Annual Report • Dec 31, 2016
Annual Report
Open in ViewerOpens in native device viewer
Cover image: White Collar Factory EC1 This page: The White Chapel Building E1
Building a brand Innovative solutions Middle market rents Active management Well-designed spaces Supporting communities Environmentally responsible Derwent London plc is the largest central London focused REIT.
Over many years, we have built up a £5 billion predominantly office portfolio in 14 'villages' in London's West End and Tech Belt. The majority of the portfolio is income producing, balanced between regenerated properties with further upside potential and properties for future redevelopment. Our business is founded on a strong balance sheet with low leverage and flexible financing. We aim to provide above average long-term returns for our shareholders, while delivering benefits for all our other stakeholders.
Our portfolio balance and resilient business model mean we are well placed to deal with the significant changes being seen in today's office market.
| At a glance | 04 |
|---|---|
| Our portfolio | 06 |
| Year in review | 10 |
| Chairman's statement | 12 |
| London's enduring appeal | 14 |
| Creating value: our business model | 18 |
| Delivery of our strategy | 20 |
| Lettings | 22 |
| Asset management | 24 |
| Developments for delivery in 2019 | 26 |
| Acquisitions and disposals | 28 |
| Measuring our performance | 30 |
| Chief Executive's statement | 36 |
| Our market | 38 |
| Property review | 40 |
| Valuation | 40 |
| Portfolio management | 43 |
| Projects | 47 |
| Investment activity | 50 |
| Finance review | 52 |
| Risk management | 60 |
| Sustainability | 66 |
| Our people | 68 |
| Board of Directors | 74 |
|---|---|
| Senior management | 76 |
| Corporate governance | 77 |
| Report of the Remuneration Committee | 85 |
| Letter from the Chairman of the | |
| Nominations Committee | 104 |
| Report of the Nominations Committee | 104 |
| Letter from the Chairman of the | |
| Risk Committee | 105 |
| Report of the Risk Committee | 105 |
| Letter from the Chairman of the | |
| Audit Committee | 106 |
| Report of the Audit Committee | 107 |
| Directors' report | 109 |
| Statement of Directors' responsibilities | 116 |
|---|---|
| Independent Auditor's report | 117 |
| Group income statement | 122 |
| Group statement of comprehensive income | 122 |
| Balance sheets | 123 |
| Statements of changes in equity | 124 |
| Cash flow statements | 125 |
| Notes to the financial statements | 126 |
| Nine-year summary | 169 |
|---|---|
| EPRA summary | 170 |
| Principal properties | 171 |
| List of definitions | 173 |
The Group acquired a long leasehold interest in this 170,000 sq ft property in February 2015 for £92.7m. We have since painted the façade and refurbished half the office space, adding a new entrance and terraces. This has increased net rental income from £3.2m to £6.2m with a further £0.6m of ERV still available to let. The building sits opposite the entrance to Farringdon Crossrail station (opening in 2018) and there is the longer term possibility to add additional space. In two years we have completed our short term objective, virtually doubling our income.
| 1 | |
|---|---|
| At a glance | 04 |
| Our portfolio | 06 |
| Year in review | 10 |
| Chairman's statement | 12 |
| London's enduring appeal | 14 |
| Creating value: our business model | 18 |
| Delivery of our strategy | 20 |
| Lettings | 22 |
| Asset management | 24 |
| Developments for delivery in 2019 | 26 |
| Acquisitions and disposals | 28 |
| Measuring our performance | 30 |
| Chief Executive's statement | 36 |
| Our market | 38 |
| Property review | 40 |
| Valuation | 40 |
| Portfolio management | 43 |
| Projects | 47 |
| Investment activity | 50 |
| Finance review | |
| Risk management | 52 60 |
Sustainability 66 Our people 68
0
| Net assets £4.0bn 2015: £4.0bn |
Maintained net asset value In a year of market uncertainty caused partly by the EU referendum, we have maintained net asset value (NAV), demonstrating the resilience of our business model. |
Portfolio valuation1 £5.0bn 2015: £5.0bn |
|
|---|---|---|---|
| Revaluation (deficit)/surplus £(37.1)m 2015: £650.0m |
Active asset management The impact of a 31bp outward yield shift was partially offset by 5.1% rental value growth, lettings, rent reviews and development profits. |
Profit for the year £53.6m 2015: £777.2m |
|
| Operational earnings growth 8% 2015: 25% |
Growth in earnings from operations As a result of an increase in net property income and lower finance costs, EPRA earnings per share (EPS) grew by 8%. |
EPRA EPS 76.99p 2015: 71.34p |
|
| Growth in final dividend 25% 2015: 10% |
Increased cash returns to shareholders Strong earnings growth in recent years and letting activity that has considerably de-risked the development pipeline have enabled us to propose a 25% increase in the final dividend. |
Dividend per share 52.36p 2015: 43.40p |
|
| Total return 1.7% 2015: 23.0% |
Positive total return despite market uncertainty NAV growth and dividends paid in 2016 provided a total return of 1.7%. |
EPRA NAV per share 3,551p 2015: 3,535p |
|
| Our approach to sustainability Read more on page |
Net assets (£m) 5,000 4,000 3,999 3,995 3,076 3,000 |
1,200 1,000 875 800 600 |
Net debt (£m) and NAV gearing (%) 60 1,013 50 949 912 905 40 30 |
| 66 | 2,371 2,000 1,918 1,000 |
400 200 |
20 10 |
2012 2013 2014 2015 2016
0
0
2012 2013 2014 2015 2016
1 Including Group share of joint ventures.
We are proposing a special dividend of 52p per share to be paid along with the final dividend in June 2017.
| Acquire properties and unlock their value |
|
|---|---|
| Maintain strong and flexible financing |
|
| Create well designed space |
|
| Optimise income | |
| Recycle capital |
Read more on page 18
Net interest cover 370% 2015: 362%
Disposal proceeds £224.7m
2015: £277.2m
Cash & undrawn facilities £383m 2015: £269m
New lettings 547,500 sq ft 2015: 523,800 sq ft
We recycled capital by funding £213.5m of capital expenditure through cash raised from property disposals, thereby retaining low gearing levels.
Property disposals above book value
We raised £224.7m of cash from property disposals in 2016. Net proceeds from four major investment property sales completed after the EU Referendum were £199.0m, 2.3% above December 2015 book value.
Strengthened financial capacity We arranged £105m of long-term fixed rate debt in 2016 and had a weighted average maturity of borrowings at the year end of 7.7 years.
We set a new record for lettings during a year – 63 transactions on floorspace of 547,500 sq ft with annual income of £31.4m. Available space remained low at 2.6%.
Increased contracted rental income
Contracted net rent £150.3m 2015: £137.1m
We converted £19.9m of rental reversion into cash flow during the year, taking the contracted rent roll to £150.3m at 31 December 2016.
LTV ratio 17.7% 2015: 17.8%
Profit on disposal of investment property
£7.5m 2015: £40.2m
7.7 years 2015: 7.3 years
EPRA vacancy rate
2.6% 2015: 1.3%
EPRA like-for-like net rental income
5.7% 2015: 5.2%
Our experienced team Read more on page 68
98% of our portfolio is located in central London, grouped in 14 'villages', each with its own individual identity. 63% can be found in the West End and 35% in the City Borders. The balance relates to properties and land held on the northern outskirts of Glasgow in Scotland.
6.0m sq ft1 Area 1 Includes 1.0m sq ft of on-site developments.
c.700 Leases
£150.3m Contracted net
rental income 2015: £137.1m
3.4% EPRA net initial yield 2015: 3.1%
6.5 years 2015: 7.0 years WAULT1
1 Weighted average unexpired lease term.
c.450 Tenants
Estimated rental value1 2015: £278.1m
1 After additional capex of £363m.
4.8% True equivalent yield 2015: 4.5%
7.8 years 2015: 7.3 years WAULT1 including pre-lets
Ourportfolio
Site of Brunel Building, opposite new Crossrail entrance, for completion in 2019.
PADDINGTON Paddington
Over £200m 22% £100-£200m 41% £50-£100m 22% Below £50m 15%
VICTORIA
Victoria
Crossrail is set to open in 2018 increasing London's rail capacity by 10%, and significantly improving connectivity. Over 70% of our properties are located close to a Crossrail station.
Liverpool Street Farringdon
We own a number of clusters in this vastly improved area of London, all located close to transport hubs. Combined, these assets represent 42% of our portfolio. These hubs include Angel and Farringdon as well as Old Street Roundabout and Shoreditch.
| £0-£30 per sq ft | 6 |
|---|---|
| £30-£40 per sq ft | 12 |
| £40-£50 per sq ft | 24 |
| £50-£60 per sq ft | 34 |
| £60+ per sq ft | 24 |
| Fitzrovia1 | 35% |
|---|---|
| Victoria | 11% |
| Baker Street/Marylebone | 4% |
| Paddington | 2% |
| Soho/Covent Garden | 1% |
| Mayfair | 1% |
| Islington/Camden | 9% |
| Clerkenwell | 11% |
| Old Street | 10% |
| Shoreditch/Whitechapel | 8% |
| Holborn | 4% |
| Holborn (non-Tech Belt) | 2% |
| Provincial | 2% |
| 1 Includes North of Oxford Street |
and Euston. Page 171
| % of rental income2 | |
|---|---|
| Burberry | 7.5 |
| Arup | 4.7 |
| Expedia | 4.3 |
| Government | 4.0 |
| Cancer Research UK | 3.8 |
| Publicis Groupe | 3.5 |
| WPP Group | 3.1 |
| Regus | 2.6 |
| FremantleMedia Group | 2.4 |
| The Office Group | 1.7 |
2 Based upon contracted net rental income of £150.3m.
| Villages | Derwent London properties |
|---|---|
| Tech belt | Crossrail |
Portfolio weighting
West End 63% City Borders 35%
| Media, TV, marketing and advertising |
30 |
|---|---|
| Professional and business services |
23 |
| Retail head offices and showrooms |
18 |
| Retail sales | 10 |
| Charities | 4 |
| Government and public administration |
4 |
| Financial | 3 |
| Other | 8 |
| 3 Expressed as a percentage of |
annualised rental income of the whole portfolio.
Average lease length of 6.5 years (7.8 years including pre-lets)
Portfolio's average rents are undemanding
The Group's reversion could add 89% to cash rents
Maintain strong and flexible financing
Acquire properties and unlock their value
Create well-designed space
Optimise income
Recycle capital
In February 2016 the office element was pre-let to Capita on a 20-year lease at £7.4m pa, an average of £86 per sq ft.
A revision to the planning permission has reduced construction risk, and will enable us to create 2.9 metre floor to ceiling heights on the whole space and provide more efficient floor plates.
During Q1 we received two major planning consents. At Monmouth House EC1 we have the ability to replace the existing 69,000 sq ft with a new 125,000 sq ft building beside White Collar Factory. At Balmoral Grove N7 we secured planning for a residential scheme. This latter site was sold profitably in Q4 for £24m.
In February we arranged £105m of 12-15 year money via a US Private Placement with three new lenders. This further broadened our sources of debt and extended our average debt maturities.
In a year of significant political change, including the EU referendum, Derwent London's business continued to make good progress. We set a new record for lettings, completed four refurbishments and progressed four developments. We raised rental income and extended our debt maturities. At the same time we broadened our support to local communities, and our business and developments won a number of awards.
The White Chapel Building E1 20 Farringdon Road EC1 78 Whitfield Street W1 78 Chamber Street E1
White Collar Factory EC1 The Copyright Building W1 80 Charlotte Street W1 Brunel Building W2
Letting momentum in the 16-storey tower was maintained throughout the year; Adobe took two floors in Q1 and in Q2 the 9th and 10th floors were let to Capital One. Runpath and Spark44 joined the roster of tenants in the second half of the year. As a result, the scheme went from 29% to 65% pre-let during 2016, with the tower 74% pre-let at the year end.
Revolving facility extended
In June we exercised the first one-year extension option on the £75m Wells Fargo revolving facility, extending the term date to July 2021.
We launched the first tranche of our Tech Belt community fund, which runs alongside our successful Fitzrovia community fund, now in its third year. Together these represent a £550,000 commitment to support local causes.
By the end of September we had pre-let 75% of Phase 1, with two thirds of these lettings achieved after the EU referendum. Lettings included GDS, Perkins+Will, Reddie & Grose, Shipowners' Club and Unruly.
In September we sold 75 Wells Street W1 for £40m.
We won EPRA Gold Awards for Financial Reporting and Sustainability for the fourth year in succession.
Disposal activity continues In November we sold Tower House WC2 for £66m and in December we sold 120-134 Tottenham Court Road W1 for £69m, taking our investment sales to £208m. On average these sales were in excess of book value with 98% exchanged or completed after the EU referendum.
Immediately following the EU referendum we considered pausing this development following the completion of groundworks. The level of our letting activity elsewhere in the portfolio, together with the relatively low breakeven rent, has led to our decision to continue with the project.
During the year we finished 326,0001 sq ft of refurbishments, the majority of which completed in Q4. Principal projects were The White Chapel Building E1, 20 Farringdon Road EC1, 78 Whitfield Street W1 and 78 Chamber Street E1. These refurbishments are currently 71% let.
In December we exercised the second one-year extension option on £450m of the £550m revolving facility, extending the maturity to January 2022. An accordion option was agreed on the remaining £100m which could extend the maturity to the same date.
Derwent London plc Report & Accounts 2016
Brunel Building
Our 2016 results demonstrate the resilience of our business model. Derwent London successfully delivered its operational strategy throughout 2016 with record lettings despite significant political change and the ensuing uncertainty.
Robert Rayne Chairman
Derwent London delivered its operational strategy successfully throughout 2016 despite a background of significant political change and the ensuing uncertainty originally stemming from June's EU referendum. 2016 was another record year of lettings for us which, combined with those achieved in recent years and reduced finance costs, resulted in an increase in EPRA earnings per share for the year of 7.9% to 76.99p.
Today's results demonstrate the resilience of our business model which is underpinned by continued demand for our well designed mid-market product in improving locations. We have a strong financial base, and an investment market that allows the balance between secure income and development opportunity to be maintained. In addition, we have talented and experienced people across the business with well established relationships with occupiers, third party professionals and local communities. These strengths are the result of considerable investment which has helped reinforce the Group's reputation, culture and brand.
Over the last few years we have looked to bolster the recurring earnings side of our total return model and this year's increase should be seen as a continuation of the substantial growth achieved in 2015. We have also significantly de-risked our development pipeline over recent months, and together, these two strategies have enabled us to recommend raising the final dividend by 25.0% to 38.50p, which takes the full year dividend to 52.36p. At this level the dividend will be covered 1.5 times by recurring earnings, and our average annual dividend growth since we converted to a REIT has been 9.8%. In addition, following the value-enhancing transactions announced today, we are proposing a special dividend of 52p per share to be paid along with the final dividend in June 2017.
The change in market sentiment in the second half of the year resulted in considerable share price weakness across the sector and a fall in the underlying value of our portfolio by 1.7% since June and 0.2% for the year. However, as stated above, the Group's recurring earnings have seen a strong increase and generated a positive total return for the year. Consequently the EPRA diluted NAV at 31 December 2016 was marginally higher at 3,551p per share, an increase of 0.5% over the year.
Whilst overall take-up in London offices slowed in 2016, our letting activity captured £31.4m pa of rental income on 547,500 sq ft, which surpassed our previous record achieved in 2015 by 16%. Despite a quieter period around the EU Referendum activity was spread evenly between the first and second halves.
The ongoing resilience of our particular markets, together with the Group's financial strength and the attractive potential returns of the Brunel Building development in Paddington W2, gave us the confidence to continue with this project. Overall, we incurred £213.5m of capital expenditure on our development projects during 2016 and at the year-end we were on site at four, Brunel Building W2, 80 Charlotte Street W1, White Collar Factory EC1 and The Copyright Building W1. Capital expenditure in 2017 is estimated at £158m, with no major schemes due to start.
The second half of the year saw a significant devaluation of sterling and an increase in overseas demand focussed on properties that produce long-term income. We took advantage of this supportive market and made 98% of our total investment sales of £208.0m after June. Overall, these disposals produced a 3.7% surplus over December 2015 book value.
During the year we extended the maturity of our debt through the issue of £105m of bonds in a US Private Placement and the extension of both our bank facilities. At the year end our financial position remained strong with interest cover of 3.7 times and LTV of 17.7%, while our undrawn facilities and cash exceeded our future capital expenditure on committed projects.
Our Sustainability Report, which is published simultaneously with the Annual Report, demonstrates the further progress we have made in this area. A major part of our sustainability programme is our work on relationships with our communities. We are therefore pleased to have extended our commitment by inaugurating a Tech Belt Community Fund to operate alongside our similar long-standing arrangement in Fitzrovia. Given the importance that the Group attaches to its sustainability performance, it was pleasing to be ranked 12th overall and top in the UK in Corporate Knights Global 100, an annual list of the world's most sustainable companies announced at the recent World Economic Forum at Davos.
One of the Group's distinctive features is its focus on innovative design and this has again been recognised externally with two recent schemes, Turnmill and White Collar Factory, both winning awards.
I would once again like to thank the Derwent London team for their continued expertise, enthusiasm and dedication without which these results would not have been possible.
Stuart Corbyn, who has served as a non-executive Director of the Company since 2006, is due to step down from the Board at the forthcoming AGM in May 2017. I would like to thank him for the advice and sound judgement that he has provided throughout this period. The Nominations Committee has started the process of finding a replacement for Stuart to allow a smooth transition. We anticipate making further announcements concerning this matter over the next few months.
We expect much of the current economic uncertainty to persist as UK–EU negotiations are likely to be protracted. How this impacts on London businesses remains to be seen but, so far, activity has been surprisingly resilient with UK economic activity improving in the second half. However, although we believe that it is right to remain cautious and have positioned the business accordingly, we have limited space currently available and our product and locations continue to attract good occupational and investment demand.
Robert Rayne Chairman 28 February 2017
London's economy and population has grown significantly in the last thirty years. It has benefitted from the deregulation and subsequent expansion of the financial sector, and more recently from the growth of the creative industries.
London has attracted both human and financial capital over recent years driving population growth, economic expansion and the creation of many new businesses, particularly in the services and creative sectors. This has helped to regenerate parts of the city which were previously less popular. As a major global hub London has also performed strongly compared with many European cities. Britain's decision to vote to leave the EU may present challenges to this position and the majority of Londoners voted to remain. However, we are confident that, although in the medium term some jobs may be repatriated to the EU, in the longer term London could benefit from UK's potentially increased flexibility.
London's population and workforce London's population totals around 8.8m and is ethnically diverse. The population is expected to grow to 10m by 2028.
The workforce totalled 5.7m in 2016 which is 0.7m more jobs than the previous 2008 peak1.
London is a leading global centre for talent and high skills employment. 1.5m Londoners work in knowledge-based sectors, 47% of the combined total of the next five top European cities2.
London's gross value added (GVA) increased 2.4% in 2016 and is expected to grow between c.1.5-2.5% pa over the next three years.
It is the pre-eminent business capital in Europe benefitting from its time zone, the wide understanding of the English language and its legal system. It is home to 40% of the European headquarters of the world's top companies2. Oxford Economics estimates 200,000 people are employed in London's tech sector and recently Apple, Expedia, Facebook and Google among others have confirmed new headquarter investments.
London has some of the best higher education facilities with several universities ranked among the best in the world. In 2015, Imperial College and University College London were ranked in the top ten with King's College 21st and LSE 38th3.
London boasts numerous attractions: four UNESCO world heritage sites, museums, theatres, opera houses, sporting venues and world-class retail. It has c.8,000 restaurants with cuisine from 70 countries. It was ranked Europe's most popular tourist destination in 20164, with 19.9m visitors.
"We see a lot of opportunity in London given the continued growth of ecommerce and technology industries and the strong pool of talent in the city."
Expedia group
London's office market totals 225m sq ft, with the West End and City representing 72% of the total. Around 75% of the West End office stock lies in conservation areas which limits development opportunities. This compares to c.33% in the City.
The City and Docklands markets hold the highest concentration of office towers and financial occupiers.
Our share of London's office market is 2.2%.
Professional and business services have long represented a high proportion of take-up. More recently creative industries' take-up has matched that of financial services.
The table below shows the sources of take-up in the past five years.
| % | |
|---|---|
| Creative Industries | 25 |
| Banking & Finance | 21 |
| Business Services | 19 |
| Professional | 11 |
| Consumer Services & Leisure | 9 |
| Public Sector/Regulatory Bodies | 7 |
| Insurance | 4 |
| Manufacturing, Industrial and Energy | 4 |
| Source: CBRE |
The London office market has proven to be cyclical over time, and is influenced by a number of external and internal factors. After six and a half years of growth, capital values turned in June 2016 and fell 1.8% in the second half of the year, to record -0.7% for the year. Rental values continued to rise in the second half to show growth of 3.6% in the year.
continued
Crossrail opens in 2018
© Crossrail
London's growth has stimulated strong demand for space in recent years with resulting price rises and Derwent London's portfolio has seen increasing rents and low vacancies. This growth produces challenges for our occupiers, suppliers and contractors and it is also one of the main reasons that business rates in central London are due to rise significantly in April 2017. The market may cool in the future but we believe that the positioning of our well designed, middle-market rental buildings, our active ongoing management and long-term commitment to projects means we are relatively well placed to capture demand.
The concerns over affordability, accommodation, transport, pollution and inequality were highlighted in the Mayoral election in May 2016. The new mayor Sadiq Khan has made building more homes his 'single biggest priority'1, and this may impact the planning process with a greater focus on affordable residential delivery.
Progress continues to be made improving London's transport infrastructure. The opening of the Elizabeth Line (Crossrail) in 2018 will add c.10% to London's rail network. The next major rail project to start will be HS2, which will improve London's rail connections with the north of the country. The government, after many years of consultation, has opted to approve the expansion of Heathrow with a third runway. Despite this, Gatwick has plans for considerable investment, and the mayor and the UK Government have approved plans for the expansion of London City airport. These moves should ensure that London remains well served by rail and air.
Following the result of the EU referendum, the UK is expected to trigger Article 50 in March 2017. The uncertain outcome of the ensuing negotiations has created new concerns for London's future. At the heart of any negotiations on leaving the EU lie its four freedoms of movement: goods, services, capital and labour. London's economy has taken advantage of these and therefore is likely to suffer if they are affected. The two most relevant issues to London appear to be:
London's success as an international financial and insurance centre has proved an important part of its economy. It is feared that London may lose access to parts of the EU market as part of the Brexit terms. This could lead to the relocation of services and staff to other EU cities, thereby reducing demand for London offices and potentially creating office vacancies. The majority of financial services jobs are located either in the financial centre of the City of London or Canary Wharf, two London markets where Derwent London has no direct exposure.
Almost three times the national average of foreign nationals live and work in London and net immigration is seen as a major factor behind its recent population and economic growth2.
At present, the terms under which the UK will leave the EU remain very uncertain, with the UK Government still to exercise Article 50 and both France and Germany, amongst others, facing national elections later in the year. In the meantime the UK and London economies have remained resilient and there has been good demand for our mid-market offices. However we expect some caution to prevail until the UK's future relationship with the EU becomes clearer.
We carefully determine the leasing and marketing strategy for each of our buildings early in the design process. We continually review the market and adapt our strategy and aspirations accordingly. At White Collar Factory, for instance, we started place-making and branding four years before the buildings were due to complete and undertook three phases of marketing.
Where we undertake early pre-letting, we endeavour to let the lower parts of the building first and, where possible, incorporate a variety of innovative ideas such as index-linked uplifts and flexibility on assignments and underletting. This helps with more proactive asset management opportunities for the future.
The success of White Collar Factory and The White Chapel Building in terms of pre-letting has reinforced awareness of our brand within the market. It also demonstrates our ability to transact quickly and at the right price. The strength of the brand is embedded within the community of property agents who advise and undertake the majority of transactions on behalf of tenants. Our innovative and considered designs, coupled with generous volumes, communal terraces and sustainable, 'wellbeing-led' workplaces are characteristics that occupiers appreciate.
We were one of the first UK landlords to embrace and pursue the WiredScore accreditation, a rating scheme that certifies the internet connectivity and infrastructure of a building. We were delighted to receive the first European Platinum level certification for our White Collar Factory development.
Occupiers are actively pursuing options close to Crossrail stations as this major infrastructure project nears completion. Many of our holdings are benefitting as over 70% are within 800 metres of a Crossrail entrance; notable amongst these are our Farringdon station cluster, 80 Charlotte Street (Tottenham Court Road station) and Brunel Building (Paddington station). In addition, we believe there is still latent value, particularly in our retail holdings on Oxford Street, which will be released once the line is open.
We listen regularly to both our existing tenant base and those in the wider business community. We try to anticipate trends and incorporate them early into our designs, such as the provision of open space (including roof terraces), public realm enhancements (the public square at Old Street Yard and 'pocket park' at 80 Charlotte Street), vertical connectivity and interesting reception/lobby spaces which double up as communal spaces.
Although the markets slowed immediately after the EU Referendum, the proactive pre-letting strategies we had across our key developments helped propel momentum in the second half of the year. Our vacancy rate is low, and as Brunel Building and 80 Charlotte Street will not be delivered until 2019, we have time to secure early pre-lets and push forward with our campaigns, which will benefit from on-site marketing suites. The pre-let to Arup at 80 Charlotte Street announced after the year end demonstrates the success of our strategy.
1 A Manifesto for all Londoners March 2016.
2 Working Capital 'The role of migrant workers in driving London's economy' Cebr November 2016.
There are significant opportunities within our £5bn portfolio of 91 properties, mainly in London's West End and Tech Belt, to capture reversion and create value.
The Group is financed through a combination of shareholder capital and borrowings from a range of sources.
Our experienced management provides direction to teams that specialise in our core activities. Collaboration within an open and collegiate culture engenders creativity and innovation.
We build dynamic and open relationships with potential and existing occupiers, local communities and investors (both shareholders and funders). This enables us to identify and respond to the needs of these key stakeholders.
On central London We concentrate on the markets we know best and in which we can deliver our good value mid-market product. Our knowledge gives us a competitive advantage, helping us to find relative value and to identify up-and-coming areas. We have created a number of property clusters in the West End and the Tech Belt and substantial parts of our portfolio will benefit from the opening of Crossrail in 2018.
We believe that good architecture attracts tenants, and that it is important to be innovative, provide flexible space and continually improve quality. These distinctive attributes have helped develop the Derwent brand.
We expect to have a positive impact on the communities and areas surrounding our buildings and ensure that our schemes are efficient, sustainable and not over specified.
The Group's attitude to good governance reflects its culture which is shaped by the Board. Through good governance, the Group aims to earn stakeholders' trust and secure its 'licence to operate'.
Well-designed buildings in vibrant locations providing flexible space at mid-market rents that appeal to occupiers and improve the local environment.
Above average long-term financial returns for shareholders. A conservative financial base and a strong balance sheet, demonstrated by low gearing and strong interest cover.
A rewarding environment in which our people are valued and developed to fulfil their potential.
Occupiers: benefit from our active management approach and high quality and sustainable space that meets their needs, helping them attract talent. Many occupiers have moved within the portfolio as their businesses have grown.
Local communities: benefit from the regenerative effects of redevelopment, investment and local projects that we initiate or support.
Investors: benefit from regular communication which provides an appreciation of how our business model is able to deliver in varying market conditions.
| Lettings | 22 |
|---|---|
| Asset management | 24 |
| Developments for delivery in 2019 | 26 |
| Acquisitions and disposals | 28 |
| Measuring our performance | 30 |
| Property review | 40 |
| Finance review | 52 |
| Sustainability | 66 |
| Our people | 68 |
| Communication with shareholders | 83 |
At the centre of the Group's risk management process is its risk register.
For REITs, market conditions change as a result of a property cycle. We aim to increase our development risk and activity while reducing financial leverage into a rising property market. Ideally, our lowest leverage is near the peak and our maximum leverage near the floor.
Although all properties are treated individually, decisions are taken in the context of the Group as a whole. This is to ensure that there is the suitable balance between income and development, that the scale and pace of development activity is appropriate to the larger Group, that the longer-term growth potential remains intact and that the Group has the financial resources to adapt to different market conditions.
From its very origins Derwent London has had a vision to become a significant and active London landlord. This reinforces our commitment to quality, allows us to look beyond initial returns for long-term gains, and to build lasting relationships with occupiers, communities and local authorities.
| Our strategic objectives | Priorities for 2016 | Achievements in 2016 | |||
|---|---|---|---|---|---|
| Acquire properties and unlock their value | Page 28 | ||||
| Buy at low capital values in improving London 'villages', capitalising on our detailed understanding of London Add to our pipeline of future opportunities and maintain this proportion of our portfolio at around 50% |
Seek acquisitions that meet our strategic criteria Achieve planning on Monmouth House EC1 Complete The White Chapel Building E1 refurbishment Maintain balance between income generation and development activity Planning secured for a potential 125,000 sq ft redevelopment of Monmouth House EC1 The White Chapel Building E1 refurbishment was completed and the basement acquired for £12m, creating the potential for Phase 2 of the refurbishment At the year end, 43% of the portfolio was potentially available for regeneration |
||||
| Create well-designed space Use top design teams to create attractive, adaptable and |
Page 26 | ||||
| modern offices whilst avoiding over-specification Incorporate features in our developments to reduce the environmental impact and increase their appeal Invest in public realm to provide desirable spaces for occupiers and local communities |
Complete White Collar Factory EC1 Continue construction at The Copyright Building W1 and 80 Charlotte Street W1 Commence Brunel Building W2 All priorities achieved with the exception of the completion of White Collar Factory EC1, which was delayed until Q1 2017 |
||||
| Optimise income | Pages 22 and 24 | ||||
| Understand occupiers' needs by building strong relationships through regular dialogue Respond to occupiers' needs by varying terms of leases or by relocating them within the portfolio Ensure income growth by incorporating minimum rental uplifts in leases when appropriate |
20 Farringdon Road EC1 Building E1 were 81% and 78% let, respectively above December 2015 ERV |
Let available space at White Collar Factory EC1, The White Chapel Building E1 and Continuously monitor portfolio for further asset management initiatives At the year end, The Copyright Building W1 and White Collar Factory EC1 were 81% and 65% pre-let, respectively. 20 Farringdon Road EC1 and Phase 1 of The White Chapel New Lettings: £31.4m pa of income secured across 547,500 sq ft, on average 6.3% Rent reviews: income increased by 42% to £18.3m pa on 395,500 sq ft Lease renewals and regears: income increased by 55% to £10.2m pa on 198,500 sq ft |
|||
| Recycle capital | Page 28 | ||||
| Regularly review the status and options for each property in the portfolio When market conditions are favourable dispose of assets where: • future growth is limited • they are non-core |
book values | Monitor portfolio for further opportunities to recycle capital Three remaining residential units at Queens W2 and The Corner House W1 sold Investment property sales raised £208m, on average 3.7% above December 2015 |
|||
| Maintain strong and flexible financing | Page 52 | ||||
| Ensure sustainable interest cover Ensure appropriate level of gearing for market conditions and our development activity Provide protection from increases in interest rates Maintain good relationships with a broad spread of funding sources Extend loan durations when rates are attractive |
Put in place additional long-term fixed rate debt Maintain good interest cover £105m of long-term debt raised via US private placement notes Maturity on £525m of revolving facilities extended by one year During 2016, the Group's interest cover was 370%. At the year end, its LTV ratio was 17.7% and it had £383m of cash and undrawn facilities |
return measure our performance across all our strategic objectives.
| KPIs and business metrics that measure our performance |
Priorities for 2017 | Principal risks to our strategic objectives |
||
|---|---|---|---|---|
| Page 30 | Page 62 | |||
| Total property return Capital return |
Continue to seek acquisitions that meet our strategic criteria |
Inconsistent strategy Inconsistent development programme |
||
| Gearing and available resources Reversionary percentage |
Maintain balance between income generation and development activity |
Adverse Brexit settlement Increase in property yields |
||
| Development potential | Reduced development returns | |||
| Cyber attack | ||||
| Regulatory non-compliance Shortage of key staff |
||||
| Total property return | Complete White Collar Factory EC1 and | Adverse Brexit settlement | ||
| Capital return | The Copyright Building W1 | Reputational damage | ||
| Tenant receipts | Progress 80 Charlotte Street W1 and | Reduced development returns | ||
| Tenant retention | Brunel Building W2 | Cyber attack | ||
| Development potential | Regulatory non-compliance | |||
| Void management | Contractor/sub-contractor default | |||
| BREEAM ratings | Shortage of key staff | |||
| Energy performance certificates | ||||
| Total property return | Continuously monitor portfolio for further | Inconsistent strategy | ||
| Capital return | asset management initiatives | Inconsistent development programme | ||
| Interest cover ratio | De-risk 80 Charlotte Street W1 and Brunel | Adverse Brexit settlement | ||
| Void management | Building W2 through pre-lets | Reputational damage | ||
| Tenant receipts | Extend income through renewals and regears | Reduced development returns | ||
| Tenant retention | at properties not earmarked for regeneration | Cyber attack | ||
| Reversionary percentage | Regulatory non-compliance Shortage of key staff |
|||
| Interest cover ratio | Monitor portfolio for further opportunities | Inconsistent strategy | ||
| Development potential | to recycle capital | Inconsistent development programme | ||
| Gearing and available resources | Adverse Brexit settlement | |||
| Increase in property yields | ||||
| Cyber attack Shortage of key staff |
||||
| Interest cover ratio | Refinance £28m secured facility maturing | Inconsistent strategy | ||
| Gearing and available resources | in 2018 | Inconsistent development programme | ||
| Reversionary percentage | Maintain or strengthen available facilities | Adverse Brexit settlement | ||
| Maintain good interest cover | Reputational damage | |||
| Increase in property yields | ||||
| Reduced development returns | ||||
| Cyber attack | ||||
| Regulatory non-compliance Shortage of key staff |
Our Leasing team had its best year yet in 2016. The fact that momentum continued throughout the year supports our view that we are offering the right product on competitive terms. The year began with strong demand, but with a vacancy rate of less than 2.0% our activities focused on the development and refurbishment programme for delivery before the end of 2017.
Ben Gummer, minister for the Cabinet Office and Paymaster General referring to The White Chapel Building E1
The year began strongly, with a good first quarter dominated by the pre-letting of the office element of The Copyright Building, 30 Berners Street W1 to Capita. We were able to close the deal by agreeing to extend Capita's lease with its existing landlord so that this is now co-terminous with the delivery of the new space. Such deals demonstrate the importance of some flexible thinking supported by balance sheet strength.
Letting progress at major schemes – 31 December 2016
Q2 was quieter ahead of the EU referendum but momentum was maintained with further lettings at White Collar Factory EC1. This continued throughout the year so that we raised pre-letting levels on the building from 29% to 65% by the year end. The development will complete in Q1 2017 and will be home to a strong roster of occupiers including Adobe, AKT II, BGL, Capital One, Runpath, Spark44 and The Office Group.
Activity picked up again in Q3 and we delivered all the deals that were under negotiation before the referendum vote. Our major achievement here was the letting of the majority of Phase 1 of The White Chapel Building E1. This refurbishment completed in October 2016 having started earlier in the year. The building is now 78% let to occupiers including GDS, Perkins+Will, Reddie & Grose, Shipowners' Club and Unruly. Given we only acquired the building in December 2015, a very quick turnaround has been achieved.
Activity continued into Q4 so that by the end of the year we had secured £31.4m pa of rent through lettings, which beat our previous record by 16%. It also meant that, at the year end, only 202,150 sq ft, or 28%, of our major 2016-17 project deliveries was still available.
| Date let | Tenant | Rent | Phase 1 | £psf Rent Min uplift |
|
|---|---|---|---|---|---|
| Q3 2016 | GDS | £2.85m pa | Phase 1 54,700 sq ft |
52.00 – |
Q4 2016 Lebara |
| 5,150 sq ft | |||||
| £0.28m pa | |||||
| 20,700 sq ft | £55.00 psf 49.50 52.50 |
||||
| Q3 2016 | Reddie & Grose | £1.01m pa | |||
| Q2 2016 | Perkins+Will | £1.19m pa | 26,400 sq ft | 45.00 49.50 |
|
| Q3 2016 | Shipowners' Club £0.62m pa | 13,100 sq ft | 47.50 – |
||
| Q3 2016 | Unruly | £1.05m pa | 24,200 sq ft | 45.00 49.50 |
|
| Phase 2 | |||||
| Phase 2 | |||||
| e White Chapel Building E1 |
Optimise income Create well-designed space
Our asset and property managers constitute Derwent London's largest team, which reflects the fact that completed and let investment buildings represent the bulk of our assets.
In these more uncertain times, the effectiveness of our teams can give us an edge in attracting new occupiers and retaining existing ones.
Our aim is to foster good and enduring relationships with all our occupiers, partly by providing an excellent level of service and a welcoming atmosphere, which also leaves a lasting positive impression on everyone who enters our buildings. Key aspects of our strategy are stunning entrances and continuous investment, not only in the physical space, but equally important, to ensure the high quality of personnel in building management, reception and security. This hands-on approach gives us excellent insight into our occupier base and ensures we can anticipate and respond to its needs.
Angel Building is an example of our approach to larger multi-let buildings with attentive on-site teams, an impressive reception, generous seating areas and an independent food offering, which has stood the test of time as well as enhancing the environment. We are duplicating this approach in our new multi-let schemes: The White Chapel Building and White Collar Factory. Whilst it may not be appropriate to replicate the full range of amenities in some of our smaller schemes, we still provide good quality entrances and services which our occupiers are able to enjoy.
We believe the overall effectiveness of our strategy and the Derwent experience is borne out by the fact many of our existing occupiers have previously occupied other Derwent London buildings, and we have good retention rates on lease expiries. Multi-let assets and shorter leases are therefore seen as an opportunity rather than a threat.
Another side to good customer service is attracting high quality occupiers and we discuss on a weekly basis any change or concerns regarding existing tenants. Bad debts across our portfolio have been kept to a minimum, even in the depths of previous recessions.
Approximately one fifth of our reversionary upside derives from re-setting passing rents to market either on review or on lease expiry. We have made good progress in the past year capturing £5.6m of additional rental income, a 41% uplift over the previous level. This is discussed in our Property review. However we still have £23.8m of potential uplifts to achieve in the next few years, with 82% falling due in 2017-18.
The Studio, Greencoat Place SW1
Greencoat House SW1
Another aspect of property management is identifying and managing small scale refurbishments or extensions. Such activities not only keep buildings fresh, but also boost the returns from our long-standing holdings. One recent example of this is at Greencoat and Gordon House SW1 which was originally acquired in 1995. In 2014 we bought in the long lease on the basement space and by the end of 2016 we had reconfigured 31,000 sq ft of previous storage and plant rooms into a basement gym, which was pre-let, and 13,000 sq ft of offices.
"This innovative deal offers real benefits to both Derwent and Arup, and was possible because of the strong and trusting relationship developed between our firms over many years."
Arup Group on 80 Charlotte Street W1
Create well-designed space
Brunel Building, Paddington W2 and 80 Charlotte Street, Fitzrovia W1 will provide good quality, well-priced product in locations benefitting from Crossrail.
Paddington is served by a major London rail terminus and underground station, but its rental performance has lagged behind many central London hotspots in this cycle. However, we think that its outlook will be much improved by the time we deliver this property in 2019. Crossrail will open in 2018 greatly improving the location's eastbound connectivity. For instance it will take four minutes to travel by train to Tottenham Court Road. In addition the area is seeing significant investment in the built environment and public realm both by ourselves and other parties.
We acquired the leasehold of the original 78,000 sq ft building, which forms the site of Brunel Building W2, for £23.4m in 2001. We kept it occupied until December 2015, when it was cleared ahead of demolition. During our ownership we achieved planning for a new 240,000 sq ft office development as well as an adjoining residential and retail block. We also negotiated with the freeholder and the intermediate long leaseholder converting our position to a 999-year long leasehold with a 2.5% ground rent on the offices. The planning uplift represented an increase of 208% in our developable area.
The building, designed by Fletcher Priest architects, will have column-free floors, two major terraces on the upper floors, and has 17,000 sq ft floorplates which are designed to be multi-let. It will open onto a new public canalside walkway and sits opposite one entrance to Paddington Crossrail station. Laing O'Rourke is the contractor on a fixed price contract. The ERV is £62.50 per sq ft, and we estimate our break-even rent is only c.£46 per sq ft.
Brunel Building, Paddington, is well placed by a Crossrail station, which is expected to significantly improve the area's eastbound connectivity in 2018.
Brunel Building W2
80 Charlotte Street W1
Fitzrovia is one of London's most improving areas. There has been considerable investment in the past few years which has attracted major occupiers such as Capita, Estée Lauder and Facebook. We have already had considerable success at Charlotte Building, 1-2 Stephen Street and 90 Whitfield Street and expect the momentum to continue following the major changes to the eastern end of Oxford Street ahead of the opening of the new Tottenham Court Road Crossrail station in 2018. Significant investment in the public realm is planned, including improvements to Tottenham Court Road with the introduction of increased pedestrianisation and public spaces.
80 Charlotte Street W1 is a major one and a half acre site. The majority of the buildings have been home to Saatchi & Saatchi for 40 years. In 2016 Saatchi completed its move to two new buildings that we had created at Turnmill EC1 and 40 Chancery Lane WC2. As a result we will now be able to complete the site demolition.
A complete island site in central London is a rare opportunity and we also had the advantage of owning nearby properties. This allowed Derwent London to create a 380,000 sq ft scheme adding 62% to the net lettable area. The island site will comprise 302,000 sq ft of offices, which will have 40,000 sq ft floorplates capable of being multi-let. During 2016 we enhanced the planning to enable us to deliver 2.9m floor to ceiling heights across all the office space. The average ERV on the offices is £80 per sq ft, compared with a break-even rent of c.£58 per sq ft. We are also introducing 14,000 sq ft retail, 14,000 sq ft of private residential and a 'pocket park'. At the adjoining Asta House we are developing 31,000 sq ft of residential space, of which 32% is affordable, plus 12,000 sq ft of offices. Since the year end, Arup has agreed to pre-let 133,600 sq ft for an annual rent of £9.7m.
We believe that an active management approach enables us to review and adjust the portfolio's balance between worked properties and opportunities. In this way, we maintain our longer term growth profile. It also means that we remain close to the investment market and have frequent evidence to support our portfolio's valuation.
Our basic strategy is to acquire opportunities let on low rents and with low capital values, located in improving areas. These properties will also have refurbishment or redevelopment potential which is not included in the purchase consideration. Generally we aim for each acquisition to be income producing while we are formulating our regeneration plan. Many of our recent acquisitions have been near existing properties thereby creating 'clusters', such as our investments in Clerkenwell close to Farringdon station illustrated here. When we judge that the time is right, we sell assets with lower return characteristics, higher capital values per sq ft or limited value-add opportunities. In addition we have been selling smaller non-core assets where activity would have a limited impact on the Group as a whole.
In 2016 we limited our acquisitions to the long leasehold interest to a lower ground floor at The White Chapel Building E1. We were much more active in terms of disposals with £208m of investment sales, virtually all of which took place after the EU referendum vote. These disposals provided market support for our carrying valuations at a time of greater market uncertainty. The four principal disposals were three office buildings in the West End and an Islington site where we had received residential planning earlier in the year.
Grafton Hotel W1 – sold in 2016
Our acquisitions and disposals in the past six years demonstrate the success of our strategy. During that period we spent £678.1m on acquiring properties predominately in the Tech Belt or Fitzrovia, adding c.1.5m sq ft to our portfolio at an average of £515 psf. Three quarters have subsequently been refurbished or redeveloped, with the remainder either sold, having achieved planning consent, or under appraisal. Over the same period we raised £1,058.5m through the sale of c.1.4m sq ft of properties which had limited future opportunities, achieving an average capital value of £800 psf.
In the past six years we have invested £672.7m of capital expenditure in refurbishing and developing properties. Of this, £380.4m, or 57%, was financed by the net property disposals referred to above, resulting in a net investment of £292.3m.
The White Chapel Building E1
Our objective is to provide above average long-term returns and benefits to shareholders, occupiers and neighbourhoods through the execution of our strategy. In order to assess the effectiveness of the different strands of this strategy, we measure our performance against a number of different benchmarks.
Total return Total property return (TPR) Void management Tenant receipts Interest cover ratio BREEAM ratings
Development potential Reversionary percentage Tenant retention Gearing and available resources Energy Performance Certificates (EPC) Capital return
Total shareholder return (TSR)
We have established a set of Key Performance Indicators (KPIs) which are measured against relevant external and internal benchmarks. In addition to these KPIs, we also use key metrics and the EPRA Best Practice Recommendations (BPR) to monitor the performance of the business. For definitions please see pages 173 and 174.
There is a clear link from our performance measures to the remuneration structure of senior management.
These performance measures are reflected in the remuneration structure of senior management as follows:
The Group's bonus scheme takes into account the total return and the total property return together with a number of other key metrics referred to above.
The vesting level of half an annual award depends on the Group's total shareholder return compared to that of a group of comparator companies. The vesting level of the other half reflects the Group's total property return compared to the IPD Central London Offices index.
Our total return, which reflects the combined effectiveness of all the strands of our strategy, equates to the combination of NAV growth plus dividends paid during the year. We aim to exceed our benchmark which is the average of other major real estate companies.
Although our total return of 1.7% in 2016 meant we underperformed against our peer group, our cumulative performance over the past five years was 124% compared to the benchmark of 83%.
Our total property return gives an indication of the effectiveness of all the property related strands of our strategy. We aim to exceed the IPD Central London Offices Index on an annual basis and the IPD UK All Property Index on a three-year rolling basis.
In a year of lower property returns due partly to greater economic uncertainty, our active approach to asset management and development meant that we exceeded our IPD benchmarks again in 2016. Over the past five years we have exceeded the IPD Central London Offices Index and the IPD UK All Property Index by 13% and 47%, respectively.
Derwent London
IPD Central London Oces Index
IPD UK All Property Index
Acquire properties and unlock their value
Maintain strong and flexible financing
continued
To optimise our rental income we plan to minimise the space immediately available for letting. We aim that this should not exceed 10% of the portfolio's estimated rental value.
To maximise our cash flow and minimise any potential bad debts we aim to collect more than 95% of rent invoiced within 14 days of the due date.
Page 43
We aim for our interest payable to be covered at least two times by net rents. The basis of calculation is similar to the covenant included in the loan documentation for our unsecured bank facilities. Please see note 39 for the calculation of this measure.
% 1.6 1.0 4.1 1.3 2.6
Sustainability has always been at the heart of Derwent London's business model. It is important that our buildings are attractive to tenants and that they are also environmentally sound and efficient. BREEAM is an environmental impact assessment method for non-domestic buildings. Performance is measured across a series of ratings; Pass, Good, Very good, Excellent and Outstanding. We target that all of our major new developments in excess of 5,000m2 should obtain a minimum BREEAM rating of 'Excellent' and all major refurbishments a minimum rating of 'Very good'.
Our performance
Our performance
Our performance
The net interest cover ratio comfortably exceeded our benchmark of 200% in each of the past five years.
Due to our letting success over the past few years, the EPRA vacancy rate has remained consistently low and well below our maximum guideline of 10%.
2012
Due to the quality of our tenants and effective credit control, rent collection has remained high over the past five years and consequently the level of defaults has been de minimis.
No BREEAM certificates were received in 2016. Based on interim scores, we are expecting our two major developments due for completion in 2017 to meet our benchmark.
| Expected completion |
Rating | |
|---|---|---|
| White Collar Factory EC1 | ||
| (Building 1) | Q1 2017 | Outstanding1 |
| The Copyright Building W1 | Q4 2017 | Excellent1 |
1 Interim score based on design stage.
| Development potential | |||||||
|---|---|---|---|---|---|---|---|
| We monitor the proportion of our portfolio with the potential for |
Our performance The percentage of our |
% | 2012 53 |
2013 55 |
2014 52 |
2015 47 |
2016 43 |
| refurbishment or redevelopment to ensure that there are sufficient opportunities for future value creation in the portfolio. |
portfolio which is available for redevelopment, regeneration or refurbishment was 43% at the end of 2016. |
||||||
| Page 47 | |||||||
| Reversionary percentage | |||||||
| This is the percentage by which the cash | Our performance | % | 2012 | 2013 | 2014 | 2015 | 2016 |
| flow from rental income would grow were the passing rent to be increased to the estimated rental value and assuming the on-site schemes are completed and let. It is used to monitor the potential future income growth of the Group. |
Having increased contracted rent by £13.2m during 2016, the 89% reversion demonstrates that there still remains significant growth potential in our income stream. |
46 | 56 | 64 | 103 | 89 | |
| Page 40 | |||||||
| Tenant retention | |||||||
| Maximising tenant retention following | Our performance | 2012 | 2013 | 2014 | 2015 | 2016 | |
| tenant lease breaks or expiries when | Our retention and re-let rate was | Exposure (£m pa) 14.7 | 20.0 | 17.3 | 17.0 | 11.0 |
Page 43
towards rental income.
Acquire properties and unlock their value
we do not have redevelopment plans minimises void periods and contributes
Maintain strong and flexible financing
Retention (%) 81 74 63 45 63 Re-let(%) 5 14 10 44 26 Total (%) 86 88 73 89 89
continued
Key metrics continued
Consistent with others in its industry, the Group monitors capital on the basis of NAV gearing and the LTV ratio. Our approach to financing has remained robust and our gearing levels reflect our ability to finance our pipeline, cope with fluctuations in the market and react quickly to any potential acquisition opportunities.
We carefully monitor our headroom (i.e. the difference between our total facilities and the amounts drawn under those facilities) and the level of uncharged properties to ensure that we have sufficient flexibility to take advantage of acquisition and development opportunities.
EPCs indicate how energy efficient a building is by assigning a rating from A (very efficient) to G (inefficient). We design projects to achieve a minimum of 'B' certificate for all new-build projects over 5,000m2 and a minimum of 'C' for all refurbishments over 5,000m2.
Page 66
Our gearing levels improved slightly in 2016 and the level of uncharged properties remained above £3.7bn (76% of the portfolio). Headroom increased due to property sales and £105m of long-term debt arranged in 2016.
| Our performance | |
|---|---|
| During 2016 we received | |
| certificates for three of our major | |
| refurbishments, all of which met |
or exceeded our benchmark.
| Completion | Rating | |
|---|---|---|
| Angel Square EC1 | Q1 2016 | C |
| 20 Farringdon Road EC1 | Q3 2016 | B |
| The White Chapel Building E1 | Q4 2016 | B |
We compare our valuation performance with the IPD Central London Offices Index for capital growth.
While central London office values declined in 2016 principally due to an outward movement in yields, our letting activity and the appeal of our mid-market product meant that we exceeded our IPD benchmark by 0.5% and have done so over the past five years by a total of 10.9%.
To measure the Group's achievement of providing above average long-term returns to its shareholders, we compare our performance with the FTSE UK 350 Super Sector Real Estate Index, using a 30-day average of the returns in accordance with industry best practice.
Page 102
Our performance The fall in the share price during the year has meant that the Group underperformed its benchmark index in 2016. However, our ability to deliver above average long-term returns is demonstrated by the fact that £100 invested in Derwent London 15 years or 10 years ago would, at the end of 2016, have been worth £496 or £156 compared with £245 or £77, respectively, for the benchmark index.
| % | |
|---|---|
| 2012 | 39.0 30.8 |
| 2013 | 16.4 17.2 |
| 2014 | 24.8 26.0 |
| 2015 | 24.5 11.4 |
| 2016 | (26.5) (12.4) |
Derwent London
FTSE UK 350 Super Sector Real Estate Index (FTSE All-Share REIT Index used for 2012-2015)
Acquire properties and unlock their value
Maintain strong and flexible financing
John Burns Chief Executive
The Group's operating performance in 2016 illustrates how our business model of creating well-designed mid-market flexible office space in improving locations can make meaningful progress even in less buoyant market conditions.
Derwent London has taken advantage of the recent levels of occupational demand to achieve a record level of lettings in 2016, although the pace of market activity has slowed with the increased uncertainty surrounding Brexit negotiations. We start 2017 with a low EPRA vacancy rate in a central London portfolio let at an undemanding average topped-up office rent of £45 per sq ft. This is comfortably at the lower end of our middle-market target range of £45 to £80 per sq ft, and very much at the affordable end of the spectrum. Our average lease length is 6.5 years or 7.8 years allowing for pre-lets.
Even after allowing for the changing outlook in the last eight months, our contractual cash rent of £150.3m, the basis of the portfolio's net initial yield, can grow by £75.8m from the expiry of rent free periods, minimum uplifts, pre-lets, or from reversions within the investment portfolio. Since then we have moved towards this by regearing the leases on 231,400 sq ft of the office space at Angel Building EC1 so that Expedia can occupy the majority of the building from 2020. This enabled us to capture the significant existing reversion, and there are now minimum uplifts at the next reviews in 2020 and 2021. In addition the income has been extended by between 9 and 14 years to 2030. CBRE estimate that this initiative has enhanced the building's value by 10%.
Letting our developments under construction and vacant space could add another £58.4m to rental income, after allowing for £363m of future capital expenditure to complete. Since the year end we have pre-let £10.7m, or 18% of this additional potential, principally from our first letting at 80 Charlotte Street W1 to Arup, and also another floor at White Collar Factory EC1 to Adobe. As a result our full development programme, which will not complete until 2019, is now 44% pre-let by income compared to 8% in December 2015.
In total, the reversionary gains in our existing portfolio could raise our contractual cash rental income by more than 85% in the next five years. In the coming 12 months, we aim to continue capturing our investment reversion, let the available space in our 2017 project completions and achieve more pre-lets on the 2019 deliveries. This strategy gives us the opportunity to tie in substantial income growth again this year while de-risking the development programme.
The Group continues to look for opportunities to replenish our future pipeline. However a lack of suitable opportunities meant that our only acquisition in 2016 was the long leasehold interest on part of The White Chapel Building. Conversely we were able to identify a number of opportunistic disposals which enabled us to sell £208m of property in 2016 where we felt that we had limited short-term value to add. These disposals have reinforced our balance sheet strength and our LTV ratio has fallen again to 17.7%. Since the year end we have agreed to sell an additional £327m of property above book value, which will further improve our financial position.
We, and our occupiers, face a number of challenges this year with heightened political and economic uncertainty and the impact of business rate increases in London from April 2017. It is still far too early to know what longer term impact these may have on the London market. So far the UK and London economies have been resilient and business confidence indicators have recovered from June 2016 levels. Our portfolio is well-balanced and opportunity rich. We have a skilled management team and financial flexibility. These attributes give us considerable scope to create further growth in our business over the next few years.
Chief Executive 28 February 2017 Our potential reversion and pre-letting opportunities could see us tie in substantial income growth again in 2017.
Despite the talk of an exodus of London bankers, important global businesses continued to make major commitments to London, notably Amazon, Apple, Expedia, Facebook, Google and Wells Fargo. Investment demand remains robust.
Although overall office take-up in 2016 failed to match the high levels of recent years, the outcome proved to be much better than had been expected in the middle of the year. In total take-up of 12.2m sq ft was 17% below the previous year, but still close to the long-term trend. Despite the talk of an exodus of London bankers, important global businesses continued to make major commitments to London, notably Amazon, Apple, Expedia, Facebook, Google and Wells Fargo among others. Three sectors continue to dominate take-up: business and professional services represented 28.6%, TMT's share has risen to 24.6% and banking and finance fell to 20.3%. However central London vacancy rates have risen from 2.3% to 4.3%. In the West End the vacancy rose a little less from 1.9% to 3.5%.
One year ago CBRE estimated that 7.1m sq ft of office space would be developed in 2016. In the event only 61% was delivered. This year it is estimated that 7.2m sq ft will be built, which, if completed, means that over the two years new supply is 2m sq ft lower than was expected at the beginning of last year. In total there is currently 12.5m sq ft under construction, which is 53% pre-let. Therefore the vacant element totals 5.9m sq ft or 2.6% of the total market. The West End's share is 1.9m sq ft under construction which is 41% pre-let, leaving 1.1m sq ft available or 1.2% of the local market.
Overall office rental growth slowed significantly in 2016 with CBRE reporting prime rents up just 1.3%, and West End rents falling marginally by 0.8%. This is the first fall since Q1 2010, and was driven by weakness in the Mayfair/St James's market, which fell 6.3%. Other West End markets were static or showed modest growth. One exception was Paddington where rents rose 8.0%.
Source: CBRE
Source: CBRE
West End office development pipeline The investment market saw strong Q1 and Q4 activity, but was relatively quiet in between which meant that activity levels at £13.1bn were 19% down on 2015. The immediate impact of the EU referendum vote was for yields to move out c.25bp to reflect heightened uncertainty and some early forced sales by the open-ended funds which created an initial sharp adjustment. However the market quickly stabilised: tenants have been resilient and the weaker level of sterling has attracted fresh investment interest as demonstrated by the £4.1bn of deals in Q4. West End annual activity at £4.4bn held up better and was only 8% lower than in 2015, seeing a much higher degree of domestic interest, which accounted for 46% of the transactions as opposed to 30% for the market as a whole. There have already been a number of significant transactions in Q1 2017 which suggests that demand remains robust.
Against the current background, projections on the future must be treated with caution. The London office occupier is likely to face additional costs following the rise in business rates introduced from April 2017, and it is widely expected that some financial and associated jobs will move to other cities in the EU. The latter will ultimately depend on the outcome of UK-EU negotiations, but a number of banks have already suggested that several thousand jobs are earmarked to move. Despite these challenges we believe that there is still scope for selective rental growth, although this is unlikely to occur across all our London villages. On average we expect ERV movements across our portfolio of between 0% and -5% in 2017. We have seen our property yields move out 31bp since December 2015, and these may drift out a little further in the current year.
Source: CBRE
Source: CBRE
The valuation themes were positives from rental growth and our on-site developments, but these were offset by an outward movement in yields and the impact of a rise in Stamp Duty Land Tax.
Nigel George Executive Director
The Group's investment portfolio was valued at £5.0bn at 31 December 2016, a similar level to last year. The valuation themes were positives from rental growth and our on-site developments, but these were offset by an outward movement in valuation yields. In addition we benefitted from an uplift on 132-142 Hampstead Road NW1 where we had conditionally agreed to sell the property. As a result the valuation would have been flat apart from the additional impact of a rise in Stamp Duty Land Tax in March 2016 that lowered values by around 1%. The net outcome was a valuation deficit for the year of £20.9m, before accounting adjustments of £23.3m (see note 16) giving a total reported deficit of £44.2m. This equated to a marginal underlying valuation decrease of 0.2% which followed a 16.5% increase in 2015. The result was an outperformance when measured against our capital value benchmarks, the IPD Quarterly Index for Central London Offices, which decreased by 0.7%, and the wider IPD UK All Property Index which fell by 1.3%.
By location, our central London properties, which represent 98% of the portfolio, saw an underlying valuation decline of 0.1%, with the West End down 0.7% and the City Borders up by 1.0%. The latter area benefitted from letting progress at the White Collar Factory EC1 and The White Chapel Building E1. The 2% balance of the portfolio is our non-core Scottish holdings and these were down 1.9%.
The portfolio's total property return was 2.9% for 2016 compared to 19.9% in 2015. The IPD Index for total return was 2.6% for Central London Offices and 3.5% for All UK Property. Although we outperformed our more comparable benchmark we underperformed the broader index as a consequence of the higher property yields outside London.
Within the investment portfolio, we were on site at four major developments during the year. Two of these, White Collar Factory EC1 and The Copyright Building W1, will be completed in 2017 and two more, 80 Charlotte Street W1 and Brunel Building W2, are in the early stages of development. In total, these projects were valued at £662m delivering a 4.7% valuation uplift. This outperformance came from strong letting activity above ERVs and the valuers releasing development surpluses as projects neared completion. Accordingly, our two near-term completions were up 14.1%. The two recently commenced developments were marked down 5.9% as our valuers increased the development margin targets for a more uncertain market.
The valuer's estimate of the net rental value of these four developments was £65.4m and at year end £18.3m or 28% of this had been secured through our pre-lets. Since then we have signed two further lettings at £10.7m pa, thereby taking our developments to 44% de-risked. The average lease length on our pre-letting activity is 15.4 years. Capital expenditure required to complete these four developments is £347m. While prime West End office rents declined marginally during the year, our mid-market rental locations, such as Fitzrovia, Victoria and the Tech Belt, continued to grow, albeit more slowly than in recent years. Our rental values, on an EPRA basis, rose by 5.1% and followed 11.8% in 2015. During 2016 the West End saw rental growth of 5.5% and the City Borders 4.4%.
On an EPRA basis the portfolio's initial yield was 3.4% which will rise to a 'topped-up' 4.1% following expiry of rent free and half rent periods and contractual rental uplifts. For the previous year, these figures were 3.1% and 3.8%, respectively. The true equivalent yield at year end was 4.83%, a 31bp outward movement over the year and follows 21bp of yield tightening in 2015. This movement was the first outward yield shift since 2009 and was mainly in the second half of the year, when the equivalent yield moved out 25bp. While the economy remained resilient during the year, especially in the second half, the outlook post the referendum remains uncertain and as a consequence buyers are seeking higher yields to reflect the greater potential risks to the rental outlook.
As noted in our 2015 Annual Report we expected a greater proportion of our future return to come from income, developments and asset management. This proved to be the case. As set out in the Portfolio Management section, our asset management initiatives also had some notable success. The outcome was a strong uplift in our annualised contracted rent. Our contracted rent rose 9.6%, from £137.1m to £150.3m, despite disposals lowering income by £6.7m and no income-producing acquisitions. The portfolio's ERV was also up, to £284.5m. Thus, the rental reversion at year end was £134.2m. Of this potential growth £52.0m is contractual from fixed uplifts, the expiry of rent free periods or pre-lets. Adding this to the current income takes our 'topped-up' rent to £202.3m which is 17.2% higher than last year.
The majority of the balance of the reversion comes from letting vacant space, either currently available to occupy or under construction. This totalled £58.4m. The main elements of this are the ERVs of our two recent development starts: 80 Charlotte Street and Brunel Building, which total £41.2m. These properties will not be delivered until 2019.
The final component comes from lease reviews and renewals. We made excellent progress in capturing some of this in 2016, but there is still a further £23.8m of potential income to come.
continued
| Vacant | Vacant | Vacant | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Valuation1 | Occupied | available | refurbishment | project | Total | ||||
| Valuation £m |
Weighting % |
performance % |
floor area2 '000 sq ft |
floor area '000 sq ft |
floor area '000 sq ft |
floor area '000 sq ft |
floor area '000 sq ft |
||
| West End | |||||||||
| Central | 2,716.0 | 54 | (0.6) | 2,315 | 33 | 52 | 640 | 3,040 | |
| Borders | 440.1 | 9 | (1.5) | 516 | – | – | – | 516 | |
| 3,156.1 | 63 | (0.7) | 2,831 | 33 | 52 | 640 | 3,556 | ||
| City | |||||||||
| Borders | 1,724.1 | 35 | 1.0 | 1,795 | 76 | 109 | 102 | 2,082 | |
| Central London | 4,880.2 | 98 | (0.1) | 4,626 | 109 | 161 | 742 | 5,638 | |
| Provincial | 100.3 | 2 | (1.9) | 337 | 4 | 2 | – | 343 | |
| Total portfolio | 2016 | 4,980.5 | 100 | (0.2) | 4,963 | 113 | 163 | 742 | 5,981 |
| 2015 | 4,988.5 | 100 | 16.5 | 4,745 | 69 | 421 | 934 | 6,169 |
1 Properties held throughout the year.
2 Includes pre-lets of current major projects.
| Rental | Rental | |
|---|---|---|
| uplift | per annum | |
| £m | £m | |
| Annualised contracted rental income, net of ground rents | 150.3 | |
| Contractual rental increases across the portfolio | 33.7 | |
| Contractual rental from pre-lets on major projects | 18.3 | |
| Letting 113,000 sq ft available floor area | 5.3 | |
| Completion and letting 163,000 sq ft of minor refurbishments | 6.0 | |
| Completion and letting 742,000 sq ft of major projects | 47.1 | |
| Anticipated rent review and lease renewal reversions | 23.8 | |
| Portfolio reversion | 134.2 | |
| Potential portfolio rental value | 284.5 |
| Net | Vacant | Rent review | Portfolio | |||
|---|---|---|---|---|---|---|
| contracted | Average | space | and lease | estimated | Average | |
| rental income | rental | rental value | reversions | rental value | unexpired | |
| per annum | income | per annum | per annum | per annum | lease length1 | |
| £m | £ per sq ft | £m | £m | £m | Years | |
| West End | ||||||
| Central | 80.6 | 35.20 | 47.7 | 31.1 | 159.4 | 6.9 |
| Borders | 19.8 | 38.43 | – | 5.1 | 24.9 | 6.3 |
| 100.4 | 35.79 | 47.7 | 36.2 | 184.3 | 6.7 | |
| City | ||||||
| Borders | 44.7 | 25.62 | 10.6 | 39.4 | 94.7 | 6.2 |
| Central London | 145.1 | 31.84 | 58.3 | 75.6 | 279.0 | 6.6 |
| Provincial | 5.2 | 15.44 | 0.1 | 0.2 | 5.5 | 3.7 |
| Total portfolio 2016 |
150.3 | 30.73 | 58.4 | 75.8 | 284.5 | 6.52 |
| 2015 | 137.1 | 29.28 | 76.4 | 64.6 | 278.1 | 7.0 |
1 Lease length weighted by rental income at year end and assuming tenants break at first opportunity.
2 7.8 years including pre-lets.
2016 was a new annual letting record, with activity evenly spread between the first and second halves of the year.
Paul Williams Executive Director
In 2016 the Group achieved a new annual letting record of £31.4m, surpassing the previous 2015 record by 16%. Activity was evenly spread between the first and second halves and, on average, exceeded the December 2015 ERV by 6.3%, as can be seen in the table below. This reflected the amount of space we had available, predominantly either being developed or refurbished, the suitability of our product and the success of our letting campaigns. As a result we start the year again with a low existing
vacancy rate, but with considerable latent letting opportunity in our development pipeline.
| Performance against Dec 15 ERV |
|||||
|---|---|---|---|---|---|
| Area sq ft |
Income £m pa |
Open market |
Overall1 | ||
| H1 | 267,700 | 16.7 | 6.5% | 6.3% | |
| H2 | 279,800 | 14.7 | 9.0% | 6.3% | |
| 2016 | 547,500 | 31.4 | 7.7% | 6.3% |
1 Includes short-term lettings at properties earmarked for redevelopment.
continued
| Total | Min/fixed | |||||||
|---|---|---|---|---|---|---|---|---|
| annual | uplift at | Lease | Lease | Rent free | ||||
| Property | Tenant | Area sq ft |
Rent £ psf |
rent £m |
first review £ psf |
term Years |
break Year |
equivalent Months |
| Q1 | ||||||||
| The Copyright Building W1 | Capita | 87,150 | 86.001 | 7.4 | – | 20 | – | 34 |
| White Collar Factory EC1 | Adobe | 28,600 | 63.50 | 1.8 | 70.00 | 11.5 | – | 18 |
| Angel Square EC1 | Expedia | 9,850 | 53.50 | 0.5 | 57.50 | 5.3 | 2 | 2 |
| Middlesex House W1 | GHA Services | 4,360 | 70.00 | 0.3 | 72.50 | 10 | 5 | 6 |
| Q2 | ||||||||
| White Collar Factory EC1 | Capital One | 29,500 | 65.00 | 1.9 | 75.35 | 11 | – | 17 |
| The White Chapel Building E1 | Perkins & Will | 26,400 | 45.00 | 1.2 | 49.50 | 10 | 5 | 8, plus 7 if no break |
| 20 Farringdon Road EC1 | The UK Trade Desk | 9,400 | 62.50 | 0.6 | 65.65 | 10 | 5 | 5 |
| 20 Farringdon Road EC1 | Okta | 10,000 | 62.50 | 0.6 | – | 10 | 5 | 6 |
| Q3 | ||||||||
| The White Chapel Building E1 | GDS | 54,700 | 52.00 | 2.8 | – | 10 | 5 | 8, plus 10 if no break |
| White Collar Factory EC1 | Spark44 | 22,900 | 67.50 | 1.5 | 70.00 | 15 | 5 & 11 | 9, plus 6 plus 6 if no break |
| The White Chapel Building E1 | Unruly | 24,200 | 45.00 | 1.1 | 49.50 | 10 | 5 | 9, plus 9 if no break |
| The White Chapel Building E1 | Reddie & Grose | 20,700 | 49.50 | 1.0 | 52.50 | 10 | – | 18 |
| Johnson Building EC1 | Audio Network | 10,800 | 63.50 | 0.7 | – | 10 | 5 | 9, plus 8 if no break |
| The White Chapel Building E1 | Shipowners' Club | 13,100 | 47.50 | 0.6 | – | 10 | – | 19 |
| 78 Whitfield Street W1 | Global Eagle Entertainment |
9,500 | 65.00 | 0.6 | – | 10 | 5 | 6 |
| White Collar Factory EC1 | Runpath | 9,800 | 64.00 | 0.6 | – | 10 | 5 | 9, plus 6 if no break |
| Q4 | ||||||||
| 20 Farringdon Road EC1 | Indeed | 18,200 | 56.50 | 1.0 | – | 5 | 3 | 5 |
| 1-2 Stephen Street W1 | Iron Web | 11,100 | 75.00 | 0.8 | – | 10 | 5 | 9, plus 9 if no break |
| White Collar Factory EC1 | Brainlabs Digital | 11,900 | 62.50 | 0.7 | – | 11 | – | 17 |
| 50 Oxford Street W1 | The Fragrance Shop | 1,000 | – | 0.4 | – | 10 | – | 9 |
1 Excludes reception area.
Last year started well with the pre-let of the whole office element of The Copyright Building W1 on a 20-year lease at an average rent of £86 per sq ft. We continued to let floors of the White Collar Factory EC1 throughout the year, achieving a new record rent of £67.50 per sq ft on the tower. We launched The White Chapel Building leasing campaign in Q2 and the property is now 78% let. The refurbishment at 20 Farringdon Road EC1 is also largely let. On our investment properties we achieved a new rental high at the Johnson Building EC1, and let the last available floor at 1-2 Stephen Street W1.
Active asset management is one way we capture growth. During 2016 we concluded lease renewals and reviews on 419,400 sq ft achieving rents of £19.5m, 40.5% above previous levels and 8.9% above December 2015 ERV. In addition, we regeared leases on 174,600 sq ft adding a further £9.1m of income 59.9% above the previous income and 16.3% above ERV. In total this covered 594,000 sq ft or 12% of our completed portfolio.
Among these transactions we secured significant uplifts on rent reviews at 20 Farringdon Road EC1, Angel Building EC1 and 1-2 Stephen Street W1 where we achieved rents of c.£50, £60 and £70 per sq ft, respectively. We also completed notable lease regears at 60 Whitfield Street W1 and 1 Oliver's Yard EC1. At the former, we provided a capital payment in return for improvements, our current income will increase from £1.6m to £2.2m in 2018, and the lease on 36,200 sq ft has been extended from 2018 to 2029. At the latter we have increased the income on 50,300 sq ft from £1.39m to £2.34m and extended the lease by three years to 2021, with the tenant retaining a break at 2018 on 17% of the space. Both these deals exceeded ERV and improved certainty of income.
At the year-end our EPRA vacancy rate was 2.6% despite a number of completions. We started 2016 with an exceptionally low 1.3% vacancy rate which peaked at 3.3% in November 2016. We have a number of properties completing this year, which could see our vacancy rate rise to 4.5% if we achieve no further lettings.
| Previous | |||||
|---|---|---|---|---|---|
| Area sq ft |
rent £m pa |
New rent £m pa |
Change | Income v Dec 15 ERV |
|
| Rent reviews | 395,500 | 12.91 | 18.32 | +41.9% | +9.8% |
| Lease renewals | 23,900 | 0.93 | 1.13 | +21.3% | -3.4% |
| Lease regears | 174,600 | 5.67 | 9.07 | +59.9% | +16.3% |
| Total | 594,000 | 19.51 | 28.52 | +46.1% | +11.1% |
continued
Profile of rental income expiry1
No lease breaks exercised
Lease breaks exercised at first opportunity
1 Based upon annualised net contracted rental income of £150.3m.
Lease length weighted by rental income and assuming tenants' break at first opportunity.
Since the year end we have pre-let the 13th floor at The White Collar Factory EC1 to Adobe, who had already taken two other floors in the tower. The new letting comprises 14,900 sq ft for a rent of £1.0m pa or £67.50 per sq ft. It is for 11.5 years and incorporates a minimum uplift with a cap and a floor on rental review in five years' time. Adobe received incentives equivalent to 22 months rent free.
We have also made our first pre-letting at 80 Charlotte Street W1, where Arup have agreed to take 133,600 sq ft of offices in the main building taking it to 41% pre-let. They have signed a 20 year unbroken lease at an initial rent of £9.74m, which is equivalent to £75 per sq ft on the main office floors. This income stream will rise by 2.25% pa for the first fifteen years of the lease at which point there is an upward only open market review. After allowing for the impact of the indexation the average rent over the first five years is in line with our December 2016 ERV for the lower floors. In return Arup is receiving incentives equivalent to 33 months rent free. They also have an option to take another 40,700 sq ft.
As reported earlier, the Group has regeared a number of leases with the Expedia group and Cancer Research UK at Angel Building, Islington EC1. Expedia will occupy at least 231,400 sq ft or 93% of the office space from 2020 and has extended its tenure from 2021 to 2030. There are minimum rental uplifts on reviews in 2020 and 2021. In return Expedia will receive incentives equivalent to 21 months rent free. The income from the total office element of the building will rise from £13.3m to a minimum of £15.0m in 2020.
Simon Silver Executive Director
Derwent London is principally a property investor and asset manager, with developments representing 13% of our portfolio by value. These come with a major £363m capital expenditure commitment and an element of operational risk resulting from our approach of starting schemes speculatively. However we do not commit to projects that would unduly stress the balance sheet and only start schemes where we believe the risk/reward ratio is attractive. We have a track record of de-risking our projects as they progress, and our potential profit margins allied to a long-term investment approach allow us significant flexibility on lease terms. Our success in this regard can be seen in the substantial progress we have made in pre-letting 292,000 sq ft or 73% of our 2017 deliveries, which compares to 22% in December 2015.
The delivery of construction projects across the London market continues to be tested this cycle which has led to some delays. White Collar Factory is nearing completion a few months behind our original schedule. The 237,000 sq ft tower building is 80% pre-let with only the top two and a half floors available. The half floor is under option until six months after practical completion. We are now focused on marketing the lower rise buildings surrounding the new open space. Currently we have pre-let 15,600 sq ft of this office space, and 9,000 sq ft of retail is conditionally under offer, which leaves 23,400 sq ft of lower rise offices and the 8,000 sq ft residential space still to let. The ERV of the project is £16.9m and the remaining capital expenditure is £11m.
Last year we announced the pre-letting of the office element of The Copyright Building for twenty years at an average rent of £86 per sq ft thereby largely de-risking the project. We have just started to market the remaining 20,000 sq ft of retail and restaurant space. The project remains on course for delivery in the second half of this year. The ERV of the building is £7.3m net, and the remaining capital expenditure is £24m.
We considered delaying Brunel Building following the Brexit vote. In the event the Group made the decision to continue work due to the development's merits and good levels of occupier interest. This canalside building will provide column-free floors and is located opposite a Crossrail station. Though it caught up a bit in 2016, Paddington has lagged much of central London this cycle and has seen limited development activity. We believe current rental levels are attractive, and the opening of Crossrail in 2018 will significantly enhance eastward public transport links to central West End and the City. Outstanding capital expenditure totals £99m and the ERV is £14.8m net or £62.50 per sq ft. We estimate our breakeven rent at c.£46 per sq ft.
80 Charlotte Street is our largest current project and demolition is underway. The space is designed to be multi-let and comprises three buildings. The largest is 309,000 sq ft of offices and 14,000 sq ft retail. There is an adjoining 14,000 sq ft private residential building and a smaller property opposite at 53-65 Whitfield Street comprising 12,000 sq ft of offices, 21,000 sq ft private residential and 10,000 sq ft affordable residential. With outstanding capital expenditure of £213m and an ERV of £26.4m, this is our most significant current project. The ERV is based off an average office rent of c.£80 per sq ft, whereas we estimate our breakeven rent at c.£58 per sq ft. Since the year end, we have pre-let 133,600 sq ft of the largest building to Arup at a rent of £9.7m. More details of this transaction are discussed under Portfolio Management above, and under Investment Activity below.
During 2016 we had an unusually high level of refurbishment activity, principally due to our opportunistic acquisition of The White Chapel Building E1 with vacant possession. In addition we had projects at 20 Farringdon Road EC1, 78 Whitfield Street W1 and 78 Chamber Street E1. Adjusting for the joint venture interest at Chamber Street these projects totalled 326,000 sq ft and all were completed during the year. They are now 71% let producing £11.7m of rent. The remaining 93,000 sq ft has an ERV of £4.4m. In the current year we will consider whether to commit to Phase 2 at The White Chapel Building, which comprises 85,000 sq ft of ground and lower ground floor space.
Completions and capital expenditure
Longer term we have planning consent for two well-located schemes including 1 Oxford Street W1, the site over the eastern Tottenham Court Road Crossrail station. The other major scheme located immediately south of the White Collar Factory is Monmouth House EC1, where last year we received consent to replace two tired properties with a new 125,000 sq ft project: this represents an 81% uplift in area. We have flexibility as to when to start both projects. Beyond that we believe another 25% of our portfolio, or 1.5m sq ft, has redevelopment or refurbishment potential which means that our overall portfolio remains rich with opportunity.
| Capex to | ||||
|---|---|---|---|---|
| Area | complete | |||
| Property | sq ft | Delivery | £m | Comment |
| Projects on site | ||||
| White Collar Factory, | 293,000 | Q1 2017 | 11 | 276,000 sq ft offices, 9,000 sq ft retail, |
| Old Street Yard EC1 | 8,000 sq ft residential – 70% pre-let overall5 | |||
| The Copyright Building, | 107,000 | H2 2017 | 24 | 87,000 sq ft offices and 20,000 sq ft retail |
| 30 Berners Street W1 | – 81% pre-let overall | |||
| Brunel Building, | 240,000 | H1 2019 | 99 | Offices |
| 55 North Wharf Road W2 | ||||
| 80 Charlotte Street W1 | 380,000 | H2 2019 | 213 | 321,000 sq ft offices, 45,000 sq ft residential |
| and 14,000 sq ft retail – 35% pre-let overall5 | ||||
| 1,020,000 | 347 | |||
| Other major planning consents | ||||
| 1 Oxford Street W1 | 275,000 | 204,000 sq ft offices, 37,000 sq ft retail | ||
| and 34,000 sq ft theatre | ||||
| Monmouth House EC11 | 125,000 | Offices, workspaces and retail | ||
| 400,000 | ||||
| Planning applications | ||||
| 19-35 Baker Street W1 | 293,000 | Planning application submitted for 206,000 sq ft | ||
| offices, 52,000 sq ft residential and 35,000 sq ft retail | ||||
| Grand Total | 1,713,000 | |||
| Current net | Pre-scheme | Proposed | 2017 | 2018 | 2019+ | Total capex | Current | ||
|---|---|---|---|---|---|---|---|---|---|
| income | area | area | capex | capex | capex | to complete | Delivery | office | |
| Property | £m pa | '000 sq ft | '000 sq ft | £m | £m | £m | £m | date | c.ERV psf |
| On-site projects | |||||||||
| White Collar Factory EC1 | – | 124 | 293 | 11 | – | – | 11 | Q1 2017 | £60 |
| The Copyright Building W1 | (0.4) | 86 | 107 | 24 | – | – | 24 | H2 2017 | £80 |
| Brunel Building W2 | (0.1) | 78 | 240 | 46 | 49 | 4 | 99 | H1 2019 | £62.50 |
| 80 Charlotte Street W1 | – | 234 | 380 | 51 | 102 | 60 | 213 | H2 2019 | £80 |
| (0.5) | 522 | 1,020 | 132 | 151 | 64 | 347 | |||
| Other | – | – | – | 16 | – | – | 16 | ||
| Committed projects | (0.5) | 522 | 1,020 | 148 | 151 | 64 | 363 | ||
| Planning and design | – | – | – | 8 | 1 | – | 9 | ||
| Other | – | – | – | 2 | 3 | 10 | 15 | ||
| – | – | – | 10 | 4 | 10 | 24 | |||
| Total | (0.5) | 522 | 1,020 | 158 | 155 | 74 | 387 | ||
| Capitalised interest | – | – | – | 11 | 13 | 14 | 38 | ||
| Total including interest | (0.5) | 522 | 1,020 | 169 | 168 | 88 | 425 |
| Current | Pre-scheme | Proposed | Earliest | ||
|---|---|---|---|---|---|
| net income | area | area | possession | ||
| Property | £m pa | '000 sq ft | '000 sq ft | year | Comment |
| Consented | |||||
| 1 Oxford Street W1 | – | – | 275 | 2018 | Offices, retail and theatre |
| Monmouth House EC11 | 0.6 | 69 | 125 | 2020 | 2016 consent – Opposite White Collar Factory |
| 0.6 | 69 | 400 | |||
| Appraisals2 | |||||
| 19-35 Baker Street W13 | 5.8 | 146 | 293 | 2018 | Joint venture – 55% Derwent London interest |
| Premier House SW1 | 2.2 | 62 | 80 | 2018 | |
| Network Building W1 | 1.9 | 64 | 100 | 2021 | |
| Francis House SW14 | 3.1 | 90 | 130 | TBC | |
| Holden House W1 | 6.0 | 91 | 150 | TBC | |
| 19.0 | 453 | 753 | |||
| Adjustments for JVs | (2.6) | (66) | (132) | 19-35 Baker Street W1 | |
| 16.4 | 387 | 621 | |||
| Consented and appraisals | 17.0 | 456 | 1,021 | ||
| On-site projects | (0.5) | 522 | 1,020 | From table above | |
| Pipeline | 16.5 | 978 | 2,041 |
3 Includes 88-110 George Street, 30 Gloucester Place and 69-85 Blandford Street. 4 Includes 6-8 Greencoat Place SW1.
5 At 28 February 2017.
1 Includes 19-23 Featherstone Street EC1. 2 Areas proposed are estimated from initial studies.
Derwent London plc Report & Accounts 2016
With virtually all our transactions in the second half of the year, 2016 was another year of net property disposals. Our one acquisition has given us the option to refurbish Phase 2 of The White Chapel Building.
David Silverman Executive Director
We comfortably exceeded our initial sales target during the year with virtually all our transactions in the second half. The three major office property sales comprised investments where we considered that the potential to add further significant short term value was limited. At Balmoral Grove N7 we had previously conditionally sold the property for residential redevelopment. All these conditions, including receipt of planning consent, were achieved during the year. We retain a potential overage interest in this property as well as at Riverwalk House SW1, which was sold in 2012 and where the residential development was completed in 2016. Any future profits will be dependent on the success of each scheme, and currently no value is attributed to these potential gains in our balance sheet. Earlier in the year we sold our remaining available residential units at The Corner House, 73 Charlotte Street W1, and Queens W2. In total we raised £224.7m of cash from sales in 2016.
As there were few acquisition opportunities that met our criteria during the year we acquired only one property, which was the long leasehold interest in one of the lower ground floors at The White Chapel Building. This has given us the option to refurbish Phase 2 as discussed on page 48.
| Total | – | 181,900 | 199.0 | n/a | – | 6.71 |
|---|---|---|---|---|---|---|
| 120-134 Tottenham Court Road W1 (retail and 330 room hotel) |
Q4 | 26,4002 | 68.9 | n/a | 3.1 | 2.3 |
| Tower House WC2 | Q4 | 53,700 | 65.9 | 1,230 | 4.31 | 3.11 |
| Balmoral Grove N7 | Q4 | 67,000 | 23.9 | n/a | n/a | 0.0 |
| 75 Wells Street W1 | Q3 | 34,800 | 40.3 | 1,160 | 2.9 | 1.3 |
| Property | Date | Area sq ft |
proceeds £m |
proceeds £ psf |
purchaser % |
Rent £m p |
| Net | Net | Net yield to |
1 Includes rental top-ups for vacant space and rent free periods.
2 Retail space only.
| Property | Date | Area sq ft |
Total cost £m |
Total cost £ psf |
Net yield % |
Net rental income £m pa |
Net rental income £ psf |
Lease length Years |
|---|---|---|---|---|---|---|---|---|
| The White Chapel | ||||||||
| Building E11 | Q1 | 30,500 | 12.0 | 395 | – | – | – | – |
1 Lower ground floor. Main building purchased in December 2015.
Since the year end we have agreed to sell two office buildings for £327m before costs.
The larger of these was a conditional put and call option to sell 8 Fitzroy Street W1 for £197m. This freehold property comprises 147,900 sq ft let to Arup for a rent of £7.2m. The purchaser is Arup and the transaction formed part of the pre-letting negotiations at 80 Charlotte Street W1 discussed above. The disposal price reflects a net initial yield of 3.4% and a premium of 2.8% before costs to its December 2016 value. Completion is expected on 23 June 2017.
The second disposal is the freehold of 132-142 Hampstead Road NW1 which we have agreed to sell to the Secretary of State for Transport for £130m. This property provides 219,700 sq ft and is let to University College London for £1.7m. We acquired the property in 2007 and achieved planning for 233,000 sq ft of offices and 38 residential units. The new offices were designed to be our first White Collar Factory, but we were unable to carry our plans forward due to the proposals to build HS2 announced in 2012. The December 2016 book value of £115m did not reflect the full benefit of the very valuable planning consent.
In a year dominated by unexpected political events and increased uncertainty, Derwent London has reported further recurring earnings growth, a step change in the proposed final dividend and a small increase in net asset value backed up by a very strong financial position.
Damian Wisniewski Finance Director
After several years where large valuation uplifts provided substantial net asset value increases for the Group, in 2016 the net asset value attributable to equity shareholders marginally increased by £10m, with the IFRS net asset value (NAV) remaining at the same rounded £4.0bn reported a year ago. The combination of a maturing London office property cycle and the EU referendum vote, among other things, gave rise to an outward yield movement on our portfolio averaging 31bp in 2016. This was partially offset by the positive impact of continuing rental growth, record letting successes and strong rent review settlements but the portfolio valuation was down as a result in H2 2016. The fall was lower than we had anticipated in the immediate aftermath of the June EU vote and was more than offset by retained recurring earnings. We have also been able to demonstrate that our carrying values remain supported by transactional evidence with £208m of property investment disposals in H2 2016 at an average price 3.7% above December 2015 book values.
These property sales had another benefit as available undrawn facilities increased by the year end to the extent that our committed development pipeline was fully funded at December 2016.
| 2016 | 2015 | |
|---|---|---|
| IFRS NAV | £3,999.4m | £3,995.4m |
| EPRA NAV per share | 3,551p | 3,535p |
| Property portfolio at fair value | £4,942.7m | £4,954.5m |
| Net rental income | £145.9m | £138.7m |
| Profit before tax | £54.5m | £779.5m |
| EPRA earnings per share (EPS) | 76.99p | 71.34p |
| Dividend per share | 52.36p | 43.40p |
| LTV ratio | 17.7% | 17.8% |
| NAV gearing | 22.6% | 22.8% |
| Net interest cover ratio | 370% | 362% |
Earnings per share and profit before tax on an IFRS basis include fair value movements arising from the revaluation of investment properties and interest rate hedging instruments and can therefore be volatile from year to year. Those fair value movements have moved from a net £657.6m uplift in 2015 to a £36.8m downward movement in 2016 with the result that the IFRS profit before tax was £54.5m in 2016, down from £779.5m in 2015. In common with best practice in our sector, alternative performance measures are also provided to supplement IFRS guidance based on the recommendations of the European Public Real Estate Association ('EPRA'). EPRA Best Practice and Policy Recommendations (BPR) have been adopted widely throughout this report and are often used within the business when considering our recurring operational performance as well as matters such as dividend policy and elements of our Directors' remuneration.
EPRA NAV per share on a diluted basis was up by 16p to 3,551p from 3,535p in 2015.
EPRA earnings increased more strongly with a 8.9% rise to £85.7m (2015: £78.7m) and EPRA earnings per share increased by 7.9% to 76.99p. Building on the substantial 31% rise in recurring profits in 2015 and with our pipeline out to 2019 now substantially de-risked due to recent lettings, we believe that this progress justifies the decision to propose a 25% increase in the final dividend. The total annual dividend remains 1.5 times covered by EPRA earnings per share at this level.
Our gearing ratios have fallen again too, though only marginally. They now stand at the lowest level for many years. The Group's loan-to-value ratio was 17.7% at 31 December 2016 (2015: 17.8%) and NAV gearing was down to 22.6% from 22.8% in 2015. Interest cover has also risen again to 370% in 2016 against 362% in 2015.
The property sales and letting progress announced with these results are expected to lead to a reduction in debt levels of £327m by June 2017. They also further de-risk the pipeline and provide additional long-dated income for the Group. The net impact of these transactions is expected to add 56p per share to the net asset value. Combined with the low level of existing gearing, the Directors are therefore proposing a special dividend of 52p per share to be paid along with the final dividend in June 2017.
Net assets attributable to equity shareholders (£m)
The net asset value of the Group was almost unchanged in 2016, retained profits after dividends being almost exactly matched by the downward fair value movements on our property portfolio and interest rate swaps. IFRS net asset value increased marginally to £3,999.4m against £3,995.4m in 2015 and EPRA diluted NAV per share increased to 3,551p per share at 31 December 2016, up from 3,535p a year earlier. The main reason for the increase in EPRA NAV per share during 2016 came from the removal of dilution in relation to our 2019 convertible bonds following the decline in share price during the year to a level below the conversion price of 3,335p. The movements in NAV per share during the year are summarised below compared with the prior year:
| 2016 | 2015 | |
|---|---|---|
| p | p | |
| Revaluation1 | (38) | 581 |
| Profit on disposals | 7 | 39 |
| EPRA earnings | 77 | 71 |
| Dividends paid | ||
| (net of scrip) | (44) | (30) |
| Interest rate swap | ||
| termination costs | (8) | (6) |
| Dilutive effect of | ||
| convertible bonds | 17 | (17) |
| Non controlling interest | 7 | (8) |
| Other | (2) | (3) |
| 16 | 627 |
1 Including share of joint ventures.
continued
A detailed reconciliation showing adjustments from the IFRS to EPRA NAV per share is shown in note 37 to the financial statements and explanations of the valuation movement for the year are provided within the Valuation section.
Excluding joint ventures the total revaluation deficit for the year was £44.2m (or 0.9% of the portfolio value) of which £1.6m was in respect of apartments under construction held as trading stock and £5.5m related to the portion of 25 Savile Row W1 that we occupy; the balance of £37.1m related to investment properties. In addition, the Group's share of the joint venture revaluation surplus was £1.8m.
As a REIT, we generally do not provide for deferred tax on upward property revaluations. The main exception is for the properties that we hold around Baker Street W1 in a joint venture with the Portman Estate (TPE). The split of ownership is 55%/45% in our favour and we have operational control. As a result, we consolidate these properties and provide for deferred tax on our share of the 45% outside the REIT regime as well as recognising a non-controlling interest in relation to TPE's share. The value of these properties declined in 2016 which is the main reason behind the reduction in the deferred tax liability to £3.1m (2015: £5.5m) and the non-controlling interest to £67.1m (2015: £72.9m).
It is also worth noting that the accrued income, which arises as a result of the 'straight-lining' of rental income under IAS17 and SIC15, reached £116.9m (2015: £97.0m) by the year end. This takes account of rent-free and reduced rent periods, other tenant incentives and fixed future rental uplifts. Part of the overall portfolio fair value is allocated to this balance, the overall split being as follows:
| 2016 £m |
2015 £m |
|
|---|---|---|
| Investment property | 4,803.8 | 4,832.3 |
| Owner-occupied property | 34.2 | 36.1 |
| Trading property | 11.7 | 10.5 |
| Carrying value | 4,849.7 | 4,878.9 |
| Trading property fair value adjustment |
– | 1.8 |
| Lease incentives and costs included in receivables |
116.9 | 97.0 |
| Headlease liabilities gross-up |
(23.9) | (23.2) |
| Fair value | 4,942.7 | 4,954.5 |
In addition, the Group owns £37.8m of properties in two joint ventures, this figure representing our 50% share of those properties at fair value. The net carrying value of the investments as at 31 December 2016 was £36.0m (2015: £30.7m).
Medium and longer term interest rates fell in the UK during the year with very significant declines around the middle of 2016 followed by some subsequent correction. The mark-to-market cost of our interest rate swaps would have risen accordingly but, as a result of £9.0m paid to terminate or re-profile swaps during the year, it was reduced from £17.6m to £17.3m. The decline in longer term rates also fuelled a £24.5m increase in the fair value adjustments for our long-term fixed rate debt and bonds but this was almost matched by a £22.0m reduction in respect to the 2019 convertible bonds, the latter movement due to the lower share price. After taking these movements into account, diluted EPRA triple net asset value fell marginally to 3,450p per share (2015: 3,463p).
It was noted in our 2015 finance review that we were progressing through a long London office property cycle and that, as that cycle matures, the recurring income component of our total return business model should increase. Capturing rental reversion and growing earnings have been among our main themes in 2016, balanced by our development activity and our property disposals.
Gross rental income increased by 4.8% to £155.4m and net rental income by 5.2% to £145.9m. With lower levels of trading activity on residential apartments in 2016 and a £1.6m write-down on
| 2016 % |
2015 % |
|
|---|---|---|
| EPRA cost ratio, incl. direct vacancy costs |
24.0 | 24.3 |
| EPRA cost ratio, excl. direct vacancy costs |
22.4 | 22.3 |
| Portfolio cost ratio, incl. direct vacancy costs |
0.8 | 0.7 |
the trading stock under development at 80 Charlotte Street W1, net property and other income was only marginally higher at £149.2m in 2016 against £148.6m in 2015. The prior year figure also included £3.7m of compensation received from contractors on schemes delivered late.
In a year when net property dispositions were higher than usual, rental income was down £5.1m due to disposals and only increased by £0.3m due to acquisitions. The main rent increases came from lettings and reviews which added £21.1m while rent reductions from lease breaks, expiries and voids totalled £5.3m and with £3.9m from schemes commencing.
Administrative expenses increased by 3.0% to £30.9m in 2016 but the trend is down as the reported figure takes account of a bonus underprovision in 2015 of £0.9m.
Our EPRA cost ratios were similar to the previous year at 24.0% (2015: 24.3%) of adjusted gross rental income including direct vacancy costs and 22.4% (2015: 22.3%) excluding those costs. As in previous years, no overheads or property costs were capitalised.
In more uncertain market conditions, investor appetite for London offices has held up more strongly than most expected and we were able to book a profit of £7.5m on disposal proceeds of £210.6m in 2016, most of which came after the EU referendum vote. In addition, there was a £1.9m trading profit on the sale of apartments during the year.
Total finance costs reduced from £35.2m in 2015 to £27.8m in 2016 after capitalising £13.0m of interest, £4.7m of which related to phase 1 of The White Chapel Building up to the date of practical completion in October 2016. Because it was acquired as a vacant property in December 2015, interest was capitalised on the purchase price as well as the subsequent development costs. The rent already contracted from the building is £7.0m so, post practical completion when the capitalisation of interest ceased, the net impact upon future earnings is expected to be positive.
Following the sale of the Grafton Hotel property in December 2016, we decided to break £10m of interest rate swaps and to reduce the rate payable under a further £135m of swaps. This cost £6.6m in total. With £2.4m paid to defer a £70m forward start swap by a further 12 months, total swap breakage costs were therefore £9.0m in 2016.
After allowing for the revaluation deficit on our property portfolio, the overall result was an IFRS profit for the year of £53.6m, down substantially from the £777.2m reported for the year ended 31 December 2015. Adjusting for profits on disposal, fair value movements and other items which are non-recurring in nature, EPRA earnings increased by 8.9% from £78.7m in 2015 to £85.7m for the year ended 31 December 2016.
A table providing a reconciliation of the IFRS results to EPRA earnings per share is included in note 37.
After removing the impact of development activity, acquisitions and disposals, EPRA like-for-like gross rental income increased by 5.1% during the year with net property income on a similar basis up by 5.7%. A full analysis is shown in the table below.
continued
| Properties | |||||
|---|---|---|---|---|---|
| owned | |||||
| throughout | Development | ||||
| the year | Acquisitions | Disposals | Property | Total | |
| £m | £m | £m | £m | £m | |
| 2016 | |||||
| Rental income | 120.8 | 5.4 | 3.0 | 26.2 | 155.4 |
| Property Expenditure | (4.6) | (1.0) | (1.0) | (2.9) | (9.5) |
| Net rental income | 116.2 | 4.4 | 2.0 | 23.3 | 145.9 |
| Profit on disposal of trading properties | – | – | 1.9 | – | 1.9 |
| Write-down of trading property | – | – | – | (1.6) | (1.6) |
| Other1 | 2.8 | 0.1 | – | 0.1 | 3.0 |
| Net property income | 119.0 | 4.5 | 3.9 | 21.8 | 149.2 |
| 2015 | |||||
| Rental income | 114.9 | 3.1 | 8.1 | 22.2 | 148.3 |
| Property Expenditure | (5.0) | (0.2) | (1.0) | (3.4) | (9.6) |
| Net rental income | 109.9 | 2.9 | 7.1 | 18.8 | 138.7 |
| Profit on disposal of trading properties | – | – | 3.2 | – | 3.2 |
| Other1 | 2.7 | – | 0.6 | 3.4 | 6.7 |
| Net property income | 112.6 | 2.9 | 10.9 | 22.2 | 148.6 |
| Increase based on gross rental income | 5.1% | 4.8% | |||
| Increase based on net rental income | 5.7% | 5.2% | |||
| Increase based on net property income | 5.7% | 0.4% |
1 Includes surrender premiums paid or received, dilapidation receipts and other income.
The corporation tax charge for the year ended 31 December 2016 increased to £2.0m in 2016 from £1.9m in the previous year, due to the profits arising on the sale of residential apartments that were held as trading stock and therefore outside the REIT tax environment.
The movement in deferred tax liabilities for the year was a credit of £2.4m. This was made up of £1.1m (2015: £0.4m debit) passing through the income statement due to the change in tax rates and the valuation impact for non-REIT Group properties and £1.3m in relation to the owner-occupied property at Savile Row.
In addition, and in accordance with our status as a REIT, £5.6m of tax was withheld from shareholders on property income distributions and paid to HMRC during the year. The Company also made significant contributions to the UK public finances on a wide range of taxes borne and collected during the year.
We have recently issued a statement of tax principles and this is included on our website at www.derwentlondon.com. The statement explains our approach to taxation, founded on the principle of retaining our low risk tax status with HMRC.
The combination of property disposals and £105m of new debt capacity means that the Group's committed pipeline of projects was fully funded as at 31 December 2016. Available undrawn facilities and cash totalled £383m and our committed pipeline stood at £363m at 31 December 2016.
Our refinancing activities during 2016 were focused on arranging some more long-term fixed rate debt in the capital markets to further diversify our funding sources, to extend our overall debt maturities and fix into attractive long-term rates. We also extended both our revolving bank facilities and reduced the mark-to-market exposure on our interest rate swaps.
In May 2016, we drew down £105m of new 12 and 15-year US private placement notes that were arranged in February 2016. Full details were provided in our 2015 report and so are not repeated here but we were very pleased to welcome three new lending relationships to the Group.
At the year end, the Group had £613m of fixed rate debt, including £150m of convertible bonds due in 2019, with a weighted average interest rate payable of 4.0%. This rate takes account of the £175m 2026 bonds at 6.5% issued by London Merchant Securities in 2001. We have considered refinancing these to lower our overall cost of debt but concluded for now that such arrangements would be neutral at best from a net present value standpoint. It remains a matter for future consideration.
Our principal bank facilities, which are fully revolving and unsecured, included two one-year extension options on top of their original five-year terms. The first extension option for our £75m Wells Fargo facility was exercised just before the middle of the year. This facility now has a term date of July 2021 with the second one-year extension option remaining, subject to the usual consents. We also extended the maturity of the £550m unsecured revolving bank facility, £450m of the facility amount now falling due in January 2022. The remaining £100m retains a January 2021 repayment date but we have agreed an accordion option for this portion which could extend the effective repayment date to January 2022.
These steps have helped us take the weighted average maturity of our debt to 7.7 years at December 2016, up from 7.3 years a year earlier.
We have also reduced the interest rates payable under our swaps to compensate for the higher rates payable under the long dated USPP notes when compared to our marginal bank loan rates of 1.5%. In April 2016, we extended the maturity of a £70m interest rate swap from April 2019 to April 2023 at no cost, thereby reducing the rate payable from 2.00% to 1.74%. Then, in December, we cancelled £10m of swaps and re-set the rates payable under a further £135m for an overall cost of £6.6m. As a result, at December 2016 the Group held £243m of swaps at an average rate of 1.82% compared with £253m at a rate of 2.44% a year earlier. The £70m forward start swap has also been deferred to March 2017 at a cost of £2.4m.
Taking all of this into account, the overall interest rate paid on our debt at 31 December 2016 fell slightly to 3.65% (2015: 3.68%). Under IFRS accounting, an additional interest charge is taken against earnings to unwind the equity component of convertible bonds; allowing for this takes the notional interest rate to 3.90% at the year-end (2015: 3.93%).
The proportion of our debt that is fixed or swapped into fixed rates was 95% as at 31 December 2016 excluding the £70m forward start swap. The proportion increased over the year due to the additional fixed rate debt arranged and the property disposals which occurred towards the end of the year.
| £m | £m | Maturity | |
|---|---|---|---|
| 6.5% secured bonds | 175 | March 2026 | |
| 3.99% secured loan | 83 | October 2024 | |
| 1.125% unsecured convertible bonds | 150 | July 2019 | |
| 4.41% unsecured private placement notes | 25 | January 2029 | |
| 4.68% unsecured private placement notes | 75 | January 2034 | |
| 3.46% unsecured private placement notes | 30 | May 2028 | |
| 3.57% unsecured private placement notes | 75 | May 2031 | |
| Committed bank facilities | |||
| Term – secured | 28 | June 2018 | |
| Bilateral revolving credit – unsecured | 75 | July 2021 | |
| Club revolving credit – unsecured | 100 | January 2021 | |
| Club revolving credit – unsecured | 450 | January 2022 | |
| 653 | |||
| At 31 December 2016 | 1,266 |
continued
Capital expenditure in 2016 was our highest to date at £213.5m including capitalised interest of £13.0m. We spent £18.0m on property acquisitions during the year, almost entirely relating to The White Chapel Building, £6.0m of which was Stamp Duty Land Tax in connection with the acquisition of the main part of the building in the previous year. As a result, the cash invested in the portfolio marginally exceeded disposal proceeds of £224.7m from the sale of properties.
With the net cash from operating activities increasing to £77.7m from £76.0 in 2015, after allowing for a £5.3m incentive paid to Capita and their existing landlord to enable them to lease office space at the Copyright Building, net debt was almost unchanged at December 2016 from a year beforehand at £904.8m (2015: £911.7m). This included a higher cash balance than usual following the sale of the Grafton Hotel, a property charged to one of our lenders. We were in the course of documenting the substitution of new replacement security at the year end and, accordingly, £10m of cash was held in a restricted bank account. It will be released once the new security is in place.
With the 25% increase in recurring earnings per share in 2015 followed by a 7.9% increase in 2016, dividend cover has increased significantly in the last two years. The final dividend was increased by 10% in 2015 but, now that we have let the main part of the development pipeline through to the end of 2018 and with continuing low vacancy rates in our portfolio and the expectation of further growth in recurring earnings in the next few years, the Board has recommended a 25.0% increase in the proposed final dividend to 38.50p per share for payment to shareholders on the register on 5 May 2017 to be paid on 9 June 2017. 32.70p will be paid as a PID and the balance of 5.80p as a conventional dividend. The interim and final dividend for the year will be 52.36p per share, an increase of 20.6% over last year. There will not be a scrip dividend alternative. It is also intended that the 2017 interim dividend will be increased by 25%.
In addition, following the value-enhancing transactions announced with these results and taking account of the impact upon our already low gearing, a special dividend of 52.00p per share is being proposed to be paid at the same time as the final dividend in June 2017.
| Debt summary | |
|---|---|
| -- | -------------- |
| 2016 £m |
2015 £m |
|
|---|---|---|
| Bank loans | ||
| Floating rate | 44.5 | 137.5 |
| Swapped | 243.0 | 253.0 |
| 287.5 | 390.5 | |
| Non-bank debt | ||
| 3.99% secured loan 2024 | 83.0 | 83.0 |
| 6.5% secured bonds 2026 | 175.0 | 175.0 |
| 1.125% unsecured convertible bonds 2019 | 150.0 | 150.0 |
| Unsecured private placement notes 2028 – 2034 | 205.0 | 100.0 |
| 613.0 | 508.0 | |
| Total | 900.5 | 898.5 |
| Hedging profile (%) | ||
| Fixed | 68 | 57 |
| Swaps | 27 | 28 |
| 95 | 85 | |
| Percentage of debt that is unsecured (%) | 68 | 68 |
| Percentage of non-bank debt (%) | 68 | 57 |
| Weighted average interest rate – cash basis (%) | 3.65 | 3.68 |
| Weighted average interest rate – IFRS basis (%) | 3.90 | 3.93 |
| Weighted average maturity of facilities (years) | 6.9 | 6.8 |
| Weighted average maturity of borrowings (years) | 7.7 | 7.3 |
| Undrawn facilities and cash | 383 | 269 |
| Uncharged properties | 3,777 | 3,709 |
| 2016 £m |
2015 £m |
|
|---|---|---|
| Cash | (17.7) | (6.5) |
| Bank facilities | 287.5 | 390.5 |
| 3.99% secured loan 2024 | 83.0 | 83.0 |
| 6.5% secured bonds 2026 | 175.0 | 175.0 |
| Acquired fair value of secured bonds less amortisation | 14.0 | 15.0 |
| 3.46% unsecured private placement notes 2028 | 30.0 | – |
| 4.41% unsecured private placement notes 2029 | 25.0 | 25.0 |
| 3.57% unsecured private placement notes 2031 | 75.0 | – |
| 4.68% unsecured private placement notes 2034 | 75.0 | 75.0 |
| 1.125% unsecured convertible bonds 2019 | 150.0 | 150.0 |
| Equity components and unwinding of discounts on convertible bonds | (5.6) | (7.7) |
| Leasehold liabilities | 23.9 | 23.2 |
| Unamortised issue and arrangement costs | (10.3) | (10.8) |
| Net debt | 904.8 | 911.7 |
| 2016 % |
2015 % |
|
|---|---|---|
| Loan-to-value ratio | 17.7 | 17.8 |
| NAV gearing | 22.6 | 22.8 |
| Net interest cover ratio | 370 | 362 |
Derwent London aims to deliver its strategic objectives whilst operating within a risk envelope defined by the Group's risk appetite. The Board recognises that risks are inherent in running any business and uses the Group's risk management system to ensure that risks to the Group's strategy are identified, understood and managed.
The Board has overall responsibility for risk management and the Group's system of internal controls. To assist with carrying out this task, the Board has delegated responsibility to the Audit Committee and the Risk Committee. Executive Management is responsible for developing and operating the Group's risk management system and for designing, implementing, maintaining and evaluating the system of internal control. The diagram illustrates the Group's risk management structure.
The Board is responsible for managing the Group's risk profile in an environment that reflects the culture and management structure of the business. Key factors to note in this regard are:
The Group's risk management framework consists of its Risk Management Policy, Risk Appetite Statement and Risk Management Process Document. The framework is designed to identify and manage the risks faced by the business recognising that not all risks can be eliminated at an acceptable cost and that there are some risks that, given its experience, the Board will choose to manage and accept.
In compliance with Code Provision C.2.1 of The UK Corporate Governance Code, the Board has carried out a robust assessment of the principal risks and uncertainties facing the Group. The core element of this assessment is the Group's risk register which is prepared by the Executive Committee in accordance with the Risk Management Process Document. The first stage in its preparation is for the Committee to identify the risks facing the Group. An assessment is then made collectively by the Committee of the following matters:
This approach allows the final assessment to reflect the effect of the controls and any mitigating procedures that are in place. If the controls and mitigating actions over a risk are deemed inadequate, the Committee will agree a target risk profile together with additional controls/actions and a timetable for their implementation.
The register and its method of preparation have been reviewed by the Risk Committee. In order to gain a more comprehensive understanding of the risks facing the business and the management thereof, the Risk Committee periodically receives presentations from senior managers and external advisers.
The Risk Committee has also monitored the Company's risk management and internal control systems primarily by regularly reviewing the set of key risk indicators that were implemented in 2015. This was supplemented by reviews of the top ten risks on the Group's risk register and the adequacy of the controls operating over these risks. Further information on the work of the Risk Committee can be found on page 105.
Following these reviews, the Risk Committee has confirmed to the Board that it is satisfied that the Group's risk management and internal control systems operated effectively throughout the period.
The Group's risk register includes 47 risks split between strategic risks, corporate risks, property risks (together, operational risks) and financial risks. One new risk has been added to the Group's list of principal risks this year:
• That the negotiations to leave the European Union result in arrangements that are damaging to the UK economy and/or central London.
The Board considered whether the overall increase in the level of risk faced by the Group in 2017, as illustrated by the graphs, was reasonable. It noted that only a few of the risks had abated during the year, whilst the risk surrounding Brexit was a significant new factor and cyber risk continued to increase. Taken with the general increase in both political and economic uncertainty, the Board concluded that the increase was justified.
Derwent London plc Report & Accounts 2016
continued
The principal risks and uncertainties facing the Group in 2017 are set out on the following pages together with the potential effects, controls and mitigating factors.
That the Group's business model does not create the anticipated shareholder value or fails to meet investors' expectations.
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 1. Inconsistent strategy The Group's strategy is inconsistent with the state of its market. 2. Inconsistent development programme The Group's development programme is not consistent with the economic cycle. Both these risks would affect the Group's ability to deliver four of its strategic objectives. Throughout most of 2016, the Group continued to benefit from a resilient central London market. However, following the EU referendum vote, sentiment became more fragile and the likelihood of the London market being adversely affected by one or more of a number of high-level economic factors remained high. If this were to occur, it would reduce the value of the Group's portfolio and the returns from its developments. This would affect two of the Group's KPIs – total return and total property return. The Board sees the level of both these risks to be broadly unchanged from last year. |
• The Group carries out an annual five-year strategic review and also prepares a budget and three rolling forecasts which cover the next two years. In the course of preparing these documents the Board considers the sensitivity of the Group's KPIs and key ratios to changes in the main assumptions underlying the forecast thereby modelling different economic scenarios. • The Group's plans are then set so as to best realise its long-term strategic goals given the most likely economic and market conditions and the Group's risk appetite. This flexibility is largely derived from the Group's policy of maintaining income from properties for as long as possible until development starts. • The level of future redevelopment opportunities in the Group's portfolio enables the Board to delay marginal projects until market conditions are favourable. • The Board pays particular attention, when setting its plans, to maintaining sufficient headroom in all the Group's key ratios, financial covenants and interest cover. • Pre-lets are sought to de-risk major projects. |
• The last annual strategic review was carried out by the Board in June 2016. This considered the sensitivity of six key measures to changes in underlying assumptions, including interest rates and borrowing margins, timing of projects, level of capital expenditure and the extent of capital recycling. • The three rolling forecasts prepared during the year focus on the same key measures but may consider the effect of varying different assumptions to reflect changing economic and market conditions. • The timing of the Group's development programme and the strategies for individual properties reflect the outcome of these considerations. • Approximately 43% of the Group's portfolio has been identified for future redevelopment. • During the year the Group's loan-to-value ratio remained at approximately 18%, its net interest cover ratio was above 370% and the REIT ratios were comfortably met. • Pre-lets were secured over 439,100 sq ft during 2016 and over 161,000 sq ft in 2017 |
| to date. | ||
| 3. Adverse Brexit settlement Negotiations to leave the European Union result in arrangements that are damaging to the UK economy and/or central London. This risk would affect the Group's ability to deliver all of its strategic objectives. Negotiations will take at least two years and the operating framework facing UK businesses thereafter cannot be predicted. This is a new principal risk and it would primarily affect the Group's total return and total property return KPIs. |
• The Group's strong financing and covenant headroom enables it to weather a downturn. • The Group's diverse and high-quality tenant base provides resilience against tenant default. • The Group's development pipeline has a degree of flexibility that enables the strategy for individual properties to be changed to reflect the prevailing economic circumstances. • Financially strong and reputable contractors are used with good access to available labour. • The Group's focus on good value, middle market properties makes it less susceptible to reductions in tenant demand. |
• At the year end, the Group had undrawn facilities and cash of £383m. • See page 8 for an analysis of the Group's tenant base. • Income is maintained at future developments until the scheme is ready to start. • The Group's average 'topped up' office rent is only £45 per sq ft. |
| Link to business model | Key | |
| Acquire properties and unlock their value | Risk increase | |
Risk decrease
Risk unchanged
New risk
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 4. Reputational damage The Group's reputation is damaged through unauthorised and inaccurate media coverage. |
• All new members of staff benefit from an induction programme and are issued with the Group's Staff Handbook. |
• The Group employs a Head of Investor and Corporate Communications and retains the services of an external PR agency. |
| This risk would impact on the Group's delivery of three of its strategic objectives. |
• Social media channels are monitored by the Group's investor relations department. |
Both maintain regular contact with external media sources. |
| • The Group takes advice on technological changes in the use of media and adapts |
• The Company engages with a number of local community bodies in areas where it operates |
|
| It would most directly impact on the Group's | its approach accordingly. | as part of its CSR activity. |
| total shareholder return – one of its key metrics. Indirectly it could impact on a number of the formal KPIs. |
• There is an agreed procedure for approving all external statements. |
|
| The Board considers the risk to have remained |
constant over the year.
That the Group becomes unable to meet its financial obligations or finance the business appropriately.
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 5. Increase in property yields Increased property yields, which may be a consequence of rising interest rates, would cause property values to fall. |
• The impact of yield changes on the Group's financial covenants and performance are monitored regularly and are subject to sensitivity analysis to ensure that adequate |
• The Group produces three rolling forecasts each year which contain detailed sensitivity analyses, including the effect of changes to yields. |
| Interest rates have remained low for an | headroom is preserved. • The impact of yield changes is considered |
• Quarterly management accounts report the Group's performance against covenants. |
| extended period and are expected to rise within the next two years. Though there is no |
when potential projects are appraised. | • Project appraisals are regularly reviewed |
| direct relationship, this may cause property yields to increase in due course. |
• The Group's move towards mainly | and updated in order to monitor the effect of yield changes. |
| unsecured financing over the past few years has simplified management of its If this risk were to occur, three of the Group's financial covenants. strategic objectives would be affected. |
||
The risk was assessed as high last year and the Board considers it to have marginally increased this year.
The Group suffers either a financial loss or adverse consequences due to processes being inadequate or not operating correctly.
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 6. Reduced development returns The Group's development projects do not produce the targeted financial return due to one or more of the following factors: |
• Standardised appraisals, which include contingencies and inflationary cost increases, are prepared for all investments and sensitivity analysis is undertaken to ensure |
• 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. |
| • Delays on site. • Increased construction costs. |
that an adequate return is made in all circumstances considered likely to occur. |
• The Group's style of accommodation remains in demand as evidenced by the |
| • Adverse letting conditions. The risk would affect delivery of four of the |
• Development costs are benchmarked to ensure that the Group obtains |
63 lettings achieved in 2016 which totalled 547,500 sq ft. |
| Group's strategic objectives. | competitive pricing and, where appropriate, fixed-price contracts are entered into. |
• The Group has often secured significant pre-lets of the space in its development |
| This would have an effect on the Group's total return and total property return KPIs. |
• Procedures carried out before starting work on site, such as pre-work investigations, historical research of the property and surveys etc, conducted as part of the planning application, |
programme which significantly 'de-risks' |
| those projects. 27 pre-lets were secured in 2016 over 439,100 sq ft. A further 161,000 sq ft has been pre-let in 2017. |
||
| The Board considers this risk to have remained broadly the same over the past year. |
reduce the risk of unidentified issues causing delays once on site. |
|
| • The Group's pre-letting strategy reduces or removes the letting risk of the development as soon as possible. |
||
| • Post-completion reviews are carried out for all major developments to ensure that improvements to the Group's procedures are identified and implemented. |
continued
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 7. Cyber attack The Group is the victim of a cyber attack that results in it being unable to use its IT systems. The risk would affect the delivery of all the |
• The Group's IT systems are protected by anti-virus software and firewalls that are continually updated. • The Group's data is regularly backed up and replicated. |
• Independent internal and external penetration tests are regularly conducted to assess the effectiveness of the Group's security. No matters were raised as a result of the 2016 test. |
| Group's strategic objectives. This would lead to an increase in costs and a diversion of management time. Increased |
• The Group's Business Continuity Plan was revised and tested during 2015. • Multifactor authentication has been introduced for both internal and external |
• The switchover of the IT system to the Group's backup facility was successfully tested in 2016. • Staff awareness programmes and presentations are delivered to make staff |
| costs would have an impact on the Group's total return KPI whilst a significant diversion of management time would have a wider effect. Although controls and procedures over the |
access to the systems. • The Group's IT department has access to cyber threat intelligence and analytics data. • Incident response and remediation policies |
aware of the techniques that may be used to gain unauthorised access to the Group's systems. |
| Group's IT infrastructure continue to be improved, the elevated profile of such risks means that the Board considers the risk to have increased over the year. |
are in place. • Cyber insurance is being evaluated. |
• Security measures are regularly reviewed by the IT Security Committee. • The Head of IT regularly reports to the Executive Committee. |
| • An independent benchmarking review of the Group's cyber security has been carried out. |
||
| 8. Regulatory non-compliance The Group's cost base is increased and management time diverted through a breach of any of the legislation that forms the regulatory framework within which the |
• Each year the Group's Risk Committee receives a report prepared by the Group's lawyers identifying legislative/regulatory changes expected over the next 12 months and reports to the Board concerning |
• A Health and Safety report is presented at all Executive Committee and main Board meetings. • The Executive Committee receives regular reports from the Head of Sustainability. |
| Group operates. It would impact on the delivery of four of the Group's strategic objectives. |
regulatory risk. • The Group employs a Head of Health and Safety who reports to the Board. |
• The Group pays considerable attention to sustainability issues and produces an Annual Sustainability Report. |
| • The Group employs a Head of Sustainability who reports to the Sustainability Committee which is chaired by Paul Williams. |
• No incidents were reported under the Group's whistleblowing policy in 2016. |
|
| An increase in costs would directly impact on the Group's total return KPI. A significant diversion of management time could affect a wider range of key metrics. |
• The Company's policies including those on the Bribery Act, Health and Safety, Equal Opportunities, Harassment and |
• The Group has considered the requirements of the Modern Slavery Act and revised its policies where appropriate in order to comply with the legislation. |
| The Board considers this risk to be unchanged | Whistleblowing are available to all staff |
| Risk, effect and progression | Controls and mitigation | Action |
|---|---|---|
| 9. Contractor/sub-contractor default Returns from the Group's developments are reduced due to delays and cost increases |
• Whenever possible the Group uses contractors/sub-contractors that it has previously worked with successfully. |
• As the size of the Group's projects has increased so the chosen contractors have become more substantial. |
| caused by either a main contractor or major sub-contractor defaulting during the project. |
• The resilience of a project's critical path is improved by establishing procedures |
• The financial accounts of both main contractors and major sub-contractors |
| The risk would affect the Group's delivery of one of its strategic objectives. |
to manage any sub-contractor default effectively. |
are reviewed. • The Group's development managers |
| • Key construction packages are acquired early in the project. |
are regularly on site and conduct unscheduled inspections. |
|
| This would primarily affect the Group's total property return KPI. |
• Performance bonds are sought if considered necessary. |
|
| The risk is considered to have remained at the same level in 2016. |
• Regular on-site supervision by Derwent London personnel increases the likelihood of identifying any problems at an early stage, thereby enabling remedial action to be taken sooner. |
|
| 10. Shortage of key staff The Group is unable successfully to implement its strategy due to a failure to recruit and retain |
• The Nominations Committee consider succession matters as a standing agenda item. |
• The Group recruited 13 new members of staff during 2016. • Staff turnover during 2016 was low at 11%. |
| key staff with appropriate skills. | • Requirements for senior management | • The average length of employment is |
| It would reduce the Group's ability to deliver all of its strategic objectives. |
succession are considered as part of the five-year strategic review. |
7.3 years. |
| • The remuneration packages of all employees are benchmarked regularly. |
||
| This risk could impact on any or all of the Group's KPIs. |
• Six-monthly appraisals identify training requirements which are fulfilled over the |
|
| The risk is seen to be unchanged over the year. |
next six months. |
In accordance with provision C.2.2 of the 2014 Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the 'Going Concern' provision (see page 84) taking account of the Group's current position and the potential impact of its principal risks. The Board conducted this review over a period of five years to 31 December 2021, which was considered appropriate for the following reasons:
The five year strategic review considers the Group's cash flows, dividend cover, REIT compliance and other key financial ratios over the period. The Board subjects these metrics to sensitivity analysis to assess the impact of the principal risks to the Group's ability to deliver its strategic objectives, which are set out on pages 62 to 65, both individually and in unison. However, for the purpose of the viability assessment, the model was stress tested to consider its resilience specifically to those risks that, if they occurred, were likely to have a significant impact on the Group's solvency and liquidity over the five year review period. These risks were identified as those that would affect property values, the availability of finance or the Group's cash flow and a scenario was modelled that assumed a severe decrease in property values combined with significant letting delays at the Group's developments and a decrease in rentals. The assumptions were considered extreme but none of the key metrics were breached with LTV remaining below 50% and net interest cover staying above 280%.
In addition the Board reverse stress tested its business model for a fall in property values and established that, all other assumptions remaining unchanged, it would take a fall in values in excess of 65% to cause the Group to breach its financing covenants.
The Board also reviewed the financing requirements of the Group over the period of the review having regard to the level of unutilised facilities at the year end and the assumptions in the five year review concerning capital recycling.
Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their review.
reduction in carbon in our like-for-like portfolio
6% reduction in energy use in our total managed portfolio
increase in our recycling rate from 68% to 73%
£350,000 awarded to date to projects from our Community Fund
Sustainability continues to form an important part of our business model and we have made strong progress, in what has been another busy and successful year.
John Davies Head of Sustainability
Paul Williams Executive Director for Sustainability The progress made in 2016 is reflected in our community fund, which continues to develop and support numerous projects and initiatives across our Fitzrovia and Tech Belt portfolios. During 2016, the fund supported 20 organisations (seven in Fitzrovia and 13 in the Tech Belt) with over £110,000 invested across a diverse range of grass-roots community projects.
Following feedback from our stakeholders, we introduced our first supply chain standard, which is designed to clearly set out our expectations of suppliers across a series of sustainability and governance issues. These issues range from employment/labour standards to payment practices and health and safety. The standard was distributed to all the major suppliers in our property management and development supply chains and they were formally required to acknowledge and adhere to it. Moreover, it has been included as a standard feature in our contractual agreements with suppliers. Going forward we will be monitoring compliance against the standard to ensure it is being implemented robustly. A copy of the standard can be found at www.derwentlondon.com/sustainability/approach.
2016 also saw a significant step forward in international climate change legislation, with 195 countries, including the UK, signing the legally binding Paris Agreement on climate change. The agreement aims to keep global temperature increases well below 20C and cut carbon emissions to virtually zero by 2050. In signing this agreement, the UK Government sent a clear signal not only of its commitment to carbon reduction, but also to businesses that they must reduce their carbon footprints and ensure they are resilient to the effects of climate change.
Benchmark) 2016 • 5 star rating (Green Star status) retained for the fifth year in succession
• Management B rating
• Gold Award for our 2015 Annual Sustainability Report
To support this commitment and ensure we minimise our risk exposure to the effects of climate change, we have developed a comprehensive management strategy underpinned by a clear and challenging science based emissions target. Further details of this strategy and target can be found in our Annual Sustainability Report at www.derwentlondon.com/ sustainability.
Yet again, our work has been recognised externally with the receipt, for a fifth consecutive year, of a five star rating (Green Star) in the Global Real Estate Sustainability Benchmark (GRESB). We also received a new and improved rating in the CDP index, achieving a 'Management B' rating. In addition, and for the fourth successive year, our Annual Sustainability Report received a Gold Award in the EPRA Reporting Awards. Finally, we were ranked 12th in Corporate Knights 2017 Global 100 companies, and were the highest placed UK based company – the list announced at the World Economic Forum meeting in Davos each year rates the world's best companies on their sustainability performance as well as their management of resources, finances and employees.
In 2015, we introduced more demanding and longer-term targets designed to challenge us, whilst ensuring we deliver against our strategic sustainability objectives. This continued into 2016, when we set more targets in this way to help us improve our performance. Moreover, we updated and strengthened our internal key performance indicators to ensure we maintain our high standards.
Similar to last year, we have set out a breakdown of our performance – both in terms of our external facing targets and internal key performance indicators – to give a complete picture of our performance.
We hope the summary presented here gives you a sense of our progress and achievements during 2016. However, for a more comprehensive review of our sustainability work and performance, please refer to our Annual Sustainability Report at www.derwentlondon.com/sustainability.
We achieved 84% of our 2016 targets compared with 81% in 2015, a modest increase, with no targets missed.
Combined we achieved 82% of our performance measures – a clear indication of the commitment and hard work of our teams.
116 employees
234 volunteering hours 89% Retention rate
59%/41%
Overall male/ female ratio
talented employees is fundamental to the Group achieving its strategic objectives.
Katy Levine (right) Head of Human Resources
Carole Freeman (left) Payroll/Human Resources Manager
Derwent London's strong and healthy culture both safeguards and generates long-term value when underpinned by effective governance. Our culture is maintained and communicated through a variety of activities, including our recruitment and induction processes, training initiatives, leadership development, performance management and succession planning. Derwent London's culture is described by its employees as 'professional', 'progressive' and 'passionate'. These, together with integrity, a consultative leadership style and commerciality, are key to the Group's performance, define what we stand for and how we behave with our stakeholders. It is important to us that every employee feels valued and respected and able to develop and thrive in our challenging, fast-paced environment.
We believe that adopting strong ethical values and communicating them reinforces standards of behaviour amongst employees and stakeholders, allows us to continue to foster a positive culture and builds a sense of trust. We consider it our duty to have procedures in place to identify and remedy any malpractice, either within the Group or elsewhere, that affects us. We also expect all employees to maintain high standards of behaviour, as set out in our Employee Handbook and policies. We encourage our staff to report any wrongdoing that falls short of those standards. Our Whistleblowing Policy enables them to do this and ensures their concerns are investigated and appropriate action is taken. To date, no calls (internally or externally) have been made to the helpline reporting any unethical behaviour.
As we continue to grow, we adapt to changing conditions and work hard on retaining our culture and open-door policy.
Our business is structured to deliver our strategic objectives with departments in the disciplines of Asset management, Development, Finance, Leasing and Acquisitions/investment recycling, with support provided by a number of other specialist functions. Cross-functional teams that draw on expertise from across the business work on specific projects (see The White Chapel Building case study on page 71), which we believe increases creativity, flexibility, innovation and collaboration.
Our Executive Committee usually meets monthly and comprises the six executive Directors and five senior managers. With all the main departments represented, the Committee ensures accountability across the business and that changes in the Group's strategic focus are communicated and implemented. Decisions can be taken on all but the most important issues, which are reserved for the Board. The Committee can meet on an ad hoc basis and this, together with the close proximity within which we work and the way we manage our projects, as described above, enables us to handle complex transactions and make quick decisions, with the overall aim of creating value and driving income growth across our portfolio.
We look to fill any management positions by internal promotions wherever possible. This strengthens our leadership pipeline and helps us retain our top talent. The fact that 27% of employees have more than ten years' service is testament to our high staff retention and ensures that we have excellent knowledge and continuity. This is balanced by the growth in the business which has seen 39% of our employees recruited in the past five years, bringing with them new ideas, competencies and experience.
In 2017 we will be reviewing how we can better work together and develop our people and culture to ensure that as a business we are 'Fit for the Future' and continue successfully to deliver our strategy.
We are an inclusive employer, which means we provide a supportive environment for all our employees. We believe this encourages creativity through diversity of thought. The Group has a strong commitment to ensuring equality and diversity in all its forms and we support the Core Conventions of the International Labour Organisation. We give full and fair consideration to all employment applicants and our policies, practices and procedures for recruitment, training, reward and career progression are based purely on merit.
Consequently we have had no discrimination claims to date and have a relatively balanced workforce of 59% male and 41% female, while within our senior management team 37% are female. In addition, 78% of our employees classify themselves as white and 22% as non-white.
Should an employee develop a long-term health concern or disability, we work closely with our Company doctor to understand the condition and, wherever possible, the adjustments that need to be made to ensure a smooth return.
We are also committed to diversity at Board level. Last year we appointed two new non-executive Directors, Cilla Snowball and Claudia Arney, who bring a wealth of experience to the Board and have been involved in mentoring other women throughout the Company.
During 2016, we updated our website to highlight our approach to equal opportunities and diversity.
Our retention rate of 89% (2015: 90%) and the results of our first employee survey conducted in 2015, as described in last year's report, reveal a highly committed, loyal and engaged workforce. The improvement most recommended through the survey related to the office facilities and the Board believe this will be delivered through the current office refurbishment due to complete in H1 2017. The new offices will further enhance collaboration between departments and provide a better working environment that promotes productivity and well-being.
A steering group was set up in 2016 to address the lower scoring areas in the employee survey. Recommendations were subsequently presented to the Executive Committee covering areas such as agile working, how to keep roles challenging and better communication of short and medium term strategy to the staff. The intention is to implement these steps in 2017 and the employee survey will be repeated towards the end of this year to measure the impact of our initiatives and the new office environment.
Employees by age
Ethnic origin split
We recognise the importance of career development and progression for our employees and how these can support our succession plans which are fundamental to the future growth and stability of
We invested £65,000 in staff training, professional qualifications and one-to-one coaching in 2016. This included a training session entitled 'Shaping Futures', which demonstrated to managers how they could help their team take ownership of their own career development within the Group's organisational structure. All employees attended a 'Give Me Strength' training session, aimed at helping them identify their strengths and how to use these skills effectively within their roles. In addition, experienced executive coaches, who understand our culture, have offered support and guidance specifically aimed at developing softer skills.
In addition, there were a number of internal initiatives aimed at sharing knowledge across the business. For example, there were induction programmes for our 13 new joiners, two Building Manager and front-of-house conferences, IT sessions, tax updates and monthly internal presentations covering topics such as progress on development projects and the leasing and marketing strategies for our buildings.
The acquisition and subsequent refurbishment and letting of The White Chapel Building was accomplished by a project team that drew on expertise from across the business.
In order to appraise the building pre-purchase, the project team originally consisted of representatives from Investment, Leasing, Development, and Valuation to ensure accurate assumptions were made in respect of income, capital expenditure, yield and value. This, alongside input on funding and tax from our Finance team, enabled us to assess whether the required returns could be achieved.
Once purchased, staff from the Development, Leasing and Marketing teams worked together to deliver the right product for the market. With the letting campaign underway, the Asset management team (including Property and Facilities management) ensured that all contractual obligations agreed with new tenants were delivered.
With the building 75% pre-let at practical completion, the project team ensured a smooth handover to the five tenants and coordinated their fit-outs. As happens on all schemes, once the tenants were in situ there was a comprehensive handover from Development and Leasing to the Asset managers.
The White Chapel Building project team will not be disbanded once the building is let; it will deliver maintenance and management of the asset, value enhancement through proactive asset management, re-letting of future voids and, potentially, a future disposal. This fully joined-up approach means that each asset in the portfolio is always working, with opportunities being closely monitored and value added throughout its life-cycle.
During the year we continued to support charitable organisations and our local communities, both financially and through the provision of our people's time and expertise. Examples include a mentoring programme and our internal volunteering programme, through which our employees spent a total of 234 hours volunteering across a range of projects. In partnership with the London Borough of Islington, 18 employees took part in a careers' workshop at a local school and we recruited our third apprentice, Nathan Joseph, as a trainee building manager. Please refer to our 2016 Annual Sustainability Report to read our interview with Nathan and for more information on our community initiatives.
To achieve our strategic objectives we need to attract, nurture, develop and retain talented employees. Our approach is to reward people based on individual performance and their contribution to the success of the Group. Annual salary increases and bonuses are linked to an overall performance rating which is allocated through our appraisal process. In order to continue to be seen as an employer of choice and maintain a high level of employee retention, we aim to provide market competitive remuneration and a comprehensive benefits package.
This substantial eight-storey office building was acquired in December 2015 and sits on a one acre site on the eastern edge of the Tech Belt. Phase 1 has undergone a light-touch refurbishment and comprises 185,000 sq ft of offices which are 78% let. We have created a new entrance and improved the atrium to provide a vibrant communal space featuring workstations, lounge area and a new café. Planning has been granted on Phase 2 which will provide an additional 85,000 sq ft on the lower ground floors.
| Board of Directors | 74 |
|---|---|
| Senior management | 76 |
| Corporate governance | 77 |
| Report of the Remuneration Committee | 85 |
| Letter from the Chairman of the | |
| Nominations Committee | 104 |
| Report of the Nominations Committee | 104 |
| Letter from the Chairman of the | |
| Risk Committee | 105 |
| Report of the Risk Committee | 105 |
| Letter from the Chairman of the | |
| Audit Committee | 106 |
| Report of the Audit Committee | 107 |
| Directors' report | 109 |
Governance
Skills and expertise: The Hon R.A. Rayne was Chief Executive Officer of London Merchant Securities plc and has been on the boards of a number of public companies, including First Leisure Corporation plc and Crown Sports plc.
Non-executive Director of LMS Capital plc and Chairman of Weatherford International Inc.
Skills and expertise: A chartered surveyor and founder of Derwent Valley Holdings in 1984, John has overall responsibility for Group strategy, business development and day-to-day operations.
Other current appointments: Member of the strategic board of the New West End Company Limited.
Skills and expertise: Damian is a chartered accountant and, prior to joining Derwent London, he held senior finance roles at Treveria Asset Management, Wood Wharf Limited Partnership and Chelsfield plc. He has overall responsibility for financial strategy, treasury, taxation and financial reporting.
Trustee and member of the governing body at the Royal Academy of Music and non-executive Director at the Associated Board of the Royal Schools of Music.
Committees: Risk.
Skills and expertise: Co-founder of Derwent Valley Holdings, Simon has overall responsibility for the Group's development and regeneration programme. He is an honorary fellow of the Royal Institute of British Architects.
Skills and expertise: Paul is a chartered surveyor who joined the Group in 1987. His responsibilities include portfolio asset management, major leasing transactions, supervision of refurbishment and development projects and sustainability.
Other current appointments: Chairman of The Paddington Partnership and Director of Sadler's Wells Foundation.
Skills and expertise: Nigel is a chartered surveyor who joined the Group in 1988. His responsibilities include acquisitions and disposals and investment analysis.
Director of the Chancery Lane Association.
Skills and expertise: David is a chartered surveyor who joined the Group in 2002. His responsibilities include overseeing the Group's investment acquisitions and disposals. David is a past Chairman of the Westminster Property Association.
Skills and expertise: Stuart is a chartered surveyor. Until 2008, he was Chief Executive of Cadogan Estates, one of the principal private estates in London, and is a past president of the British Property Federation and former chairman of Pollen Estate Trustee Company.
9. Richard D.C. Dakin, 53
Non-executive Director Appointed to the Board: 2013
Skills and expertise: Richard has been Managing Director of Capital Advisors Limited, part of CBRE, since 2014. Previously, he had been employed at Lloyds Bank since 1982 where he undertook a variety of roles including commercial and corporate banking and leveraged finance, gaining extensive knowledge of property finance and the real estate sector. He is a Fellow of the Royal Institution of Chartered Surveyors and an Associate Member of Corporate Treasurers.
Committees: Risk (chairman), Audit, Nominations.
Skills and expertise: Claudia was Group Managing Director of Emap until 2010. Prior to that she held senior roles at HM Treasury, Goldman Sachs and the Financial Times.
Chair of the Remuneration Committee of Halfords PLC, Chair of the Governance Committee of Aviva PLC. Non-executive Director of the Premier League.
Committees: Remuneration (chairman), Audit.
Skills and expertise: Cilla is Group Chairman and Group CEO at AMV BBDO and a past Chairman of the Advertising Association.
Other current appointments: Director of BBDO Worldwide and Chairman of the Women's Business Council.
Committees: Nominations, Risk.
Skills and expertise: Simon started his career in the City in 1986 and, from 1997 to his retirement in 2011, worked at Bank of America Merrill Lynch where from 2004 he was Managing Director and co-head of corporate broking. Here he led a variety of transactions including equity raisings and advised company boards on a range of issues.
Non-executive Director of Lancashire Holdings Limited and of Legal and General Investment Management Holdings. He is also a non-executive Director of Cathedral Underwriting Limited, a subsidiary of Lancashire Holdings.
Committees: Nominations (chairman), Audit, Remuneration.
Skills and expertise: Stephen is a chartered management accountant and Chief Executive of Meggitt PLC. Previously he has held a number of senior financial positions including Group Finance Director at Meggitt PLC, Thistle Hotels plc and the Automobile Association.
Committees: Audit (chairman), Risk, Remuneration.
The Executive Committee comprises the executive Directors and the following five senior managers.
1. Rick Meakin Group Financial Controller
2. Celine Thompson Head of Leasing
3. Richard Baldwin Head of Development
4. Ben Ridgwell Head of Asset and Property Management
5. Tim Kite Company Secretary
6. John Davies Head of Sustainability
7. Quentin Freeman Head of Investor and Corporate Communications
8. Jennifer Whybrow Head of Financial Planning and Analysis
9. Katy Levine Head of Human Resources
10. David Westgate Head of Tax
11. Mark Murray Head of Information Technology
Robert A. Rayne Chairman
Dear Shareholder,
On behalf of the Board, I am pleased to introduce the Group's Corporate Governance report for 2016.
The latest update of the UK Corporate Governance Code ('The Code') was published in April 2016 and is effective for accounting periods starting after July 2016. Accordingly, Derwent London was subject to the 2014 version of the Code for the whole of 2016 and I am pleased to report that it has, once again, complied in full with the provisions of The Code. The Company's position regarding the independence of Stuart Corbyn is discussed on page 81.
Whilst 2016 was, as anticipated last year, a relatively quiet year for legislative or regulatory changes, a number of initiatives were commenced that could lead to substantial changes to the governance framework over the next few years. Most of these have their roots in recent high profile corporate misconduct and have the intention of restoring 'responsible capitalism'. The Government is playing an important part in this and its initial inquiry covered a wide range of governance matters including directors' duties, executive pay, board composition and gender balance in executive positions. This led to the publishing of a Green Paper on Corporate Governance Reform in November 2016 which consulted on executive pay and improving stakeholder representation. We wait to see how any changes arising from this consultation are enacted.
At Derwent London we recognise that our 'licence to operate' is a valuable asset that is essential to running a sustainable business and we strive to maintain a corporate infrastructure that deserves the trust of all our stakeholders. This not only requires a system whereby decision making is effective and efficient, but also the right culture to exist throughout the Company. As mentioned in my letter last year, a company's culture is now seen as a fundamental factor in determining a company's behaviour, a development that was evidenced by the publication of the FRC's report 'Corporate Culture and the Role of Boards' in July 2016. Whilst measuring a company's culture is difficult, it was pleasing to note that in the most recent staff survey, words chosen to describe the culture at Derwent London were very much aligned with the tone that we, as the Board, promote.
Another matter that continues to be the subject of regular reviews is board diversity. Following on from the Davies' review, the Hampton-Alexander Review has established a new target of 33% for women representation on Boards by 2020. At the same time the Parker Review considered the wider aspects of boardroom diversity. The benefits of a diversified board are well documented and maintaining a properly balanced board is a cornerstone of effective governance. In this regard, we were pleased to welcome Claudia Arney and Cilla Snowball as the latest additions to the Board. However, to preserve this critical balance, ensuring that the Board has the correct mix of skills, experience and knowledge must be given at least as much weight when recruiting new directors as meeting prescribed levels of the various forms of diversity. This subject is discussed further in 'Our people' on page 68 and on page 82.
continued
During the year we completed the process to ensure that we comply with the Modern Slavery Act and our policy statement can be found on our website by following the link from the homepage. We have also revised our procedures regarding inside information and directors' share dealings to reflect the new requirements introduced by the Market Abuse Regulations. These changes included establishing a new committee of the Board, a Disclosure Committee, to assist the Company in identifying inside information and maintaining the insider list.
The Financial Conduct Authority ('FCA') has stated that they do not intend to amend the Code before 2019 unless their monitoring of its application indicates that changes are needed. This suggests a period of relative calm but, as mentioned above, new regulations are likely to arise from one or more of the ongoing reviews. In addition, the new General Data Protection Regulations will come into force in 2018. Therefore, during 2017 we will be studying the content of this new legislation and drawing up the necessary procedures to ensure compliance as well as monitoring the requirements of any new draft rules.
As in previous years, I would encourage you to attend the Company's Annual General Meeting on 19 May 2017 where you will have the opportunity to meet the chairmen of the Board committees and members of senior management.
Robert A. Rayne Chairman 28 February 2017
The Group's governance framework is designed primarily to ensure its compliance with the Main Principles and Code Provisions of the UK Corporate Governance Code and in addition to make sure that the Group complies with the requirements of the wider legislative environment in which it operates. The framework also establishes a code of conduct which helps promote the Group's open and transparent culture throughout the business.
Derwent London recognises the wide range of stakeholders to which it has a responsibility. In the current environment in which there is a concerted effort to re-establish 'responsible capitalism', the Group strives to be seen as responsible in order to preserve its licence to operate. However, at a more objective level, our responsibility to other stakeholders can be seen in the Group's Sustainability Report which is released on the Group's website, www.derwentlondon.com, at the same time as this Report and Accounts is published.
Page
66
The Group's Directors' Remuneration Policy was approved by shareholders at the 2014 AGM and is therefore due for renewal at the forthcoming AGM in May 2017. With the heightened level of attention being given to this matter under the 'responsible capitalism' initiative, the Remuneration Committee has consulted with the Group's major shareholders to ensure that the revised policy being voted on at the AGM accords with best practice and is acceptable to investors.
Page
85
The vote of the UK to leave the EU created a heightened level of uncertainty, particularly for London, which is likely to persist for some time and radically changed the risk profile facing the Group. The Directors considered the effect of this change when conducting their robust assessment of the risks to the delivery of the Group's strategic goals and concluded that the possibility of an unfavourable exit settlement represented a new principal risk to the Group.
Page 60
The Directors of the Company during the year and their interests in the share capital of the Company, including deferred shares and shares over which options have been granted under the performance share plan, are shown in table 1 below. All of these interests are held beneficially.
There have been no changes in any of the Directors' interests between the year end and 28 February 2017.
During the year, a conditional grant of 179,345 shares was made to Directors under the Performance Share Plan (PSP) whilst 127,242 shares vested to the Directors from an earlier conditional award at a zero exercise price. The remaining 66,518 shares of this award made to Directors lapsed.
The Directors do not participate in the Executive Share Option Scheme.
Other than as disclosed in note 36 the Directors have no interest in any material contracts of the Company.
The Board of Derwent London is responsible for:
A formal list of matters reserved for the Board is maintained which includes decisions relating to strategy, management and capital structure, internal control and corporate governance, major contracts, certain external communications and Board membership. The list is reviewed periodically.
The Board either discharges its responsibilities directly or through delegation to management or one of the Board committees.
| Ordinary shares of 5p each | Options and deferred shares | ||||
|---|---|---|---|---|---|
| 31 Dec 16 | 31 Dec 15 | 31 Dec 16 | 31 Dec 15 | ||
| R.A. Rayne1 (Chairman) |
4,174,703 | 4,194,703 | – | – | |
| J.D. Burns (Chief Executive Officer) | 653,847 | 694,498 | 126,373 | 139,545 | |
| S.P. Silver | 213,617 | 239,887 | 108,427 | 119,717 | |
| N.Q. George | 49,352 | 47,550 | 80,490 | 82,855 | |
| P.M. Williams | 48,594 | 44,551 | 80,490 | 83,286 | |
| D.G. Silverman | 22,499 | 16,469 | 80,490 | 81,733 | |
| D.M.A. Wisniewski | 28,067 | 21,781 | 80,490 | 83,286 | |
| S.A. Corbyn | 1,000 | 1,000 | – | – | |
| R.D.C. Dakin | – | – | – | – | |
| S.W.D. Fraser (Senior Independent Director) | 2,000 | – | – | – | |
| S.G. Young | 1,000 | 1,000 | – | – | |
| C.I. Arney (appointed May 2015) | 2,500 | – | – | – | |
| P.D. Snowball (appointed Sept 2015) | – | – | – | – |
1 Includes shares held by the Rayne Foundation and the Rayne Trust, both of which R.A. Rayne is a trustee.
continued
As Chairman, Robbie Rayne's principal responsibility is the effective running of the Board. This involves setting its agenda, ensuring that the Board as a whole plays a full and constructive part in the development of the Group's strategy and making sure that the Board's decision making process is operated correctly.
Other key responsibilities include:
John Burns is the Group's Chief Executive Officer and he is primarily responsible for running the Group's strategy and overall commercial objectives together with implementing the decisions of the Board and its committees. This includes the following responsibilities:
Simon Fraser took over as the Group's SID at the beginning of 2016. The role has two key functions: to provide a sounding board for the Chairman in matters of governance or the performance of the Board, and to be available to shareholders if they have concerns which have not been resolved through the normal channels of communication with the Company. Other functions of the SID include:
The full Board met eight times during 2016 and six meetings are scheduled for 2017. One meeting every year is arranged specifically to consider the Group's five year strategy. Extra meetings are arranged if necessary for the Board to properly discharge its duties.
The Executive Committee, which consists of the executive Directors plus five of the Group's senior managers, met eleven times during the year. Both bodies are provided with comprehensive papers in a timely manner to ensure that the members are fully briefed on the matters to be discussed at the meeting.
Directors' attendance at Board and Executive Committee meetings during the year was as follows:
| Executive | ||
|---|---|---|
| Full Board | Committee | |
| Number of meetings | 8 | 11 |
| Executive | ||
| John Burns | 8 | 11 |
| Simon Silver | 8 | 10 |
| Damian Wisniewski | 8 | 11 |
| Paul Williams | 8 | 11 |
| Nigel George | 7 | 11 |
| David Silverman | 8 | 11 |
| Non-executive | ||
| Robert Rayne | 8 | – |
| Stuart Corbyn | 8 | – |
| Richard Dakin | 8 | – |
| Simon Fraser | 8 | – |
| Stephen Young | 7 | – |
| Claudia Arney | 8 | – |
| Cilla Snowball | 8 | – |
A formal schedule, which has been approved by the Board, sets out the division of responsibilities between the Chairman, who is responsible for the effectiveness of the Board, and the Chief Executive Officer, who is responsible for the day-to-day operations of the business.
In addition to the Executive Committee the Board maintains four Board Committees. The terms of reference of each Committee are available on the Group's website www.derwentlondon.com. Set out below are details of the membership and duties of the Committees.
Membership and attendance:
| Claudia Arney | Chairman | |||
|---|---|---|---|---|
| Stuart Corbyn | ||||
| Simon Fraser | ||||
| Stephen Young |
The Committee is responsible for establishing the Group's remuneration policy and individual remuneration packages for the executive Directors and selected senior executives. There were five meetings of the Committee in 2016 and the report of its activities is set out on pages 85 to 103.
Membership and attendance:
| Simon Fraser | Chairman | |
|---|---|---|
| Stuart Corbyn | ||
| Richard Dakin | ||
| Cilla Snowball |
The Committee's primary responsibility is identifying external candidates for appointment as Directors and, subsequently, recommending their appointment to the Board. In addition if requested, the Committee will make a recommendation concerning an appointment to the Board from within the Group. The Committee met twice during 2016 and the report of the Nominations Committee is on page 104.
Membership and attendance:
| Richard Dakin | Chairman | ||
|---|---|---|---|
| Stephen Young | |||
| Cilla Snowball | |||
| John Burns | |||
| Damian Wisniewski |
The Committee's main responsibility is to review the effectiveness of the Group's internal control and risk management systems. It met three times during the year and the Committee's report is on page 105.
Membership and attendance:
| Stephen Young | Chairman | ||
|---|---|---|---|
| Stuart Corbyn | |||
| Richard Dakin | |||
| Simon Fraser | |||
| Claudia Arney |
The Committee is responsible for reviewing, and reporting to the Board on, the Group's financial reporting and for maintaining an appropriate relationship with the Group's Auditor. The Committee met four times during 2016 and the report of the Audit Committee is on pages 107 and 108.
The annual review of the effectiveness of the Board and its Committees, as required by provision B.6.2. of the Code, was undertaken at the start of 2016 by way of a confidential, online survey completed by all the Directors and the Company Secretary. This was facilitated by Lintstock, an independent third party which carries out no other work for the Company. The responses were consolidated by Lintstock which then prepared reports for the Chairman of each of the Board Committees and the Chairman of the Board.
In view of the new appointments made during 2015, the quality of the Group's induction process was focussed on and the replies received were generally favourable. Overall, the responses identified no particular areas of weakness although some matters were raised where it was felt that improvements could be made. One of these was the extent of the nonexecutive Directors' input to the Group's strategy. To enhance this aspect of the Board's performance, an off-site strategy day was arranged during 2016. Another matter commented on was the size of the Board. Although mentioned by a number of respondents, none suggested that the Board's performance was compromised by its size and this is a subject regularly considered by the Nominations Committee.
As a result of this evaluation, the Board is satisfied that the structure, balance of skills and operation of the Board continues to be satisfactory and appropriate for the Group.
Having used the online survey as the basis of the effectiveness review for a number of years, the Board decided to supplement this year's process by the introduction of confidential interviews, conducted by Lintstock. Given the increased importance being attached to a Group's culture, Lintstock was asked to ensure that this subject received appropriate attention in the course of the interviews.
The main areas for development that were identified in this year's appraisal process were succession, strategy and market changes. Ways to improve the Board's performance in these areas are being explored and will be reported on in next year's report and accounts.
Having considered the results of the review, and taken account of matters discussed in his one-to-one meetings with the Directors, the Chairman is satisfied that the non-executive Directors continue to be effective and show a high level of commitment in discharging their responsibilities. In reaching this conclusion, the Chairman paid particular attention to those Directors that had served on the Board for more than six years. All the non-executive Directors are standing for re-election at the Annual General Meeting.
The performance of the Chairman was assessed by the nonexecutive Directors under the leadership of the Senior Independent Director using the responses to that section of the survey.
The performance of the executive Directors was assessed by the Remuneration Committee as part of the salary review process.
The position regarding Stuart Corbyn's independence is referred to in the Chairman's letter on Corporate Governance. Under the criteria set out in provision B.1.1. of the Code, Stuart is not deemed independent having served on the Board for more than nine years.
Length of service is only one of a number of criteria against which a director's independence can be assessed, but, in view of Stuart's tenure, the Board has specifically considered his independence.
Factors taken into account in the review included:
Taken together with the effective challenge that Stuart consistently presented to management, the Board was satisfied that he continued to demonstrate an independent state of mind.
Despite this conclusion, in the interest of good governance, Stuart stepped down as the Group's Senior Independent Director and chairman of the Nominations Committee at the start of the year having served on the Board for more than nine years. It has now been agreed that Stuart should leave all the Committees that he currently serves on with effect from 31 December 2016 and retire from the Board after the Group's Annual General Meeting in May 2017.
continued
The Board notes the continued focus on diversity exhibited by a range of bodies and the wide scope of consultations and reviews published during 2016. These include the Hampton-Alexander Review which aims to build upon the progress resulting from the recommendations made by Lord Davies and The Parker Review which considered the ethnic diversity of UK boards.
The Board's policy in this regard is to make appointments based on merit with the over-riding objective of ensuring that the Board maintains the correct balance of skills, experience, length of service and knowledge of the Group to successfully deliver the Group's strategy whilst keeping in mind the well documented benefits of a diversified Board and avoiding the pitfalls of positive discrimination.
The Board is also conscious that altering the diversity of the Board can only be undertaken in conjunction with the underlying Board refreshment programme. Having recruited two new non-executives in 2015, there have been no further appointments to the Board in 2016, and consequently its diversity is unchanged.
The Board currently includes two women (15%) and the gender mix throughout the Group is illustrated by the adjacent diagram and on page 68.
One of the responsibilities of the Nominations Committee is to ensure that the Group would be able to continue with its long term strategy in the event of unforeseen circumstances. As part of this responsibility, the Committee considers the Group's succession planning on a regular basis to ensure that changes to the Board are properly planned and co-ordinated.
The Committee also monitors the development of the executive team below the Board to ensure that there is a diverse supply of senior executives and potential future Board members with the appropriate skills and experience. The Executive Committee also considers the adequacy of the Group's succession plans below the Board as part of the five year strategy review.
Having taken account of all the relevant factors described above, the Directors believe that the Board has an appropriate balance of skills, experience, knowledge and independence to deliver the Group's strategy, to enable the non-executive Directors to effectively challenge the views of the executive Directors and to satisfy the requirements of good corporate governance.
Length of tenure of Directors
The Company recognises the importance of clear communication with shareholders. Regular contact with institutional shareholders and fund managers is maintained, principally by the executive Directors, through presentations and visits to the Group's property assets. The Board receives regular reports of these meetings which include a summary of any significant issues raised by the shareholders.
The Group's website www.derwentlondon.com, which includes the presentations made to analysts and investors at the time of the Group's interim and full year results, together with the social media channels that the Group uses, provide additional sources of information for shareholders. Websites for specific developments are used to help explain the Group's current activities to shareholders in more detail. The Annual Report, which is available to all shareholders, reinforces this communication.
During 2016, the Group held over 320 investor meetings with 167 investors. Of these, 70 were shareholders at the year end and their ownership represented over 60% of the shares in issue. A calendar of our main shareholder events in 2016 can be seen below.
The AGM provides an opportunity for private shareholders in particular to question the Directors and the Chairman of each of the Board Committees. An alternative channel of communication to the Board is available to shareholders through Simon Fraser, the Senior Independent Director.
| January | Property Conference (London) |
|---|---|
| February | 2015 Results presentation |
| Roadshow (United Kingdom) | |
| March | Roadshows (Netherlands and United Kingdom) Salesforce presentations (x3) |
| April | Property Conference (London) |
| Salesforce presentation | |
| May | 2016 Q1 business update conference call |
| Salesforce presentation | |
| Property Conference (Amsterdam) | |
| June | Property Conference (London) |
| July | |
| August | 2016 H1 results presentation |
| Roadshows (Netherlands and United Kingdom) Salesforce presentation |
|
| September Property Conference (London x2 and New York) | |
| Roadshow (United Kingdom) | |
| October | |
| November 2016 Q3 business update conference call | |
| Investor conference | |
| Property Conference (London x2) | |
| December |
The principal risks and uncertainties facing the Group in 2017 together with the controls and mitigating factors are set out on pages 60 to 65. The Board has carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. As part of the assessment the Board specifically considered the impact that the UK's decision to leave the EU might have on these risks. In view of the uncertainty created by the vote and the unknown nature of the business environment that the Group will eventually be operating in, the Board concluded that this represented a new principal risk to the business.
Details of the price, credit, liquidity and cash flow risks that are inherent in the Group's business are given in note 23 on pages 150 and 151.
The key elements of the Group's internal control framework which is designed to manage and control the Group's risks are:
• an approved schedule of matters reserved for decision by the Board and the Executive Committee, supported by defined responsibilities and levels of authority;
The effectiveness of this system and the operation of the key components thereof have been reviewed for the accounting year and the period to the date of approval of the financial statements.
This review did not reveal any significant weaknesses in the Group's system of controls.
The Board was able to assess the effectiveness of the controls through the close day-to-day involvement of the executive Directors in the operation of many of the controls and the various reports that the Board receives which enable any significant control failure to be identified.
continued
The Board has considered the need for an internal audit function but continues to believe that this is unnecessary given the size and complexity of the Group.
The Board has considered the Group's report and accounts and, taking into account the recommendation of the Audit Committee, is satisfied that, taken as a whole, it is fair, balanced and understandable and provides the information necessary for the shareholders to assess the Company's position and performance, business model and strategy.
Under Provision C.1.3 of the UK Corporate Governance Code, the Board is required to report whether the business is a going concern. In considering this requirement, the Directors have taken into account the following:
Having due regard to these matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence until at least February 2018. Therefore, the Board continues to adopt the going concern basis in preparing the financial statements.
The Group's Viability Statement, which reflects the Board's conclusion regarding the impact of the principal risks on the Group's solvency and liquidity over the five year period of the review, is set out on page 65.
Claudia I. Arney Chair of the Remuneration Committee
Dear Shareholder,
I am pleased to present the report of the Remuneration Committee for the year ended 31 December 2016, my first report since becoming Chair of the Remuneration Committee in June 2016 and having joined the Board a year earlier.
My appointment coincided with the start of a comprehensive review of executive remuneration in advance of our second binding remuneration policy shareholder vote at the May 2017 AGM. This marks the third anniversary and, therefore, the expiry of our 2014 policy. In summary, the Committee is satisfied that the existing remuneration policy and structure continues to serve the Company well and that there should be no significant changes, including to overall quantum and variable pay opportunities. We are, however, enhancing our share ownership guidelines to provide greater alignment with shareholders and this is in addition to the inclusion of a two-year holding period which was introduced as part of the 2014 policy.
I set out below a summary of the pay outcomes for the 2016 financial year, the objectives and key features of the revised remuneration policy and how it will be implemented in 2017.
The Group's results for 2016 are discussed in the Strategic Report and include a total property return of 2.9% and a total return of 1.7%. Both these KPIs are measures of performance used in assessing the level of performance related pay for the Directors. To ensure that remuneration reflects a balanced
performance, a scorecard of additional metrics is taken into account by the Committee when considering the strategic element of the Group's annual bonus scheme. Taking all these measures into account resulted in a bonus entitlement of 23.25% of entitlement being earned. Whilst performance against the strategic objectives was strong, the Committee recognised that this was not reflected in the financial or share price performance of the Group which was dominated by the market effects of the Brexit vote. Accordingly, the Committee used its discretion to reduce the strategic element outcome by a quarter.
Conditional awards made in 2014 under the Group's 2014 Performance Share Scheme (PSP) will vest in May 2017. These awards were subject to two performance conditions each over 50% of the award and both measured over the three year period from 1 January 2014 to 31 December 2016. The first element was based on total shareholder return (TSR) performance compared with that of a group of other real estate companies. This measure has been finalised and none of that part of the award will vest. The second part was based on the Group's total property return compared to properties in the IPD Central London Offices Total Return Index. The IPD data will be available in March and therefore the vesting result has been estimated at the year end.
The combined assessment of the two performance measures as at 28 February 2017 was that around 25% of the total award was expected to vest. The final vesting percentage will be ascertained in March 2017 and the award will vest in May 2017.
The Committee believes that the outturn of both the annual bonus and the PSP fairly represents the Group's NAV and share price performance over their respective performance periods.
The purpose of the review was to ensure a structure which supports the Company's key remuneration principles. These include:
continued
As mentioned above, the Committee concluded that the existing policy, which has a significant weighting on performance-related pay, continues to serve the Company well and that there should be no significant changes except to share ownership guidelines which have been increased to 200% of salary for all Directors. The key elements of the 2017 remuneration policy are set out below:
No changes have been made to overall quantum and variable pay opportunities and the two-year post-vesting holding period for the performance share plan will be retained. The new policy will be proposed to shareholders for a binding vote at the 2017 AGM.
John Burns' and Simon Silver's salaries will not be increased for 2017. The other executive Directors' salaries will be increased by 2.5% which is in line with the average 'cost of living' salary increase across the rest of the Group.
The annual bonus and PSP opportunities and metrics remain unchanged with the bonus based on relative total return, total property return relative to the IPD index and strategic measures and the PSP based on relative TSR and total property return relative to the IPD index. While the measures remain the same, the Committee has made adjustments to the comparator calculations to improve transparency and alignment with strategy:
• TPR will be measured against the quarterly IPD index rather than the median property. The index is weighted by property value and therefore, in the Committee's view, provides a better measure of 'market' return than measurement against the median property in the index as has been used up till now. Using the index is also consistent with the Company's KPI and investor presentation disclosures.
Key activities The principal activities of the Committee during the year were:
Obtained external verification of the result of the financial elements of the bonus scheme and carried out the assessment of the performance against the strategic targets.
Long-term TSR performance will be assessed against the FTSE 350 Real Estate Index constituents – this is a larger peer group than the previous group of 12 real estate companies and will result in a more robust median to upper quartile comparison, particularly in the event of any delistings during the period.
The Committee reviewed the historic IPD index and Median returns in recent years and found that the index has consistently been higher than the Median. To reflect this, the TPR element of the bonus and PSP will pay out in full if the Company's performance is at least 3% pa higher than the relevant Index. The Committee believes this is a stretching outperformance target in the current market, it is as challenging as the previous TPR target range and it is more challenging than most, if not all, the targets used in our peers' incentive plans.
As part of the policy review, the Committee consulted a number of our largest shareholders in 2016. The Committee was very grateful for the feedback received and, reflecting these comments, some amendments to the original proposals were made.
The Committee will continue to encourage an open and constructive dialogue with shareholders and their representative bodies, and will consult with major shareholders on any material changes to the remuneration policy or to how it is implemented. We are aware that the executive remuneration landscape is evolving and of the potential for change, and will continue to monitor developments as they arise.
There will be two votes on remuneration at the forthcoming AGM, a binding vote on the remuneration policy and an advisory vote on the rest of the report. I hope that you will be able to support these resolutions. If you have any questions or comments then please feel free to contact me through Tim Kite, the Company Secretary.
Chair of the Remuneration Committee 28 February 2017
| Short index Annual statement |
85 |
|---|---|
| Directors' remuneration policy • Executive Director policy table. |
88 |
| • Operation of annual bonus plan and performance share plan. |
91 |
| • Remuneration scenarios. | 92 |
| Annual report on remuneration • Application of policy for 2017. |
94 |
| • Directors' remuneration summary. | 96 |
| • Directors' interests and shareholding guidelines. | 101 |
This part of the Directors' Remuneration Report has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Act). The overall remuneration policy has been developed in compliance with the principles of the UK Corporate Governance Code and the Listing Rules.
The Remuneration Policy Report set out below will be put to a binding shareholder vote at the AGM on 19 May 2017 and, if approved, the Committee intends for it to apply for a period of three financial years, 2017 to 2019. The Annual Statement by the Chairman of the Remuneration Committee and the Annual Report on Directors' Remuneration will be put to a single advisory vote at the 2017 AGM.
The Committee, on behalf of the Board, is responsible for determining remuneration packages for the executive Directors and selected other senior executives. It also oversees the operation of the Group's bonus scheme and Performance Share Plan ('PSP') and considers the level of business risk that the remuneration structure encourages the executives to take.
The key aims of the Committee's remuneration policy for senior executives are:
Having conducted a thorough review of remuneration and taken independent advice, the Committee was satisfied that the 2014 shareholder-approved remuneration policy continues to serve the Company well and that there should be no significant changes, including to overall quantum and variable pay opportunities. The key differences between the proposed remuneration policy and the previous policy are:
continued
The policy table below sets out the broad principles which will be applied when setting the individual remuneration packages of Directors. This should be read in conjunction with the recruitment and promotion policy on page 93 and the application of policy for 2017 on pages 94 and 95.
| Purpose and | ||||
|---|---|---|---|---|
| link to strategy | How operated | Maximum opportunity | Performance metrics | |
| Base salary |
To help recruit, retain and motivate high calibre executives. Reflects experience and importance to the business. |
Normally reviewed annually. Any increase is normally effective from 1 January. Factors taken into account in the review include: • The role, experience and performance of the individual |
The current salary levels are detailed in the Annual Report on Remuneration on page 94 and will be eligible for increases during the period that the Directors' remuneration policy operates. |
A broad assessment of personal and corporate performance is considered as part of the salary review. |
| and the Company. • Economic conditions. • Increases throughout the rest of the business. • Levels in companies with similar business characteristics. |
During this time, to the extent that salaries are increased, increases will normally be consistent with the policy applied to the workforce generally (in percentage of salary terms). |
|||
| Salaries are set after having due regard to the salary levels operating in companies of a broadly similar size and complexity, the responsibilities of each individual role, individual performance and an individual's experience. |
Increases beyond those linked to the workforce generally (in percentage of salary terms) may be awarded in certain circumstances such as where there is a change in responsibility, experience or a significant increase in the scale of the role and/or size, value and/or complexity of the Group. |
|||
| The Committee retains the flexibility to set the salary of a new hire at a discount to the market level initially, and to implement a series of planned increases over the subsequent few years, potentially higher than for the wider workforce, in order to bring the salary to the desired position, subject to individual performance. |
||||
| Benefits | To provide a market competitive benefits package to help recruit and retain high calibre executives. Medical benefits to help minimise disruption to business. |
Benefits include, but are not limited to, private medical insurance, car and fuel allowance and life assurance. In certain circumstances, the Committee may also approve additional allowances relating to relocation of an executive Director or other expatriate benefits required to perform the role. The Committee may provide other employee benefits to executive |
The maximum cost of providing benefits is not pre-determined and may vary from year-to-year based on the overall cost to the Company in securing these benefits for a population of employees (particularly health insurance and death-in-service cover).1 The Committee has discretion to approve a higher cost in exceptional circumstances (such as relocation), or where factors |
None. |
| Directors on broadly similar terms to the wider workforce. The Committee has the ability to reimburse reasonable business related expenses |
outside of the Committee's control have changed materially (such as increases in insurance premiums). |
1 In relation to the types of benefits detailed in the above table, the only benefit which is considered to be significant in value terms is the provision of a company car (or the provision of cash in lieu of providing a company car). The value of the benefit will be either the taxable value assessed according to HMRC rules when a company car is provided or the cash amount in the case of cash in lieu of a company car. In either case, the provision of this benefit is limited to a cost of £50,000.
and any tax thereon.
| Purpose and | ||||
|---|---|---|---|---|
| Pension | link to strategy To help recruit and retain high calibre executives and reward |
How operated The Company operates a defined contribution pension scheme. Where contributions would exceed |
Maximum opportunity Directors receive a contribution or cash supplement (or a mix of both) of up to 20% of salary. |
Performance metrics None. |
| continued contribution to the business. |
either the lifetime or annual contribution limits cash payments in lieu are made. |
Legacy arrangements for some Directors mean that a fixed amount is paid in addition to the 20% contribution. |
||
| The continuation of these arrangements for existing employees means that their maximum pension will be up to 21% of salary. |
||||
| Annual bonus |
To incentivise the annual delivery of stretching financial targets and strategic |
Bonus payments are determined by the Committee after the year end, based on performance against the targets set at the start |
Maximum bonus potential, for the achievement of stretching performance conditions is 150% of salary for all Directors. |
At least 75% of the annual bonus will be based on financial measures with up to 25% based on strategic objectives. |
| goals. Financial performance |
of the year. Bonuses up to 100% of salary are |
Metrics may include but are not limited to: |
||
| measures reflect KPIs of the business. |
paid as cash. Amounts in excess of 100% are deferred into shares of which 50% are released after 12 months and the balance after 24 months. These deferred shares are potentially forfeitable if the executive leaves prior to the share release date. |
• total return against other comparable real estate companies; • total property return versus an appropriate IPD index; and • performance objectives tailored to the delivery of the Group's short and medium-term strategy. |
||
| Dividend equivalents accrue on vested deferred shares. |
Up to 22.5% of the relevant bonus element will be payable for |
|||
| The bonus is not pensionable. The cash and deferred elements of bonuses are subject to provisions that enable the Committee to |
threshold performance against the financial measures, with full payout for achieving challenging stretch performance targets. |
|||
| recover the cash paid (clawback) or to lapse the associated deferred shares (withhold payments) in the event of a misstatement of results, error in calculation or for gross misconduct. |
The performance measures will be reviewed annually by the Committee and the Committee retains discretion to vary measures and weightings as appropriate (subject to the minimum financial measures weighting set out above) to ensure they continue to be linked to the delivery of Company strategy. |
|||
| The Committee has discretion to adjust the payment outcome if it is not deemed to reflect appropriately the overall business performance of the Company over the performance period. Any exercise of discretion will be detailed in the following year's annual report on remuneration. |
||||
| Details of the bonus targets will be disclosed retrospectively in the next year's annual report on remuneration when they are no longer deemed commercially sensitive by the Board. |
continued
| Purpose and | ||||
|---|---|---|---|---|
| Long-term incentives |
link to strategy To align the long-term interests of the Directors with those of the Group's shareholders. To incentivise value |
How operated The Committee makes an award of performance shares each year. Vesting is determined by the Group's achievements against stretching performance targets over three years and continued |
Maximum opportunity Annual award limit: up to 200% of salary in any financial year. |
Performance metrics Long-term incentive awards vest based on three-year performance against a challenging range of performance targets, with at least one third of an award based on total shareholder return (TSR). |
| creation over the long-term. To aid retention. |
employment. The Group's performance against the targets is independently verified on behalf of the Committee. |
Other metrics may include, but are not limited to, total property return relative to an appropriate IPD (or equivalent) index, total return and |
||
| A further holding period of two years is required on after tax vested shares. |
NAV or earnings growth. Up to 22.5% of each part of an award vests for achieving the |
|||
| Dividend equivalents may accrue on performance shares to the extent that performance conditions have been met, payable at the end of the vesting or, if applicable, the |
threshold performance level with full vesting for achieving challenging stretch performance targets. No awards vest for below threshold performance levels. |
|||
| end of the holding period. Clawback and malus provisions apply in the event of misstatement, an error in calculation or as a result of misconduct which results in the individual ceasing to be a director or employee of the Group within two years of vesting. |
The performance criteria will be reviewed annually by the Committee prior to each grant and the Committee has discretion to vary measures and weightings as appropriate to ensure they continue to be linked to the delivery of Company strategy subject to the minimum weighting |
|||
| Awards will be satisfied by either newly issued shares or shares purchased in the market. Any use of newly issued shares will be limited to corporate governance compliant dilution limits contained in the scheme rules. |
on TSR as set out above. The Committee has discretion to adjust the vesting outcome in exceptional circumstances to ensure that vesting outcomes are a true reflection of the overall performance of the Company over the performance period. Any use of discretion will be fully explained in the next year's remuneration report. |
|||
| Share ownership guidelines |
To provide alignment between executives and shareholders. |
Executive Directors are required to retain at least half of any deferred bonus share awards or performance |
All executive Directors – 200% of salary. Non-executive Directors – |
None. |
| shares vesting (net of tax) until the guideline is met. |
no guideline. | |||
| Only wholly owned shares will count towards the guideline. |
||||
| Non executive Directors' |
To help recruit and retain high calibre non-executives with |
The remuneration for the Chairman is set by the full Board (excluding the Chairman). |
The current non-executives' fees (and benefits where applicable) may be increased at higher rates |
None. |
| fees | relevant skills and experience. Reflects time commitments and |
The remuneration for non executive Directors is set by the executive Directors. |
than the wider workforce given that fees may only be reviewed periodically and to ensure that any |
|
| scope of responsibility. | The Chairman receives benefits limited to a company car (and driver), secretarial provision and office costs. |
changes in time commitment are appropriately recognised in the fee levels set. |
||
| Periodic fee reviews will set a base fee and, where relevant, fees for additional services such as serving on a Board Committee, chairing a Board Committee or holding the position of Senior Independent Director. |
||||
| The review will consider the expected time commitments and scope of responsibilities for each role as well as market levels in companies of comparable size and complexity. |
The Committee will operate the annual bonus plan and performance share plan in accordance with their respective rules and in accordance with the Listing Rules of the FCA where relevant. As part of the rules the Committee holds certain discretions which are required for an efficient operation and administration of these plans and are consistent with standard market practice. These include the following discretions:
If certain events occur (e.g. a material divestment or acquisition of a Group business, accounting changes, M&A activity), which mean the original performance conditions are no longer appropriate, the Committee retains the ability to make adjustments to the targets and/or set different measures and alter weightings as necessary to ensure the conditions achieve their original purpose and are not materially less difficult to satisfy.
The outstanding share incentive awards which are detailed in tables 2 and 3 on pages 99 and 101 will remain eligible to vest based on their original award terms. In addition, all arrangements previously disclosed in previous reports of the Remuneration Committee will remain eligible to vest or become payable on their original terms.
The performance metrics that are used for annual bonus and long-term incentive plans are aligned to the Company's KPIs.
For the 2017 annual bonus, a combination of sector specific financial performance measures are used, namely total return and total property return. Total return and total property return are measured on a relative basis against sector peers and industry benchmarks such as IPD. The precise measures, targets and weightings chosen may vary each year, depending on the Company's strategy. Strategic objectives are set on an annual basis, directly linked to the overall strategic focus at that time.
Long-term performance targets for 2017 are based on a combination of relative performance measures. Total Shareholder Return will be used as it provides a clear alignment between shareholders and executives and total property return (TPR) will be used as it promotes the aim to maximise returns from the investment portfolio. TSR will be measured against the constituents of the FTSE 350 Real Estate Index as this provides a robust and relevant benchmark. TPR will be measured against the IPD UK All Property Index as this is in line with the Group's KPI of exceeding the IPD UK All Property index on a three-year rolling basis.
it compares to executive Director remuneration policy While the Company does not formally consult employees on remuneration in determining the remuneration policy for executive Directors, the Committee takes account of the policy for employees across the workforce. In particular when setting base salaries for executives, the Committee compares the salary increases with those for the workforce as a whole.
The overall remuneration policy for executive Directors is broadly consistent with the remainder of the workforce. However, whilst executive remuneration is weighted towards performance-related pay, the Company operates both option and bonus schemes for employees (albeit at lower quantum and subject to performance criteria more appropriate for their role) which are similar to those of the Directors.
The Committee actively seeks dialogue with shareholders and values their input. A comprehensive shareholder consultation was undertaken in formulating the Company's revised remuneration policy. The Committee considered carefully the feedback received from major shareholders and proxy voting agencies and made changes to the policy and its implementation, as appropriate. On an ongoing basis, any feedback received from shareholders is considered as part of the Committee's annual review of remuneration. The Committee will also discuss voting outcomes at the relevant Committee meeting and will consult with shareholders when making any significant changes to the remuneration policy or the way it is being implemented.
continued
The Committee aims to provide a significant part of the Directors' total remuneration through variable pay and the following diagram illustrates the remuneration opportunity provided to the Directors by the remuneration structure at minimum, target and maximum levels of performance.
Assumptions:
Below target = fixed pay only (base salary, benefits and pension).
On-target = 50% of annual bonus payable and 22.5% vesting of the LTIP awards. Maximum = 100% of annual bonus payable and full vesting of LTIP awards.
Salary based on those applying on 1 January 2017. Benefits value is based on the cost of supplying those benefits (using the
annualised value of benefits in 31 December 2016 as a proxy). Pension value set at 20% of the salary.
Amounts have been rounded to the nearest £1,000.
Share price growth on vesting and any dividends payable on vesting shares have been ignored.
Other Directors are: Damian Wisniewski, Paul Williams, Nigel George and David Silverman, whose salary, annual bonus and LTIP arrangements for 2017 are identical.
Service contracts and compensation for loss of office
As part of the major review of the Directors' remuneration structure undertaken in 2013/2014, all the executive Directors entered into new service contracts dated 16 May 2014. Executive Directors' service contracts are terminable either by the Company providing 12 months' notice or by the executive providing six months' notice. Contracts include a payment in lieu of notice clause which provides for monthly phased payments throughout the notice period which include pro-rated salary, benefits and pension only and are subject to mitigation. In addition, the Company may also make payments in relation to any statutory claim against the Company or make a modest provision in respect of legal costs or outplacement fees. The new service contracts have no change of control provisions and all other elements were brought up to date in line with best practice.
With regard to annual bonus for a departing executive Director, if employment ends by reason of death, retirement, injury, ill-health, disability, redundancy or transfer of employment outside the Group, or any other reason as determined by the Committee (i.e. the individual is a 'good leaver'), the executive Director may be considered for a bonus payment. If the termination is for any other reason, any entitlement to bonus would normally lapse. Under any circumstance, it is the Committee's policy to ensure that any bonus payment reflects the departing executive Director's performance. Any bonus payment will normally be delayed until the performance conditions have been determined for the relevant period and be subject to a pro-rata reduction for the portion of the relevant bonus year that the individual was employed. Deferred bonus share awards will normally lapse on cessation of employment, however, in the case of good leavers, awards typically vest on the normal vesting date (or on cessation in the event of death).
With regards to PSP awards, if a participant resigns voluntarily, the award lapses. The 2014 PSP rules provide standard 'good leaver' definitions for death, retirement, injury, ill-health, disability, redundancy or transfer of employment outside the Group, or any other reason at the Committee's discretion, whereby awards will vest at their original vesting date subject to performance criteria being achieved and time pro-rating to reduce vested awards for time served in the relevant period. The Committee can decide not to pro-rate an award if it regards it as inappropriate to do so in the particular circumstances. Alternatively, for a 'good leaver', the Committee can decide that the award will vest on cessation subject to the performance conditions measured at that time and the same pro-rating described above. Such treatment will apply in the case of death.
In the event of a change of control, the treatment detailed above for good leavers would apply albeit with performance tested over the shortened performance period, and early vesting (if appropriate).
Neither the Chairman nor non-executive Directors are eligible for pension scheme membership and do not participate in the Company's bonus or equity-based incentive schemes.
The non-executive Directors listed below do not have service contracts but are appointed for three year terms which expire as follows:
| Stephen Young | 31 July 2019 |
|---|---|
| Richard Dakin | 31 July 2019 |
| Claudia Arney | 31 May 2018 |
| Simon Fraser | 31 August 2018 |
| Cilla Snowball | 31 August 2018 |
Stuart Corbyn's appointment was extended for one year to expire on 23 May 2017.
Mr Rayne has a letter of appointment, which runs for three years, expiring on 25 March 2019. In addition to his fee as Chairman, it provides for a car, driver and secretary, together with a contribution to his office running costs. His letter of appointment also contains provisions relating to payment in lieu of notice.
Executive Directors may accept a non-executive role at another company with the approval of the Board. The executive is entitled to retain any fees paid for these services.
When facilitating an external recruitment or an internal promotion the Committee will apply the following principles:
| Remuneration element | Policy |
|---|---|
| Base salary | Base salary levels will be set taking into account the individual's experience and skills, prevailing market rates in companies of comparable size and complexity and internal relativities. |
| Where appropriate the Committee may set the initial salary below this level (e.g. if the individual has limited PLC Board experience or is new to the role), with the intention to make phased pay increases over a number of years, which may be above those of the wider workforce, to achieve the desired market positioning. These increases will be subject to continued development in the role. |
|
| Benefits | Benefits as provided to current executive Directors. |
| The Committee may pay relevant relocation and legal expenses in order to facilitate a recruitment. | |
| Pension | A defined contribution or cash supplement at the level provided to current executive Directors. |
| Annual bonus | The Committee would intend to operate the same annual bonus plan for all Directors, including the same maximum opportunity at 150% of salary, albeit pro-rated for the period of employment. However, depending on the nature and timing of an appointment, the Committee reserves the right to set different performance measures, targets and weightings for the first bonus plan year if considered appropriate. Any bonus criteria in such circumstances would be disclosed in the following year's annual report on remuneration. |
| Long-term incentives |
Performance Share Plan awards would be granted in line with the policy set out in the policy table, with the possibility of an award being made after an appointment. The maximum ongoing annual award would be limited to the maximum limit set out in the policy table. |
| For an internal hire, existing awards would continue over their original vesting period and remain subject to their terms as at the date of grant. |
|
| Buy-out awards | Should it be the case that the Remuneration Committee considers it necessary to buy out remuneration which an individual would forfeit on leaving their current employer, such compensation would be structured so that the terms of the buy-out would have a fair value no higher than that of what is being forfeited and would generally be determined on a comparable basis taking into account the form, structure and vesting schedule of the remuneration being replaced as well as the probability of vesting. The Committee has the discretion to determine the type of replacement award (cash, shares), the vesting period and whether or not performance conditions apply. Where possible this will be accommodated under the Company's existing incentive plans, but it may be necessary to utilise the exemption under rule 9.4.2 of the Listing Rules. Shareholders will be informed of any such payments in the following year's annual report on remuneration. |
continued
The Committee was served throughout the year by Simon Fraser, Stuart Corbyn, Stephen Young and Claudia Arney. On 1 July 2016, Claudia Arney took over the chair of the Committee from Simon Fraser and Stuart Corbyn left the Committee on 31 December 2016. None of the members who have served during the year had any personal interest in the matters decided by the Committee, or any day-to-day involvement in the running of the business and, therefore, are considered to be independent. The full terms of reference of the Committee are available on the Company's website.
New Bridge Street (NBS) – a trading name for Aon plc – was retained to provide independent assistance to the Committee regarding the setting of salaries and the operation of the PSP and bonus scheme. In particular, NBS provides an independent assessment of outcomes under the bonus scheme and the extent of vesting of the conditional share awards under the PSP and ensures that the measures used for both schemes are comparable and consistent. This year, NBS also advised the Committee on the revision of the Group's remuneration policy which will be voted on at the AGM in May 2017. The fees paid to NBS for these services, based on hourly rates, amount to £82,500. NBS did not provide any other services to the Group during the year and the Committee is satisfied that the advice provided by NBS is independent and objective.
No Director had any involvement in determining his own remuneration although some of the matters considered by the Committee, other than his own salary, were discussed with John Burns. The Company Secretary acted as Secretary to the Committee.
Base salaries
The base salaries that are applicable from 1 January 2017, are as follows:
John Burns and Simon Silver declined any increase in their base salary for 2017. Base salaries for the other Executive Directors were increased by 2.5% which was in line with the 'cost of living' increase awarded to the wider workforce.
Benefits will continue to include a car and fuel allowance, private medical insurance and life insurance. Pension benefits are provided by way of a Company contribution at up to 21% of salary for all executive Directors.
The bonus will operate subject to the following metrics with a bonus potential of 150% for all executive Directors:
For achieving the threshold performance target (i.e. at the IPD Index or median total return against our sector peers), 22.5% of the maximum bonus opportunity will become payable.
Total return pay-out accrues on a straight line basis between the threshold level for median performance and maximum payment for upper quartile performance or better. For TPR, the payout accrues on a straight line basis between the threshold level for index performance and maximum payment for index +3.0%.
| Remuneration component | Key features |
|---|---|
| Base salary and employment benefits | To help recruit, retain and motivate high calibre executives. Reflects experience and importance to the business. Includes: • Medical benefits. • Company car/allowance. • Pension. |
| Annual bonus | To incentivise the delivery of stretching financial targets and personal performance plans. Up to 150% of salary. |
| Long term incentive plan | To align long term interests of Directors with those of shareholders. Up to a maximum of 200% salary. |
| Share ownership guidelines | To provide alignment between Directors and shareholders. All executive Directors: 200% of salary. Non-executive Directors: n/a. |
Bonuses earned above 100% of salary will be subject to deferral into Company's shares with half of the deferred element released on the first anniversary of the deferral and the remaining half released on the second anniversary.
The cash and deferred elements of bonuses are subject to provisions that enable the Committee to recover the cash paid (clawback) or to lapse the associated deferred shares (withhold payments) in the event of a misstatement of results for the financial year to which the bonus relates, error in calculation or for gross misconduct within two years of the payment of the cash bonus, or vesting of the deferred bonus shares.
It is proposed that long-term incentive awards in 2017 will be granted at 200% of salary to all executive Directors.
Half of an award vests according to the Group's relative TSR performance versus the constituents of the FTSE 350 Real Estate Index with the following vesting profile:
| TSR Performance of the Company relative to FTSE 350 Real Estate Index tested over three years |
Vesting (% of TSR part of award) |
|---|---|
| Below median | 0 |
| At median | 22.5 |
| Upper quartile | 100 |
| Straight-line vesting occurs between these points |
The other half of an award vests according to the Group's relative TPR versus the IPD UK All Property Index Total Return Index with the following vesting profile:
| Derwent London's annualised TPR versus the IPD UK All Property Index tested over three years |
Vesting (% of TPR part of award) |
|---|---|
| Below index | 0 |
| At index | 22.5 |
| Index +3.0% | 100 |
| Straight-line vesting occurs between these points |
Performance periods will run over three financial years. For awards granted in 2014 and beyond, as a minimum, the after-tax number of vested shares must be retained for a minimum holding period of two years. This five-year aggregate period is considered appropriate for a Company focused on aligning executives with shareholders over the long-term.
Awards granted under the Company's 2014 performance share plan include provisions that enable the Committee to recover value in the event of a misstatement of results for any of the financial years to which the vesting of an award related, or an error in calculation when determining the vesting result, or as a result of misconduct which results in the individual ceasing to be a Director or employee of the Group within two years of the vesting (i.e. clawback provisions apply). The mechanism through which the clawback can be implemented enables the Committee to (i) reduce the cash bonus earned in a subsequent year and/or reduce outstanding discretionary long-term incentive share awards (i.e. withholding amounts to become payable may be used to effect a clawback) or (ii) for the Committee to require that a net of tax balancing cash payment be made.
The fees effective from 1 January 2016 are: Chairman £150,000 (additional benefits are provided as detailed on page 92); base fee £42,500; Committee Chairman fee £7,500; Senior Independent Director fee £5,500; and Committee membership fee £4,000.
continued
Details of Directors' remuneration are given in table 1 below:
| Pension | Bonus | Gains from | |||||||
|---|---|---|---|---|---|---|---|---|---|
| 2016 | Salary and fees £'000 |
Benefits in kind £'000 |
and life assurance £'000 |
Cash £'000 |
Deferred £'000 |
Sub total £'000 |
equity-settled schemes1 £'000 |
Total £'000 |
|
| Executive | |||||||||
| J.D. Burns | 638 | 67 | 149 | 222 | – | 1,076 | 277 | 1,353 | |
| S.P. Silver | 547 | 49 | 144 | 191 | – | 931 | 238 | 1,169 | |
| D.M.A. Wisniewski | 407 | 22 | 88 | 142 | – | 659 | 177 | 836 | |
| N.Q. George | 407 | 22 | 94 | 142 | – | 665 | 177 | 842 | |
| P.M. Williams | 407 | 22 | 92 | 142 | – | 663 | 177 | 840 | |
| D.G. Silverman | 407 | 20 | 90 | 142 | – | 659 | 177 | 836 | |
| Non-executive | |||||||||
| R.A. Rayne | 150 | 44 | – | – | – | 194 | – | 194 | |
| S.A. Corbyn | 55 | – | – | – | – | 55 | – | 55 | |
| S.G. Young | 62 | – | – | – | – | 62 | – | 62 | |
| S.W.D. Fraser | 71 | – | – | – | – | 71 | – | 71 | |
| R.D.C. Dakin | 62 | – | – | – | – | 62 | – | 62 | |
| C.I. Arney | 54 | – | – | – | – | 54 | – | 54 | |
| P.D. Snowball | 51 | – | – | – | – | 51 | – | 51 | |
| 3,318 | 246 | 657 | 981 | 0 | 5,202 | 1,223 | 6,425 |
1 The gains from equity-settled shares are in respect of the 2014 award which will vest in May 2017 and for which the performance conditions were complete or substantially complete at 31 December 2016. The value is based on an estimate of expected vesting and the average share price over the last three months of 2016 of £25.12. As at 24 February 2017, the share price was £27.12.
| Salary | Benefits | Pension and life |
Bonus | Sub | Gains from equity-settled |
|||
|---|---|---|---|---|---|---|---|---|
| 2015 | and fees £'000 |
in kind £'000 |
assurance £'000 |
Cash £'000 |
Deferred £'000 |
total £'000 |
schemes1 £'000 |
Total £'000 |
| Executive | ||||||||
| J.D. Burns | 619 | 63 | 142 | 620 | 70 | 1,514 | 1,015 | 2,529 |
| S.P. Silver | 531 | 40 | 135 | 532 | 60 | 1,298 | 870 | 2,168 |
| D.M.A. Wisniewski | 395 | 22 | 87 | 394 | 45 | 943 | 554 | 1,497 |
| N.Q. George | 395 | 19 | 92 | 394 | 45 | 945 | 554 | 1,499 |
| P.M. Williams | 395 | 21 | 91 | 394 | 45 | 946 | 554 | 1,500 |
| D.G. Silverman | 395 | 20 | 87 | 394 | 45 | 941 | 531 | 1,472 |
| Non-executive | ||||||||
| R.A. Rayne | 150 | 42 | – | – | – | 192 | – | 192 |
| S.A. Corbyn | 67 | – | – | – | – | 67 | – | 67 |
| J. de Moller2 | 54 | – | – | – | – | 54 | – | 54 |
| S.G. Young | 62 | – | – | – | – | 62 | – | 62 |
| S.W.D. Fraser | 62 | – | – | – | – | 62 | – | 62 |
| R.A. Farnes3 | 21 | – | – | – | – | 21 | – | 21 |
| R.D.C. Dakin | 62 | – | – | – | – | 62 | – | 62 |
| C.I. Arney4 | 27 | – | – | – | – | 27 | – | 27 |
| P.D. Snowball5 | 15 | – | – | – | – | 15 | – | 15 |
| 3,250 | 227 | 634 | 2,728 | 310 | 7,149 | 4,078 | 11,227 |
1 The value of gains for equity-settled schemes presented in last year's report was based on an estimate of vesting and the average share price over the last three months of 2015. The value has been restated in this year's report to reflect the actual number of awards which vested and the share price on the date the awards were transferred to participants.
2 June de Moller retired from the Board in December 2015.
3 Robert Farnes retired from the Board in May 2015.
4 Claudia Arney joined the Board in May 2015.
5 Cilla Snowball joined the Board in September 2015.
No payments were made to past Directors or in respect of loss of office during 2016 or 2015.
Taxable benefits relates to car and fuel allowance, private medical insurance and life assurance.
Provision has been made for a bonus for 2016 of 23.3% (2015: 74.2%) of the maximum potential. This has been derived as follows:
| Performance measure | Weighting % of bonus |
Basis of calculation | Threshold % |
Three quarter vesting % |
Maximum % |
Actual % |
Payable % |
|---|---|---|---|---|---|---|---|
| Total return | 50.0 | Total return of major real estate companies |
2.6 | n/a | 10.1 | 1.7 | Nil |
| Total property return | 25.0 | Relative to IPD Central London Offices Total Return Index |
2.4 | 4.9 | 7.4 | 2.9 | 8.25 |
In addition to the above formulaic result, 25% of the annual bonus is measured against the following set of strategic targets:
| Target range |
Maximum award |
2016 achievement |
2016 award |
|
|---|---|---|---|---|
| Void management This is measured by the Group's average EPRA vacancy rate over the year. More details on this KPI are given on page 32. |
0-10% | 5.0% | 2.6% | 4% |
| Tenant retention This is measured by the percentage of tenants that remain in their space when their lease expires. This key metric is described in more detail on page 33. |
50-75% | 5.0% | 63% | 3% |
| Portfolio's development potential This is measured by the percentage of the Group's portfolio by area, where a potential development scheme has been identified. This is another key metric monitored by the Board and more detail is given on page 33. |
40-50% | 2.5% | 43% | 1% |
| Unexpired lease term This is measured by the 'topped-up' weighted average unexpired lease term of the Group's core income producing portfolio. Whilst not a published key metric, it is used by management to help maintain an appropriately balanced portfolio. |
5-10 years | 2.5% | 8.9 years | 2% |
| Sustainability This is assessed by the Group's achievements against the BREEAM benchmark at its new developments or major refurbishments. More details on this KPI are given on page 32. |
New build – Excellent Major refurbishment – Very good |
5.0% | Both schemes assessed this year achieved their targets |
5% |
| Staff satisfaction Staff surveys are used to assess this measure. |
70% to >90% of staff to be satisfied or better |
5.0% | 96% | 5% |
| 25% | 20%1 |
1 The Committee has used its discretion to reduce the award derived from the strategic targets by 25% to give a final award of 15% out of the possible 25%.
These results demonstrate the extremely strong year that the Group had at an operational level. However, the Committee recognises that this is not reflected in the financial or share price performance of the Group which has been dominated by the market effects of the Brexit vote. Given this unique situation, the Committee has used its discretion to reduce the award derived from the strategic targets by 25% to give a final award of 15% out of the possible 25%.
The total bonus estimated for each executive is therefore:
| Bonus payable | Deferred bonus | ||||
|---|---|---|---|---|---|
| Executive | % of maximum |
% of salary |
Cash bonus payable £ |
£ | % of salary |
| J.D. Burns | 23.25 | 34.88 | 222,503 | – | – |
| S.P. Silver | 23.25 | 34.88 | 190,941 | – | – |
| D.M.A. Wisniewski | 23.25 | 34.88 | 141,767 | – | – |
| N.Q. George | 23.25 | 34.88 | 141,767 | – | – |
| P.M. Williams | 23.25 | 34.88 | 141,767 | – | – |
| D.G. Silverman | 23.25 | 34.88 | 141,767 | – | – |
The Committee plans to use the same metrics for 2017 but the targets will be disclosed retrospectively as they are considered to be commercially sensitive.
continued
Half the awards granted in 2014 under the 2014 Performance Share Plan (PSP) were subject to a relative TSR performance measure and half subject to the Group's total property return. The performance condition was complete or substantially complete at the year end and the Committee made the following assessment of vesting:
| Performance measure | Weighting % of award |
Basis of calculation |
Threshold % |
Three quarter vesting % |
Maximum % |
Actual % |
% vesting/ estimated vesting |
|---|---|---|---|---|---|---|---|
| Total property return | 50 | Relative to IPD Central London Offices Total Return Index |
14.7 | 17.2 | 19.7 | 16.0 | 24.9 |
| Total shareholder return | 50 | TSR of major real estate companies |
17.7 | n/a | 48.2 | 6.0 | Nil |
As required by the scheme rules, before allowing any vesting, the Committee considered whether these performance measures reflected the Group's underlying financial performance. Having considered a range of key financial indicators, including profits and NAV performance, the Committee concluded that, for the parts of the 2014 awards with measurement periods ending in 2016, this was the case.
Therefore, the vesting for each executive is estimated to be:
| Number of shares |
Value of award on vesting1 |
|
|---|---|---|
| Executive | vesting | £ |
| J.D. Burns | 11,044 | 277,425 |
| S.P. Silver | 9,474 | 237,987 |
| D.M.A. Wisniewski | 7,033 | 176,669 |
| N.Q. George | 7,033 | 176,669 |
| P.M. Williams | 7,033 | 176,669 |
| D.G. Silverman | 7,033 | 176,669 |
1 Based on the average share price over the last three months of the financial year of £25.12 and the estimated vesting percentage of 24.9%.
The vested awards are subject to a two year holding period.
On 4 April 2016 the Committee made an award under the Group's 2014 PSP to executive Directors on the following basis:
| Type of award | Basis of award granted % of salary |
Share price at date of grant £ |
Number of shares awarded |
Face value of award £ |
% of face value which vests at threshold |
|
|---|---|---|---|---|---|---|
| J.D.Burns | Nil-cost option | 200 | 31.35 | 40,700 | 1,275,945 | 22.5% |
| S.P.Silver | Nil-cost option | 200 | 31.35 | 34,925 | 1,094,899 | 22.5% |
| D.M.A.Wisniewski | Nil-cost option | 200 | 31.35 | 25,930 | 812,906 | 22.5% |
| N.Q.George | Nil-cost option | 200 | 31.35 | 25,930 | 812,906 | 22.5% |
| P.M.Williams | Nil-cost option | 200 | 31.35 | 25,930 | 812,906 | 22.5% |
| D.G.Silverman | Nil-cost option | 200 | 31.35 | 25,930 | 812,906 | 22.5% |
If threshold performance is not achieved over the three-year performance period, none of the award will vest. The performance conditions are described in more detail on page 95.
The outstanding performance share plan awards held by Directors are set out in the table below:
| Weighted average exercise price of PSP awards | 31 December 2016 – |
31 December 2015 – |
1 January 2015 – |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Interest as at 31 December 2016 | 120,805 | 103,650 | 76,945 | 76,945 | 76,945 | 76,945 | 71,805 | 604,040 | |
| 21.20 | Lapsed | (16,547) | (14,195) | (9,036) | (9,036) | (9,036) | (8,668) | (3,625) | (70,143) |
| 21.20 | 32.05 | (31,653) | (27,155) | (17,284) | (17,284) | (17,284) | (16,582) | (6,935) | (134,177) |
| £ | £ | ||||||||
| Market price at award date |
Market price at date of vesting |
||||||||
| Shares vested or lapsed during 2016 | |||||||||
| 31.35 | 04/04/19 | 40,700 | 34,925 | 25,930 | 25,930 | 25,930 | 25,930 | 28,270 | 207,615 |
| Market price at award date £ |
Earliest vesting date |
||||||||
| Shares conditionally awarded on 4 April 2016 | |||||||||
| Interest as at 31 December 2015 | 128,305 | 110,075 | 77,335 | 77,335 | 77,335 | 76,265 | 54,095 | 600,745 | |
| 17.19 | Lapsed | (28,860) | (24,737) | (15,750) | (15,750) | (15,750) | (14,615) | (6,310) | (121,772) |
| 17.19 | 35.27 | (28,860) | (24,738) | (15,750) | (15,750) | (15,750) | (14,615) | (6,310) | (121,773) |
| date £ |
vesting £ |
||||||||
| Shares vested or lapsed during 2015 Market price at award |
Market price at date of |
||||||||
| 34.65 | 22/05/18 | 20,510 | 20,510 | ||||||
| date £ 34.65 |
vesting date 30/03/18 |
35,750 | 30,675 | 22,770 | 22,770 | 22,770 | 22,770 | 10,280 | 167,785 |
| Market price at award |
Earliest | ||||||||
| Shares conditionally awarded on 30 March 2015 | |||||||||
| Interest as at 1 January 2015 | 150,275 | 128,875 | 86,065 | 86,065 | 86,065 | 82,725 | 35,925 | 655,995 | |
| 27.12 | 29/05/17 | 44,355 | 38,050 | 28,245 | 28,245 | 28,245 | 28,245 | 12,745 | 208,130 |
| 21.20 | 08/04/16 | 48,200 | 41,350 | 26,320 | 26,320 | 26,320 | 25,250 | 10,560 | 204,320 |
| 17.19 | 12/04/15 | 57,720 | 49,475 | 31,500 | 31,500 | 31,500 | 29,230 | 12,620 | 243,545 |
| date £ |
vesting date |
J.D. Burns |
S.P. Silver |
D.M.A. Wisniewski |
N.Q. George |
P.M. Williams |
D.G. Silverman |
Employees | Total |
| Market price at award |
Earliest |
Weighted average remaining contracted life of PSP awards 1.31 years 1.29 years 1.26 years
At each year end, none of the outstanding awards were exercisable. The weighted average exercise price of awards that either vested or lapsed in 2016 was £nil (2015: £nil). The weighted average market price of awards vesting in 2016 was £32.05 (2015: £35.27).
Awards made in 2013 and previous years were made under the Group's 2004 PSP whilst those made subsequently were made under the 2014 PSP.
continued
For awards granted under either the 2004 PSP or the 2014 PSP:
• half of the shares vest based on TSR performance relative to a comparator group of companies;
• for awards granted up to 2013, half of the shares vest based on NAV performance compared to properties in the IPD Central London Offices Total Return Index; and
• for awards granted from 2014, half of the shares vest based on TPR performance compared to the properties in the IPD Central London Offices Total Return Index.
The TSR comparator group consists of a defined group of real estate companies. The comparator group for 2016 comprises the following – Big Yellow Group plc, The British Land Company plc, Capital & Regional plc, Capital & Counties Properties plc, Great Portland Estates plc, Hammerson plc, Intu Properties plc, Land Securities plc, St Modwen Properties plc, Segro plc, Shaftesbury plc and Workspace Group plc. Under the 2004 PSP 25% of awards subject to the TSR target vest for median performance over the three-year performance period increasing to full vesting for upper quartile performance. Median performance under the 2014 PSP results in 22.5% of the award subject to the TSR target test vesting with full vesting still requiring upper quartile performance.
For awards granted up to 2013 if the Group's NAV performance matches that of the median performing property in the Index over the three-year performance period 25% of awards subject to the NAV target vest. Vesting increases on a sliding scale to full vesting for out-performing the median performing property by 5% per annum. For awards granted in 2014 and beyond, median performance results in 22.5% of the award subject to the TPR target vesting. This increases to 75% vesting for outperforming the median by 2.5% per annum with full vesting being achieved for 5% per annum outperformance of the median.
The Committee has discretion to reduce the extent of vesting in the event that it feels that performance against either measure of performance is inconsistent with underlying financial performance.
For awards granted under the 2014 PSP in 2014 and beyond, at least the after tax number of vested shares must be retained for a minimum holding period of two years.
Disclosure relating to a share option scheme in which the Directors do not participate is given in note 13 on page 132.
Details of the deferred bonus shares held by the Directors are given in table 3.
| J.D. Burns |
S.P. Silver |
D.M.A. Wisniewski |
N.Q. George |
P.M. Williams |
D.G. Silverman |
Total | ||
|---|---|---|---|---|---|---|---|---|
| Interest as at 1 January 2015 | 12,928 | 11,088 | 4,019 | 3,157 | 4,019 | 3,012 | 38,223 | |
| Deferred in 2015 | ||||||||
| Value per share on |
||||||||
| Date of deferment |
deferment £ |
|||||||
| 25/03/15 | 35.27 | 6,639 | 5,695 | 4,227 | 4,227 | 4,227 | 4,227 | 29,242 |
| Vested in 2015 | ||||||||
| Date of vesting |
Value per share on vesting £ |
|||||||
| 26/03/15 | 34.65 | (3,725) | (3,193) | (571) | (571) | (571) | (530) | (9,161) |
| 26/03/15 | 34.65 | (4,602) | (3,948) | (1,724) | (1,293) | (1,724) | (1,241) | (14,532) |
| Interest at 31 December 2015 | 11,240 | 9,642 | 5,951 | 5,520 | 5,951 | 5,468 | 43,772 | |
| Deferred in 2016 | ||||||||
| Date of | Value per share on deferment |
|||||||
| deferment | £ | |||||||
| 24/03/16 | 31.21 | 2,249 | 1,929 | 1,432 | 1,432 | 1,432 | 1,432 | 9,906 |
| Vested in 2016 | ||||||||
| Value per share on |
||||||||
| Date of vesting |
vesting £ |
|||||||
| 24/03/16 | 31.21 | (4,601) | (3,947) | (1,724) | (1,293) | (1,724) | (1,241) | (14,530) |
| 24/03/16 | 31.21 | (3,320) | (2,847) | (2,114) | (2,114) | (2,114) | (2,114) | (14,623) |
| Interest at 31 December 2016 | 5,568 | 4,777 | 3,545 | 3,545 | 3,545 | 3,545 | 24,525 |
Details of the Directors' interests in shares and shareholding guidelines are given in table 4.
| £'000 | Number of shares | ||||||
|---|---|---|---|---|---|---|---|
| 2017 salary |
Shareholding guideline |
Value of beneficially held shares1 |
Beneficially held |
Deferred | Conditional | Total | |
| J.D. Burns | 638 | 1,276 | 17,732 | 653,847 | 5,568 | 120,805 | 780,220 |
| S.P. Silver | 547 | 684 | 5,793 | 213,617 | 4,777 | 103,650 | 322,044 |
| D.M.A. Wisniewski | 416 | 520 | 761 | 28,067 | 3,545 | 76,945 | 108,557 |
| N.Q. George | 416 | 520 | 1,338 | 49,352 | 3,545 | 76,945 | 129,842 |
| P.M. Williams | 416 | 520 | 1,318 | 48,594 | 3,545 | 76,945 | 129,084 |
| D.G. Silverman | 416 | 520 | 610 | 22,499 | 3,545 | 76,945 | 102,989 |
1 Valued at £27.12, the value of a 5p ordinary share in the Company on 24 February 2017.
The shareholding guideline in place at the year-end was 200% of salary for the CEO and 125% of salary for other Directors. Details of non-executive Directors' shareholdings are given on page 79.
continued
Source: omson Reuters.
This graph shows the value, by 31 December 2016, of £100 invested in Derwent London on 31 December 2008 compared to that of £100 invested in the FTSE 350 Super Sector Real Estate Index. The other points plotted are the values at intervening financial year ends.
This index has been chosen by the Committee as it is considered the most appropriate benchmark against which to assess the relative performance of the Company for this purpose.
The market price of the 5p ordinary shares at 30 December 2016 was £27.72 (2015: £36.72). During the year, they traded in a range between £22.57 and £33.96 (2015: £30.02 and £38.80).
| Total | ||||
|---|---|---|---|---|
| remuneration | Annual bonus | LTIP vesting | ||
| Year Ending | Executive | £'000 | (% of max) | (% of max) |
| 31/12/16 | J.D. Burns | 1,353 | 23.3 | 24.91 |
| 31/12/15 | J.D. Burns | 2,529 | 74.2 | 65.7 |
| 31/12/14 | J.D. Burns | 2,648 | 92.6 | 50.0 |
| 31/12/13 | J.D. Burns | 2,478 | 95.0 | 55.2 |
| 31/12/12 | J.D. Burns | 2,721 | 85.4 | 83.8 |
| 31/12/11 | J.D. Burns | 2,387 | 90.0 | 50.0 |
| 31/12/10 | J.D. Burns | 2,304 | 87.5 | 50.0 |
| 31/12/09 | J.D. Burns | 1,384 | 62.5 | 47.6 |
| 31/12/08 | J.D. Burns | 956 | 25.6 | 36.5 |
1 Estimate.
| 2016 | 2015 | % change | |
|---|---|---|---|
| Chief Executive (£'000) | |||
| Salary | 638.0 | 619.5 | 3.0 |
| Benefits | 215.4 | 205.2 | 5.0 |
| Bonus | 222.5 | 690.0 | (67.8) |
| Average employee (£'000) | |||
| Salary | 70.6 | 66.8 | 5.7 |
| Benefits | 16.3 | 13.6 | 19.9 |
| Bonus | 23.3 | 23.0 | 1.3 |
The table above shows the movement in the salary, benefits and annual bonus for the Chief Executive Officer between the current and previous financial year compared to that for an average employee.
| 2016 | 2015 | % change | |
|---|---|---|---|
| Staff costs (£m) | 24.5 | 24.0 | 2.1 |
| Distributions to shareholders (£m) | 49.7 | 45.0 | 10.4 |
| Net asset value1 (£m) |
3,932 | 3,923 | 0.23 |
1 The net asset value of the Group is shown for both years as it is the primary measure by which investors measure the success of the Group.
At the Company's 2016 AGM, the report of the Remuneration Committee received the following votes from shareholders:
| Annual report on remuneration | ||
|---|---|---|
| 2016 AGM | m | % |
| Votes cast in favour | 83.2 | 95.5 |
| Votes cast against | 3.9 | 4.5 |
| Total votes cast | 87.1 | – |
| Votes withheld | 4.3 | – |
The Directors' remuneration policy was not voted on at the 2016 AGM.
The disclosures on Directors' remuneration in tables 1 to 4 on pages 96 to 101 have been audited as required by the Companies Act 2006.
Approved by the Board of Directors and signed on behalf of the Board
Claudia I. Arney
Chairman of the Remuneration Committee 28 February 2017
I am pleased to present the Committee's report for 2016.
I took over the Chairmanship of the Nominations Committee at the start of the year when we had just completed the induction process for Claudia Arney and Cilla Snowball. Whilst these appointments had broadened the mix of skills and experience of the Board, a vital ingredient in providing effective challenge to the executives, the Committee is mindful that there needs to be a careful balance between such refreshment and continuity. Recognising this, there was no planned recruitment in 2016. However, to ensure that the new non-executive Directors served on Committees where their particular skills would be most useful, the Committee undertook a review of the membership of all the Board Committees.
Another element of maintaining an effective and balanced Board is effective succession planning. As well as ensuring that Board changes are planned and managed this also makes sure that the Board can continue to deliver its strategy in the event of unforeseen circumstances. Therefore, ensuring that there are succession plans in place for key individuals remained a priority for the Committee during 2016.
The final area of focus for the Committee was to improve the utility of the annual review of the effectiveness of the Board and its Committees. Having satisfied this point of governance for the last three years by using an externally facilitated questionnaire, it was decided to enhance the exercise this year by adding interviews to the process. The results of this extended assessment are discussed on page 81.
Last year I referred to the FRC's discussion paper on board Succession Planning and its Culture Project. As expected, both initiatives gave rise to reports during 2016 which set out their findings and we now wait for an update to the FRC's 'Guidance on Board Effectiveness' which will reflect the feedback received and is expected in 2017.
Chairman of the Nominations Committee 28 February 2017
Throughout 2016, the Committee consisted of Stuart Corbyn, Richard Dakin and Cilla Snowball under the chairmanship of Simon Fraser. All members are considered independent by the Company having no day-to-day involvement with the Company.
The terms of reference for the Committee are available on the Company's website.
The Committee meets at least once a year to arrange for the annual appraisal of the Board and its Committees. Further meetings are arranged, as required, to discharge the Committee's other responsibilities. The Committee met twice in 2016.
During the year the Committee has carried out the following tasks:
Chairman of the Nominations Committee 28 February 2017
I am pleased to present the Committee's 2016 report.
In last year's statement, I referred to the uncertainty caused by the imminent Brexit referendum. As it turned out, the Leave vote radically changed the risk profile facing the Group by creating a heightened level of political uncertainty which is likely to persist for a number of years. The immediate effect of this was a downgrading of the economic prospects for the UK and in particular for those of London and a consequent increase in the risks to the delivery of the Group's strategic objectives. In addition to this new layer of risk, there was no abatement during the year in the overall level of risks presented by external factors including those arising from cyber attacks and the geopolitical upheaval caused by the result of the US election. Given the nature of these factors, the Committee does not anticipate a reduction in the level of risk over the next few years.
As in previous years, the Committee's work during 2016 was focussed on areas identified from its review of the Group's top ten risks. This included receiving an update on the progress being made with the planned improvements to the resilience of the IT systems that had been established in 2015. Progress was on target but in view of the new IT infrastructure being introduced as part of the Group's move to new offices, further improvement is expected when the 2017 annual cyber risk review is carried out.
The Committee also received a presentation on the Group's health and safety procedures which was identified as a key risk given the level of development activity underway throughout the portfolio at the current time. This will be followed up in 2017 once the new health and safety consultants have completed their review of the existing procedures and their suggested improvements have been introduced.
The Committee's monitoring of the Group's risk management and internal control system, as required by the UK Corporate Governance Code, was enhanced by the introduction of a desktop of Key Risk Indicators which the Committee reviewed at each of its meetings.
28 February 2017
The Committee was chaired by Richard Dakin and served throughout 2016 by Stephen Young, Cilla Snowball, John Burns and Damian Wisniewski.
The Committee's terms of reference are available on the Company's website.
Three meetings are scheduled for the year with extra meetings convened if necessary for the Committee to discharge its duties.
During the year the Committee undertook the following tasks:
Chairman of the Risk Committee 28 February 2017
I am pleased to present this year's report of the Audit Committee.
During the year, in order to implement EU legislation, the FRC completed its latest update of the UK Corporate Governance Code (the 'Code') and also revised its Guidance on Audit Committees. The main change to the Code is an additional requirement that 'the Committee as a whole shall have competence relevant to the sector in which the Company operates'. Following the review of the membership of all the Board Committees carried out at the start of the year by the Nominations Committee, the Committee is satisfied that it meets this requirement.
The new requirements apply to accounting periods commencing on or after 17 June 2016 which means that they are not mandatory for Derwent London until next year. However, we believe that, in most aspects, the report of the Audit Committee that follows complies with the new requirements.
With regard the regular duties of the Committee, it was again asked by the Board to consider whether the Group's report and accounts were, taken as a whole, fair balanced and understandable; it considered the appropriateness of the Group's Going Concern and Viability statements; and it reviewed the integrity of the financial reporting and internal controls. In each of these instances, after carrying out appropriate procedures, the Committee was satisfied with the proposed disclosure. Details of this and other work carried out by the Committee are set out in the following report.
The annual review of the effectiveness of the Audit Committee was carried out by Lintstock. It concluded that the Committee was very effective and made recommendations for further improvement which we shall look to implement in 2017.
Stephen G. Young Chairman of the Audit Committee 28 February 2017
Throughout 2016, the Committee consisted of Stuart Corbyn, Simon Fraser, Richard Dakin and Claudia Arney under the chairmanship of Stephen Young. All Committee members are considered independent by the Board, having no day-to-day involvement with the Company and, with the exception of Stuart Corbyn, not having been with the Company for more than nine years. The Board's position regarding Stuart is discussed on page 81. Due to his position as Managing Director of Capital Advisors Limited, a wholly owned subsidiary of CBRE Limited, Richard Dakin does not take part in the Committee's considerations regarding the valuation of the Group's property portfolio.
The composition of the Committee was a matter considered as part of the annual assessment of the Committee. The response supported the Board's view that, taken as a whole, the Committee has competence relevant to the property sector. The Board is also satisfied that, as a qualified accountant, Stephen Young has appropriate recent and relevant financial experience to discharge his duties as Chairman of the Committee.
If required, the Committee has access to further financial expertise, at the Company's expense.
The terms of reference for the Committee are available on the Company's website.
The Committee met four times during the year to discharge its responsibilities. These were attended by the Group's external Auditor and members of the Group's senior management when invited. Two additional meetings are held each year with the Group's independent property valuers (CBRE) to consider the valuation of the property portfolio. Following each meeting, the Chairman updates the Board on the matters discussed and the decisions made.
During the year, the Committee's work covered the following areas:
• Assessed the effectiveness of the external audit.
The assessment took into account the views of both management and the Auditor and was supported by a questionnaire that highlighted the key areas. The Committee also reviewed the audit plan, which was focussed on risk and materiality, and considered the quality of the planning, the extent to which it was tailored to the business and its ability to respond to any changes in the business. Finally, the Committee noted the fees paid to the Auditor for both the statutory audit and non-audit services which are set out below.
| 2016 £'000 |
2015 £'000 |
|
|---|---|---|
| Audit of Derwent London plc and subsidiaries | 330 | 320 |
| Total audit services | 330 | 320 |
| Review of interim results | 39 | 38 |
| Other assurance services | – | – |
| Non-audit services | – | – |
| Total other services | 39 | 38 |
| Total fees | 369 | 358 |
Having taken all these matters into account, the Committee concluded that PwC had performed their audit effectively, efficiently and to a high quality. Accordingly, the Committee has recommended to the Board that PwC be re-appointed as Auditor to the Group.
• Reviewed the tenure of the external Auditor and the lead audit partner. PwC were appointed the Group's Auditor in 2014 and Craig Hughes has been the lead audit partner since then. In accordance with the current regulations the audit will be re-tendered every ten years. There are no contractual restrictions in relation to the Group's choice of external Auditor.
• Considered the appropriateness of the accounting policies, assumptions, judgements and estimates used in the preparation of the financial statements. In discharging this responsibility, the Committee routinely considers the potential for fraud arising from revenue recognition and the overriding of controls by management. In addition the following significant financial judgements were identified and the procedures set out below carried out:
• Valuation of the Group's property portfolio
The Committee considers this to be the major area of judgement in determining the accuracy of the financial statements as it is a major component in determining the Group's net asset value. In view of this, meetings were held with the Group's external valuers before both the interim and final results to consider the portfolio valuation contained therein. These meetings were led by members of the Committee with relevant and current expertise in property valuation. Key matters discussed during the meetings include the assumptions underlying the valuation, any valuation which required a greater level of judgement than normal, for example development properties, and any valuation movements that were not broadly in line with that of the IPD benchmark. The assumptions were also discussed with the Auditors who have their own valuation experts and carry out their own
continued
independent tests. This year the valuation of the Group's Hampstead Road property was the subject of particularly detailed scrutiny. These procedures enabled the Committee to be satisfied with the assumptions and judgements used in the valuation of the Group's property portfolio.
The Committee was aware that, should the Group not comply with the REIT regulations, it could incur tax penalties or ultimately be expelled from the REIT regime which would have a significant effect on the financial statements. The Committee noted the frequency with which compliance with the regulations was reported to the Board and considered the margin by which the Group complied. Based on this and the level of headroom shown in the latest Group forecasts the Committee agreed that, once again, no further action was required for the current year.
• Borrowings and derivatives
The valuation of the 2019 convertible debt and interest rate swaps was seen as an area of elevated risk. The Committee noted that the valuations were carried out by an independent third party which had valued the instruments in previous years and that the Auditor used its own treasury specialists to re-perform the valuation and to assess the reasonableness thereof. The Auditor subsequently confirmed that no issues had arisen relating to the valuation. The Committee was satisfied with the level of assurance gained from these procedures.
Following its review, the Committee was satisfied that the Group's report and accounts, taken as a whole, present a fair, balanced and understandable overview and provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
• Considered the appropriateness of the Group's viability statement and going concern assumption and advised the Board accordingly.
• Reviewed the effectiveness of the Group's system of internal financial controls. The Board retains ultimate responsibility for the effective management of risk across the Group but has delegated responsibility for this review to the Audit Committee. The review of internal non-financial controls is delegated to the Risk Committee. In conducting its review, the Committee noted that no matters had been raised by PwC as a result of their controls testing undertaken as part of the annual audit. The Committee also reviewed the Group's Risk Register, together with the controls that constitute the system of internal financial controls and the evidence that they had operated effectively over the period. No areas of weakness were identified and, as a result of the review, the Committee confirmed to the Board that the system of internal financial controls had operated effectively for the year ended 31 December 2016 and up to 28 February 2017.
• Considered the need for an internal audit function and concluded that, in view of the close involvement of the Directors in the day-to-day operations, the scale and complexity of the organisation and the focussed nature of the Group's business, there is no need to establish an internal audit function at the present time. However, external assurance may be sought in particular areas that are identified as higher risk.
• The Company was contacted by the FRC regarding its disclosure in the 2015 Report and Accounts relating to the accounting for conversion of the 2.75% unsecured convertible bonds 2016. The Committee assisted the Company in responding to the request for further information following which the matter was satisfactorily concluded with no adjustment being required. Additional disclosures are included in the 2016 annual report.
The FRC's review was based on the Company's annual report and accounts and does not benefit from detailed knowledge of its business or an understanding of the underlying transactions entered into. Their correspondence provides no assurance that the report and accounts are correct in all material respects; the FRC's role is not to verify the information provided but to consider compliance with reporting requirements.
The Company confirms that it has complied with the provisions of the Competition and Markets Authority's Order for the financial year under review.
Chairman of the Audit Committee 28 February 2017
Timothy Kite Company Secretary
The Directors present their Annual Report and audited financial statements for the year ended 31 December 2016.
This Annual Report 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 forwardlooking 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 Report and Accounts should be construed as a profit forecast or to imply that Derwent London's earnings for the current year or future years will necessarily match or exceed its historical or published earnings.
Both the Strategic Report and the Directors' Report have been drawn up and presented in accordance with and in reliance upon applicable English company law, and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
Derwent London plc is a Real Estate Investment Trust and the holding company of the Derwent London group of companies which includes no branches. It is listed on the London Stock Exchange main market with a premium listing.
Additional information which is incorporated into this Directors' report by reference, including information required in accordance with the Companies Act 2006 and the Listing Rule 9.8.4R of the Financial Conduct Authority's Listing Rules, can be located on the following pages:
| • Future business developments | 1-71 |
|---|---|
| • Employee engagement | 69 |
| • Going concern statement | 84 |
| • Viability statement | 65 |
| • Governance | 74-113 |
| • Capitalised interest | 130 |
| • Financial instruments | 144-150 |
| • Credit, market and liquidity risks | 150-151 |
| • Related party transactions | 159-160 |
| • Long term incentive schemes | 98 |
| • Contracts of significance | 112 |
| • Greenhouse gas emissions | 113 |
continued
The Board shall consist of not less than two Directors and not more than 15. Shareholders may vary the minimum and/ or maximum number of Directors by passing an ordinary resolution. Other than as required by the shareholding guideline monitored by the Remuneration Committee, a Director shall not be required to hold any shares in the Company. Directors may be appointed by the Company by ordinary resolution or by the Board. A Director appointed by the Board holds office only until the Company's next AGM and is then eligible for re-appointment. The Board or any Committee authorised by the Board may from time to time appoint one or more Directors to hold an employment or executive office for such period and on such terms as they may determine and may also revoke or terminate any such appointment.
Appointment of a Director from outside the Group is on the recommendation of the Nominations Committee, whilst internal promotion is a matter decided by the Board unless it is considered appropriate for a recommendation to be requested from the Nominations Committee.
The articles provide that, at every AGM of the Company, any Director who has been appointed by the Board since the last AGM, or who held office at the time of the two preceding AGMs and who did not retire at either of them, or who has held office with the Company, other than employment or executive office, for a continuous period of nine years or more at the date of the meeting, shall retire from office and may offer himself for re-appointment by the members. However, in accordance with Provision B.7.1 of the Code, the Company subjects all Directors to annual re-election and therefore at the next AGM all the Directors will retire and, being eligible, offer themselves for re-election. Biographies of all the Directors are given on pages 74 and 75.
The Company may by special resolution remove any Director before the expiration of his period of office. The office of a Director shall be vacated if:
The Company provides new Directors with a comprehensive induction process which includes visiting a number of the Group's properties with senior management, meetings with the Group's audit partner and corporate lawyer together with meetings with members of the management team.
If considered appropriate, new Directors are provided with external training that addresses their role and duties as a director of a quoted public company. Existing Directors monitor their own continued professional development and are encouraged to attend courses that keep their market and regulatory knowledge up-to-date. In addition, any training and development requirements are discussed during the one-to-one meetings between the Chairman and the Directors.
All Directors have access to the services of the Company Secretary and any Director may instigate an agreed procedure whereby independent professional advice may be sought at the Company's expense. Directors' and officers' liability insurance is maintained by the Company.
Subject to the Company's articles, the Companies Act and any directions given by the Company by special resolution, the business of the Company will be managed by the Board who may exercise all the powers of the Company, whether relating to the management of the business of the Company or not. In particular, the Board may exercise all the powers of the Company to borrow money, to guarantee, to indemnify, to mortgage or charge any of its undertakings, property, assets (present and future) and uncalled capital and to issue debentures and other securities and to give security for any debt, liability or obligation of the Company or of any third party.
The Company's articles permit the Directors to regulate conflicts of interest. The Board operates a policy for managing and, where appropriate, approving conflicts or potential conflicts of interest whereby Directors are required to notify the Company as soon as they become aware of a situation that could give rise to a conflict or potential conflict of interest. The register of potential conflicts of interest is regularly reviewed by the Risk Committee and the Board is satisfied that this policy has operated effectively throughout the period.
At 31 December 2016 the Group held 25,040 Derwent London shares in order to deliver the deferred bonus shares to the Directors and other senior executives when the deferral periods expire. Movements on the holding of these shares are detailed below:
| Percentage of | ||||
|---|---|---|---|---|
| Number of 5p | issued share | Aggregate | ||
| Transaction | ordinary shares |
capital % |
Price £ |
consideration £ |
| Holding as at 1 January 2015 | 38,223 | 0.034 | 625,557 | |
| Disposal on 26 March 2015 | (23,693) | (0.021) | 34.65 | (820,962) |
| Acquired on 26 March 2015 | 30,273 | 0.027 | 34.65 | 1,048,959 |
| Maximum holding during 2015 and 2016 and holding as at 31 December 2015 | 44,803 | 0.040 | 853,554 | |
| Disposal on 24 March 2016 | (29,669) | (0.027) | 31.21 | (925,969) |
| Acquired on 24 March 2016 | 9,906 | 0.009 | 31.21 | 309,166 |
| Holding as at 31 December 2016 | 25,040 | 0.022 | 236,751 |
As at 28 February 2017, the Company's issued share capital comprised a single class of 5p ordinary shares. Details of the ordinary share capital and shares issued during the year can be found in note 26 to the financial statements.
The Company can issue shares with any rights or restrictions attached to them as long as this is not restricted by any rights attached to existing shares. These rights or restrictions can be decided either by an ordinary resolution passed by the shareholders or by the Directors as long as there is no conflict with any resolution passed by the shareholders. These rights and restrictions will apply to the relevant shares as if they were set out in the articles. Subject to the articles, the Companies Act and other shareholders' rights, unissued shares are at the disposal of the Board.
If the Companies Act allows this, the rights attached to any class of shares can be changed if it is approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount (excluding any shares of that class held as treasury shares) or by a special resolution passed at a separate meeting of the holders of the relevant class of shares. This is called a 'class meeting'.
All the articles relating to general meetings will apply to any such class meeting, with any necessary changes. The following changes will also apply:
The provisions of this article will apply to any change of rights of shares forming part of a class. Each part of the class which is being treated differently is treated as a separate class in applying this article.
The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.
No person holds securities in the Company carrying special rights with regard to control of the Company.
Shareholders will be entitled to vote at a general meeting whether on a show of hands or a poll, as provided in the Companies Act. Where a proxy is given discretion as to how to vote on a show of hands this will be treated as an instruction by the relevant shareholder to vote in the way in which the proxy decides to exercise that discretion. This is subject to any special rights or restrictions as to voting which are given to any shares or upon which any shares may be held at the relevant time and to the articles.
If more than one joint holder votes (including voting by proxy), the only vote which will count is the vote of the person whose name is listed first on the register for the share.
Unless the Directors decide otherwise, a shareholder cannot attend or vote shares at any general meeting of the Company or upon a poll or exercise any other right conferred by membership in relation to general meetings or polls if he has not paid all amounts relating to those shares which are due at the time of the meeting, or if he has been served with a restriction notice (as defined in the articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act.
The Company is not aware of any agreements between shareholders that may result in restrictions on voting rights.
continued
There are no restrictions on the transfer of securities in the Company, except:
The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities.
The Directors were granted authority at the 2016 AGM to allot relevant securities up to a nominal amount of £1,852,868. That authority will apply until the conclusion of this year's AGM. At this year's AGM shareholders will be asked to grant an authority to allot relevant securities (i) up to a nominal amount of £1,856,497 and (ii) up to a nominal amount of £3,712,994 (after deducting from such limit any relevant securities allotted under (i)), in connection with an offer by way of a rights issue, (the 'section 551 authority'), such section 551 authority to apply until the end of next year's AGM.
A special resolution will also be proposed to renew the Directors' power to make non-pre-emptive issues for cash in connection with rights issues and otherwise up to a nominal amount of £556,949. A further special resolution will be proposed to renew the Directors' authority to repurchase the Company's ordinary shares in the market. The authority will be limited to a maximum of 11,138,984 ordinary shares and the resolution sets the minimum and maximum prices which may be paid.
In addition to those of the Directors disclosed on page 79, the Company has been notified of the following interests in the issued ordinary share capital as at 28 February 2017.
| Number of shares |
Percentage of issued share capital |
|
|---|---|---|
| Invesco Limited | 11,601,909 | 10.41 |
| BlackRock Investment Management (UK) Ltd |
6,906,835 | 6.21 |
| Norges Bank | 5,547,762 | 4.99 |
| Lady Jane Rayne | 3,593,838 | 3.23 |
There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid, except that, under the rules of the Group's share-based remuneration schemes some awards may vest following a change of control.
Some of the Group's banking arrangements are terminable upon a change of control of the Company.
As a REIT, a tax charge may be levied on the Company if it makes a distribution to another company which is beneficially entitled to 10% or more of the shares or dividends in the Company or controls 10% or more of the voting rights in the company, (a substantial shareholder), unless the Company has taken reasonable steps to avoid such a distribution being made. The Company's articles give the Directors power to take such steps, including the power:
There is no person with whom the Group has a contractual or other arrangement which is essential to the business of the Company.
Unless expressly specified to the contrary in the articles of the Company, the Company's articles may be amended by a special resolution of the Company's shareholders.
The Group's freehold and leasehold investment and owner-occupied properties were professionally revalued at 31 December 2016, resulting in a deficit of £21.1m, before accounting adjustments of £21.5m. The freehold and leasehold properties are included in the Group balance sheet at a carrying value of £4,838.0m. Further details are given in note 16 of the financial statements.
Details of post balance sheet events are given in note 34 of the financial statements.
The Directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and ensure that the Auditor is aware of such information.
PricewaterhouseCoopers LLP, which was appointed in 2014 following a competitive tender process, has expressed its willingness to continue in office as the Group's Auditor and accordingly, resolutions to reappoint it and to authorise the Directors to determine its remuneration will be proposed at the AGM. These are resolutions 18 and 19 set out in the notice of meeting.
The Directors are recommending a final dividend of 38.50p per share in respect of the year ended 31 December 2016. In addition, the Directors are proposing the payment of a special dividend of 52.00p per share. Shareholders will be asked to approve both these distributions at the Company's AGM on 19 May 2017.
The thirty third AGM of Derwent London plc will be held at The Westbury, Bond Street, London W1S 2YF on 19 May 2017 at 10:30am. The Notice of Meeting together with explanatory notes is contained in the circular to shareholders that accompanies the report and accounts.
We present below our annual GHG (greenhouse gas) emissions footprint for 2016 compared to our 2015 footprint together with a set of intensity ratios appropriate for our business, both of which fulfil the requirements of the Companies Act 2006 (Strategic and Directors' Report Regulations 2013).
As with previous years, we have again seen reductions in our corporate carbon footprint by 9% and carbon intensity (tCO2e/m2) reductions of 5%.
For further analysis and detail on our GHG emissions please see our Annual Sustainability Report, which can be found at www.derwentlondon.com/sustainability.
| % change | |||||
|---|---|---|---|---|---|
| Scope 1 | Energy-use Gas (total building) | 2016 2,637 |
2015 2,700 |
2015 to 2016 (2.3) |
|
| Oil (total building) | 37 | 48 | (23.3) | ||
| Travel | Fuel use in Derwent London company cars for business travel | 23 | 11 | 104.4 | |
| Fugitive emissions |
Refrigerant emissions | 837 | 427 | 96.0 | |
| Scope 2 | Energy-use Electricity use – generation (landlord-controlled areas and | 4,342 | 5,406 | (19.7) | |
| Derwent London occupied floor area) | |||||
| Scope 2 | Energy-use Market based residual mix | 5,733 | 6,363 | (9.9) | |
| Scope 3 | Energy-use Electricity use – WTT Generated Scope 3 Indirect GHG (landlord controlled areas and Derwent London occupied floor area) |
652 | 806 | (19.1) | |
| Electricity use – T&D Direct & WTT T&D Indirect (landlord controlled areas and Derwent London occupied floor area) |
452 | 513 | (11.9) | ||
| Gas (total building) | 358 | 363 | (1.4) | ||
| Oil (total building) | 7 | 10 | (29.8) | ||
| Travel | Fuel use in Derwent London company cars for business | 5 | 2 | 99.3 | |
| travel WTT | |||||
| Business air travel WTT | 4 | 3 | 61.7 | ||
| Business air travel | 38 | 23 | 65.8 | ||
| Water | Water use (total building) | 52 | 55 | (6.1) | |
| Total (exc residual mix) |
All | All | 9,444 | 10,367 | (8.9) |
| Total | All | All | 10,835 | 11,323 | (4.3) |
| (inc residual mix) | |||||
| Intensity | tCO2e/£m turnover (Scopes 1 and 2 only, including Scope 1 fugitive emissions) Intensity (tCO2e/m2) including Scope 1 fugitive emissions |
50.49 | 56.53 | (10.7) | |
| 0.024 | 0.025 | (5.1) | |||
| Tenant emissions Scope 1 + 2 + 3 | 13,330 | 15,562 | (14.3) | ||
| Out of scope | |||||
| Energy-use | Biomass use (total building) | 28 | 31 | (7.2) | |
| Data notes | |||||
| Reporting period | 1 January to 31 December 2016 | ||||
| Baseline year | 2015 | ||||
| Boundary | Operational control | ||||
| (consolidation approach) | |||||
| Alignment with | The only variation is that the GHG emission data presented does not account for single-let | ||||
| financial reporting | properties or properties for which we do not have management control. This is because we | ||||
| have no control or influence over the utility consumption in these buildings. However, the rental | |||||
| income of these properties is included in our consolidated financial statements. The percentage | |||||
| movements are calculated using the figures before rounding. | |||||
| Reporting method | The Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard. | ||||
| Emissions factor source | DEFRA, 2016 – https://www.gov.uk/government/collections/government-conversion-factors-for | ||||
| company-reporting for all emissions factors apart from the Scope 2 market based (residual mix) factor which is from Reliable disclosure systems for Europe, 2014 European residual mixes – |
|||||
| http://www.reliable-disclosure.org/documents/ | |||||
| Independent assurance | Public limited assurance (using ISAE 3000) provided by Deloitte LLP over all Scope 1, 2 and 3 GHG emissions data. |
||||
| Data changes and | No data changes or restatements. | ||||
| restatements |
Timothy J. Kite ACA Company Secretary 28 February 2017
Following a lease expiry on this property in Fitzrovia we lightly refurbished 34,000 sq ft. Work completed in Q3 2016, creating a new reception and adding 3,150 sq ft of terrace space. In the last few months 46% has been let. The building forms part of a potential future re-development of Network Building, which could start in 2021 and total c.100,000 sq ft.
| 3 | |
|---|---|
| Statement of Directors' responsibilities Independent Auditor's report Group income statement Group statement of comprehensive income Balance sheets Statements of changes in equity Cash flow statements Notes to the financial statements |
116 117 122 122 123 124 125 126 |
| OTHER INFORMATION Nine-year summary EPRA summary Principal properties List of definitions |
169 170 171 173 |
115
The Directors are responsible for preparing the Annual Report, the report of the Remuneration Committee and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the report of the Remuneration Committee comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess a company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed on pages 74 and 75 confirm that, to the best of their knowledge:
On behalf of the Board
Chief Executive Officer Finance Director 28 February 2017
John D. Burns Damian M.A. Wisniewski
In our opinion:
The financial statements, included within the Report and Accounts (the 'Annual Report'), comprise:
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006, and applicable law.
• Overall Group materiality: £50.5 million (2015: £46.4 million) which represents 1% of total assets.
• Specific materiality: £4.0 million (2015: £4.0 million) applied to property and other income, administrative expenses, provisions and working capital balances.
• The Group audit team carries out the statutory audits of all components within the Group and the consolidation.
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ('ISAs (UK & Ireland)').
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as 'areas of focus' in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.
continued
Refer to pages 107 and 108 (Report of the Audit Committee), pages 137 to 139 (Notes to the financial statements – Note 16) and page 167 (Significant accounting policies).
The Group's investment properties were valued at £4,803.8m as at 31 December 2016 and a revaluation deficit of £37.1m was accounted for under 'revaluation deficit' in the Group income statement. In excess of 98% of the value of the Group's investment property portfolio comprises offices and commercial space within Central London. The remainder of the portfolio represents a retail park, cottages and strategic land in Scotland.
Valuations are carried out by third party valuers in accordance with the RICS Valuation – Professional Standards and IAS 40.
There are significant judgements and estimates to be made in relation to the valuation of the Group's investment properties. Where available, the valuations take into account evidence of market transactions for properties and locations comparable to those of the Group.
The Central London investment property portfolio mainly features office accommodation and includes:
The most significant judgements and estimates affecting the valuation included yields and estimated rental value ('ERV') growth (as described in note 16 of the financial statements). For development projects, other assumptions including costs to completion and risk premium assumptions are also factored into the valuation.
The deficit on revaluation was a result of softening of yields, particularly in the second half of 2016 following the outcome of the EU Referendum. Despite this, ERVs have generally continued to improve in the central London property market with significant new lettings and progress on a number of development projects where further capital expenditure has been incurred and the risk weighting applied to the valuation has decreased – hence increasing the capitalised value.
The existence of significant estimation uncertainty, coupled with the fact that only a small percentage difference in individual property valuations when aggregated could result in material misstatement, is why we have given specific audit focus and attention to this area.
The valuers used by the Group are CBRE Limited for the Central London portfolio and Savills for the remaining investment property portfolio in Scotland. They are well-known firms, with sufficient experience of the Group's market. We assessed the competence, capabilities and objectivity of the firms and verified their qualifications by discussing the scope of their work and reviewing the terms of their engagements for unusual terms or fee arrangements. Based on this work, we are satisfied that the firms remain independent and competent and that the scope of their work was appropriate.
We agreed the data inputs underpinning the investment property valuation for a sample of properties, including rental income, acquisitions and capital expenditure, by agreeing them to the underlying property records held by the Group to assess the reliability, completeness and accuracy of the underlying data. The underlying property records were assessed for reliability by reviewing signed and approved lease contracts or sale/purchase contracts and by reviewing approved third party invoices. For the properties currently under development, we traced the costs included within development appraisals to quantity surveyor reports and confirmed that they were comparable to costs incurred on similar completed projects. In addition, we visited a number of the key properties in Central London that are under development to confirm the status of developments. We met with the external valuers independently of management and obtained the valuation reports to discuss and challenge the valuation methodology and assumptions.
We involved our internal valuation specialists to compare the valuations of each property to our independently formed market expectations and challenged any differences. In doing this we used evidence of comparable market transactions and focused in particular on properties where the growth in capital values was higher or lower than our expectations based on market indices.
We identified the following assets for further testing: standing investments where the valuation fell outside the expected range; ongoing and planned development projects; high value assets valued in excess of £100m; and acquisitions.
In relation to these assets, we found that yield rates and ERVs were predominantly consistent with comparable information for Central London offices and assumptions appropriately reflected comparable market information. Where assumptions did not fall within our expected range, we assessed whether additional evidence presented in arriving at the final valuations was appropriate, and, whether this was robustly challenged by the external independent valuers. Variances were predominantly due to property specific factors such as new lettings at higher rents, movements in ERV or yield to reflect market transactions in close proximity or the derisking of development projects nearing completion. We verified the movements to supporting documentation including evidence of comparable market transactions where appropriate.
We challenged the Directors and Audit Committee on the movements in the valuations and found that they were able to provide explanations and refer to appropriate supporting evidence.
Refer to page 108 (Report of the Audit Committee) and page 127 (Significant judgements, key assumptions and estimates).
The UK REIT regime grants companies tax exempt status provided they meet the rules within the regime. The rules are complex and the tax exempt status has a significant impact on the financial statements. The complexity of the rules creates a risk of inadvertently breaching and the Group's profit becoming subject to tax.
Refer to page 108 (Report of the Audit Committee), pages 144 to 151 (Notes to the financial statements – Note 23) and page 168 (Significant accounting policies).
The Group has secured and unsecured debt totalling £898.6m (2015: £895.0m). The debt includes unsecured convertible debt of £142.9m (2015: £140.2m) with an option for the Group to convert the debt when certain criteria have been met.
The Group uses interest rate swaps on a portion of its debt. The interest rate swaps were valued at 31 December 2016 by external valuers and the fair value was £17.3m (2015: £17.6m). The valuation of the swaps is based on market movements which can fluctuate significantly in the year and could have a material impact on the Group financial statements. The valuation also involves judgement and therefore is considered an area of audit focus.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group's properties are spread across 64 statutory entities with the Group financial statements being a consolidation of these entities, the Company and the Group's joint ventures. All parts of the Group, including the joint ventures, were identified as requiring an audit of their complete financial information, either due to their size or their risk characteristics or statutory requirement. This work, all of which was carried out by the Group audit team, together with additional procedures performed on the consolidation, gave us sufficient appropriate audit evidence for our opinion on the Group financial statements as a whole.
We confirmed our understanding of management's approach to ensuring compliance with the REIT regime rules.
We obtained management's calculations and supporting documentation, checking their accuracy by verifying the inputs and calculation. We involved our internal specialists to verify the accuracy of the application of the rules.
We found that the assessment prepared was free from material error and consistent with the UK REIT guidelines
We obtained and reviewed each loan contract to understand the terms and conditions. Where debt covenants were identified, we re-performed management's calculations to verify compliance with the contracts. The carrying value of all debt was agreed to third party confirmations.
For all derivatives, we agreed the carrying value to valuations obtained directly from the third party valuers, JC Rathbone Associates. We assessed the competence and capabilities of the external valuers by considering their qualifications and market experience. We involved our internal specialists who performed independent valuations to recalculate the value using independent market data.
From our work on of the terms of the debt arrangements in place as at 31 December 2016, we consider the borrowings and derivatives to be accounted for appropriately, valued correctly in the context of materiality, and disclosed appropriately.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
continued
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Overall Group materiality | £50.5 million (2015: £46.4 million). |
|---|---|
| How we determined it | 1% of total assets. |
| Specific materiality | £4.0 million. |
| How we determined it | 5% of profit before tax excluding investment property valuation movements and profit on disposal of investment properties (capped at £4.0 million). |
| Rationale for benchmark applied | The key driver of the business and determinant of the Group's value is direct property investments. Due to this, the key area of focus in the audit is the valuation of investment properties. On this basis, we set an overall Group materiality level based on total assets. |
| In addition, a number of key performance indicators of the Group are driven by income statement items and we therefore also applied a lower specific materiality for testing property and other income, administrative expenses, provisions and working capital balances. |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2.5 million (2015: £2.3 million) for financial statement line items where overall materiality applied and £0.4 million (2015: £0.4 million) for line items where specific materiality applied as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Under the Listing Rules we are required to review the Directors' statement, set out on page 84, in relation to going concern. We have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors' statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.
As noted in the Directors' statement, the Directors have concluded that it is appropriate to prepare the financial statements using the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors' use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's and Company's ability to continue as a going concern.
In our opinion:
| Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: |
|
|---|---|
| • information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Company acquired in the course of performing our audit; or – otherwise misleading. |
We have no exceptions to report. |
| •the statement given by the Directors on page 116, in accordance with provision C.1.1 of the UK Corporate Governance Code (the 'Code'), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group's and Company's performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. |
We have no exceptions to report. |
| •the section of the Annual Report on page 107, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. |
We have no exceptions to report. |
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Companies Act 2006 opinion
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the company. We have no exceptions to report arising from this responsibility.
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the Code. We have nothing to report having performed our review.
As explained more fully in the Statement of Directors' Responsibilities set out on page 116, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
We primarily focus our work in these areas by assessing the Directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London
28 February 2017
for the year ended 31 December 2016
| 2016 | 2015 | ||
|---|---|---|---|
| Note | £m | £m | |
| Gross property and other income | 5 | 193.7 | 204.9 |
| Net property and other income | 5 | 149.2 | 148.6 |
| Administrative expenses | (30.9) | (30.0) | |
| Revaluation (deficit)/surplus | 16 | (37.1) | 650.0 |
| Profit on disposal of investment property | 6 | 7.5 | 40.2 |
| Profit from operations | 88.7 | 808.8 | |
| Finance income | 7 | – | 0.1 |
| Finance costs | (27.8) | (34.9) | |
| Loan arrangement costs written off | – | (0.3) | |
| Total finance costs | 7 | (27.8) | (35.2) |
| Movement in fair value of derivative financial instruments | 0.3 | 7.6 | |
| Financial derivative termination costs | 8 | (9.0) | (6.4) |
| Share of results of joint ventures | 9 | 2.3 | 4.6 |
| Profit before tax | 10 | 54.5 | 779.5 |
| Tax charge | 15 | (0.9) | (2.3) |
| Profit for the year | 53.6 | 777.2 | |
| Attributable to: | |||
| Equity shareholders | 28 | 58.7 | 766.2 |
| Non-controlling interest | (5.1) | 11.0 | |
| 53.6 | 777.2 | ||
| Earnings per share | 37 | 52.73p | 694.53p |
| Diluted earnings per share | 37 | 52.59p | 668.73p |
The notes on pages 126 to 168 form part of these financial statements.
for the year ended 31 December 2016
| 2016 | 2015 | ||
|---|---|---|---|
| Note | £m | £m | |
| Profit for the year | 53.6 | 777.2 | |
| Actuarial (losses)/gains on defined benefit pension scheme Revaluation (deficit)/surplus of owner-occupied property |
14 16 |
(2.1) (5.5) |
0.7 1.4 |
| Deferred tax credit/(charge) on revaluation | 25 | 1.3 | (0.1) |
| Other comprehensive (expense)/income that will not be reclassified to profit or loss | (6.3) | 2.0 | |
| Total comprehensive income relating to the year | 47.3 | 779.2 | |
| Attributable to: | |||
| Equity shareholders | 52.4 | 768.2 | |
| Non-controlling interest | (5.1) | 11.0 | |
| 47.3 | 779.2 |
as at 31 December 2016
| Group | Company | ||||
|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | ||
| Note | £m | £m | £m | £m | |
| Non-current assets | |||||
| Investment property | 16 | 4,803.8 | 4,832.3 | – | – |
| Property, plant and equipment | 17 | 38.1 | 39.1 | 3.2 | 2.3 |
| Investments | 18 | 36.0 | 30.7 | 1,186.7 | 1,185.4 |
| Deferred tax | 25 | – | – | 2.2 | 3.2 |
| Pension scheme surplus | 14 | – | 1.1 | – | 1.1 |
| Other receivables | 19 | 109.1 | 90.7 | – | – |
| 4,987.0 | 4,993.9 | 1,192.1 | 1,192.0 | ||
| Current assets | |||||
| Trading property | 16 | 11.7 | 10.5 | – | – |
| Trade and other receivables | 20 | 38.5 | 52.7 | 1,513.2 | 1,389.9 |
| Cash and cash equivalents | 30 | 17.7 | 6.5 | 6.9 | 5.6 |
| 67.9 | 69.7 | 1,520.1 | 1,395.5 | ||
| Total assets | 5,054.9 | 5,063.6 | 2,712.2 | 2,587.5 | |
| Current liabilities | |||||
| Trade and other payables | 21 | 110.0 | 124.0 | 658.8 | 458.3 |
| Corporation tax liability | 1.6 | 1.7 | 0.1 | 0.4 | |
| Provisions | 22 | 0.4 | 0.7 | 0.4 | 0.7 |
| 112.0 | 126.4 | 659.3 | 459.4 | ||
| Non-current liabilities | |||||
| Borrowings | 23 | 922.5 | 918.2 | 682.7 | 678.1 |
| Derivative financial instruments | 23 | 17.3 | 17.6 | 15.5 | 15.6 |
| Provisions | 22 | 0.3 | 0.5 | 0.3 | 0.5 |
| Pension scheme deficit | 14 | 0.3 | – | 0.3 | – |
| Deferred tax | 25 | 3.1 | 5.5 | – | – |
| 943.5 | 941.8 | 698.8 | 694.2 | ||
| Total liabilities | 1,055.5 | 1,068.2 | 1,358.1 | 1,153.6 | |
| Total net assets | 3,999.4 | 3,995.4 | 1,354.1 | 1,433.9 | |
| Equity | |||||
| Share capital | 26 | 5.6 | 5.6 | 5.6 | 5.6 |
| Share premium | 27 | 188.4 | 186.3 | 188.4 | 186.3 |
| Other reserves | 27 | 950.4 | 952.9 | 930.8 | 929.1 |
| Retained earnings | 27 | 2,787.9 | 2,777.7 | 229.3 | 312.9 |
| Equity shareholders' funds | 3,932.3 | 3,922.5 | 1,354.1 | 1,433.9 | |
| Non-controlling interest | 67.1 | 72.9 | – | – | |
| Total equity | 3,999.4 | 3,995.4 | 1,354.1 | 1,433.9 |
The financial statements were approved by the Board of Directors and authorised for issue on 28 February 2017.
John D. Burns Damian M.A. Wisniewski Director Director
for the year ended 31 December 2016
| Equity | Non | ||||||
|---|---|---|---|---|---|---|---|
| Share capital |
Share premium |
Other reserves1 |
Retained earnings |
shareholders' funds |
controlling interest |
Total equity |
|
| £m | £m | £m | £m | £m | £m | £m | |
| Group | |||||||
| At 1 January 2016 | 5.6 | 186.3 | 952.9 | 2,777.7 | 3,922.5 | 72.9 | 3,995.4 |
| Profit/(loss) for the year | – | – | – | 58.7 | 58.7 | (5.1) | 53.6 |
| Other comprehensive expense | – | – | (4.2) | (2.1) | (6.3) | – | (6.3) |
| Share-based payments | – | 1.0 | 1.7 | 3.3 | 6.0 | – | 6.0 |
| Dividends paid | – | – | – | (48.6) | (48.6) | (0.7) | (49.3) |
| Scrip dividends | – | 1.1 | – | (1.1) | – | – | – |
| At 31 December 2016 | 5.6 | 188.4 | 950.4 | 2,787.9 | 3,932.3 | 67.1 | 3,999.4 |
| At 1 January 2015 | 5.1 | 174.0 | 952.5 | 1,880.6 | 3,012.2 | 63.5 | 3,075.7 |
| Profit for the year | – | – | – | 766.2 | 766.2 | 11.0 | 777.2 |
| Other comprehensive income | – | – | 1.3 | 0.7 | 2.0 | – | 2.0 |
| Transfer of owner-occupied property | – | – | 6.9 | (6.9) | – | – | - |
| Share-based payments | – | 1.3 | 1.6 | 2.6 | 5.5 | – | 5.5 |
| Bond conversion2 | 0.5 | – | (9.4) | 179.5 | 170.6 | – | 170.6 |
| Dividends paid | – | – | – | (34.0) | (34.0) | (1.6) | (35.6) |
| Scrip dividends | – | 11.0 | – | (11.0) | – | – | – |
| At 31 December 2015 | 5.6 | 186.3 | 952.9 | 2,777.7 | 3,922.5 | 72.9 | 3,995.4 |
| Company | |||||||
| At 1 January 2016 | 5.6 | 186.3 | 929.1 | 312.9 | 1,433.9 | – | 1,433.9 |
| Loss for the year | – | – | – | (35.1) | (35.1) | – | (35.1) |
| Other comprehensive expense | – | – | – | (2.1) | (2.1) | – | (2.1) |
| Share-based payments | – | 1.0 | 1.7 | 3.3 | 6.0 | – | 6.0 |
| Dividends paid | – | – | – | (48.6) | (48.6) | – | (48.6) |
| Scrip dividends | – | 1.1 | – | (1.1) | – | – | – |
| At 31 December 2016 | 5.6 | 188.4 | 930.8 | 229.3 | 1,354.1 | – | 1,354.1 |
| At 1 January 2015 | 5.1 | 174.0 | 936.9 | 195.1 | 1,311.1 | – | 1,311.1 |
| Loss for the year | – | – | – | (20.0) | (20.0) | – | (20.0) |
| Other comprehensive income | – | – | – | 0.7 | 0.7 | – | 0.7 |
| Bond conversion2 | 0.5 | – | (9.4) | 179.5 | 170.6 | – | 170.6 |
| Share-based payments | – | 1.3 | 1.6 | 2.6 | 5.5 | – | 5.5 |
| Dividends paid | – | – | – | (34.0) | (34.0) | – | (34.0) |
| Scrip dividends | – | 11.0 | – | (11.0) | – | – | – |
| At 31 December 2015 | 5.6 | 186.3 | 929.1 | 312.9 | 1,433.9 | – | 1,433.9 |
1 See note 27.
2 See note 23.
for the year ended 31 December 2016
| Group | Company | ||||
|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | ||
| Operating activities | Note | £m | £m | £m | £m |
| Property income | 147.1 | 145.6 | – | – | |
| Property expenses | (18.0) | (11.7) | – | – | |
| Cash paid to and on behalf of employees | (21.8) | (21.5) | (21.7) | (21.5) | |
| Other administrative expenses | (5.6) | (5.2) | (6.0) | (5.8) | |
| Interest received | – | 0.1 | - | 0.1 | |
| Interest paid | 7 | (22.0) | (31.4) | (20.8) | (19.8) |
| Other finance costs | (2.3) | (3.0) | (1.3) | (1.9) | |
| Other income | 2.4 | 3.1 | 2.3 | 3.0 | |
| Tax paid in respect of operating activities | (2.1) | – | – | – | |
| Net cash from/(used in) operating activities | 77.7 | 76.0 | (47.5) | (45.9) | |
| Investing activities | |||||
| Acquisition of investment properties | (18.0) | (246.2) | – | – | |
| Capital expenditure on the property portfolio | 7 | (213.5) | (116.4) | – | – |
| Disposal of investment and trading properties | 224.7 | 277.2 | – | – | |
| Investment in joint ventures | (3.0) | – | (1.3) | – | |
| Purchase of property, plant and equipment | (4.5) | (0.9) | (1.4) | (0.9) | |
| Tax received in respect of investing activities | 4.8 | – | – | – | |
| Net cash used in investing activities | (9.5) | (86.3) | (2.7) | (0.9) | |
| Financing activities Drawdown of new revolving bank loan |
– | 45.8 | – | 45.8 | |
| Net movement in intercompany loans | – | – | 107.7 | 34.6 | |
| Net movement in revolving bank loans | (103.9) | 66.3 | (103.9) | 66.3 | |
| Repayment of term loan | – | (70.0) | – | (70.0) | |
| Drawdown of private placement notes | 104.3 | – | 104.3 | – | |
| Financial derivative termination costs | (9.0) | (6.4) | (9.0) | (6.4) | |
| Net proceeds of share issues | 26 | 1.0 | 1.2 | 1.0 | 1.2 |
| Dividends paid to non-controlling interest holder | (0.8) | (1.6) | – | – | |
| Dividends paid | 29 | (48.6) | (33.3) | (48.6) | (33.3) |
| Net cash (used in)/from financing activities | (57.0) | 2.0 | 51.5 | 38.2 | |
| Increase/(decrease) in cash and cash equivalents in the year | 11.2 | (8.3) | 1.3 | (8.6) | |
| Cash and cash equivalents at the beginning of the year | 6.5 | 14.8 | 5.6 | 14.2 | |
| Cash and cash equivalents at the end of the year | 30 | 17.7 | 6.5 | 6.9 | 5.6 |
for the year ended 31 December 2016
The financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRS), IFRS Interpretations Committee interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, property, plant and equipment, available for sale investments, and financial assets and liabilities held for trading.
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 principal accounting policies are described in note 40 and are consistent with those applied in the Group's financial statements for the year to 31 December 2015, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.
The following standards, amendments and interpretations endorsed by the EU were effective for the first time for the Group's 31 December 2016 year end and had no material impact on the financial statements.
IFRS 10 (amended) – Consolidated Financial Statements;
IFRS 11 (amended) – Joint Arrangements;
IAS 1 (amended) – Presentation of Financial Statements;
IAS 16 (amended) – Property Plant and Equipment;
IAS 19 (amended) – Employee Benefits;
IAS 27 (amended) – Separate Financial Statements;
IAS 28 (amended) – Investments in Associates and Joint Ventures;
IAS 38 (amended) – Intangible Assets;
IAS 41 (amended) – Agriculture; and
IFRS 2 (amended) – Share Based Payments; IFRS 4 (amended) – Insurance Contracts; IFRS 9 – Financial Instruments; IFRS 16 – Leases; IFRIC 22 – Foreign Currency Transactions and Advance Consideration; IAS 7 (amended) – Statement of Cash Flows; IAS 12 (amended) – Income Taxes; IAS 40 (amended) – Investment Property; and Annual Improvements to IFRSs (2014 – 2016 cycle).
In addition to the above, IFRS 15 Revenue from Contracts with Customers and an amendment to IFRS 15 were in issue at the date of approval of these financial statements but were not yet effective for the current accounting year and have not been adopted early. The Group has not yet completed its evaluation of the effect of their adoption.
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. The Group's significant accounting policies are stated in note 40. 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.
The Group uses the valuation carried out by its independent 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.
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 2016 ensuring our 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.
Where the outcome of an outstanding rent review is reasonably certain, rent is accrued from the rent review date based upon an estimated annual rent. This estimate is derived from knowledge of market rents for comparable properties and is only accrued where the outcome is considered to be reasonably certain.
Any contingent consideration is recognised at fair value at the balance sheet date. The fair value is calculated using future discounted cash flows based on expected outcomes with estimated probabilities taking account of the risk and uncertainty of each input.
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is the Executive Committee comprising the six executive Directors and four senior managers) in order to allocate resources to the segments and to assess their performance.
The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. These internal financial reports include the IFRS figures but also report the non-IFRS figures for the EPRA earnings and net asset value. Reconciliations of each of these figures to their statutory equivalents are detailed in note 37. Additionally, information is provided to the Executive Committee showing gross property income and property valuation by individual property. Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.
The Group's property portfolio includes investment property, owner-occupied property and trading property and comprised 95% office buildings1 by value at 31 December 2016 (2015: 94%). The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. The remaining 5% (2015: 6%) represented a mixture of retail, hotel, residential and light industrial properties, as well as land, each of which is de minimis in its own right and below the quantitative threshold in aggregate. Therefore, in the view of the Directors, there is one reportable segment under the provisions of IFRS 8.
1 Some office buildings have an ancillary element such as retail or residential.
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).
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| Office buildings £m |
Other £m |
Total £m |
Office buildings £m |
Other £m |
Total £m |
|
| West End central | 81.4 | 4.2 | 85.6 | 82.5 | 4.0 | 86.5 |
| West End borders | 17.2 | – | 17.2 | 15.8 | 0.2 | 16.0 |
| City borders | 48.0 | 0.2 | 48.2 | 44.6 | 0.2 | 44.8 |
| Provincial | – | 5.0 | 5.0 | – | 4.7 | 4.7 |
| 146.6 | 9.4 | 156.0 | 142.9 | 9.1 | 152.0 |
A reconciliation of gross property income to gross property and other income is given in note 5.
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| Office buildings £m |
Other £m |
Total £m |
Office buildings £m |
Other £m |
Total £m |
|
| Carrying value | ||||||
| West End central | 2,531.5 | 141.1 | 2,672.6 | 2,601.4 | 180.3 | 2,781.7 |
| West End borders | 408.3 | – | 408.3 | 422.9 | 15.9 | 438.8 |
| City borders | 1,665.4 | 6.4 | 1,671.8 | 1,555.7 | 6.4 | 1,562.1 |
| Provincial | – | 97.0 | 97.0 | – | 96.3 | 96.3 |
| 4,605.2 | 244.5 | 4,849.7 | 4,580.0 | 298.9 | 4,878.9 | |
| Fair value | ||||||
| West End central | 2,573.9 | 142.1 | 2,716.0 | 2,633.8 | 184.1 | 2,817.9 |
| West End borders | 426.5 | – | 426.5 | 442.8 | 15.9 | 458.7 |
| City borders | 1,693.6 | 6.3 | 1,699.9 | 1,571.4 | 6.4 | 1,577.8 |
| Provincial | – | 100.3 | 100.3 | – | 100.1 | 100.1 |
| 4,694.0 | 248.7 | 4,942.7 | 4,648.0 | 306.5 | 4,954.5 |
A reconciliation between the fair value and carrying value of the portfolio is set out in note 16.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Gross rental income | 155.4 | 148.3 |
| Surrender premiums received | 0.1 | – |
| Other property income | 0.5 | 3.7 |
| Gross property income | 156.0 | 152.0 |
| Trading property sales proceeds | 12.5 | 24.5 |
| Service charge income | 22.8 | 25.8 |
| Other income | 2.4 | 2.6 |
| Gross property and other income | 193.7 | 204.9 |
| Gross rental income | 155.4 | 148.3 |
| Ground rent | (0.7) | (0.4) |
| Service charge income | 22.8 | 25.8 |
| Service charge expenses | (24.1) | (27.7) |
| (1.3) | (1.9) | |
| Other property costs | (7.5) | (7.3) |
| Net rental income | 145.9 | 138.7 |
| Trading property sales proceeds | 12.5 | 24.5 |
| Trading property cost of sales | (10.6) | (21.3) |
| Profit on trading property disposals | 1.9 | 3.2 |
| Write-down of trading property | (1.6) | – |
| Other property income | 0.5 | 3.7 |
| Other income | 2.4 | 2.6 |
| Other costs | – | (0.3) |
| Surrender premiums received | 0.1 | – |
| Reverse surrender premiums | (0.1) | – |
| Dilapidation receipts | 0.1 | 0.7 |
| Net property and other income | 149.2 | 148.6 |
Rental income included £10.3m (2015: £11.6m) relating to rents recognised in advance of cash receipts.
In 2016, other property income related to a rights of light settlement whilst in 2015 it related to compensation received from contractors in connection with the late delivery of pre-let schemes and recognised during the year. Other income in both years related to fees and commissions earned in relation to the management of the Group's properties and was recognised in the Group income statement in accordance with the delivery of services.
| 2016 | 2015 | |
|---|---|---|
| Investment property | £m | £m |
| Gross disposal proceeds | 210.6 | 259.3 |
| Costs of disposal | (2.6) | (2.7) |
| Net disposal proceeds | 208.0 | 256.6 |
| Carrying value | (198.8) | (215.4) |
| Adjustment for rents recognised in advance | (1.7) | (1.0) |
| 7.5 | 40.2 |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Finance income | ||
| Other | – | 0.1 |
| Finance income | – | 0.1 |
| Total finance costs | ||
| Bank loans and overdraft | 11.8 | 12.5 |
| Non-utilisation fees | 1.2 | 1.5 |
| Unsecured convertible bonds | 3.8 | 4.0 |
| Secured bonds | 11.4 | 11.4 |
| Unsecured private placement notes | 7.0 | 4.6 |
| Secured loan | 3.3 | 3.3 |
| Amortisation of issue and arrangement costs | 2.2 | 2.3 |
| Amortisation of the fair value of the secured bonds | (1.0) | (1.0) |
| Finance lease costs | 1.0 | 1.1 |
| Other | 0.1 | 0.2 |
| Gross interest cost | 40.8 | 39.9 |
| Less: interest capitalised | (13.0) | (5.0) |
| Finance costs | 27.8 | 34.9 |
| Loan arrangement costs written off | – | 0.3 |
| Total finance costs | 27.8 | 35.2 |
Total finance costs paid during 2016 were £35.0m (2015: £36.4m) of which £13.0m (2015: £5.0m) was capitalised on development projects, in accordance with IAS 23 Borrowing Costs, using the Group's average cost of borrowings during each quarter. This £13.0m (2015: £5.0m) was included in capital expenditure on the property portfolio in the Group cash flow statement under investing activities.
In 2016, the Group incurred costs of £6.6m (2015: £4.0m) to terminate and re-coupon interest rate swaps and £2.4m (2015: £2.4m) to defer the start date of a 'forward start' interest rate swap.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Revaluation surplus | 1.8 | 3.6 |
| Other profit from operations after tax | 0.5 | 1.0 |
| 2.3 | 4.6 |
See note 18 for further details of the Group's joint ventures.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| This is arrived at after charging: | ||
| Depreciation and amortisation | 0.4 | 0.4 |
| Contingent rent payable under property finance leases | 0.7 | 0.4 |
| Auditor's remuneration | ||
| Audit – Group | 0.3 | 0.3 |
| Audit – subsidiaries | 0.1 | 0.1 |
Details of the Auditor's independence are included on page 107.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Remuneration for management services | 3.9 | 5.4 |
| Share based payments | 4.1 | 4.1 |
| Post-employment benefits | 0.7 | 0.6 |
| 8.7 | 10.1 | |
| National insurance contributions | 1.2 | 1.4 |
| 9.9 | 11.5 |
Included within the figures shown in note 12 below are amounts recognised in the Group income statement, in accordance with IFRS 2 Share-based Payment, relating to the Directors. Of the £4.9m charged in 2016 (2015: £5.0m), £4.7m (2015: £4.9m) related to Directors' equity-settled share options and deferred bonus shares.
Details of the Directors' remuneration awards under the long-term incentive plan and options held by the Directors under the Group share option schemes are given in the report of the Remuneration Committee on pages 85 to 103. The only key management personnel are the Directors.
| Group | Company | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Staff costs, including those of Directors: | ||||
| Wages and salaries | 15.6 | 15.0 | 15.5 | 14.9 |
| Social security costs | 2.2 | 2.2 | 2.1 | 2.1 |
| Pension costs | 1.9 | 1.8 | 1.8 | 1.9 |
| Share-based payments expense relating to equity-settled schemes | 4.9 | 5.0 | 4.9 | 5.0 |
| 24.6 | 24.0 | 24.3 | 23.9 |
The monthly average number of employees in the Group during the year, excluding Directors, was 100 (2015: 100). The monthly average number of employees in the Company during the year, excluding Directors, was 83 (2015: 82). All were employed in administrative roles. Of the Group employees there were 13 (2015: 14) whose costs were recharged to tenants.
Details of the options held by Directors and employees under the Group's share option schemes are given in the report of the Remuneration Committee on pages 85 to 103, other than the employee share plan that is detailed below.
This scheme is separate to the performance share plan and other option schemes as disclosed in the report of the Remuneration Committee on pages 85 to 103. The Directors are not entitled to any awards under this scheme.
| Exercise | Date | |||
|---|---|---|---|---|
| price £ |
from which exercisable |
Expiry date |
Number of options |
|
| 6.10 | 18/03/2012 | 17/03/2019 | 5,540 | |
| 13.20 | 18/03/2013 | 17/03/2020 | 3,000 | |
| 16.60 | 25/03/2014 | 24/03/2021 | 6,325 | |
| 17.19 | 12/04/2015 | 11/04/2022 | 94,750 | |
| 21.99 | 10/04/2016 | 09/04/2023 | 90,750 | |
| 27.39 | 07/04/2017 | 06/04/2024 | 97,500 | |
| Outstanding at 1 January 2015 | 297,865 | |||
| Options granted during the year | 34.65 | 30/03/2018 | 29/03/2025 | 76,000 |
| Options exercised | 6.10 | (3,075) | ||
| Options exercised | 13.20 | (3,000) | ||
| Options exercised | 16.60 | (1,125) | ||
| Options exercised | 17.19 | (66,070) | ||
| Options lapsed | 21.99 | (4,000) | ||
| Options lapsed | 27.39 | (4,150) | ||
| Options lapsed during the year | (8,150) | |||
| Outstanding at 31 December 2015 | 292,445 | |||
| Options granted during the year | 31.20 | 24/03/2019 | 23/03/2026 | 95,250 |
| Options exercised | 6.10 | (865) | ||
| Options exercised | 16.60 | (5,000) | ||
| Options exercised | 17.19 | (12,260) | ||
| Options exercised | 21.99 | (30,800) | ||
| Options lapsed | 27.39 | (16,450) | ||
| Options lapsed | 34.65 | (8,550) | ||
| Options lapsed | 31.20 | (2,000) | ||
| Options lapsed during the year | (27,000) | |||
| Outstanding at 31 December 2016 | 311,770 | |||
| 31 December 2016 |
31 December 2015 |
1 January 2015 |
||
| Number of shares: | ||||
| Exercisable | 74,170 | 36,345 | 14,865 | |
| Non-exercisable | 237,600 | 256,100 | 283,000 | |
| Weighted average exercise price of share options: | ||||
| Exercisable | £20.57 | £16.35 | £12.00 |
| Non-exercisable | £30.95 | £27.72 | £22.24 |
|---|---|---|---|
| Weighted average remaining contracted life of share options: | |||
| Exercisable | 6.06 years | 6.05 years | 5.62 years |
| Non-exercisable | 8.32 years | 8.23 years | 8.29 years |
| Weighted average exercise price of share options that lapsed: | |||
| Exercisable | – | – | – |
| Non-exercisable | £29.97 | £26.28 | £22.71 |
The weighted average share price at which options were exercised during 2016 was £31.81 (2015: £36.15).
The weighted average fair value of options granted during 2016 was £6.84 (2015: £7.51).
The following information is relevant in the determination of the fair value of the options granted during 2016 and 2015 under the equity-settled employee share plan operated by the Group.
| 2016 | 2015 | |
|---|---|---|
| Option pricing model used | Binominal lattice | Binominal lattice |
| Risk free interest rate | 0.8% | 1.1% |
| Volatility | 23.0% | 21.0% |
| Dividend yield | 1.4% | 1.1% |
For both the 2016 and 2015 grants, additional assumptions have been made that there is no employee turnover and 50% of employees exercise early when the share options are 20% in the money and 50% of employees exercise early when the share options are 100% in the money.
The volatility assumption, measured as the standard deviation of expected share price returns, is based on a statistical analysis of daily prices over the last four years.
The Group and Company operate both a defined contribution scheme and a defined benefit scheme. The latter was acquired as part of the acquisition of London Merchant Securities plc in 2007 and is closed to new members. All new employees are entitled to join the defined contribution scheme. The assets of the pension schemes are held separately from those of the Group companies.
The total expense relating to this plan in the current year was £1.0m (2015: £1.0m).
The defined benefit scheme, which is contributory for members, provides benefits based on final pensionable salary and contributions are invested in a Managed Fund Policy with F&C Fund Management Limited, Legal and General Investment Management Limited and Ruffer LLP plus annuity policies held in the name of the scheme.
The company sponsors the scheme which is a funded defined benefit arrangement. This is a separate trustee-administered fund holding the pension scheme assets to meet long-term pension liabilities for some 66 past and 4 present employees as at 31 October 2013, the last date at which the scheme actuary carried out a full valuation. The level of retirement benefit is principally based on basic salary at the last scheme anniversary of employment prior to leaving active service and is linked to changes in inflation up to retirement.
The scheme is subject to the funding legislation, which came into force on 30 December 2005, outlined in the Pensions Act 2004. This, together with documents issued by the Pensions Regulator, and Guidance Notes adopted by the Financial Reporting Council, set out the framework for funding defined benefit occupational pension schemes in the UK.
The trustees of the scheme are required to act in the best interest of the scheme's beneficiaries. The appointment of the trustees is determined by the scheme's trust documentation. It is policy that one third of all trustees should be nominated by the members.
A full actuarial valuation was last carried out as at 31 October 2013 in accordance with the scheme funding requirements of the Pensions Act 2004 and the funding of the scheme is agreed between the company and the trustees in line with those requirements. These in particular require the surplus/deficit to be calculated using prudent, as opposed to best estimate actuarial assumptions.
This actuarial valuation showed a deficit of £4.9m. The Company has agreed with the trustees that it will aim to eliminate the deficit over a period of seven years from 31 October 2013 by the payment of a one-off contribution of £0.5m by 31 December 2013 and annual contributions of £0.6m payable by each 31 December from 31 December 2014 to 31 December 2019 inclusive, with the deficit being cleared by 31 October 2020. In addition, and in accordance with the actuarial valuation, the company has agreed with the trustees that it will pay 65.6% of pensionable salaries including member contributions in respect of the cost of accruing benefits and will meet expenses of the plan, DIS premiums and levies to the Pension Protection Fund.
For the purposes of IAS19 the actuarial valuation as at 31 October 2013, which was carried out by a qualified independent actuary, has been updated on an approximate basis to 31 December 2016. There have been no changes in the valuation methodology adopted for this year's disclosures compared to the previous year's disclosures.
| 2016 | 2015 | 2014 | |
|---|---|---|---|
| £m | £m | £m | |
| Fair value of plan assets | 15.9 | 13.7 | 14.9 |
| Present value of defined benefit obligation | (16.2) | (12.6) | (15.1) |
| Net (liability)/asset | (0.3) | 1.1 | (0.2) |
The present value of plan liabilities is measured by discounting the best estimate of future cash flows to be paid out by the plan using the projected unit credit method. The value calculated in this way is reflected in the net liability in the balance sheet as shown above.
The projected unit credit method is an accrued benefits valuation method in which allowance is made for projected earnings increases. The accumulated benefit obligation is an alternative actuarial measure of the scheme's liabilities, whose calculation differs from that under the projected unit credit method in that it includes no assumption for future earnings increases. In assessing this figure for the purpose of these disclosures, allowance has been made for future statutory revaluation of benefits up to retirement. At the balance sheet date the accumulated benefit obligation was £16.2m (2015: £12.6m).
All actuarial gains and losses are recognised in the year in which they occur in other comprehensive income.
We have assumed the application of IFRIC14 has no effect on the IAS19 figures.
Reconciliation of the opening and closing present value of the defined benefit obligation
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| At 1 January | 12.6 | 15.1 |
| Current service cost | 0.1 | 0.1 |
| Interest cost | 0.5 | 0.5 |
| Actuarial losses due to scheme experience | – | 0.1 |
| Actuarial gains due to changes in demographic assumptions | – | (0.2) |
| Actuarial losses/(gains) due to changes in financial assumptions | 4.4 | (1.0) |
| Benefits paid, death in service premiums and expenses | (1.4) | (2.0) |
| At 31 December | 16.2 | 12.6 |
There have been no plan amendments, curtailments or settlements in the year.
| 2016 £m |
2015 £m |
|
|---|---|---|
| At 1 January | 13.7 | 14.9 |
| Interest income | 0.5 | 0.5 |
| Return on plan assets (excluding amounts included in interest income) | 2.3 | (0.4) |
| Contributions by the Group | 0.7 | 0.7 |
| Benefits paid, death in service premiums and expenses | (1.3) | (2.0) |
| At 31 December | 15.9 | 13.7 |
The actual return on the plan assets over the year was £2.8m (2015: £0.1m).
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Current service cost | 0.1 | 0.1 |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Gain/(loss) on plan assets (excluding amounts recognised in net interest cost) | 2.3 | (0.4) |
| Experience losses arising on the defined benefit obligation | – | (0.1) |
| Gain from changes in the demographic assumptions underlying the present value | ||
| of the defined benefit obligation | – | 0.2 |
| (Loss)/gain from changes in the financial assumptions underlying the present value | ||
| of the defined benefit obligation | (4.4) | 1.0 |
| (Loss)/gain from total actuarial gains and losses (before restriction due to some | ||
| of the surplus not being recognisable) | (2.1) | 0.7 |
| Total (loss)/gain recognised in other comprehensive income | (2.1) | 0.7 |
| 2016 | 2015 | 2014 | |
|---|---|---|---|
| £m | £m | £m | |
| UK equities | 0.6 | 0.5 | 0.6 |
| Overseas equities | 0.6 | 0.5 | 0.6 |
| Government bonds | 2.6 | 2.8 | 3.0 |
| Cash | 0.8 | 0.8 | 0.7 |
| Other | 11.3 | 9.1 | 10.0 |
| Total assets | 15.9 | 13.7 | 14.9 |
The £11.3m in the 'other' asset class is made up of holdings of £6.5m in equity-linked gilt funds and £4.8m in absolute return funds.
None of the fair values of the assets shown above include any directly held financial instruments of the Group or property occupied by, or other assets used by, the Group. All of the scheme assets have a quoted market price in an active market (with the exception of the Trustee's bank account balance) representing Level 1 fair value measurement as defined by IFRS 13 Fair Value Measurement.
It is the policy of the trustees and the Group to review the investment strategy at the time of each funding valuation. The Trustees' investment objectives and the processes undertaken to measure and manage the risks inherent in the plan investment strategy are illustrated by the asset allocation at 31 December 2016.
There are no asset-liability matching strategies currently being used by the plan.
| 2016 | 2015 | 2014 | |
|---|---|---|---|
| Discount rate | % 2.70 |
% 3.95 |
% 3.65 |
| Inflation (RPI) | 3.40 | 3.30 | 3.20 |
| Salary increases | 4.90 | 4.80 | 4.70 |
| Allowance for commutation of pension for cash at retirement | 75% of Post A | 75% of Post A | 75% of Post A |
| Day Pension | Day Pension | Day Pension |
The mortality assumptions adopted at 31 December 2016 are 80% of the standard tables S2PxA, year of birth, no age rating for males and females, projected using CMI_2015 converging to 1.25% p.a. These imply the following life expectancies:
| Years | |
|---|---|
| Male retiring in 2016 | 24.0 |
| Female retiring in 2016 | 26.0 |
| Male retiring in 2036 | 25.7 |
| Female retiring in 2036 | 27.9 |
| Change in assumption | Change in liabilities | |
|---|---|---|
| Discount rate | Decrease of 0.25% pa | Increase by 6.8% |
| Inflation (RPI) | Increase of 0.25% pa | Increase by 0.3% |
| Salary increases | Increase of 0.25% pa | Increase by 0.3% |
| Rate of mortality | Increase in life expectancy of one year | Increase by 3.6% |
| Allowance for commutation of pension for cash at retirement | Members commute an extra 10% of | Decrease by 1.7% |
| Post A Day pension on retirement |
The sensitivities shown above are approximate. Each sensitivity considers one change in isolation. The inflation sensitivity includes the impact of changes to the assumptions for revaluation, pension increases and salary growth where these are linked to inflation. The average duration of the defined benefit obligation at the year ended 31 December 2016 is 27 years.
The scheme typically exposes the Group to actuarial risks such as investment risk, interest rate risk, salary growth risk, mortality risk and longevity risk. A decrease in corporate bond yields, a rise in inflation or an increase in life expectancy would result in an increase to the scheme's liabilities. This would detrimentally impact the balance sheet position and may give rise to increased charges in the income statement. This effect would be partially offset by an increase in the value of the scheme's bond holdings.
The best estimate of contributions to be paid by the Group to the plan for the year commencing 1 January 2017 is £0.7m.
| 2016 £m |
2015 £m |
|
|---|---|---|
| Corporation tax | ||
| UK corporation tax and income tax in respect of profit for the year | 1.9 | 1.8 |
| Other adjustments in respect of prior years' tax | 0.1 | 0.1 |
| Corporation tax charge | 2.0 | 1.9 |
| Deferred tax | ||
| Origination and reversal of temporary differences | (0.9) | 0.4 |
| Adjustment for changes in estimates | (0.2) | – |
| Deferred tax (credit)/charge | (1.1) | 0.4 |
| Tax charge | 0.9 | 2.3 |
In addition to the tax charge of £0.9m (2015: £2.3m) that passed through the Group income statement, a deferred tax credit of £1.3m (2015: charge of £0.1m) was recognised in the Group statement of comprehensive income relating to the revaluation of the owner-occupied property at 25 Savile Row W1.
The effective rate of tax for 2016 is lower (2015: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
| 2016 | 2015 | |
|---|---|---|
| Profit before tax | £m 54.5 |
£m 779.5 |
| Expected tax charge based on the standard rate of corporation tax in the UK of 20.00% (2015: 20.25%)1 | 10.9 | 157.8 |
| Difference between tax and accounting profit on disposals | (1.2) | (8.3) |
| REIT exempt income | (7.8) | (8.8) |
| Revaluation deficit/(surplus) attributable to REIT properties | 7.2 | (132.3) |
| Expenses and fair value adjustments not allowable for tax purposes | (2.8) | (3.6) |
| Capital allowances | (5.3) | (3.9) |
| Other differences | (0.2) | 1.3 |
| Tax charge in respect of profit for the year | 0.8 | 2.2 |
| Adjustments in respect of prior years' tax | 0.1 | 0.1 |
| 0.9 | 2.3 |
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 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.
| Total | Owner | Total | ||||
|---|---|---|---|---|---|---|
| investment | occupied | Trading | property | |||
| Freehold £m |
Leasehold £m |
property £m |
property £m |
property £m |
portfolio £m |
|
| Group | ||||||
| Carrying value | ||||||
| At 1 January 2016 | 4,006.8 | 825.5 | 4,832.3 | 36.1 | 10.5 | 4,878.9 |
| Acquisitions | 12.0 | – | 12.0 | – | – | 12.0 |
| Capital expenditure | 116.1 | 75.7 | 191.8 | 3.6 | 2.9 | 198.3 |
| Interest capitalisation | 10.6 | 2.4 | 13.0 | – | – | 13.0 |
| Additions | 138.7 | 78.1 | 216.8 | 3.6 | 2.9 | 223.3 |
| Disposals | (158.1) | (40.7) | (198.8) | – | (10.2) | (209.0) |
| Transfers | (10.1) | – | (10.1) | – | 10.1 | – |
| Revaluation | (17.4) | (19.7) | (37.1) | (5.5) | – | (42.6) |
| Write-down of trading property | – | – | – | – | (1.6) | (1.6) |
| Movement in grossing up of headlease liabilities | – | 0.7 | 0.7 | – | – | 0.7 |
| At 31 December 2016 | 3,959.9 | 843.9 | 4,803.8 | 34.2 | 11.7 | 4,849.7 |
| At 1 January 2015 | 3,464.3 | 576.7 | 4,041.0 | 24.8 | 24.0 | 4,089.8 |
| Acquisitions | 145.8 | 105.8 | 251.6 | – | – | 251.6 |
| Capital expenditure | 69.1 | 44.8 | 113.9 | 0.1 | 6.8 | 120.8 |
| Interest capitalisation | 4.0 | 0.8 | 4.8 | – | 0.2 | 5.0 |
| Additions | 218.9 | 151.4 | 370.3 | 0.1 | 7.0 | 377.4 |
| Disposals | (214.7) | (0.7) | (215.4) | – | (20.5) | (235.9) |
| Transfers to joint venture | (18.7) | – | (18.7) | – | – | (18.7) |
| Transfers | (9.8) | – | (9.8) | 9.8 | – | – |
| Revaluation | 566.8 | 83.2 | 650.0 | 1.4 | – | 651.4 |
| Movement in grossing up of headlease liabilities | – | 14.9 | 14.9 | – | – | 14.9 |
| At 31 December 2015 | 4,006.8 | 825.5 | 4,832.3 | 36.1 | 10.5 | 4,878.9 |
| Adjustments from fair value to carrying value | ||||||
| At 31 December 2016 | ||||||
| Fair value | 4,054.0 | 842.8 | 4,896.8 | 34.2 | 11.7 | 4,942.7 |
| Lease incentives and costs included in receivables | (94.1) | (22.8) | (116.9) | – | – | (116.9) |
| Grossing up of headlease liabilities | – | 23.9 | 23.9 | – | – | 23.9 |
| Carrying value | 3,959.9 | 843.9 | 4,803.8 | 34.2 | 11.7 | 4,849.7 |
| At 31 December 2015 | ||||||
| Fair value | 4,095.2 | 810.9 | 4,906.1 | 36.1 | 12.3 | 4,954.5 |
| Revaluation of trading property | – | – | – | – | (1.8) | (1.8) |
| Lease incentives and costs included in receivables | (88.4) | (8.6) | (97.0) | – | – | (97.0) |
| Grossing up of headlease liabilities | – | 23.2 | 23.2 | – | – | 23.2 |
| Carrying value | 4,006.8 | 825.5 | 4,832.3 | 36.1 | 10.5 | 4,878.9 |
| Reconciliation of fair value |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Portfolio including the Group's share of joint ventures | 4,980.5 | 4,988.5 |
| Joint ventures | (37.8) | (34.0) |
| IFRS property portfolio | 4,942.7 | 4,954.5 |
The property portfolio is subject to semi-annual external valuations and was revalued at 31 December 2016 by external valuers on the basis of fair value in accordance with The RICS Valuation – Professional Standards, which takes account of the properties' highest and best use. When considering the highest and best use of a property, the external valuers will consider its existing and potential uses which are physically, legally and financially viable. Where the highest and best use differs from the existing use, the external valuers will consider the costs and the likelihood of achieving and implementing this change in arriving at the property valuation.
CBRE Limited valued properties at £4,910.7m (2015: £4,924.8m) and other valuers at £32.0m (2015: £29.7m), giving a combined value of £4,942.7m (2015: £4,954.5m). Of the properties revalued by CBRE, £34.2m (2015: £36.1m) relating to owner-occupied property was included within property, plant and equipment, £11.7m (2015: £12.3m) was in relation to trading property and £564.2m (2015: £455.9m), included within investment property, was in relation to development properties.
The total fees, including the fee for this assignment, earned by CBRE (or other companies forming part of the same group of companies within the UK) from the Group is less than 5.0% of their total UK revenues.
During the year ended 31 December 2016, the Group transferred, at market value, a property previously held for investment to trading property as it became the Group's intention to redevelop and sell this property. Any future revaluation surplus relating to the trading property will be recognised as an adjustment to EPRA net asset value, but, in accordance with IAS 2 Inventories, will not be recognised in the carrying value of the property as trading properties are stated at the lower of cost and net realisable value.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Total revaluation (deficit)/surplus | (20.9) | 672.2 |
| Share of joint ventures | (1.8) | (3.6) |
| Lease incentives and costs | (21.5) | (16.4) |
| Trading property revaluation surplus | – | (0.3) |
| Other | – | (0.5) |
| IFRS revaluation (deficit)/surplus | (44.2) | 651.4 |
| Reported in the: | ||
| Revaluation (deficit)/surplus | (37.1) | 650.0 |
| Write-down in trading property | (1.6) | – |
| Group income statement | (38.7) | 650.0 |
| Group statement of comprehensive income | (5.5) | 1.4 |
| (44.2) | 651.4 | |
The valuation reports produced by the external valuers are based on information provided by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group's financial and property management systems and is subject to the Group's overall control environment. In addition, the valuation reports are based on assumptions and valuation models used by the external valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional judgement and market observation. Each property is considered a separate asset class based on the unique nature, characteristics and risks of the property.
Members of the Group's investments team, who report to the executive Director responsible for the valuation process, verify all major inputs to the external valuation reports, assess the individual property valuation changes from the prior year valuation report and hold discussions with the external valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its overall responsibilities.
The fair value of the property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable recent market transactions on arm's length terms.
For properties under construction, the fair value is calculated by estimating the fair value of the completed property using the income capitalisation technique less estimated costs to completion and a risk premium.
These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use significant unobservable inputs such that the fair value measurement of each property within the portfolio has been classified as Level 3 in the fair value hierarchy.
There were no transfers between Levels 1 and 2 or between Levels 2 and 3 in the fair value hierarchy during either 2016 or 2015.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to a loss of £37.1m (2015: gain of £650.0m) and are presented in the Group income statement in the line item 'revaluation (deficit)/surplus'. The revaluation deficit for the owner-occupied property of £5.5m (2015: surplus of £1.4m) was included within the revaluation reserve.
All gains and losses recorded in profit or loss in 2016 and 2015 for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at 31 December 2016 and 31 December 2015, respectively.
| West End central |
West End borders |
City borders |
Provincial commercial |
Provincial land |
Total | |
|---|---|---|---|---|---|---|
| Income | Income | Income | Income | Income | ||
| Valuation technique | capitalisation | capitalisation | capitalisation | capitalisation | capitalisation | |
| Fair value (£m)2 | 2,716.0 | 440.1 | 1,724.1 | 67.8 | 32.5 | 4,980.5 |
| Area ('000 sq ft) | 3,040 | 516 | 2,082 | 343 | – | 5,981 |
| Range of unobservable inputs3: | ||||||
| Gross ERV (per sq ft pa) | ||||||
| Minimum | £13 | £40 | £10 | £8 | n/a1 | |
| Maximum | £176 | £55 | £62 | £15 | n/a1 | |
| Weighted average | £50 | £41 | £47 | £14 | n/a1 | |
| Net initial yield | ||||||
| Minimum | 0.0% | 3.3% | 0.0% | 6.3% | 0.0% | |
| Maximum | 4.9% | 4.5% | 4.5% | 12.3% | 9.8% | |
| Weighted average | 2.8% | 4.2% | 2.4% | 6.4% | 1.7% | |
| Reversionary yield | ||||||
| Minimum | 2.4% | 5.2% | 3.9% | 6.6% | 0.0% | |
| Maximum | 9.5% | 5.8% | 5.9% | 14.3% | 9.8% | |
| Weighted average | 4.9% | 5.2% | 5.1% | 6.7% | 1.8% | |
| True equivalent yield (EPRA basis) | ||||||
| Minimum | 2.3% | 5.2% | 4.4% | 6.8% | 9.3% | |
| Maximum | 6.2% | 5.4% | 5.4% | 14.6% | 10.9% | |
| Weighted average | 4.6% | 5.3% | 5.0% | 6.9% | 10.5% |
1 There is no calculation of gross ERV per sq ft pa. The land totals 5,235 acres.
2 Includes the Group's share of joint ventures.
3 Costs to complete are not deemed a significant unobservable input by virtue of the high percentage that is already fixed.
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group's property portfolio, together with the impact of significant movements in these inputs on the fair value measurement, are shown below:
| Unobservable input | Impact on fair value measurement of significant increase in input |
Impact on fair value measurement of significant decrease in input |
|---|---|---|
| Gross ERV | Increase | Decrease |
| Net initial yield | Decrease | Increase |
| Reversionary yield | Decrease | Increase |
| True equivalent yield | Decrease | Increase |
There are inter-relationships between these inputs as they are partially determined by market rate conditions. An increase in the reversionary yield may accompany an increase in gross ERV and would mitigate its impact on the fair value measurement.
A sensitivity analysis was performed to ascertain the impact on the fair value of a 25 basis point shift in true equivalent yield and a £2.50 psf shift in ERV.
| West End central |
West End borders |
City borders |
Provincial commercial |
Provincial land |
Total | |
|---|---|---|---|---|---|---|
| True equivalent yield | ||||||
| +25bp | (5.2%) | (4.5%) | (4.8%) | (3.5%) | (2.3%) | (4.9%) |
| -25bp | 5.8% | 5.0% | 5.3% | 3.8% | 2.4% | 5.5% |
| ERV | ||||||
| +£2.50 psf | 5.0% | 6.0% | 5.4% | 17.4% | – | 5.2% |
| -£2.50 psf | (5.0%) | (6.0%) | (5.4%) | (17.4%) | – | (5.2%) |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Investment property | 2,838.5 | 2,732.3 |
| Owner-occupied property | 14.1 | 7.7 |
| Trading property | 18.4 | 9.9 |
| Total property portfolio | 2,871.0 | 2,749.9 |
| Owner | ||||
|---|---|---|---|---|
| occupied | ||||
| property £m |
Artwork £m |
Other £m |
Total £m |
|
| Group | ||||
| At 1 January 2016 | 36.1 | 1.5 | 1.5 | 39.1 |
| Additions | 3.6 | – | 1.3 | 4.9 |
| Depreciation | – | – | (0.4) | (0.4) |
| Revaluation | (5.5) | – | – | (5.5) |
| At 31 December 2016 | 34.2 | 1.5 | 2.4 | 38.1 |
| At 1 January 2015 | 24.8 | 1.5 | 0.9 | 27.2 |
| Additions | 0.1 | – | 0.9 | 1.0 |
| Depreciation | – | – | (0.3) | (0.3) |
| Transfers | 9.8 | – | – | 9.8 |
| Revaluation | 1.4 | – | – | 1.4 |
| At 31 December 2015 | 36.1 | 1.5 | 1.5 | 39.1 |
| Net book value | ||||
| Cost or valuation | 34.2 | 1.5 | 4.8 | 40.5 |
| Accumulated depreciation | – | – | (2.4) | (2.4) |
| At 31 December 2016 | 34.2 | 1.5 | 2.4 | 38.1 |
| Net book value | ||||
| Cost or valuation | 36.1 | 1.5 | 3.5 | 41.1 |
| Accumulated depreciation | – | – | (2.0) | (2.0) |
| At 31 December 2015 | 36.1 | 1.5 | 1.5 | 39.1 |
| Company | ||||
| At 1 January 2016 | – | 0.9 | 1.4 | 2.3 |
| Additions | – | – | 1.3 | 1.3 |
| Depreciation | – | – | (0.4) | (0.4) |
| At 31 December 2016 | – | 0.9 | 2.3 | 3.2 |
| At 1 January 2015 | – | 0.9 | 0.7 | 1.6 |
| Additions | – | – | 1.0 | 1.0 |
| Depreciation | – | – | (0.3) | (0.3) |
| At 31 December 2015 | – | 0.9 | 1.4 | 2.3 |
| Net book value | ||||
| Cost or valuation | – | 0.9 | 4.9 | 5.8 |
| Accumulated depreciation | – | – | (2.6) | (2.6) |
| At 31 December 2016 | – | 0.9 | 2.3 | 3.2 |
| Net book value | ||||
| Cost or valuation | – | 0.9 | 3.6 | 4.5 |
| Accumulated depreciation | – | – | (2.2) | (2.2) |
| At 31 December 2015 | – | 0.9 | 1.4 | 2.3 |
The artwork is periodically valued by Bonhams on the basis of fair value using their extensive market knowledge. The latest valuation was carried out in October 2016 and the Directors consider that there have been no material valuation movements since that date. In accordance with IFRS 13 Fair Value Measurement, the artwork is deemed to be classified as Level 3.
The historic cost of the artwork in the Group at 31 December 2016 was £1.5m (2015: £1.5m) and £0.9m (2015: £0.9m) in the Company. See note 16 for the historic cost of owner-occupied property and IFRS 13 Fair Value Measurement disclosures.
The Group has a 50% interest in two joint ventures, Primister Limited and Prescot Street Limited Partnership ('PSLP'). In 2015, 9 and 16 Prescot Street E1 was transferred from a Group company into PSLP.
| 2016 | 2015 |
|---|---|
| £m | £m |
| At 1 January 30.7 |
7.4 |
| Transfer from investment property (see note 16) – |
18.7 |
| Additions 3.0 |
– |
| Share of results of joint ventures (see note 9) 2.3 |
4.6 |
| At 31 December 36.0 |
30.7 |
The Group's share of its investments in joint ventures is represented by the following amounts in the underlying joint venture entities.
| 2016 | 2015 | |||
|---|---|---|---|---|
| Joint ventures | Group share | Joint ventures | Group share | |
| £m | £m | £m | £m | |
| Non-current assets | 75.3 | 37.7 | 67.6 | 33.9 |
| Current assets | 7.0 | 3.5 | 2.6 | 1.3 |
| Current liabilities | (5.4) | (2.7) | (1.3) | (0.6) |
| Non-current liabilities | (48.5) | (24.3) | (45.4) | (22.7) |
| Net assets | 28.4 | 14.2 | 23.5 | 11.9 |
| Loans provided to joint ventures | 21.8 | 18.8 | ||
| Total investment in joint ventures | 36.0 | 30.7 | ||
| Income | 5.2 | 2.6 | 10.1 | 5.0 |
| Expenses | (0.6) | (0.3) | (0.9) | (0.4) |
| Profit for the year | 4.6 | 2.3 | 9.2 | 4.6 |
| Subsidiaries | Joint ventures | Total | |
|---|---|---|---|
| £m | £m | £m | |
| At 1 January 2015 | 1,184.6 | – | 1,184.6 |
| Additions | 0.8 | – | 0.8 |
| At 31 December 2015 | 1,185.4 | – | 1,185.4 |
| Additions | – | 1.3 | 1.3 |
| At 31 December 2016 | 1,185.4 | 1.3 | 1,186.7 |
At 31 December 2016, the carrying value of the investment in wholly owned subsidiaries was reviewed in accordance with IAS 36 Impairment of Assets on both value in use and fair value less costs to sell bases. The Company's accounting policy is to carry investments in subsidiary undertakings at the lower of cost and recoverable amount and recognise any impairment, or reversal thereof, in the income statement.
| Group | Company | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Prepayments and accrued income | 105.4 | 87.0 | – | – |
| Other | 3.7 | 3.7 | – | – |
| 109.1 | 90.7 | – | – |
Prepayments and accrued income relates to rents recognised in advance as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts, as well as the initial direct costs of the letting, over the expected terms of their respective leases. Together with £11.5m (2015: £10.0m), which was included as current assets within trade and other receivables, these amounts totalled £116.9m at 31 December 2016 (2015: £97.0m).
| Group 2016 |
2015 | Company 2016 |
2015 | |
|---|---|---|---|---|
| Trade receivables | £m 5.1 |
£m 2.4 |
£m – |
£m – |
| Amounts owed by subsidiaries | – | – | 1,512.0 | 1,388.0 |
| Other receivables | 2.7 | 5.4 | 1.0 | 0.1 |
| Prepayments | 15.5 | 14.9 | 0.2 | 1.4 |
| Other taxes | – | 16.5 | – | – |
| Accrued income | 15.2 | 13.5 | – | 0.4 |
| 38.5 | 52.7 | 1,513.2 | 1,389.9 | |
| 2016 £m |
2015 £m |
|||
| Group trade receivables are split as follows: | ||||
| less than three months due | 5.1 | 2.4 | ||
| 5.1 | 2.4 |
Group trade receivables includes a provision for bad debts as follows:
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| At 1 January | 0.3 | 0.6 |
| Released | – | (0.3) |
| At 31 December | 0.3 | 0.3 |
| The provision for bad debts is split as follows: | ||
| less than six months due | 0.3 | 0.3 |
| 0.3 | 0.3 | |
None of the amounts included in other receivables are past due and therefore no ageing has been shown.
| Group 2016 £m |
2015 £m |
Company 2016 £m |
2015 £m |
|
|---|---|---|---|---|
| Trade payables | 2.0 | 0.2 | – | – |
| Amounts owed to subsidiaries | – | – | 647.0 | 445.4 |
| Other payables | 16.7 | 39.9 | 1.2 | 0.7 |
| Other taxes | 6.5 | – | 0.8 | 2.1 |
| Accruals | 45.9 | 49.1 | 9.7 | 10.0 |
| Deferred income | 38.9 | 34.8 | 0.1 | 0.1 |
| 110.0 | 124.0 | 658.8 | 458.3 |
| National | |||||
|---|---|---|---|---|---|
| insurance on | |||||
| Deferred bonus shares |
share-based payments |
Total | |||
| £m | £m | £m | |||
| Group | |||||
| At 1 January 2016 | – | 1.2 | 1.2 | ||
| Provided in the income statement | – | 0.2 | 0.2 | ||
| Utilised in year | – | (0.7) | (0.7) | ||
| At 31 December 2016 | – | 0.7 | 0.7 | ||
| Due within one year | – | 0.4 | 0.4 | ||
| Due after one year | – | 0.3 | 0.3 | ||
| – | 0.7 | 0.7 | |||
| At 1 January 2015 | 0.2 | 1.3 | 1.5 | ||
| Provided in the income statement | – | 0.8 | 0.8 | ||
| Provided in reserves | 0.9 | – | 0.9 | ||
| Utilised in year | (1.1) | (0.9) | (2.0) | ||
| At 31 December 2015 | – | 1.2 | 1.2 | ||
| Due within one year | – | 0.7 | 0.7 | ||
| Due after one year | – | 0.5 | 0.5 | ||
| – | 1.2 | 1.2 | |||
| Company | |||||
| At 1 January 2016 | – | 1.2 | 1.2 | ||
| Provided in the income statement | – | 0.2 | 0.2 | ||
| Utilised in year | – | (0.7) | (0.7) | ||
| At 31 December 2016 | – | 0.7 | 0.7 | ||
| Due within one year | – | 0.4 | 0.4 | ||
| Due after one year | – | 0.3 | 0.3 | ||
| – | 0.7 | 0.7 | |||
| At 1 January 2015 | 0.2 | 1.3 | 1.5 | ||
| Provided in the income statement | – | 0.8 | 0.8 | ||
| Provided in reserves | 0.9 | – | 0.9 | ||
| Utilised in year | (1.1) | (0.9) | (2.0) | ||
| At 31 December 2015 | – | 1.2 | 1.2 | ||
| Due within one year | – | 0.7 | 0.7 | ||
| Due after one year | – | 0.5 | 0.5 | ||
| – | 1.2 | 1.2 |
Provisions are made for those parts of the bonuses which are to be deferred in shares (see report of the Remuneration Committee). National insurance is payable on gains made by employees on the exercise of share-based payments granted to them. The eventual liability to national insurance is dependent on:
•the market price of the Company's shares at the date of exercise;
•the number of equity instruments that are exercised; and
•the prevailing rate of national insurance at the date of exercise.
| Group | Company | |||
|---|---|---|---|---|
| 2016 £m |
2015 £m |
2016 £m |
2015 £m |
|
| Non-current liabilities | ||||
| 2.75% unsecured convertible bonds 2016 | – | – | – | – |
| 1.125% unsecured convertible bonds 2019 | 142.9 | 140.2 | – | – |
| 6.5% secured bonds 2026 | 187.9 | 188.9 | – | – |
| 3.46% unsecured private placement notes 2028 | 29.8 | – | 29.8 | – |
| 4.41% unsecured private placement notes 2029 | 24.8 | 24.8 | 24.8 | 24.8 |
| 3.57% unsecured private placement notes 2031 | 74.5 | – | 74.5 | – |
| 4.68% unsecured private placement notes 2034 | 74.3 | 74.3 | 74.3 | 74.3 |
| 3.99% secured loan 2024 | 82.1 | 82.0 | 82.1 | 82.0 |
| Unsecured bank loans | 254.3 | 356.8 | 254.3 | 356.8 |
| Secured bank loans | 28.0 | 28.0 | – | – |
| Intercompany loan | – | – | 142.9 | 140.2 |
| Gross debt | 898.6 | 895.0 | 682.7 | 678.1 |
| Leasehold liabilities | 23.9 | 23.2 | – | – |
| Borrowings | 922.5 | 918.2 | 682.7 | 678.1 |
| Derivative financial instruments expiring in greater than one year Total borrowings and derivative financial instruments |
17.3 939.8 |
17.6 935.8 |
15.5 698.2 |
15.6 693.7 |
| Reconciliation of borrowings to net debt: | ||||
| Borrowings | 922.5 | 918.2 | 682.7 | 678.1 |
| Cash and cash equivalents | (17.7) | (6.5) | (6.9) | (5.6) |
| Net debt | 904.8 | 911.7 | 675.8 | 672.5 |
In June 2011 the Group issued its first convertible bonds which paid a coupon of 2.75% and had a conversion price of £22.22 per share. In December 2014, the Group issued a notice for the early redemption of these bonds. All the bondholders opted to convert in January 2015 with the result that 7,875,776 new ordinary shares of 5p each were issued at the conversion price of £22.22 per share, and the bonds were subsequently cancelled. Of the proceeds of £175.0m received from the bondholders, £0.5m was credited to share capital and £174.5m was credited to retained earnings. The premium on issue was not required to be transferred to a share premium account because merger relief was available due to the structure of the transaction. The ordinary shares issued on conversion of the bonds by Derwent London plc were exchanged for exchangeable redeemable preference shares ('ERPS') in the subsidiary company which issued the bonds, and the redemption of the ERPS converted the merger reserve into a realised profit. The £9.4m that had been credited to other reserves on issue was transferred to retained earnings on conversion of the bonds. In addition, unamortised amounts totalling £4.3m due to early redemption have been charged to retained earnings. After £0.1m of transaction costs, the total taken to retained earnings on conversion was, therefore, £179.5m.
In July 2013 the Group issued its second convertible bonds. The unsecured instrument pays a coupon of 1.125% until July 2019 or its conversion date, if earlier. The initial conversion price was set at £33.35 per share. In accordance with IAS 32, the equity and debt components of the bonds are accounted for separately and the fair value of the debt component has been determined using the market interest rate for an equivalent non-convertible bond, deemed to be 2.67%. As a result, £137.4m was recognised as a liability in the balance sheet on issue and the remainder of the proceeds, £12.6m, which represent the equity component, was credited to reserves. The difference between the fair value of the liability and the principal value is being amortised through the income statement from the date of issue. Issue costs of £3.8m were allocated between equity and debt and the element relating to the debt component is being amortised over the life of the bonds. The issue costs apportioned to equity of £0.3m have not been amortised. The fair value was determined by the ask-price of £105.38 per £100 as at 31 December 2016 (2015: £119.62 per £100). The carrying value at 31 December 2016 was £142.9m (2015: £140.2m).
Reconciliation of nominal value to carrying value:
| £m | |
|---|---|
| Nominal value | 150.0 |
| Fair value adjustment on issue allocated to equity | (12.6) |
| Debt component on issue | 137.4 |
| Unamortised issue costs | (1.5) |
| Amortisation of fair value adjustment | 7.0 |
| Carrying amount included in borrowings | 142.9 |
As a result of the acquisition of London Merchant Securities plc in 2007, the secured bonds 2026 were included at fair value less unamortised issue costs. This difference between fair value at acquisition and principal value is being amortised through the income statement. The fair value at 31 December 2016 was determined by the ask-price of £128.91 per £100 (2015: £124.10 per £100). The carrying value at 31 December 2016 was £187.9m (2015: £188.9m).
In February 2016, the Group arranged unsecured private placement notes, comprising £30m for 12 years and £75m for 15 years. The funds were drawn on 4 May 2016. The fair values were determined by comparing the discounted future cash flows using the contracted yields with those of the reference gilts plus the implied margins. The references were a 6% 2028 gilt and a 4.75% 2030 gilt both with an implied margin which is unchanged since the date of fixing. The carrying values at 31 December 2016 were £29.8m (2015: £nil) and £74.5m (2015: £nil), respectively.
In November 2013, the Group arranged unsecured private placement notes, comprising £25m for 15 years and £75m for 20 years. The funds were drawn on 8 January 2014. The fair values were determined by comparing the discounted future cash flows using the contracted yields with those of the reference gilts plus the implied margins. The references were a 6% 2028 gilt and a 4.25% 2032 gilt both with an implied margin which is unchanged since the date of fixing. The carrying values at 31 December 2016 were £24.8m (2015: £24.8m) and £74.3m (2015: £74.3m), respectively.
In July 2012, the Group arranged a 12¼-year secured fixed rate loan. The loan was drawn on 1 August 2012. The fair value was determined by comparing the discounted future cash flows using the contracted yield with those of the reference gilt plus an implied margin. The reference was a 5% 2025 gilt with an implied margin which is unchanged since the date of fixing. The carrying value at 31 December 2016 was £82.1m (2015: £82.0m).
In 2016, the maturity of £450m of the £550m facility arranged in September 2013 was extended by one year to 2022, with the remaining £100m still maturing in 2021.
In July 2015, a new fully revolving £75m minimum five-year unsecured loan facility was completed. An existing £90m secured bank facility from the same lender was cancelled at the same time. In 2016, the maturity of this facility was extended by one year to 2021.
As all main corporate facilities were refinanced or amended in 2014 and 2015, the fair values of the Group's bank loans are deemed to be approximately the same as their carrying amount, after adjusting for the unamortised arrangement fees.
| < 1 year £m |
1 to 2 years £m |
2 to 3 years £m |
3 to 4 years £m |
4 to 5 years £m |
> 5 years £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Group | |||||||
| At 31 December 2016 | – | – | – | – | 144.0 | 221.5 | 365.5 |
| At 31 December 2015 | – | – | – | – | 28.5 | 234.0 | 262.5 |
| Company | |||||||
| At 31 December 2016 | – | – | – | – | 144.0 | 221.5 | 365.5 |
| At 31 December 2015 | – | – | – | – | 28.5 | 234.0 | 262.5 |
The terms of the intercompany loan in the Company mirror those of the unsecured convertible bonds 2019. As with the bonds, debt and equity components of the intercompany loan have been accounted for separately, and the fair value of the debt components is identical to that of the bonds. The carrying value at 31 December 2016 was £142.9m (2015: £140.2m).
The derivative financial instruments consist of interest rate swaps, the fair values of which represent the net present value of the difference between the contracted fixed rates and the fixed rates payable if the swaps were to be replaced on 31 December 2016 for the period to the contracted expiry dates.
The Group also has a £70m forward starting interest rate swap effective from 29 March 2017. This swap is not included in the 31 December 2016 figures in the table below, but the financial impact from the effective date onwards is included in the relevant tables in this note.
The fair values of the Group's outstanding interest rate swaps have been estimated 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.
| Group | Company | |||||
|---|---|---|---|---|---|---|
| Weighted | ||||||
| average | average | |||||
| Principal | interest rate | Average life | Principal | interest rate | Average life | |
| £m | % | Years | £m | % | Years | |
| At 31 December 2016 | ||||||
| Interest rate swaps | 243.0 | 1.82 | 4.6 | 215.0 | 1.60 | 4.9 |
| At 31 December 2015 | ||||||
| Interest rate swaps | 253.0 | 2.44 | 4.6 | 255.0 | 2.30 | 4.8 |
| Group | Company | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Secured | ||||
| 6.5% secured bonds 2026 | 187.9 | 188.9 | – | – |
| 3.99% secured loan 2024 | 82.1 | 82.0 | 82.1 | 82.0 |
| Secured bank loans | 28.0 | 28.0 | – | – |
| 298.0 | 298.9 | 82.1 | 82.0 | |
| Unsecured | ||||
| 1.125% unsecured convertible bonds 2019 | 142.9 | 140.2 | – | – |
| 3.46% unsecured private placement notes 2028 | 29.8 | – | 29.8 | – |
| 4.41% unsecured private placement notes 2029 | 24.8 | 24.8 | 24.8 | 24.8 |
| 3.57% unsecured private placement notes 2031 | 74.5 | – | 74.5 | – |
| 4.68% unsecured private placement notes 2034 | 74.3 | 74.3 | 74.3 | 74.3 |
| Unsecured bank loans | 254.3 | 356.8 | 254.3 | 356.8 |
| Intercompany loans | – | – | 142.9 | 140.2 |
| 600.6 | 596.1 | 600.6 | 596.1 | |
| Gross debt | 898.6 | 895.0 | 682.7 | 678.1 |
At 31 December 2016, the Group's 3.99% secured loan 2024 was secured by a fixed charge over £191.7m (2015: £255.5m) of the Group's properties and £10.0m (2015: £nil) of cash on deposit. The Group's secured bank loan was secured by a fixed charge over £129.4m (2015: £144.8m) of the Group's properties. In addition, the secured bonds 2026 were secured by a floating charge over a number of the Group's subsidiary companies which contain £844.4m (2015: £845.1m) of the Group's properties.
At 31 December 2016, the Company's 3.99% secured loan 2024 was secured by a fixed charge over £191.7m (2015: £255.5m) of the Group's properties and £10.0m (2015: £nil) of cash on deposit.
At 31 December 2015, the Group's fixed rate and hedged debt included the unsecured convertible bonds 2019, the secured bonds 2026, a secured loan 2024, the unsecured private placement notes 2029 and 2034 and the hedged bank debt. Additionally, at 31 December 2016 the Group's fixed rate and hedged debt included the unsecured private placement notes 2028 and 2031. At 31 December 2016 and 2015, the Company's fixed rate debt comprised a secured loan 2024, the unsecured private placement notes 2029 and 2034, the hedged bank debt and the intercompany loans. Additionally, at 31 December 2016 the Company's fixed rate and hedged debt included the unsecured private placement notes 2028 and 2031.
After taking into account the various interest rate hedging instruments entered into by the Group and the Company, the interest rate exposure of the Group's and Company's gross debt was:
| Weighted | Weighted | |||||
|---|---|---|---|---|---|---|
| Floating | Fixed | Gross | average | average | ||
| rate £m |
Hedged £m |
rate £m |
debt £m |
interest rate1 % |
life Years |
|
| Group | ||||||
| At 31 December 2016 | ||||||
| 1.125% unsecured convertible bonds 2019 | – | – | 142.9 | 142.9 | 2.67 | 2.6 |
| 6.5% secured bonds 2026 | – | – | 187.9 | 187.9 | 6.50 | 9.2 |
| 3.46% unsecured private placement notes 2028 | – | – | 29.8 | 29.8 | 3.46 | 11.3 |
| 4.41% unsecured private placement notes 2029 | – | – | 24.8 | 24.8 | 4.41 | 12.0 |
| 3.57% unsecured private placement notes 2031 | – | – | 74.5 | 74.5 | 3.57 | 14.3 |
| 4.68% unsecured private placement notes 2034 | – | – | 74.3 | 74.3 | 4.68 | 17.0 |
| 3.99% secured loan 2024 | – | – | 82.1 | 82.1 | 3.99 | 7.8 |
| Unsecured bank loans | 43.6 | 210.7 | – | 254.3 | 2.68 | 5.0 |
| Secured bank loans | – | 28.0 | – | 28.0 | 4.25 | 1.5 |
| 43.6 | 238.7 | 616.3 | 898.6 | 3.90 | 7.7 | |
| At 31 December 2015 | ||||||
| 1.125% unsecured convertible bonds 2019 | – | – | 140.2 | 140.2 | 2.67 | 3.6 |
| 6.5% secured bonds 2026 | – | – | 188.9 | 188.9 | 6.50 | 10.2 |
| 4.41% unsecured private placement notes 2029 | – | – | 24.8 | 24.8 | 4.41 | 13.0 |
| 4.68% unsecured private placement notes 2034 | – | – | 74.3 | 74.3 | 4.68 | 18.0 |
| 3.99% secured loan 2024 | – | – | 82.0 | 82.0 | 3.99 | 8.8 |
| Unsecured bank loans | 135.3 | 221.5 | – | 356.8 | 2.99 | 5.0 |
| Secured bank loans | – | 28.0 | – | 28.0 | 4.30 | 2.5 |
| 135.3 | 249.5 | 510.2 | 895.0 | 3.93 | 7.3 | |
| Company | ||||||
| At 31 December 2016 | ||||||
| 3.46% unsecured private placement notes 2028 | – | – | 29.8 | 29.8 | 3.46 | 11.3 |
| 4.41% unsecured private placement notes 2029 | – | – | 24.8 | 24.8 | 4.41 | 12.0 |
| 3.57% unsecured private placement notes 2031 | – | – | 74.5 | 74.5 | 3.57 | 14.3 |
| 4.68% unsecured private placement notes 2034 | – | – | 74.3 | 74.3 | 4.68 | 17.0 |
| 3.99% secured loan 2024 | – | – | 82.1 | 82.1 | 3.99 | 7.8 |
| Unsecured bank loans | 43.6 | 210.7 | – | 254.3 | 2.68 | 5.0 |
| Intercompany loans | – | – | 142.9 | 142.9 | 2.67 | 2.6 |
| 43.6 | 210.7 | 428.4 | 682.7 | 3.24 | 7.6 | |
| At 31 December 2015 | ||||||
| 4.41% unsecured private placement notes 2029 | – | – | 24.8 | 24.8 | 4.41 | 13.0 |
| 4.68% unsecured private placement notes 2034 | – | – | 74.3 | 74.3 | 4.68 | 18.0 |
| 3.99% secured loan 2024 | – | – | 82.0 | 82.0 | 3.99 | 8.8 |
| Unsecured bank loans | 135.3 | 221.5 | – | 356.8 | 2.99 | 5.0 |
| Intercompany loans | – | – | 140.2 | 140.2 | 2.67 | 3.6 |
| 135.3 | 221.5 | 321.3 | 678.1 | 3.27 | 6.8 |
1 The weighted average interest rates are based on the nominal amounts of the debt facilities.
IFRS 7 Financial Instruments: Disclosure, requires disclosure of the maturity of the Group's and Company's remaining contractual financial liabilities. The tables below show the contractual undiscounted cash outflows arising from the Group's gross debt.
| < 1 | 1 to 2 | 2 to 3 | 3 to 4 | 4 to 5 | > 5 | ||
|---|---|---|---|---|---|---|---|
| year £m |
years £m |
years £m |
years £m |
years £m |
years £m |
Total £m |
|
| Group | |||||||
| At 31 December 2016 | |||||||
| 1.125% unsecured convertible bonds 2019 | – | – | 150.0 | – | – | – | 150.0 |
| 6.5% secured bonds 2026 | – | – | – | – | – | 175.0 | 175.0 |
| 3.46% unsecured private placement notes 2028 | – | – | – | – | – | 30.0 | 30.0 |
| 4.41% unsecured private placement notes 2029 | – | – | – | – | – | 25.0 | 25.0 |
| 3.57% unsecured private placement notes 2031 | – | – | – | – | – | 75.0 | 75.0 |
| 4.68% unsecured private placement notes 2034 | – | – | – | – | – | 75.0 | 75.0 |
| 3.99% secured loan 2024 | – | – | – | – | – | 83.0 | 83.0 |
| Unsecured bank loans | – | – | – | – | 31.0 | 228.5 | 259.5 |
| Secured bank loans | – | 28.0 | – | – | – | – | 28.0 |
| Total on maturity | – | 28.0 | 150.0 | – | 31.0 | 691.5 | 900.5 |
| Leasehold liabilities | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 237.0 | 243.0 |
| Interest on gross debt | 30.8 | 31.1 | 31.4 | 30.2 | 30.3 | 146.7 | 300.5 |
| Effect of interest rate swaps | 5.2 | 5.3 | 4.0 | 1.7 | 0.9 | 0.2 | 17.3 |
| Gross loan commitments | 37.2 | 65.6 | 186.6 | 33.1 | 63.4 | 1,075.4 | 1,461.3 |
| At 31 December 2015 | |||||||
| 1.125% unsecured convertible bonds 2019 | – | – | – | 150.0 | – | – | 150.0 |
| 6.5% secured bonds 2026 | – | – | – | – | – | 175.0 | 175.0 |
| 4.41% unsecured private placement notes 2029 | – | – | – | – | – | 25.0 | 25.0 |
| 4.68% unsecured private placement notes 2034 | – | – | – | – | – | 75.0 | 75.0 |
| 3.99% secured loan 2024 | – | – | – | – | – | 83.0 | 83.0 |
| Unsecured bank loans | – | – | – | – | 46.5 | 316.0 | 362.5 |
| Secured bank loans | – | – | 28.0 | – | – | – | 28.0 |
| Total on maturity | – | – | 28.0 | 150.0 | 46.5 | 674.0 | 898.5 |
| Leasehold liabilities | 1.1 | 1.2 | 1.2 | 1.2 | 1.2 | 144.8 | 150.7 |
| Interest on gross debt | 29.8 | 31.7 | 32.6 | 32.9 | 31.2 | 132.9 | 291.1 |
| Effect of interest rate swaps | 5.6 | 4.6 | 3.5 | 2.5 | 0.8 | 0.2 | 17.2 |
| Gross loan commitments | 36.5 | 37.5 | 65.3 | 186.6 | 79.7 | 951.9 | 1,357.5 |
Reconciliation to borrowings:
| Gross loan commitments £m |
Interest on gross debt £m |
Effect of interest rate swaps £m |
Leasehold liabilities £m |
Non-cash amortisation £m |
Borrowings £m |
|
|---|---|---|---|---|---|---|
| Group | ||||||
| At 31 December 2016 | ||||||
| Maturing in: | ||||||
| < 1 year | 37.2 | (30.8) | (5.2) | (1.2) | – | – |
| 1 to 2 years | 65.6 | (31.1) | (5.3) | (1.2) | – | 28.0 |
| 2 to 3 years | 186.6 | (31.4) | (4.0) | (1.2) | (7.1) | 142.9 |
| 3 to 4 years | 33.1 | (30.2) | (1.7) | (1.2) | – | – |
| 4 to 5 years | 63.4 | (30.3) | (0.9) | (1.2) | (1.4) | 29.6 |
| > 5 years | 1,075.4 | (146.7) | (0.2) | (213.1) | 6.6 | 722.0 |
| 1,461.3 | (300.5) | (17.3) | (219.1) | (1.9) | 922.5 | |
| At 31 December 2015 | ||||||
| Maturing in: | ||||||
| < 1 year | 36.5 | (29.8) | (5.6) | (1.1) | – | – |
| 1 to 2 years | 37.5 | (31.7) | (4.6) | (1.2) | – | – |
| 2 to 3 years | 65.3 | (32.6) | (3.5) | (1.2) | – | 28.0 |
| 3 to 4 years | 186.6 | (32.9) | (2.5) | (1.2) | (9.8) | 140.2 |
| 4 to 5 years | 79.7 | (31.2) | (0.8) | (1.2) | (0.6) | 45.9 |
| > 5 years | 951.9 | (132.9) | (0.2) | (121.6) | 6.9 | 704.1 |
| 1,357.5 | (291.1) | (17.2) | (127.5) | (3.5) | 918.2 |
| < 1 | 1 to 2 | 2 to 3 | 3 to 4 | 4 to 5 | > 5 | ||
|---|---|---|---|---|---|---|---|
| year | years | years | years | years | years | Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| Company | |||||||
| At 31 December 2016 | |||||||
| 3.46% unsecured private placement notes 2028 | – | – | – | – | – | 30.0 | 30.0 |
| 4.41% unsecured private placement notes 2029 | – | – | – | – | – | 25.0 | 25.0 |
| 3.57% unsecured private placement notes 2031 | – | – | – | – | – | 75.0 | 75.0 |
| 4.68% unsecured private placement notes 2034 | – | – | – | – | – | 75.0 | 75.0 |
| 3.99% secured loan 2024 | – | – | – | – | – | 83.0 | 83.0 |
| Unsecured bank loans | – | – | – | – | 31.0 | 228.5 | 259.5 |
| Intercompany loans | – | – | 150.0 | – | – | – | 150.0 |
| Total on maturity | – | – | 150.0 | – | 31.0 | 516.5 | 697.5 |
| Interest on debt | 19.1 | 19.5 | 20.1 | 18.8 | 18.9 | 95.5 | 191.9 |
| Effect of interest rate swaps | 4.4 | 4.4 | 3.9 | 1.7 | 0.9 | 0.2 | 15.5 |
| Gross loan commitments | 23.5 | 23.9 | 174.0 | 20.5 | 50.8 | 612.2 | 904.9 |
| At 31 December 2015 | |||||||
| 4.41% unsecured private placement notes 2029 | – | – | – | – | – | 25.0 | 25.0 |
| 4.68% unsecured private placement notes 2034 | – | – | – | – | – | 75.0 | 75.0 |
| 3.99% secured loan 2024 | – | – | – | – | – | 83.0 | 83.0 |
| Unsecured bank loans | – | – | – | – | 46.5 | 316.0 | 362.5 |
| Intercompany loans | – | – | – | 150.0 | – | – | 150.0 |
| Total on maturity | – | – | – | 150.0 | 46.5 | 499.0 | 695.5 |
| Interest on debt | 17.9 | 19.7 | 20.8 | 21.6 | 19.8 | 70.4 | 170.2 |
| Effect of interest rate swaps | 4.8 | 4.0 | 3.0 | 2.4 | 0.8 | 0.2 | 15.2 |
| Gross loan commitments | 22.7 | 23.7 | 23.8 | 174.0 | 67.1 | 569.6 | 880.9 |
Reconciliation to borrowings:
| Gross loan commitments £m |
Interest on gross debt £m |
Effect of interest rate swaps £m |
Leasehold liabilities £m |
Non-cash amortisation £m |
Borrowings £m |
|
|---|---|---|---|---|---|---|
| Company | ||||||
| At 31 December 2016 | ||||||
| Maturing in: | ||||||
| < 1 year | 23.5 | (19.1) | (4.4) | – | – | – |
| 1 to 2 years | 23.9 | (19.5) | (4.4) | – | – | – |
| 2 to 3 years | 174.0 | (20.1) | (3.9) | – | (7.1) | 142.9 |
| 3 to 4 years | 20.5 | (18.8) | (1.7) | – | – | – |
| 4 to 5 years | 50.8 | (18.9) | (0.9) | – | (1.4) | 29.6 |
| > 5 years | 612.2 | (95.5) | (0.2) | – | (6.3) | 510.2 |
| 904.9 | (191.9) | (15.5) | – | (14.8) | 682.7 | |
| At 31 December 2015 | ||||||
| Maturing in: | ||||||
| < 1 year | 22.7 | (17.9) | (4.8) | – | – | – |
| 1 to 2 years | 23.7 | (19.7) | (4.0) | – | – | – |
| 2 to 3 years | 23.8 | (20.8) | (3.0) | – | – | – |
| 3 to 4 years | 174.0 | (21.6) | (2.4) | – | (9.8) | 140.2 |
| 4 to 5 years | 67.1 | (19.8) | (0.8) | – | (0.6) | 45.9 |
| > 5 years | 569.6 | (70.4) | (0.2) | – | (7.0) | 492.0 |
| 880.9 | (170.2) | (15.2) | – | (17.4) | 678.1 |
The following table provides an analysis of the anticipated contractual cash flows for the derivative financial instruments using undiscounted cash flows. These amounts represent the gross cash flows of the derivative financial instruments and are settled as either a net payment or receipt.
| 2016 | 2016 | 2015 | 2015 | |
|---|---|---|---|---|
| Receivable | Payable | Receivable | Payable | |
| Group | £m | £m | £m | £m |
| Maturing in: | ||||
| < 1 year | 1.3 | (6.5) | 2.7 | (8.3) |
| 1 to 2 years | 1.9 | (7.2) | 4.4 | (9.0) |
| 2 to 3 years | 2.5 | (6.5) | 5.5 | (9.0) |
| 3 to 4 years | 2.0 | (3.7) | 5.0 | (7.5) |
| 4 to 5 years | 1.6 | (2.5) | 2.7 | (3.5) |
| > 5 years | 1.9 | (2.1) | 2.9 | (3.1) |
| Gross contractual cash flows | 11.2 | (28.5) | 23.2 | (40.4) |
| Company | ||||
| Maturing in: | ||||
| < 1 year | 1.1 | (5.5) | 2.5 | (7.3) |
| 1 to 2 years | 1.8 | (6.2) | 4.0 | (8.0) |
| 2 to 3 years | 2.3 | (6.2) | 5.0 | (8.0) |
| 3 to 4 years | 2.0 | (3.7) | 4.9 | (7.3) |
| 4 to 5 years | 1.6 | (2.5) | 2.7 | (3.5) |
| > 5 years | 1.9 | (2.1) | 2.9 | (3.1) |
The Group is exposed through its operations to the following financial risks:
• credit risk;
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. The following describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. Further information on risk as required by IFRS 7 is given on pages 60 to 65.
Gross contractual cash flows 10.7 (26.2) 22.0 (37.2)
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.
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.
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 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 quantitative disclosures of the credit risk exposure in relation to trade and other receivables which are neither past due nor impaired are disclosed in note 20.
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 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 profit or loss and net assets of a 50 basis point shift in interest rates would result in an increase of £0.2m (2015: £0.7m) or a decrease of £0.2m (2015: £0.7m).
It is currently Group policy that generally between 60% and 85% of external Group borrowings (excluding finance lease payables) are at fixed rates. Where the Group wishes to vary the amount of external fixed rate debt it holds (subject to it being generally between 60% and 85% of expected Group borrowings, as noted above), the Group makes use of interest rate derivatives to achieve the desired interest rate profile. Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates nor eliminates fully cash flow risk associated with variability in interest payments, it considers that it achieves an appropriate balance of exposure to these risks. At 31 December 2016, the proportion of fixed debt held by the Group was above this range at 95% (2015: 85%) following a property disposal in December. During both 2016 and 2015, the Group's borrowings at variable rate were denominated in sterling.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. When the Group raises long-term borrowings, it is generally at fixed rates.
Liquidity risk 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.
The Group's capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and non-controlling interest).
The Group's objectives when maintaining capital are:
•to safeguard the entity's ability to continue as a going concern so that it can continue to provide above average long-term returns for shareholders; and
•to provide an above average annualised total return to shareholders.
The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may vary the amount of dividends paid to shareholders subject to the rules imposed by its REIT status. It may also seek to redeem bonds, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of NAV gearing and loan-to-value ratio. During 2016, the Group's strategy, which was unchanged from 2015, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the interest cover ratio, are defined in the list of definitions on page 173 and are derived in note 39.
| Categories of financial assets and liabilities | Fair value | Total | ||
|---|---|---|---|---|
| through profit | Loans and | Amortised | carrying | |
| and loss | receivables | cost | value | |
| Group | £m | |||
| Financial assets | ||||
| Cash and cash equivalents | 17.7 | |||
| Other assets – current1 | 23.0 | |||
| 40.7 | ||||
| Financial liabilities | ||||
| 1.125% unsecured convertible bonds 2019 | (142.9) | |||
| 6.5% secured bonds 2026 | (187.9) | |||
| 3.46% unsecured private placement notes 2028 | (29.8) | |||
| 4.41% unsecured private placement notes 2029 | (24.8) | |||
| 3.57% unsecured private placement notes 2031 | (74.5) | |||
| 4.68% unsecured private placement notes 2034 | (74.3) | |||
| 3.99% secured loan 2024 | (82.1) | |||
| Bank borrowings due after one year | (282.3) | |||
| Leasehold liabilities | (23.9) | |||
| Derivative financial instruments | (17.3) | |||
| Other liabilities – current2 | (64.6) | |||
| (17.3) | – | (987.1) | (1,004.4) | |
| At 31 December 2016 | (17.3) | 40.7 | (987.1) | (963.7) |
| Financial assets | ||||
| Cash and cash equivalents | – | 6.5 | – | 6.5 |
| Other assets – current1 | £m £m £m – 17.7 – – 23.0 – – 40.7 – – – (142.9) – – (187.9) – – (29.8) – – (24.8) – – (74.5) – – (74.3) – – (82.1) – – (282.3) – – (23.9) (17.3) – – – – (64.6) – 21.3 – – 27.8 – – – (140.2) – – (188.9) – – (24.8) – – (74.3) – – (82.0) – – (384.8) – – (23.2) (17.6) – – – – (89.2) (17.6) – (1,007.4) (17.6) 27.8 (1,007.4) |
21.3 | ||
| 27.8 | ||||
| Financial liabilities | ||||
| 1.125% unsecured convertible bonds 2019 | (140.2) | |||
| 6.5% secured bonds 2026 | (188.9) | |||
| 4.41% unsecured private placement notes 2029 | (24.8) | |||
| 4.68% unsecured private placement notes 2034 | (74.3) | |||
| 3.99% secured loan 2024 | (82.0) | |||
| Bank borrowings due after one year | (384.8) | |||
| Leasehold liabilities | (23.2) | |||
| Derivative financial instruments | (17.6) | |||
| Other liabilities – current2 At 31 December 2015 |
(89.2) | |||
| (1,025.0) | ||||
| (997.2) |
| Fair value through profit |
Loans and | Amortised | Total carrying |
|
|---|---|---|---|---|
| and loss | receivables | cost | value | |
| £m | £m | £m | £m | |
| Company | ||||
| Financial assets | ||||
| Cash and cash equivalents | – | 6.9 | – | 6.9 |
| Other assets – current1 | – | 1,513.0 | – | 1,513.0 |
| – | 1,519.9 | – | 1,519.9 | |
| Financial liabilities | ||||
| 3.46% unsecured private placement notes 2028 | – | – | (29.8) | (29.8) |
| 4.41% unsecured private placement notes 2029 | – | – | (24.8) | (24.8) |
| 3.57% unsecured private placement notes 2031 | – | – | (74.5) | (74.5) |
| 4.68% unsecured private placement notes 2034 | – | – | (74.3) | (74.3) |
| 3.99% secured loan 2024 | – | – | (82.1) | (82.1) |
| Bank borrowings due after one year | – | – | (254.3) | (254.3) |
| Intercompany loans | – | – | (142.9) | (142.9) |
| Derivative financial instruments | (15.5) | – | – | (15.5) |
| Other liabilities – current2 | – | (647.0) | (10.9) | (657.9) |
| (15.5) | (647.0) | (693.6) | (1,356.1) | |
| At 31 December 2016 | (15.5) | 872.9 | (693.6) | 163.8 |
| Financial assets | ||||
| Cash and cash equivalents | – | 5.6 | – | 5.6 |
| Other assets – current1 | – | 1,388.5 | – | 1,388.5 |
| – | 1,394.1 | – | 1,394.1 | |
| Financial liabilities | ||||
| 4.41% unsecured private placement notes 2029 | – | – | (24.8) | (24.8) |
| 4.68% unsecured private placement notes 2034 | – | – | (74.3) | (74.3) |
| 3.99% secured loan 2024 | – | – | (82.0) | (82.0) |
| Bank borrowings due after one year | – | – | (356.8) | (356.8) |
| Intercompany loans | – | – | (140.2) | (140.2) |
| Derivative financial instruments | (15.6) | – | – | (15.6) |
| Other liabilities – current2 | – | (445.4) | (10.7) | (456.1) |
| (15.6) | (445.4) | (688.8) | (1,149.8) | |
1 In 2016, other assets includes all amounts shown as trade and other receivables in note 20 except prepayments and sales and social security taxes of £15.5m
(2015: £31.4m) for the Group and £0.2m (2015: £1.4m) for the Company. All amounts are non-interest bearing and are receivable within one year.
2 In 2016, other liabilities for the Group include all amounts shown as trade and other payables in note 21 except deferred income and sales and social security taxes of £45.4m (2015: £34.8m) for the Group and of £0.9m (2015: £2.2m) for the Company. All amounts are non-interest bearing and are due within one year.
Reconciliation of net financial assets and liabilities to borrowings and derivative financial instruments:
| Group 2016 £m |
2015 £m |
Company 2016 £m |
2015 £m |
|
|---|---|---|---|---|
| Net financial assets and liabilities | (963.7) | (997.2) | 163.8 | 244.3 |
| Other assets – current | (23.0) | (21.3) | (1,513.0) | (1,388.5) |
| Other liabilities – current | 64.6 | 89.2 | 657.9 | 456.1 |
| Cash and cash equivalents | (17.7) | (6.5) | (6.9) | (5.6) |
| Borrowings and derivative financial instruments | (939.8) | (935.8) | (698.2) | (693.7) |
The table below shows the fair values, where applicable, of borrowings and derivative financial instruments held by the Group, together with a reconciliation to net financial assets and liabilities. Details of inputs and valuation methods used to derive the fair values are shown in note 23.
| Group | Company | ||||
|---|---|---|---|---|---|
| Carrying value | Fair value | Carrying value | Fair value | Fair value | |
| £m | £m | £m | £m | hierarchy | |
| At 31 December 2016 | |||||
| 1.125% unsecured convertible bonds 2019 | (142.9) | (152.4) | – | – | Level 1 |
| 6.5% secured bonds 2026 | (187.9) | (225.6) | – | – | Level 1 |
| 3.46% unsecured private placement notes 2028 | (29.8) | (30.8) | (29.8) | (30.8) | Level 2 |
| 4.41% unsecured private placement notes 2029 | (24.8) | (28.8) | (24.8) | (28.8) | Level 2 |
| 3.57% unsecured private placement notes 2031 | (74.5) | (75.6) | (74.5) | (75.6) | Level 2 |
| 4.68% unsecured private placement notes 2034 | (74.3) | (88.5) | (74.3) | (88.5) | Level 2 |
| 3.99% secured loan 2024 | (82.1) | (88.2) | (82.1) | (88.2) | Level 2 |
| Bank borrowings due after one year | (282.3) | (287.5) | (254.3) | (259.5) | Level 2 |
| Intercompany loan | – | – | (142.9) | (152.4) | Level 2 |
| Derivative financial instruments | (17.3) | (17.3) | (15.5) | (15.5) | Level 2 |
| (915.9) | (994.7) | (698.2) | (739.3) | ||
| Amounts not fair valued: | |||||
| Cash and cash equivalents | 17.7 | 6.9 | |||
| Other assets – current | 23.0 | 1,513.0 | |||
| Leasehold liabilities | (23.9) | – | |||
| Other liabilities – current | (64.6) | (657.9) | |||
| Net financial assets and liabilities | (963.7) | 163.8 | |||
| At 31 December 2015 | |||||
| 1.125% unsecured convertible bonds 2019 | (140.2) | (171.7) | – | – | Level 1 |
| 6.5% secured bonds 2026 | (188.9) | (217.2) | – | – | Level 1 |
| 4.41% unsecured private placement notes 2029 | (24.8) | (27.2) | (24.8) | (27.2) | Level 2 |
| 4.68% unsecured private placement notes 2034 | (74.3) | (81.9) | (74.3) | (81.9) | Level 2 |
| 3.99% secured loan 2024 | (82.0) | (83.3) | (82.0) | (83.3) | Level 2 |
| Bank borrowings due after one year | (384.8) | (390.5) | (356.8) | (362.5) | Level 2 |
| Intercompany loan | – | – | (140.2) | (171.7) | Level 2 |
| Derivative financial instruments | (17.6) | (17.6) | (15.6) | (15.6) | Level 2 |
| (912.6) | (989.4) | (693.7) | (742.2) | ||
| Amounts not fair valued: | |||||
| Cash and cash equivalents | 6.5 | 5.6 | |||
| Other assets – current | 21.3 | 1,388.5 | |||
| Leasehold liabilities | (23.2) | – | |||
| Other liabilities – current | (89.2) | (456.1) | |||
| Net financial assets and liabilities | (997.2) | 244.3 |
There have been no transfers between Level 1 and Level 2 or Level 2 and Level 3 in either 2016 or 2015.
| Revaluation | |||
|---|---|---|---|
| surplus | Other | Total | |
| £m | £m | £m | |
| Group | |||
| At 1 January 2016 | 8.7 | (3.2) | 5.5 |
| (Credited)/charged to the income statement | (1.8) | 0.9 | (0.9) |
| Change in tax rates in the income statement | (0.3) | 0.1 | (0.2) |
| Credited to other comprehensive income | (1.2) | – | (1.2) |
| Change in tax rates in other comprehensive income | (0.1) | – | (0.1) |
| At 31 December 2016 | 5.3 | (2.2) | 3.1 |
| At 1 January 2015 | 7.2 | (2.2) | 5.0 |
| Charged/(credited) to the income statement | 1.4 | (1.0) | 0.4 |
| Charged to other comprehensive income | 0.1 | – | 0.1 |
| At 31 December 2015 | 8.7 | (3.2) | 5.5 |
| Company | |||
| At 1 January 2016 | – | (3.2) | (3.2) |
| Charged to the income statement | – | 0.9 | 0.9 |
| Change in tax rates in the income statement | – | 0.1 | 0.1 |
| At 31 December 2016 | – | (2.2) | (2.2) |
| At 1 January 2015 | – | (2.2) | (2.2) |
| Credited to the income statement | – | (1.0) | (1.0) |
| At 31 December 2015 | – | (3.2) | (3.2) |
Deferred tax on the revaluation surplus is calculated on the basis of the chargeable gains that would crystallise on the sale of the property portfolio at each balance sheet date. The calculation takes account of any available indexation on the historic cost of the properties. Due to the Group's REIT status, deferred tax is only provided at each balance sheet date on properties outside the REIT regime.
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences where the Directors believe it is probable that these assets will be recovered.
The movement in the number of 5p ordinary shares in issue is shown in the table below:
| Number | |
|---|---|
| At 1 January 2015 | 102,784,968 |
| Issued as a result of scrip dividends | 316,314 |
| Issued as a result of awards vesting under the Group's Performance Share Plan | 121,773 |
| Issued as a result of the exercise of share options1 | 73,270 |
| Issued as a result of the conversion of the convertible bonds | 7,875,776 |
| At 31 December 2015 | 111,172,101 |
| Issued as a result of scrip dividends | 33,884 |
| Issued as a result of awards vesting under the Group's Performance Share Plan | 134,177 |
| Issued as a result of the exercise of share options1 | 49,675 |
| At 31 December 2016 | 111,389,837 |
1 Proceeds from these issues were £1.0m (2015: £1.2m).
The number of outstanding share options and other share awards granted are disclosed in the report of the Remuneration Committee on pages 85 to 103 and note 13.
The following describes the nature and purpose of each reserve within shareholders' equity:
| Reserve Share premium Other reserves: |
Description and purpose Amount subscribed for share capital in excess of nominal value less directly attributable issue costs. |
|---|---|
| Merger | Premium on the issue of shares as equity consideration for the acquisition of London Merchant Securities plc (LMS). |
| Revaluation | Revaluation of the owner-occupied property and the associated deferred tax. |
| Other | Equity portion of the convertible bonds for the Group and intercompany loans for the Company. Fair value of equity instruments granted but not yet exercised under share-based payments. |
| Retained earnings | Cumulative net gains and losses recognised in the Group income statement together with other items such as dividends and share-based payments. |
| Group | Company | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Merger reserve | 910.5 | 910.5 | 910.5 | 910.5 |
| Revaluation reserve | 19.6 | 23.8 | – | – |
| Equity portion of the convertible bonds | 12.3 | 12.3 | – | – |
| Equity portion of long-term intercompany loan | – | – | 12.3 | 12.3 |
| Fair value of equity instruments under share-based payments | 8.0 | 6.3 | 8.0 | 6.3 |
| 950.4 | 952.9 | 930.8 | 929.1 |
Profit for the year in the Group income statement includes a loss of £35.1m (2015: £20.0m) generated by the Company. The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own income statement in these financial statements.
| Dividend per share | ||||||
|---|---|---|---|---|---|---|
| Payment | PID | Non-PID | Total | 2016 | 2015 | |
| date | p | p | p | £m | £m | |
| Current year | ||||||
| 2016 final dividend | 9 June 2017 | 38.50 | – | 38.50 | – | – |
| 2016 interim dividend | 21 October 2016 | 13.86 | – | 13.86 | 15.5 | – |
| Distribution of current year profit | 52.36 | – | 52.36 | 15.5 | – | |
| Prior year | ||||||
| 2015 final dividend | 10 June 2016 | 30.80 | – | 30.80 | 34.2 | – |
| 2015 interim dividend | 22 October 2015 | 12.60 | – | 12.60 | – | 14.0 |
| Distribution of prior year profit | 43.40 | – | 43.40 | 34.2 | 14.0 | |
| 2014 final dividend | 12 June 2015 | 22.35 | 5.65 | 28.00 | – | 31.0 |
| Dividends as reported in the Group statement of changes in equity |
49.7 | 45.0 | ||||
| 2016 interim dividend withholding tax | 14 January 2017 | (1.7) | – | |||
| 2015 final scrip dividend | 10 June 2016 | (1.1) | – | |||
| 2015 interim dividend withholding tax | 14 January 2016 | 1.7 | (1.7) | |||
| 2015 interim scrip dividend | 22 October 2015 | – | (3.3) | |||
| 2014 final scrip dividend | 12 June 2015 | – | (7.7) | |||
| 2014 interim dividend withholding tax | 14 January 2015 | – | 1.0 | |||
| Dividends paid as reported in the | ||||||
| Group cash flow statement 30 Cash and cash equivalents |
48.6 | 33.3 | ||||
| Group | Company | |||||
| 2016 £m |
2015 £m |
2016 £m |
2015 £m |
Cash at bank 17.7 6.5 6.9 5.6
Contracts for capital expenditure entered into by the Group at 31 December 2016 and not provided for in the accounts relating to the construction, development or enhancement of the Group's investment properties amounted to £319.4m (2015: £220.1m), whilst that relating to the Group's trading properties amounted to £15.4m (2015: £nil). At 31 December 2016 and 31 December 2015, there were no obligations for the purchase, repair or maintenance of investment or trading properties.
The Company and its subsidiaries are party to cross guarantees securing certain bank loans. At 31 December 2016 and 31 December 2015, there was no liability that could arise for the Company from the cross guarantees.
Where the Company enters into financial guarantee contracts and guarantees the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time that it becomes probable that the Company will be required to make a payment under the guarantee.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Operating lease receipts | ||
| Minimum lease receipts under non-cancellable operating leases to be received: | ||
| not later than one year | 164.6 | 149.1 |
| later than one year and not later than five years | 557.1 | 496.3 |
| later than five years | 774.0 | 699.5 |
| 1,495.7 | 1,344.9 | |
| 2016 | 2015 | |
| £m | £m | |
| Finance lease obligations | ||
| Minimum lease payments under finance leases that fall due: | ||
| not later than one year | 1.2 | 1.1 |
| later than one year and not later than five years | 4.8 | 4.8 |
| later than five years | 237.0 | 144.8 |
| 243.0 | 150.7 | |
| Future contingent rent payable on finance leases | (19.8) | (16.7) |
| Future finance charges on finance leases | (199.3) | (110.8) |
| Present value of finance lease liabilities | 23.9 | 23.2 |
| Present value of minimum finance lease obligations: | ||
| later than one year and not later than five years | 0.1 | 0.1 |
| later than five years | 23.8 | 23.1 |
| 23.9 | 23.2 |
In accordance with IAS 17 Leases, the minimum lease payments are allocated as follows:
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Finance charge | 1.0 | 1.1 |
| Contingent rent | 0.7 | 0.4 |
| Total | 1.7 | 1.5 |
The Group has approximately 700 leases granted to its tenants. These vary dependent on the individual tenant and the respective property and demise but typically are let for a term of five to 20 years, at a market rent with provisions to review to market rent every five years. Standard lease provisions include service charge payments and recovery of other direct costs. The weighted average lease length of the leases granted during 2016 was 12.2 years (2015: 11.1 years). Of these leases, on a weighted average basis, 98% (2015: 97%) included a rent free or half rent period.
In February 2017, the Group agreed a conditional put and call option to sell 8 Fitzroy Street W1 for £197m before costs to the Arup group ('Arup'), who occupy the whole building, with completion expected in June 2017. Simultaneously, Arup agreed to take a 20-year lease on 133,600 sq ft at 80 Charlotte Street W1.
In February 2017, the Group also sold its freehold interest in 132-142 Hampstead Road NW1 for £130m before costs.
The properties disposed of by the Group have not been included in non-current assets held for sale as management was not committed to selling them at 31 December 2016.
On 28 February 2017, the Group announced a special dividend of 52p per share.
A full list of subsidiaries and joint ventures as at 31 December 2016 is set out below:
| Ownership2 | Principal activity | |
|---|---|---|
| Subsidiaries | ||
| Asta Commercial Limited | 100% | Property investment |
| Bargate Quarter Limited | 65% | Investment Company |
| BBR (Commercial) Limited | 100% | Property investment |
| BBR Property Limited1 | 100% | Property trading |
| Caledonian Properties Limited | 100% | Property investment |
| Caledonian Property Estates Limited | 100% | Property investment |
| Caledonian Property Investments Limited | 100% | Property investment |
| Carlton Construction & Development Company Limited | 100% | Dormant |
| Central London Commercial Estates Limited | 100% | Property investment |
| Charlotte Apartments Limited | 100% | Property investment |
| Corinium Estates Limited | 100% | Property trading |
| City Shops Limited | 100% | Property trading |
| Derwent Asset Management Limited1 | 100% | Property management |
| Derwent Central Cross Limited1 | 100% | Property investment |
| Derwent Henry Wood Limited1 | 100% | Property investment |
| Derwent London Angel Square Limited1 | 100% | Property investment |
| Derwent London Asta Limited | 100% | Property trading |
| Derwent London Charlotte Street (Commercial) Limited | 100% | Property investment |
| Derwent London Charlotte Street Limited1 | 100% | Property trading |
| Derwent London Copyright House Limited1 | 100% | Property investment |
| Derwent London Development Services Limited1 | 100% | Management services |
| Derwent London Farringdon Limited1 | 100% | Property investment |
| Derwent London Grafton Limited1 | 100% | Property investment |
| Derwent London Howland Limited1 | 100% | Property investment |
| Derwent London KSW Limited1 | 100% | Property investment |
| Derwent London Page Street (Nominees) Limited | 100% | Dormant |
| Derwent London Page Street Limited1 | 100% | Property investment |
| Derwent Valley Central Limited1 | 100% | Property investment |
| Derwent Valley City Limited | 100% | Property investment |
| Derwent Valley Employee Trust Limited1 | 100% | Dormant |
| Derwent Valley Finance Limited | 100% | Finance company |
| Derwent Valley Limited | 100% | Holding company |
| Derwent Valley London Limited1 | 100% | Property investment |
| Derwent Valley Properties Limited | 100% | Property investment |
| Derwent Valley Property Developments Limited1 | 100% | Property investment |
| Derwent Valley Property Investments Limited1 | 100% | Property investment |
| Derwent Valley Property Trading Limited | 100% | Property trading |
| Derwent Valley Railway Company1 | 100% | Dormant |
| Derwent Valley West End Limited1 | 100% | Property investment |
| Kensington Commercial Property Investments Limited | 100% | Property investment |
| 22 Kingsway Limited1 | 100% | Dormant |
| LMS Properties Limited | 100% | Property investment |
| LMS Services Limited | 100% | Management services |
| LMS Shops Limited | 100% | Property investment |
| LMS (City Road) Limited | 100% | Property investment |
| LMS (Goodge Street) Limited | 100% | Property investment |
| LMS Finance Limited | 100% | Investment Holding |
| LMS Industrial Finance Limited | 100% | Finance company |
| LMS Leisure Investments Limited | 100% | Property investment |
| LMS Offices Limited | 100% | Property investment |
| LMS Outlets Limited | 100% | Property investment |
| LMS Residential Limited | 100% | Property trading |
| London Merchant Securities Limited1 | 100% | Holding company |
| LS Kingsway Limited | 100% | Dormant |
| Merchant Nominees Limited | 100% | Dormant |
| Merchant Overseas Holdings Limited | 100% | Dormant |
| Palaville Limited | 100% | Property investment |
| Rainram Investments Limited | 100% | Property investment |
| Shaftesbury Square Properties Limited | 100% | Property investment |
| Ownership2 | Principal activity | |
|---|---|---|
| The New River Company Limited | 100% | Property investment |
| West London & Suburban Property Investments Limited | 100% | Property investment |
| Urbanfirst Limited | 100% | Investment Holding |
| Derwent London Capital No. 2 (Jersey) Limited1 | 100% | Finance company |
| Portman Investments (Baker Street) Limited | 55% | Property investment |
| Joint ventures | ||
| Dorrington Derwent Holdings Limited | 50% | Holding company |
| Dorrington Derwent Investment Limited | 50% | Investment company |
| Prescot Street GP Limited | 50% | Management Company |
| Prescot Street Leaseco Limited | 50% | Property investment |
| Prescot Street Limited Partnership | 50% | Property investment |
| Prescot Street Nominees Limited | 50% | Dormant |
| Primister Limited | 50% | Property investment |
1 Indicates subsidiary undertakings held directly.
2 All holdings are of ordinary shares.
The Company controls 50% of the voting rights of its joint ventures, which are accounted for and disclosed in accordance with IFRS 11 Joint Arrangements.
The Company's interest in Portman Investments (Baker Street) Limited is accounted for and disclosed in accordance with IAS 27 Consolidated and Separate Financial Statements. This gives rise to a non-controlling interest within equity in the Group balance sheet and the separate disclosure of the non-controlling interest's share of the Group's profit for the year in the Group income statement and Group statement of comprehensive income.
All of the entities above are incorporated and domiciled in England and Wales, with the exception of 22 Kingsway Limited and Derwent London Capital No. 2 (Jersey) Limited, which are incorporated and domiciled in Jersey. In addition, all the entities are registered at 25 Savile Row, London W1S 2ER, with the exception of:
• 22 Kingsway Limited and Derwent London Capital No. 2 (Jersey) Limited, which are registered at 47 Esplanade, St Helier, JE1 0BD, Channel Islands;
• Dorrington Derwent Holdings Limited and Dorrington Derwent Investment Limited, which are registered at 16 Hans Road, London SW3 1RT;
• Primister Limited, which is registered at Quadrant House, Floor 6, 4 Thomas More Square, London E1W 1YW.
Details of Directors' remuneration are given in the report of the Remuneration Committee on pages 85 to 103 and note 11. A full list of subsidiaries and joint ventures is given in note 35. Other related party transactions are as follows:
The Hon. R.A. Rayne is a Director of LMS Capital plc, an investment company, which occupies offices owned by the Group for which they paid a commercial rent of £0.4m (2015: £0.3m). The Group also contributed £0.1m (2015: £0.1m) to LMS Capital plc's running costs.
During 2015, the Group paid fees, at a commercial rate, of £15,000 in respect of interior design services to Mrs R. Silver, the wife of Mr S.P. Silver.
There are no outstanding balances owed to the Group with respect to all of the above transactions.
At 31 December 2016, included within other receivables in note 20 is an amount owed by the Portman Estate, the minority owner of one of the Group's subsidiaries, of £2.0m (2015: £2.0m).
The Company received interest from and paid interest to some of its subsidiaries during the year. These transactions are summarised below:
| Interest income/(expense) | Balance receivable/(payable) | |||
|---|---|---|---|---|
| 2016 £m |
2015 £m |
2016 £m |
2015 £m |
|
| Related party | ||||
| 22 Kingsway Limited | – | – | (33.5) | (33.5) |
| BBR (Commercial) Limited | – | – | (2.3) | 0.9 |
| BBR Property Limited | (0.2) | 0.2 | (5.3) | (3.0) |
| Derwent Asset Management Limited | – | – | (0.5) | (0.3) |
| Derwent Central Cross Limited | 8.3 | 8.9 | 203.5 | 202.5 |
| Derwent Henry Wood Limited | 1.9 | 2.2 | 47.3 | 48.1 |
| Derwent London Asta Limited | 0.4 | – | 15.3 | – |
| Derwent London Angel Square Limited | 3.4 | 3.5 | 84.3 | 80.5 |
| Derwent London Capital No. 2 (Jersey) Limited1 | (3.8) | (3.7) | (142.8) | (140.1) |
| Derwent London Charlotte Street (Commercial) Limited | – | – | 1.1 | 1.1 |
| Derwent London Charlotte Street Limited | – | 0.6 | (1.6) | 7.6 |
| Derwent London Copyright House Limited | 3.0 | 1.0 | 85.9 | 53.6 |
| Derwent London Development Services Limited | 0.4 | – | 18.7 | – |
| Derwent London Farringdon Limited | 4.1 | 4.2 | 105.2 | 95.5 |
| Derwent London Grafton Limited | 0.7 | 1.6 | (26.8) | 34.6 |
| Derwent London Howland Limited | 5.0 | 5.6 | 123.9 | 126.1 |
| Derwent London KSW Limited | 3.6 | 2.9 | 88.9 | 89.1 |
| Derwent London Page Street Limited | 0.7 | 0.9 | 15.2 | 19.1 |
| Derwent Valley Central Limited | (7.5) | (7.4) | (108.8) | (6.3) |
| Derwent Valley London Limited | 4.6 | 5.3 | 152.0 | 115.0 |
| Derwent Valley Property Developments Limited | 1.7 | 3.2 | 32.3 | 58.7 |
| Derwent Valley Property Investments Limited | (4.0) | (4.0) | (83.3) | (61.3) |
| Derwent Valley Railway Company2 | – | – | (0.2) | (0.2) |
| Derwent Valley West End Limited | 0.1 | 0.1 | 2.3 | 2.4 |
| London Merchant Securities Limited3 | 5.6 | 5.5 | 151.3 | 112.3 |
| 28.0 | 30.6 | 722.1 | 802.4 |
1 The payable balance at 31 December 2016 includes the intercompany loan of £142.9m (2015: £140.2m) included in note 23.
2 Dormant company.
3 Balance owed includes subsidiaries which form part of the LMS sub-group.
The Group has not made any provision for bad or doubtful debts in respect of related party debtors. Intercompany balances are repayable on demand except the loan from Derwent London Capital No. 2 (Jersey) Limited, the payment and repayment terms of which mirror those of the convertible bonds.
Interest is charged on the on-demand intercompany balances at an arm's length basis.
| 2016 | 2015 | |||
|---|---|---|---|---|
| Pence per share |
Pence per share |
|||
| p | p | |||
| EPRA earnings | £85.7m | 76.99 | £78.7m | 71.34 |
| EPRA net asset value | £3,966.3m | 3,551 | £4,101.7m | 3,535 |
| EPRA triple net asset value | £3,853.5m | 3,450 | £4,018.8m | 3,463 |
| EPRA vacancy rate | 2.6% | 1.3% | ||
| EPRA cost ratio (including direct vacancy costs) | 24.0% | 24.3% | ||
| EPRA net initial yield | 3.4% | 3.1% | ||
| EPRA 'topped-up' net initial yield | 4.1% | 3.8% |
The definition of these measures can be found on page 173.
Number of shares
| Earnings per share | Net asset value per share | |||
|---|---|---|---|---|
| Weighted average | At 31 December | |||
| 2016 '000 |
2015 '000 |
2016 '000 |
2015 '000 |
|
| For use in basic measures | 111,315 | 110,320 | 111,390 | 111,172 |
| Dilutive effect of convertible bonds | – | 4,498 | – | 4,498 |
| Dilutive effect of share-based payments | 296 | 355 | 291 | 363 |
| For use in measures for which bond conversion is dilutive | 111,611 | 115,173 | 111,681 | 116,033 |
| Less dilutive effect of convertible bonds | – | (4,498) | – | (4,498) |
| For use in other diluted measures | 111,611 | 110,675 | 111,681 | 111,535 |
The £150m unsecured convertible bonds 2019 ('2019 bonds') have an initial conversion price set at £33.35. In accordance with IAS 33 Earnings per Share, the effect of the conversion of the bonds is required to be recognised if they are dilutive, and not recognised if they are anti-dilutive.
For 2016, the shares attributable to the conversion of the 2019 bonds were anti-dilutive for net asset value (NAV) per share, EPRA NAV per share, EPRA triple NAV per share, unadjusted earnings per share and EPRA earnings per share.
For 2015, the shares attributable to the conversion of the 2019 bonds were dilutive for net asset value (NAV), EPRA NAV per share and unadjusted earnings per share but anti-dilutive for EPRA earnings per share. For consistency purposes the Group adopted the same approach for dilution due to convertible bonds for the calculation of EPRA triple NAV per share as EPRA NAV per share.
The following tables set out reconciliations between the IFRS and EPRA earnings for the year and earnings per share. The adjustments made between the figures are as follows:
| Adjustments | ||||||
|---|---|---|---|---|---|---|
| IFRS | A | B | C | D | EPRA basis | |
| Year ended 31 December 2016 | £m | £m | £m | £m | £m | £m |
| Net property and other income | 149.2 | (1.9) | 1.6 | – | – | 148.9 |
| Total administrative expenses | (30.9) | – | – | – | – | (30.9) |
| Revaluation deficit | (37.1) | – | 37.1 | – | – | – |
| Profit on disposal of investment property | 7.5 | (7.5) | – | – | – | – |
| Net finance costs | (27.8) | – | – | – | – | (27.8) |
| Movement in fair value of derivative financial | ||||||
| instruments | 0.3 | – | – | (0.3) | – | – |
| Financial derivative termination costs | (9.0) | – | – | 9.0 | – | – |
| Share of results of joint ventures | 2.3 | – | (1.8) | – | – | 0.5 |
| Profit before tax | 54.5 | (9.4) | 36.9 | 8.7 | – | 90.7 |
| Tax charge | (0.9) | 0.5 | (2.2) | – | – | (2.6) |
| Profit for the year | 53.6 | (8.9) | 34.7 | 8.7 | – | 88.1 |
| Non-controlling interest | 5.1 | – | (7.6) | 0.1 | – | (2.4) |
| Earnings attributable to equity shareholders | 58.7 | (8.9) | 27.1 | 8.8 | – | 85.7 |
| Earnings per share | 52.73p | 76.99p | ||||
| Diluted earnings per share | 52.59p | 76.78p | ||||
| Year ended 31 December 2015 | ||||||
| Net property and other income | 148.6 | (3.2) | – | – | – | 145.4 |
| Total administrative expenses | (30.0) | – | – | – | – | (30.0) |
| Revaluation surplus | 650.0 | – | (650.0) | – | – | – |
| Profit on disposal of investment property | 40.2 | (40.2) | – | – | – | – |
| Net finance costs | (35.1) | – | – | – | 0.3 | (34.8) |
| Movement in fair value of derivative financial | ||||||
| instruments | 7.6 | – | – | (7.6) | – | – |
| Financial derivative termination costs | (6.4) | – | – | 6.4 | – | – |
| Share of results of joint ventures | 4.6 | – | (3.6) | – | – | 1.0 |
| Profit before tax | 779.5 | (43.4) | (653.6) | (1.2) | 0.3 | 81.6 |
| Tax charge | (2.3) | – | 1.4 | – | – | (0.9) |
| Profit for the year | 777.2 | (43.4) | (652.2) | (1.2) | 0.3 | 80.7 |
| Non-controlling interest | (11.0) | 0.4 | 8.4 | 0.2 | – | (2.0) |
| Earnings attributable to equity shareholders | 766.2 | (43.0) | (643.8) | (1.0) | 0.3 | 78.7 |
| Interest effect of dilutive convertible bonds | 4.0 | – | – | – | (4.0) | – |
| Diluted earnings | 770.2 | (43.0) | (643.8) | (1.0) | (3.7) | 78.7 |
| Earnings per share | 694.53p | 71.34p | ||||
| Diluted earnings per share | 668.73p | 71.11p |
| Undiluted | Diluted | ||
|---|---|---|---|
| £m | p | p | |
| At 31 December 2016 | |||
| Net assets attributable to equity shareholders | 3,932.3 | 3,530 | 3,521 |
| Adjustment for: | |||
| Deferred tax on revaluation surplus | 5.3 | ||
| Fair value of derivative financial instruments | 17.3 | ||
| Fair value adjustment to secured bonds | 14.0 | ||
| Non-controlling interest in respect of the above | (2.6) | ||
| EPRA net asset value | 3,966.3 | 3,561 | 3,551 |
| Adjustment for: | |||
| Mark-to-market of secured bonds 2026 | (50.6) | ||
| Mark-to-market of secured loan 2024 | (5.2) | ||
| Mark-to-market of unsecured private placement notes 2029 and 2034 | (17.3) | ||
| Mark-to-market of unsecured private placement notes 2028 and 2031 | (1.4) | ||
| Mark-to-market of 1.125% unsecured convertible bonds 2019 | (8.0) | ||
| Deferred tax on revaluation surplus | (5.3) | ||
| Fair value of derivative financial instruments | (17.3) | ||
| Unamortised issue and arrangement costs | (10.3) | ||
| Non-controlling interest in respect of the above | 2.6 | ||
| EPRA triple net asset value | 3,853.5 | 3,459 | 3,450 |
| At 31 December 2015 | |||
| Net assets attributable to equity shareholders – diluted | 4,062.7 | 3,501 | |
| Remove conversion of 1.125% unsecured convertible bonds 2019 | (140.2) | ||
| Net assets attributable to equity shareholders – undiluted | 3,922.5 | 3,528 | |
| Adjustment for: | |||
| Revaluation of trading properties net of tax | 1.4 | ||
| Deferred tax on revaluation surplus | 8.7 | ||
| Fair value of derivative financial instruments | 17.6 | ||
| Fair value adjustment to secured bonds | 15.0 | ||
| Non-controlling interest in respect of the above | (3.7) | ||
| EPRA net asset value – undiluted | 3,961.5 | 3,563 | |
| Adjustment for: | |||
| Potential conversion of 1.125% unsecured convertible bonds 2019 | 140.2 | ||
| EPRA net asset value – diluted | 4,101.7 | 3,535 | |
| Adjustment for: | |||
| Mark-to-market of secured bonds 2026 | (42.2) | ||
| Mark-to-market of secured loan 2024 | (0.3) | ||
| Mark-to-market of unsecured fixed rate private placement notes 2029 and 2034 | (9.1) | ||
| Deferred tax on revaluation surplus | (8.7) | ||
| Fair value of derivative financial instruments | (17.6) | ||
| Unamortised issue and arrangement costs | (8.7) | ||
| Non-controlling interest in respect of the above | 3.7 | ||
| EPRA triple net asset value – diluted | 4,018.8 | 3,463 | |
| Adjustment for 1.125% unsecured convertible bonds 2019: | |||
| Remove conversion of bonds | (140.2) | ||
| Unamortised issue and arrangement costs | (2.1) | ||
| Mark-to-market of bonds | (29.4) | ||
| EPRA triple net asset value – undiluted | 3,847.1 | 3,460 |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Administrative expenses | 30.9 | 30.0 |
| Other property costs | 7.5 | 7.3 |
| Dilapidation receipts | (0.1) | (0.7) |
| Other costs | – | 0.3 |
| Net service charge costs | 1.3 | 1.9 |
| Service charge costs recovered through rents but not separately invoiced | (0.3) | (0.2) |
| Management fees received less estimated profit element | (2.4) | (2.6) |
| Share of joint ventures' expenses | 0.5 | 0.3 |
| EPRA costs (including direct vacancy costs) (A) | 37.4 | 36.3 |
| Direct vacancy costs | (2.5) | (3.1) |
| EPRA costs (excluding direct vacancy costs) (B) | 34.9 | 33.2 |
| Gross rental income | 155.4 | 148.3 |
| Ground rent | (0.7) | (0.4) |
| Service charge components of rental income | (0.3) | (0.2) |
| Share of joint ventures' rental income less ground rent | 1.3 | 1.4 |
| Adjusted gross rental income (C) | 155.7 | 149.1 |
| EPRA cost ratio (including direct vacancy costs) (A/C) | 24.0% | 24.3% |
| EPRA cost ratio (excluding direct vacancy costs) (B/C) | 22.4% | 22.3% |
In addition to the two EPRA cost ratios, the Group has calculated an additional cost ratio based on its property portfolio fair value to recognise the 'total return' nature of the Group's activities.
| Property portfolio at fair value (D) | 4,942.7 | 4,954.5 |
|---|---|---|
| Portfolio cost ratio (A/D) | 0.8% | 0.7% |
The Group has not capitalised any overhead or operating expenses in either 2016 or 2015.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Property portfolio – wholly owned | 4,942.7 | 4,954.5 |
| Share of joint ventures | 37.7 | 33.9 |
| Less non-EPRA properties1 | (950.7) | (855.4) |
| Completed property portfolio | 4,029.7 | 4,133.0 |
| Allowance for: | ||
| Estimated purchasers' costs | 274.0 | 239.7 |
| Estimated costs to complete | 5.4 | 0.1 |
| EPRA property portfolio valuation (A) | 4,309.1 | 4,372.8 |
| Annualised contracted rental income, net of ground rents | 149.3 | 136.1 |
| Share of joint ventures | 1.0 | 1.0 |
| Less non-EPRA properties1 | (2.1) | (2.2) |
| Add outstanding rent reviews | 2.9 | 1.7 |
| Less estimate of non-recoverable expenses | (3.9) | (3.1) |
| (3.1) | (3.6) | |
| Current income net of non-recoverable expenses (B) | 147.2 | 133.5 |
| Contractual rental increases across the portfolio | 47.8 | 35.5 |
| Less non-EPRA properties1 | (18.3) | (4.9) |
| Contractual rental increases across the EPRA portfolio | 29.5 | 30.6 |
| 'Topped-up' net annualised rent (C) | 176.7 | 164.1 |
| EPRA net initial yield (B/A) | 3.4% | 3.1% |
| EPRA 'topped-up' net initial yield (C/A) | 4.1% | 3.8% |
1 In accordance with EPRA best practice guidelines, deductions are made for development properties, land and long-dated reversions.
| Vacancy rate | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| Annualised estimated rental value of vacant premises | 5.4 | 2.5 |
| Portfolio estimated rental value | 284.5 | 278.1 |
| Less non-EPRA properties1 | (77.5) | (83.6) |
| 207.0 | 194.5 | |
| EPRA vacancy rate | 2.6% | 1.3% |
1 In accordance with EPRA best practice guidelines, deductions are made for development properties, land and long-dated reversions.
| 2016 | 2015 | |
|---|---|---|
| p | p | |
| EPRA net asset value on a diluted basis | ||
| At end of year | 3,551 | 3,535 |
| At start of year | (3,535) | (2,908) |
| Increase | 16 | 627 |
| Dividend per share | 45 | 41 |
| Increase including dividend | 61 | 668 |
| Total return | 1.7% | 23.0% |
| 2016 | 2015 |
|---|---|
| £m | £m |
| Net debt 904.8 |
911.7 |
| Net assets 3,999.4 |
3,995.4 |
| NAV gearing 22.6% |
22.8% |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Net debt | 904.8 | 911.7 |
| Fair value adjustment of secured bonds | (14.0) | (15.0) |
| Unamortised issue and arrangement costs | 10.3 | 10.8 |
| Leasehold liabilities | (23.9) | (23.2) |
| Drawn debt | 877.2 | 884.3 |
| Fair value of property portfolio | 4,942.7 | 4,954.5 |
| Loan-to-value ratio | 17.7% | 17.8% |
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Net property and other income | 149.2 | 148.6 |
| Adjustments for: | ||
| Other income | (2.4) | (2.6) |
| Other property income | (0.5) | (3.7) |
| Net surrender premiums received | (0.1) | – |
| Write-down of trading property | 1.6 | – |
| Profit on disposal of trading properties | (1.9) | (3.2) |
| Reverse surrender premiums | 0.1 | – |
| Adjusted net property income | 146.0 | 139.1 |
| Finance income | – | (0.1) |
| Finance costs | 27.8 | 34.9 |
| 27.8 | 34.8 | |
| Adjustments for: | ||
| Finance income | – | 0.1 |
| Other finance costs | (0.1) | (0.2) |
| Amortisation of fair value adjustment to secured bonds | 1.0 | 1.0 |
| Amortisation of issue and arrangement costs | (2.2) | (2.3) |
| Finance costs capitalised | 13.0 | 5.0 |
| Net interest payable | 39.5 | 38.4 |
| Net interest cover ratio | 370% | 362% |
The Group financial statements incorporate the financial statements of Derwent London plc and all of its subsidiaries, together with the Group's share of the results of its joint ventures.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint ventures are accounted for using the equity method of accounting as permitted by IFRS 11 Joint Arrangements, and following the procedures for this method set out in IAS 28 Investments in Associates and Joint Ventures. The equity method requires the Group's share of the joint venture's post-tax profit or loss for the year to be presented separately in the income statement and the Group's share of the joint venture's net assets to be presented separately in the balance sheet.
Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group's interest in the joint venture concerned. Unrealised losses are eliminated in the same way, but only to the extent that there is no evidence of impairment.
Gross property income arises from two main sources:
(i) Rental income – This arises from operating leases granted to tenants. An operating lease is a lease other than a finance lease. A finance lease is one whereby substantially all the risks and rewards of ownership are passed to the lessee.
Rental income is recognised in the Group income statement on a straight-line basis over the term of the lease in accordance with SIC 15 Operating Leases – Incentives and IAS 17 Leases. This includes the effect of lease incentives given to tenants, which are normally in the form of rent free or half rent periods or capital contributions in lieu of rent free periods, and the effect of contracted rent uplifts and payments received from tenants on the grant of leases.
For income from property leased out under a finance lease, a lease receivable asset is recognised in the balance sheet at an amount equal to the net investment in the lease, as defined in IAS 17 Leases. Minimum lease payments receivable, again defined in IAS 17, are apportioned between finance income and the reduction of the outstanding lease receivable so as to produce a constant periodic rate of return on the remaining net investment in the lease. Contingent rents, being the difference between the rent currently receivable and the minimum lease payments when the net investment in the lease was originally calculated, are recognised in property income in the years in which they are receivable.
(ii) Surrender premiums – Payments received from tenants to surrender their lease obligations are recognised immediately in the Group income statement.
Other income consists of commissions and fees arising from the management of the Group's properties and is recognised in the Group income statement in accordance with the delivery of service.
(i) Share-based remuneration
Equity settled – The Company operates a long-term incentive plan and share option scheme. The fair value of the conditional awards of shares granted under the long-term incentive plan and the options granted under the share option scheme are determined at the date of grant. This fair value is then expensed on a straight-line basis over the vesting period, based on an estimate of the number of shares that will eventually vest. At each reporting date, the non-market based performance criteria of the long-term incentive plan are reconsidered and the expense is revised as necessary. In respect of the share option scheme, the fair value of the options granted is calculated using a binomial lattice pricing model.
Under the transitional provisions of IFRS 1, no expense is recognised for options or conditional shares granted on or before 7 November 2002.
Business combinations are accounted for under the acquisition method. Any excess of the purchase price of business combinations over the fair value of the assets, liabilities and contingent liabilities acquired and resulting deferred tax thereon is recognised as goodwill. Any discount is credited to the Group income statement in the period of acquisition. Goodwill is recognised as an asset and reviewed for impairment. Any impairment is recognised immediately in the Group income statement and is not subsequently reversed. Any residual goodwill is reviewed annually for impairment.
(i) Valuation – Investment properties are those that are held either to earn rental income or for capital appreciation or both, including those that are undergoing redevelopment. Investment properties are measured initially at cost, including related transaction costs. After initial recognition, they are carried in the Group balance sheet at fair value adjusted for the carrying value of leasehold interests and lease incentive and letting cost receivables. Fair value is the price that would be received to sell an investment property in an orderly transaction between market participants at the measurement date. The valuation is undertaken by independent valuers who hold recognised and relevant professional qualifications and have recent experience in the locations and categories of properties being valued.
Surpluses or deficits resulting from changes in the fair value of investment property are reported in the Group income statement in the year in which they arise.
Investments in joint ventures, being those entities over whose activities the Group has joint control, as established by contractual agreement, are included in the Group's balance sheet at cost together with the Group's share of post-acquisition reserves, on a net equity basis. Investments in subsidiaries and joint ventures are included in the Company's balance sheet at the lower of cost and recoverable amount. Any impairment is recognised immediately in the income statement.
Non-current assets are classified as held for sale if their carrying value will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met if the sale is highly probable, the asset is available for immediate sale in its present condition, being actively marketed and management is committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Non-current assets, including related liabilities, classified as held for sale are measured at the lower of carrying value and fair value less costs of disposal.
At each reporting date, these interest rate derivatives are measured at fair value, being the estimated amount that the Group would receive or pay to terminate the agreement at the balance sheet date, taking into account current interest rates and the current credit rating of the counterparties. The gain or loss at each fair value remeasurement is recognised in the Group income statement because the Group does not apply hedge accounting.
(vi) Trade payables – Trade payables are recognised and carried at the original transaction value.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the tax computations, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. In respect of the deferred tax on the revaluation surplus, this is calculated on the basis of the chargeable gains that would crystallise on the sale of the investment portfolio as at the reporting date. The calculation takes account of available indexation on the historic cost of the properties.
Deferred tax is calculated at the tax rates that are expected to apply in the period, based on Acts substantially enacted at the year end, when the liability is settled or the asset is realised. Deferred tax is included in profit or loss for the period, except when it relates to items recognised in other comprehensive income or directly in equity.
Dividends payable on the ordinary share capital are recognised in the year in which they are declared.
Transactions entered into by Group entities in currencies other than the entity's functional currency are recorded at the exchange rate prevailing at the transaction dates. Foreign exchange gains and losses resulting from settlement of these transactions and from retranslation of monetary assets and liabilities denominated in foreign currencies are recognised in the Group income statement.
| 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 20082 | |
|---|---|---|---|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Income statement | |||||||||
| Gross property income Net property income |
156.0 | 152.0 | 138.4 | 131.6 | 124.8 | 125.5 | 119.4 | 123.8 | 119.0 |
| and other income | 149.2 | 148.6 | 136.1 | 124.3 | 117.0 | 117.7 | 113.0 | 114.8 | 95.5 |
| Profit/(loss) on disposal of | |||||||||
| properties and investments | 7.5 | 40.2 | 30.2 | 53.5 | 10.8 | 36.1 | 0.9 | (16.6) | 1.2 |
| Profit/(loss) before tax | 54.5 | 779.5 | 753.7 | 467.9 | 228.1 | 233.0 | 352.8 | (34.9) | (606.5) |
| Earnings and dividend per share | |||||||||
| EPRA earnings | 85.7 | 78.7 | 58.6 | 55.1 | 51.3 | 52.3 | 53.6 | 57.6 | 21.9 |
| EPRA earnings per share (p) | 76.99 | 71.34 | 57.08 | 53.87 | 50.36 | 51.59 | 52.89 | 57.14 | 21.74 |
| IFRS dividend (p) | 44.66 | 40.60 | 37.40 | 34.50 | 31.85 | 29.60 | 27.60 | 24.50 | 23.15 |
| Distribution of years' profit (p) | 52.36 | 43.40 | 39.65 | 36.50 | 33.70 | 31.35 | 29.00 | 27.00 | 24.50 |
| Net asset value | |||||||||
| Net assets | 3,999.4 | 3,995.4 | 3,075.7 | 2,370.5 | 1,918.0 | 1,714.5 | 1,494.7 | 1,163.9 | 1,215.0 |
| Net asset value per | |||||||||
| share (p) – undiluted | 3,530 | 3,528 | 2,931 | 2,248 | 1,824 | 1,636 | 1,432 | 1,117 | 1,170 |
| EPRA net asset value per | |||||||||
| share (p) – diluted | 3,551 | 3,535 | 2,908 | 2,264 | 1,886 | 1,701 | 1,474 | 1,161 | 1,222 |
| EPRA triple net asset value | |||||||||
| per share (p) – diluted | 3,450 | 3,463 | 2,800 | 2,222 | 1,764 | 1,607 | 1,425 | 1,126 | 1,206 |
| EPRA total return (%) | 1.7 | 23.0 | 30.1 | 21.9 | 12.7 | 17.4 | 29.3 | (2.9) | (30.6) |
| Property portfolio | |||||||||
| Property portfolio at fair value | 4,942.7 | 4,954.5 | 4,168.1 | 3,353.1 | 2,859.6 | 2,646.5 | 2,426.1 | 1,918.4 | 2,108.0 |
| Revaluation (deficit)/surplus | (42.6) | 651.4 | 671.9 | 337.5 | 175.3 | 172.1 | 301.7 | (81.1) | (602.1) |
| Cash flow statement | |||||||||
| Cash flow1 | 19.6 | (43.6) | (57.3) | (65.9) | 1.9 | 18.4 | (171.6) | 139.5 | (83.7) |
| Net cash from | |||||||||
| operating activities | 77.7 | 76.0 | 65.6 | 57.5 | 52.5 | 47.2 | 46.5 | 66.4 | 39.3 |
| Acquisitions | 18.0 | 246.2 | 92.4 | 130.1 | 99.8 | 91.6 | 148.0 | 10.2 | 31.9 |
| Capital expenditure | |||||||||
| on properties | 213.5 | 116.4 | 113.2 | 108.4 | 78.6 | 42.6 | 49.5 | 94.6 | 72.9 |
| Disposals | 224.7 | 277.2 | 114.4 | 149.7 | 161.0 | 131.5 | 8.5 | 195.5 | 72.6 |
| Gearing and debt | |||||||||
| Net debt | |||||||||
| NAV gearing (%) | |||||||||
| 904.8 | 911.7 | 1,013.3 | 949.2 | 874.8 | 864.5 | 887.8 | 720.8 | 865.4 | |
| Loan-to-value ratio (%) | 22.6 17.7 |
22.8 17.8 |
32.9 24.0 |
40.0 28.0 |
45.6 30.0 |
50.4 32.0 |
59.4 35.7 |
61.9 36.4 |
71.2 39.7 |
1 Cash flow is the net cash from operating and investing activities less the dividend paid.
2 2008 was the Group's first full year following the merger of Derwent Valley Holdings plc and London Merchant Securities plc. It was also the Group's first full year as a REIT.
A list of definitions is provided on page 173.
| EPRA Measure | Definition | 2016 | 2015 |
|---|---|---|---|
| EPRA Performance Measures | Page 160 | ||
| EPRA earnings | Earnings from operational activities | £85.7m | £78.7m |
| EPRA undiluted | EPRA earnings divided by the weighted average number | 76.99p | 71.34p |
| earnings per share | of ordinary shares in issue during the financial year | ||
| EPRA net asset value (NAV) |
NAV adjusted to include trading properties and other investment interests at fair value and to exclude certain items not expected |
£3,966.3m | £4,101.7m |
| to crystallise in a long-term investment property business model | |||
| EPRA diluted NAV per share |
EPRA NAV divided by the number of ordinary shares in issue at the financial year end adjusted to include the effects of potential dilutive shares issuable under the Group's share option schemes and the convertible bonds |
3,551p | 3,535p |
| EPRA triple NAV | EPRA NAV adjusted to include the fair values of (i) financial instruments, (ii) debt and (iii) deferred taxes on revaluations, where applicable |
£3,853.5m | £4,018.8m |
| EPRA diluted triple | EPRA triple NAV divided by the number of ordinary shares in issue | 3,450p | 3,463p |
| NAV per share | at the financial year end adjusted to include the effects of potential dilutive shares issuable under the Group's share option schemes and the convertible bonds |
||
| EPRA vacancy rate | Estimated rental value (ERV) of immediately available space divided by the ERV of the EPRA portfolio |
2.6% | 1.3% |
| EPRA cost ratio (including direct vacancy costs) |
Administrative & operating costs (including costs of direct vacancy) divided by gross rental income |
24.0% | 24.3% |
| EPRA net initial yield | 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 |
3.4% | 3.1% |
| 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) |
4.1% | 3.8% |
| EPRA Sustainability Performance Measures | |||
| Total electricity consumption |
Energy use across our total managed portfolio (landlord/common areas) – annual kWh |
10,580,966 | 11,748,376 |
| Like-for-like total electricity consumption |
Energy use across our like-for-like portfolio (landlord/common areas) – annual kWh |
9,414,212 | 9,827,041 |
| Total fuel consumption | Energy use across our total managed portfolio (landlord/common areas); a total of gas, oil and biomass consumption – annual kWh |
15,237,152 | 15,782,576 |
| Like-for-like total fuel consumption |
Energy use across our like-for-like portfolio (landlord/common areas); a total of gas, oil and biomass consumption – annual kWh |
14,446,722 | 13,076,103 |
| Building energy intensity | Energy use across our total managed portfolio (landlord/common areas) – kWh per m2 |
78.07 | 82.62 |
| Total direct greenhouse gas (GHG) emissions |
Total managed portfolio emissions (landlord influenced portfolio emissions); a total of Scope 1 emissions – annual metric tonnes CO2e |
3,533 | 3,186 |
| Total indirect greenhouse gas (GHG) emissions |
Total managed portfolio emissions (landlord influenced portfolio emissions); Scope 2 energy-use – annual metric tonnes CO2e |
4,342 | 5,406 |
| Like-for-like total direct greenhouse gas (GHG) emissions |
Like-for-like emissions (landlord influenced portfolio emissions, building related only); Scope 1 energy-use – annual metric tonnes CO2e |
2,528 | 2,248 |
| Like-for-like total indirect greenhouse gas (GHG) emissions |
Like-for-like emissions (landlord influenced portfolio emissions, building related only); Scope 2 energy-use – annual metric tonnes CO2e |
3,879 | 4,542 |
| Greenhouse gas (GHG) intensity from building energy consumption |
Intensity (Scopes 1 & 2) per m2/£m turnover/fair market value (reported in tCO2e/m2) – kg CO2e/m2/year |
0.024 | 0.025 |
| Total water consumption | Water use across our total managed portfolio (excluding retail consumption) – annual m3 |
150,413 | 160,217 |
| Like-for-like total water consumption |
Water use across our like-for-like portfolio (excluding retail consumption) – annual m3 |
131,300 | 133,662 |
| Building water intensity | Water use across our total managed portfolio (excluding retail consumption) – m3/m2/year |
0.47 | 0.50 |
| Total weight of waste by | Waste generated across our total managed portfolio – | 2,739 | 2,413 |
| disposal route | annual metric tonnes and proportion by disposal route | ||
| Like-for-like total weight | Waste generated across our like-for-like portfolio – | 2,514 | 2,178 |
| of waste by disposal route | annual metric tonnes and proportion by disposal route |
| Offices (O), | ||||
|---|---|---|---|---|
| Retail/ | ||||
| restaurant (R), | ||||
| Value | Residential (Re), | Approximate | ||
| banding £m |
Industrial (I), Leisure (L) |
Freehold (F), Leasehold (L) |
net area sq ft |
|
| West End: Central (54%) | ||||
| Fitzrovia1 (35%) | ||||
| 80 Charlotte Street W1 | 100-200 | O/R/Re | F | 380,0002 |
| 1-2 Stephen Street & Tottenham Court Walk W1 | 200+ | O/R/L | F | 264,800 |
| 132-142 Hampstead Road NW1 | 100-200 | O | F | 219,700 |
| 8 Fitzroy Street W1 | 100-200 | O | F | 147,900 |
| 90 Whitfield Street W1 | 100-200 | O/R/Re | F | 109,500 |
| The Copyright Building, 30 Berners Street W1 | 50-100 | O/R | L | 107,1502 |
| Holden House, 54-68 Oxford Street W1 | 100-200 | O/R | F | 90,200 |
| Henry Wood House, 3-7 Langham Place W1 | 50-100 | O/R/L | L | 79,900 |
| Middlesex House, 34-42 Cleveland Street W1 | 50-100 | O | F | 65,700 |
| Network Building, 95-100 Tottenham Court Road W1 | 50-100 | O/R | F | 64,300 |
| 88-94 Tottenham Court Road W1 | 0-25 | O/R | F | 52,400 |
| Charlotte Building, 17 Gresse Street W1 | 50-100 | O | L | 47,200 |
| 80-85 Tottenham Court Road W1 | 50-100 | O/R | F | 44,500 |
| 60 Whitfield Street W1 | 25-50 | O | F | 36,200 |
| 43 and 45-51 Whitfield Street W1 | 25-50 | O | F | 30,900 |
| Rathbone Studios, 7-10 Rathbone Place W1 | 0-25 | O/R/Re | L | 23,100 |
| 1-5 Maple Place and 12-16 Fitzroy Street W1 | 0-25 | O | F | 20,300 |
| 76-78 Charlotte Street W1 | 0-25 | O | F | 11,000 |
| 50 Oxford Street W13 | 0-25 | O/R | F/L | 6,100 |
| Victoria (11%) | ||||
| Horseferry House, Horseferry Road SW1 | 100-200 | O | F | 162,700 |
| Greencoat and Gordon House, Francis Street SW1 | 100-200 | O | F | 138,800 |
| 1 Page Street SW1 | 100-200 | O | F | 127,800 |
| Premier House, 10 Greycoat Place SW1 | 25-50 | O | F | 62,000 |
| Francis House, 11 Francis Street SW1 | 25-50 | O | F | 57,000 |
| 6-8 Greencoat Place SW1 | 25-50 | O | F | 33,200 |
| Baker Street/Marylebone (4%) | ||||
| 19-35 Baker Street W1 | 50-100 | O/R | L | 77,800 |
| 88-110 George Street W1 | 25-50 | O/R/Re | L | 44,800 |
| 30 Gloucester Place W1 | 0-25 | O/Re | L | 23,600 |
| 16-20 Baker Street and 27-33 Robert Adam Street W1 | 0-25 | O/R/Re | L | 22,000 |
| 17-39 George Street W1 | 25-50 | O/R/Re | L | 21,400 |
| Soho/Covent Garden (1%) | ||||
| Bush House, South West Wing, Strand WC2 | 25-50 | O | F | 107,900 |
| 1 Oxford Street W1 | 0-25 | O/R/L | L | – |
| Mayfair (1%) | ||||
| 25 Savile Row W1 | 50-100 | O/R | F | 42,000 |
| Paddington (2%) | ||||
| Brunel Building, 55 North Wharf Road W2 | 50-100 | O | L | 240,0002 |
1 Includes Euston and North of Oxford Street.
2 Proposed scheme area.
3 Includes 36-38 and 42-44 Hanway Street W1.
( ) Percentages weighted by valuation.
continued
| Offices (O), | ||||
|---|---|---|---|---|
| Retail/ restaurant (R), |
||||
| Value | Residential (Re), | Approximate | ||
| banding £m |
Industrial (I), Leisure (L) |
Freehold (F), Leasehold (L) |
net area sq ft |
|
| West End: Borders (9%) | ||||
| Islington/Camden (9%) | ||||
| Angel Building, 407 St. John Street EC1 | 200+ | O/R | F | 262,000 |
| Angel Square EC1 | 100-200 | O | F | 126,200 |
| 4 & 10 Pentonville Road N1 | 25-50 | O | F | 53,400 |
| Porters North, 8-14 Crinan Street N14 | 0-25 | O | F | 43,600 |
| 401 St. John Street EC1 | 0-25 | O | F | 12,300 |
| City: Borders (35%) | ||||
| Clerkenwell (11%) | ||||
| 20 Farringdon Road EC1 | 100-200 | O/R/L | L | 169,200 |
| 88 Rosebery Avenue EC1 | 50-100 | O | F | 103,700 |
| Morelands, 5-27 Old Street EC1 | 50-100 | O/R | L | 88,800 |
| The Buckley Building, 49 Clerkenwell Green EC1 | 50-100 | O/R | F | 85,100 |
| Turnmill, 63 Clerkenwell Road EC1 | 50-100 | O/R | F | 70,300 |
| 19 Charterhouse Street EC1 | 50-100 | O | F | 63,700 |
| 5-8 Hardwick Street and 161 Rosebery Avenue EC1 | 25-50 | O | F | 35,000 |
| 151 Rosebery Avenue EC1 | 0-25 | O | F | 24,000 |
| 3-4 Hardwick Street EC1 | 0-25 | O | F | 12,000 |
| Holborn (6%) | ||||
| Johnson Building, 77 Hatton Garden EC1 | 100-200 | O/R | F | 157,100 |
| 40 Chancery Lane WC2 | 100-200 | O/R | L | 102,000 |
| 6-7 St. Cross Street EC1 | 25-50 | O | F | 33,800 |
| Old Street (10%) | ||||
| White Collar Factory, Old Street Yard EC1 | 200+ | O/R/Re | F | 293,0002 |
| 1 Oliver's Yard EC1 | 100-200 | O/R | F | 185,100 |
| Monmouth House, 58-64 City Road EC1 | 0-25 | O | F | 41,300 |
| 19-23 Featherstone Street EC1 | 0-25 | O | F | 27,500 |
| Shoreditch/Whitechapel (8%) | ||||
| Tea Building, 56 Shoreditch High Street E1 | 200+ | O/R/L | F | 269,400 |
| The White Chapel Building E1 | 100-200 | O | F | 270,000 |
| 9 and 16 Prescot Street E14 | 25-50 | O/R | F | 106,300 |
| Provincial (2%) | ||||
| Scotland (2%) | ||||
| Strathkelvin Retail Park, Bishopbriggs, Glasgow | 50-100 | R/L | F | 325,500 |
| Land, Bishopbriggs, Glasgow | 25-50 | – | F | 5,200 acres |
1 Includes Euston and North of Oxford Street.
2 Proposed scheme area.
3 Includes 36-38 and 42-44 Hanway Street W1.
4 Joint venture, Derwent London has a 50% interest.
( ) Percentages weighted by valuation.
Tech Belt (42%)
Annualised rents generated by the portfolio plus rent contracted from expiry of rent free periods and uplifts agreed at the balance sheet date.
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.
Reported results adjusted to include the effects of potential dilutive shares issuable under the Group's share option schemes and the convertible bonds.
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.
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.
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.
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.
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).
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.
An accounting adjustment to change the book value of an asset or liability to its market value.
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.
This is the amount left to draw under the Group's loan facilities (i.e. the total loan facilities less amounts already drawn).
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.
IPD is a company that produces independent benchmarks of property returns. The Group measures its performance against both the Central London Offices Index and the All UK Property Index.
Activities and behaviours, aligned to both business objectives and individual goals, against which the performance of the Group is annually assessed. Performance measured against them is referenced in the Annual Report.
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.
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.
The difference between the book value of an asset or liability and its market value.
Net debt divided by net assets.
Equity shareholders' funds divided by the number of ordinary shares in issue at the balance sheet date.
Borrowings plus bank overdraft less cash and cash equivalents.
Net property income, excluding all non-core items divided by interest payable on borrowings and non-utilisation fees.
continued
Dividends from profits of the Group's tax-exempt property rental business under the REIT regulations.
Dividends from profits of the Group's taxable residual business.
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 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.
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.
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 is a performance measure calculated by the IPD and defined in the MSCI Global Methodology Standards for Real Estate Investment as 'the percentage value change plus net income accrual, relative to the capital employed.'
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.
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.
Properties that have been held for the whole of the year (i.e. excluding any acquisitions or disposals made during the year).
The valuation increase on the underlying portfolio.
• Net initial yield
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 property, increased by estimated purchasers' costs.
The anticipated yield to which the net initial yield will rise once the rent reaches the estimated rental values.
• True equivalent yield
The constant capitalisation rate which, if applied to all cash flows from the portfolio, including current rent, reversions to valuers' estimated rental value and such items as voids and expenditures, equates to the valuation having taken into account notional purchasers' costs. Rent is assumed to be received quarterly in advance.
• Yield shift
A movement in the yield of a property asset, or like-for-like portfolio, over a given year. Yield compression is a commonlyused term for a reduction in yields.
An environmental impact assessment method for non-domestic buildings. Performance is measured across a series of ratings; Good, Very Good, Excellent and Outstanding.
Scope 1 – direct emissions;
The CDP is an organisation which works with shareholders and listed companies to facilitate the disclosure and reporting of climate change data and information.
The government department responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities in the United Kingdom.
The Global Real Estate Sustainability Benchmark is an initiative set up to assess the environmental and social performance of public and private real estate investments and allow investors to understand their performance.
The regulations place a legal duty on employers to report work-related deaths, major injuries or over-three-day injuries, work related diseases and dangerous occurrences (near miss accidents) to the Health and Safety Executive.
The emissions associated with the transmission and distribution losses in the grid from the transportation of electricity from its generation source.
The emissions associated with extracting, refining and transporting raw fuel to the vehicle, asset or process under scrutiny.
Back cover image: White Collar Factory EC1 This page: The White Chapel Building E1
Designed and produced by MerchantCantos www.merchantcantos.com Printed by Empress Litho Limited
Derwent London plc Registered office: 25 Savile Row London W1S 2ER
T +44 (0)20 7659 3000 www.derwentlondon.com Registered No. 1819699
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.