the weakest areas are, quite understandably, retail and hospitality.

Net rental income did dip slightly to £84.4 million from £86.3 million in the first half a year ago, thanks to £6.5 million costs relating in particular to 25% service charge waivers and bad debts associated with the failure of certain retail and restaurant tenants. Some 81% of rents have been received for Q1 and 78% for Q2, with 6% to come later and 9% working under agreed deferrals, although fresh income from Charlotte Street will boost the second-half’s takings.

Source: Company accounts

Overall, the vacancy rate also remained low, at just 1.1%, despite those problems in retail and hospitality and ongoing development work on new projects.

Source: Company accounts

This bodes well for the future, although Derwent London does acknowledge a further increase here is likely if the economy continues to struggle, the pandemic persists and workers remain reluctant to return to their usual desks.

However, the REIT can play its part here by providing environments which are suited to the ‘new normal’ and its relatively low-rise portfolio is already well placed in this respect. It is now incumbent upon all commercial landlords to assess building design in terms of space, number of floors, ventilation, lift access and other key facets to reassure tenants’ staff that their buildings are suitably airy, environmentally aware (‘green’), flexible and spacious.

Derwent London’s long-running mantra of ‘long life, loose-fit’ means existing shareholders will argue that the firm is ahead of the game here and worth standing by, especially as the shares look set to offer a 2.5% dividend yield and come on a 25% discount to their net asset value (NAV) per share of £39, while the company’s sub-£1 billion debt pile means it is under no particular financial pressure.

Source: Company accounts

Sceptics will argue that rents and asset values can only come under further pressure and that there is no need to rush into the shares now, given the economic uncertainties which persist and that the NAV discount will close as valuations fall rather than share prices rise, and how any fresh share price drops could easily erase the benefits of the yield.

For our forecast of dividend payouts for FTSE 100 companies, take a look at Q2's Dividend dashboard. You can also view a list of all UK-listed companies which have cut, suspended, or deferred dividend payments on this page.

These articles are for information purposes only and are not a personal recommendation or advice.