TIDMDLN
RNS Number : 9918X
Derwent London PLC
28 February 2017
28 February 2017
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR YEARED 31 DECEMBER 2016
RECORD LETTING YEAR, FINAL DIVID UP 25% AND SPECIAL DIVID
ANNOUNCED
Financial highlights
-- EPRA(1) net asset value per share increased 0.5% to 3,551p
from 3,535p at 31 December 2015, 1.3% lower than 3,598p at 30 June
2016
-- Net rental income increased 5.2% to GBP145.9m from GBP138.7m in 2015
-- EPRA earnings rose 8.9% to GBP85.7m from GBP78.7m last year
-- EPRA earnings per share increased 7.9% to 76.99p per share from 71.34p in 2015
Final dividend increased 25%
-- Proposed final dividend per share increased by 25.0% to
38.50p making 52.36p for the full year, an increase of 20.6%
-- Increase reflects strong recurring earnings growth since 2014
and de-risking of 2017-18 pipeline
Operational performance
-- Record year of lettings totalling GBP31.4m, on average 6.3% above December 2015 ERV
-- Estimated rental values (ERV) on an EPRA basis increased by 5.1% in 2016 (by 1.0% in H2)
-- Portfolio valued at GBP5.0bn; underlying fall in value 0.2%
in the year, with a decrease of 1.7% in H2
-- Valuation uplift on developments was 4.7% in the year
-- Total property return was 2.9% which was ahead of the IPD
Central London Offices Quarterly Index of 2.6%
-- True equivalent yield was 4.83%: a 31bp rise in 2016 of which 25bp was in H2
-- Investment property disposals totalled GBP208m on average 3.7% above December 2015 values
-- Capital expenditure was GBP213.5m and acquisitions GBP18m
Good growth potential and a strong start to 2017 and special
dividend of 52p per share proposed
-- Total cash rental reversion was estimated at GBP134.2m in
December 2016, which requires GBP363m of outstanding capital
expenditure, and was 39% contractual or pre-let
-- New lettings since December 2016 total GBP11.5m, including
the pre-letting to Arup of 41% of the main 80 Charlotte Street W1
development building completing in 2019
-- Current development programme 44% pre-let by income, up from 8% in December 2015
-- Leases regeared enabling Expedia to take at least 231,400 sq
ft at Angel Building EC1 from 2020 until 2030
-- Agreements to dispose of two properties in excess of book
value raising GBP327m before costs
-- Proposed special dividend of 52p per share
Robust financial position
-- Financial ratios: interest cover 3.7x, dividend cover 1.5x and LTV 17.7%
-- Net debt marginally lower at GBP904.8m in 2016
-- Debt maturity was extended to 7.7 years in 2016 from 7.3 years in 2015
-- Cash and undrawn facilities of GBP383m exceed committed
project capital expenditure of GBP363m
(1) Explanations of how the EPRA figures are derived from IFRS
are shown in Note 22
Robbie Rayne, Chairman, commented:
"Despite economic and political headwinds last year, today's
results demonstrate the strong progress made by Derwent London in
2016, providing evidence of the underlying strength of our business
and the quality of our people and portfolio. The Board has proposed
a 25% increase in the final dividend, reflecting our financial
position and the de-risking of our 2017/2018 pipeline in the last
twelve months. In addition, following the value-enhancing
transactions announced today, we are proposing a special dividend
of 52p per share."
John Burns, Chief Executive Officer, commented:
"These results highlight how our business model of creating
well-designed and innovative office space in improving locations
can make meaningful progress even in less buoyant market
conditions. Whilst we believe it is right to remain cautious, we
are in a strong financial position with a well balanced portfolio
rich with opportunities which gives us considerable scope to create
further growth in our business. 2017 has started well for us as
evidenced by this morning'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
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
Officer
Tel: +44 (0)20 7659 3000
Damian Wisniewski, Finance
Director
Quentin Freeman, Head
of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Tim Danaher
CHAIRMAN'S STATEMENT
Overview
Derwent London delivered its operational strategy successfully
throughout 2016 despite a background of significant political
change and the ensuing uncertainty originally stemming from June's
EU referendum. 2016 was another record year of lettings for us
which, combined with those achieved in recent years and reduced
finance costs, resulted in an increase in EPRA earnings per share
for the year of 7.9% to 76.99p.
Today's results demonstrate the resilience of our business model
which is underpinned by continued demand for our well designed
mid-market product in improving locations. We have a strong
financial base, and an investment market that allows the balance
between secure income and development opportunity to be maintained.
In addition, we have talented and experienced people across the
business with well established relationships with occupiers, third
party professionals and local communities. These strengths are the
result of considerable investment which has helped reinforce the
Group's reputation, culture and brand.
Over the last few years we have looked to bolster the recurring
earnings side of our total return model and this year's increase
should be seen as a continuation of the substantial growth achieved
in 2015. We have also significantly de-risked our development
pipeline over recent months, and together, these two strategies
have enabled us to recommend raising the final dividend by 25.0% to
38.50p, which takes the full year dividend to 52.36p. At this level
the dividend will be covered 1.5 times by recurring earnings, and
our average annual dividend growth since we converted to a REIT has
been 9.8%. In addition, following the value-enhancing transactions
announced today, we are proposing a special dividend of 52p per
share to be paid along with the final dividend in June 2017.
The change in market sentiment in the second half of the year
resulted in considerable share price weakness across the sector and
a fall in the underlying value of our portfolio by 1.7% since June
and 0.2% for the year. However, as stated above, the Group's
recurring earnings have seen a strong increase and generated a
positive total return for the year. Consequently the EPRA diluted
NAV at 31 December 2016 was marginally higher at 3,551p per share,
an increase of 0.5% over the year.
Whilst overall take-up in London offices slowed in 2016, our
letting activity captured GBP31.4m pa of rental income on 547,500
sq ft, which surpassed our previous record achieved in 2015 by 16%.
Despite a quieter period around the EU Referendum activity was
spread evenly between the first and second halves.
The ongoing resilience of our particular markets, together with
the Group's financial strength and the attractive potential returns
of the Brunel Building development in Paddington W2, gave us the
confidence to continue with this project. Overall, we incurred
GBP213.5m of capital expenditure on our development projects during
2016 and at the year-end we were on site at four, Brunel Building
W2, 80 Charlotte Street W1, White Collar Factory EC1 and The
Copyright Building W1. Capital expenditure in 2017 is estimated at
GBP158m, with no major schemes due to start.
The second half of the year saw a significant devaluation of
sterling and an increase in overseas demand focussed on properties
that produce long-term income. We took advantage of this supportive
market and made 98% of our total investment sales of GBP208.0m
after June. Overall, these disposals produced a 3.7% surplus over
December 2015 book value.
During the year we extended the maturity of our debt through the
issue of GBP105m of bonds in a US Private Placement and the
extension of both our bank facilities. At the year end our
financial position remained strong with interest cover of 3.7 times
and LTV of 17.7%, while our undrawn facilities and cash exceeded
our future capital expenditure on committed projects.
Our Sustainability Report, which is published simultaneously
with the Annual Report, demonstrates the further progress we have
made in this area. A major part of our sustainability programme is
our work on relationships with our communities. We are therefore
pleased to have extended our commitment by inaugurating a Tech Belt
Community Fund to operate alongside our similar longstanding
arrangement in Fitzrovia. Given the importance that the Group
attaches to its sustainability performance, it was pleasing to be
ranked 12th overall and top in the UK in Corporate Knights Global
100, an annual list of the world's most sustainable companies
announced at the recent World Economic Forum at Davos.
One of the Group's distinctive features is its focus on
innovative design and this has again been recognised externally
with two recent schemes, Turnmill and White Collar Factory, both
winning awards.
Team
I would once again like to thank the Derwent London team for
their continued expertise, enthusiasm and dedication without which
these results would not have been possible.
The Board
Stuart Corbyn, who has served as a non-executive Director of the
Company since 2006, is due to step down from the Board at the
forthcoming AGM in May 2017. I would like to thank him for the
advice and sound judgement that he has provided throughout this
period. The Nominations Committee has started the process of
finding a replacement for Stuart to allow a smooth transition. We
anticipate making further announcements concerning this matter over
the next few months.
Outlook
We expect much of the current economic uncertainty to persist as
UK-EU negotiations are likely to be protracted. How this impacts on
London businesses remains to be seen but, so far, activity has been
surprisingly resilient with UK economic activity improving in the
second half. However, although we believe that it is right to
remain cautious and have positioned the business accordingly, we
have limited space currently available and our product and
locations continue to attract good occupational and investment
demand.
CHIEF EXECUTIVE'S STATEMENT
The Group's operating performance in 2016 illustrates how our
business model of creating well-designed mid-market flexible office
space in improving locations can make meaningful progress even in
less buoyant market conditions.
Derwent London has taken advantage of the recent levels of
occupational demand to achieve a record level of lettings in 2016,
although the pace of market activity has slowed with the increased
uncertainty surrounding Brexit negotiations. We start 2017 with a
low EPRA vacancy rate in a central London portfolio let at an
undemanding average topped-up office rent of GBP45 per sq ft. This
is comfortably at the lower end of our middle-market target range
of GBP45 to GBP80 per sq ft, and very much at the affordable end of
the spectrum. Our average lease length is 6.5 years or 7.8 years
allowing for pre-lets.
Even after allowing for the changing outlook in the last eight
months, our contractual cash rent of GBP150.3m, the basis of the
portfolio's net initial yield, can grow by GBP75.8m from the expiry
of rent free periods, minimum uplifts, pre-lets, or from reversions
within the investment portfolio. Since then we have moved towards
this by regearing the leases on 231,400 sq ft of the office space
at Angel Building EC1 so that Expedia can occupy the majority of
the building from 2020. This enabled us to capture the significant
existing reversion, and there are now minimum uplifts at the next
reviews in 2020 and 2021. In addition the income has been extended
by between 9 and 14 years to 2030. CBRE estimate that this
initiative has enhanced the building's value by 10%.
Letting our developments under construction and vacant space
could add another GBP58.4m to rental income, after allowing for
GBP363m of future capital expenditure to complete. Since the year
end we have pre-let GBP10.7m, or 18% of this additional potential,
principally from our first letting at 80 Charlotte Street W1 to
Arup, and also another floor at White Collar Factory EC1 to Adobe.
As a result our full development programme, which will not complete
until 2019, is now 44% pre-let by income compared to 8% in December
2015.
In total, the reversionary gains in our existing portfolio could
raise our contractual cash rental income by more than 85% in the
next five years. In the coming 12 months, we aim to continue
capturing our investment reversion, let the available space in our
2017 project completions and achieve more pre-lets on the 2019
deliveries. This strategy gives us the opportunity to tie in
substantial income growth again this year while de-risking the
development programme.
The Group continues to look for opportunities to replenish our
future pipeline. However a lack of suitable opportunities meant
that our only acquisition in 2016 was the long leasehold interest
on part of The White Chapel Building. Conversely we were able to
identify a number of opportunistic disposals which enabled us to
sell GBP208m of property in 2016 where we felt that we had limited
short-term value to add. These disposals have reinforced our
balance sheet strength and our LTV ratio has fallen again to 17.7%.
Since the year end we have agreed to sell an additional GBP327m of
property above book value, which will further improve our financial
position.
We, and our occupiers, face a number of challenges this year
with heightened political and economic uncertainty and the impact
of business rate increases in London from April 2017. It is still
far too early to know what longer term impact these may have on the
London market. So far the UK and London economies have been
resilient and business confidence indicators have recovered from
June 2016 levels. Our portfolio is well-balanced and opportunity
rich. We have a skilled management team and financial flexibility.
These attributes give us considerable scope to create further
growth in our business over the next few years.
OUR CENTRAL LONDON OFFICE MARKET
Although overall office take-up in 2016 failed to match the high
levels of recent years, the outcome proved to be much better than
had been expected in the middle of the year. In total take-up of
12.2m sq ft was 17% below the previous year, but still close to the
long-term trend. Despite the talk of an exodus of London bankers,
important global businesses continued to make major commitments to
London notably Amazon, Apple, Expedia, Facebook, Google and Wells
Fargo among others. Three sectors continue to dominate take-up:
business and professional services represented 28.6%, TMT's share
has risen to 24.6% and banking and finance fell to 20.3%. However
central London vacancy rates have risen from 2.3% to 4.3%. In the
West End the vacancy rose a little less from 1.9% to 3.5%.
One year ago CBRE estimated that 7.1m sq ft of office space
would be developed in 2016. In the event only 61% was delivered.
This year it is estimated that 7.2m sq ft will be built, which, if
completed, means that over the two years new supply is 2m sq ft
lower than was expected at the beginning of last year. In total
there is currently 12.5m sq ft under construction, which is 53%
pre-let. Therefore the vacant element totals 5.9m sq ft or 2.6% of
the total market. The West End's share is 1.9m sq ft under
construction which is 41% pre-let, leaving 1.1m sq ft available or
1.2% of the local market.
Overall office rental growth slowed significantly in 2016 with
CBRE reporting prime rents up just 1.3%, and West End rents falling
marginally by 0.8%. This is the first fall since Q1 2010, and was
driven by weakness in the Mayfair/St James's market, which fell
6.3%. Other West End markets were static or showed modest growth.
One exception was Paddington where rents rose 8.0%.
The investment market saw strong Q1 and Q4 activity, but was
relatively quiet in between which meant that activity levels at
GBP13.1bn were 19% down on 2015. The immediate impact of the EU
referendum vote was for yields to move out c.25bp to reflect
heightened uncertainty and some early forced sales by the
open-ended funds which created an initial sharp adjustment. However
the market quickly stabilised: tenants have been resilient and the
weaker level of sterling has attracted fresh investment interest as
demonstrated by the GBP4.1bn of deals in Q4. West End annual
activity at GBP4.4bn held up better and was only 8% lower than in
2015, seeing a much higher degree of domestic interest, which
accounted for 46% of the transactions as opposed to 30% for the
market as a whole. There have already been a number of significant
transactions in Q1 2017 which suggests that demand remains
robust.
Against the current background, projections on the future must
be treated with caution. The London office occupier is likely to
face additional costs following the rise in business rates
introduced from April 2017, and it is widely expected that some
financial and associated jobs will move to other cities in the EU.
The latter will ultimately depend on the outcome of UK-EU
negotiations, but a number of banks have already suggested that
several thousand jobs are earmarked to move. Despite these
challenges we believe that there is still scope for selective
rental growth, although this is unlikely to occur across all our
London villages. On average we expect ERV movements across our
portfolio of between 0% and -5% in 2017. We have seen our property
yields move out 31bp since December 2015, and these may drift out a
little further in the current year.
VALUATION
The Group's investment portfolio was valued at GBP5.0bn at 31
December 2016, a similar level to last year. The valuation themes
were positives from rental growth and our on-site developments, but
these were offset by an outward movement in valuation yields. In
addition we benefitted from an uplift on 132-142 Hampstead Road NW1
where we had conditionally agreed to sell the property. As a result
the valuation would have been flat apart from the additional impact
of a rise in Stamp Duty Land Tax in March 2016 that lowered values
by around 1%. The net outcome was a valuation deficit for the year
of GBP20.9m, before accounting adjustments of GBP23.3m (see note
11) giving a total reported deficit of GBP44.2m. This equated to a
marginal underlying valuation decrease of 0.2% which followed a
16.5% increase in 2015. The result was an outperformance when
measured against our capital value benchmarks, the IPD Quarterly
Index for Central London Offices, which decreased by 0.7%, and the
wider IPD All UK Property Index which fell by 1.3%.
By location, our central London properties, which represent 98%
of the portfolio, saw an underlying valuation decline of 0.1%, with
the West End down 0.7% and the City Borders up by 1.0%. The latter
area benefitted from letting progress at the White Collar Factory
EC1 and The White Chapel Building E1. The 2% balance of the
portfolio is our non-core Scottish holdings and these were down
1.9%.
The portfolio's total property return was 2.9% for 2016 compared
to 19.9% in 2015. The IPD Index for total return was 2.6% for
Central London Offices and 3.5% for All UK Property. Although we
outperformed our more comparable benchmark we underperformed the
broader index as a consequence of the higher property yields
outside London.
Within the investment portfolio, we were on site at four major
developments during the year. Two of these, White Collar Factory
EC1 and The Copyright Building W1, will be completed in 2017 and
two more, 80 Charlotte Street W1 and Brunel Building W2, are in the
early stages of development. In total, these projects were valued
at GBP662m delivering a 4.7% valuation uplift. This outperformance
came from strong letting activity above ERVs and the valuers
releasing development surpluses as projects neared completion.
Accordingly, our two near-term completions were up 14.1%. The two
recently commenced developments were marked down 5.9% as our
valuers increased the development margin targets for a more
uncertain market.
The valuer's estimate of the net rental value of these four
developments was GBP65.4m and at year end GBP18.3m or 28% of this
had been secured through our pre-lets. Since then we have signed
two further lettings at GBP10.7m pa, thereby taking our
developments to 44% de-risked. The average lease length on our
pre-letting activity is 15.4 years. Capital expenditure required to
complete these four developments is GBP347m. While prime West End
office rents declined marginally during the year, our mid-market
rental locations, such as Fitzrovia, Victoria and the Tech Belt,
continued to grow, albeit more slowly than in recent years. Our
rental values, on an EPRA basis, rose by 5.1% and followed 11.8% in
2015. During 2016 the West End saw rental growth of 5.5% and the
City Borders 4.4%.
On an EPRA basis the portfolio's initial yield was 3.4% which
will rise to a 'topped-up' 4.1% following expiry of rent free and
half rent periods and contractual rental uplifts. For the previous
year, these figures were 3.1% and 3.8%, respectively. The true
equivalent yield at year end was 4.83%, a 31bp outward movement
over the year and follows 21bp of yield tightening in 2015. This
movement was the first outward yield shift since 2009 and was
mainly in the second half of the year, when the equivalent yield
moved out 25bp. While the economy remained resilient during the
year, especially in the second half, the outlook post the
referendum remains uncertain and as a consequence buyers are
seeking higher yields to reflect the greater potential risks to the
rental outlook.
As noted in our 2015 Annual Report we expected a greater
proportion of our future return to come from income, developments
and asset management. This proved to be the case. As set out in the
Portfolio Management section, our asset management initiatives also
had some notable success. The outcome was a strong uplift in our
annualised contracted rent. Our contracted rent rose 9.6%, from
GBP137.1m to GBP150.3m, despite disposals lowering income by
GBP6.7m and no income-producing acquisitions. The portfolio's ERV
was also up, to GBP284.5m. Thus, the rental reversion at year end
was GBP134.2m. Of this potential growth GBP52.0m is contractual
from fixed uplifts, the expiry of rent free periods or pre-lets.
Adding this to the current income takes our 'topped-up' rent to
GBP202.3m which is 17.2% higher than last year.
The majority of the balance of the reversion comes from letting
vacant space, either currently available to occupy or under
construction. This totalled GBP58.4m. The main elements of this are
the ERVs of our two recent development starts: 80 Charlotte Street
and Brunel Building, which total GBP41.2m. These properties will
not be delivered until 2019.
The final component comes from lease reviews and renewals. We
made excellent progress in capturing some of this in 2016, but
there is still a further GBP23.8m of potential income to come.
PORTFOLIO MANAGEMENT
In 2016 the Group achieved a new annual letting record of
GBP31.4m, surpassing the previous 2015 record by 16%. Activity was
evenly spread between the first and second halves and, on average,
exceeded the December 2015 ERV by 6.3%, as can be seen in the table
below. This reflected the amount of space we had available,
predominantly either being developed or refurbished, the
suitability of our product and the success of our letting
campaigns. As a result we start the year again with a low existing
vacancy rate, but with considerable latent letting opportunity in
our development pipeline.
Letting activity 2016
Performance against Dec 15 ERV
Area Income Open market Overall(1)
sq ft GBPm pa
------ -------- --------- ------------------ ---------------
H1 267,700 16.7 6.5% 6.3%
H2 279,800 14.7 9.0% 6.3%
------ -------- --------- ------------------ ---------------
2016 547,500 31.4 7.7% 6.3%
------ -------- --------- ------------------ ---------------
(1) Includes short-term lettings at properties earmarked for
redevelopment
Last year started well with the pre-let of the whole office
element of The Copyright Building W1 on a 20-year lease at an
average rent of GBP86 per sq ft. We continued to let floors of the
White Collar Factory EC1 throughout the year, achieving a new
record rent of GBP67.50 per sq ft on the tower. We launched The
White Chapel Building leasing campaign in Q2 and the property is
now 78% let. The refurbishment at 20 Farringdon Road EC1 is also
largely let. On our investment properties we achieved a new rental
high at the Johnson Building EC1, and let the last available floor
at 1-2 Stephen Street W1.
Principal lettings in 2016
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 Copyright
Building
W1 Capita 87,150 86.00(1) 7.4 - 20 - 34
White Collar
Factory EC1 Adobe 28,600 63.50 1.8 70.00 11.5 - 18
Angel Square
EC1 Expedia 9,850 53.50 0.5 57.50 5.3 2 2
Middlesex
House W1 GHA Services 4,360 70.00 0.3 72.50 10 5 6
Q2
White Collar Capital
Factory EC1 One 29,500 65.00 1.9 75.35 11 - 17
The White 8, plus
Chapel Building Perkins 7 if no
E1 & Will 26,400 45.00 1.2 49.50 10 5 break
The UK
20 Farringdon Trade
Road EC1 Desk 9,400 62.50 0.6 65.65 10 5 5
20 Farringdon
Road EC1 Okta 10,000 62.50 0.6 - 10 5 6
Q3
The White 8, plus
Chapel Building 10 if no
E1 GDS 54,700 52.00 2.8 - 10 5 break
9, plus
5 6 plus
White Collar & 6 if no
Factory EC1 Spark44 22,900 67.50 1.5 70.00 15 11 break
The White 9, plus
Chapel Building 9 if no
E1 Unruly 24,200 45.00 1.1 49.50 10 5 break
The White
Chapel Building Reddie
E1 & Grose 20,700 49.50 1.0 52.50 10 - 18
9, plus
Johnson Building Audio 8 if no
EC1 Network 10,800 63.50 0.7 - 10 5 break
The White
Chapel Building Shipowners'
E1 Club 13,100 47.50 0.6 - 10 - 19
Global
78 Whitfield Eagle
Street W1 Entertainment 9,500 65.00 0.6 - 10 5 6
9, plus
White Collar 6 if no
Factory EC1 Runpath 9,800 64.00 0.6 - 10 5 break
Q4
20 Farringdon
Road EC1 Indeed 18,200 56.50 1.0 - 5 3 5
9, plus
1-2 Stephen 9 if no
Street W1 Iron Web 11,100 75.00 0.8 - 10 5 break
White Collar Brainlabs
Factory EC1 Digital 11,900 62.50 0.7 - 11 - 17
50 Oxford The Fragrance
Street W1 Shop 1,000 - 0.4 - 10 - 9
------------------ ---------------- ------- --------- -------- ---------- ------- ------- ------------
(1) Excludes reception area.
Active asset management is one way we capture growth. During
2016 we concluded lease renewals and reviews on 419,400 sq ft
achieving rents of GBP19.5m, 40.5% above previous levels and 8.9%
above December 2015 ERV. In addition, we regeared leases on 174,600
sq ft adding a further GBP9.1m of income 59.9% above the previous
income and 16.3% above ERV. In total this covered 594,000 sq ft or
12% of our completed portfolio.
Asset management 2016
Area Previous New rent Change Income
sq rent GBPm v
ft GBPm pa Dec
pa 15 ERV
---------------- -------- --------- --------- ------- --------
Rent reviews 395,500 12.91 18.32 +41.9% +9.8%
---------------- -------- --------- --------- ------- --------
Lease renewals 23,900 0.93 1.13 +21.3% -3.4%
---------------- -------- --------- --------- ------- --------
Lease regears 174,600 5.67 9.07 +59.9% +16.3%
---------------- -------- --------- --------- ------- --------
Total 594,000 19.51 28.52 +46.1% +11.1%
---------------- -------- --------- --------- ------- --------
Among these transactions we secured significant uplifts on rent
reviews at 20 Farringdon Road EC1, Angel Building EC1 and 1-2
Stephen Street W1 where we achieved rents of c.GBP50, GBP60 and
GBP70 per sq ft, respectively. We also completed notable lease
regears at 60 Whitfield Street W1 and 1 Oliver's Yard EC1. At the
former, we provided a capital payment in return for improvements,
our current income will increase from GBP1.6m to GBP2.2m in 2018,
and the lease on 36,200 sq ft has been extended from 2018 to 2029.
At the latter we have increased the income on 50,300 sq ft from
GBP1.39m to GBP2.34m and extended the lease by three years to 2021,
with the tenant retaining a break at 2018 on 17% of the space. Both
these deals exceeded ERV and improved certainty of income.
At the year-end our EPRA vacancy rate was 2.6% despite a number
of completions. We started 2016 with an exceptionally low 1.3%
vacancy rate which peaked at 3.3% in November 2016. We have a
number of properties completing this year, which could see our
vacancy rate rise to 4.5% if we achieve no further lettings.
Lettings in 2017
Since the year end we have pre-let the 13th floor at The White
Collar Factory EC1 to Adobe, who had already taken two other floors
in the tower. The new letting comprises 14,900 sq ft for a rent of
GBP1.0m pa or GBP67.50 per sq ft. It is for 11.5 years and
incorporates a minimum uplift with a cap and a floor on rental
review in five years' time. Adobe received incentives equivalent to
22 months rent free.
We have also made our first pre-letting at 80 Charlotte Street
W1, where Arup have agreed to take 133,600 sq ft of offices in the
main building taking it to 41% pre-let. They have signed a 20 year
unbroken lease at an initial rent of GBP9.74m, which is equivalent
to GBP75 per sq ft on the main office floors. This income stream
will rise by 2.25% pa for the first fifteen years of the lease at
which point there is an upward only open market review. After
allowing for the impact of the indexation the average rent over the
first five years is in line with our December 2016 ERV for the
lower floors. In return Arup is receiving incentives equivalent to
33 months rent free. They also have an option to take another
40,700 sq ft.
As reported earlier, the Group has regeared a number of leases
with the Expedia group and Cancer Research UK at Angel Building,
Islington EC1. Expedia will occupy at least 231,400 sq ft or 93% of
the office space from 2020 and has extended its tenure from 2021 to
2030. There are minimum rental uplifts on reviews in 2020 and 2021.
In return Expedia will receive incentives equivalent to 21 months
rent free. The income from the total office element of the building
will rise from GBP13.3m to a minimum of GBP15.0m in 2020.
PROJECTS
Derwent London is principally a property investor and asset
manager, with developments representing 13% of our portfolio by
value. These come with a major GBP363m capital expenditure
commitment and an element of operational risk resulting from our
approach of starting schemes speculatively. However we do not
commit to projects that would unduly stress the balance sheet and
only start schemes where we believe the risk/reward ratio is
attractive. We have a track record of de-risking our projects as
they progress, and our potential profit margins allied to a
long-term investment approach allow us significant flexibility on
lease terms. Our success in this regard can be seen in the
substantial progress we have made in pre-letting 292,000 sq ft or
73% of our 2017 deliveries, which compares to 22% in December
2015.
Major developments pipeline
Property Area Delivery Capex Comment
sq to
ft complete
GBPm
------------------------- ---------- --------- ---------- -------------------------
Projects on site
276,000 sq ft
offices, 9,000
sq ft retail,
White Collar Factory, 8,000 sq ft residential
Old Street Yard Q1 - 70% pre-let
EC1 293,000 2017 11 overall
87,000 sq ft
offices and 20,000
The Copyright Building, sq ft retail
30 Berners Street H2 - 81% pre-let
W1 107,000 2017 24 overall
Brunel Building,
55 North Wharf Road H1
W2 240,000 2019 99 Offices
321,000 sq ft
offices, 45,000
sq ft residential
and 14,000 sq
80 Charlotte Street H2 ft retail - 35%
W1 380,000 2019 213 pre-let overall
------------------------- ---------- --------- ---------- -------------------------
1,020,000 347
------------------------- ---------- --------- ---------- -------------------------
Other major planning
consents
1 Oxford Street 275,000 204,000 sq ft
W1 offices, 37,000
sq ft retail
and 34,000 sq
ft theatre
Monmouth House EC1 125,000 Offices, workspaces
and retail
------------------------- ---------- --------- ---------- -------------------------
400,000
------------------------- ---------- --------- ---------- -------------------------
Planning applications
19-35 Baker Street 293,000 Planning application
W1 submitted for
206,000 sq ft
offices, 52,000
sq ft residential
and 35,000 sq
ft retail
------------------------- ---------- --------- ---------- -------------------------
Grand Total 1,713,000
------------------------- ---------- --------- ---------- -------------------------
The delivery of construction projects across the London market
continues to be tested this cycle which has led to some delays.
White Collar Factory is nearing completion a few months behind our
original schedule. The 237,000 sq ft tower building is 80% pre-let
with only the top two and a half floors available. The half floor
is under option until six months after practical completion. We are
now focused on marketing the lower rise buildings surrounding the
new open space. Currently we have pre-let 15,600 sq ft of this
office space, and 9,000 sq ft of retail is conditionally under
offer, which leaves 23,400 sq ft of lower rise offices and the
8,000 sq ft residential space still to let. The ERV of the project
is GBP16.9m and the remaining capital expenditure is GBP11m.
Last year we announced the pre-letting of the office element of
The Copyright Building for twenty years at an average rent of GBP86
per sq ft thereby largely de-risking the project. We have just
started to market the remaining 20,000 sq ft of retail and
restaurant space. The project remains on course for delivery in the
second half of this year. The ERV of the building is GBP7.3m net,
and the remaining capital expenditure is GBP24m.
We considered delaying Brunel Building following the Brexit
vote. In the event the Group made the decision to continue work due
to the development's merits and good levels of occupier interest.
This canalside building will provide column-free floors and is
located opposite a Crossrail station. Though it caught up a bit in
2016, Paddington has lagged much of central London this cycle and
has seen limited development activity. We believe current rental
levels are attractive, and the opening of Crossrail in 2018 will
significantly enhance eastward public transport links to central
West End and the City. Outstanding capital expenditure totals
GBP99m and the ERV is GBP14.8m net or GBP62.50 per sq ft. We
estimate our breakeven rent at c.GBP46 per sq ft.
80 Charlotte Street is our largest current project and
demolition is underway. The space is designed to be multi-let and
comprises three buildings. The largest is 309,000 sq ft of offices
and 14,000 sq ft retail. There is an adjoining 14,000 sq ft private
residential building and a smaller property opposite at 53-65
Whitfield Street comprising 12,000 sq ft of offices, 21,000 sq ft
private residential and 10,000 sq ft affordable residential. With
outstanding capital expenditure of GBP213m and an ERV of GBP26.4m,
this is our most significant current project. The ERV is based off
an average office rent of c.GBP80 per sq ft, whereas we estimate
our breakeven rent at c.GBP58 per sq ft. Since the year end, we
have pre-let 133,600 sq ft of the largest building to Arup at a
rent of GBP9.7m. More details of this transaction are discussed
under Portfolio Management above, and under Investment Activity
below.
During 2016 we had an unusually high level of refurbishment
activity, principally due to our opportunistic acquisition of The
White Chapel Building E1 with vacant possession. In addition we had
projects at 20 Farringdon Road EC1, 78 Whitfield Street W1 and 78
Chamber Street E1. Adjusting for the joint venture interest at
Chamber Street these projects totalled 326,000 sq ft and all were
completed during the year. They are now 71% let producing GBP11.7m
of rent. The remaining 93,000 sq ft has an ERV of GBP4.4m. In the
current year we will consider whether to commit to Phase 2 at The
White Chapel Building, which comprises 85,000 sq ft of ground and
lower ground floor space.
Longer term we have planning consent for two well-located
schemes including 1 Oxford Street W1, the site over the eastern
Tottenham Court Road Crossrail station. The other major scheme
located immediately south of the White Collar Factory is Monmouth
House EC1, where last year we received consent to replace two tired
properties with a new 125,000 sq ft project: this represents an 81%
uplift in area. We have flexibility as to when to start both
projects. Beyond that we believe another 25% of our portfolio, or
1.5m sq ft, has redevelopment or refurbishment potential which
means that our overall portfolio remains rich with opportunity.
INVESTMENT ACTIVITY
We comfortably exceeded our initial sales target during the year
with virtually all our transactions in the second half. The three
major office property sales comprised investments where we
considered that the potential to add further significant short term
value was limited. At Balmoral Grove N7 we had previously
conditionally sold the property for residential redevelopment. All
these conditions, including receipt of planning consent, were
achieved during the year. We retain a potential overage interest in
this property as well as at Riverwalk House SW1, which was sold in
2012 and where the residential development was completed in 2016.
Any future profits will be dependent on the success of each scheme,
and currently no value is attributed to these potential gains in
our balance sheet. Earlier in the year we sold our remaining
available residential units at The Corner House, 73 Charlotte
Street W1, and Queens W2. In total we raised GBP224.7m of cash from
sales in 2016.
Principal disposals 2016
Net Net Net yield
Property Date Area proceeds proceeds to purchaser Rent
sq GBPm GBP % GBPm
ft psf pa
------------------- ------- ---------- ---------- ---------- -------------- -------
75 Wells Street
W1 Q3 34,800 40.3 1,160 2.9 1.3
Balmoral Grove
N7 Q4 67,000 23.9 n/a n/a 0.0
Tower House WC2 Q4 53,700 65.9 1,230 4.3(1) 3.1(1)
120-134 Tottenham
Court Road W1
(retail and 330
room hotel) Q4 26,400(2) 68.9 n/a 3.1 2.3
------------------- ------- ---------- ---------- ---------- -------------- -------
Total - 181,900 199.0 n/a - 6.7(1)
------------------- ------- ---------- ---------- ---------- -------------- -------
(1) Includes rental top-ups for vacant space and rent free
periods. (2) Retail space only
As there were few acquisition opportunities that met our
criteria during the year we acquired only one property, which was
the long leasehold interest in one of the lower ground floors at
The White Chapel Building. This has given us the option to
refurbish Phase 2 as discussed above.
Principal acquisition 2016
Property Date Area Total Total Net Net Lease
sq cost cost yield Net rental length
ft GBPm GBP % rental income Years
psf income GBP
GBPm psf
pa
------------------ ------ ------- ------ ------ ------- --------- -------- --------
The White Chapel
Building E1(1) Q1 30,500 12.0 395 - - - -
------------------ ------ ------- ------ ------ ------- --------- -------- --------
(1) Lower ground floor. Main building purchased in December
2015.
Disposals in 2017
Since the year end we have agreed to sell two office buildings
for GBP327m before costs.
The larger of these was a conditional put and call option to
sell 8 Fitzroy Street W1 for GBP197m. This freehold property
comprises 147,900 sq ft let to Arup for a rent of GBP7.2m. The
purchaser is Arup and the transaction formed part of the
pre-letting negotiations at 80 Charlotte Street W1 discussed above.
The disposal price reflects a net initial yield of 3.4% and a
premium of 2.8% before costs to its December 2016 value. Completion
is expected on 23 June 2017.
The second disposal is the freehold of 132-142 Hampstead Road
NW1 which we have agreed to sell to the Secretary of State for
Transport for GBP130m. This property provides 219,700 sq ft and is
let to University College London for GBP1.7m. We acquired the
property in 2007 and achieved planning for 233,000 sq ft of offices
and 38 residential units. The new offices were designed to be our
first White Collar Factory, but we were unable to carry our plans
forward due to the proposals to build HS2 announced in 2012. The
December 2016 book value of GBP115m did not reflect the full
benefit of the very valuable planning consent.
FINANCE REVIEW
Financial overview
In a year dominated by unexpected political events and increased
uncertainty, Derwent London has reported further recurring earnings
growth, a step change in the proposed final dividend and a small
increase in net asset value backed up by a very strong financial
position.
After several years where large valuation uplifts provided
substantial net asset value increases for the Group, in 2016 the
net asset value attributable to equity shareholders marginally
increased by GBP10m, with the IFRS net asset value (NAV) remaining
at the same rounded GBP4.0bn reported a year ago. The combination
of a maturing London office property cycle and the EU referendum
vote, among other things, gave rise to an outward yield movement on
our portfolio averaging 31bp in 2016. This was partially offset by
the positive impact of continuing rental growth, record letting
successes and strong rent review settlements but the portfolio
valuation was down as a result in H2 2016. The fall was lower than
we had anticipated in the immediate aftermath of the June EU vote
and was more than offset by retained recurring earnings. We have
also been able to demonstrate that our carrying values remain
supported by transactional evidence with GBP208m of property
investment disposals in H2 2016 at an average price 3.7% above
December 2015 book values.
These property sales had another benefit as available undrawn
facilities increased by the year end to the extent that our
committed development pipeline was fully funded at December
2016.
Earnings per share and profit before tax on an IFRS basis
include fair value movements arising from the revaluation of
investment properties and interest rate hedging instruments and can
therefore be volatile from year to year. Those fair value movements
have moved from a net GBP657.6m uplift in 2015 to a GBP36.8m
downward movement in 2016 with the result that the IFRS profit
before tax was GBP54.5m in 2016, down from GBP779.5m in 2015. In
common with best practice in our sector, alternative performance
measures are also provided to supplement IFRS guidance based on the
recommendations of the European Public Real Estate Association
("EPRA"). EPRA Best Practice and Policy Recommendations (BPR) have
been adopted widely throughout this report and are often used
within the business when considering our recurring operational
performance as well as matters such as dividend policy and elements
of our Directors' remuneration.
EPRA NAV per share on a diluted basis was up by 16p to 3,551p
from 3,535p in 2015.
EPRA earnings increased more strongly with a 8.9% rise to
GBP85.7m (2015: GBP78.7m) and EPRA earnings per share increased by
7.9% to 76.99p. Building on the substantial 31% rise in recurring
profits in 2015 and with our pipeline out to 2019 now substantially
de-risked due to recent lettings, we believe that this progress
justifies the decision to propose a 25% increase in the final
dividend. The total annual dividend remains 1.5 times covered by
EPRA earnings per share at this level.
Our gearing ratios have fallen again too, though only
marginally. They now stand at the lowest level for many years. The
Group's loan-to-value ratio was 17.7% at 31 December 2016 (2015:
17.8%) and NAV gearing was down to 22.6% from 22.8% in 2015.
Interest cover has also risen again to 370% in 2016 against 362% in
2015.
The property sales and letting progress announced with these
results are expected to lead to a reduction in debt levels of
GBP327m by June 2017. They also further de-risk the pipeline and
provide additional long-dated income for the Group. The net impact
of these transactions is expected to add 56p per share to the net
asset value. Combined with the low level of existing gearing, the
Directors are therefore proposing a special dividend of 52p per
share to be paid along with the final dividend in June 2017.
Net asset value
The net asset value of the Group was almost unchanged in 2016,
retained profits after dividends being almost exactly matched by
the downward fair value movements on our property portfolio and
interest rate swaps. IFRS net asset value increased marginally to
GBP3,999.4m against GBP3,995.4m in 2015 and EPRA diluted NAV per
share increased to 3,551p per share at 31 December 2016, up from
3,535p a year earlier. The main reason for the increase in EPRA NAV
per share during 2016 came from the removal of dilution in relation
to our 2019 convertible bonds following the decline in share price
during the year to a level below the conversion price of 3,335p.
The movements in NAV per share during the year are summarised below
compared with the prior year:
2016 2015
-------------------------------- ----- -----
p p
Revaluation surplus (including
share of joint ventures) (38) 581
Profit on disposals 7 39
Adjusted profit after tax 77 71
Dividends paid (net of scrip) (44) (30)
Interest rate swap termination
costs (8) (6)
Dilutive effect of convertible
bonds 17 (17)
Non-controlling interest 7 (8)
Other (2) (3)
-------------------------------- ----- -----
16 627
-------------------------------- ----- -----
A detailed reconciliation showing adjustments from the IFRS to
EPRA NAV per share is shown in note 22 to the financial statements
and explanations of the valuation movement for the year are
provided within the Valuation section.
Excluding joint ventures the total revaluation deficit for the
year was GBP44.2m (or 0.9% of the portfolio value) of which GBP1.6m
was in respect of apartments under construction held as trading
stock and GBP5.5m related to the portion of 25 Savile Row W1 that
we occupy; the balance of GBP37.1m related to investment
properties. In addition, the Group's share of the joint venture
revaluation surplus was GBP1.8m.
As a REIT, we generally do not provide for deferred tax on
upward property revaluations. The main exception is for the
properties that we hold around Baker Street W1 in a joint venture
with the Portman Estate (TPE). The split of ownership is 55%/45% in
our favour and we have operational control. As a result, we
consolidate these properties and provide for deferred tax on our
share of the 45% outside the REIT regime as well as recognising a
non-controlling interest in relation to TPE's share. The value of
these properties declined in 2016 which is the main reason behind
the reduction in the deferred tax liability to GBP3.1m (2015:
GBP5.5m) and the non-controlling interest to GBP67.1m (2015:
GBP72.9m).
It is also worth noting that the accrued income, which arises as
a result of the 'straight-lining' of rental income under IAS17 and
SIC15, reached GBP116.9m (2015: GBP97.0m) by the year end. This
takes account of rent-free and reduced rent periods, other tenant
incentives and fixed future rental uplifts. Part of the overall
portfolio fair value is allocated to this balance, the overall
split being as follows:
Dec Dec
2016 2015
---------------------------------- -------- --------
GBPm GBPm
Investment property 4,803.8 4,832.3
Owner occupied property 34.2 36.1
Trading property 11.7 12.3
Accrued income 116.9 97.0
Headlease liabilities gross-up (23.9) (23.2)
---------------------------------- -------- --------
Fair value of property portfolio 4,942.7 4,954.5
---------------------------------- -------- --------
In addition, the Group owns GBP37.8m of properties in two joint
ventures, this figure representing our 50% share of those
properties at fair value. The net carrying value of the investments
as at 31 December 2016 was GBP36.0m (2015: GBP30.7m).
Medium and longer term interest rates fell in the UK during the
year with very significant declines around the middle of 2016
followed by some subsequent correction. The mark-to-market cost of
our interest rate swaps would have risen accordingly but, as a
result of GBP9.0m paid to terminate or re-profile swaps during the
year, it was reduced from GBP17.6m to GBP17.3m. The decline in
longer term rates also fuelled a GBP24.5m increase in the fair
value adjustments for our long-term fixed rate debt and bonds but
this was almost matched by a GBP22.0m reduction in respect to the
2019 convertible bonds, the latter movement due to the lower share
price. After taking these movements into account, diluted EPRA
triple net asset value fell marginally to 3,450p per share (2015:
3,463p).
Income statement
It was noted in our 2015 finance review that we were progressing
through a long London office property cycle and that, as that cycle
matures, the recurring income component of our total return
business model should increase. Capturing rental reversion and
growing earnings have been among our main themes in 2016, balanced
by our development activity and our property disposals.
Gross rental income increased by 4.8% to GBP155.4m and net
rental income by 5.2% to GBP145.9m. With lower levels of trading
activity on residential apartments in 2016 and a GBP1.6m write-down
on the trading stock under development at 80 Charlotte Street W1,
net property and other income was only marginally higher at
GBP149.2m in 2016 against GBP148.6m in 2015. The prior year figure
also included GBP3.7m of compensation received from contractors on
schemes delivered late.
In a year when net property dispositions were higher than usual,
rental income was down GBP5.1m due to disposals and only increased
by GBP0.3m due to acquisitions. The main rent increases came from
lettings and reviews which added GBP21.1m while rent reductions
from lease breaks, expiries and voids totalled GBP5.3m and with
GBP3.9m from schemes commencing.
Administrative expenses increased by 3.0% to GBP30.9m in 2016
but the trend is down as the reported figure takes account of a
bonus under-provision in 2015 of GBP0.9m.
Our EPRA cost ratios were similar to the previous year at 24.0%
(2015: 24.3%) of adjusted gross rental income including direct
vacancy costs and 22.4% (2015: 22.3%) excluding those costs. As in
previous years, no overheads or property costs were
capitalised.
In more uncertain market conditions, investor appetite for
London offices has held up more strongly than most expected and we
were able to book a profit of GBP7.5m on disposal proceeds of
GBP210.6m in 2016, most of which came after the EU referendum vote.
In addition, there was a GBP1.9m trading profit on the sale of
apartments during the year.
Total finance costs reduced from GBP35.2m in 2015 to GBP27.8m in
2016 after capitalising GBP13.0m of interest, GBP4.7m of which
related to phase 1 of The White Chapel Building up to the date of
practical completion in October 2016. Because it was acquired as a
vacant property in December 2015, interest was capitalised on the
purchase price as well as the subsequent development costs. The
rent already contracted from the building is GBP7.0m so, post
practical completion when the capitalisation of interest ceased,
the net impact upon future earnings is expected to be positive.
Following the sale of the Grafton Hotel property in December
2016, we decided to break GBP10m of interest rate swaps and to
reduce the rate payable under a further GBP135m of swaps. This cost
GBP6.6m in total. With GBP2.4m paid to defer a GBP70m forward start
swap by a further 12 months, total swap breakage costs were
therefore GBP9.0m in 2016.
After allowing for the revaluation deficit on our property
portfolio, the overall result was an IFRS profit for the year of
GBP53.6m, down substantially from the GBP777.2m reported for the
year ended 31 December 2015. Adjusting for profits on disposal,
fair value movements and other items which are non-recurring in
nature, EPRA earnings increased by 8.9% from GBP78.7m in 2015 to
GBP85.7m for the year ended 31 December 2016.
A table providing a reconciliation of the IFRS results to EPRA
earnings per share is included in note 22.
After removing the impact of development activity, acquisitions
and disposals, EPRA like-for-like gross rental income increased by
5.1% during the year with net property income on a similar basis up
by 5.7%. A full analysis is shown in the table below.
Taxation
The corporation tax charge for the year ended 31 December 2016
increased to GBP2.0m in 2016 from GBP1.9m in the previous year, due
to the profits arising on the sale of residential apartments that
were held as trading stock and therefore outside the REIT tax
environment.
The movement in deferred tax liabilities for the year was a
credit of GBP2.4m. This was made up of GBP1.1m (2015: GBP0.4m
debit) passing through the income statement due to the change in
tax rates and the valuation impact for non-REIT Group properties
and GBP1.3m in relation to the owner-occupied property at Savile
Row.
In addition, and in accordance with our status as a REIT,
GBP5.6m of tax was withheld from shareholders on property income
distributions and paid to HMRC during the year. The Company also
made significant contributions to the UK public finances on a wide
range of taxes borne and collected during the year.
We have recently issued a statement of tax principles and this
is included on our website at www.derwentlondon.com. The statement
explains our approach to taxation, founded on the principle of
retaining our low risk tax status with HMRC.
A fully funded committed pipeline
The combination of property disposals and GBP105m of new debt
capacity means that the Group's committed pipeline of projects was
fully funded as at 31 December 2016. Available undrawn facilities
and cash totalled GBP383m and our committed pipeline stood at
GBP363m at 31 December 2016.
Our refinancing activities during 2016 were focused on arranging
some more long-term fixed rate debt in the capital markets to
further diversify our funding sources, to extend our overall debt
maturities and fix into attractive long-term rates. We also
extended both our revolving bank facilities and reduced the
mark-to-market exposure on our interest rate swaps.
In May 2016, we drew down GBP105m of new 12 and 15-year US
private placement notes that were arranged in February 2016. Full
details were provided in our 2015 report and so are not repeated
here but we were very pleased to welcome three new lending
relationships to the Group.
At the year end, the Group had GBP613m of fixed rate debt,
including GBP150m of convertible bonds due in 2019, with a weighted
average interest rate payable of 4.0%. This rate takes account of
the GBP175m 2026 bonds at 6.5% issued by London Merchant Securities
in 2001. We have considered refinancing these to lower our overall
cost of debt but concluded for now that such arrangements would be
neutral at best from a net present value standpoint. It remains a
matter for future consideration.
Our principal bank facilities, which are fully revolving and
unsecured, included two one-year extension options on top of their
original five-year terms. The first extension option for our GBP75m
Wells Fargo facility was exercised just before the middle of the
year. This facility now has a term date of July 2021 with the
second one-year extension option remaining, subject to the usual
consents. We also extended the maturity of the GBP550m unsecured
revolving bank facility, GBP450m of the facility amount now falling
due in January 2022. The remaining GBP100m retains a January 2021
repayment date but we have agreed an accordion option for this
portion which could extend the effective repayment date to January
2022.
These steps have helped us take the weighted average maturity of
our debt to 7.7 years at December 2016, up from 7.3 years a year
earlier.
We have also reduced the interest rates payable under our swaps
to compensate for the higher rates payable under the long dated
USPP notes when compared to our marginal bank loan rates of 1.5%.
In April 2016, we extended the maturity of a GBP70m interest rate
swap from April 2019 to April 2023 at no cost, thereby reducing the
rate payable from 2.00% to 1.74%. Then, in December, we cancelled
GBP10m of swaps and re-set the rates payable under a further
GBP135m for an overall cost of GBP6.6m. As a result, at December
2016 the Group held GBP243m of swaps at an average rate of 1.82%
compared with GBP253m at a rate of 2.44% a year earlier. The GBP70m
forward start swap has also been deferred to March 2017 at a cost
of GBP2.4m.
Taking all of this into account, the overall interest rate paid
on our debt at 31 December 2016 fell slightly to 3.65% (2015:
3.68%). Under IFRS accounting, an additional interest charge is
taken against earnings to unwind the equity component of
convertible bonds; allowing for this takes the notional interest
rate to 3.90% at the year-end (2015: 3.93%).
The proportion of our debt that is fixed or swapped into fixed
rates was 95% as at 31 December 2016 excluding the GBP70m forward
start swap. The proportion increased over the year due to the
additional fixed rate debt arranged and the property disposals
which occurred towards the end of the year.
Net debt and cash flow
Capital expenditure in 2016 was our highest to date at GBP213.5m
including capitalised interest of GBP13.0m. We spent GBP18.0m on
property acquisitions during the year, almost entirely relating to
The White Chapel Building, GBP6.0m of which was Stamp Duty Land Tax
in connection with the acquisition of the main part of the building
in the previous year. As a result, the cash invested in the
portfolio marginally exceeded disposal proceeds of GBP224.7m from
the sale of properties.
With the net cash from operating activities increasing to
GBP77.7m from GBP76.0 in 2015, after allowing for a GBP5.3m
incentive paid to Capita and their existing landlord to enable them
to lease office space at the Copyright Building, net debt was
almost unchanged at December 2016 from a year beforehand at
GBP904.8m (2015: GBP911.7m). This included a higher cash balance
than usual following the sale of the Grafton Hotel, a property
charged to one of our lenders. We were in the course of documenting
the substitution of new replacement security at the year end and,
accordingly, GBP10m of cash was held in a restricted bank account.
It will be released once the new security is in place.
Dividend
With the 25% increase in recurring earnings per share in 2015
followed by a 7.9% increase in 2016, dividend cover has increased
significantly in the last two years. The final dividend was
increased by 10% in 2015 but, now that we have let the main part of
the development pipeline through to the end of 2018 and with
continuing low vacancy rates in our portfolio and the expectation
of further growth in recurring earnings in the next few years, the
Board has recommended a 25.0% increase in the proposed final
dividend to 38.50p per share for payment to shareholders on the
register on 5 May 2017 to be paid on 9 June 2017. 32.70p will be
paid as a PID and the balance of 5.80p as a conventional dividend.
The interim and final dividend for the year will be 52.36p per
share, an increase of 20.6% over last year. There will not be a
scrip dividend alternative. It is also intended that the 2017
interim dividend will be increased by 25%.
In addition, following the value-enhancing transactions
announced with these results and taking account of the impact upon
our already low gearing, a special dividend of 52.00p per share is
being proposed to be paid at the same time as the final dividend in
June 2017.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report,
the report of the Remuneration Committee 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 report of the
Remuneration Committee 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.
Each of 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
28 February 2017
GROUP INCOME STATEMENT
2016 2015
Note GBPm GBPm
Gross property and other income 5 193.7 204.9
---------------------------------- ---- ------ -------
Net property and other income 5 149.2 148.6
Administrative expenses (30.9) (30.0)
Revaluation (deficit)/surplus 11 (37.1) 650.0
Profit on disposal of investment
property 6 7.5 40.2
Profit from operations 88.7 808.8
Finance income 7 - 0.1
---------------------------------- ---- ------ -------
Finance costs (27.8) (34.9)
Loan arrangement costs written
off - (0.3)
---------------------------------- ---- ------ -------
Total finance costs 7 (27.8) (35.2)
Movement in fair value of
derivative financial instruments 0.3 7.6
Financial derivative termination
costs 8 (9.0) (6.4)
Share of results of joint
ventures 9 2.3 4.6
Profit before tax 54.5 779.5
Tax charge 10 (0.9) (2.3)
Profit for the year 53.6 777.2
Attributable to:
- Equity shareholders 58.7 766.2
- Non-controlling interest (5.1) 11.0
53.6 777.2
Earnings per share 22 52.73p 694.53p
Diluted earnings per share 22 52.59p 668.73p
GROUP STATEMENT OF COMPREHENSIVE INCOME
2016 2015
Note GBPm GBPm
Profit for the year 53.6 777.2
Actuarial (losses)/gains on
defined benefit pension scheme (2.1) 0.7
Revaluation (deficit)/surplus
of owner-occupied property 11 (5.5) 1.4
Deferred tax credit/(charge)
on revaluation 18 1.3 (0.1)
------------------------------------- ---- ----- -----
Other comprehensive (expense)/income
that will not be reclassified to
profit or loss (6.3) 2.0
Total comprehensive income
relating to the year 47.3 779.2
Attributable to:
- Equity shareholders 52.4 768.2
- Non-controlling interest (5.1) 11.0
47.3 779.2
GROUP BALANCE SHEET
2016 2015
Note GBPm GBPm
Non-current assets
Investment property 11 4,803.8 4,832.3
Property, plant and equipment 12 38.1 39.1
Investments 13 36.0 30.7
Pension scheme surplus - 1.1
Other receivables 14 109.1 90.7
4,987.0 4,993.9
Current assets
Trading property 11 11.7 10.5
Trade and other receivables 15 38.5 52.7
Cash and cash equivalents 20 17.7 6.5
67.9 69.7
Total assets 5,054.9 5,063.6
Current liabilities
Trade and other payables 16 110.0 124.0
Corporation tax liability 1.6 1.7
Provisions 0.4 0.7
112.0 126.4
Non-current liabilities
Borrowings 17 922.5 918.2
Derivative financial
instruments 17 17.3 17.6
Provisions 0.3 0.5
Pension scheme deficit 0.3 -
Deferred tax 18 3.1 5.5
943.5 941.8
Total liabilities 1,055.5 1,068.2
Total net assets 3,999.4 3,995.4
Equity
Share capital 5.6 5.6
Share premium 188.4 186.3
Other reserves 950.4 952.9
Retained earnings 2,787.9 2,777.7
Equity shareholders'
funds 3,932.3 3,922.5
Non-controlling interest 67.1 72.9
Total equity 3,999.4 3,995.4
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
2016 5.6 186.3 952.9 2,777.7 3,922.5 72.9 3,995.4
Profit/(loss)
for the year - - - 58.7 58.7 (5.1) 53.6
Other comprehensive
expense - - (4.2) (2.1) (6.3) - (6.3)
Share-based payments - 1.0 1.7 3.3 6.0 - 6.0
Dividends paid - - - (48.6) (48.6) (0.7) (49.3)
Scrip dividends - 1.1 - (1.1) - - -
At 31 December
2016 5.6 188.4 950.4 2,787.9 3,932.3 67.1 3,999.4
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
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
GROUP CASH FLOW STATEMENT
2016 2015
Note GBPm GBPm
Operating activities
Property income 147.1 145.6
Property expenses (18.0) (11.7)
Cash paid to and on behalf
of employees (21.8) (21.5)
Other administrative expenses (5.6) (5.2)
Interest received - 0.1
Interest paid 7 (22.0) (31.4)
Other finance costs (2.3) (3.0)
Other income 2.4 3.1
Tax paid in respect of operating
activities (2.1) -
Net cash from operating activities 77.7 76.0
Investing activities
Acquisition of investment
properties (18.0) (246.2)
Capital expenditure on the
property portfolio 7 (213.5) (116.4)
Disposal of investment and
trading properties 224.7 277.2
Investment in joint ventures (3.0) -
Purchase of property, plant
and equipment (4.5) (0.9)
Tax received in respect of
investing activities 4.8 -
Net cash used in investing
activities (9.5) (86.3)
Financing activities
Drawdown of new revolving
bank loan - 45.8
Net movement in revolving
bank loans (103.9) 66.3
Repayment of term loan - (70.0)
Drawdown of private placement
notes 104.3 -
Financial derivative termination
costs (9.0) (6.4)
Net proceeds of share issues 1.0 1.2
Dividends paid to non-controlling
interest holder (0.8) (1.6)
Dividends paid 19 (48.6) (33.3)
Net cash (used in)/from financing
activities (57.0) 2.0
Increase/(decrease) in cash
and cash equivalents in the
year 11.2 (8.3)
Cash and cash equivalents
at the beginning of the year 6.5 14.8
Cash and cash equivalents
at the end of the year 20 17.7 6.5
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
The financial information does not constitute the Group's
statutory accounts for either the year ended 31 December 2016 or
the year ended 31 December 2015, but is derived from those
accounts. The Group's statutory accounts for 2015 have been
delivered to the Registrar of Companies and those for 2016 will be
delivered following the Company's Annual General Meeting. The
Auditor's reports on both the 2015 and 2016 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.
The financial statements have been prepared in accordance with
International Financial Reporting Standards, as adopted by the
European Union (IFRS), IFRS Interpretations Committee
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. In considering
this requirement, the Directors have taken into account the
following:
- The Group's latest rolling forecast for the next two years in
particular the cash flows, borrowings and undrawn facilities.
Sensitivity analysis is included within these forecasts.
- The headroom under the Group's financial covenants.
- The risks included on the Group's risk register that could
impact on the Group's liquidity and solvency over the next 12
months.
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 2015, 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 2016 year end and had no material impact on the financial
statements.
IFRS 10 (amended) - Consolidated Financial Statements;
IFRS 11 (amended) - Joint Arrangements;
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; and
Annual Improvements to IFRSs (2012 - 2014 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 2 (amended) - Share Based Payments;
IFRS 4 (amended) - Insurance Contracts;
IFRS 9 - Financial Instruments;
IFRS 16 - Leases;
IFRIC 22 - Foreign Currency Transactions and Advance
Consideration;
IAS 7 (amended) - Statement of Cash Flows;
IAS 12 (amended) - Income Taxes;
IAS 40 (amended) - Investment Property; and
Annual Improvements to IFRSs (2014 - 2016 cycle).
In addition to the above, IFRS 15 Revenue from Contracts with
Customers and an amendment to IFRS 15 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.
The Group has not yet completed its evaluation of the effect of
their 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 2016
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 the
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 and net asset
value. 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 95%
office buildings* by value at 31 December 2016 (2015: 94%). The
Directors consider that these properties have similar economic
characteristics. Therefore, these individual properties have been
aggregated into a single operating segment. The remaining 5% (2015:
6%) 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
2016 2015
----------------------- -----------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 81.4 4.2 85.6 82.5 4.0 86.5
West End borders 17.2 - 17.2 15.8 0.2 16.0
City borders 48.0 0.2 48.2 44.6 0.2 44.8
Provincial - 5.0 5.0 - 4.7 4.7
146.6 9.4 156.0 142.9 9.1 152.0
A reconciliation of gross property income to gross
property and other income is given in note 5.
Property portfolio
2016 2015
------------------------- -------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 2,531.5 141.1 2,672.6 2,601.4 180.3 2,781.7
West End borders 408.3 - 408.3 422.9 15.9 438.8
City borders 1,665.4 6.4 1,671.8 1,555.7 6.4 1,562.1
Provincial - 97.0 97.0 - 96.3 96.3
4,605.2 244.5 4,849.7 4,580.0 298.9 4,878.9
Fair value
West End central 2,573.9 142.1 2,716.0 2,633.8 184.1 2,817.9
West End borders 426.5 - 426.5 442.8 15.9 458.7
City borders 1,693.6 6.3 1,699.9 1,571.4 6.4 1,577.8
Provincial - 100.3 100.3 - 100.1 100.1
4,694.0 248.7 4,942.7 4,648.0 306.5 4,954.5
A reconciliation between the fair value
and carrying value of the portfolio is set
out in note 11.
5. Property and other income
2016 2015
GBPm GBPm
Gross rental income 155.4 148.3
Surrender premiums received 0.1 -
Other property income 0.5 3.7
Gross property income 156.0 152.0
Trading property sales proceeds 12.5 24.5
Service charge income 22.8 25.8
Other income 2.4 2.6
Gross property and other income 193.7 204.9
Gross rental income 155.4 148.3
Ground rent (0.7) (0.4)
---------------------------------- ------ ------
Service charge income 22.8 25.8
Service charge expenses (24.1) (27.7)
---------------------------------- ------ ------
(1.3) (1.9)
Other property costs (7.5) (7.3)
Net rental income 145.9 138.7
---------------------------------- ------ ------
Trading property sales proceeds 12.5 24.5
Trading property cost of sales (10.6) (21.3)
---------------------------------- ------ ------
Profit on trading property
disposals 1.9 3.2
Write-down of trading property (1.6) -
Other property income 0.5 3.7
Other income 2.4 2.6
Other costs - (0.3)
Surrender premiums received 0.1 -
Reverse surrender premiums (0.1) -
Dilapidation receipts 0.1 0.7
Net property and other income 149.2 148.6
Rental income included GBP10.3m (2015: GBP11.6m) relating to
rents recognised in advance of cash receipts.
In 2016, other property income related to a rights of light
settlement whilst in 2015 it related to compensation received from
contractors in connection with the late delivery of pre-let schemes
and recognised during the year. Other income in both years related
to fees and commissions earned in relation to the management of the
Group's properties and was recognised in the Group income statement
in accordance with the delivery of services.
6. Profit on disposal of investment property
2016 2015
GBPm GBPm
Investment property
Gross disposal proceeds 210.6 259.3
Costs of disposal (2.6) (2.7)
Net disposal proceeds 208.0 256.6
Carrying value (198.8) (215.4)
Adjustment for rents recognised
in advance (1.7) (1.0)
7.5 40.2
7. Finance income and total finance costs
2016 2015
GBPm GBPm
Finance income
Other - 0.1
Total finance income - 0.1
Finance costs
Bank loans and overdraft 11.8 12.5
Non-utilisation fees 1.2 1.5
Unsecured convertible bonds 3.8 4.0
Secured bonds 11.4 11.4
Unsecured private placement notes 7.0 4.6
Secured loan 3.3 3.3
Amortisation of issue and arrangement
costs 2.2 2.3
Amortisation of the fair value of
the secured bonds (1.0) (1.0)
Finance lease costs 1.0 1.1
Other 0.1 0.2
Gross interest costs 40.8 39.9
Less: interest capitalised (13.0) (5.0)
Finance costs 27.8 34.9
Loan arrangement costs written off - 0.3
Total finance costs 27.8 35.2
Total finance costs paid during 2016 were GBP35.0m (2015:
GBP36.4m) of which GBP13.0m (2015: GBP5.0m) was capitalised on
development projects, in accordance with IAS 23 Borrowing Costs,
using the Group's average cost of borrowings during each quarter.
This GBP13.0m (2015: GBP5.0m) was included in capital expenditure
on the property portfolio in the Group cash flow statement under
investing activities.
8. Financial derivative termination costs
In 2016, the Group incurred costs of GBP6.6m (2015: GBP4.0m) to
terminate and re-coupon interest rate swaps and GBP2.4m (2015:
GBP2.4m) to defer the start date of a 'forward start' interest rate
swap.
9. Share of results of joint ventures
2016 2015
GBPm GBPm
Revaluation surplus 1.8 3.6
Other profit from operations after
tax 0.5 1.0
2.3 4.6
See note 13 for further details on the Group's joint
ventures.
10. Tax charge
2016 2015
GBPm GBPm
Corporation tax
UK corporation tax and income tax
in respect of profit for the year 1.9 1.8
Other adjustments in respect of
prior years' tax 0.1 0.1
Corporation tax charge 2.0 1.9
Deferred tax
Origination and reversal of temporary
differences (0.9) 0.4
Adjustment for changes in estimates (0.2) -
Deferred tax (credit)/charge (1.1) 0.4
Tax charge 0.9 2.3
In addition to the tax charge of GBP0.9m (2015: GBP2.3m) that
passed through the Group income statement, a deferred tax credit of
GBP1.3m (2015: charge of GBP0.1m) was recognised in the Group
statement of comprehensive income relating to the revaluation of
the owner-occupied property at 25 Savile Row W1.
The effective rate of tax for 2016 is lower (2015: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2016 2015
GBPm GBPm
Profit before tax 54.5 779.5
----- -------
Expected tax charge based
on the standard rate of
corporation tax in the
UK of 20.00% (2015: 20.25%)* 10.9 157.8
Difference between tax and
accounting profit on disposals (1.2) (8.3)
REIT exempt income (7.8) (8.8)
Revaluation deficit/(surplus)
attributable to REIT properties 7.2 (132.3)
Expenses and fair value adjustments
not allowable for tax purposes (2.8) (3.6)
Capital allowances (5.3) (3.9)
Other differences (0.2) 1.3
Tax charge in respect of
profit for the year 0.8 2.2
Adjustments in respect
of prior years' tax 0.1 0.1
0.9 2.3
*Changes to the UK corporation tax rates were substantively
enacted as part of the Finance Bill 2015 (on 26 October 2015) and
the Finance Bill 2016 (on 7 September 2016). These include
reductions to the main rate to reduce the rate to 19% from 1 April
2017 and to 17% from 1 April 2020. Deferred taxes at the balance
sheet date have been measured using the expected enacted tax rate
and this is reflected in these financial statements.
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 2016 4,006.8 825.5 4,832.3 36.1 10.5 4,878.9
-------------------------- -------- --------- ---------- -------- -------- ---------
Acquisitions 12.0 - 12.0 - - 12.0
Capital expenditure 116.1 75.7 191.8 3.6 2.9 198.3
Interest capitalisation 10.6 2.4 13.0 - - 13.0
-------------------------- -------- --------- ---------- -------- -------- ---------
Additions 138.7 78.1 216.8 3.6 2.9 223.3
Disposals (158.1) (40.7) (198.8) - (10.2) (209.0)
Transfers (10.1) - (10.1) - 10.1 -
Revaluation (17.4) (19.7) (37.1) (5.5) - (42.6)
Write-down of trading
property - - - - (1.6) (1.6)
Movement in grossing
up of
headlease liabilities - 0.7 0.7 - - 0.7
At 31 December 2016 3,959.9 843.9 4,803.8 34.2 11.7 4,849.7
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
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
Adjustments from fair value to carrying
value
At 31 December 2016
Fair value 4,054.0 842.8 4,896.8 34.2 11.7 4,942.7
Lease incentives and
costs
included in receivables (94.1) (22.8) (116.9) - - (116.9)
Grossing up of headlease
liabilities - 23.9 23.9 - - 23.9
Carrying value 3,959.9 843.9 4,803.8 34.2 11.7 4,849.7
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
Reconciliation of fair value
2016 2015
GBPm GBPm
Portfolio including the
Group's share of joint
ventures 4,980.5 4,988.5
Joint ventures (37.8) (34.0)
IFRS property portfolio 4,942.7 4,954.5
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2016 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 GBP4,910.7m (2015:
GBP4,924.8m) and other valuers at GBP32.0m (2015: GBP29.7m), giving
a combined value of GBP4,942.7m (2015: GBP4,954.5m). Of the
properties revalued by CBRE, GBP34.2m (2015: GBP36.1m) relating to
owner-occupied property was included within property, plant and
equipment, GBP11.7m (2015: GBP12.3m) was in relation to trading
property and GBP564.2m (2015: GBP455.9m), included within
investment property, was in relation to development properties.
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.
During the year ended 31 December 2016, the Group transferred,
at market value, a property previously held for investment to
trading property as it became the Group's intention to redevelop
and sell this property. Any future revaluation surplus relating to
the trading property will be recognised as an adjustment to EPRA
net asset value, but, in accordance with IAS 2 Inventories, will
not be recognised in the carrying value of the property as trading
properties are stated at the lower of cost and net realisable
value.
Reconciliation of revaluation (deficit)/surplus
2016 2015
GBPm GBPm
Total revaluation (deficit)/surplus (20.9) 672.2
Share of joint ventures (1.8) (3.6)
Lease incentives and costs (21.5) (16.4)
Trading property revaluation surplus - (0.3)
Other - (0.5)
IFRS revaluation (deficit)/surplus (44.2) 651.4
Reported in the:
Revaluation (deficit)/surplus (37.1) 650.0
Write-down in trading property (1.6) -
Group income statement (38.7) 650.0
Group statement of comprehensive
income (5.5) 1.4
(44.2) 651.4
Historic cost
2016 2015
GBPm GBPm
Investment property 2,838.5 2,732.3
Owner-occupied property 14.1 7.7
Trading property 18.4 9.9
Total property portfolio 2,871.0 2,749.9
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2016 36.1 1.5 1.5 39.1
Additions 3.6 - 1.3 4.9
Depreciation - - (0.4) (0.4)
Revaluation (5.5) - - (5.5)
At 31 December
2016 34.2 1.5 2.4 38.1
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
Net book value
Cost or valuation 34.2 1.5 4.8 40.5
Accumulated depreciation - - (2.4) (2.4)
At 31 December
2016 34.2 1.5 2.4 38.1
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
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 October 2016 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
2016 was GBP1.5m (2015: 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'). In 2015, 9
and 16 Prescot Street E1 was transferred from a Group company into
PSLP.
2016 2015
GBPm GBPm
At 1 January 30.7 7.4
Transfer from investment property
(see note 11) - 18.7
Additions 3.0 -
Share of results of joint
ventures (see note 9) 2.3 4.6
At 31 December 36.0 30.7
14. Other receivables (non-current)
2016 2015
GBPm GBPm
Prepayments and accrued income 105.4 87.0
Other 3.7 3.7
109.1 90.7
Prepayments and 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 GBP11.5m (2015: GBP10.0m), which was included
as current assets within trade and other receivables, these amounts
totalled GBP116.9m at 31 December 2016 (2015: GBP97.0m).
15. Trade and other receivables
2016 2015
GBPm GBPm
Trade receivables 5.1 2.4
Other receivables 2.7 5.4
Prepayments 15.5 14.9
Other taxes - 16.5
Accrued income 15.2 13.5
38.5 52.7
16. Trade and other payables
2016 2015
GBPm GBPm
Trade payables 2.0 0.2
Other payables 16.7 39.9
Other taxes 6.5 -
Accruals 45.9 49.1
Deferred income 38.9 34.8
110.0 124.0
17. Borrowings and derivative financial instruments
2016 2015
--------------- ---------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Non-current liabilities
1.125% unsecured convertible
bonds 2019 142.9 152.4 140.2 171.7
6.5% secured bonds 2026 187.9 225.6 188.9 217.2
3.46% unsecured private
placement notes 2028 29.8 30.8 - -
4.41% unsecured private
placement notes 2029 24.8 28.8 24.8 27.2
3.57% unsecured private
placement notes 2031 74.5 75.6 - -
4.68% unsecured private
placement notes 2034 74.3 88.5 74.3 81.9
3.99% secured loan 2024 82.1 88.2 82.0 83.3
Unsecured bank loans 254.3 259.5 356.8 362.5
Secured bank loans 28.0 28.0 28.0 28.0
Leasehold liabilities 23.9 23.9 23.2 23.2
Borrowings 922.5 1,001.3 918.2 995.0
Derivative financial instruments
expiring in
greater than one year 17.3 17.3 17.6 17.6
Total borrowings and derivative
financial instruments 939.8 1,018.6 935.8 1,012.6
Reconciliation to net debt:
Borrowings and derivative
financial instruments 939.8 935.8
Less:
Derivative financial
instruments (17.3) (17.6)
Cash and cash equivalents (17.7) (6.5)
Net debt 904.8 911.7
The fair value of the Group's bonds have 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 values of the Group's outstanding interest rate swaps
have been estimated by using the mid-point of the yield curves
prevailing on the reporting date and represent 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 amount, 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 2016 or 2015.
18. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2016 8.7 (3.2) 5.5
(Credited)/charged to the income
statement (1.8) 0.9 (0.9)
Change in tax rates in
the income statement (0.3) 0.1 (0.2)
Credited to other comprehensive
income (1.2) - (1.2)
Change in tax rates in other
comprehensive income (0.1) - (0.1)
At 31 December 2016 5.3 (2.2) 3.1
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
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 2016 2015
date p p p GBPm GBPm
Current year
09 June
2016 final dividend 2017 38.50 38.50 - -
21 October
2016 interim dividend 2016 13.86 - 13.86 15.5 -
----- ------- -----
Distribution of
current year profit 52.36 - 52.36
Prior year
10 June
2015 final dividend 2016 30.80 - 30.80 34.2 -
22 October
2015 interim dividend 2015 12.60 - 12.60 - 14.0
----- ------- -----
Distribution of
prior year profit 43.40 - 43.40
12 June
2014 final dividend 2015 22.35 5.65 28.00 - 31.0
----- ------- ----- ----- -----
Dividends as reported
in the
Group statement
of changes in equity 49.7 45.0
----- -----
2016 interim dividend 14 January
withholding tax 2017 (1.7) -
2015 final scrip 10 June
dividend 2016 (1.1) -
2015 interim dividend 14 January
withholding tax 2016 1.7 (1.7)
2015 interim scrip 22 October
dividend 2015 - (3.3)
2014 final scrip 12 June
dividend 2015 - (7.7)
2014 interim dividend 14 January
withholding tax 2015 - 1.0
----- -----
Dividends paid
as reported in
the
Group cash flow
statement 48.6 33.3
----- -----
20. Cash and cash equivalents
2016 2015
GBPm GBPm
Cash at bank 17.7 6.5
21. Post balance sheet events
In February 2017, the Group agreed a conditional put and call
option to sell 8 Fitzroy Street W1 for GBP197m before costs to the
Arup group ('Arup'), who occupy the whole building, with completion
expected in June 2017. Simultaneously, Arup agreed to take a
20-year lease on 133,600 sq ft at 80 Charlotte Street W1.
In February 2017, the Group also sold its freehold interest in
132-142 Hampstead Road NW1 for GBP130m before costs.
The properties disposed of by the Group have not been included
in non-current assets held for sale as management was not committed
to selling them at 31 December 2016.
On 28 February 2017, the Group announced a special dividend of
52p per share.
22. EPRA performance measures
Number of shares
Earnings per Net asset value
share per share
Weighted average At 31 December
------------------ -----------------
2016 2015 2016 2015
'000 '000 '000 '000
For use in basic measures 111,315 110,320 111,390 111,172
Dilutive effect of
convertible bonds - 4,498 - 4,498
Dilutive effect of
share-based payments 296 355 291 363
For use in measures for
which bond conversion is
dilutive 111,611 115,173 111,681 116,033
Less dilutive effect of
convertible bonds - (4,498) - (4,498)
For use in other diluted
measures 111,611 110,675 111,681 111,535
The GBP150m unsecured convertible bonds 2019 ('2019 bonds') have
an initial conversion price set at GBP33.35. 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 2016, the shares attributable to the conversion of the 2019
bonds were anti-dilutive for net asset value (NAV) per share, EPRA
NAV per share, EPRA triple NAV per share, unadjusted earnings per
share and EPRA earnings per share.
For 2015, the shares attributable to the conversion of the 2019
bonds were dilutive for net asset value (NAV), EPRA NAV per share
and unadjusted earnings per share but anti-dilutive for EPRA
earnings per share. For consistency purposes the Group 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 earnings for the year and earnings per share. The
adjustments made between the figures are as follows:
A - Disposal of investment and trading property, and associated
tax and non-controlling interest
B - Revaluation (deficit)/surplus on investment property and in
joint ventures, write-down in trading property 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 and the dilutive effect
of convertible bonds
Earnings and earnings
per share
Adjustments EPRA
-----------------------------
IFRS A B C D basis
GBPm GBPm GBPm GBPm GBPm GBPm
Year ended 31 December
2016
Net property and other
income 149.2 (1.9) 1.6 - - 148.9
Total administrative
expenses (30.9) - - - - (30.9)
Revaluation deficit (37.1) - 37.1 - - -
Profit on disposal
of investment property 7.5 (7.5) - - - -
Net finance costs (27.8) - - - - (27.8)
Movement in fair value
of derivative
financial instruments 0.3 - - (0.3) - -
Financial derivative
termination costs (9.0) - - 9.0 - -
Share of results of
joint ventures 2.3 - (1.8) - - 0.5
Profit before tax 54.5 (9.4) 36.9 8.7 - 90.7
Tax charge (0.9) 0.5 (2.2) - - (2.6)
Profit for the year 53.6 (8.9) 34.7 8.7 - 88.1
Non-controlling interest 5.1 - (7.6) 0.1 - (2.4)
Earnings attributable
to
equity shareholders 58.7 (8.9) 27.1 8.8 - 85.7
Earnings per share 52.73p 76.99p
Diluted earnings per
share 52.59p 76.78p
Adjustments EPRA
-----------------------------
IFRS A B C D basis
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)
Earnings 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
Net asset value and net asset
value per share
Undiluted Diluted
GBPm p p
At 31 December 2016
Net assets attributable to equity
shareholders 3,932.3 3,530 3,521
Adjustment for:
Deferred tax on revaluation surplus 5.3
Fair value of derivative financial
instruments 17.3
Fair value adjustment to secured
bonds 14.0
Non-controlling interest in respect
of the above (2.6)
EPRA net asset value 3,966.3 3,561 3,551
Adjustment for:
Mark-to-market of secured bonds
2026 (50.6)
Mark-to-market of secured loan
2024 (5.2)
Mark-to-market of unsecured private
placement notes 2029 and 2034 (17.3)
Mark-to-market of unsecured private
placement notes 2028 and 2031 (1.4)
Mark-to-market of 1.125% unsecured
convertible bonds 2019 (8.0)
Deferred tax on revaluation surplus (5.3)
Fair value of derivative financial
instruments (17.3)
Unamortised issue and arrangement
costs (10.3)
Non-controlling interest in respect
of the above 2.6
EPRA triple net asset value 3,853.5 3,459 3,450
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:
Mark-to-market of secured bonds
2026 (42.2)
Mark-to-market of secured loan
2024 (0.3)
Mark-to-market of unsecured fixed
rate private placement notes 2029
and 2034 (9.1)
Deferred tax on revaluation surplus (8.7)
Fair value of derivative financial
instruments (17.6)
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 1.125% 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
Cost ratios
2016 2015
GBPm GBPm
Administrative expenses 30.9 30.0
Other property costs 7.5 7.3
Dilapidation receipts (0.1) (0.7)
Other costs - 0.3
Net service charge costs 1.3 1.9
Service charge costs recovered
through rents but not separately
invoiced (0.3) (0.2)
Management fees received less estimated
profit element (2.4) (2.6)
Share of joint ventures' expenses 0.5 0.3
EPRA costs (including direct vacancy
costs) (A) 37.4 36.3
Direct vacancy costs (2.5) (3.1)
EPRA costs (excluding direct vacancy
costs) (B) 34.9 33.2
Gross rental income 155.4 148.3
Ground rent (0.7) (0.4)
Service charge components of rental
income (0.3) (0.2)
Share of joint ventures' rental
income less ground rent 1.3 1.4
Adjusted gross rental income (C) 155.7 149.1
EPRA cost ratio (including direct
vacancy costs) (A/C) 24.0% 24.3%
EPRA cost ratio (excluding direct
vacancy costs) (B/C) 22.4% 22.3%
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) 4,942.7 4,954.5
Portfolio cost ratio (A/D) 0.8% 0.7%
The Group has not capitalised any overhead or operating expenses
in either 2016 or 2015.
23. Gearing and interest cover
NAV gearing
2016 2015
GBPm GBPm
Net debt 904.8 911.7
Net assets 3,999.4 3,995.4
NAV gearing 22.6% 22.8%
Loan-to-value ratio
2016 2015
GBPm GBPm
Net debt 904.8 911.7
Fair value adjustment of secured
bonds (14.0) (15.0)
Unamortised issue and arrangement
costs 10.3 10.8
Leasehold liabilities (23.9) (23.2)
Drawn debt 877.2 884.3
Fair value of property portfolio 4,942.7 4,954.5
Loan-to-value ratio 17.7% 17.8%
Net interest cover ratio
2016 2015
GBPm GBPm
Net property and other income 149.2 148.6
Adjustments for:
Other income (2.4) (2.6)
Other property income (0.5) (3.7)
Net surrender premiums
received (0.1) -
Write-down of trading
property 1.6 -
Profit on disposal of
trading properties (1.9) (3.2)
Reverse surrender premiums 0.1 -
Adjusted net property income 146.0 139.1
Finance income - (0.1)
Finance costs 27.8 34.9
27.8 34.8
Adjustments for:
Finance income - 0.1
Other finance costs (0.1) (0.2)
Amortisation of fair value
adjustment to secured bonds 1.0 1.0
Amortisation of issue and
arrangement costs (2.2) (2.3)
Finance costs capitalised 13.0 5.0
39.5 38.4
Net interest cover ratio 370% 362%
24. Total return
2016 2015
p p
EPRA net asset value
on a diluted basis
At end of year 3,551 3,535
At start of year (3,535) (2,908)
Increase 16 627
Dividend per share 45 41
Increase including dividend 61 668
Total return 1.7% 23.0%
25. Risk management and internal control
Derwent London aims to deliver its strategic objectives whilst
operating within a risk envelope defined by the Group's risk
appetite. The Board recognises that risks are inherent in running
any business and uses the Group's risk management system to ensure
that risks to the Group's strategy are identified, understood and
managed.
The Board has overall responsibility for risk management and the
Group's system of internal controls. To assist with carrying out
this task, the Board has delegated responsibility to the Audit
Committee and the Risk Committee. Executive Management is
responsible for developing and operating 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 management
structure of the business. Key factors 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 from 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 has clearly defined levels of responsibility and authority.
The Group's risk management framework consists of its Risk
Management Policy, Risk Appetite Statement and Risk Management
Process document. The framework is designed to identify and manage
the risks faced by the business recognising that not all risks can
be eliminated at an acceptable cost and that there are some risks
that, given its experience, the Board will choose to manage and
accept.
In compliance with Code Provision C.2.1 of The UK Corporate
Governance Code, the Board has carried out a robust assessment of
the principal risks and uncertainties facing the Group. The core
element of this assessment is the Group's risk register which is
prepared by the Executive Committee in accordance with the Risk
Management document. 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 area of the business.
-- The strength of the controls operating over the risk and the
effectiveness of any mitigating actions.
This approach allows the final assessment to reflect the effect
of the controls and any mitigating procedures that are in place. If
the controls and mitigating actions over a risk are deemed
inadequate, the committee will agree a target risk profile together
with supplementary controls/actions and a timetable for their
implementation.
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 and external advisers. The Risk Committee has
also monitored the Company's risk management and internal control
systems primarily by regularly reviewing the set of key risk
indicators that were implemented in 2015. This was supplemented by
reviews of the top ten risks on the Group's risk register and the
adequacy of the controls operating over these risks.
Following these reviews, the Board is satisfied that the Group's
risk management and internal control systems operated effectively
throughout the period.
The Group's risk register includes 47 risks split between
strategic risks, operational risks and finance risks. One new risk
has been added to the Group's list of principal risks:
-- That the negotiations to leave the European Union result in
arrangements that are damaging to the UK economy/Central
London.
The Board considered whether the overall increase in the level
of risk faced by the Group in 2017. It noted that only a few of the
risks had abated during the year, whilst the risk surrounding
Brexit was a significant new factor and cyber risk continued to
increase. Taken with the general increase in both political and
economic uncertainty, the Board concluded that the increase was
justified.
The principal risks and uncertainties facing the Group in 2017
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 an annual five-year strategic * The last annual strategic review was carried out by
Inconsistent review each year and also prepares a budget and three the Board in June 2016. This considered the
strategy rolling forecasts which cover the next two years. In sensitivity of six key measures to changes in
the course of preparing these documents the Board underlying assumptions, including interest rates and
The Group's considers the sensitivity of the Group's KPIs and key borrowing margins, timing of projects, level of
strategy ratios to changes in the main assumptions underlying capital expenditure and the extent of capital
is the forecast thereby modelling different economic recycling.
inconsistent scenarios.
with the
state * The three rolling forecasts prepared during the year
of its * The Group's plans are then set so as to best realise focus on the same key measures but may consider the
market. its long-term strategic goals given the most likely effect of varying different assumptions to reflect
economic and market conditions and the Group's risk changing economic and market conditions.
2. appetite. This flexibility is largely derived from
Inconsistent the Group's policy of maintaining income from
development properties for as long as possible until development * The timing of the Group's development programme and
programme starts. the strategies for individual properties reflect the
outcome of these considerations.
The Group's
development * The level of future redevelopment opportunities in
programme is the Group's portfolio enables the Board to delay * 43% of the Group's portfolio has been identified for
not marginal projects until market conditions are future redevelopment.
consistent favourable.
with
the economic * During the period the Group's loan-to-value ratio
cycle. * The Board pays particular attention, when setting its remained at approximately 18%, its net interest cover
plans, to maintaining sufficient headroom in all the ratio was above 370% and the REIT ratios were
Throughout Group's key ratios, financial covenants and interest comfortably met.
most cover.
of 2016, the
Group * Pre-lets were secured over 439,100 sq ft during 2016,
continued to * Pre-lets are sought to de-risk major projects. with a further 133,600 sq ft already let in 2017.
benefit
from a
resilient
central
London
market.
However,
following
the
EU
referendum
vote,
sentiment
became more
fragile
and the
likelihood
of the
London
market being
adversely
affected by
one
or more of a
number
of
high-level
economic
factors
remained
high.
If this were
to
occur, it
would
reduce the
value
of the
Group's
portfolio
and
the returns
from
its
developments
.
This would
affect
two of the
Group's
KPIs -total
return
and total
property
return.
The Board
sees
the level of
both
these risks
to
be broadly
unchanged
from last
year.
3. Adverse
Brexit * The Group's strong financing and covenant headroom * At the year end, the Group had undrawn facilities and
settlement enables it to weather a downturn. cash of GBP383m.
Negotiations
to * The Group's diverse and high-quality tenant base * Income is maintained at future developments until the
leave the provides resilience against tenant default. scheme is ready to start.
European
Union result
in * The Group's development pipeline has a degree of
arrangements flexibility that enables the strategy for individual
that properties to be changed to reflect the prevailing
are damaging economic circumstances.
to
the UK
economy * Financially strong and reputable contractors are used
and/or with good access to available labour.
Central
London.
* The Group's focus on good value, middle market
Negotiations properties, makes it less susceptible to reductions
will in tenant demand.
take at least
two years and
the operating
framework
facing
UK businesses
thereafter
cannot
be predicted.
This is a new
principal
risk
and it would
primarily
affect the
Group's
total return
and
total
property
return KPIs.
4. * All new members of staff benefit from an induction * The Group employs a Head of Investor and Corporate
Reputational programme and are issued with the Group's Staff Communications and retains the services of an
damage Handbook. external PR agency. Both maintain regular contact
with external media sources.
The Group's
reputation * Social media channels are monitored by the Group's
is damaged investor relations department. * The Company engages with a number of local community
through bodies in areas where it operates as part of its CSR
unauthorised activity.
and * The Group takes advice on technological changes in
inaccurate the use of media and adapts its approach accordingly.
media
coverage.
* There is an agreed procedure for approving all
It would external statements.
most
directly
impact
on the
Group's
total
shareholder
return - one
of
its key
metrics.
Indirectly
it
could impact
on
a number of
the
formal KPIs.
The Board
considers
the risk to
be
unchanged
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
----------------------------------------- ------------------------------------------------------------- ---------------------------------------------------------------
5. Increase in * The impact of changes in property values on the * The Group produces three rolling forecasts each year
property yields Group's financial covenants and performance are which contain detailed sensitivity analyses,
monitored regularly and are subject to sensitivity including the effect of changes to yields.
Increased property analysis to ensure that adequate headroom is
yields, which preserved.
may be a consequence * Quarterly management accounts report the Group's
of rising interest performance against covenants.
rates, would cause * The impact of yield changes is considered when
property values potential projects are appraised.
to fall. * Project appraisals are regularly reviewed and updated
in order to monitor the effect of yield changes.
Interest rates * The Group's move towards mainly unsecured financing
have remained over the past few years has made management of its
low for an extended financial covenants less complicated.
period and 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.
It would affect
the following
KPIs:
* Loan-to-value ratio.
* Total return.
* Total property return.
The risk was assessed
as high last year
and the Board
considers it to
have marginally
increased 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
------------------------------------------ --------------------------------------------------------------- --------------------------------------------------------------
6. Reduced development * Standardised appraisals, which include contingencies * The procurement process used by the Group includes
returns and inflationary cost increases, are prepared for all the use of highly regarded firms of quantity
investments and sensitivity analysis is undertaken to surveyors and is designed to minimise uncertainty
The Group's development ensure that an adequate return is made in all regarding costs.
projects do not circumstances considered likely to occur.
produce the targeted
financial return * The Group's style of accommodation remains in demand
due to one or * Development costs are benchmarked to ensure that the as evidenced by the 63 lettings achieved in 2016
more of the following Group obtains competitive pricing and, where which totalled 547,500 sq ft.
factors: appropriate, fixed-price contracts entered into.
* Delays on site.
* The Group has often secured significant pre-lets of
* Procedures carried out before starting work on site, the space in its development programme which
* Increased construction costs. such as pre-work investigations, historical research significantly 'de-risks' those projects. 27 pre-lets
of the property and surveys, etc. conducted as part were secured in 2016, over 439,100 sq ft and a
of the planning application, reduce the risk of further 133,600 sq ft has already been pre-let in
* Adverse letting conditions. unidentified issues causing delays once on site. 2017.
This would have * The Group's pre-letting strategy reduces or removes
an effect on the the letting risk of the development as soon as
Group's total possible.
return and total
property return
KPIs. * Post-completion reviews are carried out for all major
developments to ensure that improvements to the
The Board considers Group's procedures can be identified and implemented.
this risk to have
remained broadly
the same over
the past year.
7. Cyber attack
* The Group's IT systems are protected by anti-virus * Independent internal and external penetration tests
The Group is the software and firewalls that are continually updated. are regularly conducted to assess the effectiveness
victim of a cyber-attack of the Group's security. No matters were raised as a
that results in result of the 2016 test.
it being unable * The Group's data is regularly backed up and
to use its IT replicated.
systems. * The switchover of the IT system to the Group's backup
facility was successfully tested in 2016.
This would lead * The Group's Business Continuity Plan was revised and
to an increase tested during 2015.
in costs and a * Staff awareness programmes and presentations are
diversion of management delivered to alert staff to the techniques that may
time. Increased * Multifactor authentication has been introduced for be used to gain unauthorised access to the Group's
costs would have both internal and external access to the systems. systems.
an impact on the
Group's total
return KPI whilst * The Group's IT department has access to cyber threat * Security measures are regularly reviewed by the IT
a significant intelligence and analytics data. Security Committee.
diversion of management
time would have
a wider effect. * Incident response and remediation policies are in * The Head of IT regularly reports to the Executive
place. Committee.
Although controls
and procedures
over the Group's * Cyber insurance is being evaluated. * An independent benchmarking review of the Group's
IT infrastructure cyber security has been carried out.
continue to be
improved, the
elevated profile
of such risks
means that the
Board considers
the risk to have
increased over
the year.
8. Regulatory
non-compliance * Each year the Group's Risk Committee receives a * A Health and Safety report is presented at all
report prepared by the Group's lawyers identifying Executive Committee and main Board meetings.
The Group's cost legislative/regulatory changes expected over the next
base is increased 12 months and reports to the Board concerning
and management regulatory risk. * The Executive Committee receives regular reports from
time diverted the Head of Sustainability.
through a breach
of any of the * The Group employs a Head of Health and Safety who
legislation that reports to the Board. * The Group pays considerable attention to
forms the regulatory sustainability issues and produces an annual
framework within sustainability report.
which the Group * The Group employs a Head of Sustainability who
operates. reports to the sustainability committee which is
chaired by Paul Williams. * No incidents were reported under the Group's
An increase in whistleblowing policy in 2016.
costs would directly
impact on the * The Company's policies including those on the Bribery
Group's total Act, Health and Safety, Equal Opportunities, * The Group has considered the requirements of the
return KPI. A Harassment and Whistleblowing are available to all Modern Slavery Act and revised its policies where
significant diversion staff on the Company intranet. appropriate in order to comply with the legislation.
of management
time could affect
a wider range * Members of staff attend external briefings in order * The Groups' Health and Safety processes were reviewed
of key metrics. to be updated on regulatory changes. and improved in 2016 and a new external consultant
was appointed.
The Board considers
this risk to be
unchanged from
last year.
9. Contractor/sub-contractor
default * Whenever possible the Group uses * As the size of the Group's projects has increased so
contractors/sub-contractors that it has previously the contractors have become more substantial.
Returns from the worked with successfully.
Group's developments
are reduced due * The financial accounts of both main contractors and
to delays and * The resilience of a project's critical path is major sub-contractors are reviewed.
cost increases improved by establishing procedures to manage any
caused by either sub-contractor default effectively.
a main contractor * The Group's development managers are regularly onsite
or major sub-contractor and conduct surprise visits.
defaulting during * Key construction packages are acquired early in the
the project. project.
This would primarily
affect the Group's * Performance bonds are sought if considered necessary.
total property
return KPI.
* Regular on-site supervision by Derwent London
The risk is considered personnel increases the likelihood of identifying any
to have remained problems at an early stage, thereby enabling remedial
at the same level action to be taken sooner.
in 2016.
10. Shortage of
key staff * The Nominations Committee consider succession matters * The Group recruited 13 new members of staff during
The Group is unable as a standing agenda item. the year.
successfully to
implement its
strategy due to * Requirements for senior management succession are * Staff turnover in 2016 was low at 11%.
a failure to recruit considered as part of the five-year strategic review.
and retain key
staff with appropriate * The average length of employment is 7.3 years.
skills. * The remuneration packages of all employees are
benchmarked regularly.
This risk could
impact on any
or all of the * Six-monthly appraisals identify training requirements
Group's KPIs. which are fulfilled over the next six months.
The risk is seen
to be unchanged
over the year.
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. Sensitivity analysis performed to ascertain the impact on
the profit or loss and net assets of a 50 basis point shift in
interest rates would result in an increase of GBP0.2m (2015:
GBP0.7m) or a decrease of GBP0.2m (2015: GBP0.7m).
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 2016, the proportion of fixed debt held
by the Group was above this range at 95% (2015: 85%) following a
property disposal in December. During both 2016 and 2015, 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. When the Group raises
long-term borrowings, it is generally 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.
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 2016, the Group's strategy, which was unchanged from
2015, was to maintain the NAV gearing below 80% in normal
circumstances. These two gearing ratios, as well as the interest
cover ratio, are defined in the list of definitions 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.
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 the 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 adjustment
An accounting adjustment to change the book value of an asset or
liability to its market value.
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 London plc 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.
Rent reviews
Rent reviews take place at intervals agreed in the lease
(typically every five years) and their purpose is usually to adjust
the rent to the current market level at the review date. For
upwards only rent reviews, the rent will either remain at the same
level or increase (if market rents are higher) at the review
date.
Reversion
The reversion is the amount by which ERV is higher than the rent
roll of a property or portfolio. The reversion is derived from
contractual rental increases, rent reviews, lease renewals and the
letting of space that is vacant and available to occupy or under
development or refurbishment.
Scrip dividend
Derwent London plc sometimes offers its shareholders the
opportunity to receive dividends in the form of shares instead of
cash. This is known as a scrip dividend.
Total property return (TPR)
Total property return is a performance measure calculated by the
IPD and defined in the MSCI Global Methodology Standards for Real
Estate Investment as 'the percentage value change plus net income
accrual, relative to the capital employed'.
Total return
The movement in EPRA adjusted net asset value per share on a
diluted basis between the beginning and the end of each financial
year plus the dividend per share paid during the year expressed as
a percentage of the EPRA net asset value per share on a diluted
basis at the beginning of the year.
Total shareholder return (TSR)
The growth in the ordinary share price as quoted on the London
Stock Exchange plus dividends per share received for the year,
expressed as a percentage of the share price at the beginning of
the year.
Underlying portfolio
Properties that have been held for the whole of the year (i.e.
excluding any acquisitions or disposals made during the year).
Underlying valuation increase
The valuation increase on the underlying portfolio.
Yields
- Net initial yield
Annualised rental income based on cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the property, increased by
estimated purchasers' costs.
- Reversionary yield
The anticipated yield, which the net initial yield will rise to
once the rent reaches the estimated rental values.
- True equivalent yield
The constant capitalisation rate which, if applied to all cash
flows from the portfolio, including current rent, reversions to
valuers' estimated rental value and such items as voids and
expenditures, equates to the valuation having taken into account
notional purchasers' costs. Rent is assumed to be received
quarterly in advance.
- Yield shift
A movement in the yield of a property asset, or like-for-like
portfolio, over a given year. Yield compression is a commonly-used
term for a reduction in yields.
27. Copies of this announcement will be available on the
Company's website, www.derwentlondon.com, from the date of this
statement. Copies will also be available from the Company
Secretary, Derwent London plc, 25 Savile Row, London, W1S 2ER.
Notes to editors
Derwent London plc
Derwent London plc owns a portfolio of commercial real estate
predominantly in central London valued at GBP5.0 billion (including
joint ventures) as at 31 December 2016, making it the largest
London-focused real estate investment trust (REIT).
Our experienced team has a long track record of creating value
throughout the property cycle by regenerating our buildings via
development or refurbishment, effective asset management and
capital recycling.
We typically acquire central London properties off-market with
low capital values and modest rents in improving locations, most of
which are either in the West End or the Tech Belt. We capitalise on
the unique qualities of each of our properties - taking a fresh
approach to the regeneration of every building with a focus on
anticipating tenant requirements and an emphasis on design.
Reflecting and supporting our long-term success, the business
has a strong balance sheet with modest leverage, a robust income
stream and flexible financing.
Landmark schemes in our 6.0 million sq ft portfolio include
Angel Building EC1, The Buckley Building EC1, White Collar Factory
EC1, 1-2 Stephen Street W1, Horseferry House SW1 and Tea Building
E1.
In 2016, the Group won the Estates Gazette National Company of
the Year and London awards as well as awards from Architects'
Journal, British Council for Offices, Civic Trust and RIBA and
achieved EPRA Gold for corporate and sustainability reporting.
As part of its wider sustainability programme, in 2013 Derwent
London launched a dedicated GBP250,000 voluntary Community Fund
and, in 2016, made a further commitment of GBP300,000 for the next
three years for Fitzrovia and the Tech Belt.
The Company is a public limited company, which is listed on the
London Stock Exchange and incorporated and domiciled in the UK. The
address of its registered office is 25 Savile Row, London, W1S
2ER.
For further information see www.derwentlondon.com or follow us
on Twitter at @derwentlondon.
Forward-looking statements
This document contains certain forward-looking statements about
the future outlook of Derwent London. By their nature, any
statements about future outlook involve risk and uncertainty
because they relate to events and depend on circumstances that may
or may not occur in the future. Actual results, performance or
outcomes may differ materially from any results, performance or
outcomes expressed or implied by such forward-looking
statements.
No representation or warranty is given in relation to any
forward-looking statements made by Derwent London, including as to
their completeness or accuracy. Derwent London does not undertake
to update any forward-looking statements whether as a result of new
information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LFFIIFDIDFID
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February 28, 2017 02:04 ET (07:04 GMT)
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