TIDMDLN
RNS Number : 0662R
Derwent London PLC
26 February 2019
Derwent London plc
("Derwent London" / "the Group")
RESULTS FOR THE YEARED 31 DECEMBER 2018
DEVELOPMENT LETTINGS DRIVE PERFORMANCE
Financial highlights
-- Net property and other income GBP185.9m, up 12.8% from GBP164.8m in 2017
-- EPRA(1) earnings of 113.1p per share, up 20.0% from 94.2p in
2017, including surrender premiums and non-recurring property
income
-- Underlying(1) earnings of 99.1p per share, up 5.1% from 94.2p
-- Derwent London delivered a total return of 5.3%:
o EPRA NAV 3,776p per share, up 1.6% after dividends from 3,716p
in December 2017
o Dividends paid 136.5p per share, which includes 75.0p special
paid in June 2018
-- Proposed final dividend raised 10.3% to 46.75p per share from 42.40p in 2017
-- Full year dividend 65.85p per share from 59.73p, up 10.2%
-- We expect the 2019 dividend to grow at a similar rate
-- Net debt increased to GBP956.9m from GBP657.9m in December 2017
-- Interest cover 491%, loan-to-value ratio 17.2%
-- Cash and undrawn facilities GBP274m before GBP250m USPP drawn in January 2019
-- Assigned Fitch corporate credit rating of A- in August 2018
with senior unsecured debt rating of A
Activity and opportunities
-- New lettings totalling GBP26.8m, achieving 4.1% above
December 2017 estimated rental value (ERV)
-- Two on-site developments totalling 623,000 sq ft - now 75%
pre-let, up from 45% one year ago
o Brunel Building W2 - 64% pre-let at December 2018 (now 77%
with balance under offer)
o 80 Charlotte Street W1 - 74% pre-let
-- Potential GBP59.6m to contribute to income after additional capex of GBP133m
-- Two new developments could add GBP30m to ERV on completion
2022, with expected capex of GBP359m
o Soho Place W1 construction contract signed February 2019
o Demolition started at the site of The Featherstone Building
EC1
-- Another 1.6m sq ft of space in the portfolio has regeneration
potential, 14% with planning consent
Portfolio update
-- Portfolio valued at GBP5.2bn - an underlying valuation increase of 2.2%
-- Underlying valuation uplift on developments was 18.0%
-- True equivalent yield of 4.73% - unchanged from December 2017
-- Total property return of 6.0%, ahead of our benchmark index(2) of 5.3%
-- EPRA vacancy rate rose to 1.8% from 1.3% in December 2017, down from 4.2% in June 2018
-- ERV growth of 1.1% in 2018
-- ERV guidance for 2019 +1% to -2%
Board changes at next AGM 17 May 2019 (previously announced)
-- The Hon. Robert Rayne (current Chairman) to retire
-- John Burns (current Chief Executive) to become Non-Executive Chairman
-- Paul Williams to become new Chief Executive
(1) Explanations of how EPRA and underlying figures are derived
from IFRS are shown in note 23
(2) MSCI IPD Central London Offices Quarterly Index
Robbie Rayne, Chairman, commented:
"Derwent London made good progress last year achieving GBP26.8m
of new lettings, a 5.1% increase in underlying earnings and a 20.0%
increase in EPRA EPS, despite continuing political and economic
uncertainty. We propose raising the final dividend 10.3% to 46.75p
per share."
John Burns, Chief Executive, commented:
"Demand for Central London offices remains very active and we
have been able to outperform the market through our development
activities. Our brand of well-designed office space remains
attractive to tenants. With its strong financial position, high
quality portfolio and pipeline of exciting opportunities, this
positions the Group for continued success."
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 register at
www.derwentlondon.com
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
Derwent London continued to make good progress in 2018 despite
prolonged political and economic uncertainty. Against the
background of protracted Brexit negotiations, we have achieved
GBP26.8m of new lettings, a 5.1% increase in underlying earnings to
99.1p per share and a 20.0% increase in EPRA EPS to 113.1p per
share. The EPRA NAV rose 1.6% to 3,776p per share after paying out
dividends of 136.5p. Our financial strength was recognised when we
were assigned a corporate credit rating of A- by Fitch, and we have
subsequently arranged a GBP250m US private placement, which was
drawn down in January 2019. We adopted the UN Sustainable
Development Goals as part of our reporting process, launched an
internal management and leadership programme and completed our
succession plans.
We propose raising the final dividend 10.3% to 46.75p per share,
taking the full year's dividend to 65.85p per share, an increase of
10.2%. Looking forward, we expect to raise the 2019 dividend at a
similar rate. For the past decade, our average ordinary dividend
growth has been 10.4% per annum and, in addition, we have paid
special dividends totalling 127p per share in the last two
years.
This month is the twelfth anniversary of the merger between
Derwent Valley and London Merchant Securities. I was one of the
architects of this transaction and subsequently became the enlarged
Group's Chairman. I believe that we have more than delivered on our
aspirations, outperforming both the relevant property and equity
indices by a substantial margin. As well as growing the business,
we have enhanced our brand, designing and creating innovative
office space with the flexibility required by today's occupiers,
located in improving areas and at middle market rents.
The Group's sustained performance over many years reflects our
culture and that can only be nurtured through strong leadership.
Derwent London benefits from a talented team, which has been led
from the beginning by its exceptional Chief Executive, John Burns.
It has been my privilege to have worked with him. However, any
achievement can only be measured through its continuing legacy and,
with this objective in mind, the Board has focused on succession
planning with the aim of ensuring a smooth management handover.
In November 2018, it was announced that I will retire at the
next AGM on 17 May 2019 to be succeeded by John Burns as
Non-Executive Chairman. The Board agreed that Paul Williams should
succeed John as Chief Executive. Paul has been a Board member since
1998, having joined Derwent Valley in 1987. He has been an integral
part of the Group's success story. We are pleased by the support
this announcement has received from our shareholders, and it
provides us with the ongoing leadership to take the Group
forward.
After nine years as a Non-Executive Director, Stephen Young will
also be retiring at our next AGM and I would like to thank him for
his considerable contribution to the business. We already have an
excellent replacement in Lucinda Bell, previously Chief Financial
Officer of British Land, who was appointed in January 2019. She
will follow Stephen as chair of the Audit Committee.
Increasingly, we are focusing on the broader impact of our
business on a wider range of stakeholders and we have established a
Responsible Business Committee chaired by Non-Executive Director,
Cilla Snowball. While we believe that we already have some of the
best ESG(1) standards in our industry, we remain committed to
improving them and 2018 saw us raise the bar again. White Collar
Factory EC1 won numerous awards, including RIBA(2) National and
BCO(3) National Innovation awards and 25 Savile Row W1 won a SKA(4)
Gold rating. We have now committed to extending our Community Fund
out to 2021, having completed its first five years in 2018, and we
saw good progress towards achieving our 2027 science-based carbon
targets.
Derwent London has a well located office portfolio and a tried
and tested strategy that is constantly being flexed in response to
the market. We remain dedicated to creating the space that allows
businesses to thrive, as well as benefits both for our investors
and for the communities in which we operate. The long-term success
of this model is dependent on the skills of our people and the
Group's relationships with its many stakeholders.
Finally, I would like to thank all those who have been involved
with Derwent London over many years and to wish the Group
continuing prosperity. I know that there are plenty of
opportunities in the portfolio, and I am very confident that the
leadership team will be able to capitalise on them as well as
adding fresh initiatives of its own.
(1) Environmental, social and governance
(2) Royal Institute of British Architects
(3) British Council for Offices
(4) RICS rating
CHIEF EXECUTIVE'S STATEMENT
The London office market has remained resilient following the
result of the EU referendum over two and a half years ago.
Occupational and investment demand is holding up and London's
economy and workforce continue to grow, although at a slower rate.
Businesses continue to look beyond the short-term uncertainty,
which has created an unusually stable period of rents and values
for the second year in succession. Derwent London has again been
able to outperform the central London office market, benefitting
from its successful development activities, which justifies the
positive decision taken in 2016 to progress with our regeneration
programme.
Despite average rents and values remaining stable, the
underlying market is witnessing a number of dynamic trends as
occupiers are increasingly focused on the impact of their workspace
in attracting and retaining their employees. These trends include
the strength of demand for new space compared to secondhand space,
and occupiers' increasing emphasis on lease flexibility, well-being
and technology. Demand is no longer purely focused just on location
and price. This has seen the proportion of London office space
occupied by flexible office providers increase from 3% to 5% in
recent years. Meanwhile, in the investment market, the strongest
demand remains for properties on longer leases.
Our development at Brunel Building W2 has seen excellent demand
with the majority of its space let for a minimum of 12 years before
breaks. Some of our smaller spaces in Clerkenwell have been let as
fully fitted flexible units on simplified shorter leases. White
Collar Factory EC1, as well as winning numerous architectural
awards, has also won the NLA well-being award. Additionally, the
asset management team has had a busy 2018, extending a number of
existing leases on our portfolio, notably creating a new 20-year
lease for Burberry at Horseferry House SW1.
We are well positioned to respond to market conditions,
reflecting the multiple skills of our team as well as the Group's
portfolio and financial structure. Our properties are predominantly
income-producing, let off middle market rents, with plenty of
opportunities to add value through both management initiatives and
regeneration. Our business is underpinned by prudent financing,
giving us the freedom to pursue our strategies at our own timing.
We vary development exposure by accelerating or slowing the
pipeline depending on the letting success of our current projects
and our market view. The overall portfolio balance is maintained by
disposing of assets where we have maximised the growth and
re-investing the proceeds into new opportunities.
From the outset, Derwent London has been passionate about the
buildings it creates. We listen to our occupiers which means that,
for many years, we have tried to create the most flexible internal
space possible and offered communal break-out space and amenities
in our multi-let buildings to help create a positive experience.
The Group likes to remain innovative and uses a range of materials
to provide the most practical, sustainable and aesthetic buildings.
Our designs consider a building's impact on the environment and the
local community, not just during construction but for the
long-term. We do not do this alone but collaborate with specialists
who we believe are the best in their field. No Derwent London
refurbishment or redevelopment is the same, but all aim to be of
the highest quality with a long-lasting positive impact.
The portfolio retains considerable reversionary potential,
totalling GBP114.9m. Nearly half of this growth is already
contracted and largely accounted for in the Group's earnings per
share, which leaves GBP59.6m, subject to rental incentives, still
to benefit our earnings. This will require another GBP133m of
capital expenditure. We are enhancing this potential income growth
in 2019 with our next major developments: Soho Place W1 and The
Featherstone Building EC1. These two well-located projects will be
major beneficiaries from the opening of the Elizabeth line (now
expected in 2020) and have a combined ERV of GBP30m. They are
expected to require an additional GBP359m of capital expenditure,
including the deferred land purchase payable to Crossrail on
completion of Soho Place. These projects will extend our
development programme out to 2022.
While we have made no significant acquisitions recently, 29% of
our existing portfolio, in addition to our current projects, holds
substantial potential for major regeneration. This includes two
West End schemes, which already have 'resolutions to grant'
planning permission, totalling 443,000 sq ft. Both could start by
2022 thereby extending our development programme out to 2025.
After thirty-five years as Chief Executive, I will be stepping
down at this year's AGM to become Non-Executive Chairman. It has
been a privilege to lead and watch the business grow from total
assets of only GBP1.1m in 1984 to the sizeable operation it is
today. From the start, I have been able to work with outstanding
colleagues. In particular, Simon Silver's design flair and
attention to detail has been so important to the Group's reputation
for providing special buildings which has become part of our DNA. I
am delighted that he is continuing to play his valuable role within
the Group.
The merger with London Merchant Securities in 2007 proved a
pivotal moment, doubling the size of the Group and providing a rich
seam of opportunities which are still delivering for us today.
During my tenure, I have benefitted from the advice of two
exemplary Chairmen: first, John Ivey and, subsequent to the merger,
Robbie Rayne. Robbie will retire at this year's AGM. I am most
grateful for his considered advice and wish him well with his other
business and charitable interests.
Derwent London has an excellent team with a broad range of
expertise and experience and we have continued to invest in the
talent pool through our 'Fit for the Future' programme. Our
business is supported by strong relationships with our occupiers,
advisers and other stakeholders. Together, we have established a
brand recognised for its cutting-edge design, providing the spaces
and services needed by today's businesses. I would like to thank
all who have been involved in Derwent London's remarkable journey
so far, especially my colleagues and family for their support.
Outlook
Making any short-term prediction today is difficult with so many
major political decisions unresolved. Longer term, we remain
confident about London's prospects and its status as a global city.
This belief, shared with many other businesses, continues to
support occupier demand. Assuming demand is maintained, we expect
the London office market will follow a similar pattern to last year
so, for 2019, we estimate our ERV growth at +1% to -2%, with stable
investment yields. Our strong financial position means that, were
London offices to suffer an unexpected downturn, we would be poised
to take advantage of any opportunities that might occur.
With its unique portfolio offering a very strong pipeline of
potential projects, I am confident that Derwent London will
continue to prosper under the future leadership of Paul Williams.
Enhanced by its regeneration skills and the financial strength to
invest when opportunities present themselves, this will ensure that
the Group continues to deliver great buildings backed up by equally
strong returns.
CENTRAL LONDON OFFICE MARKET
The London office market is not following the typical cyclical
pattern that it has experienced over the last 30 years. Investment
yields have remained firm even though rental growth has slowed.
Occupational demand and investment turnover is good, and vacancy
levels below average. Interest rates remain close to historical
lows. Normally these market fundamentals might be expected to lead
to rental growth but the continuing political uncertainty is
providing a brake. Property yields, although low, remain attractive
against comparable European cities and other asset classes.
However, the current political and economic backdrop has meant that
occupiers remain discerning over product and disciplined when
committing to new occupational costs. These trends are playing to
our strengths.
Central London office take-up rose 2.2% in 2018 to 13.7m sq ft,
which was 7.2% above the long-term average. Demand remains
dominated by business services (27%), creatives (23%) and financial
services (19%). During the year, the central London office vacancy
rate rose 0.4% to 4.6%, but is below the long-term average of 5.1%.
City vacancy rose to 5.4%, while West End vacancy was broadly
unchanged at 3.3%. There is 3.3m sq ft of office space under offer,
which is the highest year end level since 1999.
Underlying these figures is a dynamic office market. When
considering office space, corporate occupiers are increasingly
valuing the expected impact on their employees and customers ahead
of the traditional focus on cost efficiencies. In our own business
this is reflected in the increased use of non-financial measures in
our reporting. This shift may explain why new space is letting much
faster than secondhand space, and the continuing expansion of the
serviced office providers. CBRE report that the availability of
secondhand space has been rising steadily since late 2015, so that
in Q4 2018 it represented 70% of total availability, and 40% of
this (c.4m sq ft) is tenant controlled or 'grey' space. This
background suggests that unimproved older space is set to lag the
market.
The positive outlook for new space is supported by supply having
remained relatively subdued this cycle, and the pre-letting of a
high proportion of space under construction. In 2018, 4.6m sq ft of
new space was delivered, which was 21% below 2017. This year,
supply is expected to pick up with 6.6m sq ft due for completion,
of which 57% is pre-let. Overall, there is currently 13.3m sq ft
under construction for delivery in the next three years, of which
54% has been pre-let. This leaves c.6m sq ft potentially available
or under 3% of the total market. Of this availability, only 20% is
located in the West End.
The investment market remained liquid in 2018, with transactions
totalling GBP17.6bn, which was 10% ahead of 2017. Once again the
market was led by a number of large deals notably in the City, and
dominated by overseas purchasers with a focus on long-term income
streams. At the beginning of 2019, CBRE estimated that there was
GBP34bn of equity targeting London office property, which was
approximately ten times the GBP3.3bn that was available on the
market at that date.
VALUATION
The Group's investment portfolio was valued at GBP5.2bn at 31
December 2018. The valuation surplus was GBP100.2m, which after
accounting adjustments of GBP16.3m (see note 11) is a reported
surplus of GBP83.9m. This reflects an underlying valuation increase
of 2.2% (3.9% in 2017) and an outperformance against our
benchmarks: the MSCI IPD Index for Central London Offices of 1.8%
and 1.4% for the wider MSCI IPD UK All Property Index. By location,
our central London properties, 98% of the portfolio, were up 2.4%,
with the West End at 2.3% and the City borders, principally the
Tech Belt, at 2.6%. The balancing 2% of the portfolio is our
non-core Scottish holdings, and these declined 8.0%, due to the
weak retail market.
The principal contribution to the valuation uplift came from our
two on-site developments, with the underlying portfolio producing a
more modest 0.4%. Brunel Building W2 and 80 Charlotte Street W1 saw
excellent progress both on delivery and pre-lettings. Valued at
GBP618.8m, these were up 18.0% after allowing for capital
expenditure. At Brunel Building the structure and cladding are
complete, with building delivery scheduled for H1 2019. We
commenced marketing in February and by the end of the year 64% of
the space had been pre-let (now 77%). At 80 Charlotte Street, which
had been predominantly pre-let in 2017, there was also good
construction progress and delivery is scheduled for 2020.
On an EPRA basis the portfolio's initial yield was 3.4% and
unchanged over the year. The 'topped-up' yield, after the expiry of
rent free periods and contractual rental uplifts, increased from
4.4% to 4.6%, following our asset management actions increasing net
rents. The true equivalent yield remained at 4.73%, however this
represented a 3 basis point rise in the second half, a reversal of
the tightening in the first half.
As evidenced by our strong lettings, London remains active,
however rental growth has generally levelled off, a market trend
since 2016. Our EPRA ERV was up 1.1% compared to 1.7% in 2017.
While the development team had one of its busiest years, our
asset managers were also very active, focusing on maintaining our
low vacancy rate, locking in reversion, building out income and
managing lease dates for our future developments. There is more
detail in the Asset Management section. Several properties added
long-term value through significantly extended lease lengths,
thereby building in longer sustainable cashflows. These helped to
take our portfolio's average weighted lease length, including
rent-free periods and pre-lets, over the year from 7.8 to 8.2
years. However, as part of these initiatives, rent-free incentives
were granted, which initially impact value. Overall, our portfolio
activities translated to a 6.0% total property return in 2018 (8.0%
in 2017). This was above the 5.3% MSCI IPD Total Return Index for
Central London Offices and in line with the 6.0% for UK All
Property.
Our year end annualised contracted rent stood at GBP159.5m with
the portfolio's ERV of GBP274.4m, representing GBP114.9m of
reversionary potential. Within this, GBP55.3m is contracted under
existing leases from the expiry of rent-free periods and fixed
uplifts. This is already accounted for in our income statement
under the IFRS accounting treatment. Future growth is expected to
come from our development pre-lets of GBP31.9m, and there is a
further GBP16.6m from letting space, either available to occupy or
under construction. Of this, 65% is the balance of the on-site
developments, and we have already let some of this space since the
year end. The GBP11.1m final component of the reversion comes from
achieving market rents at future lease events on the existing
portfolio.
Looking forward, our reversion has been further enhanced with
the commencement this year of the next two major developments: Soho
Place W1 and The Featherstone Building EC1. These vacant sites,
which were valued at GBP85.2m, could add GBP30.0m of rental income
to the portfolio post development. Further details, including the
associated costs to complete, are provided in the Development
section.
ASSET MANAGEMENT AND INVESTMENT ACTIVITY
In 2018, we achieved GBP26.8m of new lettings across 427,100 sq
ft, on average 4.1% above December 2017 ERV. By value, open market
lettings represented 90% of the total and these achieved 9.0% above
ERV, with the overall average brought down by a number of
short-term lettings principally to preserve income on 19-35 Baker
Street W1, which we intend to redevelop. Second half activity
proved busier than the first, with 47% of our lettings by value
achieved in the final quarter.
Letting activity 2018
Let Performance against
Dec 17 ERV (%)
Area Income Open market Overall(1)
sq ft GBPm pa
-------- --------- ------------ -----------
H1 130,300 7.8 8.1 8.2
H2 296,800 19.0 9.4 2.5
-------- --------- ------------ -----------
2018 427,100 26.8 9.0 4.1
-------- --------- ------------ -----------
(1) Includes short-term lettings at properties earmarked for
redevelopment
New lettings included the five pre-lets at Brunel Building W2,
which totalled GBP11.3m and were on average 15% above December 2017
ERV. We also achieved this level of growth on the pre-let of the
office space at Asta House, part of our 80 Charlotte Street W1
project. Other major transactions include two floors at 1-2 Stephen
Street W1, all the available space at 25 Savile Row W1 and one
floor at Johnson Building EC1 (see table below for details).
Principal lettings 2018
Office Total Rent
Area rent annual Lease Lease free
sq GBP rent term break equivalent
Property Tenant ft psf GBPm Years Year Months
Brunel Building Various
W2 (5) 155,100 72.90 11.3 10-15 10-12 20-32
Metropolitan
Johnson Building Housing
EC1 Trust 22,200 62.50 1.4 10 - 21
Angel Building
EC1 Expedia 17,100 62.50 1.1 11.5 - 0
1 Stephen Street
W1 Odeon 11,100 75.00 0.8 10 - 18
Holden House
W1 retail Clarks 2,900 - 0.8 10 2 8
Tea Building Newell
E1 Rubbermaid 13,200 57.20 0.8 5 - 9
12, plus
25 Savile Row Alken Asset 10 if
W1 Management 6,900 102.50 0.7 10 5 no break
12, plus
80 Charlotte Elliott 6 if
St (Asta) W1 Wood 11,000 56.10 0.6 10 5 no break
19-35 Baker
Street W1 Knotel 14,600 41.00 0.6 5 3 9
25 Savile Row Hanover
W1 Investors 5,600 108.00 0.6 10 - 21
45-51 Whitfield
Street W1 Knotel 12,800 48.00 0.6 5.5 3.5 6
12, plus
25 Savile Row Harris 7 if
W1 Williams 6,200 102.50 0.6 10 5 no break
11, plus
Charlotte Building First Quantum 9 if
W1 Minerals 6,800 73.20 0.5 10 5 no break
Howard
19-35 Baker de Walden
Street W1 Estate 18,300 26.30 0.5 2 - 4
--------------- -------- ------- -------- ------- ------- ------------
303,800 68.80 20.9
------------------------------------ -------- ------- -------- ------- ------- ------------
Most of the short-term lettings related to the part of 19-35
Baker Street W1 occupied by House of Fraser. Following going into
administration in 2018, House of Fraser vacated some of their
space, relinquishing the remainder in Q1 2019. All of this space
has been let at a low rent, reflecting a landlord's rolling option
to break from 2021, as we plan to redevelop the building. The Group
has a 55% interest in this property held in a joint venture with
The Portman Estate.
We show our 2018 asset management activity in the table below.
In total it covered 833,000 sq ft (17% of our portfolio by area),
and we increased rents from GBP31.8m to GBP38.3m, which represented
an uplift of 20.4% but was marginally below December 2017 ERV. As
well as agreeing new rents, we lengthened a number of tenures,
notably at Horseferry House SW1 where we extended the term certain
of the lease with Burberry from five to 20 years. We also
introduced fixed uplifts in years five and 10. We extended VCCP's
leases in Greencoat and Gordon House SW1 by five years to 2025, The
Doctors Laboratory lease at 60 Whitfield Street W1 by 13 years to
2042 and FremantleMedia's leases in 1-2 Stephen Street W1 by three
years to 2024 term certain. These regears have the benefit of
increasing and extending core income but required additional
incentives.
Asset management 2018
Area Previous rent New rent Uplift Income vs
000 sq ft GBPm pa GBPm pa % Dec 17 ERV %
Rent reviews 188 6.5 8.0 24.0 2.6
----------- -------------- --------- ------- --------------
Lease renewals 265 12.7 15.3 20.3 -3.6
----------- -------------- --------- ------- --------------
Lease regears 380 12.6 15.0 18.8 -1.2
----------- -------------- --------- ------- --------------
Total 833 31.8 38.3 20.4 -1.4
----------- -------------- --------- ------- --------------
Included in the table above is GBP14.9m of income that was
subject to breaks or expiries in 2018. Of this, 90% was retained or
re-let with 10% remaining vacant at the year end. Our year end
vacancy rate remains low at 1.8%, up from 1.3% a year earlier but
down from 4.2% in June 2018.
Like our development schemes, our managed properties are subject
to some of the highest sustainability standards - a key feature of
our management approach. One of the targets we have set ourselves
is to reduce landlord carbon intensity by 55% by 2027 compared to
our 2013 emissions level. So far, we have made good progress
towards this with a 43% reduction since 2013. We will be using our
COP21 scenario analysis tool to map a five year programme to ensure
the target is met.
Investment activity
During 2018, we acquired GBP57.2m of property with the larger
transactions previously announced. The main acquisition was a
36-year leasehold interest in 88-94 Tottenham Court Road W1 for
GBP44.3m after costs, which comprises 37,400 sq ft of offices and
8,500 sq ft of retail. We already owned the freehold, which adjoins
a number of existing ownerships and is located in our Fitzrovia
village. Longer term, these could form the basis of a significant
development. The main disposal was Porters North N1, which was sold
at a 5% premium to book value early in 2018 following a lease
extension and refurbishment programme. The building was held in a
joint venture and our share of the net proceeds was GBP22.3m.
Since the year end the Group has exchanged contracts on the sale
of 9 Prescot Street E1 for GBP53.85m before costs, which represents
a small premium to December 2018 book value. The property produced
a net rental income of GBP2.3m per annum, and was held in 50:50
joint venture with LaSalle Investment Management. The joint venture
retains 16 Prescot Street.
DEVELOPMENT
We have made good progress on our two major schemes. At the year
end, we had 623,000 sq ft under construction which is now 75%
pre-let, up from 45% a year earlier. Brunel Building W2 is now 77%
pre-let with the remaining three office floors under offer. This
project is due for completion in the first half of 2019, while 80
Charlotte Street W1 is on course for completion one year later. The
commercial element is 80% pre-let, principally to Arup and The
Boston Consulting Group, which was announced in 2017. During 2018,
we pre-let the 11,000 sq ft office space in the adjoining Asta
House to Elliott Wood. Together, our two on-site projects have an
ERV of GBP42.7m, and require GBP133m of capex to complete. 80
Charlotte Street also has 55 residential units of which we expect
to let 19 and sell 36. The latter includes 14 affordable units,
which we have agreed to sell.
Major developments pipeline
Property Area Capex to complete Comment
sq ft GBPm(1)
On-site projects
Brunel Building, 2 Canalside Walk W2 243,000 16 Offices - 77% pre-let
80 Charlotte Street W1 380,000 117 321,000 sq ft offices, 45,000 sq ft
residential and 14,000 sq ft retail - 74%
pre-let/ pre-sold
overall
----------- ------------------ ---------------------------------------------
623,000 133
----------- ------------------ ---------------------------------------------
2019 starts
Soho Place W1 285,000 283(4) 209,000 sq ft offices, 36,000 sq ft retail
and 40,000 sq ft theatre
The Featherstone Building EC1 125,000 76 110,000 sq ft offices, 13,000 sq ft
workspaces and 2,000 sq ft retail
----------- ------------------ ---------------------------------------------
410,000 359
----------- ------------------ ---------------------------------------------
Other major planning consents
19-35 Baker Street W1(2) 293,000(3) 206,000 sq ft offices, 52,000 sq ft
residential and 35,000 sq ft retail
Holden House W1(2) 150,000 Retail flagship or retail and office scheme
----------- ------------------ ---------------------------------------------
443,000
----------- ------------------ ---------------------------------------------
Total 1,476,000
----------- ------------------ ---------------------------------------------
(1) As at 31 Dec 2018 (2 ') Resolution to grant' planning
permission (3) Total area - Derwent London has a 55% share of the
joint venture
(4) Includes remaining site acquisition cost and profit share to
Crossrail
We have also made further progress on our next two major
schemes. The preliminary site works at Soho Place W1 are ongoing
and we signed the main construction contract with Laing O'Rourke
last week. Demolition work has recently started at The Featherstone
Building EC1. The first project is one of the most strategic
positions in London's West End over the Tottenham Court Road
Elizabeth line station and at the eastern end of Oxford Street. The
latter is beside our highly successful White Collar Factory.
Together, the ERV is GBP30m and the estimated additional capital
expenditure and site costs total GBP359m. We expect the projects to
complete in the first half of 2022.
Our developments are designed to some of the highest
sustainability standards. Both Brunel Building and 80 Charlotte
Street are on track for BREEAM Excellent and LEED Gold. Our new
projects, Soho Place and The Featherstone Building, are set to meet
their minimum BREEAM and LEED ratings of Excellent and Gold
respectively and, if possible, we are looking to exceed them.
Moreover, we require our main contractors to work proactively with
local communities to ensure disruption is minimised and to foster
positive relationships.
Looking further out, we have two significant potential West End
projects that have a 'resolution to grant' planning. These
buildings are currently let at least until 2021, which means that
we are unlikely to start redevelopment until 2022. Beyond these, we
have a further 25% of the portfolio, or 1.4m sq ft of existing
space, identified for future development. These include properties
such as Network Building W1, Francis House SW1 and Bush House
(South West Wing) WC2.
At the beginning of 2018, we had three refurbishment projects:
The White Chapel Building E1 Phase 2, the upper floors at 25 Savile
Row W1 and parts of the lower floors at Johnson Building EC1.
Together, these projects totalled 166,000 sq ft with an ERV of
GBP7.5m. They were completed in 2018 and 78% let by the year end
(by ERV), up from 32% in August 2018. The remaining 36,300 sq ft of
space, with an ERV of GBP1.8m is at Johnson Building and forms part
of our year end vacancy reported above. We had no significant
refurbishment schemes under way at the year end.
FINANCE REVIEW
Financial overview
Against a background of significant asset management and letting
activity, it was development uplifts that drove our valuation and
net asset performance again in 2018. While the underlying central
London office rental market was relatively flat, high-quality space
in newly constructed buildings was in short supply in our villages;
as a result, the Brunel Building at Paddington attracted rents well
above our estimates and helped the total return for the year to
5.3%.
EPRA earnings have grown strongly again, enhanced by
non-recurring premiums received during the year, and we have been
able to propose an increase in the final dividend of just over
10%.
Project expenditure has raised our debt level from its low point
in December 2017 but leverage remains modest and, with uncertainty
persisting both in the UK and internationally, we remain alive to
the risks to the economic outlook; our operational priorities have
therefore been to pre-let space and capture early rental uplifts
where we can rather than to wait.
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 and Policy 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 23 and all the EPRA definitions are included
in note 26.
Delivering above average long-term returns
Our well-established business model aims to balance risk through
the economic cycle, growing returns from our regeneration projects
while also focusing on long-term sustainable earnings growth. While
our total return (ie dividends plus EPRA net asset value growth per
share) is the best single measure of our performance, we also focus
on EPRA earnings growth as this provides resilience to the business
and enhances the distributions we can pay our shareholders.
The total return in 2018 slowed a little to 5.3% from 7.7% in
2017 but represented 196.5p per share with the EPRA net asset value
per share up 60p to 3,776p after 61.5p of ordinary dividends and
75p of special dividends paid in the year. Revaluation gains
provided 75p per share with Brunel Building contributing 64p alone
following earlier than expected pre-lets at strong rents. EPRA
earnings are dealt with in more detail below.
Looking at the longer term performance too, the table below
shows how growth in the annual dividend/PID (excluding specials)
and total return have performed over one, two, five and ten
years:
Ordinary Total return Total return
dividend % % pa
growth
% pa
Year to 31 December
2018 10.2 5.3 5.3
---------- ------------- -------------
2 years to 31 December
2018 12.1 13.2 6.4
---------- ------------- -------------
5 years to 31 December
2018 12.5 83 12.8
---------- ------------- -------------
10 years to 31 December
2018 10.4 251 13.4
---------- ------------- -------------
Property portfolio
The value of our property portfolio increased to GBP5.2bn as at
31 December 2018 from GBP4.9bn a year earlier, allocated across the
balance sheet as follows:
Dec 2018 Dec 2017
GBPm GBPm
Investment property 5,028.2 4,670.7
Owner occupied property 47.0 46.5
Trading property 36.3 25.3
--------- ---------
Property carrying value 5,111.5 4,742.5
Accrued income (non-current) 123.1 105.2
Accrued income (current) 15.8 15.4
Grossing up of headlease
liabilities (60.7) (14.1)
Revaluation of trading
property 1.0 1.3
--------- ---------
Fair value of property
portfolio 5,190.7 4,850.3
--------- ---------
Capital expenditure added GBP181.5m and, out of the total
revaluation gain for the year of GBP84.1m, GBP83.4m related to the
investment property portfolio. An additional GBP0.7m came from our
own offices at 25 Savile Row W1, the latter figure appearing in the
Group Statement of Comprehensive Income. Property acquisitions
during the year totalled GBP57.2m, mainly at 88-94 Tottenham Court
Road W1, and we recognised a further GBP46.6m of discounted
headlease liabilities in the balance sheet of which GBP45.9m
relates to Soho Place W1. This takes total headlease liabilities to
GBP60.7m at the year end (2017: GBP14.1m) with an equal and
opposite amount included in net debt.
Accrued income from the 'straight-lining' of rental income under
IAS17 and SIC15 has increased to GBP138.9m (2017: GBP120.6m) due
partly to rent incentives at recently completed developments (eg
White Collar Factory EC1) or where leases have been regeared (eg
Angel Building EC1). In addition, the lease extension and rent
review at Horseferry House SW1 agreed in 2018 was accompanied by
incentives which added GBP6.4m to the balance, including an
additional rent-free period, to extend the lease by 15 years.
The net carrying value of joint venture investments at 31
December 2018 fell to GBP29.1m (2017: GBP39.7m) following the sale
of Porters North N1 in March. After repaying the related bank loan
within the joint venture company, we received a dividend of
GBP13.5m in H2 2018. 9 and16 Prescot Street E1 are now our only
joint venture property holdings but contracts have now been
exchanged to sell 9 Prescot Street later in 2019.
Property income and earnings
Gross property and other income increased to GBP228.0m from
GBP202.6m in 2017 due mainly to a number of non-recurring property
items; these included net surrender premiums of GBP3.2m (2017:
GBP0.1m) and rights of light/access receipts totalling GBP17.7m.
After the record net property disposals in 2017 which reduced
rental income in 2018 by GBP4.2m, gross rental income was up by 2%
over the year to GBP175.1m. Lettings in 2017 and 2018 added
GBP12.4m of rent while reviews provided a further GBP3.5m but
breaks and lease expiries reduced income by GBP8.7m. With ground
rents and other property costs increasing to GBP14.0m, net rental
income was unchanged at GBP161.1m. However, net property and other
income, which includes dilapidations receipts and the one-off
premiums referred to above, rose by 13% to GBP185.9m from GBP164.8m
in 2017.
Administrative expenses increased to GBP32.3m from GBP28.2m in
2017, the prior year figure having been reduced by the reversal of
an overprovision in variable rate pay and the current year figure
taking account of an underprovision in 2017. Adjusting for these,
administration costs increased year on year by GBP2.2m or 7%, the
increase being mainly attributable to higher staff costs and
variable pay. We have also seen costs rise in areas such as staff
training, GDPR compliance, pensions legislation and recruitment,
altogether adding over GBP0.6m compared with 2017. Our development
team of 14 people works entirely on regeneration projects; direct
employment costs of this team totalled GBP3.0m but, as in previous
years, we have not capitalised any of these costs or other
overheads.
In line with these cost increases and our policy of not
capitalising overheads, our EPRA cost ratio (see note 23) has
increased to 23.3% in 2018 (2017: 20.8%) or 20.8% excluding direct
vacancy costs (2017: 19.3%).
There were no significant disposals of investment properties in
2018 but we have booked a further GBP3.0m of overage in relation to
the residential project at Riverwalk House SW1. This takes the
total overage booked over the past two years to GBP8.0m in relation
to the site that was sold in 2012. In addition, sales at the
residential site at Balmoral Grove N7 sold in 2016 are now over 70%
contracted so we have recognised GBP2.0m of overage with more to
come if current pricing levels prevail on the remainder.
Although debt increased over the year, average borrowings were
actually slightly lower in 2018 than in 2017 and total finance
costs fell to GBP23.5m from GBP27.1m in 2017 after capitalised
interest of GBP10.7m (2017: GBP9.4m). Derivative financial
instruments also showed a small overall gain of GBP0.8m in 2018
(2017: GBP2.1m) as medium-term interest rates moved up slightly
during the year.
Our share of the results at our unconsolidated joint ventures
fell to GBP2.1m (2017: GBP5.0m), following the sale of Porters
North in March 2018.
Due mainly to the lower uplifts on revaluation and disposals,
IFRS profit before tax fell to GBP221.6m for the year ended 31
December 2018 against GBP314.8m in the prior year. However, on an
EPRA basis, which excludes fair value movements and profits on
disposals of investment properties, earnings increased by 20.1% to
GBP126.1m from GBP105.0m in 2017. EPRA earnings per share (EPS)
were up by a similar amount to 113.1p from 94.2p a year earlier. As
EPRA earnings and EPS include the non-recurring GBP15.6m access
rights receipt at Holden House net of fees, we have also provided
'underlying' figures, giving an adjusted EPS of 99.1p, a rise of
5.1% over 2017. Note that the underlying figures do include rights
of light and dilapidations receipts of GBP3.6m as these items occur
frequently within our ongoing property operations. A table
providing a reconciliation of the IFRS results to EPRA earnings per
share is included in note 23.
EPRA like-for-like rental income
The unusually high level of premiums received in 2018, with a
corresponding sacrifice of short-term rental income while the
buildings are re-let, has distorted EPRA like-for-like income in
2018. Adjusting the EPRA like-for-like net rental income by
removing the GBP15.6m (net) access rights premium and treating as
rent that part of the surrender premium which relates to 2018 gives
an increase in gross rent of 3.6%, net rent of 2.8% and net
property income of 5.1% when compared with 2017. Without
adjustment, the EPRA like-for-like income figures range from 0.6%
to 15.4%.
Taxation
The corporation tax charge for the year ended 31 December 2018
was GBP3.1m, broadly in line with the previous year's tax charge of
GBP3.3m.
The movement in deferred tax liabilities for the year was a
credit of GBP0.5m, of which GBP0.4m (2017: GBP1.5m credit) passed
through the income statement due to the valuation impact for
non-REIT Group properties and GBP0.1m through comprehensive income
in relation to the owner-occupied property at Savile Row.
In addition to other taxation and levies paid during the year,
in accordance with our status as a REIT, GBP6.3m of tax was
withheld from shareholders on property income distributions and
paid to HMRC during the year.
Derwent London's principles of good governance extend to a
responsible approach to tax. Our statement of tax principles is
available on our website:
www.derwentlondon.com/investors/governance/tax-principles and is
approved by the Board in line with the Group's long-term values,
culture and strategy.
Net debt and cash flow
Group borrowings increased to GBP914.5m at 31 December 2018 from
GBP730.8m a year earlier after capital expenditure invested in our
projects, dividend payments totalling GBP152.0m and net property
acquisitions of GBP57.3m. Grossing up for leasehold liabilities and
netting off cash balances, net debt increased from GBP657.9m to
GBP956.9m at December 2018. This has raised the Group loan-to-value
ratio from its low point in December 2017 of 13.2% to 17.2% in
December 2018, but it remains at the second lowest year-end level
over the past decade. Interest cover rose again to 491% for the
year compared with 454% in 2017. Note that interest cover is
calculated on net rental income and does not include surrender
premiums for rights of light/access premiums. Full details of the
calculation are in note 24.
The cash received from the various premiums in 2018 has driven a
significant rise in net cash from operating activities to GBP115.2m
from GBP83.5m in 2017. However, even if these premiums are ignored,
the underlying cashflow from operations increased by over 10% over
the year.
Capital spend on projects increased to GBP187.5m in 2018 but was
partially offset by GBP15.9m of reimbursed expenditure, GBP7.2m of
which was in connection with the Soho Place project. In 2019, we
expect to invest a further GBP207m in capital expenditure plus
GBP15m of capitalised interest across the portfolio.
Debt and financing arrangements
The only change to our debt facilities during the year was the
repayment of a small bank facility within the Porters North joint
venture.
In relation to interest rate hedging, we extended the swap on
the GBP28m bank facility secured on the Baker Street properties out
to March 2020 and paid GBP0.6m to reduce the fixed rate from 3.525%
to 0.875%. We also paid GBP2.9m to defer GBP110m of 'forward start'
swaps; the GBP70m 3.99% swap is now due to start in March 2019 and
the GBP40m 2.45% swap in October 2019. In addition, a GBP75m swap
at 1.36% is due to commence in April 2019.
These changes brought the proportion of fixed rate and swapped
debt down to 70% at December 2018, helping reduce the average cost
of our debt. At December 2018, the weighted average interest rate
was 3.43% (2017: 3.80%) or 3.68% (2017: 4.11%) allowing for the
IFRS charge on our convertible bonds. The bonds have a current
conversion price of GBP31.78 and fall due in July 2019 so they are
shown as a current liability as at the balance sheet date. As our
share price was below this level at the year-end, the dilutive
impact on conversion of the bonds has not been included in earnings
per share or net asset per share measures. Were the bonds to
convert, the impact on net asset value per share would be a
reduction of about 25 pence per share and we continue to weigh up
our options to redemption or conversion of the bonds; these
considerations will partially be dependent on the share price
movement over the next few months.
In August 2018, we received an upgrade to our corporate credit
rating. Fitch assigned Derwent London a long-term issuer default
rating of A- and a senior unsecured debt rating of A. The London
Merchant Securities Ltd senior secured bonds 2026 were subsequently
given a Fitch rating of A+. At our request, Standard & Poors
withdrew their corporate and bond ratings on 3 October 2018.
The higher year end level of debt has brought cash and undrawn
facilities down to GBP274m at December 2018 from GBP523m in 2017.
In anticipation of this and following the credit rating upgrade, we
took action in the second half of 2018 to raise fresh debt.
An agreement was signed in November 2018 with eight
institutional investors for a private placement of GBP250m new
senior unsecured notes. The issue was made up of four tranches with
maturities ranging between 7 and 15 years. The weighted average
coupon of the fixed rate notes was 2.89% with a weighted average
maturity of 10.8 years. In addition to our usual debt covenants, a
test requiring unencumbered assets to be at least 1.6 times
unsecured debt has been provided and this is gradually being
extended to our other unsecured lenders. Funds were drawn on 31
January 2019 and used to repay existing Group revolving credit
facilities.
The weighted average maturity of our debt was 5.9 years at 31
December 2018 (2017: 7.6 years) but increases on a proforma basis
with the drawdown of the new senior GBP250m notes to around 8.0
years.
Dividend
Our dividend policy has been consistent for many years: to
maintain a progressive dividend supported by rising recurring
earnings. The earnings increase in 2018 means we have been able to
propose another increase of just over 10% in our final dividend per
share, taking it to 46.75p. This will be paid in June 2019 with
30.0p to be paid as a PID with the balance of 16.75p as a
conventional dividend. The full year's dividend is 1.5 times
covered by underlying earnings and 1.7 times by EPRA earnings.
There will not be a scrip dividend alternative.
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 2019.
The principal risks and uncertainties facing the Group in 2019
are set out on the following pages with the potential impact and
the mitigating actions and controls in place. The Group's approach
to the management and mitigation of these risks is included in the
2018 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. Failure to implement the Group's 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's
KPIs to changes in the assumptions underlying our
forecasts in light of anticipated economic
* London losing its global appeal with a consequential conditions. If considered necessary, modifications
impact on the property investment or occupational are made.
markets.
* The Group's development pipeline has a degree of
flexibility that enables plans for individual
Throughout the year, the Group continued to benefit from a properties to be changed to reflect prevailing
resilient central London office economic circumstances.
market despite continuing political uncertainty.
* The Group seeks to maintain income from properties
until development commences and has an ongoing
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 with 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.
* The Group focuses on good value, middle market rent
properties which are less susceptible to reductions
in tenant demand. The Group's average 'topped' up
office rent is only GBP53.25 per sq ft (2017:
GBP49.74 per sq ft).
* The Group develops properties in locations where
there is good potential for future demand, such as
near Crossrail stations.
* Income is maintained at future developments for as
long as possible.
* Ongoing strategy is to extend income through lease
renewals and re-gearing and to de-risk the
development programme though pre-lets.
* Brexit negotiations are being monitored and potential
outcomes discussed with external advisers.
* Brexit risk assessments have been performed to
understand how the different scenarios of Brexit
could impact on our business model and strategy.
3. Management of succession
Risk that the Board's succession plans, due to become * John Burns will be the Non-Executive Chairman until
effective during 2019, fail to retain May 2021 and will aim to retain the culture of the
our senior management team and lead to a loss of our culture Group and ensure an orderly succession.
and/or talent.
* Simon Fraser, Senior Independent Director, acts as a
'sounding board' for the Chairman and an independent
point of contact for Directors and Shareholders.
* Remuneration packages are benchmarked regularly.
* Six-monthly performance appraisals identify training
requirements and career aspirations.
* The Board monitors the culture of the Group
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. Fall in property values
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 rise gradually 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 our investment portfolio
has remained resilient, increasing by 2.2% * The Group's mainly unsecured financing makes the
in 2018, despite the continuing economic management of our financial covenants
uncertainties. straightforward.
The probability that property values will fall
has increased over the last year as we approach * The Group's low loan-to-value ratio reduces the
the end of the current property cycle (normal likelihood that falls in property values have a
property cycles last for approximately seven significant impact on our business.
years and we are currently at just over eight
years). The Bank of England's Monetary Policy
Committee increased interest rates during the
year from 0.5 to 0.75%. Despite this rise, future
interest rate increases are anticipated to be
slow and incremental.
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. Risks arising from our development activities
A. 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.
Due to our significant development pipeline,
with a number of key projects currently under
construction including 80 Charlotte Street and
the Brunel Building, the risk of delays to
our projects and/or cost overruns remain a
principal risk. By the end of 2018 we had
largely
de-risked these projects.
* 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 negotiated.
* 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.
* Detailed reviews are performed on construction
projects to ensure that forecasts are aligned with
our contractors.
* 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.
B. '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.
Due to our successful pre-letting programme,
there is increased risk on completing 80
Charlotte * Frequent meetings with key contractors and
Street on time. If late we could face a loss of subcontractors to review the work programme.
rental income and penalties.
C. 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, including
There have been well-publicised issues for a their project cash flows, is carried out.
number of major contractors, including the
insolvency
of Carillion and the funding problems of other * Key construction packages are acquired early in the
major contractors. Although the insolvency project's life to reduce the risks associated with
of Carillion did not significantly impact on later default.
our contractors (or subcontractors) it did
highlight
the ongoing issues within the construction * Whenever possible the Group uses
industry and the level of risk (and thin profit contractors/subcontractors that it has previously
margins) being accepted by contractors. We worked with successfully.
regularly monitor our contractors who are
currently
not showing any trading concerns. * Regular on-site supervision by a dedicated Project
Manager. Monitor contractor performance and
identifies problems at an early stage, thereby
enabling remedial action to be taken.
* Payments to contractors to incentivise them to
achieve agreed project timescale and damages agreed
in the event of delays/cost overruns.
* Performance bonds are sought if considered necessary.
* Our main contractors are responsible, and assume the
immediate risk, for subcontractor default.
* We use known contractors who we have established
long-term working relationships.
* Contractors are paid promptly and are encouraged to
pay subcontractors promptly.
6. Risk of business interruption
A. Cyber attack
The Group is subject to a cyber attack that
results in it being unable to use its IT
systems
and/or losing data. This could lead to an
increase in costs whilst a significant
diversion
of management time would have a wider impact.
Considerable time has been spent assessing
cyber risk and strengthening our controls and
procedures.
* 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.
B. Terrorism or other business interruption
Considered a principal risk due to continuing * The Group has comprehensive business continuity and
attacks in European cities. incident management procedures both at Group level
and for each of our managed buildings which are
The risk that an act of terrorism interrupts regularly reviewed and tested.
the Group's operations is considered a
principal
risk due to terrorist activity in European * Fire protection and access/security procedures are in
cities. 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.
7. Reputational damage
The Group's reputation is damaged, for example * Close involvement of senior management in day-to-day
through unauthorised and/or inaccurate media operations and established procedures for approving
coverage or failure to comply with the relevant all external announcements.
legislation.
We have invested significantly in developing a * All new members of staff benefit from an induction
well-regarded and respected brand. Our strong programme and are issued with our Group staff
culture, low overall risk tolerance and handbook.
established procedures and policies mitigate
against
the risk of internal wrongdoing. * The Group employs a Head of Investor and Corporate
Communications and retains services of an external PR
agency, both of whom maintain regular contact with
external media sources.
* A Group whistleblowing system for staff is maintained
to report wrongdoing anonymously.
* Social media channels are monitored.
* Ongoing engagement with local communities in areas
where the Group operates.
8. Non-compliance with regulation
A. 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.
Following independent review of our health and
safety procedures, the Group has gained a
better
understanding of health and safety risks.
* 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.
* 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.
B. Climate change and 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 due to the impacts updates and presentations on environmental and
of climate sustainability performance and management matters.
change on our portfolio and/or a breach of any
of legislation. This could lead to damage to
our reputation, loss of income and/or property * The Sustainability Committee monitors our performance
value, and loss of our licence to operate. and management controls.
* Employment of qualified team led by an experienced
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 and actively monitors portfolio performance
against these.
* Production of an Annual Sustainability Report, the
key data points and performance of which are
externally assured.
C. 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.
Considerable time has been spent during the
year on areas such as GDPR and the project to * Group policies and procedures dealing with all key
prevent and detect any facilitation of tax legislation are available on the Group's intranet.
evasion.
* A Group whistleblowing system for staff is maintained
to report wrongdoing anonymously.
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 GBP1.3m (2017:
GBP0.3m) or a decrease of GBP1.3m (2017: GBP0.3m).
It is currently Group policy that generally between 60% and 85%
of external Group borrowings (excluding finance lease payables) are
at fixed rates. Where the Group wishes to vary the amount of
external fixed rate debt it holds (subject to it being generally
between 60% and 85% of expected Group borrowings, as noted above),
the Group makes use of interest rate derivatives to achieve the
desired interest rate profile. Although the Board accepts that this
policy neither protects the Group entirely from the risk of paying
rates in excess of current market rates nor eliminates fully cash
flow risk associated with variability in interest payments, it
considers that it achieves an appropriate balance of exposure to
these risks. At 31 December 2018, the proportion of fixed debt held
by the Group was 70% (2017: 88%). During both 2018 and 2017, the
Group's borrowings at variable rate were denominated in
sterling.
The Group manages its cash flow interest rate risk by using
floating-to-fixed interest rate swaps. When the Group raises
long-term borrowings, it is generally at fixed rates.
Liquidity risk
Liquidity risk arises from the Group's management of working
capital and the finance charges and principal repayments on its
debt instruments. It is the risk that the Group will encounter
difficulty in meeting its financial obligations as they fall
due.
The Group's policy is to ensure that it will always have
sufficient headroom in its loan facilities to allow it to meet its
liabilities when they become due. To achieve this aim, it seeks to
maintain committed facilities to meet the expected requirements.
The Group also seeks to reduce liquidity risk by fixing interest
rates (and hence cash flows) on a portion of its long-term
borrowings. This is further explained in the 'market risk' section
above.
Executive management receives rolling three-year projections of
cash flow and loan balances on a regular basis as part of the
Group's forecasting processes. At the balance sheet date, these
projections indicated that the Group expected to have sufficient
liquid resources to meet its obligations under all reasonably
expected circumstances.
The Group's loan facilities and other borrowings are spread
across a range of banks and financial institutions so as to
minimise any potential concentration of risk. The liquidity risk of
the Group is managed centrally by the finance department.
Capital disclosures
The Group's capital comprises all components of equity (share
capital, share premium, other reserves, retained earnings and
non-controlling interest).
The Group's objectives when maintaining capital are:
-- to safeguard the entity's ability to continue as a going
concern so that it can continue to provide above average long-term
returns for shareholders; and
-- to provide an above average annualised total return to shareholders.
The Group sets the amount of capital it requires in proportion
to risk. The Group manages its capital structure and makes
adjustments to it in light of changes in economic conditions and
the risk characteristics of the underlying assets. In order to
maintain or adjust the capital structure, the Group may vary the
amount of dividends paid to shareholders subject to the rules
imposed by its REIT status. It may also seek to redeem bonds,
return capital to shareholders, issue new shares or sell assets to
reduce debt. Consistent with others in its industry, the Group
monitors capital on the basis of NAV gearing and loan-to-value
ratio. During 2018, the Group's strategy, which was unchanged from
2017, 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 24.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union and parent 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 parent company and of the profit or loss of the group and
parent company for that period. In preparing the financial
statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable IFRSs as adopted by the European
Union have been followed for the group financial statements and
IFRSs as adopted by the European Union have been followed for the
company financial statements, subject to any material departures
disclosed and explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and parent
Company will continue in business.
The Directors are also responsible for safeguarding the assets
of the Group and parent Company and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent Company's transactions and disclose with reasonable accuracy
at any time the financial position of the Group and parent Company
and enable them to ensure that the financial statements and the
Directors' Remuneration Report comply with the Companies Act 2006
and, as regards the Group financial statements, Article 4 of the
IAS Regulation.
The Directors are responsible for the maintenance and integrity
of the parent Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
On behalf of the board
John D. Burns Damian M.A. Wisniewski
Chief Executive Officer Finance Director
26 February 2019
GROUP INCOME STATEMENT
2018 2017
Note GBPm GBPm
Gross property and other income 5 228.0 202.6
----------------------------------------------------------- ---- ------- -------
Net property and other income 5 185.9 164.8
Administrative expenses (32.3) (28.2)
Revaluation surplus 11 83.4 147.9
Profit on disposal of investment property 6 5.2 50.3
Profit from operations 242.2 334.8
Finance costs 7 (23.5) (27.1)
Movement in fair value of derivative financial instruments 4.3 9.4
Financial derivative termination costs 8 (3.5) (7.3)
Share of results of joint ventures 9 2.1 5.0
Profit before tax 221.6 314.8
Tax charge 10 (2.7) (1.8)
Profit for the year 218.9 313.0
Attributable to:
- Equity shareholders 222.3 314.0
- Non-controlling interest (3.4) (1.0)
218.9 313.0
Earnings per share 23 199.33p 281.79p
Diluted earnings per share 23 198.91p 281.12p
GROUP STATEMENT OF COMPREHENSIVE INCOME
2018 2017
Note GBPm GBPm
Profit for the year 218.9 313.0
Actuarial losses on defined benefit pension scheme - (0.9)
Revaluation surplus of owner-occupied property 11 0.7 1.8
Deferred tax credit/(charge) on revaluation 18 0.1 (0.7)
-------------------------------------------------------------------------- ----- ----- -----
Other comprehensive income that will not be reclassified to profit or loss 0.8 0.2
Total comprehensive income relating to the year 219.7 313.2
Attributable to:
- Equity shareholders 223.1 314.2
- Non-controlling interest (3.4) (1.0)
219.7 313.2
GROUP BALANCE SHEET
2018 2017
Note GBPm GBPm
Non-current assets
Investment property 11 5,028.2 4,670.7
Property, plant and equipment 12 53.1 52.2
Investments 13 29.1 39.7
Pension scheme surplus 0.3 -
Other receivables 14 123.1 105.2
5,233.8 4,867.8
Current assets
Trading property 11 36.3 25.3
Trade and other receivables 15 61.4 58.0
Cash and cash equivalents 20 18.3 87.0
116.0 170.3
Total assets 5,349.8 5,038.1
Current liabilities
Borrowings 17 148.4 -
Trade and other payables 16 103.1 86.7
Corporation tax liability 2.1 2.1
Provisions 0.3 0.2
253.9 89.0
Non-current liabilities
Borrowings 17 766.1 730.8
Derivative financial instruments 17 3.6 7.9
Leasehold liabilities 17 60.7 14.1
Provisions 0.3 0.4
Pension scheme deficit - 0.4
Deferred tax 18 1.8 2.3
832.5 755.9
Total liabilities 1,086.4 844.9
Total net assets 4,263.4 4,193.2
Equity
Share capital 5.6 5.6
Share premium 189.6 189.2
Other reserves 943.5 942.9
Retained earnings 3,063.2 2,990.6
Equity shareholders' funds 4,201.9 4,128.3
Non-controlling interest 61.5 64.9
Total equity 4,263.4 4,193.2
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 2018 5.6 189.2 942.9 2,990.6 4,128.3 64.9 4,193.2
Profit/(loss) for the
year - - - 222.3 222.3 (3.4) 218.9
Other comprehensive
income - - 0.8 - 0.8 - 0.8
Share-based payments - 0.4 (0.2) 2.5 2.7 - 2.7
Dividends paid - - - (152.2) (152.2) - (152.2)
At 31 December 2018 5.6 189.6 943.5 3,063.2 4,201.9 61.5 4,263.4
Attributable to equity shareholders
----------------------------------------------------
Equity Non-
Share Share Other Retained shareholders' controlling Total
capital premium reserves earnings funds interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 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
GROUP CASH FLOW STATEMENT
2018 2017
Note GBPm GBPm
Operating activities
Property income 159.5 154.2
Surrender premiums and other property income 22.2 0.1
Property expenses (19.1) (19.2)
Cash paid to and on behalf of employees (22.0) (19.5)
Other administrative expenses (5.2) (7.3)
Interest paid 7 (17.4) (21.7)
Other finance costs 7 (2.6) (3.2)
Other income 2.9 2.9
Tax paid in respect of operating activities (3.1) (2.8)
Net cash from operating activities 115.2 83.5
Investing activities
Acquisition of properties (57.3) (8.5)
Capital expenditure on the property portfolio 7 (187.5) (171.0)
Reimbursement of capital expenditure 15.9 6.0
Disposal of investment and trading properties 0.3 472.9
Investment in joint ventures (0.8) -
Repayment of shareholder loan - 1.3
Dividend from joint venture 13.5 -
Purchase of property, plant and equipment (0.8) (5.0)
VAT received/(paid) 7.6 (11.7)
Net cash (used in)/from investing activities (209.1) 284.0
Financing activities
Net movement in revolving bank loans 180.5 (170.8)
Payment of loan arrangement costs (0.2) -
Financial derivative termination costs (3.5) (7.3)
Net proceeds of share issues 0.4 0.8
Dividends paid to non-controlling interest holder - (1.2)
Dividends paid 19 (152.0) (119.7)
Net cash from/(used in) financing activities 25.2 (298.2)
(Decrease)/increase in cash and cash equivalents in the year (68.7) 69.3
Cash and cash equivalents at the beginning of the year 87.0 17.7
Cash and cash equivalents at the end of the year 20 18.3 87.0
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 2018 or
the year ended 31 December 2017, but is derived from those
accounts. The Group's statutory accounts for 2017 have been
delivered to the Registrar of Companies and those for 2018 will be
delivered following the Company's Annual General Meeting. The
Auditor's reports on both the 2017 and 2018 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 2017, 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 current
accounting year and had no material impact on the financial
statements.
IFRS 2 (amended) - Share Based Payments;
IFRS 4 (amended) - Insurance Contracts;
IAS 40 (amended) - Investment Property;
IFRIC 22 - Foreign Currency Transactions and Advance
Consideration;
Annual Improvements to IFRSs (2014 - 2016 cycle).
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
concludes that this has no 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 concludes that its adoption has no material impact
on the financial statements.
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 9 (amended) - Prepayment Features with Negative
Compensation;
IFRS 17 - Insurance Contracts;
IFRIC 23 - Uncertainty over Income Tax Treatments;
IAS 28 (amended) - Long-term interest in Associates and Joint
Ventures;
IAS 19 (amended) - Plan Amendment, Curtailment of
Settlement;
Annual Improvements to IFRSs (2015 - 2017 cycle).
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
The preparation of financial statements in accordance with IFRS
requires the use of certain critical accounting estimates and
judgements. It also requires management to exercise judgement in
the process of applying the Group's accounting policies. Not all of
these accounting policies require management to make difficult,
subjective or complex judgements or estimates. Estimates and
judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results may differ from
those estimates. The following is intended to provide an
understanding of the policies that management consider critical
because of the level of complexity, judgement or estimation
involved in their application and their impact on the consolidated
financial statements.
Key sources of estimation uncertainty
Property portfolio valuation
The Group uses the valuation carried out by external valuers as
the fair value of its property portfolio. The valuation is based
upon assumptions including future rental income, anticipated
maintenance costs, future development costs and the appropriate
discount rate. The valuers also make reference to market evidence
of transaction prices for similar properties. More information is
provided in note 16.
Borrowings and derivatives
The fair values of the Group's borrowings and interest rate
swaps are based on estimates provided by independent third parties.
The estimates are based on the terms of each of the financial
instruments using data available in the financial markets. More
information is provided in note 23.
Significant judgements
Compliance with the real estate investment trust (REIT) taxation
regime
As a consequence of the Group's REIT status, income and
chargeable gains on the qualifying property rental business are
exempt from corporation tax.
In order for the Group to remain in the REIT regime, it is
subject to a number of criteria that it must meet in each
accounting period. The Group comfortably met all the criteria in
2018 ensuring its REIT status is maintained. The Directors intend
that the Group should continue as a REIT for the foreseeable
future.
Income that does not qualify as property income within the REIT
rules is subject to corporation tax in the normal way. Such income
includes development fees, interest income, sale of trading
properties and our interest in unelected joint ventures.
The Group has maintained its low risk rating with HMRC due to
the continued regular dialogue we maintain with them and our
transparent approach.
A full explanation of these policies is included in the 2018
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 six
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 23. 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 2018 (2017: 97%). The
Directors consider that these individual properties have similar
economic characteristics and therefore have been aggregated into a
single operating segment. The remaining 3% (2017: 3%) 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
2018 2017
----------------------------------- --------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
West End central 95.5 0.1 95.6 79.4 0.4 79.8
West End borders 19.3 - 19.3 18.4 - 18.4
City borders 76.1 0.5 76.6 69.0 0.2 69.2
Provincial - 4.5 4.5 - 4.8 4.8
190.9 5.1 196.0 166.8 5.4 172.2
A reconciliation of gross property income to gross property and other income is given in note
5.
Property portfolio
2018 2017
--------------------------------------- ----------------------------------
Office Office
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Carrying value
West End central 2,659.4 53.8 2,713.2 2,356.8 42.2 2,399.0
West End borders 439.2 - 439.2 439.3 - 439.3
City borders 1,859.5 7.7 1,867.2 1,799.1 6.5 1,805.6
Provincial - 91.9 91.9 - 98.6 98.6
4,958.1 153.4 5,111.5 4,595.2 147.3 4,742.5
Fair value
West End central 2,658.1 54.9 2,713.0 2,394.9 43.7 2,438.6
West End borders 462.5 - 462.5 459.7 - 459.7
City borders 1,913.7 7.7 1,921.4 1,844.4 6.4 1,850.8
Provincial - 93.8 93.8 - 101.2 101.2
5,034.3 156.4 5,190.7 4,699.0 151.3 4,850.3
A reconciliation between the fair value and carrying value of the portfolio is set out in
note 11.
5. Property and other income
2018 2017
GBPm GBPm
Gross rental income 175.1 172.1
Surrender premiums received 3.2 0.1
Other property income 17.7 -
Gross property income 196.0 172.2
Service charge income 29.1 27.7
Other income 2.9 2.7
Gross property and other income 228.0 202.6
Gross rental income 175.1 172.1
Ground rent (1.4) (0.7)
---------------------------------------------------------- ------ ------
Service charge income 29.1 27.7
Service charge expenses (32.0) (29.6)
---------------------------------------------------------- ------ ------
(2.9) (1.9)
Other property costs (9.7) (8.4)
Net rental income 161.1 161.1
Other property income 17.7 -
Other income 2.9 2.7
Other costs (0.4) -
Surrender premiums received 3.2 0.1
Reverse surrender premiums (0.1) (0.2)
Dilapidation receipts 1.7 0.1
(Write-down)/reversal of write-down of trading property (0.2) 1.0
Net property and other income 185.9 164.8
Gross rental income included GBP13.4m (2017: GBP17.1m) relating
to rents recognised in advance of cash receipts.
Other property income included GBP15.8m for granting a new
access rights deed to a neighbouring property owner. The remaining
GBP1.9m relates to rights of light income in the year.
Other income relates 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
2018 2017
GBPm GBPm
Gross disposal proceeds 5.4 486.3
Costs of disposal - (3.5)
Net disposal proceeds 5.4 482.8
Carrying value (0.2) (418.9)
Adjustment for lease costs and rents recognised in advance - (19.2)
Adjustment for capital contributions - (4.2)
Adjustment for headlease liability - 9.8
Profit on disposal of investment property 5.2 50.3
Gross disposal proceeds reflect GBP3.0m (2017: GBP5.0m) of
accrued overage in relation to Riverwalk House SW1 and Vauxhall
Bridge Road SW1, which were originally sold in 2012 and GBP2.0m
(2017: GBPnil) of accrued overage in relation to Balmoral Grove N7,
which was originally sold in December 2016.
7. Finance costs
2018 2017
GBPm GBPm
Finance costs
Bank loans and overdraft 3.6 5.9
Non-utilisation fees 1.9 1.8
Unsecured convertible bonds 3.9 3.8
Secured bonds 11.4 11.4
Unsecured private placement notes 8.3 8.3
Secured loan 3.3 3.3
Amortisation of issue and arrangement costs 2.1 2.0
Amortisation of the fair value of the secured bonds (1.2) (1.1)
Finance lease costs 0.7 1.0
Other 0.2 0.1
Gross interest costs 34.2 36.5
Less: interest capitalised (10.7) (9.4)
Finance costs 23.5 27.1
Finance costs of GBP10.7m (2017: GBP9.4m) 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 2018 were GBP30.7m (2017:
GBP34.3m) of which GBP10.7m (2017: GBP9.4m) 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 GBP3.5m in the year to 31 December
2018 (2017: GBP7.3m) deferring, re-couponing or terminating
interest rate swaps.
9. Share of results of joint ventures
2018 2017
GBPm GBPm
Revaluation (deficit)/surplus (0.1) 3.9
Profit on disposal of investment property 1.3 -
Other profit from operations after tax 0.9 1.1
2.1 5.0
In March 2018, Primister Limited, in which the Group has a 50%
shareholding, disposed of its freehold interest in Porters North N1
for GBP45.4m before costs, generating a profit of GBP2.6m net of
tax.
See note 13 for further details on the Group's joint
ventures.
10. Tax charge
2018 2017
GBPm GBPm
Corporation tax
UK corporation tax and income tax in respect of profit for the year 2.9 4.0
Other adjustments in respect of prior years' tax 0.2 (0.7)
Corporation tax charge 3.1 3.3
Deferred tax
Origination and reversal of temporary differences (0.4) (1.2)
Adjustment for changes in estimates - (0.3)
Deferred tax credit (0.4) (1.5)
Tax charge 2.7 1.8
In addition to the tax charge of GBP2.7m (2017: GBP1.8m) that
passed through the Group income statement, a deferred tax credit of
GBP0.1m (2017: charge of GBP0.7m) 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 2018 is lower (2017: lower) than
the standard rate of corporation tax in the UK. The differences are
explained below:
2018 2017
GBPm GBPm
Profit before tax 221.6 314.8
------ ------
Expected tax charge based on the standard rate of
corporation tax in the UK of 19.00% (2017: 19.25%)(1) 42.1 60.6
Difference between tax and accounting profit on disposals (1.0) (9.8)
REIT exempt income (10.7) (10.8)
Revaluation surplus attributable to REIT properties (15.2) (27.4)
Expenses and fair value adjustments not allowable for tax purposes (8.1) (4.4)
Capital allowances (4.6) (4.2)
Other differences - (1.5)
Tax charge on current year's profit 2.5 2.5
Adjustments in respect of prior years' tax 0.2 (0.7)
Tax charge 2.7 1.8
(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 2018 3,867.0 803.7 4,670.7 46.5 25.3 4,742.5
---------------------------------------- -------- --------- ---------- -------- -------- ---------
Acquisitions 52.1 5.1 57.2 - - 57.2
Capital expenditure 84.5 75.7 160.2 (0.2) 10.8 170.8
Interest capitalisation 5.2 5.1 10.3 - 0.4 10.7
---------------------------------------- -------- --------- ---------- -------- -------- ---------
Additions 141.8 85.9 227.7 (0.2) 11.2 238.7
Disposals (0.2) - (0.2) - - (0.2)
Revaluation 25.5 57.9 83.4 0.7 - 84.1
Write-down of trading property - - - - (0.2) (0.2)
Movement in grossing up of
headlease liabilities - 46.6 46.6 - - 46.6
At 31 December 2018 4,034.1 994.1 5,028.2 47.0 36.3 5,111.5
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
Adjustments from fair value to carrying value
At 31 December 2018
Fair value 4,151.4 955.0 5,106.4 47.0 37.3 5,190.7
Revaluation of trading property - - - - (1.0) (1.0)
Lease incentives and costs
included in receivables (117.3) (21.6) (138.9) - - (138.9)
Grossing up of headlease liabilities - 60.7 60.7 - - 60.7
Carrying value 4,034.1 994.1 5,028.2 47.0 36.3 5,111.5
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
Reconciliation of fair value
2018 2017
GBPm GBPm
Portfolio including the Group's share of joint ventures 5,217.6 4,897.6
Less: joint ventures (26.9) (47.3)
IFRS property portfolio 5,190.7 4,850.3
The property portfolio is subject to semi-annual external
valuations and was revalued at 31 December 2018 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 GBP5,157.8m (2017:
GBP4,817.5m) and other valuers at GBP32.9m (2017: GBP32.8m), giving
a combined value of GBP5,190.7m (2017: GBP4,850.3m). Of the
properties revalued by CBRE, GBP47.0m (2017: GBP46.5m) relating to
owner-occupied property was included within property, plant and
equipment and GBP37.3m (2017: GBP26.6m) 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.
At 31 December 2018, the grossing up of headlease liabilities of
GBP60.7m includes GBP45.9m for the discounted headlease liabilities
in relation to Soho Place W1 where the Group is now actively on
site.
Reconciliation of revaluation surplus
2018 2017
GBPm GBPm
Total revaluation surplus 100.2 177.1
Less:
Share of joint ventures (0.2) (4.9)
Lease incentives and costs (16.5) (20.2)
Trading property revaluation surplus/(deficit) 0.4 (1.3)
IFRS revaluation surplus 83.9 150.7
Reported in the:
Revaluation surplus 83.4 147.9
(Write-down)/reversal of write-down of trading property (0.2) 1.0
Group income statement 83.2 148.9
Group statement of comprehensive income 0.7 1.8
83.9 150.7
Historical cost
2018 2017
GBPm GBPm
Investment property 2,924.5 2,697.0
Owner-occupied property 19.6 19.8
Trading property 44.2 33.0
Total property portfolio 2,988.3 2,749.8
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
GBPm GBPm GBPm GBPm
At 1 January 2018 46.5 1.6 4.1 52.2
Additions (0.2) - 1.1 0.9
Depreciation - - (0.7) (0.7)
Revaluation 0.7 - - 0.7
At 31 December 2018 47.0 1.6 4.5 53.1
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
Net book value
Cost or valuation 47.0 1.6 7.0 55.6
Accumulated depreciation - - (2.5) (2.5)
At 31 December 2018 47.0 1.6 4.5 53.1
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
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 May 2018 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 historical cost of the artwork in the Group at 31 December
2018 was GBP1.6m (2017: GBP1.6m). See note 11 for the historical
cost of owner-occupied property.
13. Investments
The Group has a 50% interest in three joint ventures, Dorrington
Derwent Holdings Limited, Primister Limited and Prescot Street
Limited Partnership.
2018 2017
GBPm GBPm
At 1 January 39.7 36.0
Share of results of joint ventures (see note 9) 2.1 5.0
Additions 0.8 -
Repayment of shareholder loan - (1.3)
Distributions received (13.5) -
At 31 December 29.1 39.7
14. Other receivables (non-current)
2018 2017
GBPm GBPm
Prepayments and accrued income 123.1 105.2
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 GBP15.8m (2017: GBP15.4m), which was included
as accrued income within trade and other receivables (see note 15),
these amounts totalled GBP138.9m at 31 December 2018 (2017:
GBP120.6m).
15. Trade and other receivables
2018 2017
GBPm GBPm
Trade receivables 10.7 7.1
Other receivables 4.1 6.8
Prepayments 20.6 17.3
Other taxes - 4.6
Accrued income 26.0 22.2
61.4 58.0
16. Trade and other payables
2018 2017
GBPm GBPm
Trade payables 1.4 2.0
Other payables 17.8 17.8
Other taxes 2.5 -
Accruals 38.7 27.1
Deferred income 42.7 39.8
103.1 86.7
17. Net debt and derivative financial instruments
2018 2017
------------- -------------
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Current liabilities
1.125% unsecured convertible bonds 2019 148.4 152.3 - -
148.4 152.3 - -
Non-current liabilities
1.125% unsecured convertible bonds 2019 - - 145.6 158.3
6.5% secured bonds 2026 185.9 222.1 186.9 225.6
3.46% unsecured private placement notes 2028 29.8 30.9 29.8 31.0
4.41% unsecured private placement notes 2029 24.8 29.0 24.8 29.3
3.57% unsecured private placement notes 2031 74.6 76.4 74.5 76.4
4.68% unsecured private placement notes 2034 74.4 90.9 74.3 91.8
3.99% secured loan 2024 81.9 87.0 81.7 87.9
Unsecured bank loans 267.0 269.5 85.6 89.0
Secured bank loans 27.7 28.0 27.6 28.0
766.1 833.8 730.8 817.3
Borrowings 914.5 986.1 730.8 817.3
Derivative financial instruments expiring in
greater than one year 3.6 3.6 7.9 7.9
Total borrowings and derivative financial instruments 918.1 989.7 738.7 825.2
Reconciliation to net debt:
Borrowings and derivative financial instruments 918.1 738.7
Adjustments for:
Leasehold liabilities 60.7 14.1
Derivative financial instruments (3.6) (7.9)
Cash and cash equivalents (18.3) (87.0)
Net debt 956.9 657.9
The fair values 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 2018 or 2017.
18. Deferred tax
Revaluation
surplus Other Total
GBPm GBPm GBPm
At 1 January 2018 4.5 (2.2) 2.3
(Credited)/charged to the income statement (0.8) 0.4 (0.4)
Credited to other comprehensive income (0.1) - (0.1)
At 31 December 2018 3.6 (1.8) 1.8
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
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 historical 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 2018 2017
date p p p GBPm GBPm
Current year
2018 final dividend(1) 7 June 2019 30.00 16.75 46.75 - -
2018 interim dividend 19 October 2018 19.10 - 19.10 21.3 -
------ ------- -----
Distribution of current year profit 49.10 16.75 65.85
Prior year
2017 final dividend 8 June 2018 35.00 7.40 42.40 47.3 -
2017 interim dividend 20 October 2017 17.33 - 17.33 - 19.3
------ ------- -----
Distribution of prior year profit 52.33 7.40 59.73
Special dividend
2017 special dividend 8 June 2018 - 75.00 75.00 83.6 -
------ ------- -----
Distribution of accumulated profit - 75.00 75.00
2016 final dividend 9 June 2017 32.70 5.80 38.50 - 42.9
2016 special dividend 9 June 2017 - 52.00 52.00 - 57.9
----- -----
Dividends as reported in the
Group statement of changes in equity 152.2 120.1
----- -----
2018 interim dividend withholding tax 14 January 2019 (2.3) -
2017 interim dividend withholding tax 14 January 2018 2.1 (2.1)
2016 interim dividend withholding tax 14 January 2017 - 1.7
----- -----
Dividends paid as reported in the
Group cash flow statement 152.0 119.7
----- -----
(1) Subject to shareholder approval at the AGM on 17 May
2019.
20. Cash and cash equivalents
2018 2017
GBPm GBPm
Cash at bank 18.3 87.0
21. Post balance sheet events
In January 2019, GBP250 million of new unsecured private
placement notes were drawn. The issue consists of four tranches
with maturities ranging between 7 and 15 years. The weighted
average coupon of the fixed rate notes equates to 2.89% with a
weighted average maturity of 10.8 years.
In February 2019, Prescot Street GP Limited and Prescot Street
Nominees Limited, in which the Group holds a 50% interest,
exchanged contracts for the sale of the freehold interest in 9
Prescot Street E1 for GBP53.9m before costs, with completion
expected in May 2019.
The main construction contract for Soho Place W1, one of our
next major developments, was signed in February 2019.
22. Related parties
There have been no related party transactions for the year ended
31 December 2018 that have materially affected the financial
position or performance of the Group. All related party
transactions are materially consistent with those disclosed by the
Group in its financial statements.
23. EPRA performance measures
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
-------------------- ---------------------------
2018 2017 2018 2017
'000 '000 '000 '000
For use in basic measures 111,521 111,431 111,540 111,475
Dilutive effect of share-based payments 239 267 239 295
For use in diluted measures 111,760 111,698 111,779 111,770
The GBP150m unsecured convertible bonds 2019 ('2019 bonds') have
a current conversion price of GBP31.78. 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 2018 and 31 December 2017, 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 share price at each year end, 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, write-down/(reversal of 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
In addition to the EPRA performance measures, underlying
performance measures which exclude certain items considered to be
non-recurring are used by the Directors to assess the operating
performance of the Group. A reconciliation of the EPRA and
underlying earnings for the year to 31 December 2018 is presented
below. For the year to 31 December 2017, no adjustments were made
to the EPRA earnings to derive the underlying performance.
Earnings and earnings per share
Adjustments EPRA
----------------------
IFRS A B C basis
GBPm GBPm GBPm GBPm GBPm
Year ended 31 December 2018
Net property and other income 185.9 - 0.2 - 186.1
Total administrative expenses (32.3) - - - (32.3)
Revaluation surplus 83.4 - (83.4) - -
Profit on disposal of investment property 5.2 (5.2) - - -
Net finance costs (23.5) - - - (23.5)
Movement in fair value of derivative financial instruments 4.3 - - (4.3) -
Financial derivative termination costs (3.5) - - 3.5 -
Share of results of joint ventures 2.1 (1.3) 0.1 - 0.9
Profit before tax 221.6 (6.5) (83.1) (0.8) 131.2
Tax charge (2.7) 0.3 (0.7) - (3.1)
Profit for the year 218.9 (6.2) (83.8) (0.8) 128.1
Non-controlling interest 3.4 - (5.5) 0.1 (2.0)
Earnings attributable to equity shareholders 222.3 (6.2) (89.3) (0.7) 126.1
Earnings per share 199.33p 113.07p
Diluted earnings per share 198.91p 112.83p
Underlying earnings and underlying earnings per share
EPRA earnings attributable to equity shareholders 126.1
Net income from grant of access rights (15.6)
Underlying earnings attributable to equity shareholders 110.5
Underlying earnings per share 99.08p
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
Net asset value and net asset value per share
Undiluted Diluted
GBPm p p
At 31 December 2018
Net assets attributable to equity shareholders 4,201.9 3,767 3,759
Adjustment for:
Revaluation of trading properties net of tax 0.8
Deferred tax on revaluation surplus 3.6
Fair value of derivative financial instruments 3.6
Fair value adjustment to secured bonds 11.8
Non-controlling interest in respect of the above (0.9)
EPRA net asset value 4,220.8 3,784 3,776
Adjustment for:
Mark-to-market of secured bonds 2026 (47.1)
Mark-to-market of secured loan 2024 (4.0)
Mark-to-market of unsecured private placement notes 2029 and 2034 (19.9)
Mark-to-market of unsecured private placement notes 2028 and 2031 (2.3)
Mark-to-market of 1.125% unsecured convertible bonds 2019 (3.6)
Deferred tax on revaluation surplus (3.6)
Fair value of derivative financial instruments (3.6)
Unamortised issue and arrangement costs (6.5)
Non-controlling interest in respect of the above 0.9
EPRA triple net asset value 4,131.1 3,704 3,696
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
Cost ratios
2018 2017
GBPm GBPm
Administrative expenses 32.3 28.2
Other property costs 9.7 8.4
Dilapidation receipts (1.7) (0.1)
Other costs 0.4 -
Net service charge costs 2.9 1.9
Service charge costs recovered through rents but not separately invoiced (0.3) (0.3)
Management fees received less estimated profit element (2.9) (2.7)
Share of joint ventures' expenses 0.4 0.5
EPRA costs (including direct vacancy costs) (A) 40.8 35.9
Direct vacancy costs (4.4) (2.5)
EPRA costs (excluding direct vacancy costs) (B) 36.4 33.4
Gross rental income 175.1 172.1
Ground rent (1.4) (0.7)
Service charge components of rental income (0.3) (0.3)
Share of joint ventures' rental income less ground rent 1.7 1.8
Adjusted gross rental income (C) 175.1 172.9
EPRA cost ratio (including direct vacancy costs) (A/C) 23.3% 20.8%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 20.8% 19.3%
In addition to the two EPRA cost ratios, the Group has calculated an additional cost ratio
based on its property portfolio fair value to recognise the 'total return' nature of the Group's
activities.
Property portfolio at fair value (D) 5,190.7 4,850.3
Portfolio cost ratio (A/D) 0.8% 0.7%
The Group has not capitalised any overheads in either 2018 or
2017.
24. Gearing and interest cover
NAV gearing
2018 2017
GBPm GBPm
Net debt 956.9 657.9
Net assets 4,263.4 4,193.2
NAV gearing 22.4% 15.7%
Loan-to-value ratio
2018 2017
GBPm GBPm
Net debt 956.9 657.9
Fair value adjustment of secured bonds (11.8) (12.9)
Unamortised issue and arrangement costs 6.5 8.6
Leasehold liabilities (60.7) (14.1)
Drawn debt 890.9 639.5
Fair value of property portfolio 5,190.7 4,850.3
Loan-to-value ratio 17.2% 13.2%
Net interest cover ratio
2018 2017
GBPm GBPm
Net property and other income 185.9 164.8
Adjustments for:
Other income (2.9) (2.7)
Other property income (17.7) -
Net surrender premiums received (3.2) (0.1)
Write-down/(reversal of write-down) of trading property 0.2 (1.0)
Reverse surrender premiums 0.1 0.2
Adjusted net property income 162.4 161.2
Finance costs 23.5 27.1
Adjustments for:
Other finance costs (0.2) (0.1)
Amortisation of fair value adjustment to secured bonds 1.2 1.1
Amortisation of issue and arrangement costs (2.1) (2.0)
Finance costs capitalised 10.7 9.4
Net interest payable 33.1 35.5
Net interest cover ratio 491% 454%
25. Total return
2018 2017
p p
EPRA net asset value on a diluted basis
At end of year 3,776 3,716
At start of year (3,716) (3,551)
Increase 60 165
Dividend per share 137 108
Increase including dividend 197 273
Total return 5.3% 7.7%
26. List of definitions
Capital return
The annual valuation movement arising on the Group's portfolio
expressed as a percentage return on the valuation at the beginning
of the year adjusted for acquisitions and capital expenditure.
Diluted figures
Reported results adjusted to include the effects of potential
dilutive shares issuable under the Group's share option schemes and
the convertible bonds.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the year attributable
to equity shareholders and are divided by the weighted average
number of ordinary shares in issue during the financial year to
arrive at earnings per share.
Estimated rental value (ERV)
This is the external valuers' opinion as to the open market rent
which, on the date of valuation, could reasonably be expected to be
obtained on a new letting or rent review of a property.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe's
leading property companies, investors and consultants which strives
to establish best practices in accounting, reporting and corporate
governance and to provide high-quality information to investors.
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 publicly 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 period. Yield compression is a
commonly-used term for a reduction in yields.
27. Copies of this announcement will be available on the
Company's website, www.derwentlondon.com, from the date of this
statement. Copies will also be available from the Company
Secretary, Derwent London plc, 25 Savile Row, London, W1S 2ER.
Notes to editors
Derwent London plc
Derwent London plc owns 86 buildings in a commercial real estate
portfolio predominantly in central London valued at GBP5.2 billion
(including joint ventures) as at 31 December 2018, 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 5.4 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 2018 the Group won Property Week Property Company of the Year
and EG Offices Company of the Year, whilst White Collar Factory
scooped RIBA National and London awards, RICS National and London
awards, two BCO awards for Commercial Workplace and Innovation, an
EG Creative Places award and an NLA Wellbeing award. 25 Savile Row
also won RIBA National and London awards and SKA Gold for the
fit-out. In 2017 the Group collected the Property Week Developer of
the Year award and EG Offices Company of the Year and won further
awards from RIBA, Civic Trust and BCO. In 2013 Derwent London
launched a voluntary Community Fund and has to date supported 70
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 news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR CKPDQOBKDNBB
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February 26, 2019 02:00 ET (07:00 GMT)
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