TIDMDLN
RNS Number : 0840Q
Derwent London PLC
25 February 2016
25 February 2016
Derwent London plc ("Derwent London"/ "the Group")
Excellent lettings, strong finances and well positioned for
2016
Financial highlights
-- EPRA net asset value per share increased by 21.6% to 3,535p
from 2,908p at 31 December 2014, and by 9.6% from 3,226p at 30 June
2015.
-- Net rental income increased 7.8% to GBP138.7m from GBP128.7m in 2014.
-- EPRA profit before tax rose 31.0% to GBP81.6m from GBP62.3m last year.
-- EPRA earnings per share increased 25.0% to 71.34p per share.
-- Proposed final dividend per share increased by 10.0% to
30.80p, making 43.40p for the full year.
Operational performance in 2015
-- New lettings of GBP27.1m, on average 10.8% above December 2014 ERVs.
-- The full year underlying portfolio valuation uplift was 16.5%, and was 7.1% in H2.
-- The underlying valuation uplift on our developments was 31.5% in the year.
-- Total property return was 19.9%, and ahead of the IPD Central
London Offices Index of 19.7%.
-- EPRA true equivalent yield was 4.52%; a 21bp reduction in 2015 of which 4bp was in H2.
-- Estimated rental values on an EPRA basis increased by 11.8% in 2015 (by 6.6% in H2).
-- Completed 226,000 sq ft of development - 72% profit on cost.
-- Total acquisitions were GBP246m, total disposals GBP277m, and capital expenditure GBP116m.
Portfolio well positioned for future earnings growth with a good
start to 2016
-- Achieved GBP10.1m of new lettings (GBP9.2m net) in 2016 to date.
-- Includes pre-letting all the offices at The Copyright
Building W1 to Capita (announced today).
-- Estimated portfolio reversion GBP141m pa at year end:
o 25% contractual.
o 54% from space to be let, principally developments and
refurbishments of which half to be delivered in 2016-17, and half
in 2019.
o 21% from lease reviews and renewals.
-- Estimated future capital expenditure including capitalised
interest of GBP569m over four years.
-- Estimated 5-8% ERV growth on our portfolio in 2016.
Strong finances
-- Healthy 2015 financial ratios: interest cover 3.6x; dividend cover 1.6x; and LTV 17.8%.
-- Net debt fell 10% to GBP911.7m in 2015.
-- Debt maturity rose to 7.3 years at December 2015 before US
Private Placement (USPP) in 2016.
-- GBP105m USPP in February 2016 at attractive rates (announced today).
-- Proforma cash and undrawn facilities of GBP374m including USPP.
Robbie Rayne, Chairman, commented:
"The Group made excellent progress in 2015, with results which
highlight the underlying strength of our business. The Board has
proposed a 10% increase in the final dividend reflecting our recent
earnings growth and confirming our confidence in their longer term
momentum."
John Burns, Chief Executive Officer, commented:
"We are seeing good occupier demand for our properties and our
portfolio has significant reversionary potential. We recognise that
London property cannot be immune from the economic and political
issues causing global stock market volatility. However, we have a
strong financial position and the current year has started well for
our business as evidenced by today's announcements."
Webcast and conference call
There will be a live webcast together with a conference call for
investors and analysts at 09:30 GMT today. The audio webcast can be
accessed via www.derwentlondon.com.
To participate in the call, please dial the following number:
+44 (0)20 3059 8125
Please say "Derwent London" when asked for the participant
code.
A recording of the conference call will also be made available
following the conclusion of the call on www.derwentlondon.com.
For further information, please contact:
Derwent London John Burns, Chief Executive
Tel: +44 (0)20 7659 3000 Officer
Damian Wisniewski, Finance
Director
Quentin Freeman, Head
of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Nina Coad
CHAIRMAN'S STATEMENT
Overview
Derwent London made excellent progress in 2015. A highlight of
the Group's performance was the 21.6% increase in our EPRA diluted
NAV to 3,535p per share driven by the combination of rental value
growth, development surpluses, asset management activity and yield
tightening. There was also a particularly strong rise in EPRA
recurring earnings which increased by 25.0% to 71.34p per share,
the product of our substantial letting progress in recent years and
lower interest costs.
As a result of this growing income stream, the Board has
recommended raising the final dividend by 10.0% to 30.80p per share
to make the full year's dividend 43.40p, an increase of 9.5% for
the year. At this level the total dividend for 2015 is 1.6 times
covered by recurring earnings. Our average dividend growth in the
eight years since we converted to a REIT has been 8.6% pa.
During the year the London office market saw strong demand both
from occupiers and investors. In what proved a record year for the
Group, we let 523,800 sq ft in 79 transactions capturing GBP27.1m
pa of rental income. On average these lettings were 10.8% above
December 2014 Estimated Rental Values (ERV) and, by income, 44%
were pre-lets. Buoyant investment demand enabled us to make
GBP247.8m of investment property disposals at an average surplus of
18.4% to our December 2014 book values. Despite the competitive
market conditions the Group was also able to acquire two major
properties in the Tech Belt for GBP232.0m, and we invested
GBP116.4m of capital expenditure in our projects. After a year of
significant refinancing activity, including the early conversion to
equity of the first of our two convertible bonds, we have
strengthened our financial position with enhanced interest cover of
3.62x and the LTV ratio being reduced to 17.8%.
As long term investors in central London, it is important that
our activities benefit the neighbourhoods and local environments in
which we invest. Last year we extended our commitment to the
Group's Community Investment Fund, which will now cover the Tech
Belt as well as Fitzrovia. Our Sustainability Report, published
simultaneously with the Annual Report, gives more detail of the
Group's activities. Brief highlights include improved resource
efficiency with reductions in carbon generation and energy use. We
continue to record high ratings from GRESB, CDP and EPRA, and are a
member of FTSE4good. Looking forward, to enhance the transparency
of our sustainability and corporate responsibility, we will be
following Global Reporting Initiative guidelines from 2016
onwards.
This year's results provide further testimony to the success of
our strategy and culture. The Group has again been recognised in
the Management Today awards for 'Britain's Most Admired Companies'.
In this annual survey we were ranked third across all UK companies,
and first in the property sector for the sixth successive year. It
is also gratifying to know that in a recent non-attributable staff
survey, of the 96% who responded, all stated that they were proud
to work for the Group. Once again I would like to thank them as
well as our other stakeholders and advisers.
The Board
Last year we continued to refresh the Board's composition. June
de Moller and Robert Farnes retired and we would like to thank them
for their insight and sound judgement over a long period. In their
place we are delighted to welcome Claudia Arney and Cilla Snowball,
who bring with them extensive business, advertising, marketing,
media and technology experience.
Outlook
The current year has started with major falls in global stock
markets mainly based on concerns regarding global economic growth.
In addition, the UK is facing an EU referendum in June, the result
of which will either confirm the existing situation or extend the
period of uncertainty as the ramifications of leaving the EU are
worked out. It is too early to tell what impact this may have on
the London property market, but a protracted period of uncertainty
is likely to reduce business confidence.
UK economic growth appears to be moderating and, as a global
city, London is not insulated from external risks, but the central
London office market starts the year in a strong position with good
demand and low vacancy rates. If current market conditions persist
we estimate rental value growth across our portfolio of 5-8% and
yields to remain firm in 2016. We expect the strongest rental
growth will be at the lower end of our GBP45-80 per sq ft
mid-market range and, with an average ERV on our central London
office portfolio of only GBP51 per sq ft, the Group is well placed
to benefit.
Operationally 2016 has started well for us. In particular we
have achieved GBP9.2m net of new lettings thereby considerably
de-risking our immediate development pipeline, and raised
additional long-term finance. Together with the strong occupier
interest being shown in our schemes, this enables the Group to
continue its development programme confident in its resilience to
potential market turbulence and well positioned to take advantage
of opportunities that may arise.
CHIEF EXECUTIVE'S STATEMENT
(MORE TO FOLLOW) Dow Jones Newswires
February 25, 2016 02:01 ET (07:01 GMT)
Last year's achievements reinforced the Group's strong position
as we consistently look to improve our long term income prospects.
This approach has seen us assemble a portfolio that has significant
opportunities to benefit from improving locations, hands-on asset
management and regeneration. We start 2016 with GBP141.0m of
estimated reversion. Just over half of this potential growth
derives from developments and refurbishments with a total cost to
complete of GBP569m (equivalent to 11% of the December 2015
property portfolio) which will be phased over the next four years.
The completion of this programme will add net lettable area and
will signify a major upgrade to our portfolio ensuring it meets the
latest occupational demands and environmental standards. In the
medium term our strategy is to deliver these growth prospects while
ensuring the business does not incur undue risks.
Portfolio positioned for future earnings growth
Our strategy ensures that whilst our portfolio contains a wealth
of future value enhancing opportunities the vast majority remains
income producing (at the year end this was 77% by area).
Approximately 53% consisted of property which we have already
regenerated, but which have opportunities for growth through asset
management, and another 24% was occupied buildings that form our
stock of future redevelopment and refurbishment schemes, where we
retain control over a project's timing. The remaining 23% of the
portfolio is subject to development or refurbishment projects which
we continue to de-risk as they progress. During the year the EPRA
vacancy rate, which is based on the space available to let, was
reduced from 4.1% to 1.3%. Dependent on future pre-letting
activity, this could rise in the second half of 2016 as projects
are completed.
Although we achieved new rental levels at a number of properties
in 2015, we believe our buildings continue to offer occupiers good
value with the average ERV of our central London office portfolio
still only GBP51 per sq ft, and with 56% of our portfolio by area
let below GBP50 per sq ft on a 'topped-up basis'. These lie
comfortably at the lower end of our middle-market range of
GBP45-GBP80 per sq ft.
The current development and refurbishment programme will benefit
from the opening of Crossrail. The additional estimated GBP569m
capital expenditure to complete these projects, which includes
GBP48m of capitalised interest, will be spread over the next four
years. Construction cost inflation remains high, and capacity
constraints on many contractors have seen delays across the
industry including at some of our schemes. The cumulative ERV of
these projects (including pre-lets) is GBP78.9m of which half will
not be completed until 2019.
We phase the timing of the capital expenditure on our
developments to ensure that it is appropriate to the Group's risk
appetite. During last year we completed 226,000 sq ft of projects
which are now 97% let or sold. In the next two years we expect to
deliver 728,000 sq ft, which is currently 32% let by area. This
includes pre-lets in the current year of all the office space
(87,150 sq ft) at The Copyright Building W1 to Capita, and 28,600
sq ft at White Collar Factory EC1 to Adobe. The remaining part of
our development programme totalling 620,000 sq ft relates to two
West End developments: 80 Charlotte Street W1 and Brunel Building
W2. Neither building completes until 2019, but we are already
having preliminary discussions with potential occupiers for part of
this space.
We have taken steps to unlock potential major schemes that we
could start from 2018 onwards. We are particularly pleased to have
agreed terms with Crossrail, which enable us to gain access to
redevelop above the Crossrail site at 1 Oxford Street W1, one of
London's most prominent locations.
Disciplined approach to acquisitions and disposals
We have an opportunistic approach to acquisitions within our
strategic plan and were pleased to acquire two substantial Tech
Belt properties last year at attractive prices of around GBP545 per
sq ft. Both present short term refurbishment opportunities and
together will contribute 40% of our 2016-17 projects. In the longer
term, both buildings offer the opportunity for regeneration and the
creation of additional space in the next decade.
Overall the proceeds from property sales of GBP277m exceeded the
cost of new acquisitions. Typically we sell investment assets when
we have identified better relative growth elsewhere. In 2015, our
disposals included a number of properties as part of a property
swap, and a sale to an owner-occupier after we had obtained
planning consent for a major hotel development. In addition we have
completed and sold most of our available residential units.
Following our decision to refurbish 25 Savile Row W1 as offices,
our residential exposure remains modest and primarily consists of
ancillary space connected with our larger commercial projects. In
accordance with our usual approach, we expect to continue to
recycle capital with over GBP100m of investment property sales
planned in the current year.
Finance
Underpinning our business is a flexible financial structure and
last year we took steps to strengthen this further. In January 2015
our GBP175m convertible bonds 2016 were converted early thereby
raising new equity and reducing debt. Later in the year, we
increased the level of our unsecured revolving debt by refinancing
a secured loan and extended the maturity of our principal bank
facility. The Group's year end financial ratios are strong with
interest cover of 3.62 times and an LTV ratio of 17.8%. Since the
year end we have also arranged GBP105m of new long-term debt which
will increase the level of undrawn facilities.
The year ahead
Occupier and investment demand remains strong in Derwent
London's markets and we have started the year well increasing
contracted income with a significant number of new lettings at good
levels. We have also enhanced our financial structure. The general
economic environment has shown signs of nervousness and volatility
in 2016 and, if conditions were to deteriorate, our balance sheet
strength would give us considerable resilience. However, providing
occupier demand remains solid, we expect to see further good
letting activity as the year unfolds thereby locking in significant
income growth.
OUR MARKET
See Appendix 1 for supporting graphs
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_-2016-2-24.pdf
Last year the Group continued to enjoy very favourable market
conditions with strong occupier demand underpinned by a growing UK
economy. The recent falls in public equity prices and the value of
oil and other commodities demonstrate that, despite some recovery
in the USA and European economies, overall economic growth remains
fragile and faces a number of risks. The latest estimates see the
UK economy growing at about 2% pa over the next two years, one of
the faster growth rates amongst the G8 economies, and London's
growth rate is expected to remain in excess of the UK average.
This level of economic activity remains conducive to employment
growth and continuing low interest and inflation rates in the UK.
CBRE forecasts Inner London office employment growth at 1.7% pa in
the next five years. Last year 14.5m sq ft of central London office
space was taken up, of which 4.4m sq ft was in the West End. Total
take-up was 3% below the previous year's level, but remains well
above trend. In 2015 demand from the financial sector recovered so
take up was more evenly spread across sectors with business and
professional services at 35.8%, banking and finance at 24.4% and
TMT at 20.2%. The overall vacancy rate reduced to 2.5% in central
London (one of the lowest levels recorded), and to 2.2% in the West
End. Prime rental levels are now estimated at GBP120 per sq ft in
Mayfair and St. James's, GBP82.50 per sq ft in Fitzrovia and
GBP68.50 per sq ft in the City.
The decline in the vacancy rate has led to a supply response
with estimated above average central London completions in each of
the next five years. In total this adds up to a potential 35
million sq ft of space, or 16% of the current market. The net
impact is likely to be lower than this as only 33%, or 11.6m sq ft
is under construction and, of this amount, 40% is pre-let or under
offer. The outcome is 6.9m sq ft of speculative space currently
available which represents less than half of last year's take-up.
The full impact of the 23.4m sq ft yet to start may be deferred due
to planning delays and the availability of finance.
Another feature of the potential supply is that only 24%, or
8.2m sq ft, is in the West End and the amount of new supply to be
delivered in the West End is expected to fall between 2016 and
2019. Of this potential supply 2.5m sq ft is under construction of
which 30% is pre-let. This leaves 1.7m sq ft under speculative
construction representing 40% of last year's take-up. After the
completion of White Collar Factory and the refurbishment of The
White Chapel Building E1 later this year, our subsequent committed
major projects are all located in the West End.
(MORE TO FOLLOW) Dow Jones Newswires
February 25, 2016 02:01 ET (07:01 GMT)
Last year saw GBP16.2bn of central London investment
transactions (GBP8.2bn in H1), which was GBP2.3bn below 2014 levels
with a smaller volume of deals above GBP100m. Overseas investors
continued to dominate, but the UK buyers' share of the total
increased to 42% from 31%. CBRE reports that demand weakened in Q3
before picking up again in Q4, and there was GBP4.5bn of office
stock under offer at year end. However, it expects to see more
stock on the market as some investors seek to take profits. CBRE
expects yields to be unchanged in 2016 given the background of
continuing low interest rates and central London's growth
prospects. It estimates rental growth in the City and West End
markets for 2016 to be over 6%. Our own portfolio has a more
significant West End and Tech Belt weighting than the central
London average, but CBRE's views support our own estimates of 5-8%
average ERV growth across our portfolio and investment yields to
remain firm in 2016.
In the near term the London property market continues to face a
number of specific opportunities and challenges. Crossrail is on
track to open in 2018. This will improve London's east-west
connectivity and, in central London, the new service is expected to
particularly benefit Tottenham Court Road and Farringdon.
Approximately half our portfolio is located near these two
stations. With London's population growth expected to continue,
attention has begun to focus on central London's next major rail
project, Crossrail 2, but this is still uncommitted and the project
is unlikely to complete before 2030 at the earliest. If it goes
ahead it will improve north-south connectivity, again running
through Tottenham Court Road and with new stations in our Islington
and Victoria villages.
It is expected that business rates (local taxes) will increase
in 2017, and this is likely to raise occupation costs in London.
The new rates will be set on April 2015 rental levels, whereas the
current rates are set on April 2008 levels. As most London
commercial property has experienced good rental growth in that
period, business rates are likely to rise, although a transitional
period, if adopted, could defer the full impact. Although these
costs are borne by our tenants, the rise in overall occupation
costs may affect future rental growth while these additional
expenses are absorbed. CBRE has recently estimated the impact
across 19 central London locations. On an unweighted basis the
average increase in rates on prime offices is 40%, which translates
into an average increase of occupational costs (rates and rents) of
11%. Given that we have seen strong rental growth on our properties
we would expect to be affected and CBRE estimates that occupational
costs in our largest village, Fitzrovia will increase by 4%. Based
on their numbers, the successful Shoreditch and Farringdon
locations could experience some of the higher increases of our
villages, with increases of 13% and 9% respectively. These numbers
remain a matter of conjecture at this stage, but they suggest Tech
Belt total occupancy costs will still remain substantially below
most of the traditional core office locations.
As well as these two specific catalysts there are two
uncertainties based on upcoming votes. On 5 May Londoners will
choose a new Mayor, and, whatever the outcome, there are likely to
be some policy changes. In addition, a national referendum on
whether the UK should remain in the European Union is to be held on
23 June. We have previously discussed the additional property
market uncertainty that we would expect to see if the result was
for the UK to leave the EU. CBRE warns that the central London
office market would be the most affected given the sensitivity of
the financial services industry. Our own portfolio would not be
immune to any potential fall out, but it has no exposure to the
City core market and financial tenants accounted for just 2% of our
rental income in December 2015.
VALUATION
See Appendix 2 for supporting graphs and table
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_1-2016-2-24.pdf
The Group's investment portfolio was valued at GBP5.0bn as at 31
December 2015, having benefited from buoyant occupational demand,
development surpluses and a further tightening of valuation yields.
The valuation surplus for the year was GBP672.2m, before accounting
adjustments of GBP20.8m (see note 11) giving a total reported
movement of GBP651.4m. The underlying valuation increase was 16.5%
which followed 20.4% in 2014, another strong year. We have
outperformed our benchmarks again in 2015. The IPD Central London
Offices Index increased by 15.7% and the wider IPD All UK Property
Index rose by 7.8%.
By location, our central London properties, which constitute 98%
of the portfolio, saw an underlying valuation increase of 16.8%.
The West End was up 14.6% and the City Borders rose 22.5%. The
Scottish properties represent the balance of the portfolio and
increased by 1.3%. The portfolio's total property return was 19.9%
in 2015 compared to 25.1% in 2014. The IPD total return index was
19.7% for Central London Offices and 13.1% for All UK Property.
Within the investment portfolio, we were on site at five
developments during the year. Four of these, Turnmill EC1, 40
Chancery Lane WC2, White Collar Factory EC1 and The Copyright
Building W1 were commercial developments whilst the fifth was a
small residential scheme at 73 Charlotte Street W1. In total these
projects were valued at GBP457.5m and delivered a 31.5% uplift in
the year. Turnmill and 40 Chancery Lane were completed in the year
and handed over to Publicis Groupe, and at 73 Charlotte Street the
majority of the apartments have been sold. At year end we were
still on-site at White Collar Factory and The Copyright Building.
These two projects were valued at GBP259.3m and are progressing
well.
At the end of the year we added two new developments, both
properties where we had achieved planning permissions for
substantial floor area increases. These were 80 Charlotte Street W1
and Brunel Building W2 which were valued at GBP251.4m. Both will be
completed in 2019.
At 1-2 Stephen Street W1, our major refurbishment project during
the year, we completed the latest phase of works. This focused on
improving and extending the retail units on Tottenham Court Road
and followed a phased upgrade of nearly half the office space. The
letting of the majority of the retail units and the office
refurbishment at above anticipated rental values contributed to a
strong valuation rise of 19.0% on the property to GBP340.6m.
Looking at our rental growth, it was another strong year. Rental
values, on an EPRA basis, rose by 11.8% following 9.0% in 2014.
During 2015 the City Borders saw rental growth of 15.2% and the
West End 10.8%.
On an EPRA basis the portfolio's initial yield was 3.1% which
increases to 3.8% on a 'topped-up' basis, following expiry of rent
free periods and contractual rental uplifts. For the previous year,
these figures were 3.4% and 4.0% respectively. The true equivalent
yield at year end was 4.52%, a 21bp reduction over the year and
follows 55bp of yield tightening in 2014. This tempering of yield
compression was further illustrated with the second half of 2015's
movement being 4bp compared to 17bp in the first half. As valuation
yields appear to have levelled out so future property valuation
growth is most likely to come from rental returns, development
surpluses and asset management.
The December 2015 valuation recorded a good increase in our
portfolio's contracted income and a very significant increase in
our potential income. Overall, our contracted income has risen 4.1%
to GBP137.1m pa and our ERV has risen 29.0% to GBP278.1m pa.
The portfolio's reversion stands at GBP141.0m. Of this growth
GBP35.5m is contractual and due to come from fixed uplifts or the
expiry of rent free periods within the leases. Adding this to our
contracted income takes 'topped-up' rent to GBP172.6m, 5.4% higher
than last year.
The bulk of the reversion comes from the potential income from
letting either vacant space under construction, under refurbishment
or currently available. It primarily reflects the recent start of
the two new developments at 80 Charlotte Street W1 and Brunel
Building W2, and the acquisition of The White Chapel Building E1
(previously known as Aldgate Union), which is currently undergoing
refurbishment. The total ERV of vacant space at the year end was
GBP76.4m pa. Whilst this has more than doubled since June 2015,
much of this space will not be delivered for four years. These
projects require GBP569m of further expenditure, and offer a degree
of flexibility on the timing of delivery. Of this vacant space 75%
derives from developments, 22% from refurbishments and only 3%
represents existing vacancy. We have let or pre-let 12% of this
space since the year end for GBP9.2m pa net, at levels in excess of
December 2015 ERV.
The final component of our growth could come from lease reviews
and renewals and this is estimated to add GBP29.1m to our income,
which is 24% higher than last year.
PORTFOLIO MANAGEMENT
See Appendix 3 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_2-2016-2-24.pdf
2015 was a record year for Group letting activity. In total we
secured GBP27.1m of rental income on 523,800 sq ft at an average
level 10.8% above December 2014 ERVs . Of this, 44% by income were
pre-lets as we let development space during its course of
construction. Open market lettings were 14.3% above December 2014
ERVs. Second half lettings totalled GBP10.7m pa on 201,200 sq ft,
and were on average 22.3% above December 2014 ERVs or 12.9% above
June 2015 ERVs. Notable new rental levels were achieved at 1
Stephen Street W1, Davidson Building WC2 (since sold) and Charlotte
Building W1 all at GBP80 per sq ft or above for the upper floors,
and at White Collar Factory EC1, Tea Building E1 and Angel Square
EC1 where rents of GBP62.50 per sq ft, GBP57.50 per sq ft and
GBP55.00 per sq ft respectively, were obtained.
(MORE TO FOLLOW) Dow Jones Newswires
February 25, 2016 02:01 ET (07:01 GMT)
Significant transactions included the letting of the majority of
the commercial space on our recently completed projects including
the office space at 1-2 Stephen Street W1 and eight of the nine
retail units at Tottenham Court Walk W1. Together these added
GBP5.8m to rents. We also made our first pre-lets at White Collar
Factory securing GBP4.9m pa.
The purchases of Angel Square EC1 in November 2014 and 20
Farringdon Road EC1 in February 2015 brought almost immediate
letting opportunities. The former 126,900 sq ft property was
acquired with an income of GBP2.4m pa, equivalent to an average
rent of GBP19 per sq ft. The majority of the leases expired in
March 2015, but we swiftly re-let 98,300 sq ft to Expedia and The
Office Group, and the property is now virtually fully let at a rent
of GBP4.8m pa. The second purchase was a 170,600 sq ft building
producing GBP3.2m pa net. In the second half we re-let the 25,700
sq ft ground floor, and embarked on the refurbishment of 88,000 sq
ft, of which 38% has been pre-let. Assuming we let the remaining
available space at ERV we will have increased the income on the
property to GBP6.5m pa net.
For some time we have been monitoring the expansion of the new
breed of flexible office space providers. We could see they were
responding to significant demand for small amounts of space, lease
flexibility and co-working facilities that would be too management
intensive for our business. One operator which caught our attention
was The Office Group ("TOG"), who share with us an interest in
workspace design. Last year we made three lettings to them
totalling 116,150 sq ft, or GBP6.0m pa of rent (3.5% of contractual
rent). All these transactions are at properties with multi-let
strategies, and were agreed at market rents with two incorporating
an additional profit share once TOG has achieved a threshold
return. The most significant of these is at 2 Stephen Street W1
where, based on current profitability, we are expecting overage
income of about GBP7 per sq ft in 2016 on 34,150 sq ft. We expect
the TOG space to complement our offer and extend our buildings'
appeal to a wider range of potential occupiers to whom we are
unable to offer the same level of services and lease flexibility.
TOG's services are available both to occupiers within the buildings
and to other businesses in the vicinity, which we believe adds to
each properties' utility and vibrancy.
Our letting progress saw the EPRA vacancy rate on our portfolio
fall from 4.1% to 1.3% in the year. The major components of this
residual have either since been let or are currently under offer.
However in addition to the immediately available space we have a
number of refurbishments under way which will provide letting
opportunities during the course of the year. The most significant
is at The White Chapel Building E1, which we acquired vacant in
December 2015 and is now undergoing a light refurbishment at a cost
of around GBP18m. We expect 200,000 sq ft of refurbished offices to
be available here in the latter part of 2016 with an ERV of
c.GBP9.0m. Other notable projects include rejuvenating space at 20
Farringdon Road EC1, Network Building W1 and the eighth floor of 1
Stephen Street W1. Assuming we are unable to secure any further
lettings at White Collar Factory or these other projects, our
proforma vacancy would rise to c.12%.
During 2015 the Group carried out 35 rent reviews on 357,300 sq
ft and 29 lease renewals on 72,300 sq ft. In total this increased
the income from these properties by 27.7% to GBP18.2m pa. 98% of
all rents were collected within 14 days of the due date.
In the current year to date we have let 132,300 sq ft for
GBP10.1m pa gross (GBP9.2m net). The most significant letting was
of the 87,150 sq ft office element at The Copyright Building W1
which was announced today. Capita is taking a 20-year lease for a
gross rent of GBP7.4m pa. After ground rents we will receive
GBP6.5m pa. The average office rent is GBP86 per sq ft, which was
above December ERV, but after allowing for rental incentives
equivalent to a 34 months rent-free period and a payment to
Capita's current landlord to extend their lease to allow a
back-to-back move into The Copyright Building, the terms are in
line with December levels. The other major letting in the period
was a further two floors at White Collar Factory where Adobe has
pre-let 28,600 sq ft for GBP1.8m pa.
Principal lettings in 2015
Min
/ fixed
uplift
at
Total first
Area Rent annual review Lease Lease Rent free
sq GBP rent GBP term break equivalent
Property Tenant ft psf GBPm psf Years Year Months
--------------- -------------- ------- --------- -------- ----------- ------- ------- ------------
Q1
The
2 Stephen Office
Street W1(1) Group 34,150 65.00(1) 2.2 71.75 20 - 15
2.5, plus
3 3 if no
Angel Square & break in
EC1 Expedia 57,600 36.80 2.1 41.60 6 5 year 3
1 Stephen
Street W1 AnaCap 16,150 81.75 1.3 84.25 10 - 15
Tea Building
E1 Feed 7,990 47.50 0.4 - 5 - 5
Davidson 7, plus
Building Astus 5 if no
WC2 UK 4,370 80.00 0.3 82.50 10 5 break
Q2
The
White Collar Office
Factory EC1 Group 41,300 57.50 2.4 63.50 20 - 24
The
Angel Square Office
EC1(1) Group 40,700 35.00(1) 1.4 38.65 10(2) - 9
Davidson 7, plus
Building First 7 if no
WC2 Utility 6,230 72.50 0.5 75.00 10 5 break
9, plus
Morelands 3 if no
EC1 Spark44 5,370 55.00 0.3 60.00 9 5 break
--------------- -------------- ------- --------- -------- ----------- ------- ------- ------------
Q3
12
White Collar AKT &
Factory EC1 II 28,400 57.50 1.6 63.50 20 15 24
20 Farringdon Improbable
Road EC1 Worlds 25,700 42.50 1.1 43.50 6 - 7
Charlotte
Building Kingston
W1 Smith 5,960 82.50 0.4 85.00 10 - 14
3, plus
Angel Square 2 if no
EC1 DrEd 4,740 55.00 0.3 - 4.5 3 break
Davidson 7, plus
Building Elastic 5 if no
WC2 search 6,300 72.50 0.5 76.00 10 5 break
20 Farringdon Moo
Road EC1 Print 33,500 45.00 1.5 49.50 10 6 8
Tea Building
E1 Transferwise 23,950 57.50 1.4 - 5 - 6
White Collar
Factory EC1 BGL 14,300 62.50 0.9 69.00 10 - 18
Davidson 7, plus
Building 7 if no
WC2 Alibaba 6,310 72.50 0.5 74.70 10 5 break
--------------- -------------- ------- --------- -------- ----------- ------- ------- ------------
Q4
Tottenham
Court Walk Marie
W1 Claire 7,900 - 0.4 - 10 5 7.5
--------------- -------------- ------- --------- -------- ----------- ------- ------- ------------
(1) The Group will receive a share of The Office Group's profits
on this space above a minimum level
(2) Landlord's break in year five
PROJECTS
See Appendix 4 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_3-2016-2-24.pdf
(MORE TO FOLLOW) Dow Jones Newswires
February 25, 2016 02:01 ET (07:01 GMT)
During 2015 we completed four major projects totalling 226,000
sq ft, the commercial elements of which are now virtually fully
let. Our residential scheme at 73 Charlotte Street W1 was completed
in September, and we have sold nine apartments leaving one under
offer and one available. These projects have proved very profitable
providing the Group with GBP10.3m of net rental income and the four
major projects recorded a 72% profit on cost.
Major projects pipeline
Property Area Delivery Comment
sq
ft
-------------------------- ----------- --------- -----------------------
Projects completed
in 2015
Turnmill, 63 Clerkenwell 70,500 Q1 2015 Offices and retail
Road EC1 - 100% let
Tottenham Court Walk 38,000 Q2 2015 Retail - 93%
W1(1) let
40 Chancery Lane WC2 102,000 Q3 2015 Offices and retail
- 100% let
73 Charlotte Street 15,500 Q3 2015 Residential and
W1 offices - 77%
sold/let
-------------------------- ----------- --------- -----------------------
226,000
-------------------------- ----------- --------- -----------------------
Projects on site
White Collar Factory, 293,000 Q4 2016 Office-led development
Old Street Yard EC1 - 38% pre-let
The Copyright Building, 105,000(2) H2 2017 Offices and retail
30 Berners Street W1 - 81% pre-let
80 Charlotte Street 380,000 H1 2019 Offices, residential
W1 and retail
Brunel Building, 55-65 240,000 H1 2019 Offices
North Wharf Road W2
1,018,000
-------------------------- ----------- --------- -----------------------
Other major planning
consents
1 Oxford Street W1 275,000 Offices, retail
and theatre
Monmouth House EC1 125,000 Offices, workspaces
and retail
400,000
-------------------------- ----------- --------- -----------------------
Grand Total 1,644,000
-------------------------- ----------- --------- -----------------------
(1) Refurbishment
(2) Excludes reception area
We are now on-site at four major projects. White Collar Factory
is our signature Tech Belt development overlooking Silicon
Roundabout. Following five years' research by our own design team,
together with AHMM (architects) and Arup (engineers), it
incorporates a number of design principles which enhance its
flexibility, utility and sustainability to occupiers. The ERV has
risen 12% to GBP16.5m pa in 2015 and we have budgeted to spend a
further GBP62m of capital expenditure to complete the project in Q4
2016 with 38% already pre-let.
At The Copyright Building W1 we have today announced the letting
to Capita of the entire office element leaving 20,000 sq ft of
retail still to let. The ERV of this retail space is GBP1.1m pa
gross (GBP1.0m net). We estimate future capital expenditure at
GBP49m to complete the scheme in H2 2017.
At 80 Charlotte Street in the heart of Fitzrovia, we have
commenced stripping out with full demolition of the existing
property to start later this year. The major island site will
comprise a 309,000 sq ft office building capable of being multi-let
as well as ancillary retail and residential space. This ancillary
space will include the development of 67 Whitfield Street with
14,000 sq ft residential, and the redevelopment of the neighbouring
Asta House which will comprise 12,000 sq ft offices and 31,000 sq
ft residential including 32% affordable. The project's estimated
ERV is GBP23.9m pa and capital expenditure to complete is estimated
at GBP207m. Following delays in finishing other projects,
completion is now expected in H1 2019.
We are also on site at the Brunel Building W2, where our scheme
will provide modern flexible office space and enhance the immediate
location by opening up the canal side beside Paddington station
(another beneficiary of Crossrail). In November we fixed the price
of the construction contract and the overall capital expenditure to
complete is estimated at GBP122m. The ERV is GBP14.8m pa net with
completion expected in H1 2019.
At the half year we highlighted the impact of escalating
building costs. We challenged the consensus indices that were
reporting 4 to 6% annual inflation arguing that in central London
it was actually running closer to 10% pa. We expect it to continue
at this level through 2016. Our sensitivity to construction costs
principally resides with The Copyright Building and 80 Charlotte
Street as our other two major projects' costs are fixed. This
leaves approximately half of our four year capital expenditure with
variable costs but we have assumed inflation in our estimates.
We have made advances on our future projects that could start
from 2018 onwards. In July we agreed terms at 1 Oxford Street W1
with Crossrail whereby we will be granted a new 150-year lease in
return for a payment to them of GBP55m. Of this sum GBP2m has been
paid, a further GBP5m will be payable on release of the site, with
the residual GBP48m payable on practical completion of our
buildings. In addition, Crossrail will receive 16% of any
development profit and a ground rent equivalent to 5% of the rent
on the commercial space. The site, which is currently being
developed as the Tottenham Court Road Crossrail station, has
planning for 204,000 sq ft offices, 37,000 sq ft retail and a
34,000 sq ft theatre. Work is due to start in early 2018 and this
exciting project represents the west side of a major new central
London piazza.
Earlier in the year we signed a Memorandum of Understanding with
our joint venture partners, The Portman Estate, enabling us to
progress preliminary planning studies on another major potential
project at 19-35 Baker Street W1. The existing buildings, which are
fully let off low rents, comprise 146,000 sq ft, but our plans
indicate the site is capable of supporting up to 250,000 sq ft. Our
ownership is 55% and the earliest possession date is 2018.
In June we received planning consent for a 110,000 sq ft hotel
and offices at Wedge House, 40 Blackfriars Road SE1. The existing
property is a 38,700 sq ft building and we had previously engaged
with Ennismore, the owners of The Hoxton, to draw up new plans.
Following the success of our application and the resolution of a
number of outstanding matters we sold the building to Ennismore for
GBP33.0m after costs in December releasing value early and securing
a substantial capital uplift. We are being retained as development
manager for which we will receive a fee of GBP1.5m. Completion of
the new 192-room Hoxton is expected in 2018.
Since the year end we have received planning permission for two
projects: Monmouth House EC1 and Balmoral Grove N7. The former
would involve the redevelopment of two existing office buildings of
69,000 sq ft into a new property providing 125,000 sq ft of
offices, workspaces and retail. It is located adjacent to White
Collar Factory and therefore will benefit from the latter's
progress in transforming the south western corner of Silicon
Roundabout. Our earliest possession date for this site is 2017.
Balmoral Grove is 67,000 sq ft of industrial and office space in
Islington. Consent has been obtained to redevelop this site with
280,000 sq ft of residential and commercial space, of which 44% of
the residential will be affordable. We have agreed terms to sell
this property to a residential developer subject to the resolution
of a few outstanding matters.
INVESTMENT ACTIVITY
Despite very competitive market conditions during 2015 we were
able to acquire two substantial buildings in the Tech Belt at a low
average cost of GBP545 per sq ft. We also acquired a number of
smaller retail and office properties. These are strategically
placed close to our current holdings at the eastern end of Oxford
Street, and will benefit from the significant changes to this
area.
Principal acquisitions 2015
Total Total Net Lease
Property Date Area cost cost yield Net Net lengthYears
sq GBPm GBP % rental rental
ft psf income income
GBPm GBP
pa psf
------------------ ------- -------- ------ ------ ------- -------- -------- -------------
20 Farringdon
Road EC1 Q1 170,600 92.7 545 3.5 3.2 27(1) 2
50 Oxford Street
W1(2) Q3 6,050 14.5 2,395 2.6 0.4 74 3
The White Chapel
Building E1(3) Q4 255,000 139.3 545 - - - -
Total 431,650 246.5 570 - 3.6 - -
--------------------------- -------- ------ ------ ------- -------- -------- -------------
(1) Excludes 26,200 sq ft ground floor offices let at a
peppercorn rent
(2) Includes 36-38 and 42-44 Hanway Street W1
(3) Excludes 30,500 sq ft lower ground floor that completed in
Q1 2016
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The first Tech Belt acquisition was in Clerkenwell, an area we
had previously identified as a major beneficiary of Crossrail. Our
recent acquisition and development activity has seen our exposure
to this village rise from 5% to 11% in the last five years. The
175-year lease of 20 Farringdon Road, with a ground rent of 10% pa
was acquired in February 2015 through a property swap. This
substantial property is located opposite the new Farringdon
Crossrail station which will be an important interchange with the
London underground and the Thameslink overground line. In the
second half of 2015 we renewed the lease on the 25,700 sq ft ground
floor raising the rent from GBP2 pa to GBP1.1m pa (GBP42.50 per sq
ft). We are currently refurbishing 88,000 sq ft principally on the
upper floors at a total cost of GBP11m and have pre-let 38% at
GBP45 per sq ft. All the leases expire or have a landlord break in
2021/2022 giving us the scope to consider a more significant
redevelopment following the opening of Crossrail which is expected
to complete the transformation of an area that is already
improving.
The second Tech Belt acquisition was in Whitechapel, at the
eastern end of the Tech Belt arc. We see this village as offering
attractive value given the good levels of occupier demand here and
the rent increases seen elsewhere. We made our first acquisition in
the Whitechapel market in 2012 when we acquired 9 and 16 Prescot
Street E1. This is now held in a 50/50 joint venture as a
consequence of our property swap for 20 Farringdon Road. Our
progress on this property and elsewhere in the Tech Belt gave us
the confidence to acquire The White Chapel Building with vacant
possession. This represents a departure from our normal practice of
acquiring income producing buildings. In this exceptional case we
believe that, due to the good condition and flexibility of the
existing property, it requires only a modest level of
refurbishment. Since the year end we have acquired the long lease
on the lower ground floor for GBP12m after costs, which extended
our ownership to 285,000 sq ft.
To maintain the balance of our investment portfolio, with its
attractive growth profile, it is important that we dispose of
assets where either we can secure substantial uplifts or where we
now expect only a limited impact on our overall growth. These
decisions are made in the context of the Group's income base as a
whole.
The volume of our sales activity in the last few years has been
at fairly consistent levels. It has also seen us sell most of our
isolated smaller buildings in less central locations at substantial
premiums to book value. The latest of these were our holdings at
Portobello Dock W10. In addition last year we sold a number of more
central properties. At the Davidson Building WC2 we completed the
refurbishment of a number of floors in Q4 2014. These were let at
new rental levels ranging between GBP72.50 per sq ft and GBP80 per
sq ft during 2015. This fresh rental evidence enabled us to achieve
an attractive price for the building. Following the receipt of
planning permission for a hotel and office development, we sold
Wedge House SE1 to a hotel operator. The three Q1 disposals which
formed part of the property swap to acquire 20 Farringdon Road were
discussed in last year's report and are included in the Table
below.
Principal disposals 2015
Property Net Net Net Net
Date Area proceeds proceeds yield surplus
sq GBPm GBP to Dec
ft psf purchaser 2014
%
--------------------------- ------- -------- ---------- ---------- ----------- ---------
22 Kingsway WC2 Q1 91,400 64.1 700 4.4 (2)
Mark Square House
EC2 Q1 61,700 31.9 515 4.4 0
9 and 16 Prescot
Street E1 (50% interest) Q1 53,700 18.7 350 3.2 3
Davidson Building
WC2 Q4 43,100 65.4 1,520 3.9 21
Wedge House, 40
Blackfriars Road
SE1 Q4 38,700 33.0 855 - 86
Portobello Dock
W10 Q4 52,600 34.7 660 3.6 54
--------------------------- ------- -------- ---------- ---------- ----------- ---------
Total 341,200 247.8 725 3.5 18.4
------------------------------------ -------- ---------- ---------- ----------- ---------
Residential development forms a very small part of Group
activities. In the last two years our disposals have included a
number of residential trading sales relating to our small
developments at Queens, Bayswater W2 and The Corner House,
Fitzrovia W1. During 2015 these activities raised GBP23.7m,
comprising 13 apartments. Since the year end we have sold the last
unit at Queens and have only two apartments remaining at The Corner
House. In addition we have the potential to receive an overage
payment at Riverwalk House SW1, which is dependent on the scheme's
final profitability.
FINANCE REVIEW
See Appendix 5 for supporting graphs and tables
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Financial overview
Derwent London has reported another very strong combination of
NAV and earnings growth for the year ended 31 December 2015 and, as
explained below, has also taken a number of steps during the year
to further strengthen its financial position and de-risk its
pipeline.
Helped by the issue of shares in January 2015 in connection with
our call for early redemption of the 2016 convertible bonds, the
Group's net asset value (NAV) rose by GBP919.7m to GBP4.0bn through
2015, an increase substantially higher than the GBP705.2m recorded
in 2014. After allowing for the new shares issued, diluted EPRA NAV
per share was 21.6% higher than the year before, giving a total
return for 2015 of 23.0% (2014: 30.1%).
The benefits of consistently good lettings and asset management
over the last year or so, as well as the refinancing activity in
2015 which substantially reduced our interest charge, have been
reflected in a 31.0% increase in EPRA profit before tax and a 25.0%
increase in EPRA recurring earnings per share to 71.34p compared to
the previous year. Backed up by a 5.2 % increase in like-for-like
net rents in 2015 and positive lettings continuing into 2016, this
has encouraged us to raise the final dividend by 10.0% to 30.8p per
share. The total dividend for the year remains well covered at 1.6
times recurring earnings.
Our financing ratios have all improved again, with the
loan-to-value ratio reduced from 24.0% at December 2014 to 17.8% in
December 2015 and net interest cover up from 286% in 2014 to 362%
for 2015. We have also been able to reduce the average IFRS
interest rate on debt from 4.22% to 3.93% at December 2015, or down
from 3.78% to 3.68% on a cash basis, while paying down net debt by
GBP101.6m during the year and usefully increasing the weighted
average unexpired length of our debt facilities.
Keeping to our long-established business model, the short term
project pipeline is now substantially de-risked following lettings
at the White Collar Factory and The Copyright Building and, as
reported elsewhere, we are seeing good enquiries for the White
Chapel Building and the space which we are creating for delivery in
2019. With a further GBP105m of long term financing arranged in
February 2016, we have the financial confidence to comfortably
build out the committed pipeline, which continues to produce a
significant level of development profit, while retaining our
financial ratios at attractive levels.
See Appendix 5 for chart of portfolio value, net assets and
gearing
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Net asset value growth
The overall 627p increase in EPRA NAV per share can be
summarised as follows:
2015 2014
p p
-------------------------------- ----- -----
Revaluation surplus 581 654
Profit on disposals 39 33
EPRA profit after tax 71 57
Dividends paid (net of scrip) (30) (35)
Interest rate swap termination
costs (6) (2)
Dilutive effect of convertible
bonds (17) (46)
Non-controlling interest (8) (10)
Other (3) (7)
-------------------------------- ----- -----
627 644
-------------------------------- ----- -----
See Appendix 5 for NAV 'bridge' chart
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
A detailed reconciliation showing adjustments from the IFRS NAV
to the EPRA NAV is shown in note 22 to the financial
statements.
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The contribution to NAV growth per share from property
revaluations has fallen slightly from 2014, due partly to the
larger number of shares in issue, but, at 581p per share (584p
including our share of joint ventures) remained at a very high
level. Of this increase, 55% came from an increase in estimated
rental values adopted by our valuers, 24% from development profits
and a relatively lower 21% from yield shift. We also made
substantial property disposals during the year achieving 39p per
share over book values and demonstrating that our valuations are
underpinned by market demand. One of the properties, 9 and 16
Prescot Street, was sold into a joint venture in which the Group
has a residual 50% interest. This is the main reason why the
carrying value of our investments increased from GBP7.4m to
GBP30.7m during the year.
As the GBP175m convertible bonds due in 2016 were redeemed early
and converted into new shares in January 2015, there was no further
dilution relating to those bonds in 2015. However, with the Group's
NAV per share now over GBP33.35, which is the conversion price of
the 2019 convertible bonds, the fully diluted EPRA NAV per share
has taken into account 17p per share of dilution in 2015 in
relation to the 2019 bonds. Note that the earliest date that the
2019 bonds can be converted into new shares is July 2016.
Medium and long term interest rates continued to move up and
down with market sentiment through 2015 and into 2016. The twenty
year swap, for example, varied between 1.7% and 2.5% through the
course of 2015 and, since the year end, has fallen back to well
under 2.0%. These are substantial relative movements but interest
rates generally remain at very low levels by historical standards,
helping to underpin property yields. We have continued to monitor
these rates and to buy down swaps from time to time thereby
managing our interest rate exposure. The mark-to-market cost of all
our interest rate swaps fell from GBP25.2m to GBP17.6m through
2015, the latter figure representing less than 2% of year end net
debt. Fair value exposures for our fixed rate debt and bonds also
closed substantially through the year helping the EPRA triple net
asset value to increase by 23.7% during the year to 3,463p per
share.
Income statement
As we progress through the current long London office property
cycle, there is naturally a greater focus on income generation.
Lettings from recent developments and asset management initiatives
have had a tangible impact upon the Group's property income, a
trend expected to continue over the next few years. Gross rental
income was up by 8.5% to GBP148.3m and net rental income by 7.8% to
GBP138.7m. Allowing for the profits from sales of residential
apartments and other property income, net property and other income
increased by GBP12.5m or 9.2% to GBP148.6m for the year.
In 2015, the increase in gross rental income came mainly from
lettings and rent reviews which added GBP21.5m of income including
GBP18.3 from lettings commencing in the year. Property acquisitions
added another GBP4.0m of rental income while the disposals brought
it down by GBP7.0m. Rent lost from lease breaks, expiries and voids
was GBP2.6m and from schemes starting was GBP4.5m. An additional
GBP2.3m came from various small premiums received and 'rights of
light' settlements. The other property income of GBP3.7m related to
compensation received from contractors for schemes at 40 Chancery
Lane, Turnmill and 1-2 Stephen Street which were delivered late.
The contracts were at fixed prices and the sums recognised partly
offset the rent lost in 2015 due to the late completion of the
projects.
See Appendix 5 for gross property income chart
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Administrative expenses increased by 7.0% to just under GBP30.0m
in 2015, due mainly to higher staff salaries and bonuses. However,
finance costs were reduced considerably, by 17.0% to GBP35.2m, as
the total amount of debt fell following the conversion of the 2016
bonds and the average interest rate on that debt was also reduced
during the year. This came mainly from lower margins on our bank
facilities but was also achieved by breaking or re-setting swap
rates during the year at a cost of GBP4.0m. The positive impact of
this will be felt for several years. In addition the start date on
a GBP70m forward start swap was deferred at a cost of GBP2.4m. The
interest capitalised in 2015 was GBP5.0m, a small reduction on the
GBP5.3m in 2014 and, as before, no overheads or property costs were
capitalised. Our EPRA cost ratios were almost identical to the
previous year.
The combination of rental growth and lower finance costs drove
the recurring EPRA profit before tax to GBP81.6m, up by 31.0% over
the year. After taking account of property valuation uplifts,
profits on disposals of properties and fair value movements, the
overall IFRS profit for the year increased from GBP749.8m in 2014
to GBP777.2m for the year ended 31 December 2015.
A table providing a reconciliation of the IFRS to EPRA profit
before tax and earnings per share is included in note 22.
See Appendix 5 for EPRA profit before tax chart
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
EPRA like-for-like gross rental income, which removes the impact
of development activity, acquisitions and disposals, increased by
5.0% during the year with net rental income on a similar basis up
by 5.2%. These figures demonstrate the gradual capture of our
rental reversion as we move through the current property cycle. A
full analysis is shown in the table below.
See Appendix 5 for EPRA like-for-like rental income table
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Taxation
The corporation tax charge for the year increased to GBP1.9m in
2015 from GBP0.8m in the previous year, most of this increase being
due to the profits arising on the sales of residential apartments
which were held as trading stock and therefore outside the REIT tax
environment. The deferred tax charge for the year was lower than in
2014 at GBP0.4m as this took account of certain historic tax losses
which were previously not recognised.
In addition, and in accordance with our status as a REIT,
GBP4.8m of tax was withheld from shareholders on property income
distributions and paid to HMRC during the year.
Refinancing to fund the pipeline
Derwent London has had another significant year of financing
activity.
As is noted above, the first element was the early conversion of
the 2016 convertible bonds into new equity and the resultant issue
of 7.88m new ordinary shares. This brought down our net debt by
GBP170.5m and significantly reduced financial gearing while also
boosting interest cover. Together with the general improvement in
our financial risk profile over recent years, it also enabled
Standard and Poor's to upgrade our corporate credit rating, which
now stands at BBB+ with a stable outlook.
With effect from March 2015, we extended the maturity of a
GBP40m interest rate swap from June 2017 to June 2022 thereby
reducing the rate payable from 3.0% to 2.35%. This had no
associated cost and extended the weighted average maturity of our
swaps while also saving interest charges of GBP260k per annum until
June 2017. In July 2015, we paid GBP2m to reduce the coupon on a
GBP75m interest rate swap from 2.975% to 2.49% through to April
2020.
Then, in July 2015 we completed a new unsecured and fully
revolving GBP75m facility with Wells Fargo. The facility has a five
year term but can be extended by up to two years upon request and
can also be increased in amount by up to GBP25m during its term.
The previous GBP90m secured facility from the same lender, of which
GBP70m was drawn, was repaid and cancelled at the same time. The
margin under the new facility is substantially lower than
previously and, at a cost of GBP2m, we also reduced the amount
hedged under this facility from GBP70m to GBP40m and extended the
swap period out to July 2022 at a new lower rate of 2.446%
(previously 3.18%). This refinancing extended the weighted average
maturity of our debt, lowered our annual finance costs and provided
greater flexibility: the new facility is fully revolving (ie we can
draw and repay between zero and GBP75m) whereas the previous
facility only had a GBP20m revolving element and it also increased
our unencumbered property assets by GBP390m. The financial
covenants for the new facility are identical to those of our
existing GBP550m unsecured bank facility.
The final step in 2015 was to extend the maturity of the GBP550m
unsecured revolving bank facility from January 2020 to January
2021. There is an additional one year extension option available,
subject to the usual consents.
All of these actions have helped us extend the weighted average
maturity of our debt from 6.6 years at December 2014 to 7.3 years
at December 2015. The average interest rate on our debt has also
been reduced from 4.22% at December 2014 to 3.93% at December 2015
on an IFRS basis and from 3.78% to 3.68% on a cash basis. In
addition, unencumbered property assets have increased by 36% during
the year to GBP3.7bn.
The proportion of our debt that is fixed or swapped into fixed
rates was 85% as at 31 December 2015. This excludes a GBP70m
forward start swap which would become effective in March 2016
unless we pay to defer it.
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February 25, 2016 02:01 ET (07:01 GMT)
With long term interest rates remaining at very low levels, our
most recent refinancing activity has been to increase the Group's
long term fixed rate unsecured debt by accessing the US private
placement market for the second time. In February 2016, we agreed
to issue GBP30m of new 3.46% senior notes expiring in May 2028 and
GBP75m of new 3.57% senior notes expiring in May 2031. The GBP105m
funds will be drawn in May 2016 from three new institutional
relationships and have identical financial covenants to both our
existing unsecured bank facilities and the private placement notes
issued in January 2014. Together with the planned property
disposals in 2016, this will increase our financial firepower
further from the GBP269.0m of undrawn facilities and cash at 31
December 2015 and will also further extend the weighted average
maturity of our debt.
See Appendix 5 for table of debt facilities
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Net debt and cash flow
Net debt was reduced significantly during the year to GBP911.7m
from GBP1,013.3m, taking the loan-to-value ratio down to 17.8% and
NAV gearing to 22.8%. These are now at the lower end of our target
range but are only expected to grow modestly through the next few
years. Net proceeds from the sale of properties during the year
totalled GBP277.2m; this sum exceeded properties acquired by
GBP31.0m so we have been net sellers of property for the fifth year
in a row before taking account of capital expenditure. Cash flows
invested in our projects during the year increased to GBP116.4m but
were more than covered by the deleveraging impact of the early
redemption of the 2016 convertible bonds.
As planned, the net cash from operations has increased
significantly again, to GBP76.0m for the year from GBP65.6m in
2014. Most of this increase comes directly from higher property
income receipts. This has helped us to grow interest cover again, a
particularly important metric that the Group uses in its business
planning. From 286% in 2014, this rose to 362% for the year ended
31 December 2015, calculated on the net basis as set out in note
23.
See Appendix 5 for reconciliation of net debt, gearing and
interest cover ratios, debt summary and maturity profiles of debt
facilities and fixed rates and swaps
http://www.rns-pdf.londonstockexchange.com/rns/0840Q_4-2016-2-24.pdf
Dividend
With the step up in recurring earnings in 2015, the Board has
recommended a 10.0% increase in the proposed final dividend to
30.80p per share for payment to shareholders in June 2016. All
30.80p will be paid as a PID. The total dividend for the year will
be 43.40p per share, an increase of 3.75p or 9.5% over last year.
As before, we will be offering a scrip dividend alternative though
this will be reviewed later in the year depending upon equity
market conditions.
Our financial outlook
With low financial gearing, enhanced interest cover, substantial
recent pre-lets to de-risk the pipeline and additional financial
headroom, we are well placed to build out our current committed
programme of projects and thereby crystallise anticipated
development profits over the next few years. Recurring earnings
growth has also accelerated in 2015 and, with substantial rental
reversion in a portfolio with low average rents, should continue to
increase as we move through this property cycle.
Our consistent and focused business model is based on the
fundamental balancing of the portfolio between income and value
growth while retaining a conservative level of financial risk. The
portfolio remains full of opportunities for many years to come but,
with low passing rents, also offers many defensive qualities should
the current global economic uncertainty bring a more challenging
occupational environment for London's office landlords. At the
moment, conditions remain favourable for us and, with limited new
space being built in our markets and low interest rates supporting
tight property yields, we aim to continue delivering and de-risking
our committed projects over the next year while also continuing to
capture rental reversion and grow earnings.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report,
the Directors' Remuneration Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group and Company financial statements in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union. Under company law the Directors
must not approve the financial statements unless they are satisfied
that they give a true and fair view of the state of affairs of the
Group and the Company and of the profit or loss of the Group for
that period. In preparing these financial statements, the Directors
are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements;
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
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 and the Group and enable them to
ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets
of the Company and the Group and hence for taking reasonable steps
for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors consider that the annual report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess a company's
performance, business model and strategy.
The Directors confirm that to the best of their knowledge:
-- the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the Group; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Group, together with a description of the principal risks and
uncertainties that it faces.
On behalf of the board
John D. Burns Damian M.A. Wisniewski
Chief Executive Officer Finance Director
25 February 2016
GROUP INCOME STATEMENT
2015 2014
Note GBPm GBPm
Gross property and other
income 5 204.9 180.5
----------------------------------- ----- -------- --------
Net property and other income 5 148.6 136.1
----------------------------------- ----- -------- --------
Administrative expenses (30.0) (28.1)
Movement in valuation of
cash-settled share options - (0.3)
----------------------------------- ----- -------- --------
Total administrative expenses (30.0) (28.4)
Revaluation surplus 11 650.0 667.1
Profit on disposal of investment
property 6 40.2 28.2
Profit on disposal of investment
in joint venture 6 - 2.0
Profit from operations 808.8 805.0
Finance income 7 0.1 -
----------------------------------- ----- -------- --------
Finance costs (34.9) (42.4)
Loan arrangement costs written
off (0.3) -
----------------------------------- ----- -------- --------
Total finance costs 7 (35.2) (42.4)
Movement in fair value of
derivative financial instruments 7.6 (9.4)
Financial derivative termination
costs 8 (6.4) (2.0)
Share of results of joint
ventures 9 4.6 2.5
Profit before tax 779.5 753.7
Tax charge 10 (2.3) (3.9)
Profit for the year 777.2 749.8
Attributable to:
- Equity shareholders 766.2 737.7
- Non-controlling interest 11.0 12.1
777.2 749.8
Earnings per share 22 694.53p 718.60p
Diluted earnings per share 22 668.73p 647.78p
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GROUP STATEMENT OF COMPREHENSIVE INCOME
2015 2014
Note GBPm GBPm
Profit for the year 777.2 749.8
Actuarial gains/(losses) on
defined benefit pension scheme 0.7 (1.6)
Revaluation surplus of owner-occupied
property 11 1.4 4.8
Deferred tax on revaluation
surplus 18 (0.1) (0.9)
------------------------------------------ ---- ------ ------
Other comprehensive income that
will not be reclassified to profit
or loss 2.0 2.3
Total comprehensive income
relating to the year 779.2 752.1
Attributable to:
- Equity shareholders 768.2 740.0
- Non-controlling interest 11.0 12.1
779.2 752.1
GROUP BALANCE SHEET
2015 2014
Note GBPm GBPm
Non-current assets
Investment property 11 4,832.3 4,041.0
Property, plant and equipment 12 39.1 27.2
Investments 13 30.7 7.4
Pension scheme surplus 1.1 -
Other receivables 14 90.7 78.9
4,993.9 4,154.5
Current assets
Trading property 11 10.5 24.0
Trade and other receivables 15 52.7 32.0
Corporation tax asset - 0.2
Cash and cash equivalents 20 6.5 14.8
69.7 71.0
Total assets 5,063.6 4,225.5
Current liabilities
Borrowings 17 - 170.5
Trade and other payables 16 124.0 89.8
Corporation tax liability 1.7 -
Provisions 0.7 0.8
126.4 261.1
Non-current liabilities
Borrowings 17 918.2 857.6
Derivative financial
instruments 17 17.6 25.2
Provisions 0.5 0.7
Pension scheme deficit - 0.2
Deferred tax 18 5.5 5.0
941.8 888.7
Total liabilities 1,068.2 1,149.8
Total net assets 3,995.4 3,075.7
Equity
Share capital 5.6 5.1
Share premium 186.3 174.0
Other reserves 952.9 952.5
Retained earnings 2,777.7 1,880.6
Equity shareholders'
funds 3,922.5 3,012.2
Non-controlling interest 72.9 63.5
Total equity 3,995.4 3,075.7
GROUP STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
---------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2015 5.1 174.0 952.5 1,880.6 3,012.2 63.5 3,075.7
Profit for the
year - - - 766.2 766.2 11.0 777.2
Other comprehensive
income - - 1.3 0.7 2.0 - 2.0
Transfer of
owner-occupied
property - - 6.9 (6.9) - - -
Share-based
payments - 1.3 1.6 2.6 5.5 - 5.5
Bond conversion 0.5 - (9.4) 179.5 170.6 - 170.6
Dividends paid - - - (34.0) (34.0) (1.6) (35.6)
Scrip dividends - 11.0 - (11.0) - - -
At 31 December
2015 5.6 186.3 952.9 2,777.7 3,922.5 72.9 3,995.4
Attributable to equity shareholders
---------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2014 5.0 170.4 948.6 1,180.0 2,304.0 66.5 2,370.5
Profit for the
year - - - 737.7 737.7 12.1 749.8
Other comprehensive
income - - 3.9 (1.6) 2.3 - 2.3
Share-based
payments 0.1 1.5 - 2.9 4.5 - 4.5
Dividends paid - - - (36.3) (36.3) (15.1) (51.4)
Scrip dividends - 2.1 - (2.1) - - -
At 31 December
2014 5.1 174.0 952.5 1,880.6 3,012.2 63.5 3,075.7
GROUP CASH FLOW STATEMENT
2015 2014
Note GBPm GBPm
Operating activities
Property income 145.6 135.2
Property expenses (11.7) (8.1)
Cash paid to and on behalf of
employees (21.5) (21.7)
Other administrative expenses (5.2) (5.3)
Interest received 0.1 -
Interest paid 7 (31.4) (31.0)
Other finance costs (3.0) (3.0)
Other income 3.1 1.7
Amounts received from joint
ventures - 0.1
Tax paid in respect of operating
activities - (2.3)
Net cash from operating activities 76.0 65.6
Investing activities
Acquisition of investment properties (246.2) (92.4)
Capital expenditure on the property
portfolio 7 (116.4) (113.2)
Disposal of investment and trading
properties 277.2 114.4
Disposal of investment in joint
venture - 4.9
Repayment of loan by joint venture
on disposal - 1.9
Purchase of property, plant
and equipment (0.9) (0.3)
Advances to non-controlling
interest holder - (2.0)
Net cash used in investing activities (86.3) (86.7)
Financing activities
Drawdown of new revolving bank
loan 45.8 -
Net movement in revolving bank
loan 66.3 (38.9)
Repayment of term loan (70.0) -
Drawdown of private placement
notes - 99.0
Financial derivative termination
costs (6.4) (2.0)
Net proceeds of share issues 1.2 1.5
Dividends paid to non-controlling
interest holder (1.6) -
Dividends paid 19 (33.3) (36.2)
Net cash from financing activities 2.0 23.4
(Decrease)/increase in cash
and cash equivalents in the
year (8.3) 2.3
Cash and cash equivalents at
the beginning of the year 14.8 12.5
Cash and cash equivalents at
the end of the year 20 6.5 14.8
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 2015 or
the year ended 31 December 2014, but is derived from those
accounts. The Group's statutory accounts for 2014 have been
delivered to the Registrar of Companies and those for 2015 will be
delivered following the Company's Annual General Meeting. The
Auditor's reports on both the 2014 and 2015 accounts were
unmodified, did not draw attention to any matters by way of an
emphasis of matter and did not contain any statement under Section
498 of the Companies Act 2006.
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The financial statements have been prepared in accordance with
International Financial Reporting Standards, as adopted by the
European Union (IFRS), IFRS IC 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.
Going concern
The Board continues to adopt the going concern basis in
preparing these consolidated financial statements.
2. Changes in accounting policies
The accounting policies used by the Group in these condensed
financial statements are consistent with those applied in the
Group's financial statements for the year to 31 December 2014, as
amended to reflect the adoption of new standards, amendments and
interpretations which became effective in the year as shown
below.
New standards adopted during the year
The following standards, amendments and interpretations endorsed
by the EU were effective for the first time for the Group's 31
December 2015 year end and had no material impact on the financial
statements:
Annual Improvements to IFRSs (2011 - 2013 Cycle).
Standards and interpretations in issue but not yet effective
The following standards, amendments and interpretations were in
issue at the date of approval of these financial statements but
were not yet effective for the current accounting year and have not
been adopted early. Based on the Group's current circumstances the
Directors do not anticipate that their adoption in future periods
will have a material impact on the financial statements of the
Group.
IFRS 9 Financial Instruments;
IFRS 10 (amended) - Consolidated Financial Statements;
IFRS 11 (amended) - Joint Arrangements;
IFRS 14 Regulatory Deferral Accounts;
IFRS 16 Leases;
IAS 1 (amended) - presentation of financial statements;
IAS 16 (amended) - Property Plant and Equipment;
IAS 19 (amended) - Employee Benefits;
IAS 27 (amended) - Separate Financial Statements;
IAS 28 (amended) - Investments in Associates and Joint
Ventures;
IAS 38 (amended) - Intangible Assets;
IAS 41 (amended) - Agriculture;
Annual Improvements to IFRSs (2010 - 2012 Cycle); and
Annual Improvements to IFRSs (2014).
In addition to the above, IFRS 15 Revenue from Contracts with
Customers was in issue at the date of approval of these financial
statements but was not yet effective for the current accounting
year and has not been adopted early. The Group has not yet
completed its evaluation of the effect of its adoption.
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.
- Property portfolio valuation.
- Compliance with the real estate investment trust (REIT)
taxation regime.
- Outstanding rent reviews.
- Contingent consideration.
A full explanation of these policies is included in the 2015
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 Committee comprising the six executive Directors and four
senior managers) in order to allocate resources to the segments and
to assess their performance.
The internal financial reports received by the Group's Executive
Committee 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 EPRA earnings per share, net
asset value and profit figures. Reconciliations of each of these
figures to their statutory equivalents are detailed in note 22.
Additionally, information is provided to the Executive Committee
showing gross property income and 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 trading property and comprised 94%
office buildings* by value at 31 December 2015 (2014: 93%). The
Directors consider that these properties have similar economic
characteristics. Therefore, these individual properties have been
aggregated into a single operating segment. The remaining 6% (2014:
7%) represented a mixture of retail, hotel, residential and light
industrial properties, as well as land, each of which is de minimis
in its own right and below the quantitative threshold in aggregate.
Therefore, in the view of the Directors, there is one reportable
segment under the provisions of IFRS 8.
All of the Group's properties are based in the UK. No
geographical grouping is contained in any of the internal financial
reports provided to the Group's Executive Committee and, 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 strategic report. The majority of the Group's properties are
located in London (West End central, West End borders and City
borders), with the remainder in Scotland (Provincial).
*Some office buildings have an ancillary element such as retail
or residential.
Gross property
income
2015 2014
------------------------ ------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 82.5 4.0 86.5 80.5 3.7 84.2
West End borders 15.8 0.2 16.0 13.4 0.3 13.7
City borders 44.6 0.2 44.8 35.6 0.2 35.8
Provincial - 4.7 4.7 - 4.7 4.7
142.9 9.1 152.0 129.5 8.9 138.4
A reconciliation of gross property income to gross
property and other income is given in note 5.
Property portfolio
2015 2014
--------------------------- ---------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 2,601.4 180.3 2,781.7 2,289.4 153.2 2,442.6
West End borders 422.9 15.9 438.8 364.4 15.6 380.0
City borders 1,555.7 6.4 1,562.1 1,164.0 5.4 1,169.4
Provincial - 96.3 96.3 - 97.8 97.8
4,580.0 298.9 4,878.9 3,817.8 272.0 4,089.8
Fair value
West End central 2,633.8 184.1 2,817.9 2,322.3 159.7 2,482.0
West End borders 442.8 15.9 458.7 385.2 15.5 400.7
City borders 1,571.4 6.4 1,577.8 1,178.0 5.4 1,183.4
Provincial - 100.1 100.1 - 102.0 102.0
4,648.0 306.5 4,954.5 3,885.5 282.6 4,168.1
A reconciliation between the fair value
and carrying value of the portfolio is set
out in note 11.
5. Property and other income
2015 2014
GBPm GBPm
Gross rental income 148.3 136.7
Surrender premiums received - 0.1
Other property income 3.7 1.6
Gross property income 152.0 138.4
Trading property sales proceeds 24.5 15.7
Service charge income 25.8 24.4
Other income 2.6 2.0
Gross property and other income 204.9 180.5
Gross rental income 148.3 136.7
Ground rent (0.4) (0.4)
---------------------------------- ------- -------
Service charge income 25.8 24.4
Service charge expenses (27.7) (25.6)
---------------------------------- ------- -------
(1.9) (1.2)
Other property costs (7.3) (6.4)
Net rental income 138.7 128.7
---------------------------------- ------- -------
Trading property sales proceeds 24.5 15.7
Trading property cost of sales (21.3) (11.8)
---------------------------------- ------- -------
Profit on trading property
disposals 3.2 3.9
Other property income 3.7 1.6
Other income 2.6 2.0
Other costs (0.3) -
Surrender premiums received - 0.1
Reverse surrender premiums - (0.4)
Dilapidation receipts 0.7 0.2
Net property and other income 148.6 136.1
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Included within rental income is GBP0.3m (2014: GBP1.5m) of
income which was derived from a lease of one of its buildings where
the Group entered into an agreement 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 GBP11.6m (2014:
GBP7.0m) relating to rents recognised in advance of the cash
receipts.
In 2015, other property income relates to compensation received
from contractors in connection with the late delivery of pre-let
schemes under fixed price contracts and recognised during the year.
The comparative in 2014 related to a rights of light settlement.
Other income in both years 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.
6. Profit on disposal
2015 2014
GBPm GBPm
Investment property
Gross disposal proceeds 259.3 100.6
Costs of disposal (2.7) (1.6)
Net disposal proceeds 256.6 99.0
Carrying value (215.4) (70.3)
Adjustment for rents recognised
in advance (1.0) (0.5)
Profit on disposal of investment
property 40.2 28.2
Investment in joint venture
Gross disposal proceeds - 5.4
Costs of disposal - (0.5)
Net disposal proceeds - 4.9
Carrying value - (2.9)
Profit on disposal of investment
in joint venture - 2.0
Total profit on disposal 40.2 30.2
In February 2015, the Group entered into a property swap with
LaSalle Investment Management. This resulted in the disposal of two
properties and the transfer of 9 and 16 Prescot Street E1 to a
50:50 joint venture in exchange for the acquisition of 20
Farringdon Road EC1 and cash proceeds. The carrying value of
Prescot Street at the date of disposal was GBP36.2m and the fair
value at that date was GBP37.4m. 50% (GBP18.1m) was disposed of for
cash proceeds of GBP18.7m, resulting in a profit on disposal of
GBP0.6m, which is included in the GBP40.2m profit on disposal shown
above. The remaining 50% was transferred to investments (see note
13) in exchange for a loan of GBP18.7m.
In April 2014, the Group disposed of its 25% interest in the
joint venture Euro Mall Sterboholy a.s. in Prague for GBP5.4m
before costs of GBP0.5m. Included within the tax charge in 2014 was
GBP0.9m relating to this disposal, resulting in a profit on
disposal net of tax of GBP1.1m. At the same time, a loan of GBP1.9m
to the joint venture was repaid.
7. Finance costs
2015 2014
GBPm GBPm
Finance income
Other 0.1 -
Total finance income 0.1 -
Finance costs
Bank loans and overdraft 12.5 12.7
Non-utilisation fees 1.5 2.3
Unsecured convertible bonds 4.0 10.4
Secured bonds 11.4 11.4
Unsecured private placement notes 4.6 4.5
Secured loan 3.3 3.3
Amortisation of issue and arrangement
costs 2.3 3.3
Amortisation of the fair value
of the secured bonds (1.0) (0.9)
Finance lease costs 1.1 0.5
Other 0.2 0.2
Gross interest costs 39.9 47.7
Less: finance costs capitalised (5.0) (5.3)
Finance costs 34.9 42.4
Loan arrangement costs written
off 0.3 -
Total finance costs 35.2 42.4
Finance costs of GBP5.0m (2014: GBP5.3m) have been capitalised
on development projects, in accordance with IAS 23 Borrowing Costs,
using the Group's average cost of borrowings during each quarter.
Total finance costs paid during 2015 were GBP36.4m (2014: GBP36.3m)
of which GBP5.0m (2014: GBP5.3m) was included in capital
expenditure on the property portfolio in the Group cash flow
statement under investing activities.
As a result of the refinancing of one of the Group's bank
facilities in July 2015, GBP0.3m of unamortised arrangement costs
associated with the previous facility repaid were written off to
the Group income statement in 2015. In accordance with EPRA
guidance, these costs have been excluded from EPRA profit and
earnings (see note 22).
8. Financial derivative termination costs
The Group incurred costs of GBP4.0m in 2015 to terminate and
re-coupon interest rate swaps and GBP2.4m to defer the start date
of a 'forward-start' swap.
In 2014, the Group incurred costs of GBP2.0m deferring the start
dates of two 'forward-start' interest rate swaps.
9. Share of results of joint ventures
2015 2014
GBPm GBPm
Revaluation surplus 3.6 1.9
Other profit from operations after
tax 1.0 0.6
4.6 2.5
See note 13 for further details on the Group's joint
ventures.
10. Tax charge
2015 2014
GBPm GBPm
Corporation tax
UK corporation tax and income tax
in respect of profit for the year 1.8 0.8
Other adjustments in respect of
prior years' tax 0.1 -
Corporation tax charge 1.9 0.8
Deferred tax
Origination and reversal of temporary
differences 0.4 3.2
Adjustment for changes in estimates - (0.1)
Deferred tax charge 0.4 3.1
Tax charge 2.3 3.9
In addition to the tax charge of GBP2.3m (2014: GBP3.9m) that
passed through the Group income statement, a deferred tax charge of
GBP0.1m (2014: GBP0.9m) was recognised in the Group statement of
comprehensive income relating to revaluation of the owner-occupied
property at 25 Savile Row W1.
The effective rate of tax for 2015 is lower (2014: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2015 2014
GBPm GBPm
Profit before tax 779.5 753.7
-------- --------
Expected tax charge based
on the standard rate of
corporation tax in the
UK of 20.25% (2014: 21.50%)* 157.8 162.0
Difference between tax and
accounting profit on disposals (8.3) (5.1)
REIT exempt income (8.8) (9.8)
Revaluation surplus attributable
to REIT properties (132.3) (143.4)
Expenses and fair value adjustments
not allowable for tax purposes (3.6) 0.9
Capital allowances (3.9) (3.6)
Origination and reversal
of temporary differences 0.4 3.2
Other differences 0.9 (0.3)
Tax charge in respect of
profit for the year 2.2 3.9
Adjustments in respect
of prior years' tax 0.1 -
2.3 3.9
*The Finance Act 2015 set the main rate of UK corporation tax at
20% with effect from 1 April 2015. Finance (No.2) Act 2015 has
introduced further reductions in the main corporation tax rate from
20% to 19% with effect from 1 April 2017 and from 19% to 18% with
effect from 1 April 2020.
11. Property portfolio
Total Owner- Total
investment occupied Trading property
Freehold Leasehold property property property portfolio
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
At 1 January 2015 3,464.3 576.7 4,041.0 24.8 24.0 4,089.8
-------------------------- -------- --------- ---------- -------- -------- ---------
Acquisitions 145.8 105.8 251.6 - - 251.6
Capital expenditure 69.1 44.8 113.9 0.1 6.8 120.8
Interest capitalisation 4.0 0.8 4.8 - 0.2 5.0
-------------------------- -------- --------- ---------- -------- -------- ---------
Additions 218.9 151.4 370.3 0.1 7.0 377.4
Disposals (214.7) (0.7) (215.4) - (20.5) (235.9)
Transfers to joint
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February 25, 2016 02:01 ET (07:01 GMT)
venture (18.7) - (18.7) - (18.7)
Transfers (9.8) - (9.8) 9.8 - -
Revaluation 566.8 83.2 650.0 1.4 - 651.4
Movement in grossing
up of
headlease liabilities - 14.9 14.9 - - 14.9
At 31 December 2015 4,006.8 825.5 4,832.3 36.1 10.5 4,878.9
At 1 January 2014 2,773.2 469.7 3,242.9 19.7 22.6 3,285.2
-------------------------- -------- --------- ---------- -------- -------- ---------
Acquisitions 92.2 - 92.2 - - 92.2
Capital expenditure 80.0 24.1 104.1 0.3 12.3 116.7
Interest capitalisation 3.6 1.3 4.9 - 0.4 5.3
-------------------------- -------- --------- ---------- -------- -------- ---------
Additions 175.8 25.4 201.2 0.3 12.7 214.2
Disposals (70.1) (0.2) (70.3) - (11.3) (81.6)
Revaluation 585.4 81.7 667.1 4.8 - 671.9
Movement in grossing
up of
headlease liabilities - 0.1 0.1 - - 0.1
At 31 December 2014 3,464.3 576.7 4,041.0 24.8 24.0 4,089.8
Adjustments from fair value to carrying
value
At 31 December 2015
Fair value 4,095.2 810.9 4,906.1 36.1 12.3 4,954.5
Revaluation of trading
property - - - - (1.8) (1.8)
Lease incentives and
costs
included in receivables (88.4) (8.6) (97.0) - - (97.0)
Grossing up of headlease
liabilities - 23.2 23.2 - - 23.2
Carrying value 4,006.8 825.5 4,832.3 36.1 10.5 4,878.9
At 31 December 2014
Fair value 3,541.6 572.6 4,114.2 24.8 29.1 4,168.1
Revaluation of trading
property - - - - (5.1) (5.1)
Lease incentives and
costs
included in receivables (77.3) (4.2) (81.5) - - (81.5)
Grossing up of headlease
liabilities - 8.3 8.3 - - 8.3
Carrying value 3,464.3 576.7 4,041.0 24.8 24.0 4,089.8
Reconciliation of fair value
2015 2014
GBPm GBPm
Portfolio including the
Group's share of joint
ventures 4,988.5 4,178.6
Joint ventures (34.0) (10.5)
IFRS property portfolio 4,954.5 4,168.1
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2015 by external valuers
on the basis of fair value in accordance with the RICS Valuation -
Professional Standards, which takes account of the properties'
highest and best use. When considering the highest and best use of
a property, the external valuers will consider its existing and
potential uses which are physically, legally and financially
viable. Where the highest and best use differs from the existing
use, the external valuers will consider the costs and the
likelihood of achieving and implementing this change in arriving at
the property valuation.
CBRE Limited valued properties at GBP4,924.8m (2014:
GBP4,135.2m) and other valuers at GBP29.7m (2014: GBP32.9m). Of the
properties revalued by CBRE, GBP36.1m (2014: GBP24.8m) relating to
owner-occupied property was included within property, plant and
equipment and GBP12.3m (2014: GBP29.1m) was in relation to trading
property.
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 February 2015, the Group entered into a property swap,
further details of which are provided in note 6. The carrying value
of 9 and 16 Prescot Street E1 at the date of disposal was GBP36.2m,
and 50% of this is shown within the GBP235.9m of disposals above,
reflecting the sale to our partner. The fair value at the date of
disposal was GBP37.4m, and 50% of this is the GBP18.7m shown as
transfer to joint venture above, reflecting the 50% retained by the
Group.
During 2009, certain freehold properties owned by the Group were
compulsorily purchased by the Secretary of State for Transport
close to the proposed Tottenham Court Road Crossrail station. The
Group retained a pre-emption right for first refusal on any
subsequent disposal of the site. In July 2015, a development
agreement was signed whereby the Group can gain access to redevelop
the site once the station has been completed. A long leasehold
interest in the site will be granted to the Group upon practical
completion of its office, theatre and retail development, which has
received planning permission. Costs of GBP7.3m were incurred by the
Group up to 31 December 2015 and, in accordance with IAS 40
Investment Property, an investment property has been recognised
during the year, which was subsequently revalued at the balance
sheet date. A further GBP3.7m of recoverable costs have been
recognised in long-term receivables.
Reconciliation of revaluation surplus
2015 2014
GBPm GBPm
Total revaluation surplus 672.2 685.7
Share of joint ventures (3.6) (1.9)
Lease incentives and costs (16.4) (8.0)
Trading property revaluation surplus (0.3) (3.9)
Other (0.5) -
IFRS revaluation surplus 651.4 671.9
Reported in the:
Group income statement 650.0 667.1
Group statement of comprehensive
income 1.4 4.8
651.4 671.9
Historic cost
2015 2014
GBPm GBPm
Investment property 2,732.3 2,534.4
Owner-occupied property 7.7 7.6
Trading property 9.9 23.4
Total property portfolio 2,749.9 2,565.4
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2015 24.8 1.5 0.9 27.2
Additions 0.1 - 0.9 1.0
Depreciation - - (0.3) (0.3)
Transfers 9.8 - - 9.8
Revaluation 1.4 - - 1.4
At 31 December
2015 36.1 1.5 1.5 39.1
At 1 January 2014 19.7 1.5 1.0 22.2
Additions 0.3 - 0.2 0.5
Depreciation - - (0.3) (0.3)
Revaluation 4.8 - - 4.8
At 31 December
2014 24.8 1.5 0.9 27.2
Net book value
Cost or valuation 36.1 1.5 3.5 41.1
Accumulated depreciation - - (2.0) (2.0)
At 31 December
2015 36.1 1.5 1.5 39.1
Net book value
Cost or valuation 24.8 1.5 2.6 28.9
Accumulated depreciation - - (1.7) (1.7)
At 31 December
2014 24.8 1.5 0.9 27.2
The artwork is periodically valued by Bonhams on the basis of
fair value using their extensive market knowledge. The latest
valuation was carried out in December 2014 and the Directors
consider that there have been no material valuation movements since
that date. In accordance with IFRS 13 Fair Value Measurement, the
artwork is deemed to be classified as Level 3.
The historic cost of the artwork in the Group at 31 December
2015 was GBP1.5m (2014: GBP1.5m). See note 11 for the historic cost
of owner-occupied property.
13. Investments
The Group has a 50% interest in two joint ventures, Primister
Limited and Prescot Street Limited Partnership ('PSLP'). 9 and 16
Prescot Street E1 was transferred from a Group company into PSLP
during the year.
In April 2014 the Group disposed of its 25% interest and 50%
voting rights in the joint venture, Euro Mall Sterboholy a.s..
2015 2014
GBPm GBPm
At 1 January 2014 7.4 5.1
Distributions received - (0.1)
Transfer from investment property 18.7 -
(see note 11)
Share of results of joint
ventures (see note 9) 4.6 2.5
Disposal of investment in
joint venture - (0.1)
At 31 December 2015 30.7 7.4
14. Other receivables (non-current)
2015 2014
GBPm GBPm
Accrued income 87.0 73.2
Other 3.7 5.7
90.7 78.9
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Accrued income relates to rents recognised in advance as a
result of spreading the effect of rent free and reduced rent
periods, capital contributions in lieu of rent free periods and
contracted rent uplifts, as well as the initial direct costs of the
letting, over the expected terms of their respective leases.
Together with GBP10.0m (2014: GBP8.3m), which was included as
current assets within trade and other receivables, these amounts
totalled GBP97.0m at 31 December 2015 (2014: GBP81.5m).
15. Trade and other receivables
2015 2014
GBPm GBPm
Trade receivables 2.4 4.5
Other receivables 5.4 2.4
Prepayments 14.9 15.7
Other taxes 16.5 -
Accrued income 13.5 9.4
52.7 32.0
16. Trade and other payables
2015 2014
GBPm GBPm
Trade payables 0.2 2.2
Other payables 39.9 12.8
Sales and social security
taxes - 4.2
Accruals 49.1 37.4
Deferred income 34.8 33.2
124.0 89.8
Included within the other payables for the Group of GBP39.9m is
GBP26.4m that relates to a deferred VAT payment on the acquisition
of a property in December 2015. The payment was made in January
2016.
17. Borrowings and derivative financial instruments
2015 2014
----------------- ------------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Current liabilities
2.75% unsecured convertible
bonds 2016 - - 170.5 234.4
- - 170.5 234.4
Non-current liabilities
1.125% unsecured convertible
bonds 2019 140.2 171.7 137.5 154.5
6.5% secured bonds 2026 188.9 217.2 189.8 227.4
4.41% unsecured private
placement notes 2029 24.8 27.2 24.7 27.6
4.68% unsecured private
placement notes 2034 74.3 81.9 74.2 83.5
3.99% secured loan 2024 82.0 83.3 81.9 84.1
Unsecured bank loans 356.8 362.5 243.7 249.0
Secured bank loans 28.0 28.0 97.5 98.0
Leasehold liabilities 23.2 23.2 8.3 8.3
918.2 995.0 857.6 932.4
Borrowings 918.2 995.0 1,028.1 1,166.8
Derivative financial instruments
expiring in
greater than one year 17.6 17.6 25.2 25.2
Total borrowings and derivative
financial instruments 935.8 1,012.6 1,053.3 1,192.0
Reconciliation to net debt:
Borrowings and derivative
financial instruments 935.8 1,053.3
Less:
Derivative financial
instruments (17.6) (25.2)
Cash and cash equivalents (6.5) (14.8)
Net debt 911.7 1,013.3
In December 2014, the Group issued a notice for the early
redemption of the 2.75% unsecured convertible bonds 2016. All the
bonds converted in January 2015 into new ordinary shares of 5p each
and were subsequently cancelled. The transaction gave rise to an
increase in retained earnings of GBP179.5m.
The fair value of the Group's bonds has been estimated on the
basis of quoted market prices, representing Level 1 fair value
measurement as defined by IFRS 13 Fair Value Measurement.
The fair values of the 3.99% secured loan and the unsecured
private placement notes have been determined by comparing the
discounted future cash flows using the contracted yield with those
of the reference gilts plus the implied margins, and represent
Level 2 fair value measurement.
The fair value of the Group's outstanding interest rate swaps
has been estimated by using the mid-point of the yield curves
prevailing on the reporting date and represents the net present
value of the differences between the contracted rate and the
valuation rate when applied to the projected balances for the
period from the reporting date to the contracted expiry dates.
These represent Level 2 fair value measurement.
The fair value of the Group's bank loans is approximately the
same as their carrying value, after adjusting for the unamortised
arrangement fees, and also represents Level 2 fair value
measurement.
The fair value of the following financial assets and liabilities
are the same as their carrying amounts:
-- Cash and cash equivalents;
-- Trade receivables, other receivables and accrued income
included within trade and other receivables;
-- Trade payables, other payables and accruals included within trade and other payables; and
-- Leasehold liabilities.
There have been no transfers between Level 1 and Level 2 or
Level 2 and Level 3 in either 2015 or 2014.
18. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2015 7.2 (2.2) 5.0
Charged/(credited) to the income
statement 1.4 (1.0) 0.4
Charged to other comprehensive
income 0.1 - 0.1
At 31 December 2015 8.7 (3.2) 5.5
At 1 January 2014 5.5 (4.5) 1.0
Charged to the income statement 1.0 2.2 3.2
Change in tax rates in the
income statement (0.2) 0.1 (0.1)
Charged to other comprehensive
income 0.9 - 0.9
At 31 December 2014 7.2 (2.2) 5.0
Deferred tax on the revaluation surplus is calculated on the
basis of the chargeable gains that would crystallise on the sale of
the property portfolio at each balance sheet date. The calculation
takes account of any available indexation on the historic cost of
the properties. Due to the Group's REIT status, deferred tax is
only provided at each balance sheet date on properties outside 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.
19. Dividend
Dividend per
share
-----------------------
Payment PID Non-PID Total 2015 2014
date p p p GBPm GBPm
Current year
10 June
2015 final dividend 2016 30.80 - 30.80 - -
22 October
2015 interim dividend 2015 12.60 - 12.60 14.0 -
------ ------- ------
Distribution of
current year profit 43.40 - 43.40
Prior year
12 June
2014 final dividend 2015 22.35 5.65 28.00 31.0 -
23 October
2014 interim dividend 2014 7.30 4.35 11.65 - 12.0
------ ------- ------
Distribution of
prior year profit 29.65 10.00 39.65
13 June
2013 final dividend 2014 23.50 2.25 25.75 - 26.4
------ ------- ------ ------ ------
Dividends as reported
in the
Group statement
of changes in equity 45.0 38.4
------ ------
2015 interim dividend 14 January (1.7) -
withholding tax 2016
2015 interim scrip 22 October (3.3) -
dividend 2015
2014 final scrip 12 June (7.7) -
dividend 2015
2014 interim dividend 14 January
withholding tax 2015 1.0 (1.0)
2014 interim scrip 23 October
dividend 2014 - (1.0)
2013 final scrip 13 June
dividend 2014 - (1.1)
2013 interim dividend 14 January
withholding tax 2014 - 0.9
------ ------
Dividends paid
as reported in
the
Group cash flow
statement 33.3 36.2
------ ------
20. Cash and cash equivalents
2015 2014
GBPm GBPm
Cash at bank 6.5 14.8
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21. Post balance sheet events
In February 2016, the Group agreed to issue GBP30m of new
unsecured 3.46% senior notes expiring in May 2028 and GBP75m of new
unsecured 3.57% senior notes expiring in May 2031. The GBP105m of
funds will be drawn in May 2016.
22. EPRA performance measures
Number of shares
Earnings per Net asset
share value per
share
Weighted average At 31 December
------------------- ------------------
2015 2014 2015 2014
'000 '000 '000 '000
For use in basic measures 110,320 102,658 111,172 102,785
Dilutive effect of
convertible bonds 4,498 12,373 4,498 7,876
Dilutive effect of
share-based payments 355 456 363 477
For use in measures for
which bond conversion is
dilutive 115,173 115,487 116,033 111,138
Less dilutive effect of
convertible bonds (4,498) (12,373) (4,498) (7,876)
For use in other diluted
measures 110,675 103,114 111,535 103,262
The GBP150m unsecured convertible bonds 2019 ('2019 bonds') have
an initial conversion price set at GBP33.35. The GBP175m unsecured
convertible bonds 2016 ('2016 bonds') were redeemed early and
converted into ordinary shares in January 2015 at a conversion
price of GBP22.22.
In accordance with IAS 33 Earnings per Share, the effect of the
conversion of the bonds is required to be recognised if they are
dilutive, and not recognised if they are anti-dilutive.
For 2015, the shares attributable to the conversion of the 2019
bonds were dilutive for net asset value (NAV) and EPRA NAV per
share and unadjusted earnings per share but anti-dilutive for EPRA
earnings per share.
For 2014, the shares attributable to the conversion of the 2019
bonds were dilutive for unadjusted earnings per share but
anti-dilutive for all other measures. The shares attributable to
the 2016 bonds were dilutive for NAV and EPRA NAV per share and
unadjusted earnings per share but anti-dilutive for EPRA earnings
per share.
For consistency purposes, the Group has adopted the same
approach for dilution due to convertible bonds for the calculation
of EPRA triple NAV per share as EPRA NAV per share.
The following tables set out reconciliations between the IFRS
and EPRA figures for profit before tax, profit for the year and
earnings per share. The adjustments made between the figures are as
follows:
A - Disposal of investment and trading property and investment
in joint venture, and associated tax and non-controlling
interest
B - Revaluation surplus on investment property and in joint
ventures, and associated deferred tax and non-controlling
interest
C - Fair value movement and termination costs relating to
derivative financial instruments, and associated non-controlling
interest
D - Loan arrangement costs written off, movement in the
valuation of cash-settled options and the dilutive effect of
convertible bonds
Profit before tax and
earnings per share
Adjustments
----------------------------------
IFRS A B C D EPRA
GBPm GBPm GBPm GBPm GBPm GBPm
Year ended 31 December
2015
Net property and other
income 148.6 (3.2) - - - 145.4
Total administrative
expenses (30.0) - - - - (30.0)
Revaluation surplus 650.0 - (650.0) - - -
Profit on disposal of
investment property 40.2 (40.2) - - - -
Net finance costs (35.1) - - - 0.3 (34.8)
Movement in fair value
of derivative
financial instruments 7.6 - - (7.6) - -
Financial derivative
termination costs (6.4) - - 6.4 - -
Share of results of
joint ventures 4.6 - (3.6) - - 1.0
Profit before tax 779.5 (43.4) (653.6) (1.2) 0.3 81.6
Tax charge (2.3) - 1.4 - - (0.9)
Profit for the year 777.2 (43.4) (652.2) (1.2) 0.3 80.7
Non-controlling interest (11.0) 0.4 8.4 0.2 - (2.0)
Profit for the year
attributable to
equity shareholders 766.2 (43.0) (643.8) (1.0) 0.3 78.7
Interest effect of dilutive
convertible bonds 4.0 - - - (4.0) -
Diluted earnings 770.2 (43.0) (643.8) (1.0) (3.7) 78.7
Earnings per share 694.53p 71.34p
Diluted earnings per
share 668.73p 71.11p
Adjustments
----------------------------------
IFRS A B C D EPRA
GBPm GBPm GBPm GBPm GBPm GBPm
Year ended 31 December
2014
Net property and other
income 136.1 (3.9) - - - 132.2
Total administrative
expenses (28.4) - - - 0.3 (28.1)
Revaluation surplus 667.1 - (667.1) - - -
Profit on disposal of
investment property 28.2 (28.2) - - - -
Profit on disposal of
investment 2.0 (2.0) - - - -
Net finance costs (42.4) - - - - (42.4)
Movement in fair value
of derivative
financial instruments (9.4) - - 9.4 - -
Financial derivative
termination costs (2.0) - - 2.0 - -
Share of results of
joint ventures 2.5 - (1.9) - - 0.6
Profit before tax 753.7 (34.1) (669.0) 11.4 0.3 62.3
Tax charge (3.9) 1.0 1.2 - - (1.7)
Profit for the year 749.8 (33.1) (667.8) 11.4 0.3 60.6
Non-controlling interest (12.1) - 10.4 (0.3) - (2.0)
Profit for the year
attributable to
equity shareholders 737.7 (33.1) (657.4) 11.1 0.3 58.6
Interest effect of dilutive
convertible bonds 10.4 - - - (10.4) -
Diluted earnings 748.1 (33.1) (657.4) 11.1 (10.1) 58.6
Earnings per share 718.60p 57.08p
Diluted earnings per
share 647.78p 56.83p
Net asset value and net asset value
per share
Undiluted Diluted
GBPm p p
At 31 December 2015
Net assets attributable to equity
shareholders - diluted 4,062.7 3,501
Remove conversion of 1.125% unsecured
convertible bonds 2019 (140.2)
Net assets attributable to equity
shareholders - undiluted 3,922.5 3,528
Adjustment for:
Revaluation of trading properties
net of tax 1.4
Deferred tax on revaluation surplus 8.7
Fair value of derivative financial
instruments 17.6
Fair value adjustment to secured
bonds 15.0
Non-controlling interest in respect
of the above (3.7)
EPRA net asset value - undiluted 3,961.5 3,563
Adjustment for:
Potential conversion of 1.125%
unsecured convertible bonds 2019 140.2
EPRA net asset value - diluted 4,101.7 3,535
Adjustment for:
Deferred tax on revaluation surplus (8.7)
Fair value of derivative financial
instruments (17.6)
Mark-to-market of secured bonds (42.2)
Mark-to-market of fixed rate secured
loan (0.3)
Mark-to-market of fixed rate unsecured
private placement notes (9.1)
Unamortised issue and arrangement
costs (8.7)
Non-controlling interest in respect
of the above 3.7
EPRA triple net asset value - diluted 4,018.8 3,463
Adjustment for 1.25% unsecured
convertible bonds 2019:
Remove conversion of bonds (140.2)
Unamortised issue and arrangement
costs (2.1)
Mark-to-market of bonds (29.4)
EPRA triple net asset value - undiluted 3,847.1 3,460
At 31 December 2014
Net assets attributable to equity
shareholders - diluted 3,182.7 2,864
Remove conversion of 2.75% unsecured
convertible bonds 2016 (170.5)
Net assets attributable to equity
shareholders - undiluted 3,012.2 2,931
Adjustment for:
Revaluation of trading properties
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net of tax 4.1
Deferred tax on revaluation surplus 7.2
Fair value of derivative financial
instruments 25.2
Fair value adjustment to secured
bonds 16.0
Non-controlling interest in respect
of the above (3.2)
EPRA net asset value - undiluted 3,061.5 2,979
Adjustment for:
Potential conversion of 2.75%
unsecured convertible bonds 2016 170.5
EPRA net asset value - diluted 3,232.0 2,908
Adjustment for:
Deferred tax on revaluation surplus (7.2)
Fair value of derivative financial
instruments (25.2)
Mark-to-market of 1.125% unsecured
convertible bonds 2019 (14.2)
Mark-to-market of secured bonds (52.4)
Mark-to-market of fixed rate secured
loan (1.1)
Mark-to-market of fixed rate unsecured
private placement notes (11.1)
Unamortised issue and arrangement
costs (11.9)
Non-controlling interest in respect
of the above 3.2
EPRA triple net asset value - diluted 3,112.1 2,800
Adjustment for 2.75% unsecured
convertible bonds 2016:
Remove conversion of bonds (170.5)
Unamortised issue and arrangement
costs (1.4)
Mark-to-market of bonds (62.5)
EPRA triple net asset value - undiluted 2,877.7 2,800
Cost ratios
2015 2014
GBPm GBPm
Administrative expenses 30.0 28.1
Other property costs 7.3 6.4
Dilapidation receipts (0.7) (0.2)
Other costs 0.3 -
Net service charge costs 1.9 1.2
Service charge costs recovered
through rents but not separately
invoiced (0.2) (0.5)
Management fees received less estimated
profit element (2.6) (2.0)
Share of joint ventures' expenses 0.3 0.1
EPRA costs (including direct vacancy
costs) (A) 36.3 33.1
Direct vacancy costs (3.1) (1.8)
EPRA costs (excluding direct vacancy
costs) (B) 33.2 31.3
Gross rental income 148.3 136.7
Ground rent (0.4) (0.4)
Service charge components of rental
income (0.2) (0.5)
Share of joint ventures' rental
income less ground rent 1.4 0.8
Adjusted gross rental income (C) 149.1 136.6
EPRA cost ratio (including direct
vacancy costs) (A/C) 24.3% 24.2%
EPRA cost ratio (excluding direct
vacancy costs) (B/C) 22.3% 22.9%
In addition to the two EPRA cost ratios, the Group
has calculated an additional cost ratio based
on its property portfolio fair value to recognise
the 'total return' nature of the Group's activities.
Property portfolio at fair value
(D) 4,954.5 4,168.1
Portfolio cost ratio (A/D) 0.7% 0.8%
The Group has not capitalised any overhead or operating expenses
in either 2015 or 2014.
23. Gearing and interest cover
NAV gearing
2015 2014
GBPm GBPm
Net debt 911.7 1,013.3
Net assets 3,995.4 3,075.7
NAV gearing 22.8% 32.9%
Loan-to-value ratio
2015 2014
GBPm GBPm
Net debt 911.7 1,013.3
Fair value adjustment of secured
bonds (15.0) (16.0)
Unamortised issue and arrangement
costs 10.8 13.3
Leasehold liabilities (23.2) (8.3)
Drawn debt net of cash 884.3 1,002.3
Fair value of property portfolio 4,954.5 4,168.1
Loan-to-value ratio 17.8% 24.0%
Net interest cover ratio
2015 2014
GBPm GBPm
Net property and other income 148.6 136.1
Adjustments for:
Other income (2.6) (2.0)
Other property income (3.7) (1.6)
Net surrender premiums
received - (0.1)
Profit on disposal of
trading properties (3.2) (3.9)
Reverse surrender premiums - 0.4
Adjusted net property income 139.1 128.9
Finance income (0.1) -
Finance costs 34.9 42.4
34.8 42.4
Adjustments for:
Finance income 0.1 -
Other finance costs (0.2) (0.2)
Amortisation of fair value
adjustment to secured bonds 1.0 0.9
Amortisation of issue and
arrangement costs (2.3) (3.3)
Finance costs capitalised 5.0 5.3
38.4 45.1
Net interest cover ratio 362% 286%
24. Total return
2015 2014
p p
EPRA net asset value
on a diluted basis
At end of year 3,535.00 2,908.00
At start of year (2,908.00) (2,264.00)
Increase 627.00 644.00
Dividend per share 40.60 37.40
Increase including dividend 667.60 681.40
Total return 23.0% 30.1%
25. Risk management and internal control
Derwent London aims to deliver above average long-term returns
to shareholders whilst operating within the Group's risk appetite.
The Board uses the Group's risk management system to ensure that
risks to the Group's strategy are identified, understood and
managed, recognising that such risks are inherent in running any
business.
Overall responsibility for risk management and the Group's
system of internal controls rests with the Board which has
delegated responsibility to the Audit Committee and the Risk
Committee. Executive management is responsible for developing the
Group's risk management system and for designing, implementing,
maintaining and evaluating the systems of internal control.
The Board is responsible for managing the Group's risk profile
in an environment that reflects the culture and organisation of the
business. Key matters to note in this regard are:
-- Senior management encourages an open and transparent culture throughout the business.
-- The close day-to-day involvement of the Directors in the
business allows any system weaknesses to be identified quickly.
-- The Group mainly operates out of a single office in central
London which is within close proximity to most of its
properties.
-- The senior management team is experienced and stable and overall staff turnover is low.
-- The Group has a Whistleblowing Policy which is supported by an independent advice line.
The Group's risk management framework was prepared within the
context of this operating environment and consists of its Risk
Appetite Statement, a Risk Management Policy document and a Risk
Management Process document. The Board's approach to risk
management recognises that not all risk can be eliminated at an
acceptable cost and that there are some risks that, given its
experience, the Board will choose to accept.
The Risk Register, which is prepared by the Executive Committee,
is the core element of the Group's risk management process. The
first stage in its preparation is for the Committee to identify the
risks facing the Group. An assessment is then made collectively by
the Committee of the following matters:
-- The likelihood of each risk occurring.
-- The potential impact of the risk on each different aspect of the business.
-- The strength of the controls operating over the risk.
This approach allows the final assessment to reflect the effect
of the controls and any mitigating procedures that are in
place.
The Register and its method of preparation have been reviewed by
the Risk Committee. In order to gain a more comprehensive
understanding of the risks facing the business and the management
thereof, the Risk Committee periodically receives presentations
from senior managers.
Code Provision C.2.3. of the 2014 version of the UK Corporate
Governance Code requires the Board to monitor the Company's risk
management and internal control systems. To comply with this
requirement, the Executive Committee undertook an interim review of
the Risk Register and the operation of the Group's key controls in
August 2015. In addition the Risk Committee considered the adequacy
of the controls operating over the top ten risks facing the Group
to supplement its annual review of the Risk Register and
controls.
Following these extra processes, the Board is satisfied that the
Group's risk management and internal control systems operated
effectively throughout the period.
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For 2016 the Group intends to introduce a set of key risk
indicators to enhance its assessment of the operation of the key
controls.
The Group's Risk Register includes 44 risks split between
strategic risks, operational risks and finance risks. The principal
risks and uncertainties facing the Group in 2016 include one new
risk namely the risk of default by a contractor or subcontractor.
Three key risks from 2015 are no longer included in the list. These
are:
-- Shortage of future development opportunities.
-- Inefficient systems.
-- Tenant default.
The average weighted risk score is lower in 2015 than in 2014.
The Board has considered whether this is a reasonable change and
concluded that it reflects three main factors:
-- As the Group's net asset value has increased, it becomes
inherently more resilient to the financial effect of a number of
risks that in the past would have represented a higher impact to
the Group.
-- As the Group's rental income increases and its portfolio of
tenants becomes more diverse, the risk presented by any one tenant
defaulting is reduced.
-- During 2015 some controls and mitigating factors relating to
key risks were revised and improved so reducing the risk weighting
of those particular risks.
The principal risks and uncertainties facing the Group in 2016
are set out on the following pages together with the potential
effects, controls and mitigating factors.
Strategic risks
That the Group's Business Model does not create the anticipated
shareholder value or fails to meet investors' expectations.
Risk, effect Controls and mitigation Action
and
progression
-------------- --------------------------------------------------------------- ---------------------------------------------------------------
1. * The Group carries out a five-year strategic review * The last annual strategic review was carried out by
Inconsistent each year and also prepares an annual budget and the Board in June 2015. This considered the
strategy three rolling forecasts which cover the next two sensitivity of six key measures to changes in
The Group's years. In the course of preparing these documents the underlying assumptions including interest rates and
strategy Board considers the sensitivity of the Group's KPIs borrowing margins, timing of projects, level of
is and key ratios to changes in the main assumptions capital expenditure and the extent of capital
inconsistent underlying the forecast thereby modelling different recycling.
with the economic scenarios.
state
of its
market. * 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 may consider the
2. realise its long-term strategic goals given the most effect of varying different assumptions to reflect
Inconsistent likely economic and market conditions and the Group's changing economic and market conditions.
development risk appetite. This flexibility is largely due to the
programme Group's policy of maintaining income from properties
The Group's for as long as possible until development starts.
development * The timing of the Group's development programme and
programme is the strategies for individual properties reflect the
not outcome of these considerations.
consistent * The level of future redevelopment opportunities in
with the Group's portfolio enables the Board to delay
the economic marginal projects until market conditions are
cycle. favourable. * Approximately 50% of the Group's portfolio has been
The Group identified for future redevelopment.
continues
to benefit
from * The Board pays particular attention, when setting its
a strong plans, to maintaining sufficient headroom in all the * During the year the Group's loan-to-value ratio fell
central Group's key ratios, financial covenants and interest from 24% to below 18%, its net interest cover ratio
London cover. was above 360% and the REIT ratios were comfortably
market. met.
However,
this
could be * Pre-lets are sought to de-risk major projects.
adversely * Pre-lets were secured over 240,250 sq ft during 2015.
affected by
a
number of
high
level
economic
factors such
as
uncertainty
caused
by Brexit
(the
referendum
on
the UK's
continuing
membership
of
the EU), the
effect
of the
Chinese
economic
slowdown
or London
losing
its 'Safe
Haven'
status. This
would
reduce the
value
of the
Group's
portfolio
with
a consequent
effect
on two of
its
KPIs - total
return
and total
property
return.
The Board
sees
the level of
both
these risks
to
have
slightly
increased
since
last year.
3.
Reputational * All new members of staff benefit from an induction * The Group employs a Head of Investor and Corporate
damage programme and are issued with the Group's Staff Communications and retains the services of an
The Group's Handbook. external PR agency. Both maintain regular contact
reputation with external media sources.
is damaged
through
unauthorised * Social media channels are monitored by the Group's
and investor relations department. * The Company engages with a number of local community
inaccurate bodies in areas here it operates as part of its CSR
media activity.
coverage.
This risk * The Group takes advice on technological changes in
would the use of media and adapts its approach accordingly.
most directly
impact on the
Group's total
shareholder * There is an agreed procedure for approving all
return external statements.
- one of its
key
metrics.
Indirectly
it could
impact
on a number
of
the formal
KPIs.
The Board
considers
the risk have
increased
slightly
over the
year.
Financial risks
That the Group becomes unable to meet its financial obligations
or finance the business appropriately.
Risk, effect and Controls and mitigation Action
progression
----------------------------------- --------------------------------------------------------------- ---------------------------------------------------------------
4. Increase in * The impact of yield changes on the Group's financial * The Group produces three rolling forecasts each year
property yields covenants and performance are monitored regularly and which contain detailed sensitivity analyses including
Increases in interest are subject to sensitivity analysis to ensure that the effect of changes to yields.
rates can lead adequate headroom is preserved.
to higher property
yields which would * Quarterly management accounts report the Group's
cause property * The impact of yield changes is considered when performance against covenants.
values to fall. potential projects are appraised.
This would affect
the following * Project appraisals are regularly reviewed and updated
KPIs: * The Group's move towards mainly unsecured financing in order to monitor the effect of yield changes.
* Loan-to-value ratio. over the last few years has made management of its
financial covenants less complicated.
* Total return.
* Total property return.
Interest rates
have remained
low for an extended
period of time
and yields have
decreased further
during the year.
Interest rates
are expected to
rise within the
next two years.
Though there is
no direct relationship,
this may cause
property yields
to increase in
due course. The
risk was assessed
as high last year
and the Board
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considers it to
have remained
at a similar level
this year.
Operational risks
The Group suffers either a financial loss or adverse
consequences due to processes being inadequate or not operating
correctly.
Risk, effect and Controls and mitigation Action
progression
------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------
5. Reduced development * Standardised appraisals including contingencies and * The Group is advised by leading planning consultants
returns inflationary cost increases are prepared for all and has considerable in-house planning expertise. Tw
The Group's development investments and sensitivity analysis is undertaken to o
projects do not ensure that an adequate return is made in all planning consents were received in 2015, and a
produce the anticipated circumstances considered likely to occur. further two have been secured in the year to date.
financial return
due to one or
more of the following
factors: * Development costs are benchmarked to ensure that the * Executive Directors represent the Group on a number
* delays in the planning process Group obtains competitive pricing. of local bodies which ensures that it remains aware
of local planning issues.
* increased construction costs
* Regular cost reports are produced for the Executive
Committee and the Board that monitor progress of * The procurement process used by the Group includes
* adverse letting conditions actual expenditure against budget and timetable. This the use of highly regarded firms of quantity
allows potential adverse variances to be identified surveyors and is designed to minimise uncertainty
and addressed at an early stage. regarding costs.
This would have
an effect on the
Group's total
return and total * The Group's cost committee meets on a weekly basis to * The Group's style of accommodation remains in demand
property return consider new budget requests or amendments. as evidenced by the 79 lettings achieved in 2015
KPIs. which totalled 523,800 sq ft.
The Board considers
this risk to have
remained broadly * Post completion reviews are carried out for all major
the same over developments to ensure that improvements to the * The Group has often secured significant pre-lets of
the last year. Group's procedures can be identified and implemented. the space in its development programme which
significantly 'de-risks' those projects. 33 pre-lets
were secured in 2015 over 240,250 sq ft.
* Alternative procurement methods are evaluated as a
way of minimising the impact of increased
construction costs.
6. Business interruption
The Group is either * The Group's IT systems are protected by anti-virus * Independent internal and external penetration tests
the victim of software and firewalls which are continually updated. are regularly conducted to assess the effectiveness
a cyber attack of the Group's security. No matters were raised as a
or suffers a disaster result of the 2015 test.
that results in
it being unable * The Group's data is regularly backed up and
to use its IT replicated.
systems. * Staff awareness programmes are delivered to alert
This would lead staff to the techniques that may be used to gain
to an increase unauthorised access to the Group's systems.
in cost and a * The Group's Business Continuity Plan was revised
diversion of management during 2015 and successfully tested in November.
time. Increased
costs would have * Security measures are regularly reviewed by the IT
an impact on the steering group.
Group's total * Multifactor authentication has been introduced for
return KPI whilst both internal and external access to the systems.
a significant
diversion of management * The Head of IT regularly reports to the Executive
time would have Committee.
a wider effect. * The Group's IT department has access to cyber threat
Due to the heightened intelligence and analytics data.
assessment of
this risk in 2014 * An independent benchmarking review of the Group's
a number of improvements cyber security has been carried out.
have been made * Incident response and remediation policies are in
to the controls place.
and mitigating
factors during
2015 and as a
consequence the * Cyber insurance is being evaluated.
Board considers
the risk to have
reduced over the
year.
7. Regulatory
non-compliance * Each year the Group's Risk Committee receives a * A Health and Safety report is presented at all
The Group's cost report prepared by the Group's lawyers identifying Executive Committee and main Board meetings.
base is increased legislative/regulatory changes expected over the next
and management 12 months and reports to the Board concerning
time diverted regulatory risk.
through a breach * The Executive Committee receives regular reports from
of any of the the Sustainability Manager.
legislation that
forms the regulatory * The Group employs a Health and Safety Manager who
framework within reports to the Board.
which the Group * The Group pays considerable attention to
operates. sustainability issues and produces an annual
An increase in sustainability report.
costs would directly * The Group employs a Sustainability Manager who
impact on the reports to the sustainability committee which is
Group's total chaired by Paul Williams.
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return KPI. A * The Group has reviewed and revised its whistleblowing
significant diversion policy during the year. No incidents were reported
of management under the policy in 2015.
time could affect * The Company's policies including those on the Bribery
a wider range Act, Health and Safety, Equal Opportunities,
of key metrics. Harassment and Whistleblowing are available to all
This risk has staff on the Company intranet. * The Group has reviewed the requirements of the Modern
increased marginally Slavery Act and revised its policies where
due to the increased appropriate in preparation for reporting in
scale of the Group's compliance with the legislation next year.
development activity * Members of staff attend external briefings in order
and the associated to remain cognizant of regulatory changes.
increase in Health
and Safety risks. * CDM 2015 regulations have been implemented.
8. Contractor/sub-contractor
default * Whenever possible the Group uses * As the size of the Group's projects has increased so
Returns from the contractors/sub-contractors that it has worked with the contractors have become more substantial.
Group's developments successfully previously.
are reduced due
to delays and
cost increases * The financial accounts of both main contractors and
caused by either * The resilience of a project's critical path is major sub-contractors are reviewed.
a main contractor increased by establishing procedures to manage any
or major sub-contractor sub-contractor default effectively.
defaulting during
the project.
This would primarily
affect the Group's * Key construction packages are acquired early in the
total property project.
return KPI.
This risk has
increased over
the year as the * Performance bonds are sought if considered necessary.
construction industry
has become more
stretched.
9. Shortage of
key staff * The Nominations Committee consider succession matters * The Group recruited 15 new members of staff during
The Group is unable as a standing agenda item. 2015.
to successfully
implement its
strategy due to
a failure to recruit * Requirements for senior management succession are * Staff turnover during 2015 was low at 10%.
and retain key considered as part of the five-year strategic review.
staff with appropriate
skills.
This risk could * The average length of employment is 7.7 years.
impact on any * The remuneration packages of all employees are
or all of the benchmarked regularly.
Group's KPIs.
The risk is seen
to be unchanged
over the year. * Six-monthly appraisals identify training requirements
which are fulfilled over the next six months.
Financial instruments - risk management
The Group is exposed through its operations to the following
financial risks:
-- credit risk;
-- market 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 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 years.
Principal financial instruments
The principal financial instruments used by the Group, from
which financial instrument risk arises, are trade receivables, cash
at bank, trade and other payables, floating rate bank loans, fixed
rate loans and private placement notes, 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 to executive management for designing and operating
processes that ensure the effective implementation of the
objectives and policies.
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 lease contracts in relation to its property portfolio. It
is Group policy to assess the credit risk of new tenants before
entering into such 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 a
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 is the risk that the fair value or future cash flows
of a financial instrument will fluctuate due to changes in market
prices. Market risk arises for the Group from its use of variable
interest bearing instruments (interest rate risk).
The Group monitors its interest rate exposure on a regular
basis. A sensitivity analysis performed to ascertain the impact on
profit or loss and net assets of a 50 basis point shift in interest
rates would result in an increase of GBP0.7m (2014: GBP0.3m) or a
decrease of GBP0.7m (2014: GBP0.3m).
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 2015, the proportion of fixed debt held
by the Group was at the top of this range at 85% (2014: 94%).
During both 2015 and 2014, the Group's borrowings at variable rate
were denominated in sterling.
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 fixed rates.
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.
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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 'market risk' section
above.
Executive management receives rolling three-year projections of
cash flow 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 and other borrowings are spread
across a range of banks and financial institutions 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
non-controlling 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 vary the
amount of dividends paid to shareholders subject to the rules
imposed by its REIT status. It may also seek to redeem bonds,
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 loan-to-value
ratio. During 2015, the Group's strategy, which was unchanged from
2014, 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 23.
26. List of definitions
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.
CDP
The CDP is an organisation which works with investors and listed
companies to facilitate the disclosure and reporting of climate
change data and information.
Diluted figures
Reported results adjusted to include the effects of potential
dilutive shares issuable under the Group's share option schemes and
the convertible bonds.
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.
Estimated rental value (ERV)
This is the external valuers' opinion as to the open market rent
which, on the date of valuation, could reasonably be expected to be
obtained on a new letting or rent review of a property.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe's
leading property companies, investors and consultants which strives
to establish best practices in accounting, reporting and corporate
governance and to provide high-quality information to investors.
This includes guidelines for the calculation of the following
performance measures which the Group has adopted.
- EPRA earnings per share
Earnings from operational activities.
- EPRA net asset value per share
NAV adjusted to include trading properties and other investment
interests at fair value and to exclude certain items not expected
to crystallise in a long-term investment property business
model.
- EPRA triple net asset value per share
EPRA NAV adjusted to include the fair values of (i) financial
instruments, (ii) debt and (iii) deferred taxes on revaluations,
where applicable.
- EPRA cost ratio (including direct vacancy costs)
EPRA costs as a percentage of gross rental income less ground
rent (including share of joint venture gross rental income less
ground rent). EPRA costs include administrative expenses, other
property costs, net service charge costs and the share of joint
ventures' overheads and operating expenses (net of any service
charge costs), adjusted for service charge costs recovered through
rents and management fees.
- EPRA cost ratio (excluding direct vacancy costs)
Calculated as above, but with an adjustment to exclude direct
vacancy costs.
- EPRA net initial yield (NIY)
Annualised rental income based on the cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the EPRA property
portfolio, increased by estimated purchasers' costs.
- EPRA "topped up" net initial yield
This measure incorporates an adjustment to the EPRA NIY in
respect of the expiration of rent free periods (or other unexpired
lease incentives such as discounted rent periods and stepped
rents).
- EPRA vacancy rate
Estimated rental value (ERV) of immediately available space
divided by ERV of the EPRA portfolio.
- EPRA like-for-like rental income growth
The growth in rental income on properties owned throughout the
current and previous year under review. This growth rate includes
revenue recognition and lease accounting adjustments but excludes
properties held for development in either year and properties
acquired or disposed of in either year.
Fair value movement
An accounting adjustment to change the book value of an asset or
liability to its market value.
Global Real Estate Sustainability Benchmark (GRESB)
The Global Real Estate Sustainability Benchmark is an initiative
set up to assess the environmental and social performance of public
and private real estate investments and allow investors to
understand their performance.
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.
Headroom
This is the amount left to draw under the Group's loan
facilities, i.e. the total loan facilities less amounts already
drawn.
Interest rate swap
A financial instrument where two parties agree to exchange an
interest rate obligation for a predetermined amount of time. These
are generally used by the Group to convert floating rate debt to
fixed rates.
Investment Property Databank Limited (IPD)
IPD is a company that produces independent benchmarks of
property returns. The Group measures its performance against both
the Central London Offices Index and the All UK Property Index.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives
and individual goals, against which the performance of the Group is
annually assessed.
Lease incentives
Any incentive offered to occupiers to enter into a lease.
Typically the incentive will be an initial rent free or half rent
period, stepped rents, or a cash contribution to fit-out or similar
costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property
portfolio. Drawn debt is equal to drawn facilities less cash and
the unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability
and its market value.
NAV gearing
Net debt divided by net assets.
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.
Net debt
Borrowings plus bank overdraft less cash and cash
equivalents.
Net interest cover ratio
Net property income, excluding all non-core items divided by
interest payable on borrowings and non-utilisation fees.
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.
Real Estate Investment Trust (REIT)
The UK Real Estate Investment Trust ("REIT") regime was launched
on 1 January 2007. On 1 July 2007, Derwent elected to convert to
REIT status.
The REIT legislation was introduced to provide a structure which
closely mirrors the tax outcomes of direct ownership in property
and removes tax inequalities between different real estate
investors. It provides a liquid and publically available vehicle
which opens the property market to a wide range of investors.
A REIT is exempt from corporation tax on qualifying income and
gains of its property rental business providing various conditions
are met. It remains subject to corporation tax on non-exempt income
and gains e.g. interest income, trading activity and development
fees.
REITs must distribute at least 90% of the Group's income profits
from its tax exempt property rental business, by way of dividend,
known as a property income distribution. Property income
distributions from the tax exempt property rental business will
suffer withholding tax at 20% with withholding tax exemption for
certain UK resident companies and tax exempt bodies.
If the Group distributes profits from the non-tax exempt
business, the distribution will be taxed as an ordinary dividend in
the hands of the investors.
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