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RNS
Derwent London PLC  -  DLN   

Interim results for the half year ended 30 June 17

Released 07:00 10-Aug-2017

RNS Number : 5845N
Derwent London PLC
10 August 2017
 

 

10 August 2017

Derwent London plc ("Derwent London" / "the Group")

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2017
EXCELLENT OPERATIONAL PROGRESS AT DERWENT LONDON

Financial highlights                                                                              

·      EPRA1 net asset value per share increased 0.9% to 3,582p from 3,551p at 31 December 2016

·      A total return of 3.4% including the 2016 final and special dividends totalling 90.5p per share

·      Net rental income increased 9.2% to £79.3m from £72.6m in H1 2016

·      EPRA earnings rose 22.5% to £50.6m from £41.3m

·      EPRA earnings per share increased 22.3% to 45.42p per share from 37.13p

·      Interim dividend per share raised 25% to 17.33p

 

First half activity

·      Record six months of lettings totalling £23.4m, on average 0.5% above December 2016 ERV

·      Investment property disposals totalled £327m in H1, 6.0% above December 2016 values

·      Agreed second half disposals takes the total to £492m, 10% above December 2016 values

·      Capital expenditure in H1 of £87.2m including capitalised interest of £4.7m

·      Capital expenditure to complete programme of projects on site £324m

·      Potential surplus of £170m still to come on successful execution of two projects for delivery 2019

·      Continuing good interest from potential occupiers

 

Portfolio update

·      Portfolio valued at £4.8bn; an underlying valuation increase of 1.9% in H1

·      Underlying valuation uplift on developments was 9.5% in the half year

·      Total property return in H1 was 3.6% which was ahead of the IPD Central London Offices Quarterly Index of 3.3%

·      True equivalent yield was 4.79%: tightening by 4bp since December 2016

·      The portfolio's EPRA vacancy rate fell from 2.6% to 1.9% in the six months to 30 June 2017

·      Estimated rental values (ERV) on an EPRA basis increased by 1.1% in H1 2017

·      Guidance for 2017 ERV raised to a range of 2% to -3% from 0% to -5%

 

Advancing the development of Soho Place W1

·      Progressing detailed design and engaging with potential contractors at Soho Place W1 (previously 1 Oxford Street) for expected start in H2 2018

·      Significant 285,000 sq ft mixed use scheme over Tottenham Court Road Elizabeth Line station

·      Estimated additional capital expenditure of c.£260m

 

Robust financial position

·      Interest cover 4.3x and loan-to-value (LTV) ratio 14.9%

·      Net debt down to £733.7m at 30 June 2017 from £904.8m at 31 December 2016

·      Cash and undrawn facilities up to £446m on 30 June 2017

·      Expect to raise 2017 final dividend by 10%

 

1Explanations of how EPRA figures are derived from IFRS are shown in note 23

 

Robbie Rayne, Chairman, commented:

"Derwent London's strong recurring earnings growth underpins today's 25% increase in the interim dividend. In addition, with almost £500m of disposals or forward sales above book values already this year, the Group has further strengthened its financial position."

John Burns, Chief Executive Officer, commented:

"We have achieved a record £23.4m of new lettings in the first half.  Following this success, we have marginally raised market guidance for both rents and yields in 2017.

Despite continuing political uncertainty, we have made strong progress in capturing reversion and de-risking the pipeline which highlights the appeal of our product.  This has given us the confidence to advance with our next major development at Soho Place W1, above Tottenham Court Road Elizabeth Line station."

 

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:00 BST today.  The audio webcast can be accessed via www.derwentlondon.com.

To participate in the call, please dial the following number: +44 (0)20 3059 8125

A recording of the conference call will also be made available following the conclusion of the call on www.derwentlondon.com.

 

For further information, please contact:

Derwent London

Tel: +44 (0)20 7659 3000

 

 

John Burns, Chief Executive Officer

Damian Wisniewski, Finance Director

Quentin Freeman, Head of Investor Relations

 

Brunswick Group

Tel: +44 (0)20 7404 5959

 

Simon Sporborg

Tim Danaher

Emily Trapnell

 

 

OVERVIEW AND OUTLOOK

Derwent London continues to take advantage of the many opportunities within its portfolio to grow income and, with our particular brand of space seeing strong demand, we have set a new record for half year lettings.  We have also extended leases on a number of major holdings and have seen good rent review progress too.  This is an endorsement both of our product and the skills of our teams.  The recently completed White Collar Factory EC1 is a clear example of where we believe the Group sets the pace for new office design and execution.

The general political and economic background remains uncertain with domestic politics dominating the last six months. The recent General Election led to further changes in the political landscape, and all this while the UK is negotiating its exit from the EU. London has also been directly impacted by a number of tragic incidents, which have heightened awareness of security and housing issues. 

From a commercial perspective businesses continue to believe that London will remain a major and open European and global city.  This confidence can be seen with our letting and sales activity this year.  There have been major additional commitments from our existing occupiers: Arup and Expedia, as well as the decision of Fotografiska to launch its first gallery outside Stockholm at The White Chapel Building E1 announced today.  These are significant international groups choosing to invest in London.  We recently announced the forward sale of The Copyright Building W1 to Union Investment for £165m, which has taken our property disposals in the year to date to over £490m, over 9% of December's portfolio, all above book value.

Our leasing progress and disposals have further de-risked a significant part of our development programme thereby increasing our capacity for new opportunities.  The contracted growth in our rental income has also been boosted by a number of asset management initiatives, notably at Angel Building EC1 and the Tea Building E1 that have crystallised reversion and extended income. 

First half EPRA earnings per share were up 22.3% to 45.42p. As guided last year, the strong recurring earnings growth has enabled us to increase the interim dividend by 25.0% to 17.33p per share.  It will be paid as a PID on 20 October 2017 to shareholders on the register as at 15 September 2017.  This follows the 25% increase in last year's final dividend and the 52.0p per share special dividend paid in June 2017.  We expect that the 2017 final dividend will increase by 10%.

Despite the dividend payments and the general market uncertainty in the first half of 2017, EPRA NAV rose by 0.9% to 3,582p per share helped by a strong performance from our continuing development activity.

We still have significant further upside to capture from our projects due to be delivered in 2019.  Successful execution of these schemes is expected to add £40.6m pa to rents and we are seeing good interest from potential occupiers.  Completion will require some £279m of capital expenditure, which is covered by our cash and undrawn facilities of £446m, and this will be supplemented by the proceeds from the disposal of The Copyright Building W1 in the second half. 

Our letting achievements and strong finances mean that we have decided to press ahead with the detailed design and early procurement at Soho Place W1. This site is located above the Tottenham Court Road Elizabeth Line station, which is due to open in less than 18 months.  In addition, we continue to enhance our portfolio's potential and have recently submitted planning applications for two further West End projects.

In April we announced the introduction of our new long-term science-based carbon reduction targets, which align the Group with the outcomes of the COP21 global agreement on climate change, and ensure we are taking a proactive approach to reducing our carbon footprint.  Our community fund continues to support numerous grass roots projects and initiatives.  In May we announced the latest round of funding which supported 13 projects across our Fitzrovia and Tech Belt villages.

Following the retirement of Stuart Corbyn after our Annual General Meeting in May, the Nominations Committee commenced the process to recruit his replacement.  We have initiated a search, a shortlist of candidates has been identified and it is intended to appoint the successful applicant by the year end.  Tim Kite, who has been with the Group for 28 years and has been Company Secretary since 1995, will be retiring in October 2017 and we wish to thank him very much for his valuable contribution.  We look forward to welcoming his successor, David Lawler, who brings with him considerable experience in a similar role.

We have slightly raised our ERV estimates for 2017 to +2% to -3%, and are now of the view that yields are likely to remain firm this year.  Against this background we will continue to focus on extracting value from the portfolio and our strong project pipeline.  The strength of our balance sheet also puts the Group in a good position to make future acquisitions which will further enhance the portfolio.

 

OUR CENTRAL LONDON OFFICE MARKET

Occupier demand and lettings remain the drivers of our business. These continue to hold up well against the background of the EU referendum result one year ago and the imposition of new business rates in April this year. Absolute levels of central London office take-up at 5.8m sq ft in the first six months, as measured by CBRE, were 5% above last year's levels, but below the exceptional levels recorded in 2014 and 2015. We have continued to see good demand for our product but rental growth, as predicted, has slowed with lettings taking longer to conclude and incentives increasing.

Encouragingly, the amount of space under offer has steadily risen this year to 3.5m sq ft of which 42% is in the West End and 39% in the City. However this demand is against the background of increased supply, which has seen central London vacancy rates rise from 4.2% to 4.6% in H1. This compares to the ten-year average of 4.4% and the fifteen-year average of 5.4%.

The current year is expected to represent a short-term peak of supply with delivery of 6.2m sq ft of which 43% has already completed. In the following two years annual completions are expected to fall to 4.7m sq ft and 3.6m sq ft, respectively, based on space under construction at 30 June 2017. Of this future supply, 48% is pre-let, which leaves 6.2m sq ft or under 3% of central London's total office stock available. The West End, where our development programme is located, has a proportionately much smaller share of supply. Its current estimated speculative space under construction is 0.9m sq ft or c.1% of local stock, which compares to the current West End vacancy rate of 3.9%. These figures could change with new starts, especially for 2019, and there remains the potential for further substantial amounts of space to be delivered in 2020 and 2021, but as yet few of these schemes are committed.

The investment market has proved very robust with £8.2bn of deals, which is a first half level exceeded only once since 2007. Overseas buyers have dominated with domestic investors having been net sellers now for two years. There remains significant interest in central London with CBRE monitoring c.£40bn of global equity targeting London offices of which over half derives from Asia. Thus demand continues to significantly exceed the amount of stock on the market and has helped create substantial liquidity.

 

VALUATION

Against the backdrop of a robust investment market and significant Group activity, our portfolio was valued at £4.84bn at 30 June 2017. This produced a surplus of £85.1m, or £67.7m after accounting adjustments (see note 11).  The underlying capital growth on the portfolio was 1.9% reversing the 1.7% fall witnessed in H2 2016. This outperformed the 1.7% increase in the IPD Quarterly Index for Central London Offices but was below the wider IPD UK All Property Index which was up 2.1%. Our first half total property return was 3.6% which compares to the IPD Central London offices total return of 3.3% and 4.6% for All UK Property.

By location, our central London properties, which represent 98% of the portfolio, increased in value by 1.9% with the City Borders up 2.4% and the West End up 1.6%. The balance of the portfolio comprising our non-core Scottish holdings was up 0.5%.

Our rental values, on an EPRA basis, rose by 1.1%, similar to the 1.0% growth seen in the second half of last year. Again the City Borders, up 1.7%, saw stronger momentum than the West End, up 0.7%.

The portfolio's initial yield on an EPRA basis was 3.2% which, after contractual uplifts and allowing for the expiry of rent free and half rent periods, rises to 4.4% on a 'topped-up' basis. In December the comparable numbers were 3.4% and 4.1% respectively. The true equivalent yield came in 4bp in the first half to 4.79%, halting last year's trend when the equivalent yield rose 31bp.

In December 2016 we had four properties under development and these were revalued at £785m in June 2017, delivering a strong surplus of 9.5%. This result was helped by our letting activity and the forward disposal of The Copyright Building W1. Excluding the impact of developments, our underlying investment portfolio rose 0.5% in the period. Following the completion of the White Collar Factory EC1 we have three developments under construction with a June 2017 value of £478m and an ERV of £47.9m.  These require further capital expenditure of £286m to complete. There is more detail on our development properties below.

We continued to lock in reversion so that our contracted cash rent at 30 June was £145.8m. This was an increase of 3.1% over six months after adjusting for the impact of disposals. The portfolio's ERV was £275.9m giving a cash reversion of £130.1m, of which 53.6% is contracted.

 

Composition of portfolio ERV 30 June 2017

 


Contracted

Potential

Rent


£m

£m

£m

Contracted net rental income at 30 June 2017



145.8

Contractual rental uplifts

50.6



Pre-let element of refurbishments

2.9



Pre-let element of on-site developments

16.2


69.7









Topped-up rental income and pre-lets



215.5

Vacant space including refurbishments


9.2


On-site developments not pre-let


31.7


Rent reviews and lease expiries


19.5

60.4









Estimated rental value



275.9





 

Of this reversion, £50.6m is contractual through rent free or half rent periods and fixed uplifts which are incorporated in the income statement using the straight line basis adopted under IFRS accounting. This explains the difference between the annualised accounting rent of £170.0m and our contracted cash rent of £145.8m above. There is also a further £19.1m of pre-let income which should contribute to rents after the projects are completed.  Together these take our 'topped-up' rent including pre-lets to £215.5m. We expect to complete the disposal of The Copyright Building in the second half, which will reduce the above ERV by £7.4m, of which £6.5m is pre-let.

 

PORTFOLIO MANAGEMENT

 

We have had an exceptional first six months of letting activity which totalled 439,200 sq ft producing rents of £23.4m pa.  This is 40% ahead of the same period last year, which was our previous record six month period.  It is also 38%, or £6.4m, higher than we reported in May this year.  On average our lettings were 0.5% above December 2016 ERV, or 1.9% ahead excluding the major pre-let to Arup.

 

Principal lettings H1 2017

Property



Tenant

 

 

 

Area
sq ft

 

Rent
£ psf

 

Total
annual
rent
£m

 

Min / fixed
uplift at
first review
£ psf

 

Lease
term
Years

 

Lease
break
Year

 

Rent free equivalent
Months

 

Q1









80 Charlotte Street W1

Arup

133,600

72.90

9.71

81.50

20

-

33

White Collar Factory EC1

Adobe

14,900

67.50

1.0

74.50

11.5

-

22

Angel Building EC1

Expedia

12,500

62.50

0.8

-

13.3

-

18

Greencoat & Gordon House SW1

VCCP

12,800

55.00

0.7

-

8.5

-

13

20 Farringdon Road EC1

Accenture

11,500

55.00

0.6

-

10

5

9, plus 9
if no break

Q2









The White Chapel Building E1

Phase 2 - lower ground floors

Fotografiska

89,000

27.00

2.4

27.70

15

12

30, plus 6
if no break

White Collar Factory EC1

Box.com

28,500

75.00

2.1

-

15

10

18, plus 5
if no break

The White Chapel Building E1

Wilmington

27,000

52.00

1.4

-

10

-

20

The White Chapel Building E1

ComeOn!

12,700

50.00

0.6

-

10

5

11, plus 8
if no break

White Collar Factory EC12

Red Badger

7,700

62.50

0.5

65.60

10

5

9.5, plus 5
if no break

78 Whitfield Street W1

Made Thought

4,800

63.50

0.3

-

10

4.5

8

78 Whitfield Street W1

Yoyo Wallet

4,800

63.00

0.3

-

4.5

-

8

78 Chamber Street E13

NetBooster

6,700

40.00

0.3

-

10

5

10

 

1 Annual increases of 2.25% for the first 15 years    2 Low rise buildings    3 Joint venture - Derwent London share

 

Our developments and refurbishments have seen the bulk of letting activity demonstrating the attractiveness of our product.  We announced our largest single transaction, the pre-letting of 133,600 sq ft to Arup at 80 Charlotte Street W1, earlier in the year.

Phase 1 of The White Chapel Building E1 is now fully let, and today we announce the pre-letting of Phase 2 to Fotografiska, which has taken the lower ground floors as Fotografiska - The London Museum of Photography. We are very pleased to house this exciting cultural and leisure hub which will add further vibrancy to the building and enhance the Whitechapel experience.

We have also captured growth through active asset management, increasing our annual rents by £5.9m.  In February we reported the major regearing of leases at Angel Building EC1 which saw Expedia increase and extend their commitment until 2030.  In the last six months we have also renewed the lease with the advertising agency, Mother, at Tea Building E1 extending its term by 10 years to 2028. Mother is an important anchor to the property, occupying 49,650 sq ft, and has helped create the building's successful identity. We are very pleased that this association is set to continue for at least another decade. In addition we renewed the lease on 19-35 Baker Street W1 at a relatively modest rental increase, but with a mutual break from 2020 to enable us to gain access to the site should we wish to pursue a scheme. In this latter case we opted for flexibility rather than maximising the rent on the space.

 

Asset management H1 2017

 


Area
sq ft

Previous rent
£m pa

New rent
£m pa

Change

Income v
Dec 16 ERV

Rent reviews

60,100

2.1

3.1

+45.5%

+3.5%

Lease renewals

124,300

5.2

6.3

+21.1%

(4.7)%1

Lease regears

254,400

11.5

15.3

+33.3%

+8.6%

Total

438,800

18.8

24.7

+31.3%

+4.2%

 

1 Includes 19-35 Baker Street (see text)

 

At 30 June 2017 the EPRA vacancy rate was 1.9%, down from 2.6% in December despite the completion of White Collar Factory.

 

PROJECTS

We have recently completed White Collar Factory EC1, which we believe to be one of the most progressive new office buildings in London.  It incorporates a number of special features such as 3.5m floor to ceiling heights, concrete core cooling and opening windows which combine to make this a very environmentally efficient building as well as providing the long-life loose-fit space capable of adapting to the fast changing patterns of office use.  Some of the design was so ground breaking that we installed and ran a prototype for 12 months.  The 237,000 sq ft tower is now 92% let with the remaining space under offer.  Adjacent to the tower is Old Street Yard, creating new public realm, surrounded by lower rise buildings providing 39,000 sq ft of offices, 9,000 sq ft of restaurants and 9 residential units.  Together these have turned a group of obsolete office buildings into a vibrant Tech Belt campus beside Silicon roundabout.  The lower rise commercial space is 66% let and we will look to let the residential space once the office fit-out phase is completed later this year.  Assuming the properties are fully let we will have achieved commercial rents of £17.4m, which is 25% above our target at the outset of the development three and a half years ago.

At our other project due for completion in 2017, The Copyright Building W1, one of the three retail units is let with a further unit under offer and the office space was pre-let last year.  In July we announced the forward sale of this property and have provided a 20 month rent guarantee for the remaining unlet retail units which, together, have a gross ERV of c.£0.7m pa.

 

Major developments pipeline

 

Property

Area
sq ft

Delivery

Capex to complete

£m1

Comment

Completed projects





White Collar Factory, Old Street Yard EC1

293,000

H1 2017

7

276,000 sq ft offices, 9,000 sq ft retail, 8,000 sq ft residential - 87% let overall

Projects on site





The Copyright Building, 30 Berners Street W1

107,000

H2 2017

7

87,000 sq ft offices and 20,000 sq ft retail - 90% pre-let overall

 

Brunel Building, 55 North Wharf Road W2

240,000

H1 2019

85

Offices

 

80 Charlotte Street W1

380,000

H2 2019

194

321,000 sq ft offices, 45,000 sq ft residential and 14,000 sq ft retail -  35% pre-let overall

 


727,000


286


Other projects





Soho Place W1

285,000


260

209,000 sq ft offices, 36,000 sq ft retail and 40,000 sq ft theatre

 

Other consents





Monmouth House EC1

125,000



Offices, workspaces and retail


410,000




Planning applications





19-35 Baker Street W1

293,0002



206,000 sq ft offices, 52,000 sq ft residential and 35,000 sq ft retail

Holden House W1

150,000



Retail scheme or retail and office scheme


443,000




Grand total (excluding completed projects)

1,580,000




 

1 As at 30 June 2017     2 Total area - Derwent London has a 55% share of the joint venture

 

The immediate focus is now on the two schemes totalling 620,000 sq ft due for delivery in 2019 where, in aggregate, 22% of the space is pre-let.  Based on the June valuation there is the potential for a further £170m surplus once these properties are completed and let.

The largest is 80 Charlotte Street W1, where we announced the pre-letting of 133,600 sq ft to Arup on a 20-year lease in February.  This project is in the centre of Fitzrovia, which is currently benefitting from major changes including its location close to the Elizabeth Line.  The project's ERV is £25.8m and the remaining capital expenditure is £194m, of which 94% has been fixed or instructed. Following the pre-letting we estimate the breakeven office rent on the remainder of the project has fallen from £58 per sq ft to £45 per sq ft, and we are seeing good interest in the balance of the office space.

The other major project for delivery in 2019 is Brunel Building, Paddington W2 with a diagrid external structure enabling column-free floors.  This area was not a beneficiary of the rental growth seen in the early part of this cycle but, as a result, has enjoyed relatively strong growth in the last two years.  We believe current rental levels remain attractive, and the opening of the Elizabeth Line in 2018 will significantly enhance eastward public transport links to central West End and the City.  Remaining capital expenditure, which is all fixed, totals £85m and the ERV is £14.8m net or £62.50 per sq ft.  We estimate our breakeven rent to be c.£48 per sq ft.

The success we have enjoyed at our on-site schemes is encouraging us to advance new projects. We expect to be granted access to our Soho Place W1 (previously 1 Oxford Street) site later this year and this would enable us to carry out further preliminary work with the intention of starting construction in H2 2018. The development is on one of the most strategic sites in the West End.  We estimate the capital expenditure at c.£260m and the ERV at c.£22m pa net. We have also advanced two additional schemes by applying for planning permission at 19-35 Baker Street W1 and Holden House, 54-68 Oxford Street W1.  These latter two schemes are unlikely to start before 2020, and our Baker Street project is a 55% interest held in a joint venture with our partner, The Portman Estate.

 

INVESTMENT ACTIVITY

 

So far this year we have sold or agreed to sell £492m of property at an average price 10% above December 2016 book value.  The two disposals announced with our results in February have since completed and, in June, we exchanged contracts for the sale of The Copyright Building, 30 Berners Street W1 to Union Investment Real Estate GmbH for £165.0m or £148.7m net of top-ups relating to rent free periods and a rent guarantee on the vacant retail space.  After allowing for the 12.5% ground rent payable to the freeholder, this represented a net initial yield to the purchaser of 4.2%.  Completion will occur once the building is finished in Q4 2017.  Allowing for this disposal we have sold or agreed to sell £700m of property since last year's referendum, all above December 2015 book values.

 

Disposals H1 2017


Property


Date


Area
sq ft

Gross
proceeds
£m

Gross
proceeds
£ psf

Net yield to purchaser
%


Rent
£m pa

132-142 Hampstead Road NW1

Q1

219,700

130.1

590

1.2

1.7

8 Fitzroy Street W1

Q2

147,900

197.0

1,330

3.4

7.2

 

We are finding few purchasing opportunities that meet our acquisition criteria, but we remain active in the pursuit of them.

 

FINANCIAL REVIEW

 

Our half year to 30 June 2017 was characterised by continued strong underlying earnings growth, a substantial level of property disposals which has further reduced gearing and a modest upward revaluation of property fair values backed by stable yields and development activity.

Gross rental income rose to £85.4m for the first half of 2017, up 11.3% over the corresponding period in 2016 and 8.5% above H2 2016.  This was helped by the recent lettings at The White Chapel Building and White Collar Factory, but also supported by many other letting and asset management successes across the portfolio which more than offset the impact of recent disposals.  Net rental income was also up substantially at £79.3m compared to £72.6m in H1 2016 and, though we had no residential apartments to sell this time, net property and other income rose to £81.5m from £74.2m in H1 2016.

Excluding the effect of acquisitions, disposals and developments, EPRA like-for-like net rental income grew by 5.6% against H1 2016 and 3.0% over the six months from H2 2016.

Administration expenses fell by 16.3% to £12.8m for the 2017 half year, mainly a function of lower bonus and incentive payments.  This has reduced our EPRA cost ratio to 20.9% compared with 23.4% for the first half of 2016 and 24.0% for the 2016 full year.  Overall finance costs were almost unchanged at £14.3m for the half year, lower interest costs offset by less interest capitalised, with the latter at £4.7m compared with £6.3m in H1 2016.  EPRA earnings have increased strongly, by 22.5% to £50.6m from £41.3m in H1 2016, and EPRA earnings per share were up by 22.3% over the same period to 45.42p from 37.13p in H1 2016.

The overall revaluation surplus for our investment properties in the first half of 2017 was £66.7m after accounting adjustments for incentives.  This was very slightly higher than H1 2016 and reversed the downward movement seen in H2 2016 following the EU referendum vote.  Joint ventures showed a £3.4m gain on revaluation.  We have also seen substantial profits booked on our investment property disposals so far in 2017 with a combined £19.1m uplift on gross proceeds of £327.1m from 132-142 Hampstead Road NW1 and 8 Fitzroy Street W1.  Together with a small overall positive impact from interest rate derivative fair value movements, the IFRS profit before tax for the first half was £145.8m compared with £98.5m in H1 2016.

Though impacted by first half dividend payments totalling £100.8m including the 52.0p per share special, total net assets grew by £43.6m over the six months to 30 June 2017 and EPRA net asset value per share was also up, by 0.9%, to 3,582p per share from 3,551p in December 2016.  This represents a total return, including the dividends, over the six month period of 3.4% compared with 2.7% for H1 2016.

Capital expenditure totalled £79.5m in H1 2017, against £100.8m in H1 2016.  We anticipate incurring a further £104m in the second half of 2017, principally at 80 Charlotte Street W1 and Brunel Building W2, with £206m expected in 2018.  The property disposals referred to earlier have reduced the overall portfolio carrying value to £4.7bn as at 30 June 2017, including £132.0m transferred to 'assets held for sale' following the exchange of contracts on The Copyright Building W1.  Our recent head office refurbishment at Savile RowW1 and the move from two upper floors to three lower floors has also increased the carrying value of 'owner occupied property' to £44.7m at the half year.  Investment property carrying values have therefore reduced by almost £300m to £4.5bn over the six months to 30 June 2017.   

Altogether, this has brought our gearing down again and further improved interest cover while increasing available and undrawn facilities. This puts us in a very strong position from which to commit to further development activity and to fund future acquisitions.

Financing and net debt

The property disposals in H1 reduced net debt by £171.1m to £733.7m at 30 June 2017 from £904.8m on 31 December 2016 and from £1,008.6m at 30 June 2016.  It is worth noting that both of these transactions were somewhat unusual, one being the result of a compulsory purchase in connection with HS2 and the other being linked to a major letting agreement.  After The Copyright Building W1 completes in H2 2017, we are not currently anticipating further significant disposals and expect to see net debt trend upwards as future capital expenditure is incurred on our pipeline.  With interest rates remaining very low, we have chosen to retain £203m of swaps to provide future rate protection and, as we have a policy of being not more than 100% hedged on our bank debt, we held an unusually large cash balance at 30 June 2017.

Our principal financing metrics have improved again.  The Group's LTV ratio was only 14.9% at 30 June 2017, down from 19.1% a year earlier and 17.7% at the 2016 year end.  LTV including our share of joint ventures was also 14.9%.  Interest cover has risen to 431% for the six months to June 2017 compared to 370% for the 2016 full year and available undrawn facilities and cash increased to £446m from £383m at December 2016.  Net cash from operating activities also increased to £37.2m for the half year compared to £29.5m in H1 2016 though the latter was affected by a £5.3m incentive payment to the incoming tenant at The Copyright Building to facilitate their move.

During the first half, we extended the maturity of our £75m unsecured revolving facility from Wells Fargo by a further year to July 2022 and cancelled £100m of the £550m revolving bank facility for which we received a fee rebate of £750,000.  A £40m interest rate swap was also terminated as part of these arrangements at a slightly discounted cost of £3.2m.  The remaining £450m facility runs to January 2022.  We have also agreed and signed a new £15m development loan facility with Barclays for our Primister joint venture and a new 5 year £28m loan facility with HSBC secured on assets that we hold with the Portman Estate.  The latter was signed in July 2017 and the old facility was due for repayment in June 2018, hence the current liability shown in the June 2017 balance sheet.

A £70m swap with a forward start date has also been deferred to September 2017 at a cost of £1.3m.

A summary of the overall debt position at 30 June 2017 is shown in the following table:


Jun 2017

Jun 2016

Dec 2016

Hedging profile (%)




Fixed

74

61

68

Swaps

25

25

27


99

86

95





Percentage of debt that is unsecured (%)

65

71

68

Percentage of non-bank debt (%)

75

61

68





Weighted average interest rate - cash basis (%)

3.71

3.65

3.65

Weighted average interest rate - IFRS basis (%)

3.99

3.88

3.90





Weighted average maturity of facilities (years)

6.7

7.0

6.9

Weighted average maturity of borrowings (years)

7.5

7.7

7.7





Undrawn facilities and cash (£m)

446

279

383

Uncharged properties (£m)

3,828

3,868

3,777





 

 

RISK MANAGEMENT AND INTERNAL CONTROL

 

 

Derwent London aims to deliver its strategic objectives whilst operating within a risk envelope defined by the Group's risk appetite. The Board recognises that risks are inherent in running any business and uses the Group's risk management system to ensure that risks to the Group's strategy are identified, understood and managed.

The Board has overall responsibility for risk management and the Group's system of internal controls. To assist with carrying out this task, the Board has delegated responsibility to the Audit Committee and the Risk Committee. Executive management is responsible for developing and operating the Group's risk management system and for designing, implementing, maintaining and evaluating the systems of internal control.

The Board is responsible for managing the Group's risk profile in an environment that reflects the culture and management structure of the business. Key factors to note in this regard are:

·      Senior management encourages an open and transparent culture throughout the business.

·      The close day-to-day involvement of the Directors in the business allows any system weaknesses to be identified quickly.

·      The Group mainly operates from a single office in Central London which is within close proximity to most of its properties.

·      The senior management team is experienced and stable and overall staff turnover is low.

·      The Group has a whistleblowing policy which is supported by an independent advice line.

·      The Group has clearly defined levels of responsibility and authority.

 

The Group's risk management framework consists of its Risk Management Policy, Risk Appetite Statement and Risk Management Process document. The framework is designed to identify and manage the risks faced by the business recognising that not all risks can be eliminated at an acceptable cost and that there are some risks that, given its experience, the Board will choose to manage and accept.

In compliance with Code Provision C.2.1 of The UK Corporate Governance Code, the Board has carried out a robust assessment of the principal risks and uncertainties facing the Group. The core element of this assessment is the Group's risk register which is prepared by the Executive Committee in accordance with the Risk Management document. The first stage in its preparation is for the Committee to identify the risks facing the Group. An assessment is then made collectively by the Committee of the following matters:

·      The likelihood of each risk occurring.

·      The potential impact of the risk on each different area of the business.

·      The strength of the controls operating over the risk and the effectiveness of any mitigating actions.

 

This approach allows the final assessment to reflect the effect of the controls and any mitigating procedures that are in place. If the controls and mitigating actions over a risk are deemed inadequate, the Committee will agree a target risk profile together with supplementary controls/actions and a timetable for their implementation.

The register and its method of preparation have been reviewed by the Risk Committee. In order to gain a more comprehensive understanding of the risks facing the business and the management thereof, the Risk Committee periodically receives presentations from senior managers and external advisers. The Risk Committee has also monitored the Company's risk management and internal control systems primarily by regularly reviewing the set of key risk indicators that were implemented in 2015. This was supplemented by reviews of the top ten risks on the Group's risk register and the adequacy of the controls operating over these risks.

Following these reviews, the Board is satisfied that the Group's risk management and internal control systems operated effectively throughout the period.

The Group's risk register includes 47 risks split between strategic risks, operational risks and finance risks.

The principal risks and uncertainties facing the Group in 2017 are set out on the following pages together with the potential effects, controls and mitigating factors.

 

Strategic risks

That the Group's Business Model does not create the anticipated shareholder value or fails to meet investors' expectations.

Risk, effect 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.

Throughout the first half of 2017, the Group continued to benefit from a resilient central London market. However, the result of the General Election in May increased the level of economic uncertainty 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.

Overall, the Board sees the level of both these risks to be broadly unchanged over the period.

 

 

·  The Group carries out a five-year strategic review each year 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 and financial covenants.

·  Pre-lets are sought to de-risk major projects.

 

·   The last annual strategic review was carried out by the Board in June 2017. This considered the sensitivity of five 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.

·   41% of the Group's portfolio has been identified for future redevelopment.

·   During the period the Group's loan-to-value ratio reduced to approximately 15%, its net interest cover ratio was 431% and the REIT ratios were comfortably met.

·   Pre-lets were secured over 247,000 sq ft during H1 2017.

 

3. Adverse Brexit settlement

 

Negotiations to leave the European Union result in arrangements that are damaging to the UK economy and/or Central London.

Negotiations will take at least two years and the operating framework facing UK businesses thereafter cannot be predicted.

This risk 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 which have 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 30 June 2017, the Group had undrawn facilities and cash of £446m.

·   Income is maintained at future developments until the scheme is ready to start.

 

4. Reputational damage

 

The Group's reputation is damaged through unauthorised and inaccurate media coverage.

It would most directly impact on the Group's total shareholder return - one of its key metrics. Indirectly it could impact on a number of the formal KPIs.

The Board considers the risk to be unchanged over the period.

 

 

 

 

·  All new members of staff benefit from an induction programme and are issued with the Group's Staff Handbook.

·  Social media channels are monitored by the Group's investor relations department.

·  The Group takes advice on technological changes in the use of social media and adapts its approach accordingly.

·  There is an agreed procedure for approving all external statements.

 

 

 

 

 

·   The Group employs a Head of Investor and Corporate Communications and retains the services of an external PR agency. Both maintain regular contact with external media sources.

·   The Company engages with a number of local community bodies in areas where it operates as part of its CSR activity.

Financial risks

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.

Interest rates have remained low for an extended period and are expected to rise within the next two years. Though there is no direct relationship, this may cause property yields to increase in due course.

It would affect the following KPIs:

·      Loan-to-value ratio.

·      Total return.

·      Total property return.

The Board continues to assess this risk as high.

 

 

 

 

·  The impact of changes in property values on the Group's financial covenants and performance are monitored regularly and are subject to sensitivity analysis to ensure that adequate headroom is preserved.

·  The impact of yield changes is considered when potential projects are appraised.

·  The Group's move towards mainly unsecured financing over the past few years has made management of its financial covenants less complicated.

 

 

 

·   The Group produces three rolling forecasts each year which contain detailed sensitivity analyses, including the effect of changes to yields.

·   Quarterly management accounts report the Group's performance against covenants.

·   Project appraisals are regularly reviewed and updated in order to monitor the effect of yield changes.

Operational risks

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:

·      Delays on site.

·      Increased construction costs.

·      Adverse letting conditions.

This would have an effect on the Group's total return and total property return KPIs.

 

The Board considers this risk to have remained broadly the same over the period.

 

 

 

·  Standardised appraisals, which include contingencies and inflationary cost increases, are prepared for all investments and sensitivity analysis is undertaken to ensure that an adequate return is made in all circumstances considered likely to occur.

·  Development costs are benchmarked to ensure that the Group obtains competitive pricing and, where appropriate, fixed-price contracts are entered into.

·  Procedures carried out before starting work on site, such as pre-work investigations, historical research of the property and surveys, etc. conducted as part of the planning application, reduce the risk of unidentified issues causing delays once on site.

·  The Group's pre-letting strategy reduces or removes the letting risk of the development as soon as possible.

·  Post-completion reviews are carried out for all major developments to ensure that improvements to the Group's procedures can be identified and implemented.

 

 

 

 

 

·   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.

·   The Group's style of accommodation remains in demand as evidenced by the 33 lettings achieved in H1 2017 which totalled 439,200 sq ft.

·   The Group has often secured significant pre-lets of the space in its development programme which significantly 'de-risks' those projects. 5 pre-lets were secured in H1 2017 on 247,000 sq ft.

7. Cyber attack

 

The Group is the victim of a cyber-attack that results in it being unable to use its IT systems.

 

This would lead to an increase in costs and a diversion of management time. Increased 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 Group's IT infrastructure continue to be improved, the elevated profile of such risks means that the Board considers the risk to have remained high over the period.

 

 

·  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.

·  The Group's Business Continuity Plan was revised and tested during 2015.

·  Multifactor authentication has been introduced for both internal and external access to the systems.

·  The Group's IT department has access to cyber threat intelligence and analytics data.

·  Incident response and remediation policies are in place.

 

 

 

·   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.

·   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 alert staff to the techniques that may be used to gain unauthorised access to the Group's systems.

·   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 Group operates.

 

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 Board considers this risk to be unchanged over the period.

 

 

·  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 regulatory risk.

·  The Group employs a Head of Health and Safety who reports to the Board.

·  The Group employs a Head of Sustainability who reports to the sustainability committee which is chaired by Paul Williams.

·  The Company's policies including those on the Bribery Act, Health and Safety, Equal Opportunities, Harassment and Whistleblowing are available to all staff on the Company intranet.

·  Members of staff attend external briefings in order to be updated on regulatory changes.

 

 

·   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.

·   The Group pays considerable attention to sustainability issues and produces an annual sustainability report.

·   No incidents were reported under the Group's whistleblowing policy in the period.

·   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 Groups' Health and Safety processes were reviewed and improved in 2016 and a new external consultant was appointed.

 

9. Contractor/sub-contractor default

 

Returns from the Group's developments are reduced due to delays and cost increases caused by either a main contractor or major sub-contractor defaulting during the project.

 

This would primarily affect the Group's total property return KPI.

 

The risk is considered to have remained at the same level in the period.

 

 

 

·  Whenever possible the Group uses contractors/sub-contractors that it has previously worked with successfully.

·  The resilience of a project's critical path is improved by establishing procedures to manage any sub-contractor default effectively.

·  Key construction packages are acquired early in the project.

·  Performance bonds are sought if considered necessary.

·  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.

 

 

 

 

·   As the size of the Group's projects has increased so the contractors have become more substantial.

·   The financial accounts of both main contractors and major sub-contractors are reviewed.

·   The Group's development managers are regularly on site and conduct surprise visits.

10. Shortage of key staff

 

The Group is unable successfully to implement its strategy due to a failure to recruit and retain key staff with appropriate skills.

 

This risk could impact on any or all of the Group's KPIs.

 

The risk is seen to be unchanged over the period.

 

 

·  The Nominations Committee consider succession matters as a standing agenda item.

·  Requirements for senior management succession are considered as part of the five-year strategic review.

·  The remuneration packages of all employees are benchmarked regularly.

·  Six-monthly appraisals identify training requirements which are fulfilled over the next six months.

 

 

 

·   The Group has recruited eight new members of staff in the year to date.

·   Staff turnover in the first half of 2017 was low at 3%.

·   The average length of employment is 7.3 years.

 

 

Financial instruments - risk management

 

The Group is exposed through its operations to the following financial risks:

 

·      credit risk;

·      market risk; and

·      liquidity risk.

 

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. The following describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

 

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous years.

 

Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, cash at bank, trade and other payables, floating rate bank loans, fixed rate loans and private placement notes, secured and unsecured bonds and interest rate swaps.

 

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority to executive management for designing and operating processes that ensure the effective implementation of the objectives and policies.

 

The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's flexibility and its ability to maximise returns. Further details regarding these policies are set out below:

 

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from lease contracts in relation to its property portfolio. It is Group policy to assess the credit risk of new tenants before entering into such contracts. The Board has established a Credit Committee which assesses each new tenant before a new lease is signed. The review includes the latest sets of financial statements, external ratings when available and, in some cases, forecast information and bank and trade references. The covenant strength of each tenant is determined based on this review and, if appropriate, a deposit or a guarantee is obtained.

 

As the Group operates predominantly in central London, it is subject to some geographical risk. However, this is mitigated by the wide range of tenants from a broad spectrum of business sectors.

 

Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of investment grade are accepted. This risk is also reduced by the short periods that money is on deposit at any one time.

 

The carrying amount of financial assets recorded in the financial statements represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained.

 

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk arises for the Group from its use of variable interest bearing instruments (interest rate risk).

 

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 30 June 2017, the proportion of fixed debt held by the Group was above this range at 99% (31 December 2016: 95%) following a property disposal in June. During both 2017 and 2016, the Group's borrowings at variable rate were denominated in sterling.

 

The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. When the Group raises long-term borrowings, it is generally at fixed rates.

 

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

 

The Group's policy is to ensure that it will always have sufficient headroom in its loan facilities to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain committed facilities to meet the expected requirements. The Group also seeks to reduce liquidity risk by fixing interest rates (and hence cash flows) on a portion of its long-term borrowings. This is further explained in the 'market risk' section above.

 

Executive management receives rolling three-year projections of cash flow and loan balances on a regular basis as part of the Group's forecasting processes. At the balance sheet date, these projections indicated that the Group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

 

The Group's loan facilities and other borrowings are spread across a range of banks and financial institutions so as to minimise any potential concentration of risk. The liquidity risk of the Group is managed centrally by the finance department.

 

Capital disclosures

The Group's capital comprises all components of equity (share capital, share premium, other reserves, retained earnings and non-controlling interest).

 

The Group's objectives when maintaining capital are:

 

·      to safeguard the entity's ability to continue as a going concern so that it can continue to provide above average long-term returns for shareholders; and

·      to provide an above average annualised long-term total return to shareholders.

 

The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may vary the amount of dividends paid to shareholders subject to the rules imposed by its REIT status. It may also seek to redeem bonds, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of NAV gearing and loan-to-value ratio. During 2017, the Group's strategy, which was unchanged from 2016, was to maintain the NAV gearing below 80% in normal circumstances. These two gearing ratios, as well as the net interest cover ratio, are defined at the end of this announcement and are derived in note 24.



Statement of Directors' responsibilities

The Directors' confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules (DTR) 4.2.7 and 4.2.8, namely:

·      An indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      Material related-party transactions in the first six months of the financial year and any material changes in the related-party transactions described in the last Annual Report.

The Directors are listed in the Derwent London plc Annual Report of 31 December 2016 and a list of the current Directors is maintained on the Derwent London plc website: www.derwentlondon.com. The maintenance and integrity of the Derwent London website is the responsibility of the Directors.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 

On behalf of the Board

 

 

John D. Burns                                                                                  Damian M.A. Wisniewski

Chief Executive Officer                                                                                  Finance Director

 

10 August 2017

 

 

GROUP CONDENSED INCOME STATEMENT

 



Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016








Unaudited


Unaudited


Audited



Note


£m


£m


£m











Gross property and other income

5


99.4


101.4


193.7










Net property and other income

5


81.5


74.2


149.2


Administrative expenses



(12.8)


(15.3)


(30.9)


Revaluation surplus/(deficit)

11


66.7


64.5


(37.1)


Profit on disposal of investment property

6


19.1


2.5


7.5











Profit from operations



154.5


125.9


88.7











Finance costs

7


(14.3)


(13.9)


(27.8)


Movement in fair value of derivative financial instruments


6.4


(12.8)


0.3


Financial derivative termination costs

8


(4.5)


(1.2)


(9.0)


Share of results of joint ventures

9


3.7


0.5


2.3











Profit before tax



145.8


98.5


54.5











Tax charge

10


(0.6)


(1.0)


(0.9)











Profit for the period



145.2


97.5


53.6




















Attributable to:









 - Equity shareholders



146.4


98.5


58.7


 - Non-controlling interest



(1.2)


(1.0)


(5.1)














145.2


97.5


53.6






































Earnings per share

23


131.42p


88.55p


52.73p




















Diluted earnings per share

23


131.04p


86.50p


52.59p





























 

GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME

 


Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016







Unaudited


Unaudited


Audited



Note


£m


£m


£m











Profit for the period



145.2


97.5


53.6











Actuarial losses on defined benefit pension scheme



(1.1)


(1.3)


(2.1)


Revaluation surplus/(deficit) of owner-occupied property

11


-


0.5


(5.5)


Deferred tax (charge)/credit on revaluation

19


(0.4)


0.2


1.3


Other comprehensive expense that will not be









    reclassified to profit or loss



(1.5)


(0.6)


(6.3)











Total comprehensive income relating to the period



143.7


96.9


47.3




















Attributable to:









- Equity shareholders



144.9


97.9


52.4


- Non-controlling interest



(1.2)


(1.0)


(5.1)














143.7


96.9


47.3











 

 

GROUP CONDENSED BALANCE SHEET

 



30.06.2017

30.06.2016

31.12.2016





Unaudited


Unaudited


Audited



Note


£m


£m


£m











Non-current assets









Investment property

11


4,509.6


4,997.0


4,803.8


Property, plant and equipment

12


50.5


39.6


38.1


Investments

13


38.5


32.9


36.0


Other receivables

14


100.6


101.8


109.1





4,699.2


5,171.3


4,987.0




















Current assets









Trading property

11


14.1


9.6


11.7


Trade and other receivables

15


43.9


40.7


38.5


Cash and cash equivalents



102.8


12.7


17.7





160.8


63.0


67.9











Non-current assets held for sale

16


132.0


-


-











Total assets



4,992.0


5,234.3


5,054.9




















Current liabilities









Borrowings

18


28.0


-


-


Trade and other payables

17


95.2


113.0


110.0


Corporation tax liability



1.8


1.2


1.6


Provisions



0.3


0.3


0.4





125.3


114.5


112.0




















Non-current liabilities









Borrowings

18


808.5


1,021.3


922.5


Derivative financial instruments

18


11.0


30.4


17.3


Provisions



0.2


0.2


0.3


Pension scheme deficit



1.4


0.2


0.3


Deferred tax

19


2.6


5.4


3.1





823.7


1,057.5


943.5











Total liabilities



949.0


1,172.0


1,055.5




















Total net assets



4,043.0


4,062.3


3,999.4




















Equity









Share capital



5.6


5.6


5.6


Share premium



188.7


188.2


188.4


Other reserves



940.9


952.7


950.4


Retained earnings



2,841.9


2,843.9


2,787.9


Equity shareholders' funds



3,977.1


3,990.4


3,932.3


Non-controlling interest



65.9


71.9


67.1











Total equity



4,043.0


4,062.3


3,999.4











 

 

GROUP CONDENSED STATEMENT OF CHANGES IN EQUITY

 


Attributable to equity shareholders














Equity

Non-




Share

Share

Other

Retained

shareholders'

controlling

Total


capital

premium

reserves

earnings


funds

interest

equity


£m


£m


£m


£m


£m


£m


£m















At 1 January 2017

5.6


188.4


950.4


2,787.9


3,932.3


67.1


3,999.4

Profit/(loss) for the period

-


-


-


146.4


146.4


(1.2)


145.2

Other comprehensive expense

-


-


(0.4)


(1.1)


(1.5)


-


(1.5)

Transfer of owner-occupied property

-


-


(6.9)


6.9


-


-


-

Share-based payments

-


0.3


(2.2)


2.6


0.7


-


0.7

Dividends paid

-


-


-


(100.8)


(100.8)


-


(100.8)















At 30 June 2017 (unaudited)

5.6


188.7


940.9


2,841.9


3,977.1


65.9


4,043.0





























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 period

-


-


-


98.5


98.5


(1.0)


97.5

Other comprehensive income/(expense)

-


-


0.7


(1.3)


(0.6)


-


(0.6)

Share-based payments

-


0.8


(0.9)


3.2


3.1


-


3.1

Dividends paid

-


-


-


(33.1)


(33.1)


-


(33.1)

Scrip dividends

-


1.1


-


(1.1)


-


-


-















At 30 June 2016 (unaudited)

5.6


188.2


952.7


2,843.9


3,990.4


71.9


4,062.3





























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 (audited)

5.6


188.4


950.4


2,787.9


3,932.3


67.1


3,999.4





























 

GROUP CONDENSED CASH FLOW STATEMENT

 



Half year to 30.06.2017

Half year to 30.06.2016


Year to 31.12.2016









Unaudited


Unaudited


Audited



Note


  £m


  £m


£m











Operating activities









Property income



74.1


70.1


147.1


Property expenses



(11.2)


(12.6)


(18.0)


Cash paid to and on behalf of employees



(9.2)


(13.5)


(21.8)


Other administrative expenses



(3.2)


(1.9)


(5.6)


Interest paid

7


(11.6)


(10.8)


(22.0)


Other finance costs

7


(1.7)


(1.4)


(2.3)


Other income



1.2


1.0


2.4


Tax paid in respect of operating activities



(1.2)


(1.4)


(2.1)











Net cash from operating activities



37.2


29.5


77.7




















Investing activities









Acquisition of investment properties



(0.9)


(18.0)


(18.0)


Capital expenditure on the property portfolio

7


(87.2)


(93.2)


(213.5)


Disposal of investment and trading properties



324.8


20.4


224.7


Investment in joint ventures


-


(1.7)


(3.0)


Repayment of loan by joint venture



1.2


-


-


Purchase of property, plant and equipment



(4.7)


(0.3)


(4.5)


Tax (paid)/received in respect of investing activities



(4.8)


-


4.8











Net cash from/(used in) investing activities



228.4


(92.8)


(9.5)




















Financing activities









Net movement in revolving bank loans



(77.8)


(3.5)


(103.9)


Drawdown of private placement notes



-


104.3


104.3


Financial derivative termination costs



(4.5)


(1.2)


(9.0)


Net proceeds of share issues



0.3


0.8


1.0


Dividends paid to non-controlling interest holder

-


-


(0.8)


Dividends paid

20


(98.5)


(30.9)


(48.6)











Net cash (used in)/from financing activities



(180.5)


69.5


(57.0)




















Increase in cash and cash equivalents in the period

85.1


6.2


11.2


Cash and cash equivalents at the beginning of the period

17.7


6.5


6.5











Cash and cash equivalents at the end of the period



102.8


12.7


17.7











 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1. Basis of preparation

 

Neither the financial information for the half year to 30 June 2017 nor the half year to 30 June 2016 was subject to an audit but has been subject to a review in accordance with the International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.

 

The comparative financial information presented herein for the year to 31 December 2016 does not constitute the Group's statutory accounts, but is derived from those accounts. The Group's statutory accounts for the year to 31 December 2016 have been delivered to the Registrar of Companies. The Auditor's report on those accounts was unmodified, did not draw attention to any matters by way of an emphasis of matter and did not contain any statement under Section 498 of the Companies Act 2006.

 

The financial information in these condensed consolidated financial statements is that of the holding company and all of its subsidiaries (the "Group") together with the Group's share of its joint ventures. It has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting and should be read in conjunction with the annual report and accounts for the year to 31 December 2016 which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRS IC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, property, plant and equipment and financial assets and liabilities held for trading. 

As with most other UK property companies and REITs, the Group presents many of its financial measures in accordance with the guidance criteria issued by the European Public Real Estate Association ('EPRA').  These measures, which provide consistency across the sector, are all derived from the IFRS figures in note 23.

Going concern

Under Provision C.1.3 of the UK Corporate Governance Code 2014, the Board needs to report whether the business is a going concern. In considering this requirement, the Directors have taken into account the following:

 

·      The Group's latest rolling forecast for the next two years, in particular the cash flows, borrowings and undrawn facilities.

·      The headroom under the Group's financial covenants.

·      The risks included on the Group's risk register that could impact on the Group's liquidity and solvency over the next 12 months.

·      The risks on the Group's risk register that could be a threat to the Group's business model and capital adequacy. 

 

In particular the Directors have considered the relatively long-term and stable nature of the cash flows receivable under the tenant leases, the Group's loan-to-value ratio of 14.9%, the interest cover ratio of 431% and the £446m total of undrawn facilities and cash at 30 June 2017. They have also considered the fact that the average maturity of borrowings was 7.5 years at 30 June 2017.

 

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review. In addition, the Group's risks and risk management processes can be found within the risk management and internal controls.

 

Having due regard to these matters and after making appropriate enquiries, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date of signing of these condensed consolidated financial statements and, therefore, the Board continues to adopt the going concern basis in their preparation.

 

 

2. Changes in accounting policies

 

The accounting policies used by the Group in these condensed consolidated financial statements are consistent with those applied by the Group in its financial statements for the year to 31 December 2016.

 

Standards in issue but not yet effective

The following standards, amendments and interpretations were in issue at the date of approval of the condensed consolidated financial statements but were not yet effective for the current accounting period and have not been adopted early.  Based on the Group's current circumstances the Directors do not anticipate that their adoption in future periods will have a material impact on the financial statements of the Group.

 

IFRS 2 (amended) - Share Based Payments;

IFRS 4 (amended) - Insurance Contracts;

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 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases were in issue at the date of approval of these condensed consolidated financial statements but were not yet effective for the current accounting period and have not been adopted early. 

 

IFRS 9 Financial Instruments (effective from 1 January 2018)

 

This standard applies to classification and measurement of financial assets and financial liabilities, impairment provisioning and hedge accounting.  The Group has completed its preliminary assessment of the impact of IFRS 9 and believes that the main area of impact relates to impairment provisioning which may affect measurement and presentation of trade receivables and balances due from subsidiaries within the Company financial statements. By December 2017, the Group will have determined how it will estimate expected credit losses and the sources of forward-looking data, but does not expect the standard to have a material impact on the financial statements.

 

IFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018)

 

This standard combines a number of previous standards, setting out a five step model for the recognition of revenue and establishing principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue. The standard is applicable to service charge income, facilities management income, investment property disposals and trading property disposals, but excludes rent receivable, which is within the scope of IFRS 16. The Group has completed its preliminary assessment of IFRS 15 and does not expect its adoption to have a material impact on the financial statements, but it may result in changes to presentation and disclosure.

 

IFRS 16 Leases (effective 1 January 2019)

 

This standard does not substantially affect the current accounting for rental income earned by the Group as lessor. The main impact of the standard is the removal of the distinction between operating and finance leases for lessees, which will result in almost all leases being recognised on the balance sheet.  As the Group does not hold any material operating leases as lessee, the impact of the standard is not expected to be material to the financial statements.

 

 

3. Significant judgments, key assumptions and estimates

 

Some of the significant accounting policies require management to make difficult, subjective or complex judgments or estimates.  The following is intended to provide a summary of those policies which management consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements. 

 

·      Property portfolio valuation.

·      Compliance with the real estate investment trust (REIT) taxation regime.

·      Outstanding rent reviews.

·      Contingent consideration.

 

These are the same policies identified at the previous year end and a full discussion of these policies is included in the 2016 financial statements.

 

 

4.   Segmental information

 

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is the Executive Committee comprising the six executive Directors and five senior managers) in order to allocate resources to the segments and to assess their performance.

 

The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements.  These internal financial reports include the IFRS figures but also report the non-IFRS figures for the EPRA earnings and net asset value.  Reconciliations of each of these figures to their statutory equivalents are detailed in note 23. Additionally, information is provided to the Executive Committee showing gross property income and property valuation by individual property.  Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

 

The Group's property portfolio includes investment property, owner-occupied property, assets held for sale and trading property and comprised 97% office buildings* in central London by value (30 June 2016: 94%; 31 December 2016: 95%). Therefore, the Directors consider that these individual properties have similar economic characteristics and have aggregated them into a single operating segment.  The remaining 3% (30 June 2016: 6%; 31 December 2016: 5%) represented a mixture of retail, hotel, residential and light industrial properties, as well as land, each of which is de minimis in its own right and below the quantitative threshold in aggregate.  Therefore, in the view of the Directors, there is one reportable segment under the provisions of IFRS 8.

 

All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8.  However, geographical analysis is included in the tables below to provide users with additional information.  The majority of the Group's properties are located in London (West End central, West End borders and City borders), with the remainder in Scotland (Provincial).

 

* Some office buildings have an ancillary element such as retail or residential.

 

Gross property income

 







Office buildings

Other

Total















£m


£m


£m














Half year to 30 June 2017









West End central



41.2


0.3


41.5


West End borders



9.2


-


9.2


City borders



32.2


0.2


32.4


Provincial



-


2.3


2.3




















82.6


2.8


85.4


























Half year to 30 June 2016









West End central



40.8


2.2


43.0


West End borders



8.1


-


8.1


City borders



23.0


0.1


23.1


Provincial



-


2.5


2.5




















71.9


4.8


76.7


























Year to 31 December 2016









West End central



81.4


4.2


85.6


West End borders



17.2


-


17.2


City borders



48.0


0.2


48.2


Provincial



-


5.0


5.0




















146.6


9.4


156.0














 

A reconciliation of gross property income to gross property and other income is given in note 5.

 

Property portfolio

 

 






Carrying value


Fair value







Office






Office










buildings

Other

Total

buildings

Other

Total







£m


£m


£m


£m


£m


£m



















30 June 2017














West End central


2,432.9


28.5


2,461.4


2,470.7


28.7


2,499.4


West End borders


428.3


-


428.3


446.9


-


446.9


City borders


1,706.2


6.5


1,712.7


1,744.0


6.5


1,750.5


Provincial


-


98.0


98.0


-


101.0


101.0
























4,567.4


133.0


4,700.4


4,661.6


136.2


4,797.8




































30 June 2016














West End central


2,675.5


177.4


2,852.9


2,717.0


179.4


2,896.4


West End borders


435.2


14.0


449.2


454.2


14.0


468.2


City borders


1,637.2


6.2


1,643.4


1,656.3


6.2


1,662.5


Provincial


-


97.7


97.7


-


101.2


101.2
























4,747.9


295.3


5,043.2


4,827.5


300.8


5,128.3




































31 December 2016














West End central


2,531.5


141.1


2,672.6


2,573.9


142.1


2,716.0


West End borders


408.3


-


408.3


426.5


-


426.5


City borders


1,665.4


6.4


1,671.8


1,693.6


6.3


1,699.9


Provincial


-


97.0


97.0


-


100.3


100.3
























4,605.2


244.5


4,849.7


4,694.0


248.7


4,942.7



















 

A reconciliation between the fair value and carrying value of the portfolio is set out in note 11.

 

 

5. Property and other income

 


Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016






£m


£m


£m










Gross rental income


85.4


76.7


155.4


Surrender premiums received


-


-


0.1


Other property income


-


-


0.5










Gross property income


85.4


76.7


156.0


Trading property sales proceeds


-


12.5


12.5


Service charge income


12.8


11.1


22.8


Other income


1.2


1.1


2.4










Gross property and other income


99.4


101.4


193.7


















Gross rental income


85.4


76.7


155.4


Ground rent credit/(expense)


0.1


(0.3)


(0.7)


Service charge income


12.8


11.1


22.8


Service charge expenses


(14.0)


(11.8)


(24.1)




(1.2)


(0.7)


(1.3)


Other property costs


(5.0)


(3.1)


(7.5)










Net rental income


79.3


72.6


145.9


Trading property sales proceeds


-


12.5


12.5


Trading property cost of sales


-


(10.6)


(10.6)


Profit on trading property disposals


-


1.9


1.9


Reversal of write-down/(write-down) of trading property


1.0


(1.4)


(1.6)


Other property income


-


-


0.5


Other income


1.2


1.1


2.4


Surrender premiums received


-


-


0.1


Reverse surrender premiums


-


(0.1)


(0.1)


Dilapidation receipts


-


0.1


0.1










Net property and other income


81.5


74.2


149.2










 

Rental income included £8.8m (half year to 30 June 2016: £5.5m; year to 31 December 2016: £10.3m) relating to rents recognised in advance of cash receipts. Other income relates to fees and commissions earned in relation to the management of the Group's properties and was recognised in the Group income statement in accordance with the delivery of services.

 

 

6. Profit on disposal of investment property

 


Half year to 30.06.2017

Half year to 30.06.2016


Year to 31.12.2016







£m


£m


£m










Investment property








Gross disposal proceeds


327.1


5.2


210.6


Costs of disposal


(1.3)


(0.1)


(2.6)










Net disposal proceeds


325.8


5.1


208.0


Carrying value


(295.6)


(2.6)


(198.8)


Adjustment for rents recognised in advance


(11.1)


-


(1.7)












19.1


2.5


7.5










 

 

7. Finance costs

 






Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016














£m


£m


£m














Finance costs









Bank loans and overdraft



3.7


6.3


11.8


Non-utilisation fees



0.8


0.6


1.2


Unsecured convertible bonds



1.9


1.9


3.8


Secured bonds



5.7


5.7


11.4


Unsecured private placement notes



4.1


2.9


7.0


Secured loan



1.7


1.7


3.3


Amortisation of issue and arrangement costs



1.0


1.1


2.2


Amortisation of the fair value of the secured bonds



(0.5)


(0.5)


(1.0)


Finance lease costs



0.5


0.5


1.0


Other



0.1


-


0.1














Gross interest costs



19.0


20.2


40.8


Less: interest capitalised



(4.7)


(6.3)


(13.0)














Finance costs



14.3


13.9


27.8














 

Finance costs of £4.7m (half year to 30 June 2016: £6.3m; year to 31 December 2016: £13.0m) have been capitalised on development projects, in accordance with IAS 23 Borrowing Costs, using the Group's average cost of borrowing during each quarter. Total finance costs paid to 30 June 2017 were £18.0m (half year to 30 June 2016: £18.5m; year to 31 December 2016: £37.3m) of which £4.7m (half year to 30 June 2016: £6.3m; year to 31 December 2016: £13.0m) was included in capital expenditure on the property portfolio in the Group cash flow statement under investing activities.

 

 

8. Financial derivative termination costs

 

The Group incurred costs of £4.5m in the half year to 30 June 2017 (half year to 30 June 2016: £1.2m; year to 31 December 2016: £9.0m) deferring, re-couponing or terminating interest rate swaps.

 

 

9. Share of results of joint ventures

 






Half year to 30.06.2017

Half year to 30.06.2016


Year to 31.12.2016















£m


£m


£m














Revaluation surplus



3.4


0.2


1.8


Other profit after tax from operations



0.3


0.3


0.5




















3.7


0.5


2.3














 

See note 13 for further details on the Group's joint ventures.

 

 

10. Tax charge

 






Half year to 30.06.2017

Half year to 30.06.2016


Year to 31.12.2016















£m


£m


£m














Corporation tax









UK corporation tax and income tax in respect of profit for the period

1.5


0.9


1.9


Other adjustments in respect of prior years' tax


-


-


0.1














Corporation tax charge



1.5


0.9


2.0


























Deferred tax









Origination and reversal of temporary differences


(0.6)


0.5


(0.9)


Adjustment for changes in estimates



(0.3)


(0.4)


(0.2)














Deferred tax (credit)/charge



(0.9)


0.1


(1.1)























Tax charge


0.6


1.0


0.9














 

In addition to the tax charge of £0.6m (half year to 30 June 2016: £1.0m; year to 31 December 2016: £0.9m) that passed through the Group income statement, a deferred tax charge of £0.4m (half year to 30 June 2016: credit of £0.2m; year to 31 December of 2016: credit of £1.3m) was recognised in the Group statement of comprehensive income relating to the revaluation of the owner-occupied property at 25 Savile Row W1.

 

The effective rate of tax for the half year to 30 June 2017 is lower (half year to 30 June 2016: lower; year to 31 December 2016: lower) than the standard rate of corporation tax in the UK. The differences are explained below:

 

 


Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016





£m


£m


£m










Profit before tax


145.8


98.5


54.5










Expected tax charge based on the standard rate of 








  corporation tax in the UK of 19.25% (2016: 20%)*

28.1


19.7


10.9


Difference between tax and accounting profit on disposals


(4.0)


(0.5)


(1.2)


REIT exempt income


(5.3)


(3.8)


(7.8)


Revaluation attributable to REIT properties


(13.1)


(12.9)


7.2


Expenses and fair value adjustments not allowable for








  tax purposes


(2.2)


0.4


(2.8)


Capital allowances


(2.1)


(2.5)


(5.3)


Other differences


(0.8)


0.6


(0.2)










Tax charge on current period's profit


0.6


1.0


0.8










Adjustments in respect of prior years' tax


-


-


0.1












0.6


1.0


0.9










 

*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 in the main rate to 19% from 1 April 2017 and then to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using the expected enacted tax rate and this is reflected in these financial statements.

 

 

11. Property portfolio

 

Carrying value





















Total

Owner-

Assets


Total





investment

occupied

held for

Trading

property



Freehold

Leasehold

property

property

sale

property

portfolio



£m

£m

£m

£m

£m

£m











At 1 January 2017

3,959.9

843.9

4,803.8

34.2

-

11.7

4,849.7


Acquisitions

0.8

0.2

1.0

-

-

-

1.0


Capital expenditure

34.6

36.5

71.1

2.3

-

1.4

74.8


Interest capitalisation

2.6

2.1

4.7

-

-

-

4.7


Additions

38.0

38.8

76.8

2.3

-

1.4

80.5


Disposals

(295.6)

-

(295.6)

-

-

-

(295.6)


Transfers

(8.2)

(133.9)

(142.1)

8.2

133.9

-

-


Revaluation

43.4

23.3

66.7

-

-

-

66.7


Reversal of write-down of trading property

-

-

-

-

-

1.0

1.0


Adjustment to assets held for sale

-

-

-

-

(1.9)

-

(1.9)











At 30 June 2017

3,737.5

772.1

4,509.6

44.7

132.0

14.1

4,700.4




















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

63.8

30.1

93.9

-

-

0.6

94.5


Interest capitalisation

5.4

0.9

6.3

-

-

-

6.3


Additions

81.2

31.0

112.2

-

-

0.6

112.8


Disposals

(2.6)

-

(2.6)

-

-

(10.2)

(12.8)


Transfers

(10.1)

-

(10.1)

-

-

10.1

-


Revaluation

66.6

(2.1)

64.5

0.5

-

-

65.0


Write-down of trading property

-

-

-

-

-

(1.4)

(1.4)


Movement in grossing up of









 headlease liabilities

-

0.7

0.7

-

-

-

0.7











At 30 June 2016

4,141.9

855.1

4,997.0

36.6

-

9.6

5,043.2




















At 1 January 2016

4,006.8

825.5

4,832.3

36.1

-

10.5

4,878.9


Acquisitions

12.0

-

12.0

-

-

-

12.0


Capital expenditure

116.1

75.7

191.8

3.6

-

2.9

198.3


Interest capitalisation

10.6

2.4

13.0

-

-

-

13.0


Additions

138.7

78.1

216.8

3.6

-

2.9

223.3

Disposals

(158.1)

(40.7)

(198.8)

-

-

(10.2)

(209.0)


Transfers

(10.1)

-

(10.1)

-

-

10.1

-


Revaluation

(17.4)

(19.7)

(37.1)

(5.5)

-

-

(42.6)


Write-down of trading property

-

-

-

-

-

(1.6)

(1.6)


Movement in grossing up of









 headlease liabilities

-

0.7

0.7

-

-

-

0.7











At 31 December 2016

3,959.9

843.9

4,803.8

34.2

-

11.7

4,849.7











 

 

Adjustments from fair value to carrying value





















Total

Owner-

Assets


Total






investment

occupied

held for

Trading

property




Freehold

Leasehold

property

property

sale

property

portfolio




£m

£m

£m

£m

£m

£m

£m












At 30 June 2017









Fair value

3,829.8

775.5

4,605.3

44.7

133.7

14.1

4,797.8


Selling costs relating to assets










held for sale

-

-

-

-

(1.7)

-

(1.7)


Lease incentives and costs










included in receivables

(92.3)

(17.5)

(109.8)

-

-

-

(109.8)


Grossing up of headlease liabilities

-

14.1

14.1

-

-

-

14.1












Carrying value

3,737.5

772.1

4,509.6

44.7

132.0

14.1

4,700.4






















At 30 June 2016









Fair value

4,232.8

849.3

5,082.1

36.6

-

9.6

5,128.3


Lease incentives and costs










included in receivables

(90.9)

(18.1)

(109.0)

-

-

-

(109.0)


Grossing up of headlease liabilities

-

23.9

23.9

-

-

-

23.9












Carrying value

4,141.9

855.1

4,997.0

36.6

-

9.6

5,043.2






















At 31 December 2016









Fair value

4,054.0

842.8

4,896.8

34.2

-

11.7

4,942.7


Lease incentives and costs










included in receivables

(94.1)

(22.8)

(116.9)

-

-

-

(116.9)


Grossing up of headlease liabilities

-

23.9

23.9

-

-

-

23.9












Carrying value

3,959.9

843.9

4,803.8

34.2

-

11.7

4,849.7





















 

Reconciliation of fair value
























30.06.2017

30.06.2016

31.12.2016








£m


£m


£m














Portfolio including the Group's share of joint ventures



4,842.2


5,164.0


4,980.5


Joint ventures



(44.4)


(35.7)


(37.8)














IFRS property portfolio



4,797.8


5,128.3


4,942.7


























 

The property portfolio is subject to semi-annual external valuations and was revalued at 30 June 2017 by external valuers on the basis of fair value in accordance with The RICS Valuation - Professional Standards, which takes account of the properties' highest and best use. When considering the highest and best use of a property, the external valuers will consider its existing and potential uses which are physically, legally and financially viable.  Where the highest and best use differs from the existing use, the external valuers will consider the costs and the likelihood of achieving and implementing this change in arriving at the property valuation.

 

CBRE Limited valued properties at £4,765.2m (30 June 2016: £5,097.6m; 31 December 2016: £4,910.7m) and other valuers at £32.6m (30 June 2016: £30.7m; 31 December 2016: £32.0m).  Of the properties revalued by CBRE, £44.7m (30 June 2016: £36.6m; 31 December 2016: £34.2m) relating to owner-occupied property was included within property, plant and equipment, £133.7m (30 June 2016: £nil; 31 December 2016: £nil) was included within non-current assets held for sale, and £14.1m (30 June 2016: £9.6m; 31 December 2016: £11.7m) was included within trading property.

 

The total fees, including the fee for this assignment, earned by CBRE (or other companies forming part of the same group of companies within the UK) from the Group is less than 5.0% of their total UK revenues.

 

During the year ended 31 December 2016, the Group transferred from investment property to trading property, at market value, the residential element of the 80 Charlotte Street development which it intends to sell. Any future revaluation surplus relating to the trading property will be recognised as an adjustment to EPRA net asset value, but, in accordance with IAS 2 Inventories, will not be recognised in the carrying value of the property as trading properties are stated at the lower of cost and net realisable value.

 

 

Reconciliation of revaluation surplus/(deficit)
























Half year to 30.06.2017

Half year to 30.06.2016

Year to 31.12.2016














£m


£m


£m














Total revaluation surplus/(deficit)



85.1


75.6


(20.9)


Share of joint ventures



(3.6)


(0.2)


(1.8)


Lease incentives and costs



(12.1)


(12.0)


(21.5)


Assets held for sale selling costs



(1.7)


-


-


Other



-


0.2


-














IFRS revaluation surplus/(deficit)



67.7


63.6


(44.2)


























Reported in the:












Revaluation surplus/(deficit)



66.7


64.5


(37.1)





Reversal of write-down/(write-down) of trading property


1.0


(1.4)


(1.6)















Group income statement



67.7


63.1


(38.7)



Group statement of comprehensive income



-


0.5


(5.5)




















67.7


63.6


(44.2)


























 

12. Property, plant and equipment

 









Owner-
















occupied
















property


Artwork


Other


Total










£m


£m


£m


£m


















At 1 January 2017







34.2


1.5


2.4


38.1


Additions







2.3


-


2.4


4.7


Disposals







-


-


(0.2)


(0.2)


Transfers







8.2


-


-


8.2


Depreciation







-


-


(0.3)


(0.3)


















At 30 June 2017







44.7


1.5


4.3


50.5


































At 1 January 2016







36.1


1.5


1.5


39.1


Additions







-


-


0.1


0.1


Depreciation







-


-


(0.1)


(0.1)


Revaluation







0.5


-


-


0.5


















At 30 June 2016







36.6


1.5


1.5


39.6


































At 1 January 2016







36.1


1.5


1.5


39.1


Additions







3.6


-


1.3


4.9


Depreciation







-


-


(0.4)


(0.4)


Revaluation







(5.5)


-


-


(5.5)


















At 31 December 2016







34.2


1.5


2.4


38.1


































Net book value















Cost or valuation







44.7


1.5


5.8


52.0


Accumulated depreciation







-


-


(1.5)


(1.5)


















At 30 June 2017







44.7


1.5


4.3


50.5


































Net book value















Cost or valuation







36.6


1.5


3.7


41.8


Accumulated depreciation







-


-


(2.2)


(2.2)


















At 30 June 2016







36.6


1.5


1.5


39.6


































Net book value















Cost or valuation







34.2


1.5


4.8


40.5


Accumulated depreciation







-


-


(2.4)


(2.4)


















At 31 December 2016







34.2


1.5


2.4


38.1


















 

The artwork is periodically valued by Bonhams on the basis of fair value using their extensive market knowledge.  The latest valuation was carried out in October 2016 and the Directors consider that there have been no material valuation movements since that date. In accordance with IFRS 13 Fair Value Measurement, the artwork is deemed to be classified as Level 3.

 

13. Investments

 

The Group has a 50% interest in two joint ventures, Primister Limited and Prescot Street Limited Partnership.

 

 


30.06.2017


30.06.2016


31.12.2016



£m


£m


£m









At 1 January

36.0


30.7


30.7


Additions

-


1.7


3.0


Share of results of joint ventures (see note 9)

3.7


0.5


2.3


Repayment of shareholder loan

(1.2)


-


-










38.5


32.9


36.0









 

 

14. Other receivables (non-current)

 

30.06.2017

30.06.2016

31.12.2016



£m


£m


£m









Prepayments and accrued income

96.9


98.1


105.4


Other

3.7


3.7


3.7










100.6


101.8


109.1
















 

Prepayments and accrued income relates to rents recognised in advance as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts, as well as the initial direct costs of the letting, over the expected terms of their respective leases. Together with £12.9m (30 June 2016: £10.9m; 31 December 2016: £11.5m), which was included as current assets within trade and other receivables, these amounts totalled £109.8m at 30 June 2017 (30 June 2016: £109.0m; 31 December 2016: £116.9m).

 

 

15. Trade and other receivables

 

30.06.2017

30.06.2016

31.12.2016



£m


£m


£m









Trade receivables

7.3


4.5


5.1


Other receivables

2.6


2.4


2.7


Prepayments

19.2


19.6


15.5


Accrued income

14.8


14.2


15.2










43.9


40.7


38.5









 

 

16. Non-current assets held for sale

 





30.06.2017

30.06.2016

31.12.2016







£m


£m


£m













Transfer from investment property (see note 11)


132.0


-


-
























 

In June 2017, the Group exchanged contracts on the sale of a long leasehold interest for a total of £165.0m, or £148.7m before costs and net of adjustments relating to rent free periods and a rent guarantee on the vacant retail space. After costs to complete and a risk premium, the property was valued at £133.7m at 30 June 2017.

 

In accordance with IFRS 5 Non-current Assets Held for Sale, this property was recognised as a non-current asset held for sale and, after deducting selling costs of £1.7m, the carrying value was £132.0m.

 

 

17. Trade and other payables

 

30.06.2017

30.06.2016

31.12.2016



£m


£m


£m









Trade payables

2.5


5.1


2.0


Other payables

16.6


15.7


16.7


Other taxes

3.4


0.3


6.5


Accruals

35.7


55.3


45.9


Deferred income

37.0


36.6


38.9










95.2


113.0


110.0









 

 

18. Borrowings and derivative financial instruments

 






30.06.2017


30.06.2016


31.12.2016







Book


Fair


Book


Fair


Book


Fair







value


value


Value


value


value


value







£m


£m


£m


£m


£m


£m



















Current liabilities














Secured bank loan


28.0


28.0


-


-


-


-





















28.0


28.0


-


-


-


-

































Non-current liabilities














1.125% unsecured convertible bonds 2019

144.2


151.1


141.5


148.6


142.9


152.4


6.5% secured bonds 2026


187.4


225.4


188.4


232.1


187.9


225.6


3.46% unsecured private placement notes 2028

29.8


30.8


29.8


31.4


29.8


30.8


4.41% unsecured private placement notes 2029

24.8


28.8


24.8


29.6


24.8


28.8


3.57% unsecured private placement notes 2031

74.5


75.7


74.5


76.8


74.5


75.6


4.68% unsecured private placement notes 2034

74.3


88.4


74.3


90.4


74.3


88.5


3.99% secured loan 2024


81.9


88.1


82.1


89.6


82.1


88.2


Unsecured bank loans


177.5


181.5


354.0


359.0


254.3


259.5


Secured bank loan


-


-


28.0


28.0


28.0


28.0


Leasehold liabilities


14.1


14.1


23.9


23.9


23.9


23.9