TIDMDLN
RNS Number : 4407Y
Derwent London PLC
01 March 2012
1 March 2012
Derwent London plc ("Derwent London" / "the Group")
Results for the year ended 31 December 2011
DERWENT LONDON ANNOUNCES STRONG 2011 RESULTS
Derwent London, the largest real estate investment trust (REIT)
focused on the central London commercial market, announces results
for the year ended 31 December 2011.
HIGHLIGHTS
Continued strong performance in 2011
Financial strength and flexibility retained
-- GBP600m debt facilities refinanced including the issue of a GBP175m 2.75% convertible bond
-- Undrawn bank facilities totalled GBP469m (2010: GBP245m)
-- Loan to value ratio reduced to 32.0% (31 December 2010: 35.7%)
Further significant dividend growth
-- Final dividend increased to 21.90p giving a total of 31.35p, up 8.1% on 2010
Robust demand for our distinctive brand of high quality,
mid-market office space
-- 100 lettings in 2011 totalling 495,700 sq ft (46,050m(2)) at GBP16.7m pa (2010: GBP8.0m)
-- Vacancy rate at 31 December 2011 was 1.3% (31 December 2010: 5.9%)
-- New lettings signed in 2012 include a pre-let to Burberry at
1 Page Street SW1 (127,000 sq ft /11,800m(2))
Further investment in the portfolio
-- Planning permissions secured to create a total of 0.9 million
sq ft (83,600m(2)), a 68% uplift on existing floorspace
-- Seven schemes on site or planned to commence in 2012
totalling over 500,000 sq ft (46,500m(2)) incurring total capital
expenditure of GBP137m
-- Joint venture with Grosvenor announced today at 1-5 Grosvenor
Place SW1 with a view to redevelopment. Grosvenor have granted a
new 150-year lease to replace the Group's existing leases and paid
GBP60m to the Group in return for 50% ownership
-- Headlease at 40 Chancery Lane regeared in 2012, unlocking a
100,000 sq ft (9,300m(2)) development
-- Riverwalk House and nearby property sold, subject to planning permission, for GBP77.3m
Robert Rayne, Chairman, commented:
"Derwent London has proven again that the strategy of focusing
on mid-market central London property is successful. We have
increased and extended our debt facilities to provide us with the
firepower and flexibility to exploit the opportunities open to us.
We are confident that the Group is well positioned to deliver good
returns both in the tough environment we currently face, and when
more sustained economic growth appears."
John Burns, Chief Executive Officer, commented:
"2011 has been another strong year for Derwent London. The
robust leasing activity we experienced in the first half of the
year has continued throughout 2011 and into 2012 and we are
confident that the quality and distinctive space in our portfolio
will continue to attract a diverse mix of tenants.
"We have made significant progress in unlocking the potential
value at a number of our projects, and look forward to advancing
our exciting pipeline. The positive regenerative impact of
Crossrail is increasingly apparent in our villages close to
Tottenham Court Road and Farringdon."
For further information, please contact:
Derwent London Tel: 020 7659 3000
John Burns, Chief Executive Officer
Damian Wisniewski, Finance Director
Louise Rich, Head of Investor Relations
Brunswick Group LLP Tel: 020 7404 5959
Kate Holgate / Elizabeth Adams
There will be a webcast of the results at 9:30am today which can
be accessed at www.derwentlondon.com
CHAIRMAN'S STATEMENT
Overview
Derwent London recorded another strong performance in 2011,
seeing good progress across a range of projects, whilst maximising
flexibility and mitigating key risks. Our business model has again
proved robust in turbulent markets, with the core central London
office market holding up well. We have seen lower than average
supply and continued strong demand both from tenants and a wide
variety of domestic and overseas investors. EPRA net asset value
per share increased by 15.4% to 1,701p from 1,474p at 31 December
2010 and the portfolio generated a revaluation surplus of GBP172.1m
(2010: GBP301.7m).
In a period in which asset management has become ever more
important, 2011 was a record year for lettings at the Group. This
activity produced total rental income of GBP16.7m pa on floorspace
of 495,700 sq ft (46,050m(2)). This surpassed our 2010 performance,
when the lettings totalled GBP8.0m pa. These transactions reduced
the Group's space immediately available for occupation to 1.3% by
estimated rental value, down from 5.9% at the start of the year.
There are a number of projects currently on site which, when
completed, will increase this percentage. However taking account of
pre-lets, including Burberry's expansion into 1 Page Street SW1,
and the continuing receipt of rental income from the Buckley
Building (previously Woodbridge House) EC1, these schemes have been
considerably derisked.
The year was also an important one for the Group in securing
planning permissions at a number of properties which add to our
store of future opportunities. In 2011 we received planning
permission to create a total of 0.9m sq ft (83,600m(2)), an uplift
on the existing floorspace at these properties of 68%. Amongst
these consents, in our core Fitzrovia Estate, 80 Charlotte Street
W1 will provide 367,000 sq ft (34,100m(2)) of development, a
further step in the wider regeneration of the area. The City Road
Estate EC1 scheme also received planning permission during the
year. This 289,000 sq ft (26,800m(2)) office-led development is
located at Old Street roundabout, in the centre of the area
promoted by the Government as 'Tech City'. It will be developed
using our 'White Collar Factory' principles though we would require
a pre-let of a substantial portion before proceeding with this
scheme.
The development of Crossrail will have a significant beneficial
impact on central London, and we intend to take full advantage of
this with projects planned around both the Tottenham Court Road and
Farringdon interchanges. Towards the end of 2011, in collaboration
with Crossrail, we submitted a planning application for major
regeneration at 1 Oxford Street W1. The 275,000 sq ft (25,500m(2))
proposed scheme would be built above the Tottenham Court Road
Crossrail and London Underground station. We have the option to
repurchase this site upon completion of the Crossrail works, around
2017. It is hoped to receive a planning decision shortly.
During the year we also made material progress on our proposed
schemes in the Farringdon area, with Turnmill at 63 Clerkenwell
Road EC1 and the Buckley Building on Clerkenwell Green EC1 both
receiving planning consent. Turnmill is a 70,000 sq ft (6,500m(2))
new-build office development which will occupy a major corner site
close to the Farringdon Crossrail interchange. The development is
expected to start later in 2012. At the nearby Buckley Building we
are now on site, enlarging the existing property to 85,000 sq ft
(7,900m(2)) with works due to complete later this year.
In October 2011, we signed a Memorandum of Understanding with
Grosvenor, our freeholder at 1-5 Grosvenor Place SW1, to consider
redevelopment of the site. We are now pleased to confirm that we
have progressed this relationship into a formal joint venture. The
Group has restructured its headleases into a new 150-year term and
sold 50% of this interest to Grosvenor for GBP60m. The existing
buildings occupy an underutilised flagship site of 1.5 acres (0.6
hectare), at Hyde Park Corner. The transaction offers a unique
opportunity to undertake a substantial mixed-use redevelopment in
such a prominent location. Whilst we progress redevelopment plans,
we are maintaining income through short-term, flexible
lettings.
At 40 Chancery Lane WC2 we have undertaken similar active asset
management. In early 2012 we exchanged conditional contracts with
our freeholder to restructure and extend our interests here into a
new 128-year lease. This has unlocked a redevelopment opportunity
which is due to start in the second half of 2012. It will provide a
new 100,000 sq ft (9,300m(2)) six-storey office building which we
expect to complete by the end of 2014.
Towards the end of 2011, we submitted a planning application for
the redevelopment of Riverwalk House on Millbank SW1. In contrast
to the commercial developments above, this application is for a
148,000 sq ft (13,700m(2)) high-specification residential
redevelopment. We have exchanged contracts to sell this and another
nearby property for GBP77.3m to Ronson Capital Partners, with
completion conditional on receipt of planning permission. This
transaction will provide the Group with valuable experience of a
major residential scheme and a continued interest by way of a
profit overage.
Following the Government's recent decision to proceed with the
HS2 rail link, the Board has given careful consideration to our
proposed 265,000 sq ft (24,600m(2)) office and residential
development at Hampstead Road NW1. The property is now expected to
be compulsorily purchased as part of the construction of HS2.
Despite having reached advanced negotiations on major pre-lets on
this project, in view of the uncertainty as to the future of the
site and the considerable investment needed to complete the
project, we have decided to defer redevelopment. 'Light touch'
refurbishment options are now being considered that will enable us
to let the space on flexible terms and we will keep the situation
under review as the Government's plans progress.
The process of recycling the portfolio continues, disposing of
properties where this appears an attractive option. In 2011 we sold
GBP132.5m of mature and smaller assets, giving rise to a surplus on
disposal of GBP36.1m. Where opportunities arose, we also made
acquisitions, totalling GBP87.5m, either near existing holdings,
such as 1 Page Street SW1, or where we could buy or lengthen
headleases such as at the Network Building W1 and Morelands
Buildings EC1. These purchases give us greater control over the
future of these properties.
Despite a difficult period for UK and European banks when their
cost of funds has been under renewed pressure and access to capital
has been constrained, our covenant remains in demand and we
continue to receive very good support from the banking sector.
Including the issue of a GBP175m unsecured convertible bond in June
2011 we signed up a total of GBP600m of new or extended facilities
in 2011. As well as deferring any bank refinancing risk until 2014,
we have diversified our sources of finance and anticipate that an
increasing proportion of our future debt requirements is likely to
come from non-bank sources.
The Group's performance would not be possible without a highly
committed and experienced team. It was gratifying that this was
recognised when Derwent London was ranked fifth overall among UK
companies in Management Today's 'Britain's Most Admired Companies'
Award, and first in the property sector for the second consecutive
year. In addition, the Angel Building was shortlisted for the
prestigious RIBA Stirling Prize as well as being awarded a number
of other accolades, endorsing the strength of our design
philosophy. Further recognition of the quality of our business came
when we were recently awarded the Estates Gazette 'Property Company
of the Year - Offices'.
Results
The portfolio performed well through the whole of 2011,
increasing in underlying value by 7.6% to GBP2.6bn and driving the
Group's EPRA net asset value to 1,701p per share compared with
1,474p a year earlier and 1,621p at June 2011. This 15.4% increase
over the year was led by the GBP172.1m revaluation movement which
came mainly from rental growth while the GBP301.7m surplus in 2010
also benefited from yield compression.
With strong lettings and new income from properties acquired,
gross property income increased to GBP125.5m from GBP119.4m in 2010
but EPRA earnings per share fell slightly from 52.89p to 51.59p due
mainly to higher finance and administration costs. Profits on
disposals of investment properties, which are not included in the
EPRA earnings, totalled GBP36.1m in 2011 against GBP0.9m in
2010.
The Board continues to pursue a progressive dividend policy and
is proposing an increase in the final dividend of 8.1% to 21.9p per
share to be paid on 15 June 2012 to shareholders on the register at
18 May 2012. Of this amount, 18.10p will be paid as a PID under the
UK REIT regime and there will be a scrip alternative. The total
dividend for the year is therefore 31.35p, an increase of 8.1% on
that in 2010 and a level which remains well covered by recurring
earnings.
Property disposals during 2011 almost matched the combined
investment in new acquisitions and capital expenditure and, with
the valuation increase noted above, this has contributed to another
fall in gearing. The Group's loan to value ratio at 31 December
2011 was 32.0% against 35.7% in December 2010 and undrawn and
available bank facilities totalled GBP469m at December 2011, a
substantial increase over the equivalent figure at December 2010 of
GBP245m. In addition, there was GBP589m of uncharged property at
December 2011 compared with GBP484m at the previous year end.
The Board
As previously announced, Donald Newell stepped down from his
position as non-executive Director at the conclusion of the Annual
General Meeting in May 2011. Don joined the Company when it merged
with London Merchant Securities, where he had been on the Board
since 1998. Again I would like to thank him for his valuable
contribution and sound counsel throughout this period.
Outlook
Whilst we believe that low GDP growth and a paucity of finance
will continue to act as headwinds to the UK economy, including to
the real estate market, we consider Derwent London to be strongly
placed. The London economy continues to show resilience and our
focus on mid-market rentals accords with the somewhat straitened
times in which we currently live. We have, and continue to attract,
a diverse tenant mix, with an emphasis on companies from the
Technology, Media and Telecoms sectors.
Despite the difficult state of the economy, we are encouraged by
the continuing strength of our letting activity. We are on site or
due to commence major capital projects covering over 500,000 sq ft
(46,500m(2)) in 2012 which will involve total capital expenditure
of about GBP137m. We have either pre-let commitments, or continuing
rental income, over almost 50% of these projects.
In the near term, the London economy should receive a boost in
2012 with the Queen's Diamond Jubilee celebrations, the Olympics
and the Paralympics and, in the medium term, our central London
'villages' will greatly benefit from the progress of Crossrail.
We have a vibrant portfolio that is attractive to tenants, a
strong pipeline of development opportunities and a very sound
financial base. As a result we have capacity for further
substantial investment in both new acquisitions and development
expenditure, and we continually assess opportunities, whilst
retaining flexibility over the timing of such commitments. We
believe the Group is well positioned to deliver good returns both
in the tough environment we currently face, and when more sustained
economic growth appears.
R.A. Rayne
1 March 2012
BUSINESS REVIEW
OUR PORTFOLIO
Derwent London provides high quality, innovative contemporary
office space, priced at mid-market rents. We own and manage a 5.4
million sq ft (501,400m(2)) portfolio that was valued at GBP2.6bn
as at 31 December 2011. Of our portfolio, 77% is in the West End,
the main focus of our operations, in villages such as Fitzrovia,
Victoria, Belgravia and Marylebone. The City borders account for
19% and include villages such as Old Street, Clerkenwell, Holborn
and Shoreditch and the remaining 4% is in Scotland, on the northern
outskirts of Glasgow. With over half of the portfolio still to be
worked, we have a wealth of value-creating opportunities in the
portfolio that can be crystallised through asset management or
regeneration. With some major planning approvals in 2011, we have
added to these opportunities.
The portfolio consists of 122 buildings and has over 600 tenants
covering a range of business sectors. Media, TV, marketing and
advertising tenants account for 29% of our net rental income whilst
professional and business services tenants comprise 28% and 13% of
our income is from retail sales outlets.
Our portfolio's annualised net contracted rental income at the
year end was GBP113.1m, compared to an estimated rental value of
GBP160.4m, therefore offering strong reversionary potential. With
passing rent of GBP25.79 per sq ft (GBP277.60 per m(2) ) on our
central London office portfolio, rising to GBP31.10 per sq ft
(GBP334.80 per m(2) ) once 'topped up' for the expiry of rent free
periods and other rental incentives, average rents remain low.
OUR MARKET
See appendix 1
http://www.rns-pdf.londonstockexchange.com/rns/4407Y_-2012-2-29.pdf
Overview
The UK economy grew by an estimated 0.9% in 2011, a weaker level
than anticipated a year ago, with growth of 0.6% in the third
quarter and contraction of 0.2% in the final quarter. UK base rates
stayed at their historic low of 0.5% during the year whilst
unemployment continued to rise and RPI inflation stayed at 5% or
above for every month of 2011 with the exception of December.
Against this backdrop, and with the Government's austerity
measures starting to impact the economy, the outlook for 2012
remains fragile. In addition, the sovereign debt issues in many
parts of the Eurozone add to the economic and political uncertainty
further subduing business sentiment and putting additional pressure
on the cost of borrowing. The Bank of England is predicting that
inflation will fall in 2012 and is hopeful that the further
quantitative easing will help to stimulate the economy. Most
commentators expect interest rates to remain unchanged throughout
2012 whilst the International Monetary Fund in January 2012
predicted that UK GDP growth for the year will be constrained at
around 0.6% before rising to 2% in 2013. With this background,
financial and business services employment in central London is
expected to rise by 1.2% in 2012 before accelerating to 3.7% in
2013 according to Oxford Economics.
London, where 96% of Derwent London's portfolio is located, is a
major centre for international business and commerce and generates
approximately 20% of UK economic output. Its economy is
predominantly service-based and was one of the strongest performing
UK regions in the year. Despite London's significant exposure to
the financial services sector and to Europe, the capital has
remained resilient and continues to attract national and
international occupiers and inward investment.
The year ahead will be a memorable one for London as it hosts
the Olympic and Paralympic Games in the summer and it will play a
major role in the celebrations surrounding the Queen's Diamond
Jubilee. These events are expected to boost sentiment and economic
activity and further enhance London's international profile.
Central London office occupier market
Central London has an office stock of approximately 218 million
sq ft (20.3 million m(2)), making the capital a significant office
centre in both a European and global context. By sub-area, 50% of
London's office stock is in the City, 41% in the West End and 9% in
Docklands. Derwent London focuses on the West End and its surrounds
and tailors its space to the more diverse occupier base here that
mainly comprises companies from the media and professional and
business services sectors. The City and Docklands are very much
dominated by financial and legal occupiers.
As published by surveyors CBRE, central London office take-up
for 2011 was 10.3 million sq ft (0.96 million m(2)). This was lower
than the 14.6 million sq ft (1.36 million m(2)) recorded in 2010
and approximately 10% below the 10-year average. Relative to trend,
and underlining the resilience of our chosen operating market, the
West End was the strongest performing sub-area with annual take-up
of 4.4 million sq ft (409,000m(2)). This was 6% above the 10-year
average and 8% below the 2010 level. The Technology, Media and
Telecommunications (TMT) sectors were particularly active in 2011
and accounted for 24% of West End take-up.
With the lowest level of completed developments since the early
1990s at 1.7 million sq ft (158,000m(2)), the CBRE central London
vacancy rate by floorspace remained stable over the year, and below
the 10-year average. This rate started the year at 5.5%, declined
to 4.9% at the half year and finished at 5.2%. With few development
completions, the West End's vacancy rate was even lower, commencing
the year at 5.2%, falling to 3.8% at the half year before rising to
4.3% at the year end.
With the differing levels of supply and demand across the
central London office sub-areas, the CBRE prime rent index showed
West End rents increasing by 4.8% in 2011 compared to a 0.6% rise
in the City.
Central London investment market
Central London investment volumes, according to CBRE, totalled
GBP8.4bn in 2011, down 14% on 2010 and 17% below the 10-year
average. In the West End, annual transactions totalled GBP3.2bn
with overseas investors accounting for 57% of the total. Over the
year, prime yields in the West End remained at 4.0%, unchanged
since mid 2010 and 150 basis points lower than their maximum during
the downturn in 2009. City prime yields compressed by 35 basis
points over the year and finished at 5.0%.
VALUATION
See appendix 2
http://www.rns-pdf.londonstockexchange.com/rns/4407Y_1-2012-2-29.pdf
In 2011, London continued to be investors' UK location of choice
with strong domestic and international demand. This appetite, in a
market with a scarcity of properties for sale coupled with rental
growth performance, enabled London's commercial property values to
outperform the rest of the UK again.
In the first half of 2011, the investment market saw a marginal
tightening of valuation yields and an improving rental growth
trend. However, with the increased economic uncertainty in the
Eurozone in the second half, sentiment was moderated and this
stabilised yields and limited rental growth.
Within this environment, the Group's investment portfolio was
valued at GBP2.6bn at 31 December 2011. The valuation surplus was
GBP181.7m for the year, before lease incentive adjustments of
GBP9.6m, giving a total movement of GBP172.1m. This valuation
movement was below the GBP301.7m in 2010, a year when yield
compression across the portfolio was more widespread.
The underlying valuation increase over the year was 7.6%, or
8.8% if property sales completed during the year had been retained
and valued at their disposal level. Both were an outperformance
against our comparative benchmark measures, the IPD Capital Growth
Index for Central London Offices at 7.3%, and the IPD All UK
Property Index at 1.7%. Valuation performance was stronger in the
first half of the year with a 4.6% increase, slowing to 2.9% in the
second half as the rate of rental growth eased.
Our London portfolio saw underlying capital values grow by 7.9%
over the year. Within this, West End properties increased by 8.1%
and City border properties rose by 7.1%. The remaining 4% of the
portfolio, our Scottish assets, increased by 1.5% over the
year.
Our projects that are currently on site and encompass the entire
building, namely 1 Page Street, Buckley Building and 4 & 10
Pentonville Road, were valued at GBP96.2m as at December 2011. This
reflects a valuation uplift of 4.8% over their value on 31 December
2010 or date of purchase, if later. These projects are at a
relatively early stage of development and offer the potential for
material valuation uplift in the future.
As shown by our buoyant 2011 letting activity, good tenant
demand moved rents forward and this growth was the principal driver
in valuation performance. Over the year, the underlying estimated
rental value increased by 6.3% (2010: 5.4%). Rental growth in the
first half of the year was 4.1% before moderating to 2.1% in the
second half as economic uncertainty increased.
On an EPRA basis, the portfolio's net initial yield was 4.4%
which would rise to 5.2% on a 'topped-up' basis following the
expiry of rent-free periods and contracted rental uplifts. The net
reversionary yield was 5.8%.
The portfolio's true equivalent yield at 31 December 2011 was
5.61% against 5.65% at the half year and 5.77% at the end of 2010,
reflecting the general yield stabilisation seen across the
investment market, whereas there was a 67 basis point yield
compression in 2010. On a total property return basis, the
portfolio delivered 13.4% in 2011 compared to 21.3% in 2010. The
IPD Total Return Index was 12.5% for Central London Offices and
7.8% for All UK Property.
PORTFOLIO MANAGEMENT
See appendix 3
http://www.rns-pdf.londonstockexchange.com/rns/4407Y_2-2012-2-29.pdf
Overview
Active asset management is a cornerstone of the business and we
made significant achievements in a number of areas during 2011.
Letting activity was strong with a high volume of transactions at
above estimated rental values whilst voids were kept to a minimum.
We saw excellent tenant retention and rent collection remained
prompt. Rent reviews and lease renewals captured portfolio
reversion.
Letting activity
Our well-designed, mid-priced offices continued to prove popular
and 2011 was another exceptional period of leasing activity. In
total, we concluded 100 lettings on a floorspace of 495,700 sq ft
(46,050m(2)) and a rental income of GBP16.7m pa, the highest ever
level achieved by the Group. In 2010, we concluded a similar number
of lettings but at GBP8.0m pa on a floorspace of 347,000 sq ft
(32,200m(2)).
Lettings comprised GBP8.5m pa in the first half of the year and
GBP8.2m pa in the second half. Two thirds of the lettings were 'new
income' as the floorspace concerned was producing a total rent of
GBP5.3m pa at the start of 2011.
Open market transactions for the year accounted for 88% of the
activity and achieved rents 11.2% higher than their December 2010
estimated rental values. The uplift was 8.9% for overall lettings,
which include short-term transactions at our future development
projects. In the second half of the year, open market transactions
were 5.9% above June 2011 estimated rental values whilst overall
transactions were 4.6% above.
Lettings during the year included:
-- Angel Building, 407 St John Street EC1 - this award-winning
263,000 sq ft (24,400m(2)) regeneration project, which completed in
September 2010, became fully let in November 2011 following seven
lettings during the year totalling GBP5.5m pa on 136,500 sq ft
(12,680m(2)). Expedia, the world's largest online travel company,
took 93,400 sq ft (8,680m(2)) of office space at GBP3.8m pa whilst
Sage Pay and NG Bailey took 29,800 sq ft (2,770m(2)) at GBP1.2m pa.
The retail units, totalling 13,300 sq ft (1,230m(2)), attracted
well known names - Jamie's Italian, Busaba Eathai and Hummingbird
Bakery - at a total rent of GBP0.5m pa. During the year the Angel
Building was shortlisted for the RIBA Stirling Prize and won
numerous accolades including RIBA London, the British Council for
Offices and the British Construction Industry awards.
-- 88 Rosebery Avenue EC1 - 49,000 sq ft (4,550m(2)) of offices
were pre-let to City University at GBP1.2m pa at this refurbishment
which involved just under half of the building.
-- 1-5 Grosvenor Place SW1 - whilst we progress the development
plans here, through the recent headlease regear (see 'Activity in
2012'), we continue to optimise income through shorter term
lettings. Nine transactions were concluded in 2011 at a rent of
GBP1.2m pa, covering 26,600 sq ft (2,470m(2)), which was 4.8% above
December 2010 estimated rental values.
-- Tea Building, Shoreditch High Street E1 - nine office
lettings were concluded at this landmark property totalling GBP1.2m
pa, 31% ahead of December 2010 estimated rental values, on a
floorspace of 41,000 sq ft (3,810m(2)). With the ever improving
micro market in the area and our recent environmentally-friendly
'Green Tea' fit out of several units, rents achieved during the
year averaged GBP29 per sq ft (GBP310 per m(2)) with an all-time
high for the building of GBP32.50 per sq ft (GBP350 per m(2)) in
the third quarter. With a total rental income of GBP4.5m pa and an
estimated rental value of GBP6.2m pa, the building remains highly
reversionary. At the year end, this 250,400 sq ft (23,260m(2))
building had an occupancy rate of 97% with the balance of space
under offer.
-- Johnson Building, 77 Hatton Garden EC1 - 22,300 sq ft
(2,070m(2)) was let to Lastminute.com at GBP0.95m pa equating to
GBP42.50 per sq ft (GBP455 per m(2)) and the highest level achieved
in this building.
Through asset management initiatives during the year, we
captured further reversion within the portfolio and concluded 52
rent reviews and lease renewals that increased the Group's income
by GBP0.9m pa, a 14.1% uplift on the previous income.
Tenant retention and rent collection
Although 19% (GBP21.4m) of the Group's 2010 year end income was
subject to lease breaks and expiries during the year, tenant
retention remained strong across the business. Excluding those
where projects were imminent, the total exposure to lease breaks
and expiries was 14% (GBP16.2m). Of this, 72% of income was
retained (2010: 72%), 21% re-let prior to the year end (2010: 17%)
and a further 2% re-let or placed under offer since the year
end.
Rent collection continued to be prompt with on average 98%
collected within 14 days of the due date. This is above the KPI
collection target of 95% and compares with 96% in 2010.
Vacancy rate
With our strong letting activity and active portfolio
management, the portfolio's EPRA vacancy rate by rental value,
measured as space immediately available for occupation, ended the
year at 1.3% or GBP1.9m pa. Half of this space has either been let
subsequently or is under offer. This compared to 5.9% at the start
of the year and 4.0% in June. By available floorspace, the year end
vacancy rate was 1.3%, down from 4.9% a year earlier and 3.5% at
the half-year. This compared favourably to the CBRE central London
rate that decreased from 5.5% to 5.2% during the year.
Our five principal on-site projects have an estimated rental
value of about GBP13m pa and, upon completion, would increase the
Group's vacancy rate to around 9%. However, after adjusting for
pre-lets and space under offer, the rate would reduce to
approximately 5%.
Activity in 2012
Letting activity has continued into 2012 with the completion of
a further 153,100 sq ft (14,220m(2)) of transactions at a rental
income of GBP6.0m pa.
These included 1 Page Street SW1 where we are pleased to
announce that Burberry will be increasing their presence in our
portfolio by pre-letting the entire 127,000 sq ft (11,800m(2))
building for GBP5.3m pa. This reflects a level of GBP50 per sq ft
(GBP540 per m(2)) on the top three floors with GBP45 per sq ft
(GBP485 per m(2)) on a typical mid-level floor. The lease is for a
20-year term with a tenant-only break option in year ten and a
rent-free period equivalent to 22 months. The first review after
five years will be subject to a minimum uplift to GBP5.7m pa. An
amendment to the existing planning consent has been submitted and
approval is anticipated shortly. The completion of the lease is
conditional on obtaining satisfactory consent.
We are also pleased to announce that we have signed a joint
venture agreement with Grosvenor, our freeholder, for the future
redevelopment of 1-5 Grosvenor Place, Belgravia SW1. As part of the
transaction our headleases, that were due to expire in 2063 and
2084, have been regeared into a new 150-year term at a ground rent
of 5% of rental income. Simultaneously, the Group has sold 50% of
its ownership to Grosvenor and received GBP60m before costs. Having
assembled the ownership over many years, this initiative protects
our value through the headlease regear and unlocks the opportunity
for a substantial and prestigious mixed-use scheme, likely to
include a luxury hotel, commercial and residential space. The
existing buildings, totalling 168,000 sq ft (15,600m(2)), are fully
let at a gross income of GBP6.2m pa and occupy a prime 1.5 acre
(0.6 hectare) island site, which overlooks Hyde Park Corner.
Following the transaction our share of the income is GBP2.95m. We
are in the process of selecting architects to work on this
scheme.
PROJECTS
See appendix 4
http://www.rns-pdf.londonstockexchange.com/rns/4407Y_3-2012-2-29.pdf
During the year we made excellent progress with our development
programme through the completion of a range of refurbishments, the
advancement of our on-site projects and the receipt of six major,
value-creating planning consents. These total 0.9 million sq ft
(83,600m(2)) and relate to 80 Charlotte Street W1, City Road Estate
EC1, Turnmill EC1, Buckley Building EC1, 4 & 10 Pentonville
Road N1 and the first phase of Central Cross W1. We await decisions
on a number of other significant planning applications made in 2011
including 1 Oxford Street W1 and Riverwalk House SW1.
Despite the difficult state of the economy, we are encouraged by
the strength of our letting activity and the relatively moderate
level of space available to rent in our key markets. Our current
development programme, which is either on-site or scheduled to
commence in 2012, totals just over 0.5 million sq ft (46,500m(2))
on seven projects. These will have a potential net rental income of
around GBP20m pa and will incur total capital expenditure of
approximately GBP137m.
Review of 2011 activity
In 2011, the Group completed 219,400 sq ft (20,380m(2)) of
projects - 91,400 sq ft (8,490m(2)) in the first half of the year
and 128,000 sq ft (11,890m(2)) in the second. After the disposal of
Victory House, these are now fully let at GBP5.2m pa.
The principal completions were:
-- 33 George Street W1 - Pandora Jewellery pre-let the entire
13,000 sq ft (1,210m(2)) refurbished building for GBP0.7m pa which
was completed in January 2011.
-- Victory House, 170 Tottenham Court Road W1 - following
completion of this 48,000 sq ft (4,460m(2)) mixed-use scheme in
July, the building was sold (see 'Disposals').
-- 88 Rosebery Avenue EC1 - a 49,000 sq ft (4,550m(2))
refurbishment that was completed in December and pre-let to City
University for GBP1.2m pa.
Smaller refurbishments at the Tea Building E1, Holden House W1,
Morelands Buildings EC1 and 55-65 North Wharf Road W2 were also
completed in the year. Overall, excluding capitalised interest,
GBP41.0m of capital expenditure was invested in the portfolio in
2011.
At year end, five principal projects were on site totalling
338,000 sq ft (31,400m(2)) with an estimated net rental value of
GBP13m pa and a capital expenditure to complete of GBP68m. By
estimated income, 50% of these are pre-let or under offer. The
schemes are:
-- 1 Page Street SW1 - this 127,000 sq ft (11,800m(2)) office
building has been pre-let to Burberry (see 'Activity in 2012'). As
part of the agreement with Burberry, as well as internal
refurbishment and extension, the building will be reclad with an
elegant masonry facade. This approach has enabled us to increase
the floor area by 8% from the 118,000 sq ft (10,960m(2)) at the
time of acquisition. We await planning approval for these
amendments. Total capital expenditure to complete is estimated at
GBP30m and it is anticipated that the building will be handed over
to Burberry in mid 2013.
-- Buckley Building (formerly Woodbridge House), 49 Clerkenwell
Green EC1 - planning consent for this scheme was gained in May 2011
to refurbish and extend the existing building by 13% to 85,000 sq
ft (7,900m(2)). Work is due to complete towards the end of 2012. To
improve the building's identity, the office entrance is being
repositioned from Aylesbury Street to the more prominent
Clerkenwell Green. We have received some good early interest on
this building and the Group continues to receive a rental income of
GBP2.5m pa until March 2015 from an agreement with the previous
tenant, which considerably derisks this project.
-- 4 & 10 Pentonville Road N1 - this 55,000 sq ft
(5,110m(2)) office refurbishment, opposite our Angel Building,
gained planning consent in April 2011. The two existing buildings
will be linked and remodelled, increasing the previous floor area
by over 20%. Completion is scheduled for mid 2012.
-- Central Cross W1 (Phases 1 & 2) - planning permission was
obtained in September 2011 for the remodelling and extension of the
main office entrance that will create 23,000 sq ft (2,140m(2)) of
ground floor offices. Strip out work commenced in December on this
first phase of this regeneration, with delivery due in late 2013.
We expect to coincide these works with Phase 2 that will include a
further office refurbishment of 21,000 sq ft (1,950m(2)). We have
placed 15,400 sq ft (1,430m(2)) of Phase 1 under offer and we
intend to rebrand the building going forward as 1-2 Stephen
Street.
-- Morelands Buildings, 5-27 Old Street EC1 - following a
headlease extension, this multi-let building is undergoing a
rolling refurbishment with 27,000 sq ft (2,510m(2)) in the current
phase. This includes a fourth floor refurbishment and new fifth
floor of 17,800 sq ft (1,650m(2)) which have been pre-let at
GBP34.50 per sq ft (GBP370 per m(2)) and GBP37.50 per sq ft (GBP405
per m(2)) respectively and which are due to complete by the end of
2012.
Projects - 2012
In the year ahead, we are due to commence two exciting new-build
projects totalling 170,000 sq ft (15,800m(2)) with a net estimated
rental value of over GBP7m pa:
-- 40 Chancery Lane WC2 - a second half start is proposed at
this 100,000 sq ft (9,300m(2)) six-storey Midtown office scheme. In
February 2012, to enable the redevelopment, we exchanged
conditional contracts to restructure and extend our interests into
a new 128-year lease with our freeholder, the Colville Estate.
Completion will take place on achieving vacant possession, and will
replace a 17-year unexpired headlease held on the majority of the
site, the relinquishing of a minor freehold element and the
extension of our ownership to include an adjacent building where
the Group had no previous interest. The ground rent gearing is 18%
of rental income, with the opportunity for the Group to pay a
premium to reduce this to 10%. The freeholder will receive a share
of the project's profits above a target return. Completion is
anticipated towards the end of 2014 and the project will incur
capital expenditure estimated at GBP44m.
-- Turnmill, 63 Clerkenwell Road EC1 - this 70,000 sq ft
(6,500m(2)) office development was granted planning permission in
September 2011. It offers a substantial regeneration opportunity in
an area that will benefit from the arrival of Crossrail at nearby
Farringdon station in circa 2018. Capital expenditure is
anticipated to be GBP26m with completion due in mid 2014.
At 132-142 Hampstead Road NW1, following the Government's
January 2012 decision to proceed with the HS2 high speed rail link,
we have reluctantly decided to put on hold the 265,000 sq ft
(24,600m(2)) office and residential redevelopment. This decision is
due to the expectation that our ownership will be compulsorily
purchased should HS2 be built. Despite having been in advanced
negotiations for substantial office pre-lets, the considerable
capital expenditure of around GBP90m needed to complete the project
and the uncertainty as to its future leads us to believe that the
risk to proceed with the planned redevelopment is too great. We are
now considering several 'light touch' refurbishment options that
will allow us to offer space on flexible terms.
Projects - 2013 and onwards
During the year, our development team advanced a number of major
future projects that could commence from 2013. These were made up
of planning permissions granted, planning applications submitted
and appraisal studies.
Planning permissions included:
-- 80 Charlotte Street W1 - this 367,000 sq ft (34,100m(2))
mixed-use Fitzrovia development, providing 320,000 sq ft
(29,700m(2)) of offices, together with residential and retail space
and a new public park was granted planning permission by the Mayor
of London in September 2011. This island site, located in the heart
of Fitzrovia, currently comprises 200,000 sq ft (18,600m(2)) of
outdated offices. The new scheme will be a major step in the wider
regeneration of the area. Construction is due to commence after the
existing leases expire in March 2013. Total anticipated capital
expenditure is around GBP125m with delivery expected in 2015.
-- City Road Estate EC1 - this major 289,000 sq ft (26,800m(2))
office-led development, located at Old Street roundabout within the
Government's 'Tech City', was granted planning permission in
October. The proposed scheme reflects a 130% increase on the
existing floorspace and includes a new 16-storey office building,
that incorporates our 'White Collar Factory' concept, together with
retail and residential units. The existing buildings are multi-let
on flexible leases producing GBP0.8m pa. The Group will be looking
to secure a significant pre-let prior to committing an anticipated
GBP100m of capital expenditure.
Planning applications made during the year included:
-- Riverwalk House, 157-166 Millbank SW1 - a planning
application was submitted in October for a 121-unit 148,000 sq ft
(13,700m(2)) high-specification residential redevelopment at this
prestigious riverside location. The building has been sold, subject
to receipt of satisfactory planning permission (see
'Disposals').
-- 1 Oxford Street W1 - a joint planning application with
Crossrail Limited was submitted in October for a 275,000 sq ft
(25,500m(2)) mixed-use scheme at Tottenham Court Road station,
which will become a major transport interchange following the
completion of Crossrail. This comprises 204,000 sq ft (18,900m(2))
of offices, 37,000 sq ft (3,400m(2)) of retail space and a 350-seat
theatre. The site was compulsorily purchased from the Group by
Crossrail in 2009 and we have the option to re-acquire it following
the completion of their station works around 2017.
-- 96-98 Bishop's Bridge Road W2 - planning permission was
granted in February 2012 for a residential-led scheme of 21,400 sq
ft (1,990m(2)), comprising 16 units, at this former 1930s cinema.
It is anticipated that construction will start in early 2013.
We continue to advance a number of appraisal studies across the
portfolio. This year we will be progressing our plans at 1-5
Grosvenor Place SW1 and the retail phase of Central Cross W1 where
planning applications will be submitted in due course.
Acquisitions
Further depth was added to our development pipeline with
acquisitions in 2011 totalling GBP87.5m before costs.
-- 1 Page Street SW1 - this vacant office building, located
close to our Horseferry House holding in Victoria, was acquired in
March for GBP45.0m. As outlined in the 'Activity in 2012' section,
we have pre-let the entire building to Burberry.
-- Network Building, 95-100 Tottenham Court Road W1 - the
headlease of this 64,000 sq ft (5,900m(2)) multi-let Fitzrovia
office and retail property was purchased for GBP31.0m in April. The
Group already owned the freehold and, by merging the interests, we
are able to consider a more substantial redevelopment in the
future. Income from this building is GBP2.1m pa which should rise
to GBP2.7m pa on the letting of the vacant office space.
-- Morelands Buildings, 5-27 Old Street EC1 - the headlease of
this popular, multi-tenanted Clerkenwell property was regeared for
an outlay of GBP5.8m before costs in the first half of the year,
extending our tenure from 45 to 125 years and increasing our
development rights. This regear facilitates a phased refurbishment
and extension of the property with Phase 1, which has been mostly
pre-let, now underway, incurring capital expenditure to complete of
GBP5.6m.
-- 423-425 Caledonian Road N7 - this 18,300 sq ft (1,700m(2))
office building was purchased for GBP5.6m in June and produces an
income of GBP0.3m pa. It is opposite an existing holding, Balmoral
Grove Buildings, where we are formulating a residential planning
application.
Disposals
During the year the Group took the opportunity to recycle
capital through the disposal of a mixture of mature and smaller
assets. Sales totalled GBP132.5m before costs, had an income of
GBP3.2m pa and gave rise to an overall surplus of GBP36.1m, or 38%
above the December 2010 valuation. These included:
-- Covent Garden Estate WC2 - this 71,900 sq ft (6,680m(2))
mixed-use holding of five freehold properties, that produced
GBP2.5m pa, was sold for GBP68.0m.
-- Victory House, 170 Tottenham Court Road W1 - following an
extensive refurbishment, this 48,000 sq ft (4,460m(2)) mixed-used
property was sold for GBP37.2m.
-- 79-89 Pentonville Road N1 - this 35,600 sq ft (3,310m(2)) low
income producing property was sold for GBP11.0m.
-- 18-30 Leonard Street EC2 - the long leasehold interest of
this cleared site, with planning consent for 47 residential units
and 20,000 sq ft (1,860m(2)) of offices, was sold for GBP11.0m.
-- Harp House, 83-86 Farringdon Street EC4 - at the expiry of
the existing lease, this 14,300 sq ft (1,330m(2)) property was sold
for GBP5.0m in December with vacant possession.
In addition, in December 2011 we exchanged conditional contracts
to sell Riverwalk House SW1 and 232-242 Vauxhall Bridge Road SW1
for GBP77.3m to Ronson Capital Partners with completion subject to
receipt of satisfactory planning permission. A planning decision is
expected shortly. The Group will maintain an interest in the
development by way of a profit overage arrangement and will work
closely with the purchasers to enhance our expertise in residential
projects.
Following the year end, at 1-5 Grosvenor Place SW1, we
restructured our ownership and sold a 50% interest in the new
headlease to Grosvenor for GBP60m as part of our joint venture
arrangements for the future redevelopment of this site (see
'Activity in 2012').
FINANCE REVIEW
See appendix 5
http://www.rns-pdf.londonstockexchange.com/rns/4407Y_4-2012-2-29.pdf
Looking back on 2011, the first half of the year showed a
continuation of the relatively strong recovery in sentiment that
characterised 2010 but, from mid-year onwards, the UK's economic
recovery slowed and stresses within the Eurozone came prominently
to the surface. Certain European governments found that the cost of
refinancing their sovereign debt was set to rise dramatically. The
interdependence of banks upon banks, and banks upon sovereign
support, caused market concern and political solutions were not
rapid enough to curtail a substantial loss of confidence. The UK
emerged as something of a 'safe haven', pushing gilt yields to
almost record lows. However, confidence in the UK's domestic
economy weakened in the second half, UK national debt levels also
remain high and domestic consumer demand is under sustained
pressure.
We therefore remain some way from 'normal' market conditions. As
a consequence, our financial initiatives in 2011 focused on
pre-emptive mitigation of refinancing exposures, while also
managing operational risk such as letting voids. At the same time,
we have worked to unlock valuable development opportunities for the
future.
Adjusted net asset value per share
The Group's EPRA adjusted net asset value per share increased by
15.4% to 1,701p per share as at 31 December 2011 from 1,474p a year
earlier. As usual, the main constituent of this increase was the
property portfolio valuation which showed an increase of 168p per
share after allowing for capital expenditure and lease incentives.
Profits arising on disposals of investment properties also
contributed another 35.4p per share compared with 0.9p per share in
2010.
London commercial property values have not yet recovered to
their December 2007 peak levels but, since December 2009, the Group
has seen a cumulative increase of almost 47% in net asset value per
share. Debt and gearing levels have also been reduced further in
the last year and we have been able to enhance the level of undrawn
and available bank facilities.
Due to an increase in the valuation of the part of 25 Savile Row
W1 that the Group occupies as its head office, this part has now
been reclassified from investment properties to 'property, plant
and equipment' in compliance with IAS 16 and IAS 40. Please refer
to note 2 for further details of this minor restatement of the
prior year comparative numbers.
In accordance with IFRS 5, the properties that were expected to
be sold during 2012 have been included in 'assets held for sale' at
the balance sheet date. These are discussed in the 'Disposals'
section of the Property Review and amounted to GBP137.5m.
Group income statement
The last year was characterised by a record level of new
lettings and reviews for the Group which helped gross property
income to grow by 5.1% to GBP125.5m from GBP119.4m for the year
ended 31 December 2010. After taking account of lease breaks and
expiries, new lettings increased gross income by GBP3.3m compared
to 2010. Properties acquired in 2010 and 2011 added GBP7.2m of
rental income when compared with the 2010 calendar year, partly due
to the full year's contribution from Central Cross, while disposals
only reduced rent by GBP1.6m. However, as we progressed schemes at
Riverwalk House, Hampstead Road, 88 Rosebery Avenue and 4 & 10
Pentonville Road, the income generated from those properties fell
by GBP4.4m when compared with the prior year. As noted last year,
the Buckley Building continues to generate rental income of GBP2.5m
pa during the construction period and beyond to 2015.
Premiums received from tenants terminating leases early totalled
GBP1.4m after netting off the related accrued income from
unamortised lease incentives. The largest premium received came
from a tenant who paid GBP1.5m to vacate the Johnson Building in
December 2011; the resulting write-off of unamortised rent accrued
through the rent-free period totalled GBP0.9m. This lease surrender
was supported by a back-to-back letting to Lastminute.com at a
higher rental level.
Property outgoings and ground rents increased from GBP8.1m in
2010 to GBP9.8m due mainly to void costs being higher in 2011
during the post completion period at the Angel Building until it
was fully let and Riverwalk House's office tenant vacating in April
2011. In addition, surrender premiums of GBP1.9m were paid in 2011
of which the largest was a GBP1.3m payment to secure vacant
possession at 210 Old Street. As a result, net property income
increased by 4.2% to GBP117.7m, a slightly lower percentage than
the increase in gross rents. Net rental income took account of a
further recovery of GBP1.6m of commercial rates rebates from prior
years, marginally lower than the GBP1.7m rates credit in 2010.
Excluding the impact of acquisitions, disposals and properties
under development, like-for-like net property income on an EPRA
basis rose by 3.7% from 2010 and an analysis is shown in the table
in Appendix 5.
Administrative expenses increased to GBP22.7m from GBP20.9m in
2010 due mainly to increased staff and office costs. As in the
previous year, we have both increased and strengthened the
management team and we believe this was a contributory factor to
the valuable planning consents won during the year. The Group's
consistently strong performance over recent years has also
contributed to an increase in the provision for long-term
management incentives of GBP0.7m compared to 2010.
Average borrowings during the year were about GBP118m higher
than in 2010. In addition, the impact of higher margins and fees
charged on bank facilities renewed since November 2010 and the
lower level of floating rate debt combined to increase net finance
costs from 2010. Net finance costs, after capitalising GBP2.2m of
interest in 2011, increased to GBP43.2m from GBP37.9m in 2010. The
GBP175m of unsecured convertible bonds issued in June 2011 pay a
cash coupon of 2.75% pa but, in accordance with IFRS accounting
rules, we have recognised the hybrid nature of this instrument by
booking an additional non-cash interest charge of 1.24% pa which
added GBP1.0m to the 2011 finance cost. In future years, the
additional charge will be GBP1.9m pa. In addition, the equity
element of the convertible bond instrument of GBP9.4m, after costs,
was recognised in reserves at the point of issue.
The resulting EPRA recurring profit before tax was GBP52.3m for
the year ended 31 December 2011 compared with GBP55.2m in 2010. Tax
recoveries from historical positions in the UK and USA meant that
EPRA earnings per share fell by less than 3% to 51.59p from 52.89p
in 2010.
The overall profit before taxation for the year was GBP233.0m
compared to GBP352.8m in 2010, the reduction due mainly to the
lower level of property revaluation movements in 2011. The surplus
arising in 2011 from the revaluation of the Group's property
portfolio amounted to GBP172.1m against GBP301.7m in 2010. A
further contribution came from profits on disposals of investment
properties in 2011 of GBP36.1m offset partially by the GBP26.5m
mark-to-market deficit on interest rate swaps referred to below.
The gain on disposals of investment properties came from the sales
of low yielding properties at Covent Garden and 78-79 Pentonville
Road in the first half of the year and Victory House, 18-30 Leonard
Street and Harp House in the second half. In aggregate, these sales
achieved 38% above December 2010 book values, after costs.
Gilt yields and swap rates over the medium and long-term fell
strongly in the second half of 2011 after rising a little in the
first half. This recent decline in rates has been quite exceptional
with the 10-year gilt hovering around 2.0% at the 2011 year end
illustrating a distinct cooling of UK growth and interest rate
expectations. The resulting mark-to-market deficit of GBP26.5m for
2011 compares with a GBP2.4m deficit in 2010. Interest rates have
so far remained low into 2012.
Taxation
The 2011 tax credit relating to the non-REIT part of the
business was GBP1.3m. This comprised a tax charge of GBP0.5m for
the unelected share in our joint venture with the Portman Estate
and a prior year tax credit of GBP1.8m. The latter item benefited
from the resolution of a long-running US tax matter resulting in a
cash receipt of GBP0.4m. In addition, we were able to release
provisions against UK tax enquiries amounting to GBP1.4m. The
deferred tax provision in 2011 fell slightly to GBP5.2m as the
effect of the higher revaluation surplus was more than offset by
previously unrecognised tax losses and the reduced UK corporation
tax rate which falls to 25% on 1 April 2012.
Financing, net debt and cash flow
As the Group entered 2011 it faced GBP32.5m of bank facilities
expiring in 2012 and a further GBP575m due to expire in 2013. We
were also very aware of the deleveraging pressures facing real
estate lending banks. Therefore, a principal strategic aim for the
year was to focus on refinancing the majority of this requirement
before 2012.
We had also previously flagged that we would look to seek out
non-bank sources of debt and, after considering a number of other
options, we decided to launch a GBP175m unsecured convertible bond
in May 2011, the first of its type by a UK REIT. This was well
received and was several times over-subscribed. Pricing settled at
a 2.75% pa coupon with an initial exercise price of GBP22.22, some
50% above the Group's net asset value at December 2010. This issue
provides a source of unsecured debt with no corporate or
asset-specific financial covenants and a low coupon. It also
carries a relatively modest risk of dilution given the high
conversion price relative to net asset value. In documenting the
issue, we were able to include an allowance of up to GBP350m for
other capital markets issues such as private placements and bonds,
together with unlimited access to bank and insurance company debt.
We considered that this combination was unlikely to fetter our
borrowing strategy over the five-year term of the bonds.
We have also taken action to renew and/or extend and refinance
bank facilities during the year. In June 2011, the GBP100m
bilateral revolving facility with The Royal Bank of Scotland was
extended to a renewal date of April 2015; the margin increased to
120bp and steps up again in April 2012 to 175bp for loan to value
("LTV") ratios up to 65% and 200bp in the less likely event that we
draw above 65% LTV.
We were also able to increase the principal amount of our
revolving bilateral loan facility with HSBC that expires in
November 2015 from GBP100m to GBP125m. This GBP25m increase was
executed in December 2011 on the same terms as the original
facility which was arranged in November 2010.
Both of these transactions are indicative of the strong nature
of our valued banking relationships and illustrate the increasingly
binary nature of the bank loan environment. For a small number of
chosen borrowers, funds are available on terms that remain
reasonably attractive while, for others, the facilities are either
all but unavailable or are priced at a significant premium.
In the second half of the year, we approached a number of
potential lenders to refinance part of the GBP375m syndicated loan
facility expiring in March 2013 that was inherited upon the merger
with London Merchant Securities in 2007. Our intention was to
remove the risk in relation to that part of this refinancing which
was to be funded by banks while leaving a further part which could
be replaced with non-bank funding in 2012. Derwent London favours
facilities which are either held by one bank or by a small club of
banks and we therefore preferred to avoid assembling a new large
syndicated facility.
After receiving several offers of funding, in December 2011 we
signed a new GBP150m fully revolving five-year facility provided
equally by The Royal Bank of Scotland and Barclays and a new
GBP150m fully revolving five-year facility provided by Lloyds Bank
to replace and extend their existing GBP100m bilateral facility.
Although signed in 2011, these new facilities did not become
available for drawing until January 2012 and so, as at the 2011
balance sheet date, the GBP375m facility was still in place. In
January 2012, the GBP375m facility was part-cancelled and now
consists of a GBP150m fully revolving facility.
The debt profiles of the bank facilities as at 31 December 2011
and the pro-forma refinanced position are both provided in Appendix
5.
We believe that the pricing on these two new facilities is at
good and sensible levels in the current market, which became
considerably more difficult in the last quarter of 2011. In both
cases, we have agreed a 'ratchet' of margin pricing based on the
amount drawn; at the lower end of the range of LTV ratios where we
tend to operate most of the time, margins of 185bp and 160bp,
respectively, were agreed for the two facilities while we expect to
pay margins between 160bp and 215bp through the life of these
loans. Should we need to draw the full amounts and in a situation
where property security values were also to fall substantially from
current levels, the margins in both facilities could be up to
250bp.
We are not seeking to renew the small GBP32.5m unsecured
facility expiring in June 2012 which was originally arranged in
connection with the loan notes offered at the time of the LMS
merger. The remaining loan notes were repaid in January 2012.
In order to mitigate the effect of an increase in facility
margins, we have taken steps to reduce the weighted average cost of
our interest rate swaps. In January 2012, when the higher margins
started to take effect, we broke two interest rate swaps with a
principal amount of GBP130m and a weighted average rate of about
5.0%, excluding margin, which were due to expire in March 2013. The
cost of breaking these swaps was GBP6.3m, a small discount to the
additional interest charge that we would have incurred through the
remaining life of the swaps. At the same time, we took out a new
GBP70m swap to April 2019 at a rate of just under 2.0%, excluding
margin. The impact of the new facility margins and swap rates is
shown in the table in Appendix 5.
Cash proceeds from the sales of investment properties during
2011 were GBP131.5m which almost matched the GBP134.2m outflow
incurred on capital expenditure and property acquisitions. Cash
generated from operations after payment of the dividend totalled
GBP21.8m for the year leading to an overall reduction in bank and
other loans.
Taking account of amortisation of arrangement fees and other
adjustments, the Group's net debt fell slightly to GBP864.5m at
December 2011 compared to GBP887.8m a year earlier. After allowing
for the cash raised from the issue of the convertible bond in June,
bank loans were repaid by a net amount of GBP186.6m during the year
compared to a net drawing of GBP158.8m in 2010.
Supported by the rise in portfolio values, gearing has fallen
again in 2011 and the Group's overall LTV ratio, after allowing for
unamortised loan arrangement costs, fell from 35.7% at 31 December
2010 to 32.0% at 31 December 2011. Balance sheet gearing fell from
59.4% to 50.4% over the same period. As noted above, our finance
costs have increased in the year and, accordingly, the Group's
overall interest cover ratio for the year fell a little to 307%,
after capitalisation of interest, or 291% excluding capitalised
interest, compared to 328% in 2010. These levels of LTV ratio and
interest cover provide very substantial headroom for our bank
facilities.
The weighted average length of unexpired debt facilities at 31
December 2011 was 4.4 years but, with the new facilities that
became effective in January 2012, the pro-forma figure rises to 5.2
years, which is the same as at 31 December 2010.
The issue of the convertible bonds in June 2011 increased
available headroom under bank facilities but also raised the
proportion of debt that is at fixed rates; at 31 December 2011, the
percentage of debt at fixed rates was 98% though this has fallen to
90% in January 2012 on the termination of the old swaps and the
arrangement of the new swap noted above. This level of fixed rates
provides us with considerable protection against movements in
interest rates but remains a little above our target range. As we
invest further in the portfolio over the medium term, we expect
this proportion to fall back under 85%.
As a result of the higher level of fixed rates and the increased
margins that we pay on recently renewed bank facilities, the
weighted average cost of debt, including the secured bond,
increased from 4.34% at December 2010 to 4.91% in December 2011,
inclusive of the non-cash element of the convertible bond, or 4.65%
if the latter is excluded.
The bond issue increased the level of committed bank facilities
available for drawing at 31 December 2011 to GBP469m compared with
GBP245m the previous year, added to which there was an additional
GBP589m of uncharged property in December 2011; the comparative
figure at December 2010 was GBP484m. The low LTV ratio at December
2011 means that the Group's bank covenants, both for LTV ratio and
interest cover, have significant headroom and we estimate that
property values could fall by around 50% before there was an LTV
ratio breach under any of the facilities.
Dividend
Our dividend remains well covered and, as a result, the Board
has been able to recommend an 8.1% increase in the proposed final
dividend to 21.90p per share. Of the final dividend, 18.10p will be
paid as a PID with the balance of 3.80p as a conventional dividend.
This will bring the total dividend for the year to 31.35p per
share, an increase of 2.35p or 8.1% over 2010. We will again offer
a scrip dividend alternative as this has proved popular with
shareholders with around 17% opting for shares rather than cash so
far since it was introduced.
Directors' responsibilities
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company, for safeguarding the assets of
the Company, for taking reasonable steps for the prevention and
detection of fraud and other irregularities and for the preparation
of a Directors' report and Directors' remuneration report which
comply with the requirements of the Companies Act 2006.
The Directors are responsible for preparing the annual report
and the financial statements in accordance with the Companies Act
2006. The Directors are also required to prepare financial
statements for the Group in accordance with International Financial
Reporting Standards, as adopted by the European Union (IFRSs) and
Article 4 of the IAS Regulation. The Directors have chosen to
prepare financial statements for the Company in accordance with
IFRSs.
Group financial statements
International Accounting Standard 1 requires that financial
statements present fairly for each financial year the Group's and
Company's financial position, financial performance and cash flows.
This requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting
Standards Board's "Framework for the preparation and presentation
of financial statements". In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable
IFRSs. A fair presentation also requires the Directors to:
-- consistently select and apply appropriate accounting policies;
-- present information, including accounting polices, in a
manner that provides relevant, reliable, comparable and
understandable information; and
-- provide additional disclosures when compliance with the
specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance.
The Directors confirm to the best of their knowledge:
-- they have complied with the above requirements in preparing
the financial statements which give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation taken as
a whole;
-- the adoption of a going concern basis for the preparation of
the financial statements continues to be appropriate based on the
foregoing and having reviewed the forecast financial position of
the Group; and
-- the business review includes a fair review of the development
and performance of the business and the position of the Company and
the undertakings included in the consolidation taken as whole,
together with a description of the principal risks and
uncertainties that they face.
-- Financial statements are published on the Group's website in
accordance with legislation in the United Kingdom governing the
preparation and dissemination of financial statements, which may
vary from legislation in other jurisdictions. The maintenance and
integrity of the Group's website is the responsibility of the
Directors. The Directors' responsibility also extends to the
ongoing integrity of the financial statements contained
therein.
On behalf of the board
J. D. Burns D.M.A. Wisniewski
Chief Executive Officer Finance Director
1 March 2012
GROUP INCOME STATEMENT
2011 2010
Restated
Note GBPm GBPm
Gross property income 125.5 119.4
Other income 2.0 1.7
---------------------------------------------- ---- ------- --------
Total income 5 127.5 121.1
Property outgoings (9.8) (8.1)
Net property income 117.7 113.0
Administrative expenses 2 (22.7) (20.9)
Revaluation surplus 2 170.1 298.1
Profit on disposal of investment properties 6 36.1 0.9
Profit from operations 301.2 391.1
Finance income 7 1.1 1.9
Finance costs 7 (44.3) (39.8)
Movement in fair value of derivative
financial instruments (26.5) (2.4)
Share of results of joint ventures 8 1.5 2.0
Profit before tax 233.0 352.8
Tax credit 9 1.3 -
Profit for the year 234.3 352.8
Attributable to:
- Equity shareholders 228.3 343.6
- Minority interest 6.0 9.2
234.3 352.8
Earnings per share 10 225.20p 339.68p
Diluted earnings per share 10 217.67p 337.47p
GROUP STATEMENT OF COMPREHENSIVE INCOME
2011 2010
Restated
Note GBPm GBPm
Profit for the year 234.3 352.8
Actuarial losses on defined benefit
pension scheme (3.5) (0.4)
Revaluation surplus of owner-occupied
property 11 2.0 3.6
Deferred tax on revaluation surplus 16 0.7 (1.0)
Foreign currency translation - 0.2
------ --------
Other comprehensive (expense)/income (0.8) 2.4
Total comprehensive income relating to the
year 233.5 355.2
Attributable to:
- Equity shareholders 227.5 346.0
- Minority interest 6.0 9.2
233.5 355.2
GROUP BALANCE SHEET
2011 2010 2009
Restated Restated
Note GBPm GBPm GBPm
Non-current assets
Investment property 2, 11 2,444.9 2,373.3 1,876.9
Property, plant and equipment 2, 12 19.4 16.7 13.1
Investments 9.7 8.4 6.4
Pension scheme surplus - 0.7 0.8
Other receivables 13 55.4 45.8 38.9
2,529.4 2,444.9 1,936.1
Current assets
Trading properties - - 1.0
Trade and other receivables 45.0 37.7 44.0
Cash and cash equivalents 3.5 7.2 19.0
48.5 44.9 64.0
Non-current assets held for
sale 14 137.5 - -
Total assets 2,715.4 2,489.8 2,000.1
Current liabilities
Bank overdraft and loans 15 32.5 5.6 5.9
Trade and other payables 70.9 63.4 59.0
Corporation tax liability 1.3 3.3 5.4
Derivative financial instruments - - 1.6
Provisions 1.6 1.4 2.3
106.3 73.7 74.2
Non-current liabilities
Borrowings 15 835.5 889.4 733.9
Derivative financial instruments 15 51.9 25.4 21.4
Provisions 0.5 0.7 0.8
Pension scheme deficit 1.5 - -
Deferred tax 16 5.2 5.9 5.9
894.6 921.4 762.0
Total liabilities 1,000.9 995.1 836.2
Total net assets 1,714.5 1,494.7 1,163.9
Equity
Share capital 5.0 5.0 5.0
Share premium 162.9 158.2 156.9
Other reserves 936.6 924.0 920.1
Retained earnings 558.2 361.6 45.2
Equity shareholders' funds 1,662.7 1,448.8 1,127.2
Minority interest 51.8 45.9 36.7
Total equity 1,714.5 1,494.7 1,163.9
GROUP STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
-----------------------------------------------
Share Share Other Retained Minority Total
capital premium reserves earnings Total interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2011
(restated) 5.0 158.2 924.0 361.6 1,448.8 45.9 1,494.7
Total comprehensive
income for the
year - - 2.7 224.8 227.5 6.0 233.5
Share-based payments
expense transferred
to
reserves - - 2.4 - 2.4 - 2.4
Transfer between
reserves
in respect of
performance
share plan - - (1.9) 1.9 - - -
Issue of convertible
bonds - - 9.4 - 9.4 - 9.4
Premium on issue
of shares - 4.7 - - 4.7 - 4.7
Dividends paid - - - (30.1) (30.1) (0.1) (30.2)
At 31 December 2011 5.0 162.9 936.6 558.2 1,662.7 51.8 1,714.5
Attributable to equity shareholders
-----------------------------------------------
Share Share Other Retained Minority Total
capital premium reserves earnings Total interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2010
(as previously
reported) 5.0 156.9 916.8 48.5 1,127.2 36.7 1,163.9
Restatement (see
note 2) - - 3.3 (3.3) - - -
-------- ------- -------- -------- -------- -------- --------
At 1 January 2010
(restated) 5.0 156.9 920.1 45.2 1,127.2 36.7 1,163.9
Total comprehensive
income for the
year - - 2.8 343.2 346.0 9.2 355.2
Share-based payments
expense transferred
to
reserves - - 2.2 - 2.2 - 2.2
Transfer between
reserves in
respect of performance
share plan - - (1.1) 1.1 - - -
Premium on issue
of shares - 1.3 - - 1.3 - 1.3
Dividends paid - - - (27.9) (27.9) - (27.9)
At 31 December 2010 5.0 158.2 924.0 361.6 1,448.8 45.9 1,494.7
(restated)
-------- ------- -------- -------- -------- -------- --------
GROUP CASH FLOW STATEMENT
2011 2010
Note GBPm GBPm
Operating activities
Cash received from tenants 116.8 117.1
Direct property expenses (13.1) (9.8)
Cash paid to and on behalf of employees (14.4) (13.7)
Other administrative expenses (5.2) (5.7)
Interest received - 0.1
Interest paid 7 (36.5) (38.8)
Other finance costs (1.8) (1.8)
Other income 2.1 2.1
Tax paid in respect of operating activities (0.7) (3.0)
Net cash from operating activities 47.2 46.5
Investing activities
Acquisition of investment properties (91.6) (148.0)
Capital expenditure on investment properties 7 (42.6) (49.5)
Disposal of investment properties 131.5 8.5
Purchase of property, plant and equipment (0.2) (0.4)
Disposal of property, plant and equipment - 0.1
Distributions received from joint ventures 0.3 -
Advances to minority interest holder (0.8) (1.0)
Net cash used in investing activities (3.4) (190.3)
Financing activities
Net proceeds of bond issue 170.2 -
Repayment of revolving bank loan (75.0) (94.2)
Drawdown of new revolving bank loan - 60.0
Net movement in other revolving bank
loans (179.1) 193.0
Drawdown of non-revolving bank loans 67.5 0.3
Repayment of loan notes - (0.3)
Net proceeds of share issues - 1.3
Dividends paid to minority interest
holder (0.1) -
Dividends paid 17 (25.4) (27.8)
Net cash (used in)/from financing activities (41.9) 132.3
Increase/(decrease) in cash and cash
equivalents in the year 1.9 (11.5)
Cash and cash equivalents at the beginning
of the year 1.6 13.1
Cash and cash equivalents at the end
of the year 20 3.5 1.6
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
The financial information does not constitute the Group's
statutory accounts for either the year ended 31 December 2011 or
the year ended 31 December 2010, but is derived from those
accounts. The Group's statutory accounts for 2010 have been
delivered to the Registrar of Companies and those for 2011 will be
delivered following the Company's annual general meeting. The
auditor's reports on both the 2010 and 2011 accounts were
unqualified; did not draw attention to any matters by way of an
emphasis; and did not contain any statement under Section 498 of
the Companies Act 2006.
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS), as adopted by
the European Union, IFRIC interpretations and with those parts of
the Companies Act 2006 applicable to companies reporting under
IFRS. The financial statements have been prepared under the
historical cost convention as modified by the revaluation of
investment properties, property, plant and equipment, available for
sale investments, and financial assets and liabilities held for
trading. The accounting policies used are consistent with those
applied in the 2010 annual financial statements, as amended to
reflect the adoption of new standards, amendments and
interpretations which became effective in the year and the
presentational changes outlined below.
2. Changes in accounting policies
New standards adopted during the year
The following standards, amendments and interpretations endorsed
by the EU are effective for the first time for the Group's 31
December 2011 year end:
IAS 24 Related Party Disclosures (revised);
IAS 32 Financial Instruments: Presentation (amendment);
IFRIC 14 IAS 19 The Limit of a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction;
IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments; and
Amendments arising from the 2010 annual improvements
project.
These had no material impact on the financial statements.
Standards and interpretations in issue but not yet effective
At the date of authorisation of these financial statements, the
following standards and interpretations applicable to the Group's
financial statements which have not been applied in these financial
statements were in issue but not yet effective at the year end. The
following standards are deemed not relevant to the Group or to have
no material impact on the financial statements of the Group when
the relevant standards come into effect:
IFRS 7 Financial Instruments Disclosures (amendment);
IFRS 9 Financial Instruments;
IFRS 12 Disclosure of Interests in Other Entities;
IFRS 13 Fair Value Measurement;
IAS1 Presentation of Financial Statements (amendment);
IAS 12 Income taxes (amendment);
IAS 19 Employee Benefits (amendment);
IAS 27 Separate Financial Statements; and
IAS 28 Investments in Associates and Joint Ventures.
The following standards will affect the accounting for any
future joint arrangements entered into by the Group:
IFRS 10 Consolidated Financial Statements; and
IFRS 11 Joint Arrangements;
Accounting policy changes
As a result of the issue of GBP175m convertible bonds in June
2011, the following accounting policy has been adopted by the
Group:
Convertible bonds
The fair value of the liability component of a convertible bond
is determined using the market interest rate for an equivalent
non-convertible bond. This amount is recorded as a liability on an
amortised cost basis until extinguished on conversion or maturity
of the bonds. The remainder of the proceeds is allocated to the
conversion option. This is recognised and included in shareholders'
equity, net of income tax effects and is not subsequently
re-measured. Issue costs are apportioned between the liability and
the equity components of the convertible bonds based on their
carrying amounts at the date of issue. The portion relating to the
equity component is charged directly against equity. The issue
costs apportioned to the liability are amortised over the life of
the bond. The issue costs apportioned to equity are not
amortised.
In addition, with effect from 1 January 2011, the Group has made
the following changes to its accounting policies:
Capitalisation of interest
In accordance with IAS 23, Borrowing Costs, interest has been
capitalised on development projects. The Group capitalises interest
on development expenditure at the average cost of borrowings during
the period. In the year to 31 December 2011 the Group capitalised
GBP2.2m of interest. Had the Group adopted this policy from 1
January 2010, interest of GBP0.2m would have been capitalised
during the year to 31 December 2010. Due to the immaterial amounts
involved in 2010 and prior years, the comparative figures have not
been restated for this accounting policy change.
Owner-occupied property
The Group occupies a portion of one of its properties. Due to an
increased level of occupation and an uplift in the valuation, the
Directors now consider the owner-occupied portion to be
significant. It has, therefore, been transferred to property, plant
and equipment from investment property in accordance with IAS 40,
Investment Property, and IAS 16, Property Plant and Equipment. This
part of the building is now being depreciated, in a similar way to
other tangible fixed assets, over its remaining useful life with
the depreciation included in administrative expenses. The
respective revaluation movement and associated deferred tax is
recognised in other comprehensive income as opposed to the income
statement and included within a revaluation reserve in equity
rather than in retained earnings.
As a result of this second accounting policy change, the
following adjustments have been made to the comparative income
statements, statements of comprehensive income, statements of
changes in equity and the balance sheets:
As previously
Restated position reported Impact
-------------------- --------------------- ------------------
2010 2009 2010 2009 2010 2009
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ -------- --------- ---------- --------- -------- --------
Income statement
Administrative expenses
* (20.9) (17.6) (20.8) (17.5) (0.1) (0.1)
Revaluation surplus/(deficit) 298.1 (79.6) 301.6 (81.1) (3.5) 1.5
Tax credit/(charge) - 8.7 (1.0) 9.4 1.0 (0.7)
-------- --------
Profit/(loss) for the
year 352.8 (24.8) 355.4 (25.5) (2.6) 0.7
Other comprehensive
income in the year
** 2.4 (4.5) (0.2) (3.8) 2.6 (0.7)
Overall impact on total
-------- --------
comprehensive income - -
======== ========
Basic earnings/(loss)
per share (p) 339.68 (25.89) 342.25 (26.59) (2.57) 0.70
Diluted earnings/(loss)
per share (p) 337.47 (25.89) 340.03 (26.59) (2.56) 0.70
Balance sheet
Property, Other
Investment plant reserves
and Retained
property equipment *** earnings
GBPm GBPm GBPm GBPm
---------- --------- -------- --------
01 January 2009
As previously reported 2,085.6 1.2 923.4 95.0
Restated position 2,072.3 14.5 927.6 90.8
---------- --------- -------- --------
Impact (13.3) 13.3 4.2 (4.2)
---------- --------- -------- --------
31 December 2009
As previously reported 1,888.6 1.4 916.8 48.5
Restated position 1,876.9 13.1 920.1 45.2
---------- --------- -------- --------
Impact (11.7) 11.7 3.3 (3.3)
---------- --------- -------- --------
31 December 2010
As previously reported 2,388.5 1.5 918.1 367.5
Restated position 2,373.3 16.7 924.0 361.6
---------- --------- -------- --------
Impact (15.2) 15.2 5.9 (5.9)
---------- --------- -------- --------
* Restatement due to the depreciation charge on the
owner-occupied portion of the investment property.
** Represents the revaluation surplus, net of deferred tax, for
the owner-occupied portion of the investment property, previously
reported in the income statement.
*** The difference represents the transfer from retained
earnings to the accumulated revaluation reserve, net of deferred
tax, of the owner-occupied portion of the investment property.
3. Significant judgments, key assumptions and estimates
Some of the significant accounting policies require management
to make difficult, subjective or complex judgments or estimates.
The following is a summary of those policies which management
consider critical because of the level of complexity, judgment or
estimation involved in their application and their impact on the
financial statements. Other than judgements for compulsory purchase
orders, which are no longer applicable, these are the same
judgements identified at the previous year end.
- Trade receivables
- Exceptional items
- Property portfolio valuation
- Outstanding rent reviews
- Compliance with the real estate investment trust (REIT)
taxation regime
A full discussion of these policies will be included in the 2011
financial statements.
4. Segmental information
IFRS 8, Operating Segments, requires operating segments to be
identified on the basis of internal financial reports about
components of the Group that are regularly reviewed by the chief
operating decision maker (which in the Group's case is its
executive Board comprising the six executive Directors) in order to
allocate resources to the segments and to assess their
performance.
The internal financial reports received by the Group's executive
Board contain financial information at a Group level as a whole and
there are no reconciling items between the results contained in
these reports and the amounts reported in the financial statements.
These internal financial reports include the IFRS figures but also
report the non-IFRS figures for the adjusted earnings per share,
net asset value and profit figures. Reconciliations of each of
these figures to their statutory equivalents are detailed in note
10. Additionally, information is provided to the executive Board
showing gross property income and investment property valuation by
individual property. Therefore, for the purposes of IFRS 8, each
individual property is considered to be a separate operating
segment in that its performance is monitored individually.
The Group's property portfolio includes investment property,
owner-occupied property and assets held for sale and comprises 92%
office buildings* by value. The Directors consider that these
properties have similar economic characteristics. Therefore, these
individual properties have been aggregated into a single operating
segment. The remaining 8% represents a mixture of retail, hotel,
residential and light industrial properties, as well as land, each
of which is de minimis in its own right. Accordingly, the Directors
are of the view that it is appropriate to disclose two reportable
segments, 'office buildings' and 'other', by reference to gross
property income and property value.
No tenant accounts for more than 10% of gross property income in
either 2011 or 2010, and no individual property accounts for more
than 10% of the value of the property portfolio in either year.
*Some office buildings have an ancillary element such as retail
or residential.
Property portfolio Carrying value Fair value
------------------------- ------------------------
2011 2010 2011 2010
GBPm GBPm GBPm GBPm
Office buildings 2,397.1 2,173.8 2,439.3 2,205.8
Other 202.4 214.7 207.2 220.3
2,599.5 2,388.5 2,646.5 2,426.1
A reconciliation between fair value and carrying value of the portfolio
is set out in note 11.
Gross property income 2011 2010
GBPm GBPm
Office buildings 115.5 109.2
Other 10.0 10.2
125.5 119.4
All of the Group's properties are based in the UK. The Group
also has a joint venture in Prague which represents 0.2% of the
Group's assets and is excluded from this analysis. No geographical
grouping is contained in any of the internal financial reports
provided to the Group's executive Board. Therefore, no geographical
segmental analysis is required by IFRS 8. However, the following
analysis is included to provide users with additional information
regarding the geographical areas contained in the business
review.
Property portfolio Carrying value Fair value
------------------ ------------------
2011 2010 2011 2010
GBPm GBPm GBPm GBPm
West End central 1,786.3 1,662.6 1,806.7 1,679.7
West End borders 220.3 174.5 231.4 178.2
City borders 482.9 443.3 493.7 456.1
Provincial 110.0 108.1 114.7 112.1
2,599.5 2,388.5 2,646.5 2,426.1
Gross property income 2011 2010
GBPm GBPm
West End central 82.5 82.6
West End borders 9.2 7.3
City borders 27.5 23.9
Provincial 6.3 5.6
125.5 119.4
5. Income
2011 2010
GBPm GBPm
Rental income 124.1 118.8
------ ------
Surrender premiums received 2.4 0.7
Write-off of associated rents previously recognised
in advance (1.0) (0.1)
----------------------------------------------------- ------ ------
1.4 0.6
Gross property income 125.5 119.4
Other income 2.0 1.7
127.5 121.1
Included within rental income is GBP1.8m (2010: GBP1.0m) of
income from a lease at one of the Group's buildings where an
agreement was entered into to restructure the lease arrangements
such that the Group could obtain possession of the building whilst
maintaining rental income. The Group has included the income from
this building within gross property income as, although similar to
a lease surrender arrangement, the Group's entitlement to this
rental income is linked to its continued ownership of the property
rather than being an unconditional amount receivable (whether as an
upfront payment or through a series of instalments). Additionally,
rental income includes GBP8.8m (2010: GBP5.4m) relating to rents
recognised in advance of the cash receipts.
Other income relates to fees and commissions earned in relation
to the management of the Group's properties and is recognised in
the Group income statement in accordance with the delivery of
services. It also includes GBP0.2m (2010: GBPnil) of development
income which represents the finalisation of the profit share earned
by the Group from the project management of the construction and
letting of a property on behalf of a third party.
6. Profit on disposal of investment property
2011 2010
GBPm GBPm
Gross disposal proceeds 132.5 1.1
Costs of disposal (1.2) -
------- ------
Net disposal proceeds 131.3 1.1
Carrying value (95.0) (0.2)
Adjustment for rents recognised in advance (0.2) -
36.1 0.9
7. Finance income and costs
2011 2010
GBPm GBPm
Finance income
Return on pension plan assets 0.8 0.8
Other 0.3 1.1
Total finance income 1.1 1.9
Finance costs
Bank loans and overdraft 27.0 25.4
Non-utilisation fees 1.9 1.4
Secured bonds 11.4 11.4
Unsecured convertible bonds 3.8 -
Amortisation of issue and arrangement costs 2.0 1.0
Amortisation of the fair value of the secured
bonds (0.8) (0.8)
Finance leases 0.5 0.5
Pension interest costs 0.6 0.6
Foreign exchange loss - 0.2
Other 0.1 0.1
Gross interest costs 46.5 39.8
Less: interest capitalised (2.2) -
Total finance costs 44.3 39.8
Interest of GBP2.2m (2010: GBPnil) has been capitalised on
development projects, in accordance with IAS 23, Borrowing Costs,
using the Group's average cost of borrowings during each quarter.
Total interest paid during 2011 was GBP38.5m (2010: GBP38.8m) of
which GBP2.0m (2010: GBPnil) was included in capital expenditure on
investment properties in the Group cash flow statement under
investing activities.
The foreign exchange loss in 2010 of GBP0.2m resulted from the
translation of an intercompany loan from a non-trading US
subsidiary. The impact on net asset value from this exchange
movement was minimal as there is an offsetting entry in equity (see
Group statement of comprehensive income). During 2011, there was no
exchange loss or gain on the intercompany loan.
Other finance income in 2010 included GBP0.8m received as a
contribution towards the costs of arranging alternative financing
upon the early repayment of a banking facility. In accordance with
IAS 39, Financial Investments: Recognition and Measurement, this
amount was credited to the income statement. No such contribution
was received in 2011.
8. Share of results of joint ventures
2011 2010
GBPm GBPm
Revaluation surplus 0.9 0.9
Other profit from operations after tax 0.6 1.1
1.5 2.0
9. Tax credit
2011 2010
Restated
GBPm GBPm
Corporation tax credit/(charge)
UK corporation tax and income tax on profit
for the year (0.5) (1.2)
Other adjustments in respect of prior years'
tax 1.8 0.2
1.3 (1.0)
Deferred tax credit
Origination and reversal of temporary differences 0.4 0.8
Adjustment for changes in estimates (0.4) 0.2
- 1.0
1.3 -
In addition, GBP0.7m (2010: GBPnil) of deferred tax was
recognised in the statement of comprehensive income relating to
revaluation of the owner-occupied investment property.
The effective rate of tax for 2011 is lower (2010: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2011 2010
Restated
GBPm GBPm
Profit before tax 233.0 352.8
------- --------
Expected tax charge based on the
standard rate of
corporation tax in the UK of
26.5% (2010: 28.0%)* (61.7) (98.8)
Difference between tax and accounting
profit on disposals 9.6 1.6
REIT exempt income 7.6 8.5
Revaluation surplus attributable
to REIT properties 44.5 83.3
Expenses and fair value adjustments not (allowable)/deductible
for tax purposes (3.2) 1.4
Capital allowances 3.8 3.4
Other differences (1.1) 0.4
Tax charge on current year's profit (0.5) (0.2)
Adjustments in respect of prior
years' tax 1.8 0.2
1.3 -
*The expected tax rate for 2011 has been changed in line with
the 2011 Finance Act.
10. Profit before tax, earnings and net asset value per
share
On 2 June 2011, the Group issued GBP175m of unsecured
convertible bonds. The initial conversion price of the bonds was
set at GBP22.22 and the share price at 31 December 2011 was
GBP15.60. Although it is not expected that the bonds would be
converted at this share price, the dilutive effect of these shares
is required to be recognised in accordance with IAS 33, Earnings
Per Share. For the year ended 31 December 2011, these shares are
dilutive for basic earnings per share. However, they are
anti-dilutive for both EPRA and underlying earnings per share and
all net asset per share measures, and have therefore been excluded
from those calculations.
Earnings per share Net asset value
per share
------------------------------- -------------------- ------------------
Weighted average At 31 December
-------------------- ------------------
2011 2010 2011 2010
'000 '000 '000 '000
------------------------------- --------- --------- -------- --------
Number of shares
For use in basic measures 101,375 101,155 101,641 101,200
Dilutive effect of convertible 4,587 - - -
bonds
Dilutive effect of share-based
payments 667 661 656 669
------------------------------- --------- --------- -------- --------
For use in diluted earnings
per share 106,629 101,816 102,297 101,869
Less dilutive effect of (4,587) - - -
convertible bonds
------------------------------- --------- --------- -------- --------
For use in other diluted
measures 102,042 101,816 102,297 101,869
Profit Earnings Diluted
before per earnings
tax Earnings share per share
GBPm GBPm p p
---------------------------------------- -------- -------- -------- ---------
Diluted earnings for year ended
31 December 2011 232.1 217.67
Interest effect of dilutive convertible
bond (3.8)
-------- -------- ---------
Undiluted profit/earnings 233.0 228.3 225.20
Adjustment for:
Disposal of properties (36.1) (36.1)
Group revaluation surplus (170.1) (169.5)
Joint venture revaluation surplus (0.9) (0.9)
Fair value movement in derivative
financial instruments 26.5 26.5
Movement in valuation of cash-settled
share options (0.1) (0.1)
Minority interests in respect
of the above - 4.1
------------------------------------------ -------- -------- -------- ---------
EPRA 52.3 52.3 51.59 51.25
Rates credits (1.6) (1.6)
------------------------------------------ -------- -------- -------- ---------
Underlying 50.7 50.7 50.01 49.69
Year ended 31 December 2010 (restated) 352.8 343.6 339.68 337.47
Adjustment for:
Disposal of properties (0.9) (0.9)
Group revaluation surplus (298.1) (298.3)
Joint venture revaluation surplus (0.9) (0.9)
Fair value movement in derivative
financial instruments 2.4 2.4
Movement in valuation of cash-settled
share options (0.1) 0.1
Minority interests in respect
of the above - 7.5
------------------------------------------ -------- -------- -------- ---------
EPRA (restated) 55.2 53.5 52.89 52.55
Foreign exchange loss 0.2 0.2
Rates credits (1.7) (1.7)
------------------------------------------ -------- -------- -------- ---------
Underlying (restated) 53.7 52.0 51.41 51.07
The figures for 2010 have been restated for the change in accounting
policy in respect of owner-occupied property as outlined in note
2.
Basic Diluted
GBPm p p
----------------------------------------------- -------- ------ -------
At 31 December 2011
Net assets 1,714.5
Minority interest (51.8)
------------------------------------------------- -------- ------ -------
Net assets attributable to equity shareholders 1,662.7 1,636 1,625
Adjustment for:
Deferred tax on revaluation surplus 8.2
Fair value of derivative financial instruments 50.3
Fair value adjustment to secured bonds 18.6
------------------------------------------------ -------- ------ -------
EPRA adjusted net asset value 1,739.8 1,712 1,701
Adjustment for:
Deferred tax on revaluation surplus (8.2)
Fair value of derivative financial instruments (50.3)
Mark-to-market of unsecured bonds 2.4
Mark-to-market of secured bonds (39.4)
------------------------------------------------ -------- ------ -------
EPRA triple net asset value 1,644.3 1,618 1,607
At 31 December 2010
Net assets 1,494.7
Minority interest (45.9)
------------------------------------------------- -------- ------ -------
Net assets attributable to equity shareholders 1,448.8 1,432 1,422
Adjustment for:
Deferred tax on revaluation surplus 8.6
Fair value of derivative financial instruments 25.0
Fair value adjustment to secured bonds 19.4
------------------------------------------------ -------- ------ -------
EPRA adjusted net asset value 1,501.8 1,484 1,474
Adjustment for:
Deferred tax on revaluation surplus (8.6)
Fair value of derivative financial instruments (25.0)
Mark-to-market of secured bonds (16.7)
------------------------------------------------ -------- ------ -------
EPRA triple net asset value 1,451.5 1,434 1,425
11. Investment property
Total Owner- Assets Total
held
investment occupied for property
Freehold Leasehold property property sale portfolio
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
At 1 January 2011 1,965.7 407.6 2,373.3 15.2 - 2,388.5
-------- --------- ---------- -------- ------ ---------
Acquisitions 85.5 6.1 91.6 - - 91.6
Capital expenditure 32.5 6.5 39.0 - 2.0 41.0
-------------------------------- -------- --------- ---------- -------- ------ ---------
Additions 118.0 12.6 130.6 - 2.0 132.6
Interest capitalisation 1.9 0.3 2.2 - - 2.2
Disposals (95.0) - (95.0) - - (95.0)
Depreciation - - - (0.1) - (0.1)
Transfers (58.0) (66.3) (124.3) - 123.5 (0.8)
Revaluation 136.3 21.8 158.1 2.0 12.0 172.1
At 31 December 2011 2,068.9 376.0 2,444.9 17.1 137.5 2,599.5
At 1 January 2010 (restated) 1,526.1 350.8 1,876.9 11.7 - 1,888.6
-------- --------- ---------- -------- ------ ---------
Acquisitions 148.0 - 148.0 - - 148.0
Capital expenditure 42.1 7.4 49.5 - - 49.5
-------------------------------- -------- --------- ---------- -------- ------ ---------
Additions 190.1 7.4 197.5 - - 197.5
Transfer from trading property 1.0 - 1.0 - - 1.0
Disposals - (0.2) (0.2) - - (0.2)
Depreciation - - - (0.1) - (0.1)
Revaluation 248.5 49.6 298.1 3.6 - 301.7
At 31 December 2010 (restated) 1,965.7 407.6 2,373.3 15.2 - 2,388.5
At 1 January 2009 (restated) 1,709.2 363.1 2,072.3 13.3 - 2,085.6
-------- --------- ---------- -------- ------ ---------
Acquisitions - 9.8 9.8 - - 9.8
Capital expenditure 80.2 11.3 91.5 - - 91.5
-------------------------------- -------- --------- ---------- -------- ------ ---------
Additions 80.2 21.1 101.3 - - 101.3
Disposals (207.9) (8.1) (216.0) - - (216.0)
Depreciation - - - (0.1) - (0.1)
Revaluation (55.4) (24.1) (79.5) (1.5) - (81.0)
Grossing up of headlease
liabilities - (1.2) (1.2) - - (1.2)
At 31 December 2009 (restated) 1,526.1 350.8 1,876.9 11.7 - 1,888.6
Adjustments from fair value to
carrying value
At 31 December 2011
Fair value 2,118.4 373.8 2,492.2 17.1 137.2 2,646.5
Rents recognised in advance (49.5) (4.1) (53.6) - (0.8) (54.4)
Grossing up of headlease
liabilities - 6.3 6.3 - 1.1 7.4
Carrying value 2,068.9 376.0 2,444.9 17.1 137.5 2,599.5
At 31 December 2010
Fair value 2,007.9 403.0 2,410.9 15.2 - 2,426.1
Rents recognised in advance (42.2) (2.8) (45.0) - - (45.0)
Grossing up of headlease
liabilities - 7.4 7.4 - - 7.4
Carrying value 1,965.7 407.6 2,373.3 15.2 - 2,388.5
At December 2009
Fair value 1,561.6 345.1 1,906.7 11.7 - 1,918.4
Rents recognised in advance (35.5) (1.7) (37.2) - - (37.2)
Grossing up of headlease
liabilities - 7.4 7.4 - - 7.4
Carrying value 1,526.1 350.8 1,876.9 11.7 - 1,888.6
The property portfolio was revalued at 31 December 2011 by
external valuers, on the basis of market value as defined by the
Valuation Standards published by The Royal Institution of Chartered
Surveyors. CBRE Limited valued properties at GBP2,615.2m (2010:
GBP2,396.2m, 2009: GBP1,889.9m) and other valuers at GBP31.3m
(2010: GBP29.9m, 2009: GBP28.5m). Of the properties revalued by
CBRE, GBP17.1m (2010: GBP15.2m, 2009: GBP11.7m) relating to
owner-occupied property was included within property, plant and
equipment and GBP137.5m (2010: GBPnil, 2009: GBPnil) was included
within non-current assets held for sale.
The figures for 31 December 2010 and 31 December 2009 have been
restated for the change in accounting policy in respect of
owner-occupied property as outlined in note 2. Also see note 2 for
the accounting policy in relation to interest capitalisation.
The revaluation surplus in the income statement of GBP170.1m for
the year ended 31 December 2011 (2010: GBP298.1m) included the
revaluation surplus for the non-current assets held for sale of
GBP12.0m (2010: GBPnil). The revaluation surplus for the
owner-occupied property of GBP2.0m (2010: GBP3.6m) was included
within the revaluation reserve.
The transfer of GBP0.8m (2010: GBPnil, 2009: GBPnil) relates to
artwork held at the Group's properties which was previously
capitalised as part of the property. However, as these items are
transferable and would not necessarily be included with a sale of a
property they have been transferred to property, plant and
equipment in the current year (see note 12).
2011 2010 2009
(restated) (restated)
GBPm GBPm GBPm
Historical cost
Investment property 2,055.5 2,085.8 1,887.6
Owner-occupied property 7.3 7.3 7.2
Assets held for sale 69.2 - -
------- ---------- ----------
Total property portfolio 2,132.0 2,093.1 1,894.8
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2011 15.2 0.7 0.8 16.7
Additions - - 0.3 0.3
Transfers - 0.8 - 0.8
Depreciation (0.1) - (0.3) (0.4)
Revaluation 2.0 - - 2.0
At 31 December 2011 17.1 1.5 0.8 19.4
At 1 January 2010 (restated) 11.7 0.7 0.7 13.1
Additions - - 0.4 0.4
Disposals - - (0.1) (0.1)
Depreciation (0.1) - (0.2) (0.3)
Revaluation 3.6 - - 3.6
At 31 December 2010
(restated) 15.2 0.7 0.8 16.7
At 1 January 2009 (restated) 13.3 0.7 0.5 14.5
Additions - - 0.4 0.4
Depreciation (0.1) - (0.2) (0.3)
Revaluation (1.5) - - (1.5)
At 31 December 2009
(restated) 11.7 0.7 0.7 13.1
Net book value
Cost or valuation 17.1 1.5 1.8 20.4
Accumulated depreciation - - (1.0) (1.0)
At 31 December 2011 17.1 1.5 0.8 19.4
Net book value
Cost or valuation 15.2 0.7 2.9 18.8
Accumulated depreciation - - (2.1) (2.1)
At 31 December 2010
(restated) 15.2 0.7 0.8 16.7
Net book value
Cost or valuation 11.7 0.7 2.7 15.1
Accumulated depreciation - - (2.0) (2.0)
At 31 December 2009
(restated) 11.7 0.7 0.7 13.1
The artwork is periodically valued by Bonhams on the basis of
open market value and the Directors consider whether any valuation
movements have taken place prior to each year end. The latest
valuation was carried out in March 2011.
The historic cost of the artwork in the Group at 31 December
2011 was GBP1.5m (2010: GBP0.7m). See note 11 for the historic cost
of owner-occupied property.
13. Other receivables (non-current)
2011 2010
GBPm GBPm
Accrued income 50.1 41.3
Other 5.3 4.5
55.4 45.8
Accrued income relates to rents recognised in advance as a
result of spreading the effect of rent free periods and capital
contributions in lieu of rent free periods as well as contractual
rent increases during the lease over the term of their respective
leases. At 31 December 2011, the total rents recognised in advance
were GBP54.4m (2010: GBP45.0m), with GBP4.3m of this amount (2010:
GBP3.7m) included as current assets within trade and other
receivables.
14. Non-current assets held for sale
2011 2010
GBPm GBPm
Investment properties (see note 11) 137.5 -
137.5 -
In February 2012, the Group signed a joint venture agreement
with Grosvenor, the freeholder of 1-5 Grosvenor Place SW1 to
consider the redevelopment of the site. As part of this
transaction, the Group was granted a 150-year headlease and sold
50% of its ownership to Grosvenor for GBP60m, before costs. In
addition, the Group has exchanged contracts to sell two properties
with completion conditional on a suitable planning permission the
receipt of which is expected to occur during the second half of
2012. Therefore, at 31 December 2011, these properties have been
recognised as non-current assets held for sale in accordance with
IFRS 5, Non-current Assets Held for Sale. See note 11 for historic
cost of non-current assets held for sale.
15. Borrowings and derivatives financial instruments
2011 2010
GBPm GBPm
Current liabilities
Bank overdraft - 5.6
Unsecured bank loan 31.4 -
Loan notes 1.1 -
32.5 5.6
Non-current liabilities
2.75% unsecured convertible bonds 2016 162.4 -
6.5% secured bonds 2026 192.2 192.9
Bank loans 473.5 656.6
Unsecured bank loan - 31.4
Loan notes - 1.1
Leasehold liabilities 7.4 7.4
835.5 889.4
Derivative financial instruments expiring
in greater than one year 51.9 25.4
Total liabilities 919.9 920.4
Reconciliation to net debt:
Total borrowings and derivative financial
instruments 919.9 920.4
Less:
Derivative financial instruments (51.9) (25.4)
Cash and cash equivalents (3.5) (7.2)
Net debt 864.5 887.8
In June 2011 the Group issued a convertible bond. The unsecured
instrument pays a coupon of 2.75% until July 2016. In accordance
with IFRS the equity and debt components of the bond are accounted
for separately and the fair value of the debt component has been
determined using the market interest rate for an equivalent
non-convertible bond. As a result, GBP165.4m was recognised as a
liability in the balance sheet on issue and the remainder of the
proceeds, GBP9.6m, which represents the equity component, was
credited to reserves. The difference between the fair value of the
liability and the principal value is amortised through the income
statement from the date of issue. Issue costs of GBP4.8m have been
allocated between equity and debt and the element relating to the
debt component is amortised over the life of the bond. The issue
costs apportioned to equity of GBP0.2m are not amortised. The
carrying value at 31 December 2011 was GBP162.4m.
Reconciliation of nominal value to carrying value:
GBPm
Nominal value 175.0
Fair value adjustment on issue
allocated to equity (9.6)
------
Debt component on issue 165.4
Unamortised issue costs (4.0)
Amortisation of fair value adjustment 1.0
------
Carrying amount included in total debt
at 31 December 2011 162.4
16. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2011 8.9 (3.0) 5.9
Released during the year in other
comprehensive income (0.7) - (0.7)
Provided/(released) during the year
in the income statement 1.2 (0.8) 0.4
Change in tax rates (0.6) 0.2 (0.4)
At 31 December 2011 8.8 (3.6) 5.2
At 1 January 2010 8.1 (2.2) 5.9
Provided during the year in other
comprehensive income 1.0 - 1.0
Provided/(released) during the year
in the income statement 0.1 (0.9) (0.8)
Changes in tax rates (0.3) 0.1 (0.2)
At 31 December 2010 8.9 (3.0) 5.9
Deferred tax on the revaluation surplus is calculated on the
basis of the chargeable gains that would crystallise on the sale of
the investment property portfolio as at each balance sheet date.
The calculation takes account of indexation on the historic cost of
the properties and any available capital losses. Due to the Group's
REIT status, deferred tax is only provided at each balance sheet
date on properties outside of the REIT regime.
17. Dividends
Dividend
per
Payment share 2011 2010
date p GBPm GBPm
Current year
2011 final dividend 15 June 2012 21.90 - -
4 November
2011 interim dividend 2011 9.45 9.6 -
-------- ------ ------
Distribution of current year profit 31.35 9.6 -
Prior year
2010 final dividend 16 June 2011 20.25 20.5 -
5 November
2010 interim dividend 2010 8.75 - 8.8
-------- ------ ------
Distribution of prior year profit 29.00 20.5 8.8
2009 final dividend 17 June 2010 18.85 - 19.1
-------- ------ ------
Dividends as reported in the Group
statement
of changes in equity 30.1 27.9
------ ------
2011 interim dividend witholding 27 January (1.4) -
tax 2012
2011 interim scrip dividend 4 November (2.3) -
2011
2010 final scrip dividend 16 June 2011 (2.4) -
2010 interim dividend withholding 14 January
tax 2011 1.4 (1.4)
2009 interim dividend withholding 14 January
tax 2010 - 1.3
------ ------
Dividends paid as reported in
the Group cash
flow statement 25.4 27.8
------ ------
18. Gearing ratios
Balance sheet gearing
2011 2010
GBPm GBPm
Net debt 864.5 887.8
Net assets 1,714.5 1,494.7
Balance sheet gearing 50.4% 59.4%
Loan to value ratio
2011 2010
GBPm GBPm
Net debt 864.5 887.8
Unamortised issue costs and fair value adjustment
of secured bonds (18.6) (19.4)
Unamortised arrangement costs 7.9 5.9
Leasehold liabilities (7.4) (7.4)
Drawn facilities 846.4 866.9
Fair value of property portfolio 2,646.5 2,426.1
Loan to value ratio 32.0% 35.7%
Interest cover ratio
2011 2010
GBPm GBPm
Gross property income 125.5 119.4
Surrender premiums (2.4) (0.7)
Ground rent (0.8) (0.8)
Gross rental income net of ground rent 122.3 117.9
Net finance costs 43.2 37.9
Foreign exchange loss - (0.2)
Net pension return 0.2 0.3
Finance lease costs (0.5) (0.5)
Amortisation of fair value adjustment to secured
bonds 0.8 0.8
Amortisation of issue and arrangement costs (2.0) (1.0)
Non-utilisation fees (1.9) (1.4)
Net interest payable 39.8 35.9
Interest cover ratio 307% 328%
19. Total return
2011 2010
% %
Total return 17.4 29.3
20. Cash and cash equivalents
2011 2010
GBPm GBPm
Overdrafts - (5.6)
Short-term deposits 3.5 7.2
3.5 1.6
21. Post balance sheet events
In February 2012, the Group signed a joint venture agreement
with Grosvenor for the future redevelopment of 1-5 Grosvenor Place,
Belgravia SW1. As part of the transaction the headleases, that were
due to expire in 2063 and 2084, were regeared into a new 150-year
term at a ground rent of 5% of rental income. Simultaneously, the
Group has sold 50% of its ownership to Grosvenor and received
GBP60m, before costs.
22. Risk Management
Risk management and internal control
Risk is an inherent part of running a business and, whilst the
Board aims to maximise returns, the associated risks must be
understood and managed. Overall responsibility for this process
rests with the Board whilst executive management is responsible for
designing, implementing and maintaining the necessary systems of
control.
During 2011, the Board recognised the raised profile being given
to risk management in the UK Corporate Governance Code and decided
to establish a Risk Committee to increase the focus of the Group's
work in this area. The committee first met in November 2011 and
consists of June de Moller, John Burns and Damian Wisniewski under
the chairmanship of Stephen Young.
The Group operates principally from one central London office
with a relatively flat management structure. This enables the
executive Directors to be closely involved in day-to-day matters
and therefore able to quickly identify and respond to risks.
A key element in the systems of control is the Group's risk
register which is reviewed formally once a year. The register is
initially prepared by the executive Board which, having identified
the risks, collectively assesses the severity of each risk, the
likelihood of it occurring and the strength of the controls in
place. This approach allows the effect of any mitigating procedures
to be considered and recognises that risk cannot be totally
eliminated at an acceptable cost. There are also some risks that,
with its experience and after due consideration, the Board will
choose to accept.
The register, its method of preparation and the operation of the
key controls in the Group's system of internal control, is then
reviewed and commented upon by the risk committee before being
considered and adopted by the full Board. The register was reviewed
between December 2011 and February 2012 and the principal risks and
uncertainties that the Group faces in 2012, together with the
controls and mitigating factors, are set out below:
Strategic risks
That the Group's strategy doesn't create the anticipated shareholder
value or fails to meet investors' expectations.
Risk and effect Controls and mitigation Action
* The Group's strategy is inconsistent with the state * Each year the Group carries out a five-year strategic * The Board carried out its last annual strategic
of the market in which it operates. The Group review, prepares a budget and also frequent rolling review in June 2011 and considered the sensitivity of
benefits from a strong central London market. This forecasts covering the next two years. In the course six key measures to changes in eight underlying
could be adversely affected by, amongst other facto of both exercises the Board considers the effect on assumptions including interest rates, property yields
rs key ratios of changing the main underlying rental growth and capital recycling.
ongoing crisis in the Eurozone, the introduction of assumptions.
a
"Tobin" tax or the loss of London's current "safe
haven" status. * The three rolling forecasts prepared during the year
* The Group's plans can then be set so as to best focused on the same key measures but considered the
realise its long-term strategic goals given the effect of varying different assumptions to reflect
likely prevailing economic and market conditions. changing economic and market conditions.
* The Group's development programme is not consistent This flexibility arises from the policy of
with the economic cycle. maintaining income from properties as far as possible
until development starts.
* The timing of the Group's development programme and
the strategies for individual properties reflect the
outcome of these considerations.
* Over 50% of the Group's portfolio has been identified
for future redevelopment. This enables the Board to
delay marginal projects until market conditions are
favourable.
* The risk remains significant and therefore in setting
its plans the Board pays particular attention to
maintaining sufficient headroom in all the Group's
key ratios, financial covenants and interest cover.
Financial risks
That the Group becomes unable to meet its financial obligations
or finance the business appropriately.
Risk and effect Controls and mitigation Action
* A substantial decline in property values or a * The Group's secured borrowings contain financial * The Group issued GBP175 million of unsecured
material loss of rental income could result in a covenants based on specific security and not convertible bonds during 2011.
breach of the Group's financial covenants. This may corporate ratios such as overall balance sheet
accelerate the repayment of the Group's borrowings or gearing. Treasury control schedules are updated
result in their cancellation. weekly whilst the rolling forecasts enable any
potential problems to be identified at an early stage * The Group tested its compliance with its financial
and corrective action to be taken. The Group has covenants regularly and operated comfortably within
considerable headroom under its financial covenants, these limits throughout 2011. Property values could
operates at a modest level of gearing and has a decline by 50% at the balance sheet date before there
substantial amount of uncharged property that could would be a breach of financial covenants.
be used in such circumstances.
* At the year end the Group owned GBP589m of uncharged
properties.
* The Group's cost of borrowing is increased due to an * The Group's five-year strategic review and rolling * The Group's financing comes from a number of
inability to raise finance from its preferred forecasts enables any financing requirement to be different sources/providers and has a varied maturity
sources. identified at an early stage. This allows the profile. The proportion of the Group's borrowings
preferred source of finance to be identified and provided by bank loans has fallen from 80% to 59%
evaluated and, to a degree, raised when market over the year.
conditions are favourable.
* During 2011 the Group refinanced GBP600 million.
* The weighted average duration of the Group's debt is
4.4 years.
* At the year end the Group had GBP469m of unutilised
committed bank facilities.
* Financing costs are higher due to increases in * The Group uses interest rate derivatives to "top up" * The Group has terminated two interest rate swaps
interest rates. the amount of fixed rate debt to a level commensurate which were at historic rates and initiated new
with the perceived risk to the Group. instruments which have enabled the Group to lock in
the lower rates that are available.
* 98% of borrowings were fixed or hedged at the year
end.
Operational risks
The Group suffers either a loss or adverse consequences due
to processes being inadequate or not operating correctly.
Risk and effects Controls and mitigation Action
* The Group's development projects do not produce the * Standardised appraisals including contingencies are * The Group is advised by top planning consultants and
anticipated financial return due to delays in the prepared for all investments and sensitivity analysis has considerable in-house planning expertise.
planning process, increased construction costs or is undertaken to ensure that an adequate return is
adverse letting conditions. made in all circumstances considered likely to occur.
* Executive directors represent the Group on a number
* The scale of the Group's development programme is of local bodies which ensures that it remains aware
managed to reflect anticipated market conditions. of local issues.
* Regular cost reports are produced which monitor
progress of actual expenditure against budget. This * The procurement process used by the Group includes
allows potential adverse variances to be identified the use of top firms of quantity surveyors and is
and addressed at an early stage. designed to minimise uncertainty regarding costs.
* Post completion reviews are carried out for all
developments to ensure that improvements to the * Development costs are benchmarked to ensure that the
Group's procedures are identified and implemented. Group obtains competitive pricing.
* The Group's style of accommodation remains in demand
as evidenced by the 100 lettings achieved in both
2010 and 2011.
* The Group has secured pre-lets for approximately 50%
of the space in its current development programme
which significantly "de-risks" these projects.
* The Group suffers a loss of rental income and * All prospective tenants are considered by the Group's * The Group has a diversified tenant base.
increased vacant property costs due to tenants credit committee and security is taken where
vacating or becoming bankrupt. In particular, in the appropriate either in the form of parent company
current adverse economic conditions, there is guarantees or rent deposits.
increased stress on consumer spending which could * The credit committee meets each week and considered
lead to higher business failures. 117 potential tenants during the year. The committee
* The Group's property managers maintain regular also monitors the content of a schedule of the
contact with tenants and work closely with any that tenants that the property managers are monitoring and
are facing financial difficulties. the actions being taken.
* In total the Group holds rental deposits amounting to
GBP11.3 m.
* On average, the Group has collected 98% of the rents
due within 14 days of the due date.
* The Group is unable to successfully implement its * The remuneration packages of all employees are * The Group has recruited 8 new members of staff during
strategy due to a failure to recruit and retain key benchmarked regularly. the year including key appointments in IT and
staff with appropriate skills. corporate communications.
* Six-monthly appraisals identify training requirements
which are fulfilled over the next year.
* Staff turnover during 2011 was low at 6%.
* The Group's cost base is increased or its reputation * The new Risk Committee will report to the Board * A Health and Safety report is presented at all
damaged through a breach of any of the legislation concerning the Group's regulatory risk. executive and main Board meetings.
that forms the regulatory framework within which the
Group operates.
* The Group employs a Health and Safety Manager.
* The Group pays considerable attention to
sustainability issues and produces a sustainability
* A sustainability committee chaired by Paul Williams report annually.
and advised by external consultants addresses risk in
this area.
Financial instruments - risk management
The Group is exposed through its operations to the following
financial risks:
-- credit risk;
-- fair value or cash flow interest rate risk; and
-- liquidity risk.
In common with all other businesses, the Group is exposed to
risks that arise from its use of financial instruments. The
following describes the Group's objectives, policies and processes
for managing those risks and the methods used to measure them.
Further quantitative information in respect of these risks is
presented throughout these condensed financial statements. There
have been no substantive changes in the Group's exposure to
financial instrument risks, its objectives, policies and processes
for managing those risks or the methods used to measure them from
previous periods.
Principal financial instruments
The principal financial instruments used by the Group, from
which financial instrument risk arises, are trade receivables, cash
at bank, bank overdraft, trade and other payables, floating rate
bank loans, secured and unsecured bonds, interest rate swaps and,
in 2010, interest rate caps.
General objectives, policies and processes
The Board has overall responsibility for the determination of
the Group's risk management objectives and policies and, whilst
retaining ultimate responsibility for them, it has delegated the
authority for designing and operating processes that ensure the
effective implementation of the objectives and policies to
executive management.
The overall objective of the Board is to set policies that seek
to reduce risk as far as possible without unduly affecting the
Group's flexibility and its ability to maximise returns. Further
details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations. The Group is mainly exposed to credit
risk from its lease contracts. It is Group policy to assess the
credit risk of new tenants before entering into contracts. The
Board has established a credit committee which assesses each new
tenant before a new lease is signed. The review includes the latest
sets of financial statements, external ratings, when available,
and, in some cases forecast information and bank and trade
references. The covenant strength of each tenant is determined
based on this review and, if appropriate, a deposit or a guarantee
is obtained.
As the Group operates predominantly in central London, it is
subject to some geographical risk. However, this is mitigated by
the wide range of tenants from a broad spectrum of business
sectors.
Credit risk also arises from cash and cash equivalents and
deposits with banks and financial institutions. For banks and
financial institutions, only independently rated parties with
minimum rating of investment grade are accepted. This risk is also
reduced by the short periods that money is on deposit at any one
time.
The carrying amount of financial assets recorded in the
financial statements represents the Group's maximum exposure to
credit risk without taking account of the value of any collateral
obtained.
Market risk
Market risk arises from the Group's use of interest bearing
instruments. It is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in interest rates (interest rate risk).
Fair value and cash flow interest rate risk
The Group is exposed to cash flow interest rate risk from
borrowings at variable rates. It is currently Group policy that
between 60% and 85% of external Group borrowings (excluding finance
lease payables) are at fixed rates. Where the Group wishes to vary
the amount of external fixed rate debt it holds (subject to it
being at least 60% and no more than 85% of expected Group
borrowings, as noted above), the Group makes use of interest rate
derivatives to achieve the desired interest rate profile. Although
the Board accepts that this policy neither protects the Group
entirely from the risk of paying rates in excess of current market
rates nor eliminates fully cash flow risk associated with
variability in interest payments, it considers that it achieves an
appropriate balance of exposure to these risks. At 31 December
2011, the portion of fixed debt held by the Group was above this
range at 98%. In January 2012, the interest rate swaps were broken
and replaced with a lower value of swap. This had the effect of
reducing this figure to 90%. During both 2011 and 2010, the Group's
borrowings at variable rate were denominated in sterling.
The Group monitors the interest rate exposure on a regular
basis.
The Group manages its cash flow interest rate risk by using
floating-to-fixed interest rate swaps. The Group generally raises
long-term borrowings at floating rates and swaps them into
fixed.
Liquidity risk
Liquidity risk arises from the Group's management of working
capital and the finance charges and principal repayments on its
debt instruments. It is the risk that the Group will encounter
difficulty in meeting its financial obligations as they fall
due.
The Group's policy is to ensure that it will always have
sufficient headroom in its loan facilities to allow it to meet its
liabilities when they become due. To achieve this aim, it seeks to
maintain committed facilities to meet the expected requirements.
The Group also seeks to reduce liquidity risk by fixing interest
rates (and hence cash flows) on a portion of its long-term
borrowings. This is further explained in the 'fair value and cash
flow interest rate risk' section above.
The executive management receives rolling three-month cash flow
projections on a monthly basis and three-year projections of loan
balances on a regular basis as part of the Group's forecasting
processes. At the balance sheet date, these projections indicated
that the Group expected to have sufficient liquid resources to meet
its obligations under all reasonably expected circumstances.
The Group's loan facilities are spread across a range of banks
so as to minimise any potential concentration of risk. The
liquidity risk of the Group is managed centrally by the finance
department.
Capital disclosures
The Group's capital comprises all components of equity (share
capital, share premium, other reserves, retained earnings and
minority interest).
The Group's objectives when maintaining capital are:
-- to safeguard the entity's ability to continue as a going
concern so that it can continue to provide returns for
shareholders; and
-- to provide an above average annualised total return to shareholders.
The Group sets the amount of capital it requires in proportion
to risk. The Group manages its capital structure and makes
adjustments to it in light of changes in economic conditions and
the risk characteristics of the underlying assets. In order to
maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to
shareholders, issue new shares, or sell assets to reduce debt.
Consistent with others in its industry, the Group monitors capital
on the basis of balance sheet gearing and the loan to value ratio.
During 2011, the Group's strategy, which was unchanged from 2010,
was to maintain the balance sheet gearing below 80% in normal
circumstances. These two gearing ratios as well as the interest
cover ratio are defined at the end of this announcement and are
derived in note 18.
23. Related parties
The Directors confirm that, to the best of their knowledge,
there were no significant related party transactions or changes in
related party transactions during the financial year ended 31
December 2011.
24. List of definitions
Net assets per share or net asset value (NAV)
Equity shareholders' funds divided by the number of ordinary
shares in issue at the balance sheet date.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the year attributable
to equity shareholders and are divided by the weighted average
number of ordinary shares in issue during the financial year to
arrive at earnings per share.
Diluted earnings per share
Earnings per share adjusted to include the dilutive effects of
potential shares issuable under the Group's share option schemes
and the convertible bond.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe's
leading property companies, investors and consultants who strive to
establish best practices in accounting, reporting and corporate
governance and to provide high-quality information to investors. In
October 2010, EPRA published its Best Practices Recommendations
(www.epra.com/media/EPRA_2010_BPR.pdf). This includes guidelines
for the calculation of the following performance measures:
- Adjusted net asset value per share;
- Adjusted earnings per share;
- Net initial yield;
- "Topped up" net initial yield; and
- Vacancy rate.
Derwent London has adopted the EPRA methodology for all of these
measures. In addition, in accordance with EPRA guidelines, we have
made Company specific adjustments to adjusted profit and adjusted
earnings per share to arrive at the underlying positions (see
below).
Underlying earnings per share
EPRA earnings per share adjusted for items which are excluded to
show the underlying trend.
Property income distribution (PID)
Dividends from profits of the Group's tax-exempt property rental
business under the REIT regulations.
Non PID
Dividends from profits of the Group's taxable residual
business.
Net debt
Borrowings plus bank overdraft less cash and cash
equivalents.
Balance sheet gearing
Net debt divided by net assets.
Interest cover ratio
Gross property income, excluding surrender premiums, less ground
rent divided by interest payable on borrowings less interest
receivable and capitalised interest.
Loan to value ratio (LTV)
The nominal value of borrowed funds divided by the fair value of
investment property.
Ground rent
The rent payable by the Group for its leasehold properties.
Under IFRS, these leases are treated as finance leases and the cost
allocated between interest payable and property outgoings.
Building Research Establishment Environmental Assessment Method
(BREEAM)
The BREEAM rating assesses the operational and the embodied
environmental impacts of individual buildings. The ratings are
Pass, Good, Very Good, Excellent and Outstanding.
Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations (RIDDOR)
The regulations place a legal duty on employers to report
work-related deaths, major injuries or over-three-day injuries,
work related diseases and dangerous occurrences (near miss
accidents) to the Health and Safety executive.
IPD Central London Offices Index
An index, compiled by Investment Property Databank Limited, of
the central and inner London offices in their quarterly valued
universe.
Capital return
The annual valuation movement arising on the Group's portfolio
expressed as a percentage return on the valuation at the beginning
of the year adjusted for acquisitions and capital expenditure.
Total return
The movement in EPRA adjusted net asset value per share between
the beginning and the end of each financial year plus the dividend
per share paid during the year expressed as a percentage of the
EPRA adjusted net asset value per share at the beginning of the
year.
Total property return
The annual capital appreciation, net of capital expenditure,
plus the net annual rental income received, expressed as a
percentage of capital employed (property value at the beginning of
the year plus capital expenditure).
Total shareholder return
The growth in the ordinary share price as quoted on the London
Stock Exchange plus dividends per share received for the year,
expressed as a percentage of the share price at the beginning of
the year.
Rent roll
The annualised contracted rental income, net of ground
rents.
True equivalent yield
The constant capitalisation rate which, if applied to all cash
flows from the portfolio, including current rent, reversions to
valuers' estimate rental value and such items as voids and
expenditures, equates to the valuation having taken into account
notional purchasers' costs. Assumes rent is received quarterly in
advance.
Reversion
The reversion is the amount by which the rental value as
estimated by the Group's external valuers is higher than the rent
roll of a property or portfolio. The reversion is derived from
contractual rental increases, rent reviews, lease renewals and the
letting of vacant space.
Underlying portfolio
Properties that have been held for the whole of the financial
year.
25. Copies of this announcement will be available on the
Company's website, www.derwentlondon.com, from the date of this
statement. Copies will also be available from the Company
Secretary, Derwent London plc, 25 Savile Row, London, W1S 2ER.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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