TIDMDLN
RNS Number : 9849F
Derwent London PLC
27 February 2018
27 February 2018
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEARED 31 DECEMBER 2017
EXCELLENT OPERATIONAL PROGRESS AND 75P PER SHARE SPECIAL
DIVID
Financial highlights
-- EPRA(1) net asset value per share increased 4.6% to 3,716p
from 3,551p at 31 December 2016 and a 3.7% increase from 3,582p at
30 June 2017
-- The total return was 7.7% including dividends paid of 107.8p per share
-- Net rental income increased 10.4% to GBP161.1m from GBP145.9m
-- EPRA earnings rose 22.5% to GBP105.0m from GBP85.7m
-- EPRA earnings per share increased 22.4% to 94.2p per share from 77.0p
-- Final dividend raised 10.1% to 42.4p to give full year
dividend of 59.73p, an increase of 14.1%
-- Proposed special dividend of 75p per share to be paid in June 2018
Operational performance
-- Record new lettings achieving GBP41.5m, on average 1.3% above December 2016 ERV
-- Investment property disposals totalled GBP482.8m, 11.8% above December 2016 values
-- Capital expenditure of GBP165.0m in 2017 including capitalised interest of GBP9.4m
-- 623,000 sq ft under construction for delivery in 2019 now 45% pre-let
-- Required capital expenditure of GBP265.0m to complete major year end projects
-- Potential surplus of c.GBP140m still to come on the two developments for delivery in 2019
-- Work started at Soho Place W1, above the new Crossrail station
Portfolio update
-- Portfolio valued at GBP4.9bn, an underlying valuation
increase of 3.9% (4.9% including disposals)
-- Underlying valuation uplift on developments was 16.0%
-- Total property return 8.0% versus the MSCI IPD Central London
Offices Quarterly Index of 7.1%
-- True equivalent yield was 4.7%, tightening by 10bp since December 2016
-- The portfolio's EPRA vacancy rate fell from 2.6% to 1.3%
-- Consented future pipeline increased 108% to 853,000 sq ft
with two new West End developments
-- Estimated rental values (ERV) on an EPRA basis increased by 1.7%
-- Year end portfolio cash rental reversion estimated at GBP110m
-- 2018 ERV guidance of +2% to -3%
Robust financial position
-- Interest cover 454%, and loan-to-value ratio 13.2%
-- Net debt down to GBP657.9m from GBP904.8m at 31 December 2016
-- Cash and undrawn facilities up to GBP523m
(1) Explanations of how EPRA figures are derived from IFRS are
shown in note 22
Robbie Rayne, Chairman, commented:
"We have had an exceptional year for lettings, increased EPRA
earnings by 22.5%, achieved a total return of 7.7% and further
improved our strong financial position. We continue to see
attractive returns from investing in our pipeline and are proposing
a 10.1% increase in the final dividend plus a special dividend of
75p per share."
John Burns, Chief Executive, commented:
"The London office market continues to be resilient with good
occupier and investment demand. Our highly successful White Collar
Factory development demonstrates Derwent London's innovative
approach. We have largely pre-let the office element at 80
Charlotte Street and are seeing good interest in our Brunel
Building. We have now started work at Soho Place, one of London's
most important Crossrail sites."
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 3936 2999 using Participation Access Code: 653857.
A recording of the conference call will also be made available
following the conclusion of the call on www.derwentlondon.com.
For further information, please contact:
Derwent London John Burns, Chief Executive
Tel: +44 (0)20 7659 3000 Damian Wisniewski, Finance
Director
Quentin Freeman, Head
of Investor Relations
Brunswick Group Simon Sporborg
Tel: +44 (0)20 7404 5959 Nina Coad
Emily Trapnell
CHAIRMAN'S STATEMENT
Operationally we have had another excellent year setting a
record for new lettings, with GBP41.5m achieved. During the year we
completed White Collar Factory EC1, a demonstration of how we
regenerate important locations through the creation of innovative
office space. In addition we extended a number of leases, notably
on our major assets at Angel Building EC1 and Tea Building E1.
These management activities have had the impact of increasing
income while GBP482.8m of property disposals reduced debt levels.
Together these provided further evidence of the attractions of the
Derwent London brand to both occupiers and property investors.
London office values have firmed during the last year and our
NAV rose 4.6% to 3,716p per share in 2017. Our underlying earnings
grew more strongly, up 22.4% to 94.2p per share principally due to
recent development completions. After a 25% rise in the 2016 final
dividend, this earnings growth enabled us to raise the 2017 interim
dividend by 25% too. We have now reverted to a growth rate closer
to our long term trend and propose raising the 2017 final dividend
by 10.1% to 42.4p per share. The final dividend will be paid on 8
June 2018 to investors on the share register on 4 May 2018. In the
nine years since our first full year as a UK REIT, our annual
compound growth in net assets, earnings and dividends per share has
been 13.2%, 17.7% and 10.4%, respectively. This performance does
not include last year's 52.0p per share special dividend, which was
paid out in response to a number of value enhancing transactions
announced with our last full year's results.
We have continued to make highly profitable disposals which,
together with rising underlying property values, have seen our
loan-to-value ratio (LTV) move to exceptionally low levels. As a
result the Board has decided to propose another special dividend
totalling 75.0p per share or GBP84m which will be paid with the
final dividend in June 2018.
Our developments continue to win awards and our Annual
Sustainability Report to be published simultaneously with our
Annual Report demonstrates our commitment to the environment and
wider stakeholders. Highlights from 2017 include White Collar
Factory achieving a BREEAM "Outstanding" and LEED "Platinum" on
completion, the highest levels possible. Our managed portfolio
achieved a significant reduction in energy consumption, and the
Derwent London Community Fund has been established for over five
years during which time it has invested in 56 different local
projects and grass roots initiatives.
Helen Gordon, CEO of Grainger plc, was appointed as an
independent non-executive Director with effect from 1 January 2018.
We welcome her and her extensive knowledge of the real estate
market. Tim Kite, who was appointed Company Secretary in 1995,
retired in October 2017 and we wish to thank him for his valued
assistance over the years. His successor, David Lawler, brings with
him considerable experience in a similar role.
We have a strategically placed property portfolio and
considerable financial resources which are greatly enhanced through
the skills of our people and their relationships with occupiers,
investors, local communities, suppliers and advisors. I would like
to thank the Derwent London team for ensuring that we continue to
make the most of our available opportunities in a way that also
allows other businesses to thrive and creates long term value for
the communities in which we operate, as well as achieving above
average long-term returns for our investors.
CHIEF EXECUTIVE'S STATEMENT
The London office market remained resilient in 2017 as both
occupier and investor demand has been strong. Although leasing
incentives have increased in some instances and deals take longer
to complete, prices remain firm. Longer term demand will depend on
the continuing strength of the London economy, the impact of the
UK's final Brexit settlement and what actions the UK subsequently
takes.
While our developments continue to take the limelight with their
design flair and pre-letting successes, it is equally important we
actively manage our income-producing assets which represent 86% of
the portfolio. These divide into core income and properties
earmarked for future development. In 2017 we had significant
success extending leases and raising income, and this year we have
opportunities to do more of the same.
Our focus on designing office space with the flexibility that
today's occupiers require in improving areas and at middle-market
rents continues to serve us well. The average 'topped-up' rent on
our London office portfolio is an undemanding GBP50 per sq ft.
During 2017 we let the remaining available space at The White
Chapel Building E1 and all of the White Collar Factory tower, as
well as pre-letting or placing under option virtually all of our
largest project ever at 80 Charlotte Street W1. The latter has been
committed to by major international companies, Arup and The Boston
Consulting Group, nearly two years ahead of expected completion.
Our product and locations are also attractive to investors as we
made GBP482.8m of investment sales last year, 11.8% above December
2016 values. These deals, together with important lease extensions,
show the ongoing appeal of our buildings which continue to
anticipate the trends in tenants' occupational requirements.
In addition to 80 Charlotte Street, the Brunel Building,
Paddington W2 is our other major scheme due for completion in 2019
and together these total 623,000 sq ft. We have largely pre-let the
former and are seeing good occupier interest in the latter. During
2017 we received resolutions to grant planning consent for an
additional 443,000 sq ft of development at 19-35 Baker Street W1
and Holden House W1 which means that at the year end we had 853,000
sq ft(1) of consented potential schemes. Included in this is Soho
Place W1, where we took possession in January 2018 and have now
started preliminary works on one of central London's most prominent
sites located over the new Tottenham Court Road Elizabeth line
station.
Our developments represent the major contributor to our income
growth. At the year end we had GBP110m of portfolio reversion of
which 40% related to rent free periods and minimum uplifts. This
means that GBP44.2m is already taken into account in our reported
earnings. Therefore earnings growth will be driven principally by
the remaining GBP65.8m of potential upside. The letting of
developments and refurbishments represents 74% of this growth.
With an EPRA vacancy rate of only 1.3%, we start 2018 with less
immediate space available than last year. Our current development
pipeline, including Soho Place, totals 908,000 sq ft and is 30%
pre-let, and we have a further 165,000 sq ft under refurbishment
which is 54% pre-let. Our success in letting the available space
will be an important indicator of market conditions and determine
the timing of the other projects in our substantial long-term
pipeline.
Following last year's major disposals, the Group had cash and
undrawn facilities of GBP523m at the year end. This year's special
dividend will cost GBP84m and our expected development expenditure
over the next four years, including Soho Place, is GBP574m. Our LTV
would rise from 13.2% to a proforma 24% after allowing for this
expenditure.
Outlook
We have an exceptional pipeline of existing opportunities, good
interest in our product and the business is particularly well
placed, despite the ongoing political and economic uncertainty.
With a robust financial position, we are under no pressure to make
disposals but rather, we are looking to further grow our portfolio.
Against this background, we estimate that in 2018 our average ERV
growth will be +2% to -3% and property yields will be broadly
stable. Given the projects due for delivery in 2019 are already 45%
pre-let, we remain confident in our longer term earnings growth.
Based on these prospects, we expect to raise our 2018 dividend by
10%. For the longer term, we have started preliminary works at Soho
Place and have planning consent for a number of other exciting
future projects.
(1) This figure includes 132,000 sq ft attributable to minority
interests
CENTRAL LONDON OFFICE MARKET
London and UK economic growth has slowed since the EU referendum
result but overall the outcome has been better than initially
expected. Looking forward, most estimates predict ongoing low
levels of UK GDP growth in the next couple of years in the order of
1.0% to 1.7% pa, as Brexit and political uncertainty continue to
weigh on business decisions. We have seen the first increase in
base rates in over 10 years when the Bank of England raised them
0.25% to 0.5% and stated that it expected to continue to move these
up gradually over a number of years as the economy recovers.
Continuing economic expansion has seen central London office
take-up remain good with CBRE estimating that 13.2m sq ft of space
was let in 2017, which was an increase of 7% on 2016. This was in
excess of the long-term average but below the recent trend. The
West End remained strong with 4.8m sq ft of lettings, the highest
level since 2007.
A notable feature last year was the amount of space taken by the
serviced office providers in total 16.5% of total market activity.
We have a number of leases with The Office Group, whose space
aligns with ours and who we have had a relationship with since
2015. Technology and working practices will mean that going forward
the serviced office sector will continue to have an important
position in the London office market.
The overall vacancy rate rose from 4.1% to 4.7%, and the West
End by a lesser amount from 3.3% to 3.7%. Vacancy rates have risen
now for two years but still remain below long-term average levels.
JLL is estimating current office demand at 12.5m sq ft, which is
lower than last year and the long term trend, but active demand of
9.6m sq ft is at its highest level since June 2016.
New office supply of 5.7m sq ft was delivered in 2017, which was
20% lower than predicted one year ago. There is currently c.12m sq
ft under construction for completion in the next three years. Given
that 47% of the space under construction is pre-let, available new
space for delivery in the next three years remains at c.6m sq ft or
under 3% of the total market. The West End, where our current
developments are concentrated, has only 1.1m sq ft or c.1% of the
local market stock under construction that is available.
CBRE estimates prime central London office rents fell 2.9% in
2017, the first fall in almost seven years. However the performance
varied by location. The West End was weakest, down 4.5% led by
Mayfair & St James's and Victoria, but rental levels stabilised
here in the second half of the year. At the same time, Fitzrovia
and Paddington, where we have substantial interests, saw rents rise
by over 3%. GVA estimates that rental incentives have increased to
about 20% of headline rent from 15% in most central London
locations during 2017. Given the short term outlook for supply and
demand, we would expect a similar mixed pattern for 2018 with
headline rents continuing to drift but certain markets,
particularly those impacted by Crossrail, performing better.
Investment activity rose 26% last year to GBP16.4bn reversing
three years of decreases, but all of the last six years have
witnessed very liquid markets with significant foreign investment.
Two high profile City deals, each over GBP1bn and at substantial
premiums, took the 2017 headlines and stimulated increased second
half supply, as other investors tested the market appetite. Despite
widespread demand not all these properties have found buyers but,
as there appears limited financial pressure on vendors to sell and
there is a lack of income-producing alternatives, we expect to see
values remain broadly stable in 2018. Recent reports continue to
highlight significant investor appetite from the same regions that
were active last year.
VALUATION
The Group's investment portfolio was valued at GBP4.9bn at 31
December 2017. The primary valuation drivers, projects, yields and
rental values, all contributed positively to produce a GBP177.1m
valuation surplus. After accounting adjustments, see note 11, the
total reported surplus was GBP150.7m. The underlying valuation
increase was 3.9% compared to a 0.2% decline in 2016. Including the
GBP482.8m of profitable disposals the valuation surplus increases
to 4.9%. Accordingly the portfolio outperformed the MSCI IPD Index
for Central London Offices, which increased by 3.6%.
Our central London properties, 98% of the portfolio, saw an
underlying valuation uplift of 4.0%, with the West End at 1.9% and
the City Borders, principally the Tech Belt, up 7.5%. The latter
benefitted from our successful projects, including White Collar
Factory and The White Chapel Building. The balance of the portfolio
at 2% is our non-core Scottish holdings and this was flat at
+0.5%.
The portfolio's total property return, which is one of our KPIs,
was 8.0% for 2017 compared to 2.9% in 2016. The MSCI IPD Total
Return Index was 7.1% for Central London Offices and 10.2% for All
UK Property.
We were particularly active with our four on-site developments
at the beginning of 2017. White Collar Factory was completed and is
now a core income property. Brunel Building and 80 Charlotte
Street, which were valued at GBP404.7m at the December 2017, are
not scheduled to complete until 2019. Charlotte Street saw strong
pre-letting activity during the year. These three developments
delivered a 16.0% valuation uplift in 2017. The other development,
The Copyright Building W1, was sold in the second half of the year
generating a valuation surplus of 21.0% above book value.
On an EPRA basis the portfolio's initial yield at December 2017
was 3.4% rising to a 'topped-up' 4.4% following the expiry of rent
free periods and contractual rental uplifts. For the previous year,
these figures were 3.4% and 4.1%, respectively. The true equivalent
yield was 4.73%, a 10bp inward movement over the year which
compares favourably with the 31bp yield expansion in 2016. This
change reflects stronger investor demand for central London
assets.
Our mid-market rental villages continued to attract a wide range
of occupiers, but the rate of rental growth has slowed. Our EPRA
rental value movement was up 1.7%.
As well as our record letting year, our asset management team
was busy capturing growth from the core income element of the
portfolio through rent reviews, renewals and lease re-gears. There
are more details on this activity in the Asset Management section
below. These improvements contributed to the 6.5% increase in the
annualised contracted rent, from GBP150.3m to GBP160.1m. The gain
was despite the loss of GBP8.6m of contracted rent from disposals,
which also caused the total ERV to decline 5.1% to GBP270.1m.
The portfolio reversion at year end was GBP110.0m. Of this
GBP68.4m is contractual from fixed uplifts, the expiry of rent free
periods or pre-lets. The majority of the balance comes from letting
vacant space, either available to occupy or under construction.
This totalled GBP27.3m, of which 69% relates to the two on-site
developments: Brunel Building and 80 Charlotte Street. The final
GBP14.3m component of the reversion comes from achieving market
rents at future rent reviews and lease renewals.
ASSET MANAGEMENT
We continue to make the most of the opportunities provided by
the strength of London's occupational market aligned with our
development programme. During 2017 we let 685,700 sq ft achieving
rents of GBP41.5m (GBP41.3m net), at an average level of 1.3% above
December 2016 ERV. This represents an exceptional level of activity
surpassing last year's previous record by 32%, and it means that we
have achieved GBP56.2m of new lettings in the 18 months since the
EU referendum.
Letting activity 2017
Let Performance against
Dec 16 ERV (%)
------ ----------------- -------------------------
Area Income Open market Overall(1)
sq ft GBPm
pa
------ -------- ------- ------------ -----------
H1 439,200 23.4 1.8 0.5
H2 246,500 18.1 2.4 2.4
------ -------- ------- ------------ -----------
2017 685,700 41.5 2.1 1.3
------ -------- ------- ------------ -----------
(1) Includes short-term lettings at properties earmarked for
redevelopment
Our second half 2017 transactions covered 246,500 sq ft and
achieved GBP18.1m of rent at average rents 2.4% above December 2016
ERV, or 1.8% above June 2017 ERV. Of our total lettings for the
year, 61% by income came from pre-lets notably at 80 Charlotte
Street and The White Chapel Building Phase 2 and a further 15% from
lettings at major completions, notably White Collar Factory.
Principal lettings in 2017
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
80 Charlotte
Street W1 Arup 133,600 72.90 9.7(1) 81.50 20 - 33
White Collar
Factory EC1 Adobe 14,900 67.50 1.0 74.50 11.5 - 22
Angel Building
EC1 Expedia 12,500 62.50 0.8 - 13.3 - 18
Greencoat
& Gordon House
SW1 VCCP 12,800 55.00 0.7 - 8.5 - 13
9, plus
9
20 Farringdon if no
Road EC1 Accenture 11,500 55.00 0.6 - 10 5 break
------------------ -------------- -------- ------ -------- --------- ------- ------- -------------
Q2
The White
Chapel Building
E1 30, plus
Phase 2 - 6
lower ground if no
floors Fotografiska 89,000 27.00 2.4 27.70 15 12 break
18, plus
5
White Collar if no
Factory EC1 Box.com 28,500 75.00 2.1 - 15 10 break
The White
Chapel Building
E1 Wilmington 27,000 52.00 1.4 - 10 - 20
11, plus
The White 8
Chapel Building if no
E1 ComeOn! 12,700 50.00 0.6 - 10 5 break
9.5, plus
5
White Collar Red if no
Factory EC1(2) Badger 7,700 62.50 0.5 65.60 10 5 break
78 Whitfield Made
Street W1 Thought 4,800 63.50 0.3 - 10 4.5 8
78 Whitfield Yoyo
Street W1 Wallet 4,800 63.00 0.3 - 4.5 - 8
78 Chamber
Street E1(3) NetBooster 6,700 40.00 0.3 - 10 5 10
------------------ -------------- -------- ------ -------- --------- ------- ------- -------------
Q3
The
Boston
80 Charlotte Consulting
Street W1 Group 123,500 85.50 10.6 - 15 12 Confidential
80 Charlotte
Street W1 Arup 19,800 75.00 1.5(1) 83.80 20 - 33
90 Whitfield
Street W1 Freightliner 12,100 71.00 0.9 - 10 - 22
Holden House Russell
W1 & Bromley 3,800 - 0.7 - 10 5 3
12-16 Fitzroy
Street W1 Ergonom 8,800 54.00 0.5 57.00 15 10 15
9, plus
White Collar 9 if no
Factory EC1 Egress 6,700 67.50 0.5 - 10 5 break
------------------ -------------- -------- ------ -------- --------- ------- ------- -------------
Q4
The Copyright Bone
Building W1(4) Daddies 5,600 - 0.4 - 20 - 14
------------------ -------------- -------- ------ -------- --------- ------- ------- -------------
(1) Annual increases of 2.25% for the first 15 years (2) Low
rise buildings (3) Joint venture - Derwent London share (4) Since
sold
Leases totalling 771,900 sq ft or c.15% of our portfolio were
subject to breaks or expiries in 2017, which was 30% more than in
2016. Rent review activity was lower, but the average 42% increase
in passing rents matched last year and was 11% over ERV. We saw
particularly strong growth at 88 Rosebery Avenue EC1 and 4 & 10
Pentonville Road N1, two buildings in the Tech Belt.
Lease renewals were dominated by two large transactions where we
extended leases on a short term basis. The first was at 19-35 Baker
Street where we received a resolution to grant planning consent for
redevelopment and therefore needed to retain flexibility and the
latter was 1 Stephen Street W1. The Group also had considerable
success re-gearing leases to important tenants at Angel Building
(Expedia) and Tea Building (Mother). In total these last four
transactions covered 416,000 sq ft, and show our different
approaches to lease events depending on our plan for each building.
We retained or re-let 92% of the income from properties where
leases either expired or were due to expire during the year.
In 2017 our average lease length weighted by contractual passing
rent moved from 6.5 years to 6.0 years or 7.0 years allowing for
rent-free 'top-ups'. These numbers were impacted by the disposal of
8 Fitzroy Street W1. Including the recently agreed pre-lets, where
the lease lengths are considerably longer, the weighted average
lease length rises to 7.8 years, the same as last year.
A summary of our asset management activity in the year can be
found in the following table:
Asset management 2017
Area Previous New rent Uplift Income
sq ft rent GBPm % v
GBPm pa Dec 16
pa ERV %
---------------- -------- --------- --------- ------- --------
Rent reviews 209,500 6.4 9.1 42 11
---------------- -------- --------- --------- ------- --------
Lease renewals 269,600 10.5 13.2 26 (6)
---------------- -------- --------- --------- ------- --------
Lease re-gears 292,800 12.1 16.3 35 8
---------------- -------- --------- --------- ------- --------
Total 771,900 29.0 38.6 33 4
---------------- -------- --------- --------- ------- --------
The continuing demand for our product means that our EPRA
vacancy rate fell to 1.3% at the year end. This was down from 2.6%
over the year despite two significant development completions.
DEVELOPMENT AND REFURBISHMENT
Two developments comprising 401,000 sq ft were completed in
2017. White Collar Factory surpassed our expectations with its
progressive design gaining considerable international coverage. The
tower is fully let, with the tenants in occupation, and the
remaining lower rise space is either let or under offer. This
development has achieved a 96% profit on cost as at 31 December
2017. The Copyright Building achieved a 23% profit on cost.
At the year end we had two West End projects under construction
totalling 623,000 sq ft, which are 45% pre-let. We have since
started preliminary works on Soho Place, also in the West End.
Major developments pipeline
Property Area Delivery Capex Comment
sq to
ft complete
GBPm(1)
------------------------- ----------- --------- ---------- -------------------------
Completed projects
White Collar Factory, 293,000 H1 265,000 sq ft
Old Street Yard 2017 offices, 20,000
EC1 sq ft retail,
8,000 sq ft residential
- 94% let
The Copyright Building, 108,000 H2 88,000 sq ft
30 Berners Street 2017 offices and 20,000
W1 sq ft retail
- 100% let. Sold
H2 2017.
------------------------- ----------- --------- ---------- -------------------------
401,000
On-site projects
Brunel Building,
2 Canalside Walk H1
W2 243,000 2019 70 Offices
332,000 sq ft
offices, 45,000
sq ft residential
and 3,000 sq
80 Charlotte Street H2 ft retail - 73%
W1 380,000 2019 182 pre-let overall
------------------------- ----------- --------- ---------- -------------------------
623,000 252
------------------------- ----------- --------- ---------- -------------------------
Other major planning
consents
Soho Place W1 285,000 209,000 sq ft
offices, 36,000
sq ft retail
and 40,000 sq
ft theatre
Monmouth House EC1 125,000 Offices, workspaces
and retail
19-35 Baker Street 293,000(2) 206,000 sq ft
W1 offices, 52,000
sq ft residential
and 35,000 sq
ft retail
Holden House W1 150,000 Retail flagship
or retail and
office scheme
------------------------- ----------- --------- ---------- -------------------------
853,000
------------------------- ----------- --------- ---------- -------------------------
Grand total (excluding
completed projects) 1,476,000
------------------------- ----------- --------- ---------- -------------------------
(1) As at 31 Dec 2017 (2) Total area - Derwent London has a 55% share of the joint venture
Our largest project is 80 Charlotte Street in Fitzrovia. The
development comprises three elements: first the largely pre-let
offices totalling 321,000 sq ft; secondly a residential element of
45,000 sq ft in 55 units (25% are affordable) and finally the
ancillary retail of 14,000 sq ft. The project is due for completion
at the end of 2019 and requires an additional GBP182m of capital
expenditure to complete. The ERV is GBP25.8m pa.
The other major project at the year end was Brunel Building,
Paddington, where we are seeing good interest from potential
occupiers. Construction is advancing well on this canalside
project, which is due to complete in the first half of 2019. The
building is designed to be multi-let and has an external diagrid
structural frame thereby allowing the floors to be virtually column
free. There are two significant terraces on the upper floors, one
of which is likely to be for communal use. Capital expenditure to
complete is GBP70m and the ERV is GBP14.8m.
In addition there were three smaller projects in hand at the
year end. First there is the development of the lower ground floors
and a new pavilion at The White Chapel Building. It has been
pre-let to Fotografiska who will operate as the London Museum of
Photography. The project has been let for GBP2.4m and requires
additional capital expenditure of GBP13m. Completion is due in the
second half of 2018. This will see the final transformation of a
tired back office space, which we acquired in December 2015, into a
vibrant creative and cultural hub. Secondly we are refurbishing
57,200 sq ft at Johnson Building EC1 following lease expiries. The
estimated ERV here is GBP3.2m. Finally we have recently completed
the refurbishment of 18,700 sq ft on the upper floors of 25 Savile
Row W1.
We recently gained access to the site of our next exciting major
mixed-use development Soho Place, which lies above the Tottenham
Court Road Elizabeth line station. This gateway onto the eastern
end of Oxford Street and Soho Square will provide 209,000 sq ft of
offices, 36,000 sq ft of retail as well as a new theatre.
Preliminary work has started with the main construction contract
expected to be signed later in 2018. The further capital
expenditure and site payment is estimated at GBP309m and the ERV at
GBP22.0m net. The earliest the project could complete is in
2021.
Looking further ahead, Monmouth House EC1, next to White Collar
Factory, has planning consent and we recently received resolutions
to grant consent for 19-35 Baker Street (where we hold 55% of a
joint venture with The Portman Estate) and Holden House. Baker
Street is an office-led scheme, whereas Holden House would be
suitable for a major retail store. Given the latter's position in
the fast improving eastern end of Oxford Street and the exceptional
floorplate size for this location it has considerable retail
potential. We also have planning for an alternative scheme on this
with a higher proportion of offices giving us significant
flexibility. Beyond these three projects we are working up active
plans on another three buildings representing 4% of the existing
portfolio.
INVESTMENT ACTIVITY
We sold three major properties in 2017 for GBP475m net of costs
and rental top-ups, demonstrating the ongoing depth of demand
during 2017. We have previously reported on all three transactions,
and the details are shown in the table below. None of the disposals
offered significant opportunities for us to add short-term value.
The sale of 132-142 Hampstead Road NW1 was part of the HS2 site
assembly, 8 Fitzroy Street was sold to the occupier, Arup, as part
of the 80 Charlotte Street pre-let and The Copyright Building was
sold to a German fund. The level of disposals was above our medium
term business targets and has left us in a strong position to
recycle the proceeds principally into our development activity,
where we currently expect development yields of 6.0% on cost.
Major disposals in 2017
Net Net Net
Property Date Area proceeds proceeds yield Rent
sq GBPm GBP to purchaser GBPm
ft psf % pa
------------------- ------- -------- ---------- ---------- -------------- ------
132-142 Hampstead
Road NW1 Q1 219,700 129.4 590 1.2 1.7
8 Fitzroy Street
W1 Q2 147,900 196.9 1,330 3.4 7.2
The Copyright
Building W1 Q4 108,000 148.2 1,370 4.2 7.4
------------------- ------- -------- ---------- ---------- -------------- ------
We are continually on the hunt for acquisitions but the scarcity
of opportunities that match our criteria has meant that our
activity has been limited in 2017 to a small acquisition in
Victoria SW1 adding to our cluster in that location. Since the year
end we have exchanged contracts to sell Porters North N1 (held in a
50% joint venture) for GBP45.4m net of 'top-ups', which is 5% above
December 2017 book value.
FINANCE REVIEW
Financial overview
Our financial results for the year ended 31 December 2017 showed
a return to meaningful net asset value growth and another strong
rise in underlying earnings. The continued de-risking of our
pipeline of value adding projects, high levels of portfolio
occupancy and gearing levels which have fallen again after the
receipt of GBP472.9m from property disposals, have combined to put
us in a very strong financial position. However, with continuing
political and economic uncertainty making the outlook for the UK
and London harder than usual to anticipate, we believed that 2017
was the right time to de-risk the business particularly as there
were attractive opportunities to do so. At the same time, demand
from occupiers and investors alike has buoyed London's commercial
property values and we found no significant new properties to
acquire during the year. At present, we see more attractive returns
from investing in our pipeline. We are also recommending a 10.1%
increase in the final dividend and, following last June's 52p
special dividend, are proposing to pay out a further 'special' in
June 2018 of 75p per share.
Presentation of financial results
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS). In common with
usual and best practice in our sector, alternative performance
measures have also been provided to supplement IFRS based on the
recommendations of the European Public Real Estate Association
("EPRA"). EPRA Best Practice Recommendations (BPR) have been
adopted widely throughout this report and are used within the
business when considering our operational performance as well as
matters such as dividend policy and elements of our Directors'
remuneration. Full reconciliations between IFRS and EPRA figures
are provided in note 22 and all the EPRA definitions are included
in note 25.
Net asset value
Though underlying values for the main part of our portfolio were
fairly flat in 2017, recent development projects such as White
Collar Factory provided strong valuation uplifts and, as a result,
the Group's net asset value grew by almost 5% during the year.
Adding back the 108p per share of dividends paid in 2017, including
last year's 52p special dividend, the total return for the year
calculated on an EPRA basis was 7.7%. This compares with the 1.7%
total return in 2016 when the result of the EU referendum was still
reverberating.
The Group's IFRS net asset value was GBP4.2bn at 31 December
2017 against just under GBP4.0bn in 2016 and EPRA NAV per share on
a diluted basis increased to 3,716p per share, up 4.6% from 3,551p
a year earlier. The main movements in EPRA NAV per share during the
year are summarised below compared with 2016:
2017 2016
p p
-------------------------------- ----- -----
Revaluation movement 138 (38)
Profit on disposals 45 7
EPRA earnings 94 77
Interim/final dividends (56) (44)
Special dividend (52) -
Interest rate swap termination
costs (7) (8)
Dilutive effect of convertible
bonds - 17
Non-controlling interest - 7
Other 3 (2)
-------------------------------- ----- -----
165 16
-------------------------------- ----- -----
The uplift in our property valuation through 2017 together with
the strong profit booked on property disposals added a combined
183p per share to our net asset value; this compares with a deficit
of 31p per share for the same items in 2016. Of the 138p per share
revaluation uplift, 77p per share came from The White Chapel
Building, White Collar Factory and 80 Charlotte Street alone while
another 22p was gained at Angel Building partly due to the Expedia
re-gear. In total, the revaluation gain for the year was GBP150.7m
of which GBP1.0m was a partial reversal of the 2016 write-down in
respect of properties held as trading stock and GBP1.8m came from
our new offices at 25 Savile Row; the balance of GBP147.9m related
to the investment property portfolio.
Including GBP14.8m of letting and legal fees being amortised
over their respective lease terms, accrued income from the
'straight-lining' of rental income under IAS17 and SIC15 was
GBP120.6m at 31 December 2017 (2016: GBP116.9m). Though the balance
increased during the year as we recognised income in advance of
cash receipts and incurred letting and legal fees, it also fell by
GBP19.2m due to the property disposals.
The overall year end make-up of our portfolio valuation was as
follows:
Dec Dec
2017 2016
GBPm GBPm
---------------------------------- -------- --------
Investment property 4,670.7 4,803.8
Owner occupied property 46.5 34.2
Trading property 25.3 11.7
-------- --------
Carrying value 4,742.5 4,849.7
Accrued income 120.6 116.9
Grossing up of headlease
liabilities (14.1) (23.9)
Revaluation of trading property 1.3(1) -
---------------------------------- -------- --------
Fair value of property portfolio 4,850.3 4,942.7
---------------------------------- -------- --------
(1) Not included in the IFRS accounts
The net carrying value of joint venture investments at 31
December was GBP39.7m (2016: GBP36.0m) and the fair value of our
50% share of the two properties held was GBP47.3m (2016: GBP37.8m).
One of these, Porters North, is due to be sold for GBP45.4m net of
rental 'top-ups' in March 2018, at which point our only external
joint venture debt will be repaid.
Income statement
We have maintained our focus on raising underlying earnings from
our portfolio in 2017. Some of this came from new lettings at the
recently completed properties such as White Collar Factory and
White Chapel Building but we have also grown income from the
like-for-like portfolio and our costs have reduced too.
Gross rental income increased to GBP172.1m from GBP155.4m in
2016 and net rental income was up to GBP161.1m from GBP145.9m a
year before. These reflect annual increases of 10.7% and 10.4%,
respectively, in spite of over GBP482.8m of net property disposals
during the year. After taking account of fee income from joint
venture projects and the GBP1.0m partial reversal of a trading
property provision booked in 2016, net property and other income
increased to GBP164.8m from GBP149.2m in 2016. Lettings in 2016 and
2017 added GBP33.1m of rental income over the year. Breaks,
expiries and scheme voids reduced rental income by GBP5.3m and the
disposals removed GBP11.1m. Irrecoverable property costs increased
slightly to GBP10.3m but remain low at under 6% of rental income
due partly to our low vacancy rates.
We saw an 8.7% fall in administration expenses during the year
to GBP28.2m against the background of an increased headcount and
our move into newly fitted offices. The reduction was mainly due to
substantial falls in amounts booked for variable remuneration. As
in previous years, no overheads or property costs were
capitalised.
With these lower administration costs, our EPRA cost ratios fell
to 20.8% (2016: 24.0%) of gross rental income including direct
vacancy costs and to 19.3% (2016: 22.4%) excluding those costs.
Investment property disposals during the year amounted to
GBP482.8m after netting off cash top-ups for rent-free periods.
This is our largest ever Ievel of annual disposals and gave rise to
an IFRS profit in 2017 of GBP50.3m or 45p per share. GBP24.9m of
this came from the sale of The Copyright Building which was
completed in 2017 and where the December 2016 valuation had
therefore still factored in significant completion risks and profit
to come. It also took account of the sale of Hampstead Road as part
of the HS2 site assembly around Euston station and 8 Fitzroy Street
to Arup, both of which were announced with our 2016 results.
Total finance costs fell to GBP27.1m from GBP27.8m in 2016
despite a GBP3.6m lower level of interest capitalised; GBP9.4m was
capitalised in 2017 against GBP13.0m in the previous year.
Accordingly, the underlying interest charge has fallen by around
11% compared to 2016.
The mark-to-market cost of our remaining interest rate swaps
fell by GBP9.4m in 2017 partially offset by GBP7.3m of breakage
costs. With lower levels of debt, we decided to break or defer
GBP245m of interest rate swaps in late 2017. Full details are
provided under 'net debt' below.
Our share of the revaluation surplus in our two small joint
ventures was GBP3.9m in 2017 and they also contributed GBP1.1m of
profits after tax. However, as noted above, the main portfolio
revaluation showed a much stronger result than in 2016 with a net
uplift after accounting adjustments of GBP147.9m against a deficit
of GBP37.1m in 2016. The overall IFRS profit for the year was
therefore GBP313.0m compared with GBP53.6m in 2016. EPRA earnings
for 2017, which remove fair value movements and the profits arising
on property disposals to arrive at an underlying measure of
performance, increased by 23% during the year to GBP105.0m from
GBP85.7m in 2016; this reflects a 79% rise over the last three
years.
A table providing a reconciliation of the IFRS results to EPRA
earnings per share is included in note 22.
After adjustments to remove developments, 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
5.2%. A full analysis is shown in the table below.
Taxation
The corporation tax charge for the year ended 31 December 2017
increased to GBP3.3m in 2017 from GBP2.0m in the previous year.
Part of this increase was due to the reversal of the 2016
write-down on residential apartments held as trading stock and
therefore outside the REIT tax environment.
The movement in deferred tax liabilities for the year was a
credit of GBP0.8m. This was made up of GBP1.5m (2016: GBP1.1m
credit) passing through the income statement due mainly to the
revaluation of non-REIT Group properties plus a charge of GBP0.7m
in relation to the property we occupy at 25 Savile Row.
In addition, GBP5.7m of further tax was paid to HMRC during the
year as, in line with other REITs, we are required to withhold tax
from certain shareholders on property income distributions.
Net debt and cash flow
The property disposals during the year raised cash proceeds of
GBP472.9m which helped to reduce net debt to GBP657.9m at 31
December 2017 from GBP904.8m a year earlier. The Group's LTV ratio
fell correspondingly from 17.7% to 13.2% and NAV gearing declined
from 22.6% to 15.7%.
The other main cash flow items were the cash generated from
operating activities, which increased by 7% to GBP83.5m, and cash
used as we invest in our portfolio. Capital expenditure on projects
paid was GBP165.0m including GBP9.4m of capitalised interest, both
of which were a little lower than the prior year.
Interest cover has shown another strong increase to 454% for the
year ended 31 December 2017 from 370% in 2016, calculated on the
net basis set out in note 23.
Debt and financing arrangements
In the first half of the year, we extended the maturity of our
GBP75m unsecured revolving facility from Wells Fargo by a further
year to July 2022. We also cancelled GBP100m of the GBP550m
revolving bank facility for which we received a fee rebate of
GBP0.75m. The size of this facility, which expires in January 2022,
is now GBP450m. A GBP40m interest rate swap was terminated as part
of these arrangements at a slightly discounted cost of GBP3.2m. A
new short-term GBP15m development loan facility was also agreed
with Barclays for our Primister joint venture but will be repaid
upon the sale of the JV's sole property, Porters North, in March
2018. A GBP28m loan facility with HSBC secured on assets that we
hold with the Portman Estate was also signed in July 2017. This
five year facility has a term to July 2022 replacing the previous
facility which had been due to expire in June 2018.
At the end of 2017, we had GBP523m of cash and undrawn
facilities and our two main revolving bank facilities totalling
GBP525m were substantially undrawn. This required us to break or
defer most of our interest rate swaps. Following the sale of The
Copyright Building, we broke a GBP60m interest rate swap giving
rise to a GBP0.2m receipt and deferred GBP115m of swaps for a
payment of GBP1.7m. The GBP40m 2.446% swap will now commence in
October 2018 and expire in July 2022 and the GBP75m 1.359% swap
will start in April 2019 and run to April 2025. The phasing of
these forward-starting swaps has been planned in line with expected
spending on our projects and the consequent likely increase in
future borrowings. They will also give us a degree of protection
should interest rates rise more quickly than expected. The
remaining GBP70m forward start swap has also been deferred to March
2018 at a cost of GBP2.5m. The proportion of our debt that is fixed
or swapped into fixed rates was 88% (2016: 95%) as at 31 December
2017 excluding the forward start swaps.
At the balance sheet date, the weighted average maturity of our
debt was 7.6 years (2016: 7.7 years) and the overall interest rate
paid was 3.80% (2016: 3.65%). Allowing for the additional IFRS
charge for our 2019 convertible bonds, the interest rate was 4.11%
(2016: 3.90%). These average rates have both been affected by the
small amount of floating rate bank debt outstanding at the end of
the year. After allowing for non-utilisation fees, our marginal
borrowing rate is 1.25%.
Dividend
The strong rise in recurring earnings per share during the year
has enabled us to propose a final dividend of 42.4p per share. This
will be paid in June 2018 and is an increase of 10.1% over last
year's final dividend with 35.0p to be paid as a PID with the
balance of 7.4p as a conventional dividend. There will not be a
scrip dividend alternative. In addition and partly in recognition
of the excellent property disposals through the year which yielded
a profit on historic cost of GBP169m, a special dividend of 75p per
share will also be paid to ordinary shareholders in June 2018.
Our financial outlook
From a strong starting point, the Group further improved its
financial position through the year with lower debt, increased
interest cover and earnings and a total return of 7.7%. The low
leverage, together with the absence of current opportunities to buy
new assets that match our testing criteria, has enabled us to
propose substantial payments to shareholders in H1 2018.
Our business model continues to work well with recently
completed development projects providing both earnings and
valuation uplifts and our asset management activities helping
like-for-like rental income to grow too. Further pre-lets have
substantially de-risked the on-site development projects and
continuing strong occupier interest has encouraged us to progress
our next large project at Soho Place. We also have a significant
pipeline of projects for the future.
Completion of the schemes at 80 Charlotte Street, Brunel
Building, White Chapel Building and Soho Place will incur about
GBP574m of capital expenditure from January 2018 and take our
proforma LTV gearing to 24%, assuming no further development
profits, acquisitions or disposals. We believe this is appropriate
positioning for us given the current political and economic outlook
and will give us many continuing options as we move the business
forwards.
PRINCIPAL RISKS AND UNCERTAINTIES
We have identified certain principal risks and uncertainties
that could prevent the Group from achieving its strategic
objectives and assessed how these risks could best be mitigated
through a combination of internal controls, risk management and the
purchase of insurance cover. These risks are reviewed and updated
on a regular basis and were last formally assessed by the Board in
February 2018.
The principal risks and uncertainties facing the Group in 2018
are set out on the following pages with the potential effects,
controls and mitigation factors. The Group's approach to the
management and mitigation of these risks is included in the 2017
Annual Report.
Strategic risks
That the Group's business model and/or strategy does not create
the anticipated shareholder value or fails to meet investors' and
other stakeholder expectations.
Risk, effect and progression Controls and mitigation
--------------------------------------------------------------- ------------------------------------------------------------------
1. Inconsistent strategy
The Group's strategy is not met due to poor strategy * The Group conducts an annual five-year strategic
implementation or a failure to respond review and prepares a budget and three rolling
appropriately to internal or external factors such as: forecasts covering the next two years.
* A economic downturn and/or the Group's development
programme being inconsistent with the current
economic cycle; * The Board considers the sensitivity of the Group KPIs
and key metrics to changes in the assumptions
underlying our forecasts in light of anticipated
* London losing its global appeal with a consequential economic conditions. If considered necessary,
impact on the property investment or occupational modifications are made.
markets.
* The Group's development pipeline has a degree of
flexibility that enables plans for individual
The Board considers this risk to have remained broadly the properties to be changed to reflect prevailing
same. Throughout the year, the economic circumstances.
Group continued to benefit from a resilient central London
office market.
* The Group seeks to maintain income from properties
until development commences and has an on-going
strategy to extend our income through lease renewals
and re-gearing.
* The Group aims to de-risk the development programme
through pre-lets.
* The Group maintains sufficient headroom in all the
Group's key ratios and financial covenants and a
focus on interest cover.
2. Adverse Brexit settlement
Risk that negotiations to leave the European Union result in * The Group's strong financing and covenant headroom
arrangements which are damaging enables it to weather a downturn.
to the London economy.
As a predominantly London-based group, we are particularly * The Group's diverse and high-quality tenant base
sensitive to any factors which provides resilience against tenant default.
impact upon London's growth and demand for office space.
Negotiations are likely to be ongoing during 2018 and the * The Group focuses on good value, middle market rent
operating framework facing UK businesses properties which are less susceptible to reductions
and the effect on London post-Brexit cannot be accurately in tenant demand. The Group's average 'topped' up
predicted. office rent is only GBP49.74 per sq ft.
Although some progress on negotiations has been made, the
Board considers this risk to have * The Group develops properties in locations where
remained broadly the same during the year. there is greatest potential for future demand, such
as near Crossrail stations.
* Income is maintained at future developments for as
long as possible.
* On-going strategy is to extend income through lease
renewals and re-gearing and to de-risk the
development programme though pre-lets.
* Updates received on occupier trends by engaging with
our current tenants and advisors.
3. Reputational damage
The Group's reputation is damaged, for example through * Close involvement of senior management in day-to-day
unauthorised and/or inaccurate media operations and established procedures for approving
coverage or failure to comply with relevant legislation. all external announcements.
We have an established and trusted brand. Our strong culture,
low overall risk tolerance and * All new members of staff benefit from an induction
established procedures and policies mitigate against the risk programme and are issued with our Group staff
of internal wrong-doing. handbook.
The Board considers this risk to have remained broadly the
same during the year. * The Group employs a Head of Investor and Corporate
Communications and retains services of an external PR
agency who both maintain regular contact with
external media sources.
* A Group whistleblowing system for staff is maintained
to report wrong-doing anonymously.
* Social media channels are monitored.
* Ongoing engagement with local communities in areas
where the Group operates.
Financial risks
Significant steps have been taken in recent years to reduce or
mitigate the Group's financial risks such that few are now
considered to be principal risks of the Group. The main financial
risk is that the Group becomes unable to meet its financial
obligations, which is not currently a principal risk. Financial
risks can arise from movements in the financial markets in which we
operate and inefficient management of capital resources.
Risk, effect and progression Controls and mitigation
----------------------------- ------------------------
4. Increase in property yields
Increasing property yields which may be a * The impact of yield changes is considered when
consequence of rising interest rates would cause potential projects are appraised.
property values to fall. Interest rates have
remained low for an extended period and are
expected * The impact of yield changes on the Group's financial
to gradually rise over the next few years. Though covenants and performance are monitored regularly and
there is no direct relationship, this may are subject to sensitivity analysis to ensure that
cause property yields to increase. adequate headroom is preserved.
The underlying value of the properties in our
portfolio have remained resilient, and in 2017 * The Group's move towards mainly unsecured financing
have increased by 3.9%, despite the continuing over the past few years has simplified the management
economic uncertainties. of our financial covenants.
The Board considers this risk to have remained
broadly the same during the year. * The Group's low loan-to-value ratio reduces the
likelihood that falls in property values have a
significant impact on our business.
Operational risks
The Group suffers either a financial loss or adverse
consequences due to processes being inadequate or not operating
correctly, human factors or other external events.
Risk, effect and progression Controls and mitigation
----------------------------- ------------------------
5. Reduced development returns
The Group's development projects do not produce
the targeted financial returns due to one
or more of the following factors:
* Delay on site
* Increased construction costs
* Adverse letting conditions
For example: delays could lead to penalties
payable to pre-let tenants at 80 Charlotte
Street.
The ongoing economic uncertainty arising from
the decision to leave the EU has caused this
risk to increase slightly. Although pre-lets
have substantially de-risked our schemes, they
have also led to greater financial exposure
should projects be delivered late.
* Investment appraisals, which include contingencies
and inflationary cost increases, are prepared and
sensitivity analysis is undertaken to measure that an
adequate return is made in all likely circumstances.
* The procurement process used by the Group includes
the use of highly regarded firms of quantity
surveyors and is designed to minimise uncertainty
regarding costs.
* Development costs are benchmarked to ensure that the
Group obtains competitive pricing and, where
appropriate, fixed-price contracts are entered into.
* Procedures carried out before starting work on site,
such as site investigations, historical research of
the property and surveys conducted as part of the
planning application, reduce the risk of unidentified
issues causing delays once on site.
* The Group's pre-letting strategy reduces or removes
the letting risk of the development as soon as
possible.
* Post-completion reviews are carried out for all major
developments to ensure that improvements to the
Group's procedures are identified, implemented and
lessons learned.
6. Cyber attack
The Group is subject to a cyber-attack that
results in it being unable to use its IT
systems
and/or loses data. This could lead to an
increase in costs whilst a significant
diversion
of management time would have a wider impact.
Risk has slightly decreased due to the controls
and procedures implemented during 2017.
* The Group's Business Continuity Plan is regularly
reviewed and tested.
* Independent internal and external 'penetration' tests
are regularly conducted to assess the effectiveness
of the Group's security.
* Multifactor authentication exists for remote access
to our systems.
* Incident response and remediation policies are in
place.
* The Group's data is regularly backed up and
replicated and our IT systems are protected by
anti-virus software and firewalls that are frequently
updated.
* Annual staff awareness and training programmes.
* Security measures are regularly reviewed by the IT
Steering Committee.
7. Non-compliance with health and safety
legislation
The Group's cost base is increased and
management time is diverted through an incident
or
breach of health and safety legislation leading
to reputational damage and/or loss of our
licence to operate.
New principal risk - previously included within
regulatory non-compliance.
* The Group has a qualified health and safety team
whose performance is monitored and managed by the
Health and Safety Committee.
* External advisors (ORSA) appointed to advise on
construction health and safety.
* When required, external consultants are used on
facilities management matters.
* The Board and Executive Committee receive regular
updates and presentations on key health and safety
matters.
* All our properties have health, safety and fire
management procedures in place which are reviewed
annually.
* External project managers review health and safety on
each construction site on a monthly basis.
8. Non-compliance with environmental and
sustainability legislation
The Group's cost base is increased and * The Board and Executive Committee receive regular
management time is diverted through a breach of updates and presentations on environmental and
any sustainability performance and management matters.
of the legislation e.g. Minimum Energy
Efficiency Standards (MEES) for buildings. This
could * The Sustainability Committee monitors our performance
lead to damage to our reputation and/or loss of and management controls.
our licence to operate.
New principal risk - previously included within * Employment of qualified team led by an experienced
regulatory non-compliance. Head of Sustainability.
* The Group benchmarks its ESG (environmental, social
and governance) reporting against various industry
benchmarks.
* The Group has set long-term science based carbon
targets aligned with the outcome of the Paris Climate
Change Agreement & UK Climate Change Act (COP 21).
* Production of an Annual Sustainability Report, the
key data points and performance of which are
externally assured.
9. Other regulatory non-compliance
The Group's cost base is increased and * The Board and Risk Committee receive regular reports
management time is diverted through a breach of prepared by the Group's legal advisers identifying
any upcoming legislative/regulatory changes. External
of the legislation that forms the regulatory advice is taken on any new legislation.
framework within which the Group operates. This
could lead to damage to our reputation and/or
loss of our licence to operate. * Staff training and awareness programmes.
The Board considers this risk to have remained
broadly the same during the year. * Group policies and procedures dealing with all key
legislation are available on the Group's intranet.
* A Group whistleblowing system for staff is maintained
to report wrong-doing anonymously.
10. 'On-site' risk
Risk of project delays and/or cost overruns * Prior to construction beginning on site we conduct
caused by unidentified issues e.g. asbestos in site investigations including the building's history
refurbishments or ground conditions in and various surveys to identify any potential issues.
developments.
For example, delays could lead to penalties * Regular monitoring of our contractors' cash-flows.
payable to pre-let tenants at 80 Charlotte
Street.
Our pre-let strategy has increased this risk. * Off-site inspection of key components to ensure they
have been completed to the requisite quality.
New principal risk.
* Payments to contractors to incentivise them to
achieve agreed project timescale and damages agreed
in the event of delays/cost overruns.
* Frequent meetings with key contractors and
subcontractors to review the work programme.
11. Contractor/subcontractor default
Returns from the Group's developments are * The financial standing of our main contractors is
reduced due to delays and cost increases caused reviewed prior to awarding the project contract.
by either a main contractor or major
subcontractor defaulting during the project.
* Regular monitoring of our contractors' cash-flows is
The risk has slightly increased during the carried out.
year, partly due to the economic and political
uncertainty and the importance of delivering
the Group's key development projects. * Key construction packages are acquired early in the
project's life to reduce the risks associated with
later default.
* Whenever possible the Group uses
contractors/subcontractors that it has previously
worked with successfully.
* Regular on-site supervision by a dedicated Project
Manager which monitors contractor performance and
identifies any problems at an early stage thereby
enabling remedial action to be taken.
* Performance bonds are sought if considered necessary.
* Our main contractors are responsible, and assume the
risk, for any subcontractor default.
12. Shortage of key staff
The Group is unable to successfully implement * The Nomination Committee considers succession matters
its strategy due to a failure to recruit and at Board level as a standing agenda item.
retain key staff with appropriate skills and/or
inadequate succession planning.
* Senior management succession is considered during the
The Board considers this risk to have remained five-year strategic reviews.
broadly the same during the year.
* Remuneration packages for all employees are
benchmarked regularly.
* Six-monthly performance appraisals identify training
requirements and career aspirations.
13. Terrorism or other business interruption
Elevated to a new principal risk due to recent
attacks in European capital cities. * The Group has comprehensive business continuity and
incident management procedures both at Group level
New principal risk and for each of our managed buildings which are
regularly reviewed and tested.
* Fire protection and access/security procedures are in
place at all of our managed properties.
* Comprehensive property damage and business
interruption insurance which includes terrorism.
* At least annually, a fire risk assessment and health
and safety inspection is performed for each property
in our managed portfolio.
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 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 GBP0.3m (2016:
GBP0.2m) or a decrease of GBP0.3m (2016: GBP0.2m).
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 2017, the proportion of fixed debt held
by the Group was slightly above this range at 88% (2016: 95%).
During both 2017 and 2016, 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 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 2017, the Group's strategy, which was unchanged from
2016, 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.
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 the Group's
position, performance, business model and strategy.
Each of the Directors confirms 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 and
loss 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
27 February 2018
GROUP INCOME STATEMENT
2017 2016
Note GBPm GBPm
Gross property and other income 5 202.6 193.7
----------------------------------------------------------- ---- ------- ------
Net property and other income 5 164.8 149.2
Administrative expenses (28.2) (30.9)
Revaluation surplus/(deficit) 11 147.9 (37.1)
Profit on disposal of investment property 6 50.3 7.5
Profit from operations 334.8 88.7
Finance costs 7 (27.1) (27.8)
Movement in fair value of derivative financial instruments 9.4 0.3
Financial derivative termination costs 8 (7.3) (9.0)
Share of results of joint ventures 9 5.0 2.3
Profit before tax 314.8 54.5
Tax charge 10 (1.8) (0.9)
Profit for the year 313.0 53.6
Attributable to:
- Equity shareholders 314.0 58.7
- Non-controlling interest (1.0) (5.1)
313.0 53.6
Earnings per share 22 281.79p 52.73p
Diluted earnings per share 22 281.12p 52.59p
GROUP STATEMENT OF COMPREHENSIVE INCOME
2017 2016
Note GBPm GBPm
Profit for the year 313.0 53.6
Actuarial losses on defined benefit pension scheme (0.9) (2.1)
Revaluation surplus/(deficit) of owner-occupied property 11 1.8 (5.5)
Deferred tax (charge)/credit on revaluation 18 (0.7) 1.3
-------------------------------------------------------------------------------- ----- ----- -----
Other comprehensive income/(expense) that will not be reclassified to profit or loss 0.2 (6.3)
Total comprehensive income relating to the year 313.2 47.3
Attributable to:
- Equity shareholders 314.2 52.4
- Non-controlling interest (1.0) (5.1)
313.2 47.3
GROUP BALANCE SHEET
2017 2016
Note GBPm GBPm
Non-current assets
Investment property 11 4,670.7 4,803.8
Property, plant and equipment 12 52.2 38.1
Investments 13 39.7 36.0
Other receivables 14 105.2 109.1
4,867.8 4,987.0
Current assets
Trading property 11 25.3 11.7
Trade and other receivables 15 58.0 38.5
Cash and cash equivalents 20 87.0 17.7
170.3 67.9
Total assets 5,038.1 5,054.9
Current liabilities
Trade and other payables 16 86.7 110.0
Corporation tax liability 2.1 1.6
Provisions 0.2 0.4
89.0 112.0
Non-current liabilities
Borrowings 17 744.9 922.5
Derivative financial instruments 17 7.9 17.3
Provisions 0.4 0.3
Pension scheme deficit 0.4 0.3
Deferred tax 18 2.3 3.1
755.9 943.5
Total liabilities 844.9 1,055.5
Total net assets 4,193.2 3,999.4
Equity
Share capital 5.6 5.6
Share premium 189.2 188.4
Other reserves 942.9 950.4
Retained earnings 2,990.6 2,787.9
Equity shareholders' funds 4,128.3 3,932.3
Non-controlling interest 64.9 67.1
Total equity 4,193.2 3,999.4
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 2017 5.6 188.4 950.4 2,787.9 3,932.3 67.1 3,999.4
Profit/(loss) for the
year - - - 314.0 314.0 (1.0) 313.0
Other comprehensive
income/(expense) - - 1.1 (0.9) 0.2 - 0.2
Transfer of
owner-occupied
property - - (6.9) 6.9 - - -
Share-based payments - 0.8 (1.7) 2.8 1.9 - 1.9
Dividends paid - - - (120.1) (120.1) (1.2) (121.3)
At 31 December 2017 5.6 189.2 942.9 2,990.6 4,128.3 64.9 4,193.2
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
GROUP CASH FLOW STATEMENT
2017 2016
Note GBPm GBPm
Operating activities
Property income 154.3 147.1
Property expenses (19.2) (18.0)
Cash paid to and on behalf of employees (19.5) (21.8)
Other administrative expenses (7.3) (5.6)
Interest paid 7 (21.7) (22.0)
Other finance costs 7 (3.2) (2.3)
Other income 2.9 2.4
Tax paid in respect of operating activities (2.8) (2.1)
Net cash from operating activities 83.5 77.7
Investing activities
Acquisition of investment properties (8.5) (18.0)
Capital expenditure on the property portfolio 7 (165.0) (213.5)
Disposal of investment and trading properties 472.9 224.7
Investment in joint ventures - (3.0)
Repayment of shareholder loan 1.3 -
Purchase of property, plant and equipment (5.0) (4.5)
VAT (paid)/received (11.7) 4.8
Net cash from/(used in) investing activities 284.0 (9.5)
Financing activities
Net movement in revolving bank loans (170.8) (103.9)
Drawdown of private placement notes - 104.3
Financial derivative termination costs (7.3) (9.0)
Net proceeds of share issues 0.8 1.0
Dividends paid to non-controlling interest holder (1.2) (0.8)
Dividends paid 19 (119.7) (48.6)
Net cash used in financing activities (298.2) (57.0)
Increase in cash and cash equivalents in the year 69.3 11.2
Cash and cash equivalents at the beginning of the year 17.7 6.5
Cash and cash equivalents at the end of the year 20 87.0 17.7
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 2017 or
the year ended 31 December 2016, but is derived from those
accounts. The Group's statutory accounts for 2016 have been
delivered to the Registrar of Companies and those for 2017 will be
delivered following the Company's Annual General Meeting. The
Auditor's reports on both the 2016 and 2017 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 IC interpretations and with those parts
of the Companies Act 2006 applicable to companies reporting under
IFRS. The financial statements have been prepared under the
historical cost convention as modified by the revaluation of
investment properties, property, plant and equipment, 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 current and forecast risks included on the Group's risk
register that could impact on the Group's liquidity and solvency
over the next 12 months from the date of signing.
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 2016, 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 2017 year end and had no material impact on the financial
statements.
IAS 7 (amended) - Statement of Cash Flows;
IAS 12 (amended) - Income Taxes;
IFRS 12 - Disclosures of Interests in Other Entities.
Standards 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;
IAS 40 (amended) - Investment Property;
IFRS 17 - Insurance Contracts;
IFRIC 22 - Foreign Currency Transactions and Advance
Consideration;
IFRIC 23 - Uncertainty over Income Tax Treatments;
Annual Improvements to IFRSs (2014 - 2016 cycle).
In addition to the above, IFRS 9 Financial Instruments, IFRS 15
Revenue from Contracts with Customers and IFRS 16 Leases were in
issue at the date of approval of these condensed consolidated
financial statements but were not yet effective for the current
accounting period and have not been adopted early.
IFRS 9 Financial Instruments (effective from 1 January 2018)
This standard applies to classification and measurement of
financial assets and financial liabilities, impairment provisioning
and hedge accounting. The Group's assessment of IFRS 9 determined
that the main area of potential impact was impairment provisioning
on trade receivables, given the requirement to use a
forward-looking expected credit loss model. However, the Group
considers that this will not have a material impact on its
financial statements.
IFRS 15 Revenue from Contracts with Customers (effective from 1
January 2018)
IFRS 15 combines a number of previous standards, setting out a
five step model for the recognition of revenue and establishing
principles for reporting useful information to users of financial
statements about the nature, amount, timing and uncertainty of
revenue. The standard is applicable to service charge income,
facilities management income, investment property disposals and
trading property disposals, but excludes rent receivable, which is
within the scope of IFRS 16. The Group has completed its assessment
of IFRS 15 and considers that its adoption will not have a material
impact on the financial statements.
IFRS 16 Leases (effective 1 January 2019)
This standard does not substantially affect the accounting for
rental income earned by the Group as lessor. The main impact of the
standard is the removal of the distinction between operating and
finance leases for lessees, which will result in almost all leases
being recognised on the balance sheet. As the Group does not hold
any material operating leases as lessee, the impact of the standard
is not expected to be material to the financial statements.
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.
Key sources of estimation uncertainty
- Property portfolio valuation.
- Borrowings and derivatives.
Significant judgments
- Compliance with the real estate investment trust (REIT)
taxation regime.
A full explanation of these policies is included in the 2017
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 five
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 97%
office buildings(1) by value at 31 December 2017 (2016: 95%). The
Directors consider that these individual properties have similar
economic characteristics and therefore have been aggregated into a
single operating segment. The remaining 3% (2016: 5%) 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).
(1) Some office buildings have an ancillary element such as
retail or residential.
Gross property income
2017 2016
----------------------------------- --------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 79.4 0.4 79.8 81.4 4.2 85.6
West End borders 18.4 - 18.4 17.2 - 17.2
City borders 69.0 0.2 69.2 48.0 0.2 48.2
Provincial - 4.8 4.8 - 5.0 5.0
166.8 5.4 172.2 146.6 9.4 156.0
A reconciliation of gross property income to gross property and other income is given in note
5.
Property portfolio
2017 2016
--------------------------------------- ----------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 2,356.8 42.2 2,399.0 2,531.5 141.1 2,672.6
West End borders 439.3 - 439.3 408.3 - 408.3
City borders 1,799.1 6.5 1,805.6 1,665.4 6.4 1,671.8
Provincial - 98.6 98.6 - 97.0 97.0
4,595.2 147.3 4,742.5 4,605.2 244.5 4,849.7
Fair value
West End central 2,394.9 43.7 2,438.6 2,573.9 142.1 2,716.0
West End borders 459.7 - 459.7 426.5 - 426.5
City borders 1,844.4 6.4 1,850.8 1,693.6 6.3 1,699.9
Provincial - 101.2 101.2 - 100.3 100.3
4,699.0 151.3 4,850.3 4,694.0 248.7 4,942.7
A reconciliation between the fair value and carrying value of the portfolio is set out in
note 11.
5. Property and other income
2017 2016
GBPm GBPm
Gross rental income 172.1 155.4
Surrender premiums received 0.1 0.1
Other property income - 0.5
Gross property income 172.2 156.0
Trading property sales proceeds - 12.5
Service charge income 27.7 22.8
Other income 2.7 2.4
Gross property and other income 202.6 193.7
Gross rental income 172.1 155.4
Ground rent (0.7) (0.7)
---------------------------------------------------------- ------ ------
Service charge income 27.7 22.8
Service charge expenses (29.6) (24.1)
---------------------------------------------------------- ------ ------
(1.9) (1.3)
Other property costs (8.4) (7.5)
Net rental income 161.1 145.9
---------------------------------------------------------- ------ ------
Trading property sales proceeds - 12.5
Trading property cost of sales - (10.6)
---------------------------------------------------------- ------ ------
Profit on trading property disposals - 1.9
Reversal of write-down/(write-down) of trading property 1.0 (1.6)
Other property income - 0.5
Other income 2.7 2.4
Surrender premiums received 0.1 0.1
Reverse surrender premiums (0.2) (0.1)
Dilapidation receipts 0.1 0.1
Net property and other income 164.8 149.2
Rental income included GBP17.1m (2016: GBP10.3m) relating to
rents recognised in advance of cash receipts.
In 2017 and 2016, other income 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
2017 2016
GBPm GBPm
Gross disposal proceeds 486.3 210.6
Costs of disposal (3.5) (2.6)
Net disposal proceeds 482.8 208.0
Carrying value (418.9) (198.8)
Adjustment for lease costs and rents recognised in advance (19.2) (1.7)
Adjustment for capital contributions (4.2) -
Adjustment for headlease liability 9.8 -
Profit on disposal of investment property 50.3 7.5
Included within profit on disposal is GBP14.6m relating to the
sale of 132-142 Hampstead Road NW1 in March 2017 and GBP24.9m
relating to the sale of The Copyright Building W1 in November 2017.
In addition, gross disposal proceeds reflect GBP5.0m of accrued
overage in relation to Riverwalk House SW1, which was originally
sold in 2012.
7. Finance costs
2017 2016
GBPm GBPm
Finance costs
Bank loans and overdraft 5.9 11.8
Non-utilisation fees 1.8 1.2
Unsecured convertible bonds 3.8 3.8
Secured bonds 11.4 11.4
Unsecured private placement notes 8.3 7.0
Secured loan 3.3 3.3
Amortisation of issue and arrangement costs 2.0 2.2
Amortisation of the fair value of the secured bonds (1.1) (1.0)
Finance lease costs 1.0 1.0
Other 0.1 0.1
Gross interest costs 36.5 40.8
Less: interest capitalised (9.4) (13.0)
Finance costs 27.1 27.8
Finance costs of GBP9.4m (2016: GBP13.0m) have been capitalised
on development projects, in accordance with IAS 23 Borrowing Costs,
using the Group's average cost of borrowings during each quarter.
Total finance costs paid to 31 December 2017 were GBP34.3m (2016:
GBP37.3m) of which GBP9.4m (2016: GBP13.0m) was included in capital
expenditure on the property portfolio in the Group cash flow
statement under investing activities.
8. Financial derivative termination costs
The Group incurred costs of GBP7.3m in the year to 31 December
2017 (2016: GBP9.0m) deferring, re-couponing or terminating
interest rate swaps.
9. Share of results of joint ventures
2017 2016
GBPm GBPm
Revaluation surplus 3.9 1.8
Other profit from operations after tax 1.1 0.5
5.0 2.3
See note 13 for further details on the Group's joint
ventures.
10. Tax charge
2017 2016
GBPm GBPm
Corporation tax
UK corporation tax and income tax in respect of profit for the year 4.0 1.9
Other adjustments in respect of prior years' tax (0.7) 0.1
Corporation tax charge 3.3 2.0
Deferred tax
Origination and reversal of temporary differences (1.2) (0.9)
Adjustment for changes in estimates (0.3) (0.2)
Deferred tax credit (1.5) (1.1)
Tax charge 1.8 0.9
In addition to the tax charge of GBP1.8m (2016: GBP0.9m) that
passed through the Group income statement, a deferred tax charge of
GBP0.7m (2016: credit of GBP1.3m) 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 2017 is lower (2016: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2017 2016
GBPm GBPm
Profit before tax 314.8 54.5
------ -----
Expected tax charge based on the standard rate of
corporation tax in the UK of 19.25% (2016: 20.00%)(1) 60.6 10.9
Difference between tax and accounting profit on disposals (9.8) (1.2)
REIT exempt income (10.8) (7.8)
Revaluation (surplus)/deficit attributable to REIT properties (27.4) 7.2
Expenses and fair value adjustments not allowable for tax purposes (4.4) (2.8)
Capital allowances (4.2) (5.3)
Other differences (1.5) (0.2)
Tax charge on current year's profit 2.5 0.8
Adjustments in respect of prior years' tax (0.7) 0.1
Tax charge 1.8 0.9
(1) 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 then 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 2017 3,959.9 843.9 4,803.8 34.2 11.7 4,849.7
---------------------------------------- -------- --------- ---------- -------- -------- ---------
Acquisitions 0.8 - 0.8 - 7.8 8.6
Capital expenditure 73.3 62.7 136.0 2.3 4.7 143.0
Interest capitalisation 4.7 4.6 9.3 - 0.1 9.4
---------------------------------------- -------- --------- ---------- -------- -------- ---------
Additions 78.8 67.3 146.1 2.3 12.6 161.0
Disposals (298.2) (120.7) (418.9) - - (418.9)
Transfers (8.2) - (8.2) 8.2 - -
Revaluation 134.7 13.2 147.9 1.8 - 149.7
Reversal of write-down of trading
property - - - - 1.0 1.0
At 31 December 2017 3,867.0 803.7 4,670.7 46.5 25.3 4,742.5
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
Adjustments from fair value to carrying value
At 31 December 2017
Fair value 3,968.6 808.6 4,777.2 46.5 26.6 4,850.3
Revaluation of trading property - - - - (1.3) (1.3)
Lease incentives and costs
included in receivables (101.6) (19.0) (120.6) - - (120.6)
Grossing up of headlease liabilities - 14.1 14.1 - - 14.1
Carrying value 3,867.0 803.7 4,670.7 46.5 25.3 4,742.5
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
Reconciliation of fair value
2017 2016
GBPm GBPm
Portfolio including the Group's share of joint ventures 4,897.6 4,980.5
Less: joint ventures (47.3) (37.8)
IFRS property portfolio 4,850.3 4,942.7
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2017 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 GBP4,817.5m (2016:
GBP4,910.7m) and other valuers at GBP32.8m (2016: GBP32.0m), giving
a combined value of GBP4,850.3m (2016: GBP4,942.7m). Of the
properties revalued by CBRE, GBP46.5m (2016: GBP34.2m) relating to
owner-occupied property was included within property, plant and
equipment and GBP26.6m (2016: GBP11.7m) was in relation to trading
property.
The total fees, including the fee for this assignment, earned by
CBRE (or other companies forming part of the same group of
companies within the UK) from the Group is less than 5.0% of their
total UK revenues.
During the year ended 31 December 2016, the Group transferred,
at market value, a property previously held for investment to
trading property as it was being developed for sale. 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. In 2016 the net
realisable value of this property was lower than its cost which
resulted in a GBP1.6m write-down. An increase in the net realisable
value in 2017 resulted in a write back of this adjustment. In
addition, in 2017, there was a write-down of GBP0.6m on another
trading property that was acquired in the year.
Reconciliation of revaluation surplus/(deficit)
2017 2016
GBPm GBPm
Total revaluation surplus/(deficit) 177.1 (20.9)
Less:
Share of joint ventures (4.9) (1.8)
Lease incentives and costs (20.2) (21.5)
Trading property revaluation surplus (1.3) -
IFRS revaluation surplus/(deficit) 150.7 (44.2)
Reported in the:
Revaluation surplus/(deficit) 147.9 (37.1)
Reversal of write-down/(write-down) of trading property 1.0 (1.6)
Group income statement 148.9 (38.7)
Group statement of comprehensive income 1.8 (5.5)
150.7 (44.2)
Historic cost
2017 2016
GBPm GBPm
Investment property 2,697.0 2,838.5
Owner-occupied property 19.8 14.1
Trading property 33.0 18.4
Total property portfolio 2,749.8 2,871.0
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2017 34.2 1.5 2.4 38.1
Additions 2.3 0.1 2.6 5.0
Disposals - - (0.2) (0.2)
Depreciation - - (0.7) (0.7)
Transfers 8.2 - - 8.2
Revaluation 1.8 - - 1.8
At 31 December 2017 46.5 1.6 4.1 52.2
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
Net book value
Cost or valuation 46.5 1.6 5.9 54.0
Accumulated depreciation - - (1.8) (1.8)
At 31 December 2017 46.5 1.6 4.1 52.2
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
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
2017 was GBP1.6m (2016: 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.
2017 2016
GBPm GBPm
At 1 January 36.0 30.7
Additions - 3.0
Repayment of shareholder loan (1.3) -
Share of results of joint ventures (see note 9) 5.0 2.3
At 31 December 39.7 36.0
14. Other receivables (non-current)
2017 2016
GBPm GBPm
Prepayments and accrued income 105.2 105.4
Other - 3.7
105.2 109.1
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 GBP15.4m (2016: GBP11.5m), which was included
as current assets within trade and other receivables, these amounts
totalled GBP120.6m at 31 December 2017 (2016: GBP116.9m).
15. Trade and other receivables
2017 2016
GBPm GBPm
Trade receivables 7.1 5.1
Other receivables 6.8 2.7
Prepayments 17.3 15.5
Other taxes 4.6 -
Accrued income 22.2 15.2
58.0 38.5
16. Trade and other payables
2017 2016
GBPm GBPm
Trade payables 2.0 2.0
Other payables 17.8 16.7
Other taxes - 6.5
Accruals 27.1 45.9
Deferred income 39.8 38.9
86.7 110.0
17. Borrowings and derivative financial instruments
2017 2016
------------- ---------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Non-current liabilities
1.125% unsecured convertible bonds 2019 145.6 158.3 142.9 152.4
6.5% secured bonds 2026 186.9 225.6 187.9 225.6
3.46% unsecured private placement notes 2028 29.8 31.0 29.8 30.8
4.41% unsecured private placement notes 2029 24.8 29.3 24.8 28.8
3.57% unsecured private placement notes 2031 74.5 76.4 74.5 75.6
4.68% unsecured private placement notes 2034 74.3 91.8 74.3 88.5
3.99% secured loan 2024 81.7 87.9 82.1 88.2
Unsecured bank loans 85.6 89.0 254.3 259.5
Secured bank loans 27.6 28.0 28.0 28.0
Leasehold liabilities 14.1 14.1 23.9 23.9
Borrowings 744.9 831.4 922.5 1,001.3
Derivative financial instruments expiring in
greater than one year 7.9 7.9 17.3 17.3
Total borrowings and derivative financial instruments 752.8 839.3 939.8 1,018.6
Reconciliation to net debt:
Borrowings and derivative financial instruments 752.8 939.8
Less:
Derivative financial instruments (7.9) (17.3)
Cash and cash equivalents (87.0) (17.7)
Net debt 657.9 904.8
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 were 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 2017 or 2016.
18. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2017 5.3 (2.2) 3.1
Credited to the income statement (1.0) (0.2) (1.2)
Change in tax rates in the income statement (0.5) 0.2 (0.3)
Charged to other comprehensive income 0.8 - 0.8
Change in tax rates in other comprehensive income (0.1) - (0.1)
At 31 December 2017 4.5 (2.2) 2.3
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
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 2017 2016
date p p p GBPm GBPm
Current year
2017 final dividend(1) 8 June 2018 35.00 7.40 42.40 - -
2017 interim dividend 20 October 2017 17.33 - 17.33 19.3 -
------ ------- -----
Distribution of current year profit 52.33 7.40 59.73
Special dividend
2017 special dividend(1) 8 June 2018 - 75.00 75.00 - -
------ ------- -----
Distribution of accumulated profit - 75.00 75.00
Prior year
2016 final dividend 9 June 2017 32.70 5.80 38.50 42.9 -
2016 interim dividend 21 October 2016 13.86 - 13.86 - 15.5
------ ------- -----
Distribution of prior year profit 46.56 5.80 52.36
Special dividend
2016 special dividend 9 June 2017 - 52.00 52.00 57.9 -
------ ------- -----
Distribution of accumulated profit - 52.00 52.00
2015 final dividend 10 June 2016 30.80 - 30.80 - 34.2
------ ------- ----- ----- -----
30.80 - 30.80
Dividends as reported in the
Group statement of changes in equity 120.1 49.7
----- -----
2017 interim dividend withholding tax 14 January 2018 (2.1) -
2016 interim dividend withholding tax 14 January 2017 1.7 (1.7)
2015 final scrip dividend 10 June 2016 - (1.1)
2015 interim dividend withholding tax 14 January 2016 - 1.7
----- -----
Dividends paid as reported in the
Group cash flow statement 119.7 48.6
----- -----
(1) Subject to shareholder approval at the AGM on 18 May
2018.
20. Cash and cash equivalents
2017 2016
GBPm GBPm
Cash at bank 87.0 17.7
21. Post balance sheet events
Crossrail completed the base infrastructure works at Soho Place
W1 and handed over the site to the Group in January 2018.
In January 2018, Primister Limited, in which the Group is a
joint shareholder, exchanged contracts for the sale of its freehold
interest in Porters North N1 for GBP45.4m before costs, with
completion expected in March 2018.
On 27 February 2018 a special dividend of 75p per share was
proposed, which is subject to shareholder approval at the AGM on 18
May 2018.
22. EPRA performance measures
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
-------------------- ---------------------------
2017 2016 2017 2016
'000 '000 '000 '000
For use in basic measures 111,431 111,315 111,475 111,390
Dilutive effect of share-based payments 267 296 295 291
For use in diluted measures 111,698 111,611 111,770 111,681
The GBP150m unsecured convertible bonds 2019 ('2019 bonds') have
a current conversion price of GBP32.73. The Group recognises the
effect of conversion of the bonds if they are both dilutive and,
based on the share price, likely to convert.
For the years ended 31 December 2017 and 31 December 2016, the
Group did not recognise the dilutive impact of the conversion of
the 2019 bonds on its earnings per share (EPS) or net asset value
(NAV) per share measures as, based on the recent share price, the
bonds were not expected to convert.
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 movement on investment property and in joint
ventures, (reversal of write-down)/write-down of trading property
and associated deferred tax and non-controlling interest
C - Fair value movement and termination costs relating to
derivative financial instruments, associated non-controlling
interest and the dilutive effect of convertible bonds
Earnings and earnings per share
Adjustments EPRA
----------------------
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year ended 31 December 2017
Net property and other income 164.8 - (1.0) - 163.8
Total administrative expenses (28.2) - - - (28.2)
Revaluation surplus 147.9 - (147.9) - -
Profit on disposal of investment property 50.3 (50.3) - - -
Net finance costs (27.1) - - - (27.1)
Movement in fair value of derivative financial instruments 9.4 - - (9.4) -
Financial derivative termination costs (7.3) - - 7.3 -
Share of results of joint ventures 5.0 - (3.9) - 1.1
Profit before tax 314.8 (50.3) (152.8) (2.1) 109.6
Tax charge (1.8) 1.1 (1.5) - (2.2)
Profit for the year 313.0 (49.2) (154.3) (2.1) 107.4
Non-controlling interest 1.0 - (3.8) 0.4 (2.4)
Earnings attributable to equity shareholders 314.0 (49.2) (158.1) (1.7) 105.0
Earnings per share 281.79p 94.23p
Diluted earnings per share 281.12p 94.00p
Adjustments EPRA
----------------------
IFRS A B C basis
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
Net asset value and net asset value per share
Undiluted Diluted
GBPm p p
At 31 December 2017
Net assets attributable to equity shareholders 4,128.3 3,703 3,694
Adjustment for:
Revaluation of trading properties net of tax 1.0
Deferred tax on revaluation surplus 4.5
Fair value of derivative financial instruments 7.9
Fair value adjustment to secured bonds 12.9
Non-controlling interest in respect of the above (1.5)
EPRA net asset value 4,153.1 3,726 3,716
Adjustment for:
Mark-to-market of secured bonds 2026 (50.6)
Mark-to-market of secured loan 2024 (4.9)
Mark-to-market of unsecured private placement notes 2029 and 2034 (21.1)
Mark-to-market of unsecured private placement notes 2028 and 2031 (2.4)
Mark-to-market of 1.125% unsecured convertible bonds 2019 (11.8)
Deferred tax on revaluation surplus (4.5)
Fair value of derivative financial instruments (7.9)
Unamortised issue and arrangement costs (8.6)
Non-controlling interest in respect of the above 1.5
EPRA triple net asset value 4,042.8 3,627 3,617
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
Cost ratios
2017 2016
GBPm GBPm
Administrative expenses 28.2 30.9
Other property costs 8.4 7.5
Dilapidation receipts (0.1) (0.1)
Net service charge costs 1.9 1.3
Service charge costs recovered through rents but not separately invoiced (0.3) (0.3)
Management fees received less estimated profit element (2.7) (2.4)
Share of joint ventures' expenses 0.5 0.5
EPRA costs (including direct vacancy costs) (A) 35.9 37.4
Direct vacancy costs (2.5) (2.5)
EPRA costs (excluding direct vacancy costs) (B) 33.4 34.9
Gross rental income 172.1 155.4
Ground rent (0.7) (0.7)
Service charge components of rental income (0.3) (0.3)
Share of joint ventures' rental income less ground rent 1.8 1.3
Adjusted gross rental income (C) 172.9 155.7
EPRA cost ratio (including direct vacancy costs) (A/C) 20.8% 24.0%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 19.3% 22.4%
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) 4,850.3 4,942.7
Portfolio cost ratio (A/D) 0.7% 0.8%
The Group has not capitalised any overhead or operating expenses
in either 2017 or 2016.
23. Gearing and interest cover
NAV gearing
2017 2016
GBPm GBPm
Net debt 657.9 904.8
Net assets 4,193.2 3,999.4
NAV gearing 15.7% 22.6%
Loan-to-value ratio
2017 2016
GBPm GBPm
Net debt 657.9 904.8
Fair value adjustment of secured bonds (12.9) (14.0)
Unamortised issue and arrangement costs 8.6 10.3
Leasehold liabilities (14.1) (23.9)
Drawn debt 639.5 877.2
Fair value of property portfolio 4,850.3 4,942.7
Loan-to-value ratio 13.2% 17.7%
Net interest cover ratio
2017 2016
GBPm GBPm
Net property and other income 164.8 149.2
Adjustments for:
Other income (2.7) (2.4)
Other property income - (0.5)
Net surrender premiums received (0.1) (0.1)
(Reversal of write-down)/write-down of trading property (1.0) 1.6
Profit on disposal of trading properties - (1.9)
Reverse surrender premiums 0.2 0.1
Adjusted net property income 161.2 146.0
Finance costs 27.1 27.8
Adjustments for:
Other finance costs (0.1) (0.1)
Amortisation of fair value adjustment to secured bonds 1.1 1.0
Amortisation of issue and arrangement costs (2.0) (2.2)
Finance costs capitalised 9.4 13.0
Net interest payable 35.5 39.5
Net interest cover ratio 454% 370%
24. Total return
2017 2016
p p
EPRA net asset value on a diluted basis
At end of year 3,716 3,551
At start of year (3,551) (3,535)
Increase 165 16
Dividend per share 108 45
Increase including dividend 273 61
Total return 7.7% 1.7%
25. 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.
EPRA published its latest Best Practices Recommendations in
November 2016. 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.
In addition, the Group has adopted the following recommendation
for investment property reporting.
- 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.
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.
MSCI Inc. (MSCI IPD)
MSCI Inc. 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.
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. These distributions can be
subject to withholding tax at 20%.
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
MSCI 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.
26. 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 87 buildings in a commercial real estate
portfolio predominantly in central London valued at GBP4.9 billion
(including joint ventures) as at 31 December 2017, 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 5.5 million sq ft portfolio include
White Collar Factory EC1, Angel Building EC1, The Buckley Building
EC1, 1-2 Stephen Street W1, Horseferry House SW1 and Tea Building
E1.
In 2017 the Group won the Property Week Developer of the Year
award and EG Offices Company of the Year and won further awards for
RIBA, Civic Trust and BCO and was listed 12th in the Corporate
Knights Global 100 of the world's most sustainable companies. In
2013 Derwent London launched a voluntary Community Fund and has to
date supported 56 community projects in 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 PGUUCPUPRPUQ
(END) Dow Jones Newswires
February 27, 2018 02:01 ET (07:01 GMT)
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