TIDMDLN
RNS Number : 8420Y
Derwent London PLC
28 February 2013
28 February 2013
Derwent London plc ("Derwent London" / "the Group")
Results for the year ended 31 December 2012
Confident outlook underpinned by strong performance
Financial highlights
-- EPRA net asset value per share increased by 11% to 1,886p from 1,701p at 31 December 2011
-- EPRA profit before tax of GBP52.5m (2011: GBP52.3m) despite
increase in development activity
-- EPRA earnings per share of 50.36p (2011: 51.59p)
-- Increase in EPRA like-for-like net rental income of 8.2%
-- Final dividend increased by 8.4% to 23.75p per share (2011: 21.90p)
-- Loan-to-value ratio of 30% (2011: 32%)
Performance
-- GBP13.3m of lettings concluded on 340,300 sq ft (31,610m(2))
at a 7.6% premium to December 2011 ERV
-- Vacancy rate low at 1.6% (31 December 2011: 1.3%) reflecting
strong demand particularly from the TMT sector
-- Underlying valuation increase of 7.3% in 2012 (2011: 7.6%)
-- Underlying estimated rental values rose 6.7% (2011: 6.3%)
-- EPRA net initial yield 4.3% (31 December 2011: 4.4%) and true
equivalent yield 5.55% (31 December 2011: 5.61%)
-- Developments and major refurbishments rose 14.1% in value
Projects
-- Six major planning consents obtained during the year totalling 655,000 sq ft (60,850m(2))
-- 495,000 sq ft (46,000m(2)) of major projects underway at year end of which 37% pre-let
-- Further 422,000 sq ft (39,200m(2)) to start in 2013
-- 2.7 million sq ft (250,000m(2)) pipeline, two thirds of which has planning consent
-- Construction of White Collar Factory, City Road EC1 being
brought forward on a speculative basis
-- Unlocked redevelopment opportunity at 55-65 North Wharf Road,
Paddington W2 allowing construction of 240,000 sq ft (22,300m(2))
of offices from 2014
Acquisitions and disposals
-- Acquisitions totalled GBP101m
-- Disposals raised GBP161m after costs, giving a 4.5% surplus over 31 December 2011 values
Robert Rayne, Chairman, commented:
"Derwent London has delivered another strong set of results in
2012. The Group achieved a double digit percentage increase in net
asset value driven by increasing rents in our markets, management
activity and progress in our development pipeline.
We are continuing to see new tenants attracted to the space we
provide and consider that rents in our markets will continue to
rise. This gives us the confidence both to accelerate our
development pipeline and increase the dividend for the year by
7.5%."
John Burns, Chief Executive Officer, commented:
"Last year was an excellent one for Derwent London. Our
signature mid-market central London office space remains in demand
and we expect our rental values to rise between 4% and 6% in
2013.
At Derwent London we look to create tomorrow's space today. We
will complete 260,000 sq ft of projects in 2013 and by the year end
we intend to have over 650,000 sq ft under construction, including
80 Charlotte Street, our largest regeneration project to date. We
believe our prospects are good and look forward to the future with
confidence."
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 10:00am today which
can be accessed at www.derwentlondon.com
CHAIRMAN'S STATEMENT
Last year was both a significant year for London and another
strong one for Derwent London. The Group's hallmark mid-market
office product was in demand, there was excellent progress in the
development pipeline, a string of successful planning decisions and
the unlocking of value through restructuring of leasehold
interests. We added to the portfolio in our core markets, recycled
capital and achieved our refinancing targets. This activity added
value and we saw an 11% increase in EPRA net asset value per share
to 1,886p with the portfolio generating an overall revaluation
surplus of GBP175.3m. All this was achieved whilst broadly
maintaining profits and further strengthening our balance
sheet.
Highlights
Progress was made across all the Group's business areas:
-- 340,300 sq ft (31,610m(2)) of space was let, securing
GBP13.3m of rental income at an average premium of 7.6% to 31
December 2011 ERV, of which 55% related to pre-lettings of
developments. The EPRA vacancy rate of available space at the year
end was 1.6%.
-- Six planning consents were secured totalling 655,000 sq ft (60,850m(2)).
-- 4 & 10 Pentonville Road N1 was completed (55,000 sq ft/ 5,110m(2)) and is 87% let.
-- Asset management initiatives were completed on 580,000 sq ft
(53,900m(2)) providing greater longevity of income and inbuilt
rental growth.
-- Principal acquisitions were five properties totalling 247,500
sq ft (23,000m(2)) bought for GBP90.3m after costs (GBP365 per sq
ft/ GBP3,930 per m(2)) at an average net initial yield of 4.7%.
-- Disposals raised GBP161m after costs, generating a profit of
GBP6.9m. These included the 50% interest in 1-5 Grosvenor Place SW1
to facilitate future development. The remainder were non-core
assets.
-- Our financing retains strength and flexibility. During the
year we signed an GBP83m 3.99% 12-year secured loan, further
diversifying our sources of finance and increasing our weighted
average length of unexpired debt to 6.1 years at the year end.
The EPRA net initial yield of the portfolio was 4.3% at 31
December 2012. The EPRA like-for-like net rental income increased
over the year by 8.2%. In addition at the year end reversionary
income stood at GBP55.4m pa, 38% of which is contracted through the
expiry of rent free periods, stepped rents and fixed uplifts.
Our market
In 2012, the eyes of the world were on London, which hosted
memorable celebrations for the Queen's Diamond Jubilee, the
Olympics and the Paralympics. The capital excelled in its time in
the spotlight, demonstrating just what an attractive, welcoming and
exciting place it is. It has an effective and improving
infrastructure, a diverse and vibrant mix of cultural events and
the London economy stands apart from the country as a whole. London
is a desirable place in which to live, work and operate businesses.
Consequently the property investment market in central London
continues to flourish with yields remaining firm supported by high
levels of activity.
Derwent London is an innovator in the regeneration of London's
offices, investing in improving areas in the West End and City
borders and offering tenants great space. This requires
well-designed buildings at reasonable rents in the appealing
locations of the future - such as those close to the Crossrail
routes or within "London's Tech Belt", an arc stretching between
Kings Cross and Whitechapel. Our mid-market offices continue to
attract tenants with Unilever recently taking 21,100 sq ft
(1,960m(2)) at the Buckley Building EC1. We said at the beginning
of 2012 that rents would rise, and were pleased to see stronger
growth than the 4-5% we had envisaged, with a 6.7% underlying
increase in the estimated rental value (ERV) and new lettings
signed at rents on average 7.6% ahead of December 2011 ERV.
Capturing value
The strength of the occupational market and our robust financing
give us the confidence to press ahead with our development
pipeline. We completed 4 & 10 Pentonville Road N1 in August
2012, but still had six major projects underway at the year end
totalling 495,000 sq ft (46,000m(2)). During 2013 we are starting
work on three additional schemes totalling 422,000 sq ft
(39,200m(2)) including our largest project to date, the 385,000 sq
ft (35,800m(2)) regeneration of 80 Charlotte Street, Fitzrovia
W1.
Looking further to the future, we have over 1.8 million sq ft
(169,000m(2)) of exciting projects to start in 2014 and beyond of
which 0.9 million sq ft (86,000m(2)) has planning permission.
One of our largest schemes with planning permission is the White
Collar Factory at City Road EC1 where we are about to finish a
working prototype. Marketing presentations begin in April before we
move into full scale construction of this office development in the
heart of "London's Tech Belt" on a speculative basis.
We have recently signed an option agreement with the freeholder
and head leaseholder that provides for a regear of our leasehold
interest at 55-65 North Wharf Road W2. This will enable us to
proceed with the development of 240,000 sq ft (22,300m(2)) of
office space under a 999-year lease at this important site in
Paddington where we hold a planning consent.
Results and dividend
Derwent London's property portfolio increased in value to
GBP2.86bn as at 31 December 2012, showing an overall revaluation
surplus of GBP175.3m and an underlying valuation increase of 7.3%
during the year, which compares to annual capital growth of 4.1%
produced by the IPD Central London Offices Index. Of our valuation
increase, 4.1% came in the second half of 2012. The portfolio's
total property return for the year was 11.6% against 8.8% for IPD.
This strong property return contributed to EPRA net asset value per
share rising to 1,886p at the year end compared with 1,701p at 31
December 2011 and 1,770p at 30 June 2012. After adding back
dividends, the Group's total return for the year was 12.7%.
Despite a significant acceleration in development activity
during the year, income levels have been broadly maintained, with
EPRA profit before tax of GBP52.5m against GBP52.3m in the previous
year. Given dividend cover of 1.5 times and our current outlook, we
are recommending a final dividend for the year of 23.75p, an
increase of 8.4%, to be paid on 14 June 2013 to shareholders on the
register on 10 May 2013. Of this, 18.75p 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 33.70p, an increase of
7.5% on that in 2011.
The Group's overall debt position was broadly unchanged with net
debt up by only 1.2% over the year to GBP874.8m. The overall
loan-to-value ratio at the end of 2012 fell to 30.0% from 32.0% in
2011 and gross interest cover over 2012 has increased to 351% from
307% last year. Following the arrangement of a new GBP83m 12-year
loan in August, around 50% of our current financing is with
non-bank sources and we have increased the weighted average
unexpired duration of debt to 6.1 years. We had substantial undrawn
facilities totalling GBP333m and uncharged properties totalling
GBP624m at the year end giving us the headroom to meet our
committed capital expenditure requirements.
We do not achieve these results without considerable commitment,
skill and hard work. I would like to thank the Derwent London team,
and congratulate them for winning Management Today's 'Britain's
Most Admired Property Company' award for the third successive
year.
The Board
We welcomed Simon Fraser to the Board on 1 September 2012 and
believe that his extensive corporate broking and financial services
experience will benefit the Group. Simon Neathercoat retired from
the Board on 31 December 2012 after giving 13 years of valuable
advice.
Outlook
London is a desirable place in which to operate and invest and
this currently shows no signs of changing. Our office brand appeals
to a wide range of tenants from both a design and a price
perspective, in particular those from the broad-based TMT world.
The increase in rents in our markets in 2012 exceeded our
expectations. We believe we shall see rental growth in these
markets of 4-6% in 2013 with yields remaining stable.
We have an extensive and deliverable pipeline of value-creating
developments, both for the near term and extending into the future.
These are well-located in our core areas and in many cases will
benefit substantially from the arrival of Crossrail.
In 2013 we aim to make progress in the following areas:
-- Complete 212,000 sq ft (19,700m(2)) at Buckley Building EC1
and 1 Page Street SW1 which are 70% pre-let overall.
-- Progress construction of 256,000 sq ft (23,790m(2)) at 1-2
Stephen Street W1, 40 Chancery Lane WC2 and Turnmill EC1.
-- Commence construction of 422,000 sq ft (39,200m(2)) in three
developments including 80 Charlotte Street W1. Of this space around
20% will be residential, which will enable Derwent London to take
advantage of the current high demand for central London residential
property.
-- Progress a number of major consented projects including White
Collar Factory EC1, 55-65 North Wharf Road W2 and a retail scheme
at 18-30 Tottenham Court Road W1 (together 570,000 sq ft/
52,910m(2)).
-- Advance the planning of our future value-creating
opportunities, including 1-5 Grosvenor Place SW1.
Our increased development programme, significant reversionary
potential and asset management activities provide a strong
foundation for the delivery of future value. Low leverage and our
focus on interest cover create the financial strength to undertake
this development pipeline and to take advantage of new
opportunities. These components give us a powerful platform for
growth thereby continuing to provide attractive returns to
shareholders.
Robert A. Rayne
28 February 2013
OUR MARKET
See Appendix 1 for supporting graphs
http://www.rns-pdf.londonstockexchange.com/rns/8420Y_-2013-2-27.pdf
London's economy is predominantly service-based and accounts for
approximately 20% of national output. It remained resilient in 2012
despite the weakness in the UK economy as a whole. In central
London, Derwent London's core market, office take-up was lower than
average but the supply of space was constrained, thereby keeping
vacancy rates below trend and providing the conditions for further
rental growth. In addition London continued to be seen by investors
as offering an attractive investment destination. Transaction
volumes were at their highest level for five years according to
leading surveyors, CBRE.
Economic backdrop
The lack of growth in the UK economy, with continued austerity
measures and uncertainties within the Eurozone, provided the main
economic backdrop to 2012. UK GDP was flat over 2012, compared with
a rise of 0.9% in 2011. The UK base rate remained unchanged at
0.5%, whilst total employment reached an all-time high, rising 1.6%
over the year and CPI inflation fell from 4.2% to 2.7%. London's
economy proved more resilient than that of the country as a whole
with its GDP growing 0.3% over the year according to Oxford
Economics.
Looking forward, the outlook for UK growth remains subdued. The
Bank of England forecast that the economy is likely to see a
gradual recovery over the next three years with GDP growth of
around 1% predicted for 2013, well below its historical average. In
London the economy is expected to continue to outperform the
country as a whole, notwithstanding some of the enduring banking
issues, with GDP growth of 1.3% forecast for 2013 and 2.5% for
2014.
Central London office occupier market
The central London office market, where 97% of Derwent London's
portfolio is located, plays a key role in the success of the
capital by providing a home to a wide range of national and
international companies. At the year end, the capital's office
stock totalled approximately 221 million sq ft (20.5 million m(2))
- 49% located in the City, 42% in the West End and 9% in
Docklands.
CBRE reported that central London office take-up in 2012
totalled 9.8 million sq ft (0.91 million m(2)), 7% lower than the
previous year and 17% below the 10-year average. In the West End
take-up was 16% below the average at 3.5 million sq ft (0.33
million m(2)) with the TMT sector comprising 23% of transactions.
During 2012, West End active demand increased 15% with the TMT
sector accounting for over 50% of year end requirements, suggesting
that the low take-up at least in part reflects the low level of
completions. Overall City activity was 12% below the 10-year
average at 4.1 million sq ft (0.38 million m(2)).
On the delivery side, West End development completions were
fractionally below the 10-year average at 0.95 million sq ft
(88,300m(2)) whilst City completions were just 0.51 million sq ft
(47,400m(2)), 73% below the 10-year average. These relatively low
levels of supply helped moderate the central London vacancy rate
which was 5.3% at the year end. The West End vacancy rate declined
slightly from 4.3% to 4.2% whilst the City rate decreased from 7.0%
to 6.8% over the same period. With supply for both locations still
below 10-year averages, the CBRE prime rent index showed further
rental uplift with growth of 3.7% in the West End and 0.8% in the
City over the year.
The level of West End completions is expected to rise
considerably during 2013, but we expect that this space will be
absorbed by the market given current levels of demand and the level
of pre-lets already agreed on these properties.
Central London office investment market
According to CBRE, central London office investment transactions
totalled GBP14.0bn in 2012, 55% greater than 2011 and 28% above the
10-year average. London's status as an international safe haven
persisted with the property market offering both rental growth and
liquidity. Overseas investors accounted for 67% of
acquisitions.
Prime yields were static throughout the year at 4.0% in the West
End and 5.0% in the City.
The progress in the Crossrail project gained visibility during
2012. There was a flurry of acquisition and development activity
around future Crossrail hubs such as Tottenham Court Road and
Farringdon stations, where we have a large concentration of our
portfolio, whilst Shoreditch, with its new High Street station,
benefited from the completion of the London Overground orbital.
We note with interest the Government's plans to include
conversion of offices to residential units within permitted
development rights for three years, but do not believe that this
will have a significant impact on our business.
VALUATION
See Appendix 2 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/8420Y_1-2013-2-27.pdf
The strong levels of investment in London's commercial property
market, together with good demand for space and improving central
London office rents, presented a positive backdrop to the
valuation. The Group's investment portfolio was valued at GBP2.86bn
at 31 December 2012. Over the year, there was a valuation surplus
of GBP183.3m, before deducting lease incentive adjustments of
GBP8.0m, giving a total movement of GBP175.3m. The underlying
valuation increased by 7.3%, a similar level to the 7.6% in 2011,
and outperformed both the IPD Index for central London offices in
2012, which increased by 4.1%, and the wider market, the IPD All UK
Property Index, which declined by 3.1%.
Within the investment portfolio, seven principal projects were
on site during 2012, comprising five developments and two major
phased refurbishments. These progressed well, not only on the
construction and delivery side, but also through lettings to
companies including Burberry, Ticketmaster and Unilever. They are
detailed further under the Portfolio Management section. Reflecting
this activity, the developments increased in value by 20.6% during
the year to GBP185.3m, and the refurbishments by 8.7% to GBP202.3m,
giving a total increase in value of 14.1% to GBP387.6m. They
represented about 14% of the investment portfolio at the year end
and delivered around a quarter of the portfolio's valuation
surplus. Excluding projects, the balance of the portfolio increased
by 6.3% on an underlying basis.
In addition to the strong performance from our projects, the ERV
of the portfolio increased steadily over the year and we were
active on the asset management front. Both were also important
contributors to the valuation uplift. Our ERVs rose by 6.7% and
followed a 6.3% increase in 2011. Examples of our asset management
accomplishments were lease management and letting activity at 1
Oliver's Yard EC2 and the Tea Building E1. This gave rise to
valuation increases over the year at these buildings of 17% and 10%
respectively.
Our central London properties, which comprise 97% of the
portfolio, increased by 7.8%, with those in the West End rising by
7.2% and the City border assets by 10.2%. The balance of the
portfolio at 3% is our non-core Scottish holdings. These
principally comprise a retail warehouse park and agricultural land
and saw a 5.3% valuation decline in 2012, reflecting the general
outward movement of yields in provincial markets.
The portfolio's net initial yield, on an EPRA basis, was 4.3%,
which rises to 4.8% on a 'topped-up' basis, following contractual
uplifts and expiry of rent free periods. The true equivalent yield
was 5.55% and compares with 5.61% at the end of 2011. This reflects
the general stabilisation of yields for London assets.
The portfolio remains highly reversionary. At 31 December 2012
the Group's net annualised rental income was GBP119.6m, with the
portfolio's ERV at GBP175.0m, representing GBP55.4m of reversion.
Of this, GBP21.0m is contractual, from our scheme pre-lets, such as
1 Page Street SW1 at GBP5.3m, fixed rental uplifts from the expiry
of rent free periods and contracted stepped rentals. A further
GBP21.1m is from available space at year end and our projects where
we are on site. The balance of the reversion of GBP13.3m was from
future rent reviews and lease renewals.
On a total property return basis the portfolio delivered 11.6%
compared with 13.4% in 2011. The IPD Total Return Index was 8.8%
for Central London Offices and 2.7% for All UK Property.
PORTFOLIO MANAGMENT
See Appendix 3 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/8420Y_2-2013-2-27.pdf
Letting activity
Our mid-market offices in the West End and City borders continue
to prove attractive to tenants, as evidenced by another excellent
year for lettings in 2012. We let 340,300 sq ft (31,610m(2)) at an
annual rent of GBP13.3m and an average premium of 7.6% to the
December 2011 ERV. For comparison, in 2011, when we had more space
available, we concluded 495,700 sq ft (46,050m(2)) of lettings at
an annual rent of GBP16.7m.
Excluding short-term lettings where we want to retain
flexibility for future projects, and which constituted 8% by income
and 11% by floorspace, open market lettings were at an average
premium of 9.2% to the December 2011 ERV.
Annual income from lettings in the first half of the year
totalled GBP8.9m, and GBP4.4m in the second half. Overall lettings
in the second half were settled at an average premium of 10.3% to
the June 2012 ERV and for open market lettings at a 12.3% premium.
On the basis of our most recent activity and ongoing tenant
interest we see no slowdown in the rental market for our
properties.
During 2012 we maintained a low vacancy rate, and 55% of our
transactions by income were pre-lets, including most of our large
transactions: Burberry at 1 Page Street SW1, Unilever at Buckley
Building EC1 and BrandOpus at 1 Stephen Street W1. We also saw, and
continue to see, strong interest in our available space from the
TMT sector with 27% of our lettings in 2012 from this sector and
68% if wider creative industries are included.
The principal transactions in 2012 were as follows:
-- 1 Page Street SW1
This 127,000 sq ft (11,800m(2)) building was pre-let to Burberry
for 20 years with a break in year ten at a rent of GBP5.3m pa,
rising to a minimum of GBP5.7m pa after five years. The initial
rent equates to GBP50 per sq ft (GBP540 per m(2)) on the best
space, which compares with GBP38 per sq ft (GBP410 per m(2)) on
similar space that Burberry currently occupies in our adjacent
162,700 sq ft (15,110m(2)) Horseferry House.
-- 4 & 10 Pentonville Road N1
Within two months of practical completion, 47,700 sq ft
(4,430m(2)) of this 55,000 sq ft (5,110m(2) ) building was let for
12 years to Ticketmaster at GBP45 per sq ft (GBP484 per m(2)) on
the top floor and GBP42.50 per sq ft (GBP457 per m(2)) on a typical
mid-level floor, giving a total rent of GBP1.9m pa. The completion
of this development, opposite our Angel Building where rents of
GBP42 per sq ft (GBP452 per m(2)) were achieved in 2011, continues
the regeneration of this increasingly vibrant part of
Islington.
-- Buckley Building EC1
Unilever has pre-let 21,100 sq ft (1,960m(2)) of office space
paying GBP45 per sq ft (GBP484 per m(2)) on the ground floor and
GBP40 per sq ft (GBP431 per m(2)) on the lower ground to give a
total rent of GBP0.9m pa, 27% above the 30 June 2012 ERV of this
space. The lease is for 12 years with a tenant's break at year six
on payment of a 12 month rent penalty. A rent free period
equivalent to 12 months was granted, with an additional six months
if the break is not exercised.
We are formally launching the marketing of the remaining 64,000
sq ft (5,900 m(2)) in this building in April 2013, following
completion of the project.
-- 1-2 Stephen Street W1
BrandOpus is more than tripling its occupation in our portfolio
and will relocate to 18,300 sq ft (1,700m(2)) in Phase 1 of the 1-2
Stephen Street refurbishment from 5,000 sq ft (460m(2)) at the
nearby Charlotte Building W1. It took 15,400 sq ft (1,430m(2)) in
2012 and an additional 2,900 sq ft (270m(2)) in February 2013. It
will occupy ground and lower ground floor offices under a 10-year
lease, paying a rent of GBP0.8m pa, representing GBP52.50 per sq ft
(GBP565 per m(2)) on the prime space.
-- Johnson Building EC1
Existing media tenant Grey took an additional 11,100 sq ft
(1,030m(2)) on a 9-year lease at GBP45 per sq ft (GBP485 per m(2))
or GBP0.50m pa, taking its total presence in the building to 61,100
sq ft (5,680m(2)).
We maintain the appeal of the space that we offer by
anticipating and reflecting the evolving needs of occupiers. Many
tenants now tend to occupy their space in a more open-plan way than
in a traditional office design, with informal meeting spaces and
coffee bars worked into the fit-out. In May 2012, a Derwent London
team visited San Francisco and Silicon Valley to meet tenants who
may look to expand into the UK as well as to see the occupational
requirements of creative industries there. By following and
understanding such trends, we are able to create tomorrow's space
today and we were pleased to see three Derwent London tenants
(Innocent Drinks, Mind Candy and Mother) featured in the Daily
Telegraph's list of 'Top 10 coolest offices in UK'.
Asset management
We continued to see strong tenant retention in 2012. During the
year GBP14.7m pa of rental income was subject to lease expiries and
breaks. After excluding space taken back for identified projects
and disposals, representing GBP4.2m pa, 81% of this income was
retained and 5% relet during 2012.
The Group concluded 65 rent reviews, lease renewals and regears
in the year on 580,000 sq ft (53,900m(2)) at a combined rent of
over GBP21m pa, at an uplift of 7.7% on the previous income.
In several cases these asset management initiatives built in
longer leases and/ or future rental uplifts, underpinning certainty
of income for Derwent London. The most significant of these
were:
-- 1 Oliver's Yard EC2
o Sage Publications
Four leases covering 40,300 sq ft (3,740m(2)) were extended from
two to seven years. Annual stepped rental increases were
introduced, taking the rent from GBP1.0m pa to GBP1.4m pa over the
term, equating to between GBP25 per sq ft (GBP270 per m(2)) and
GBP36 per sq ft (GBP390 per m(2)) and comparing favourably with a
December 2011 ERV of GBP28.50 per sq ft (GBP305 per m(2)). Lease
incentives equated to a four month rent free period.
o Telecity
Leases on 68,700 sq ft (6,380m(2)) were extended from five to 25
years, with rent increases from GBP1.8m pa in 2012 to GBP2.3m pa in
2017 which equates to GBP45 per sq ft (GBP485 per m(2)) on the best
space. Thereafter the rent increases by 2.5% pa compounded every
five years. Lease incentives equated to a 12 month rent free
period.
-- 8 Fitzroy Street W1
This 148,000 sq ft (13,750m(2)) building is let to Arup until
2033. We replaced five-yearly upward-only rent reviews with an
annual stepped increase taking the rent from GBP6.2m pa (GBP45 per
sq ft/ GBP485 per m(2) on a typical floor) to GBP8.4m pa (GBP60 per
sq ft/ GBP645 per m(2)) in 2021. There is then an upward-only,
open-market rent review with the income increasing 2.5% pa
thereafter.
Reversionary potential
There remains a wide variety of additional opportunities for
asset management initiatives. Our central London average passing
office rent remains modest at GBP26.04 per sq ft (GBP280 per m(2))
and offers an excellent platform for income growth. Allowing for
contracted increases, the average 'topped-up' rent is GBP31.18 per
sq ft (GBP336 per m(2)). This compares with an ERV as at 31
December 2012 of GBP35.64 per sq ft (GBP384 per m(2)).
Rent collection
Rent collection remains prompt, with 97% of rent collected on
average within 14 days of the due date for the year and 98% for the
fourth quarter.
Vacancy rate
With strong tenant demand and retention, the vacancy rate in the
portfolio remained low throughout 2012, even following the
completion of 4 & 10 Pentonville Road N1. At the end of
December 2012 the vacancy rate was 1.6% on an EPRA basis by rental
value, measured as space immediately available for occupation, or
GBP2.1m pa (31 December 2011: 1.3% or GBP1.9m pa). Since the year
end half of this has either been let or is under offer. By
available floorspace, the year end vacancy rate was 1.7% (31
December 2011: 1.3%). This compares favourably with the CBRE
central London rate that stood at 5.3% at the end of 2012.
Our six projects where we are on site have an estimated net
rental value of about GBP22m pa and upon completion, after
adjusting for pre-lets, would increase the Group's vacancy rate of
available space to around 11% measured by rental value. Much of
this space will not be ready for occupation until towards the end
of 2014.
Activity in 2013 to date
In 2013 to date a further 241,900 sq ft (22,470m(2)) has been
let or placed under offer generating income of GBP2.3m pa. This
includes:
-- 132-142 Hampstead Road NW1
The property, which under current plans is expected to be
compulsorily purchased as part of the construction of HS2, is
undergoing a 'light touch' refurbishment. UCL (University College
London) has taken a pre-let of all 217,000 sq ft (20,160m(2)) at a
total rent of GBP1.6m pa with 3% pa uplifts fixed in March 2016 and
September 2018. The lease is for a 10-year term with mutual rolling
breaks from September 2018 and has a rent free period equivalent to
15 months. This letting bolsters net income whilst retaining
flexibility for development if circumstances change.
INVESTMENT ACTIVITY
Acquisitions
During 2012 we added to the portfolio and recycled capital in
specific situations. Our purchases, totalling GBP101.5m including
costs, reflect our strategy of buying income-producing assets off
low capital values with medium-term refurbishment opportunities
and, in most cases, adjacent or very close to existing assets.
The main acquisitions in 2012 were:
Francis House, 9 and 16 Prescot 25 and 29 Berners
11 Francis Street Street E1 Street W1
SW1
------------------- -------------------------- ------------------ -------------------------
Total cost GBP30.6m GBP23.2m GBP36.5m
------------------- -------------------------- ------------------ -------------------------
Tenure Freehold Freehold Leasehold expiring
in 2080
------------------- -------------------------- ------------------ -------------------------
Size 57,000 sq ft (5,300m(2)) 111,000 sq ft 79,500 sq ft (7,390m(2))
(10,310m(2))
------------------- -------------------------- ------------------ -------------------------
Annual passing GBP1.6m rising GBP1.3m GBP1.4m
rent to GBP1.7m from
2015
------------------- -------------------------- ------------------ -------------------------
5.1% rising to
Net initial yield 5.4% 5.5% 3.8%
------------------- -------------------------- ------------------ -------------------------
Tenant Channel Four Television Co-operative Bank PRS for Music
plc (9 Prescot
Street)
------------------- -------------------------- ------------------ -------------------------
Lease expiry 2020 2015 (9 Prescot 2016
Street)
------------------- -------------------------- ------------------ -------------------------
Opportunity Synergy with our Refurbishment Refurbishment
adjacent ownership and extension and redevelopment
at Greencoat & potential in an potential at these
Gordon House and improving area Fitzrovia properties
6-8 Greencoat of Whitechapel. when the tenant
Place in Victoria. vacates.
------------------- -------------------------- ------------------ -------------------------
Disposals
1-5 Grosvenor Riverwalk House Triangle Centre,
Place SW1 and 232-242 Vauxhall Bishopbriggs,
Bridge Road SW1 Scotland
-------------------- ------------------------- ---------------------- -------------------------
Net proceeds GBP66.9m GBP76.6m GBP16.6m
-------------------- ------------------------- ---------------------- -------------------------
Tenure 50% of 150-year Freehold Freehold
lease
-------------------- ------------------------- ---------------------- -------------------------
Annual net passing GBP3.1m (50% share GBP0.2m GBP1.3m
rent of total rent
on the building)
-------------------- ------------------------- ---------------------- -------------------------
Net disposal yield 4.5 % Mostly vacant 8.1%
-------------------- ------------------------- ---------------------- -------------------------
Comment Interest sold Sold for residential 75,500 sq ft (7,010m(2))
as part of the development. shopping centre
regear onto a Profit overage north of Glasgow.
new 150-year headlease, retained. Combined
unlocking potential valuation increased
redevelopment. by 75% over the
last three years.
-------------------- ------------------------- ---------------------- -------------------------
In 2012, Derwent London recycled properties for net proceeds of
GBP160.9m at a profit of GBP6.9m. This included the sale of three
buildings, as well as the disposal of a 50% interest in 1-5
Grosvenor Place SW1.
Since the year end we have exchanged contracts for the sale of
our holdings in Commercial Road E1, where we have secured planning
permission for a 417-room student accommodation block together with
26,500 sq ft (2,460m(2)) of offices, for GBP17.0m before costs.
PROJECTS
See Appendix 4 for supporting graphs and tables.
http://www.rns-pdf.londonstockexchange.com/rns/8420Y_3-2013-2-27.pdf
As at 31 December 2012 the Group was on site at six major
projects totalling 495,000 sq ft (46,000m(2)). These projects had
capital expenditure to complete at that date of GBP91m, and a total
estimated rental value of about GBP22m. Of this space, 37% has been
pre-let. In 2013 a further three projects totalling 422,000 sq ft
(39,200m(2)) and with capital expenditure to complete of GBP168m
will commence.
Planning success in 2012
We saw continued planning success in 2012, with six schemes
totalling 655,000 sq ft (60,850m(2)) granted planning permission.
The schemes that received permission are:
Size Nature of Project status Comment
development
-------------------- --------------------- --------------- ---------------------------------------
1 Oxford Street W1
-----------------------------------------------------------------------------------------------------
275,000 Offices, Start from The Group holds an option to
sq ft (25,500m(2)) retail and 2017 repurchase this site which
theatre is above Tottenham Court Road
station, following the completion
of Crossrail work.
-------------------- --------------------- --------------- ---------------------------------------
1 Page Street SW1
-----------------------------------------------------------------------------------------------------
127,000 Office refurbishment Underway 100% pre-let to Burberry.
sq ft (11,800m(2)) and extension
-------------------- --------------------- --------------- ---------------------------------------
Riverwalk House and 232-242 Vauxhall Bridge Road SW1
-----------------------------------------------------------------------------------------------------
175,000 Residential Underway Sold in 2012. Group retains
sq ft (16,300m(2)) a profit overage in this development.
-------------------- --------------------- --------------- ---------------------------------------
Queens, 96-98 Bishop's Bridge Road W2
-----------------------------------------------------------------------------------------------------
21,400 sq Residential Started in 16 residential units and ground
ft (1,990m(2)) 2013 floor retail space to be built
on the corner of Bishop's Bridge
Road and Queensway. Completion
is due in Q4 2014.
-------------------- --------------------- --------------- ---------------------------------------
18-30 Tottenham Court Road W1
-----------------------------------------------------------------------------------------------------
41,000 sq Retail extension Start 2014 New and improved double-height
ft (3,810m(2)) frontage, providing modern
units. Area being transformed
through the Crossrail project.
-------------------- --------------------- --------------- ---------------------------------------
73 Charlotte Street W1
-----------------------------------------------------------------------------------------------------
15,500 sq Residential Start 2013 11 units, two of which are
ft (1,440m(2)) affordable, and 1,900 sq ft
(180m(2)) of offices.
-------------------- --------------------- --------------- ---------------------------------------
Project completed in 2012
4 & 10 Pentonville Road N1 was completed in Q3 2012 and 87%
of this 55,000 sq ft (5,110m(2)) office refurbishment was let to
Ticketmaster (see 'Letting activity').
Projects under construction
The following projects were under construction at the end of
2012:
Size of project Capital Completion Pre-let
expenditure date
to complete
---------------------- ------------------------------- ------------- ----------- -----------------
sq ft m(2) GBPm
---------------------- ----------------- ------------ ------------- ----------- -----------------
Developments
------------------------------------------------------------------------------------------------------
Buckley Building,
49 Clerkenwell
Green EC1 85,000 7,900 3 Q1 2013 25% to Unilever
---------------------- ----------------- ------------ ------------- ----------- -----------------
1 Page Street 100% to
SW1 127,000 11,800 15 Q2 2013 Burberry
---------------------- ----------------- ------------ ------------- ----------- -----------------
Turnmill, 63
Clerkenwell Road
EC1 70,000 6,500 19 Q3 2014
---------------------- ----------------- ------------ ------------- ----------- -----------------
40 Chancery Lane
WC2 100,000 9,300 34 Q4 2014
---------------------- ----------------- ------------ ------------- ----------- -----------------
Phased refurbishments
------------------------------------------------------------------------------------------------------
Morelands Buildings,
5-27 Old Street
EC1 27,000 2,510 2 Q1 2013 66% to AHMM
---------------------- ----------------- ------------ ------------- ----------- -----------------
1-2 Stephen Street
W1 86,000 7,990 18 2013/14 21% to BrandOpus
---------------------- ----------------- ------------ ------------- ----------- -----------------
Total 495,000 46,000 91
---------------------- ----------------- ------------ ------------- ----------- -----------------
Other projects
As at 31 December 2012, 282,600 sq ft (26,250m(2)) of minor
refurbishments were underway, including at 3-4 Hardwick Street EC1
and 132-142 Hampstead Road NW1. These had an ERV of GBP4.0m pa and
capital expenditure to complete of GBP8m.
Projects starting in 2013
During 2013 the Group will be increasing the proportion of
development in the portfolio by commencing the following projects,
totalling 422,000 sq ft (39,200m(2)):
-- 80 Charlotte Street W1
At 385,000 sq ft (35,800m(2)), this is the largest regeneration
that Derwent London has undertaken and will be one of the biggest
schemes in the West End when construction starts towards the end of
2013. The main development occupies a 1.4 acre (0.6 hectare) site
that will provide 320,000 sq ft (29,730m(2)) of offices and retail
with 17,000 sq ft (1,580m(2)) of private residential units and
retail adjacent at 67 Whitfield Street W1. Two other nearby
properties will deliver a further 12,000 sq ft (1,110m(2)) of
offices and 36,000 sq ft (3,340m(2)) of residential space, 42% of
which will be affordable housing.
We are currently undertaking implementation works on site and
expect to sign the main construction contract in the summer. A deed
to obtain vacant possession of 80 Charlotte Street from Saatchi
& Saatchi in the second half of 2013 has been signed. Overall
capital expenditure is estimated at around GBP150m and the project
is due for delivery in 2016.
-- Queens, 96-98 Bishop's Bridge Road W2
This 21,400 sq ft (1,990m(2)) residential scheme in Westbourne
Grove comprises 16 units and 2,700 sq ft (250m(2)) of retail space.
Having received planning permission in 2012, work has now
started.
-- 73 Charlotte Street W1
This is another medium-sized residential-led development of
15,500 sq ft (1,440m(2)) to provide 11 units, two of which are
affordable, together with 1,900 sq ft (180m(2)) of offices. Work is
expected to start at this site after the receipt of vacant
possession in the second half of 2013.
Projects for 2014 and beyond
The Group has five further projects with planning permission
with a total proposed net lettable area of 0.9 million sq ft
(86,000m(2)) and a similar level of projects under appraisal,
providing additional opportunities to grow the business. We have
made important progress on the following projects:
-- White Collar Factory, City Road EC1
We have constructed a 3,000 sq ft (280m(2)) working prototype or
'live suite' to showcase the White Collar Factory principles of the
16-storey office building that forms the core of this proposed
development. Marketing presentations begin here in April and we
intend to move into full scale construction of the exciting 289,000
sq ft (26,800m(2)) regeneration at this major corner site at Old
Street which we now expect to build on a speculative basis.
The White Collar Factory will be a 21st century interpretation
of the industrial buildings of the past. It will be of concrete
frame construction with exposed thermal-mass, a generous 3.5 metre
floor to ceiling height, and well-insulated façades that are
tailored to deal with solar gain. With openable windows, cooling
will also be provided by chilled water pipes embedded in the
concrete slabs with air ventilation and simple lighting suspended
underneath. Our engineers estimate that, as a result of its design,
the building will use 25% less carbon and save up to 25% in
operating costs compared with that of a traditional office
building.
The existing buildings are currently occupied on flexible lease
terms allowing vacant possession from the end of 2013. The capital
expenditure to complete this project will be around GBP100m.
-- 55-65 North Wharf Road W2
Having recently entered into an option agreement with the
freeholder and long leaseholder to restructure our headlease, this
redevelopment has moved a step closer. On exercise of the option,
the freeholder will grant Derwent London a 999-year lease over the
240,000 sq ft (22,300m(2)) office element of the site and grant the
long leaseholder a similar lease over the 73,000 sq ft (6,800m(2))
of residential and retail space. Derwent London will pay a modest
ground rent of 2.5% of income and will undertake to build the
basement of both buildings. The long leaseholder will contribute
GBP5m towards the construction cost of the basement.
This site represents one of the best locations within Paddington
Basin yet to be developed and will provide a striking architectural
addition to the regeneration of the wider area. It is directly
opposite one of the entrances to the National Rail, Crossrail and
London Underground services at Paddington.
Current letting terms allow for possession from 2014 onwards and
Derwent London's capital expenditure to undertake this project
would be around GBP100m.
-- 1 -5 Grosvenor Place SW1
In March 2012, Derwent London and Grosvenor announced a joint
venture and headlease regear at 1-5 Grosvenor Place. This
collaboration unlocks a major prime redevelopment opportunity of
over 260,000 sq ft (24,000m(2) ) at this unique 1.5 acre (0.6
hectare) site. Working with Grosvenor a professional advisory team
has been assembled, with the expectation of submitting a planning
application for this mixed-use redevelopment including a hotel,
residential and offices within the next year. The joint venture
partners are working towards choosing an operator for the hotel
element from the current shortlist over the next few months. In the
meantime the property is almost fully let on flexible leases.
We have started studies on our recent acquisitions at Prescot
Street and Berners Street to formulate our longer term plans for
these buildings.
FINANCE REVIEW
See Appendix 5 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/8420Y_4-2013-2-27.pdf
Over many years, Derwent London's business model has been to add
value through refurbishment, redevelopment and asset management
while also maintaining a secure recurring income stream, modest
leverage and strong interest cover. The strength of our balance
sheet plus the confidence that comes from robust five-year
financial projections supports the business and enables us to plan
to take account of anticipated market cycles. This allows
decision-taking that fuels growth backed by a careful assessment of
the risks.
The calendar year 2012 was, in many respects, a significant one
for London. Sterling was seen as a relative safe haven while many
of the other European economies were under extreme pressure.
Notwithstanding the lack of overall economic growth in the UK and
the domestic tension caused by a deficit reduction programme,
policies exercised by Government and the Bank of England helped to
encourage capital flows into London. This strengthened sterling and
forced interest rates down to exceptionally low levels though there
has been some correction in both measures in the first few weeks of
2013.
Another notable feature of the year for our sector was the
continued and substantial disparity between availability and cost
of capital for those seen as strong borrowers and the rest. In
particular, investors associated with London continued to defy the
gloom which was felt in much of the rest of the UK.
All these factors meant that this was a good environment for
stronger companies within our sector to refinance. In January 2012,
we completed GBP300m of bank facilities signed in December 2011. In
addition, Derwent London secured GBP83m of inexpensive long-term
debt in August 2012, tapping a source which we had not previously
utilised.
We also continued our policy of recycling capital through asset
sales, improved our overall interest cover and drove rental growth
in the portfolio with like-for-like net rental growth up by 8.2% on
the year. With low voids and much of the existing development
pipeline de-risked through pre-lets, we have been able to push
ahead with important new projects such as Turnmill EC1 and 40
Chancery Lane WC2 and to commit to our largest scheme to date at 80
Charlotte Street W1. In addition, we have now agreed to accelerate
the development of the White Collar Factory at City Road EC1.
Net asset value
EPRA net asset value per share increased to 1,886p per share as
at 31 December 2012 from 1,701p a year earlier, an increase of
10.9%. This was largely due to another pronounced rise in value of
the property portfolio which showed an increase of 170p per share
after allowing for capital expenditure and lease incentives.
The main components of the rise in NAV per share were as
follows:
2011 2012
p p
Revaluation surplus 170 169
EPRA profit after tax 50 51
Dividends paid (net
of scrip) (30) (25)
Profit on disposals 7 36
Interest rate swap (7) -
termination cost
Minority interests
on revaluation (5) (4)
185 227
The Group's net asset value rose to GBP1.92bn at 31 December
2012 from GBP1.71bn in 2011 and the value of the property portfolio
increased to GBP2.86bn.
The mark-to-market cost of derivatives rose by 2p per share to
53p, offset by a fall in deferred tax liabilities of 5p as certain
historical tax issues were successfully resolved. The fair value of
fixed rate liabilities increased by a net 20p per share as
medium-term interest rates fell significantly. These combined to
bring the Group's EPRA triple net asset value per share to 1,775p
at 31 December 2012, an increase of 10.5% over the year.
Income statement
Derwent London's development activity increased significantly
through 2012. We invested GBP77.5m in the portfolio and capitalised
GBP4.9m of interest against figures of GBP41.0m and GBP2.2m,
respectively, in 2011. This rebalancing of activity away from the
income-producing part of the portfolio inevitably has an impact
upon rental income. However, through strong lettings and asset
management together with careful financial planning, we have sought
to ensure that earnings are broadly flat year on year.
EPRA recurring profit before tax increased slightly to GBP52.5m
for the year ended 31 December 2012 compared with GBP52.3m in 2011.
The prior year benefitted from the write-back of GBP1.8m of current
tax provisions and this is the main reason why EPRA earnings per
share fell back a little to 50.4p from 51.6p in 2011.
Although we have extended our development programme and recycled
capital through property disposals, gross rental income increased
slightly during the year by GBP0.6m to GBP124.7m. New lettings in
2012 added GBP3.7m of income in the year while rent reviews, mainly
in relation to the settlement of the 2011 review at 8 Fitzroy
Street W1, added a further GBP3.5m. Lettings and reviews from the
previous year also contributed GBP4.6m. Properties acquired in 2012
increased 2012 rent by GBP1.6m while the loss of income from
properties sold was GBP6.1m. Lease breaks, expiries and voids
reduced rent by a further GBP6.7m. Premiums received from lease
surrenders vary from year to year and, on a net basis, were only
GBP0.1m in 2012 against GBP1.4m in 2011.
Property outgoings overall were GBP10.3m, a 5.1% increase from
the previous year, part of which is due to the higher ground rent
paid at 1-5 Grosvenor Place SW1 following the regear. The prior
year also benefitted from GBP1.6m of rates credits; in 2012 the
recovery of overpaid rates was GBP0.3m. Surrender premiums paid to
tenants fell to GBP0.2m in 2012 compared to GBP1.9m in 2011.
The real progress in rental income levels across the portfolio
can be demonstrated by the strong increase in like-for-like
property income where the effects of acquisitions, disposals and
developments are taken out; EPRA net rental income increased by
8.2% during the year. A full analysis is shown in the attached
table.
Total administrative expenses increased to GBP25.1m from
GBP22.7m in 2011. Development activity and a greater emphasis on
areas such as sustainability has increased headcount again in 2012.
If the provision for cash-settled share options is excluded, the
underlying increase in administrative expenses was 7.5%, due mainly
to increased staff costs. The Group's consistently strong
performance over recent years has contributed to an increase in the
provision for long-term management incentives of GBP0.7m compared
to 2011.
Net finance costs fell to GBP40.8m from GBP43.2m in the prior
year due partly to a higher amount capitalised on projects, GBP4.9m
against GBP2.2m last year. Interest costs have fallen by GBP2.3m
compared to the previous year, offset by an increase of GBP2.5m in
charges for arrangement and non-utilisation fees.
The overall profit before taxation for the year was GBP228.1m,
only marginally lower than the equivalent figure of GBP233.0m in
2011. Overall revaluation gains in 2012 were GBP175.3m of which
GBP174.4m passed through the income statement and property
disposals, principally of Riverwalk House SW1 and half of 1-5
Grosvenor Place, also yielded a profit of GBP6.9m. The profit on
disposal of investment of GBP3.9m related to the realisation of
exchange gains on the liquidation of our last remaining US
subsidiary. The company had been inactive for several years and, as
an equal and opposite amount passed through the statement of
comprehensive income, this has no impact upon EPRA net asset value
or recurring earnings.
In addition to the previously reported GBP6.3m cost of breaking
GBP130m of interest rate swaps in January 2012, a further GBP0.6m
of breakage costs were incurred in August when the other GBP65m
swap associated with the old GBP375m loan facility was also closed
out. The original loan and swap expiry dates were all in March
2013. The cost of 'fair valuing' our other interest rate swaps was
GBP2.4m for the year.
Taxation
As a REIT, we do not generally pay corporation tax as much of
our business activity is tax-exempt. However, part of the business,
principally the unelected share in our joint venture with the
Portman Estate, is outside the REIT; the 2012 tax charge relating
to this non-REIT part of the business was GBP0.8m comprising a tax
charge of GBP0.6m and a prior year tax charge of GBP0.2m. Following
successful discussions with HMRC bringing much of our Scottish land
holdings within the REIT structure, we have been able to write back
GBP4.4m of the Group's deferred tax liability during the year. In
addition, an increase in available tax losses enabled a further
GBP1.3m to be released. The rate of UK corporation tax falls again
to 23% on 1 April 2013 reducing our year end deferred tax balance
by GBP0.4m, though this has been offset by the increased deferred
tax liability on the year's revaluation gains.
Financing
By the start of 2012, we had already refinanced the majority of
the bank facilities falling due for repayment in 2013. As noted in
last year's report, this had been accomplished with the issue of
GBP175m of convertible bonds and GBP425m of new or enlarged
revolving credit facilities signed with relationship lenders.
During the year, we have completed the remaining refinancing
requirement while also continuing with our strategic aims of
diversifying sources of debt, lengthening average debt maturities
and managing the cost and risk profile associated with our debt
facilities.
In January 2012, the new bank facilities documented in December
2011 were drawn. These consisted of a GBP150m fully revolving five
year facility provided equally by RBS and Barclays and a new
GBP150m fully revolving five year facility provided by Lloyds Bank
to replace and extend their existing GBP100m bilateral
facility.
In January 2012, we also broke two interest rate swaps with a
principal amount of GBP130m and a weighted average rate of about
5.0% 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 swapped a total of GBP70m
to April 2019 at just under 2.0%.
Following the repayment in January 2012 of the last loan notes
associated with the London Merchant Securities PLC ("LMS")
transaction, the GBP32.5m unsecured 'loan note' facility due to
expire in June 2012 was also cancelled. In addition, the Group's
overdraft facility was reduced to GBP2.5m from GBP10.0m in July
2012.
Refinancing of the 2013 debt maturities was completed in August
with a new GBP83m fixed rate loan from Cornerstone, part of the
Mass Mutual Financial Group. The new loan was the first transaction
entered into by Cornerstone in the UK. It is fixed at 3.99% until
October 2024, 210 basis points above the reference gilt, and is
secured on two properties in Fitzrovia. The initial loan-to-value
("LTV") ratio was 48.3%, the LTV covenant is set at 70% and there
is no amortisation to expiry. At the same time, the remaining
GBP95m of drawn debt from the GBP375m facility arranged by LMS in
2006 was prepaid and the residual GBP150m facility was cancelled. A
termination cost of GBP0.6m was incurred on a GBP65m interest rate
swap running to March 2013 leaving a forward start swap of GBP65m
at just under 2.0% from March 2013 to April 2019. Overall, these
actions reduced the level of swaps at the balance sheet date by
GBP125m compared to a year earlier, while the amount of fixed rate
debt increased by GBP83m. This overall reduction of GBP42m moved
the proportion at fixed rates or swapped to 92% from 98% at the end
of 2011 and provided a weighted average cost of debt of 4.88% on an
IFRS basis, or 4.63% using the cash cost of the convertible bonds.
This is slightly lower than a year earlier when it was 4.91% and
4.65%, respectively. With the high cost of breaking swaps, the
proportion at fixed rates continues to be slightly higher than our
target range of 60% to 85%.
Available undrawn facilities totalled GBP333m at 31 December
2012 in addition to which there was GBP624m of uncharged property.
The equivalent figures at 31 December 2011 were GBP469m and
GBP589m, respectively.
Maturity profiles of financing facilities and interest rate
hedges as at 31 December 2012 are provided below. The Group's new
long-dated loan has increased the weighted average length of
unexpired debt to 6.1 years at 31 December 2012 compared to 5.3
years in 2011.
Net debt and cash flow
Notwithstanding further significant investment in the pipeline
and GBP101.5m of new properties acquired in the year, property
disposals ensured that net debt only increased by GBP10.3m during
the year to GBP874.8m. The principal properties disposed of were
Riverwalk House, 232-242 Vauxhall Bridge Road, the Triangle Centre
in Scotland and a half share in 1-5 Grosvenor Place which together
provided a cash inflow of GBP161.0m after costs.
Combined with this small increase in debt, the strong rise in
property values meant that the Group's overall LTV ratio fell to
30.0% from 32.0% in 2011. Balance sheet gearing fell
correspondingly from 50.4% to 45.6%. We focus more on interest
cover than absolute levels of leverage and are pleased to report
that gross interest cover rose to 351% for the year compared to
307% in 2011. Net interest cover, after property and administrative
expenses and treating interest capitalised as an expense, increased
to 223% in 2012 from 214% in the previous year.
Dividend
Our approach is to manage dividend distribution in a way that
maintains sufficient dividend cover out of recurring earnings but
which also reflects a progressive and sustainable level of growth
for our shareholders. The Board has been able to recommend an 8.4%
increase in the proposed final dividend to 23.75p per share of
which 18.75p will be paid as a PID with the balance of 5.00p as a
conventional dividend. This will bring the total dividend for the
year to 33.70p per share, an increase of 2.35p or 7.5% over 2011. A
scrip dividend alternative will continue to be offered.
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 the report of the Remuneration Committee
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 (IFRS) 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 policies, 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
John D. Burns Damian M.A. Wisniewski
Chief Executive Officer Finance Director
28 February 2013
GROUP INCOME STATEMENT
2012 2011
Note GBPm GBPm
Gross property and other income 5 150.6 150.9
------------------------------------------- ---- ------- -------
Net property and other income 5 117.0 117.7
---- ------- -------
Administrative expenses (24.5) (22.8)
Movement in valuation of cash-settled
share options (0.6) 0.1
---- ------- -------
Total administrative expenses (25.1) (22.7)
Revaluation surplus 13 174.4 170.1
Profit on disposal of investment property 6 6.9 36.1
Profit on disposal of investment 7 3.9 -
Profit from operations 277.1 301.2
Finance income 8 1.0 1.1
Finance costs 8 (41.8) (44.3)
Movement in fair value of derivative
financial instruments (2.4) (26.5)
Financial derivative termination
costs 9 (6.9) -
Share of results of joint ventures 10 1.1 1.5
Profit before tax 228.1 233.0
Tax credit 11 4.6 1.3
Profit for the year 232.7 234.3
Attributable to:
- Equity shareholders 226.9 228.3
- Minority interest 5.8 6.0
232.7 234.3
Earnings per share 12 222.76p 225.20p
Diluted earnings per share 12 211.82p 217.67p
GROUP STATEMENT OF COMPREHENSIVE INCOME
2012 2011
Note GBPm GBPm
Profit for the year 232.7 234.3
Actuarial gains/(losses) on defined
benefit pension scheme 1.2 (3.5)
Revaluation surplus of owner-occupied
property 13 0.9 2.0
Deferred tax on revaluation surplus 15 0.3 0.7
Foreign currency translation 8 (0.3) -
Reclassification of exchange differences
to income statement 7 (3.9) -
------ ------
Other comprehensive expense (1.8) (0.8)
Total comprehensive income relating
to the year 230.9 233.5
Attributable to:
- Equity shareholders 225.1 227.5
- Minority interest 5.8 6.0
230.9 233.5
GROUP BALANCE SHEET
2012 2011
Note GBPm GBPm
Non-current assets
Investment property 13 2,772.6 2,444.9
Property, plant and equipment 14 20.3 19.4
Investments 10.2 9.7
Deferred tax 15 0.5 -
Pension scheme surplus 0.2 -
Other receivables 16 60.9 55.4
2,864.7 2,529.4
Current assets
Trade and other receivables 17 50.8 45.0
Cash and cash equivalents 24 4.4 3.5
55.2 48.5
Non-current assets held for sale 18 16.5 137.5
Total assets 2,936.4 2,715.4
Current liabilities
Bank overdraft and loans 20 - 32.5
Trade and other payables 19 80.5 70.9
Corporation tax liability 1.9 1.3
Provisions 1.7 1.6
84.1 106.3
Non-current liabilities
Borrowings 20 879.2 835.5
Derivative financial instruments 20 54.3 51.9
Provisions 0.8 0.5
Pension scheme deficit - 1.5
Deferred tax 15 - 5.2
934.3 894.6
Total liabilities 1,018.4 1,000.9
Total net assets 1,918.0 1,714.5
Equity
Share capital 5.0 5.0
Share premium 165.3 162.9
Other reserves 934.0 936.6
Retained earnings 756.1 558.2
Equity shareholders' funds 1,860.4 1,662.7
Minority interest 57.6 51.8
Total equity 1,918.0 1,714.5
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 2012 5.0 162.9 936.6 558.2 1,662.7 51.8 1,714.5
Profit for the year - - - 226.9 226.9 5.8 232.7
Other comprehensive
income - - (3.0) 1.2 (1.8) - (1.8)
Share-based payments - 0.4 0.4 2.3 3.1 - 3.1
Dividends paid - - - (30.5) (30.5) - (30.5)
Scrip dividends - 2.0 - (2.0) - - -
At 31 December 2012 5.0 165.3 934.0 756.1 1,860.4 57.6 1,918.0
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 5.0 158.2 924.0 361.6 1,448.8 45.9 1,494.7
Profit for the year - - - 228.3 228.3 6.0 234.3
Other comprehensive
income - - 2.7 (3.5) (0.8) - (0.8)
Share-based payments - - 0.5 1.9 2.4 - 2.4
Issue of convertible
bonds - - 9.4 - 9.4 - 9.4
Dividends paid - - - (25.4) (25.4) (0.1) (25.5)
Scrip dividends - 4.7 - (4.7) - - -
At 31 December 2011 5.0 162.9 936.6 558.2 1,662.7 51.8 1,714.5
GROUP CASH FLOW STATEMENT
2012 2011
Note GBPm GBPm
Operating activities
Property income 118.1 116.8
Property expenses (9.9) (13.1)
Cash paid to and on behalf of employees (17.8) (14.4)
Other administrative expenses (4.3) (5.2)
Interest received 0.1 -
Interest paid 8 (33.3) (36.5)
Other finance costs (3.4) (1.8)
Other income 2.5 2.1
Tax paid in respect of operating activities (0.2) (0.7)
Net cash from operating activities 51.8 47.2
Investing activities
Acquisition of investment properties (99.8) (91.6)
Capital expenditure on investment properties 8 (78.6) (42.6)
Disposal of investment properties 161.0 131.5
Purchase of property, plant and equipment (0.4) (0.2)
Distributions received from joint ventures 0.7 0.3
Advances to minority interest holder (2.4) (0.8)
Net cash used in investing activities (19.5) (3.4)
Financing activities
Net proceeds of bond issue - 170.2
Repayment of revolving bank loan (123.0) (75.0)
Drawdown of new revolving bank loan 73.0 -
Net movement in other revolving bank
loans 133.5 (179.1)
Repayment of non-revolving bank loans (158.5) -
Drawdown of non-revolving bank loans - 67.5
Drawdown of non-revolving loan 81.6 -
Repayment of loan notes (1.1) -
Financial derivative termination costs (6.9) -
Net proceeds of share issues 0.4 -
Dividends paid to minority interest
holder - (0.1)
Dividends paid 21 (30.4) (25.4)
Net cash used in financing activities (31.4) (41.9)
Increase in cash and cash equivalents
in the year 0.9 1.9
Cash and cash equivalents at the beginning
of the year 3.5 1.6
Cash and cash equivalents at the end
of the year 24 4.4 3.5
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 2012 or
the year ended 31 December 2011, but is derived from those
accounts. The Group's statutory accounts for 2011 have been
delivered to the Registrar of Companies and those for 2012 will be
delivered following the Company's Annual General Meeting. The
auditor's reports on both the 2011 and 2012 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, as adopted by the
European Union (IFRS), 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 2011 annual financial statements, as amended to
reflect the adoption of new standards, amendments and
interpretations which became effective in the year and the
presentational change 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 2012 year end:
IFRS 7 Financial Instruments Disclosures (amendment) and
IAS 12 Income taxes (amendment);
These had no material impact on the financial statements.
In accordance with best practice guidelines, a presentational
change has been made such that, where the Group acts as a
principal, service charge income and expenditure have been
accounted for separately in the income statement. This has resulted
in an increase in both the previously stated 2011 gross property
and other income and property expenses of GBP23.4m, as shown in
note 5. There is no impact on profit for the year or net
assets.
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 9 Financial Instruments;
IFRS 12 Disclosure of Interests in Other Entities;
IFRS 13 Fair Value Measurement;
IAS 1 Presentation of Financial Statements (amendment);
IAS 19 Employee Benefits (amendment);
IAS 27 Separate Financial Statements;
IAS 28 Investments in Associates and Joint Ventures; and
IAS 32 Financial Instruments: Presentation.
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.
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 exceptional items,
these are the same judgements identified at the previous year
end.
- Trade receivables
- 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 2012
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
12. 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 93%
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 7% 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 2012 or 2011, and no individual property accounts for more
than 10% of the value of the property portfolio in either year.
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, geographical
analysis is included in the tables below to provide users with
additional information regarding the areas contained in the
business review.
*Some office buildings have an ancillary element such as retail
or residential.
Gross property income 2012 2011
------------------------- ------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 78.0 1.9 79.9 79.1 3.4 82.5
West End borders 11.5 0.2 11.7 9.0 0.2 9.2
City borders 27.3 0.1 27.4 27.4 0.1 27.5
Provincial - 5.8 5.8 - 6.3 6.3
116.8 8.0 124.8 115.5 10.0 125.5
A reconciliation of gross property income to gross property and
other income is given in note 5.
Property portfolio
Carrying value 2012 2011
--------------------------- ---------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 1,782.9 86.1 1,869.0 1,706.4 79.9 1,786.3
West End borders 244.5 9.9 254.4 210.5 9.8 220.3
City borders 590.2 4.5 594.7 480.2 2.7 482.9
Provincial - 88.9 88.9 - 110.0 110.0
2,617.6 189.4 2,807.0 2,397.1 202.4 2,599.5
Fair value 2012 2011
--------------------------- ---------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 1,806.4 86.2 1,892.6 1,726.7 80.0 1,806.7
West End borders 259.7 9.9 269.6 221.6 9.8 231.4
City borders 599.4 4.5 603.9 491.0 2.7 493.7
Provincial - 93.5 93.5 - 114.7 114.7
2,665.5 194.1 2,859.6 2,439.3 207.2 2,646.5
A reconciliation between fair value and carrying value
of the portfolio is set out in note 13.
5. Property and other income
2012 2011
GBPm GBPm
Rental income 124.7 124.1
------- -------
Surrender premiums received 0.3 2.4
Write-off of associated rents previously recognised
in advance (0.2) (1.0)
----------------------------------------------------- ------- -------
0.1 1.4
Gross property income 124.8 125.5
Service charge income 23.3 23.4
Other income 2.5 2.0
Gross property and other income 150.6 150.9
Gross property income 124.8 125.5
Other income 2.5 2.0
Ground rents (0.5) (0.3)
Reverse surrender premiums (0.2) (1.9)
------- -------
Service charge income 23.3 23.4
Service charge expenses (24.8) (25.8)
----------------------------------------------------- ------- -------
(1.5) (2.4)
Other property costs (8.1) (5.2)
Net property and other income 117.0 117.7
Included within rental income is GBP2.5m (2011: GBP1.8m) of
income which was derived from a lease of 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 GBP8.2m (2011:
GBP8.8m) 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. In 2011, it also included GBP0.2m of development income
which represented 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
2012 2011
GBPm GBPm
Gross disposal proceeds 162.0 132.5
Costs of disposal (1.1) (1.2)
-------- -------
Net disposal proceeds 160.9 131.3
Carrying value (154.2) (95.0)
Adjustment for rents recognised in advance (0.9) (0.2)
Movement in grossing up of headlease liability 1.1 -
6.9 36.1
7. Profit on disposal of investment
In March 2012 the Group liquidated a non-trading US subsidiary.
In previous years, the retranslation of the US-dollar denominated
loan from this subsidiary resulted in foreign exchange movements
being reflected in the income statement. The net asset impact in
each year has been effectively nil as there was an equal and
opposite movement taken to other comprehensive income on
translation of the subsidiary's net asset balance. In accordance
with IAS 21, The Effects of Changes in Foreign Exchange Rates, on
disposal of this foreign subsidiary the cumulative amount of
GBP3.9m of the exchange differences previously recognised in other
comprehensive income and accumulated in the foreign exchange
translation reserve has been reclassified to the income statement.
As in previous years, the effect of this reclassification on net
assets is effectively nil.
8. Finance income and costs
2012 2011
GBPm GBPm
Finance income
Return on pension plan assets 0.7 0.8
Foreign exchange gain 0.3 -
Other - 0.3
Total finance income 1.0 1.1
Finance costs
Bank loans and overdraft 21.9 27.0
Non-utilisation fees 3.3 1.9
Secured bonds 11.4 11.4
Unsecured convertible bonds 6.6 3.8
Amortisation of issue and arrangement costs 3.1 2.0
Amortisation of the fair value of the secured
bonds (0.8) (0.8)
Finance leases 0.4 0.5
Pension interest costs 0.6 0.6
Other 0.2 0.1
Gross interest costs 46.7 46.5
Less: interest capitalised (4.9) (2.2)
Total finance costs 41.8 44.3
Interest of GBP4.9m (2011: GBP2.2m) 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 2012 was GBP38.2m (2011: GBP38.5m) of
which GBP4.9m (2011: GBP2.0m) was included in capital expenditure
on investment properties in the Group cash flow statement under
investing activities.
The foreign exchange gain in 2012 of GBP0.3m (2011: GBPnil)
resulted from the retranslation of an intercompany loan from a
non-trading US subsidiary. The impact on net asset value from this
exchange movement was effectively nil as there is an offsetting
entry in equity (see Group statement of comprehensive income). The
US subsidiary was liquidated in March 2012 (see note 7).
9. Financial derivative termination costs
In January 2012, the Group terminated two interest rate swaps
with a principal amount of GBP130m and a weighted average rate of
approximately 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 would have been
incurred through the remaining life of the swaps.
In addition, in July 2012, the Group incurred costs of GBP0.6m
breaking an interest rate swap with a principal amount of GBP65m
and a weighted average rate of just under 2.0%, excluding margin,
which was due to expire in March 2013.
10. Share of results of joint ventures
2012 2011
GBPm GBPm
Revaluation surplus 0.3 0.9
Other profit from operations after tax 0.8 0.6
1.1 1.5
11. Tax credit
2012 2011
GBPm GBPm
Corporation tax (charge)/credit
UK corporation tax and income tax on profit
for the year (0.6) (0.5)
Other adjustments in respect of prior years'
tax (0.2) 1.8
Corporation tax (charge)/credit (0.8) 1.3
Deferred tax credit
Origination and reversal of temporary differences 5.1 (0.4)
Adjustment for changes in estimates 0.3 0.4
Deferred tax credit 5.4 -
Tax credit 4.6 1.3
In addition, a deferred tax credit of GBP0.3m (2011: GBP0.7m)
was recognised in the statement of comprehensive income relating to
revaluation of the owner-occupied property.
The effective rate of tax for 2012 is lower (2011: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2012 2011
GBPm GBPm
Profit before tax 228.1 233.0
------- -------
Expected tax charge based on the
standard rate of
corporation tax in the UK of
24.5% (2011: 26.5%)* (55.9) (61.7)
Difference between tax and accounting
profit on disposals 1.1 9.6
REIT exempt income 5.6 7.6
Revaluation surplus attributable
to REIT properties 42.3 44.5
Expenses and fair value adjustments not deductible/(allowable)
for tax purposes 4.7 (3.2)
Capital allowances 3.3 3.8
Origination and reversal of temporary
differences 5.1 -
Other differences (1.4) (1.1)
Tax credit/(charge) on current year's
profit 4.8 (0.5)
Adjustments in respect of prior
years' tax (0.2) 1.8
4.6 1.3
*The expected tax rate for 2012 has been changed in line with
the 2012 Finance Act.
12. Profit before tax, earnings and net asset value per
share
On 2 June 2011, the Group issued GBP175m of unsecured
convertible bonds, with an initial conversion price set at
GBP22.22. Although it was not expected that the bonds would be
converted at the share price at either year end (2012: GBP21.06;
2011: GBP15.60), the dilutive effect of these shares is required to
be recognised in accordance with IAS 33, Earnings Per Share. For
2012 and 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, in accordance with IAS 33, been excluded from those
calculations.
Number of shares
------------------------------- --------- --------- -------- --------
Earnings per share Net asset value
per share
------------------------------- -------------------- ------------------
Weighted average At 31 December
-------------------- ------------------
2012 2011 2012 2011
'000 '000 '000 '000
------------------------------- --------- --------- -------- --------
For use in basic measures 101,859 101,375 102,014 101,641
Dilutive effect of convertible
bonds 7,876 4,587 - -
Dilutive effect of share-based
payments 500 667 523 656
------------------------------- --------- --------- -------- --------
For use in diluted earnings
per share 110,235 106,629 102,537 102,297
Less dilutive effect of
convertible bonds (7,876) (4,587) - -
------------------------------- --------- --------- -------- --------
For use in other diluted
measures 102,359 102,042 102,537 102,297
Profit before tax, earnings and earnings
per share
----------------------------------------------------- -------- -------- ---------
Profit Earnings Diluted
before per earnings
tax Earnings share per share
GBPm GBPm p p
---------------------------------------- -------- -------- -------- ---------
Diluted earnings for year ended
31 December 2012 233.5 211.82
Interest effect of dilutive convertible
bonds (6.6)
-------- -------- ---------
Undiluted profit/earnings 228.1 226.9 222.76
Adjustment for:
Disposal of properties (6.9) (6.9)
Disposal of investment (3.9) (3.9)
Group revaluation surplus (174.4) (178.8)
Joint venture revaluation surplus (0.3) (0.3)
Fair value movement in derivative
financial instruments 2.4 2.4
Financial derivative termination
costs 6.9 6.9
Movement in valuation of cash-settled
share options 0.6 0.6
Minority interests in respect
of the above - 4.4
------------------------------------------ -------- -------- -------- ---------
EPRA 52.5 51.3 50.36 50.12
Foreign exchange gain (0.3) (0.3)
Rates credits (0.3) (0.3)
-------- -------- -------- ---------
Underlying 51.9 50.7 49.77 49.53
Diluted earnings for year ended
31 December 2011 232.1 217.67
Interest effect of dilutive convertible
bonds (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
Net asset value and net asset value per
share
------------------------------------------------- -------- ------ -------
Basic Diluted
GBPm p p
----------------------------------------------- -------- ------ -------
At 31 December 2012
Net assets 1,918.0
Minority interest (57.6)
-------- ------ -------
Net assets attributable to equity shareholders 1,860.4 1,824 1,814
Adjustment for:
Deferred tax on revaluation surplus 4.1
Fair value of derivative financial instruments 54.3
Fair value adjustment to secured bonds 17.8
Minority interest in respect of the above (2.7)
-------- ------ -------
EPRA adjusted net asset value 1,933.9 1,896 1,886
Adjustment for:
Deferred tax on revaluation surplus (4.1)
Fair value of derivative financial instruments (54.3)
Mark-to-market of unsecured bonds (20.0)
Mark-to-market of secured bonds (39.0)
Mark-to-market of fixed rate secured loan 1.0
Minority interest in respect of the above 2.7
-------- ------ -------
EPRA triple net asset value 1,820.2 1,784 1,775
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 8.8
Fair value of derivative financial instruments 51.9
Fair value adjustment to secured bonds 18.6
Minority interest in respect of the above (2.2)
-------- ------ -------
EPRA adjusted net asset value 1,739.8 1,712 1,701
Adjustment for:
Deferred tax on revaluation surplus (8.8)
Fair value of derivative financial instruments (51.9)
Mark-to-market of unsecured bonds 2.4
Mark-to-market of secured bonds (39.4)
Minority interest in respect of the above 2.2
-------- ------ -------
EPRA triple net asset value 1,644.3 1,618 1,607
13. 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 2012 2,068.9 376.0 2,444.9 17.1 137.5 2,599.5
-------- --------- ---------- -------- -------- ---------
Acquisitions 57.1 44.4 101.5 - - 101.5
Capital expenditure 63.9 13.2 77.1 - 0.4 77.5
Interest capitalisation 4.2 0.7 4.9 - - 4.9
-------- --------- ---------- -------- -------- ---------
Additions 125.2 58.3 183.5 - 0.4 183.9
Disposals (16.1) (0.2) (16.3) - (137.9) (154.2)
Depreciation - - - (0.1) - (0.1)
Transfers (17.7) 1.2 (16.5) - 16.5 -
Revaluation 136.3 38.1 174.4 0.9 - 175.3
Movement in grossing up
of
headlease liabilities - 2.6 2.6 - - 2.6
At 31 December 2012 2,296.6 476.0 2,772.6 17.9 16.5 2,807.0
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
Interest capitalisation 1.9 0.3 2.2 - - 2.2
-------- --------- ---------- -------- -------- ---------
Additions 119.9 12.9 132.8 - 2.0 134.8
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
Adjustments from fair value to
carrying value
At 31 December 2012
Fair value 2,353.9 471.3 2,825.2 17.9 16.5 2,859.6
Rents recognised in advance (57.3) (4.2) (61.5) - - (61.5)
Grossing up of headlease
liabilities - 8.9 8.9 - - 8.9
Carrying value 2,296.6 476.0 2,772.6 17.9 16.5 2,807.0
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
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2012 by external valuers
on the basis of fair value in accordance with the RICS Valuation -
Professional Standards (2012). The valuers' opinion was primarily
derived using comparable recent market transactions on arm's length
terms. CBRE Limited valued the majority of the properties at
GBP2,829.1m (2011: GBP2,615.2m) and other valuers valued the
remaining properties at GBP30.5m (2011: GBP31.3m). Of the
properties revalued by CBRE, GBP17.9m (2011: GBP17.1m) relating to
owner-occupied property was included within property, plant and
equipment and GBP16.5m (2011: GBP137.2m) was included within
non-current assets held for sale.
The total fees, including the fee for this assignment, earned by
CBRE (or other companies forming part of the same group of
companies within the UK) from the Group is less than 5.0% of their
total UK revenues.
In 2011, the revaluation surplus in the income statement of
GBP170.1m included the revaluation surplus for the non-current
assets held for sale of GBP12.0m. The revaluation surplus for the
owner-occupied property of GBP0.9m (2011: GBP2.0m) was included
within the revaluation reserve.
In 2011, the transfer of GBP0.8m related 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 were
transferred to property, plant and equipment (see note 14).
2012 2011
GBPm GBPm
Historical cost
Investment property 2,205.8 2,055.5
Owner-occupied property 7.3 7.3
Assets held for sale 15.3 69.2
------- -------
Total property portfolio 2,228.4 2,132.0
14. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2012 17.1 1.5 0.8 19.4
Additions - - 0.4 0.4
Depreciation (0.1) - (0.3) (0.4)
Revaluation 0.9 - - 0.9
At 31 December 2012 17.9 1.5 0.9 20.3
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
Net book value
Cost or valuation 17.9 1.5 2.2 21.6
Accumulated depreciation - - (1.3) (1.3)
At 31 December 2012 17.9 1.5 0.9 20.3
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
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 November 2012.
The historic cost of the artwork in the Group at 31 December
2012 was GBP1.5m (2011: GBP1.5m). See note 13 for the historic cost
of owner-occupied property.
15. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2012 (8.8) 3.6 (5.2)
Released during the year in other
comprehensive income 0.2 - 0.2
Changes in tax rates in other comprehensive
income 0.1 - 0.1
Released during the year in the income
statement 3.8 1.3 5.1
Change in tax rates in the income
statement 0.6 (0.3) 0.3
At 31 December 2012 (4.1) 4.6 0.5
At 1 January 2011 (8.9) 3.0 (5.9)
Released during the year in other
comprehensive income 0.6 - 0.6
Changes in tax rates in other comprehensive
income 0.1 - 0.1
(Provided)/released during the year
in the income statement (1.2) 0.8 (0.4)
Change in tax rates in the income
statement 0.6 (0.2) 0.4
At 31 December 2011 (8.8) 3.6 (5.2)
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.
Deferred tax assets have been recognised in respect of all tax
losses and other temporary differences where the Directors believe
it is probable that these assets will be recovered.
16. Other receivables (non-current)
2012 2011
GBPm GBPm
Accrued income 55.5 50.1
Other 5.4 5.3
60.9 55.4
Accrued income relates to rents recognised in advance as a
result of spreading the effect of rent free periods, reduced rent
periods, capital contributions in lieu of rent free periods and
contracted rent uplifts over the expected terms of their respective
leases. At 31 December 2012, the total rents recognised in advance
were GBP61.5m (2011: GBP54.4m), with GBP6.0m of this amount (2011:
GBP4.3m) included as current assets within trade and other
receivables.
17. Trade and other receivables
2012 2011
GBPm GBPm
Trade receivables 8.6 9.0
Other receivables 13.3 13.0
Prepayments 14.8 16.5
Sales and social security taxes 5.9 2.2
Accrued income 8.2 4.3
50.8 45.0
18. Non-current assets held for sale
2012 2011
GBPm GBPm
Investment properties (see note 13) 16.5 137.5
16.5 137.5
In February 2013, the Group exchanged contracts to sell two
freehold properties for a total of GBP16.5m after costs.
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 exchanged contracts to sell two properties,
Riverwalk House SW1 and 232-242 Vauxhall Bridge Road SW1, with
completion conditional on a suitable planning permission the
receipt of which occurred during the second half of 2012.
Therefore, at 31 December 2012 and 31 December 2011,
respectively, these properties were recognised as non-current
assets held for sale in accordance with IFRS 5, Non-current Assets
Held for Sale. See note 13 for historic cost of non-current assets
held for sale.
19. Trade and other payables
2012 2011
GBPm GBPm
Trade payables 7.9 7.1
Other payables 10.6 10.9
Accruals 25.7 17.1
Deferred income 36.3 35.8
80.5 70.9
20. Borrowings and derivative financial instruments
2012 2011
GBPm GBPm
Current liabilities
Unsecured bank loan - 31.4
Loan notes - 1.1
- 32.5
Non-current liabilities
2.75% unsecured convertible bonds 2016 165.0 162.4
6.5% secured bonds 2026 191.4 192.2
Bank loans 432.2 473.5
3.99% secured loan 81.7 -
Leasehold liabilities 8.9 7.4
879.2 835.5
Derivative financial instruments expiring
in greater than one year 54.3 51.9
Total liabilities 933.5 919.9
Reconciliation to net debt:
Total borrowings and derivative financial
instruments 933.5 919.9
Less:
Derivative financial instruments (54.3) (51.9)
Cash and cash equivalents (4.4) (3.5)
Net debt 874.8 864.5
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.
21. Dividends
Dividend per share
-----------------------
Payment PID Non-PID Total 2012 2011
date p p p GBPm GBPm
Current year
2012 final dividend 14 June 2013 18.75 5.00 23.75 - -
1 November
2012 interim dividend 2012 9.95 - 9.95 10.2 -
------ ------- ------ ------ ------
Distribution of current
year profit 28.70 5.00 33.70 10.2 -
Prior year
2011 final dividend 15 June 2012 18.10 3.80 21.90 22.3 -
4 November
2011 interim dividend 2011 9.45 - 9.45 - 9.6
------ ------- ------ ------ ------
Distribution of prior
year profit 27.55 3.80 31.35 22.3 9.6
2010 final dividend 16 June 2011 20.25 - 20.25 - 20.5
------ ------- ------ ------ ------
Dividends as reported
in the
Group statement of changes
in equity 32.5 30.1
------ ------
2012 interim dividend 14 January (1.5) -
witholding tax 2013
2012 interim scrip dividend 1 November (0.7) -
2012
2011 final scrip dividend 15 June 2012 (1.3) -
2011 interim dividend 27 January
witholding tax 2012 1.4 (1.4)
4 November
2011 interim scrip dividend 2011 - (2.3)
2010 final scrip dividend 16 June 2011 - (2.4)
2010 interim dividend 14 January
withholding tax 2011 - 1.4
------ ------
Dividends paid as reported
in the
Group cash flow statement 30.4 25.4
------ ------
22. Gearing ratios
NAV gearing
2012 2011
GBPm GBPm
Net debt 874.8 864.5
Net assets 1,918.0 1,714.5
NAV gearing 45.6% 50.4%
Loan-to-value ratio
2012 2011
GBPm GBPm
Net debt 874.8 864.5
Fair value adjustment of secured bonds (17.8) (18.6)
Unamortised arrangement costs 11.2 7.9
Leasehold liabilities (8.9) (7.4)
Drawn facilities 859.3 846.4
Fair value of property portfolio 2,859.6 2,646.5
Loan-to-value ratio 30.0% 32.0%
Interest cover ratio
2012 2011
GBPm GBPm
Gross property income 124.8 125.5
Surrender premiums (0.3) (2.4)
Ground rent (0.9) (0.8)
Gross rental income net of ground rent 123.6 122.3
Net finance costs 40.8 43.2
Foreign exchange gain 0.3 -
Net pension return 0.1 0.2
Finance lease costs (0.4) (0.5)
Amortisation of fair value adjustment to secured
bonds 0.8 0.8
Amortisation of issue and arrangement costs (3.1) (2.0)
Non-utilisation fees (3.3) (1.9)
Net interest payable 35.2 39.8
Interest cover ratio 351% 307%
23. Total return
2012 2011
% %
Total return 12.7 17.4
24. Cash and cash equivalents
2012 2011
GBPm GBPm
Short-term deposits 4.4 3.5
25. Post balance sheet events
In February 2013, the Group exchanged contracts to sell two
freehold properties for a total of GBP16.5m after costs. These
transactions will realise neither a profit nor loss on
disposal.
26. Risk management and internal control
Risk is an inherent part of running a business and, whilst the
Board aims to maximise returns, it needs to understand and manage
the associated risks. Whilst overall responsibility for this
process rests with the Board it has delegated responsibility for
assurance concerning the risk management process to the Audit
Committee and the Risk Committee, the latter having been
established at the end of 2011. Executive management is responsible
for designing, implementing and maintaining the necessary systems
of internal control.
The Group operates principally from one central London office
with a relatively flat management structure. This enables members
of the Executive Committee to be closely involved in day-to-day
matters and therefore able to quickly identify and respond to
risks.
A key element in the system of internal controls is the Group's
risk register which is reviewed formally by the Board once a year.
The register is prepared by the members of the Executive Committee
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. It also
recognises that there are 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 reviewed
throughout the year by the Risk Committee which periodically
receives presentations from senior management to gain a more
in-depth understanding of the control environment in certain areas
of the business. The register was updated between December 2012 and
February 2013 and includes 43 risks spread between strategic risks,
corporate risks, property risks and financial risks.
The principal risks and uncertainties that the Group faces in
2013, together with the controls and mitigating factors, are set
out below:
Strategic risks
That the Group's strategy does not create the anticipated shareholder
value or fails to meet investors' expectations.
Risk and effect Controls and mitigation Action
* Inconsistent strategy * The Group carries out a five-year strategic review * The last annual strategic review was carried out by
each year and also prepares an annual budget and the Board in June 2012. This considered the
three rolling forecasts which cover the next two sensitivity of six key measures to changes in
The Group's strategy years. In the course of preparing these documents the underlying assumptions including interest rates and
is inconsistent with Board considers the effect on the Group's KPIs and borrowing margins, timing of projects, level of
the state of the market key ratios caused by changing the main underlying capital expenditure and capital recycling.
in which it operates. assumptions to reflect different economic scenarios.
* Inconsistent development programme * The three rolling forecasts prepared during the year
* The Group's plans can then be set so as to best focus on the same key measures but consider the
realise its long-term strategic goals given the effect of varying different assumptions to reflect
The Group's development expected economic and market conditions. This changing economic and market conditions.
programme is not consistent flexibility arises from the policy of maintaining
with the economic cycle. income from properties for as long as possible until
development starts.
* The timing of the Group's development programme and
The Group currently the strategies for individual properties reflect the
benefits from a strong outcome of these considerations.
central London market * Over 50% of the Group's portfolio has been identified
which could be adversely for future redevelopment. This enables the Board to
affected by a number delay marginal projects until market conditions are * During the year the Group's interest cover ratio was
of high level economic favourable. above 350% and the REIT ratios were comfortably met.
factors. This would At the year end its loan-to-value ratio was 30%.
reduce the value of
the Group's portfolio * The risk remains significant and therefore in forming
with a consequent effect its plans the Board pays particular attention to
on two of its KPIs maintaining sufficient headroom in all the Group's
- Total Return and key ratios, financial covenants and interest cover.
Total Property Return.
The Board sees the
level of this risk
as broadly unchanged
from last year.
Financial risks
That the Group becomes unable to meet its financial obligations
or finance the business appropriately.
Risk and effect Controls and mitigation Action
* Breach of financial covenants * The Group's secured borrowings contain financial * The Group tests its compliance with financial
covenants based on specific security and not covenants regularly and operated comfortably within
corporate ratios such as overall NAV gearing. these limits throughout 2012. Property values could
A substantial decline Treasury control schedules are updated weekly whilst decline by around 40% at the balance sheet date
in property values the rolling forecasts enable any potential problems before there would be a breach of financial
or a material loss to be identified at an early stage and corrective covenants.
of rental income could action to be taken. The Group has considerable
result in a breach headroom under its financial covenants, operates at a
of the Group's financial modest level of gearing and has a substantial amount * Compliance with the financial covenants is one of the
covenants. This may of uncharged property that could be secured if matters monitored as part of the sensitivity analysis
accelerate the repayment necessary. undertaken when preparing the annual strategic review
of the Group's borrowings and the rolling forecasts.
or result in their
cancellation.
* At 31 December 2012 the Group owned GBP624m of
A decline in property uncharged properties.
values would affect
the Group's Total Return
and Total Property
Return, both KPIs.
A loss of rental income
would also affect another
KPI - Interest Cover
Ratio.
The Board considers
this risk to be slightly
lower this year as
it has considerable
headroom with its covenants
and expects the business
cycle to be less volatile.
* Sub-optimal financing * The Group's five-year strategic review and rolling * The Group's financing comes increasingly from a
forecasts enable financing requirements to be number of different sources/providers and has a
identified at an early stage. This allows alternative varied maturity profile. The proportion of the
structure sources of finance to be evaluated and the preferred Group's borrowings provided by bank loans decreased
The Group's cost of one to be identified. To a degree, the funds can then from 59% at 31 December 2011 to 50% at the year end.
borrowing is increased be raised when market conditions are favourable.
due to an inability
to raise finance from
its preferred sources. * The refinancing of the facilities maturing in 2013
that was started in 2011 was completed in August
This risk would affect 2012. The focus in 2011 was to renew or refinance
the Group's Interest revolving bank facilities. Then in August 2012, the
Cover Ratio KPI. remaining GBP150m bank loan expiring in 2013 was
prepaid and cancelled and a new GBP83m loan was
The Board considers signed with Cornerstone/Mass Mutual for a term of
this risk to have decreased 121/4 years at a fixed rate of 3.99%.
over the last 12 months
as the Group has increased
the diversity of its
funding sources and * As at 31 December 2012, the weighted average duration
there have been improvements of the Group's debt was 6.1 years.
in the health of the
banking sector.
* At the year end the Group had GBP333m of unutilised
available, committed bank facilities.
* Higher interest rates * The Group uses interest rate derivatives to "top up" * During the year the Group terminated three interest
the amount of fixed rate debt to a level commensurate rate swaps which were at historic rates and initiated
with the perceived risk to the Group. new instruments which have locked in the lower rates
Financing costs are that were available at that time.
higher due to increases
in interest rates.
* 92% of borrowings were fixed or hedged at the year
This risk would also end.
affect the Group's
Interest Cover Ratio
KPI.
The Board sees this
risk as unchanged over
the year.
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
* Reduced development * Standardised appraisals including contingencies are * The Group is advised by top planning consultants and
prepared for all investments and sensitivity analysis has considerable in-house planning expertise.
is undertaken to ensure that an adequate return is
returns made in all circumstances considered likely to occur.
The Group's development
projects do not produce * Executive Directors represent the Group on a number
the anticipated financial * The scale of the Group's development programme is of local bodies which ensures that it remains aware
return due to one or managed to reflect anticipated market conditions. of local issues.
more of the following
factors:
* Regular cost reports are produced for the Executive
Committee and the Board that monitor progress of * The procurement process used by the Group includes
: Delays in the planning actual expenditure against budget. This allows the use of highly regarded firms of quantity
process. potential adverse variances to be identified and surveyors and is designed to minimise uncertainty
: Delays due to addressed at an early stage. regarding costs.
contractors/
sub-contractors
defaulting. * Post completion reviews are carried out for all major
: Increased construction developments to ensure that improvements to the * Development costs are benchmarked to ensure that the
costs. Group's procedures are identified and implemented. Group obtains competitive pricing.
: Adverse letting
conditions.
This would have an * The Group's style of accommodation remains in demand
effect on the Group's as evidenced by the 49 lettings achieved in 2012
Total Return and Total which totalled 340,300 sq ft.
Property Return KPIs.
Taken as a whole the
Board considers this * The Group has secured significant pre-lets of the
risk to be at the same space in its current development programme which
level as last year. significantly "de-risks" these projects.
* Tenant default * All prospective tenants are considered by the Group's * The Group has a diversified tenant base.
credit committee and security is taken where
appropriate either in the form of parent company
The Group suffers a guarantees or rent deposits.
loss of rental income * The credit committee meets each week and considered
and increased vacant 98 potential tenants during the year.
property costs due * The Group's property managers maintain regular
to tenants vacating contact with tenants and work closely with any that
or becoming bankrupt. are facing financial difficulties.
The continuing lack * In total the Group holds rental deposits amounting to
of growth in the UK GBP10.8m.
economy could lead
to an increase in business * The Group's credit committee regularly reviews a list
failure. of slow payers and considers what actions should be
taken. * On average during the year, the Group has collected
This risk would have 98% of the rents due within 14 days of the due date.
an immediate effect
on the Group's Tenant
Receipts and Void
Management
KPIs and, if significant,
on the Total Property
Return, Total Return
and Interest Cover
Ratio.
The Board considers
this risk to have
increased
over the last year
due to the effect that
the prolonged austerity
measures are having
on businesses.
* Shortage of key staff * The remuneration packages of all employees are * The Group recruited 11 new members of staff during
bench-marked regularly. 2012. The key appointment of a sustainability manager
was made in January 2013.
The Group is unable
to successfully implement * Six-monthly appraisals identify training requirements
its strategy due to which are fulfilled over the next six months. * Staff turnover during 2012 was low at 7% (9%
inadequate succession including retirees).
planning or a failure
to recruit and retain * The Nominations Committee reviews the Group's
key staff with appropriate succession planning for both executive and
skills. non-executive Directors. * The Executive Committee considers non-Board
succession issues.
This risk could impact
on any of the Group's
KPIs.
The risk is seen as
unchanged over the
year.
* Damaged reputation * The Group's risk committee reports to the Board * A Health and Safety report is presented at all
concerning regulatory risk. Executive Committee and main Board meetings.
The Group's cost base
is increased or its * The Group employs a health and safety manager.
reputation damaged * The Group pays considerable attention to
through a breach of sustainability issues and produces a sustainability
any of the legislation * A sustainability committee chaired by Paul Williams report annually.
that forms the regulatory and advised by external consultants addresses risk in
framework within which this area. A sustainability manager was recruited in
the Group operates. January 2013.
This risk would most * The Company's policies including those on the Bribery
directly impact on Act, Health and Safety, Equal Opportunities,
the Group's Total Harassment and Whistleblowing are available to all
Shareholder staff on the Company intranet.
Return - one of its
key metrics. Indirectly
it could impact on * All new members of staff benefit from an induction
a number of the formal programme.
KPIs.
The Board considers
the risk to have increased
over the year due to
increased legislation
covering more areas
of the Group's business
and an increased ability
of pressure groups
to gain publicity for
any breaches.
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, a fixed rate loan, secured and unsecured bonds, and
interest rate swaps.
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
generally 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 generally between 60% and 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 2012, the proportion of fixed debt held by the Group
was above this range at 92%. During both 2012 and 2011, the Group's
borrowings at variable rate were denominated in sterling.
The Group monitors the interest rate exposure on a regular
basis. A sensitivity analysis was performed to ascertain the impact
on profit or loss and net assets of a 50 basis point shift in
interest rates and this would result in an increase of GBP0.3m
(2011: GBP0.1m) or a decrease of GBP0.3m (2011: GBP0.1m).
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-year projections
of cashflow and 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 above average long-term
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 NAV gearing and the loan-to-value ratio. During
2012, the Group's strategy, which was unchanged from 2011, was to
maintain the NAV 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
22.
27. 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 2012.
28. 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.
The EPRA guidelines include guidance 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. Currently these adjustments are for
rates credits and the foreign exchange movement.
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.
NAV 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 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
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' estimated 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.
29.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
FR UBVBROKAUUAR
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