This article first appeared on GuruFocus .
Release Date: August 06, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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Derwent London PLC ( DWVYF ) delivered a strong operational performance, securing over 30 million in leasing and asset management transactions, with new leases signed more than 5% above ERV.
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The company is executing its capital allocation framework effectively, completing or contracting 280 million of disposals within 3% of book value and launching a 50 million share buyback that is over halfway complete.
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The London occupational market is robust, with active demand exceeding supply and driving rental growth, evidenced by a 2.6% increase in underlying ERV, the highest first-half rise in a decade.
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Development projects are performing well, with Network completing fully pre-let and delivering an ungeared IRR of around 11%, while the new 50 Baker Street project is forecast to deliver an ungeared IRR in excess of 12%.
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The company upgraded its 2026 EPRA earnings guidance due to a stronger-than-expected first half, and maintains a strong balance sheet with comfortable leverage and reduced average interest rates following refinancing.
Negative Points
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EPRA NTA decreased by 2.1% in the first half, driven by a 6 basis points outward yield shift and a 45.8 million provision booked against the Old Street Quarter site.
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The investment market remains subdued, impacted by the war in the Middle East, leading to lower transaction volumes and outward yield movements across the portfolio.
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Gross rental income declined compared to H1 2025, due to a larger-than-usual number of projects on site and additional vacancy, including One Page Street which is being marketed for sale.
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Net finance costs increased due to a reduction in capitalised interest and the redemption of low-cost convertible bonds, replaced by conventional bonds at a higher 5.25% rate.
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The company faces potential further provisions on the Old Street Quarter, as the provision is sensitive to delivery options and could increase substantially if the site is sold without development.
Q & A Highlights
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Q: Can you explain your capitalized interest policy, the rate used, and how you will approach the Old Street Quarter? Will you capitalize against the cost or the lower residual value, and will you undertake activities to keep capitalized interest artificially high? A: Damien (CFO): Our policy hasn't changed, and capitalized interest actually fell by about 2 million from H125 to H126. It was slightly higher than expected due to Network completing later, which extended the capitalization period. For Old Street Quarter, once we acquire the site, we will capitalize interest on the acquisition cost, making the initial earnings impact very small. We capitalize at an average rate of about 4.5%, not a marginal rate, so there would be a small earnings impact given marginal rates are slightly higher.
Q: You highlighted increased confidence in your FY30 EPS targets. Is it fair to assume you're now towards the top end of the 25-30% range, and what would it take to increase that target? A: Damien (CFO): I'm usually careful with these things, and 2030 is far away. Our model has strengthened since the last report, but I didn't think it was right to upgrade guidance four years in advance. We're feeling more confident, but we're maintaining guidance. I'm a little bit more confident than I was in February.
Q: Looking at the economics of a buyback as the share price has gone up, how do you think about it on a risk-adjusted basis relative to other capital redeployment options like development? A: Damien (CFO): The buybacks, even at today's share price, are accretive to NTA, but you give up the ability to grow earnings. The important thing is to be investable, and strong earnings growth through 2030 comes from investing in schemes rather than buybacks. The buyback issue only arises when we have surplus capital. If we make additional disposals, we'll balance decisions between acquisitions, development, and buybacks at that time.
Q: In terms of the strong rental backdrop, are you seeing any indication of a change in incentives? A: Emily (Portfolio Director): Incentives have remained fairly stubborn at around 24 months on 10 years. The main reason is construction cost inflation, which impacts tenants as much as us. I see them holding firm as quite a positive rather than having gone out further.
Q: If the modelling at Old Street Quarter assumed a 100% chance of disposal, how would that impact the provision? A: Damien (CFO): The provision is very sensitive. If you sell the scheme without going through development, you give up development profits, which would increase the provision. I'm not going to give an actual number because there are many moving parts, but it would be substantially higher than the existing provision.
Q: Do you think contractors are building in much larger contingency into their fixed-price bids now, and is it challenging to get a fixed price? A: Paul (CEO): Being associated with Derwent is seen as very positive for contractors. We have good relationships with tier-one contractors and just fixed prices for both Holden and 50 Baker Street. They're a bit more cautious about the Middle East, but they know we pay well and on time. We were able to fix without paying a big premium and have contingency left within the schemes.
Q: How much of the EPRA earnings guidance upgrade for 2026 is driven by higher capitalized interest versus organic factors, and what should we think about as a run rate into H2? A: Damien (CFO): There are winners and losers. We were expecting a rate cut later in the year, which would have lowered finance costs in H2, but that's gone the other waynow we expect one rate increase. H1 was stronger than expected. The capitalized interest is offset by the later rent from Network. The upgrade is driven by organic portfolio growth and cost reduction, but there's been a shift due to interest rate changes. Page Street is on the market and vacant, so the longer we hold it, the more it hits earnings in H2.
Q: Have you had any approaches to buy the Old Street Quarter site pre-planning or buy your option? A: Paul (CEO): We have had some approaches, but I wouldn't want to reveal anything commercially sensitive. Our focus is getting planning permission, working well with Related Argent. It's a two-and-a-half-acre site in central London, so it attracts interest. We'll let the market know if we do anything. It's extremely unlikely we'd deliver it ourselves, so we'll look at options to de-risk.
Q: Can you talk about the shape of Flex growth to 15% of the portfolio? Is it going to be 30% of certain buildings or entire buildings? And is the 11% beat to ERV on a flex ERV or conventional? A: Emily (Portfolio Director): The growth is based on our existing portfolio, not buying in specifically for that purpose. We appraise everything under 10,000 square feet on both Flex and Cat A, and almost certainly deliver everything under 5,000 square feet as Flex. We have self-contained buildings in Fitzrovia that will be fully flexed. Middlesex House will likely be 100% flex, and Greencoat House is about 50/50. The ERV beat is against a Flex ERV, which is higher than a Cat A ERV.
Q: Is there anything specific that led to underperformance versus the MSCI Central London Index in the first half? And is Page Street's vacation within the like-for-like GRI performance? A: Emily (Portfolio Director): We normally beat MSCI, but we think this half's data set is distorted by a lot of low-yielding development stock coming into the data set. The MSCI pool has also gotten smaller. Damien (CFO): Page Street is not in the like-for-like; we've stripped it out as it's not available for let and not in the EPRA portfolio.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
